U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB


(Mark One)
[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        For the fiscal year ended December 31, 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)

          Securities registered pursuant to Section 12(b) of the Exchange Act:

                                      None
                               -----------------
                                (Title of class)

          Securities registered pursuant to Section 12(g) of the Exchange Act:

                        Common Stock, Par Value $0.00025
                        --------------------------------
                                (Title of class)

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

                             Yes    [X]      No  [ ]


                                       1
<PAGE>

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be  contained,  to the best of issuer's  knowledge,  in  definitive
proxy of information  statements  incorporated  by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]

     Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

     State  issuer's  revenues for its most recent fiscal year (ending  December
31, 2005): $693,860.

     State the aggregate market value of the voting and non-voting common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was last sold, or the average bid and asked price of such common  equity,
as of January 31, 2006: $10,225,104.49

          Applicable Only to issuers Involved in Bankruptcy Proceedings
                        During the Preceding Five Years.

                                       N/A

     Indicate  by check mark  whether  the issuer  has filed all  documents  and
reports  required  to be filed by  Section  12, 13 and  15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

                               Yes [ ]    No [ ]


                    Applicable Only to Corporate Registrants

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

            Class                             Outstanding as of March 28, 2006
--------------------------------------------------------------------------------
Common Stock, $.00025 par value                        28,573,654

                       Documents Incorporated By Reference

     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document in
incorporated:  (1) any  annual  report  to  security  holders;  (2) any proxy or
information  statement;  and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security holders
for fiscal year ended December 24, 1980).







                                       2
<PAGE>



INDEX

NDEX

ITEM 1. DESCRIPTION OF BUSINESS .......................................... 5

ITEM 2. DESCRIPTION OF PROPERTIES ....................................... 35

ITEM 3. LEGAL PROCEEDINGS ............................................... 35

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 35

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
           MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ............ 35

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATION ........................... 40

ITEM 7. FINANCIAL STATEMENTS ............................................ 46

        CONSOLIDATED BALANCE SHEET ...................................... 48

        CONSOLIDATED STATEMENT OF OPERATIONS ............................ 49

        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY .................. 50

        CONSOLIDATED STATEMENTS OF CASH FLOWS ...................... 51 - 52

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................... 53

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE .......................... 80

ITEM 8A. CONTROLS AND PROCEDURES ........................................ 80

ITEM 8B.  OTHER INFORMATION ............................................. 81

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
             PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
                   EXCHANGE ACT ......................................... 81

ITEM 10.EXECUTIVE COMPENSATION .......................................... 84

ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
           AND MANAGEMENT ............................................... 87

ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 89

ITEM 13.EXHIBITS ........................................................ 92

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES .......................... 94

SIGNATURES .............................................................. 94

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<PAGE>

                           FORWARD LOOKING STATEMENTS

     Statements  made in this Form  10-KSB  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.

Available Information

     Lexington Resources, Inc. files annual,  quarterly,  current reports, proxy
statements,  and other  information with the Securities and Exchange  Commission
(the  "Commission").  You may read and copy documents referred to in this Annual
Report on Forms 10-KSB,  SB2 and 8K that have been filed with the  Commission at
the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
You may obtain  information  on the  operation of the Public  Reference  Room by
calling the  Commission  at  1-800-SEC-0330.  You can also obtain  copies of our
Commission filings by going to the Commission's website at http://www.sec.gov



























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<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT

     Lexington  Resources,  Inc. was incorporated under the laws of the State of
Nevada in 1996 under the name "All Wrapped Up,  Inc."  During 1997,  the Company
changed it name to  Intergold  Corporation  and was  engaged in the  business of
exploration of gold and precious  metals in the United  States.  On November 19,
2003, Intergold Corporation (now known as Lexington Resources,  Inc.), Lexington
Oil & Gas Ltd. Co. LLC, an Oklahoma limited liability company  ("Lexington Oil &
Gas", or  "Lexington"),  and the shareholders of Lexington (the "Lexington Oil &
Gas Shareholders")  entered into a share exchange agreement (the "Share Exchange
Agreement").  In accordance with the terms of the Agreement: (i) Lexington Oil &
Gas became our wholly-owned  subsidiary;  (ii) we changed our name to "Lexington
Resources,  Inc." and our trading symbol to "LXRS";  and (iii) our sole business
operations  are  as a  natural  resource  exploration  company  engaged  in  the
acquisition  and  development  of oil and natural gas  properties  in the United
States.  On  November  20,  2003,  we  filed an  amendment  to our  articles  of
incorporation changing our name to "Lexington Resources, Inc."

     This  acquisition  has been  accounted  for as a reverse  acquisition  with
Lexington  Oil & Gas  being  treated  as the  accounting  parent  and  Lexington
Resources,  Inc., the legal parent, being treated as the accounting  subsidiary.
Accordingly, the consolidated results of operations of the Company include those
of Lexington  Oil & Gas for the period from its  inception on September 29, 2003
and  those  of  Lexington  Resources,   Inc.  since  the  date  of  the  reverse
acquisition.  Please note that  throughout  this  report,  and unless  otherwise
noted,  the  words  "we,"  "our,"  "us," or the  "Company"  refer  to  Lexington
Resources, Inc.

CURRENT BUSINESS OPERATIONS

General

     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.  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 53.2% back-in working interest to Lexington.

     During fiscal year 2004, we consummated  the acquisition of gross leasehold
acres in the  Arkoma  Basin in the  State of  Oklahoma,  including  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,  4,850 gross acres in the
H-9 Prospect,  and a further 320 gross acres in the area of the H-9 Prospect. We
hold an 85% working  interest  and a 79% net revenue  interest in  approximately
1,932 gross acres on the Coal Creek Prospect. We have drilled, completed and are
producing gas from two wells drilled on the Coal Creek  Prospect.  We hold a 90%
working  interest  and an 81% net revenue  interest in  approximately  292 gross
acres on the Panther  Creek  Prospect.  On January 25,  2005,  we entered into a
joint  operating  agreement  with Newfield  Exploration  Mid-Continent,  Inc. to
participate  in one of three proposed wells to be drilled in the vicinity of our
leases  in  the  Panther  Creek  Prospect.  This  well  has  been  drilled,  and
completed..

                                       5
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     We have  experienced  delays in obtaining  drilling rigs in the past due to
the high  drilling  demand in the Arkoma Basin where we have been  concentrating
our  coal bed  methane  and  other  gas  targeted  production  and land  leasing
programs.  On November 9, 2004,  we  announced  that we had reached an agreement
with Oak Hills  Drilling and  Operating,  LLC, ("Oak Hills") to drill a ten well
program.  Oak Hills is an Oklahoma  based  private  drilling and well  operating
contractor  that is our  designated  oil and gas  operator  for all our  Company
operated well interests. Oak Hills provides drill rig and drilling expertise for
us to execute our planned  drilling  initiatives.  Oak Hills is the wholly owned
subsidiary  of Oak Hills  Drilling and Operating  International,  Inc., a Nevada
corporation.  Mr. Douglas Humphreys, one of our directors, is currently the sole
director  and  officer of both Oak Hills and Oak Hills  Drilling  and  Operating
International, Inc.

     Our  transfer  agent is  Transfer  OnLine,  Inc.,  317 S.W.  Alder  Street,
Portland, Oregon 97204.

Acquisition of Oak Hills

     On  September  23, 2005,  we entered  into an  agreement in principle  (the
"Agreement") to acquire 100% of the total issued and  outstanding  shares of Oak
Hills. The Agreement was subject to certain conditions  precedent  including but
not limited to: (i) the prior  receipt by us of a  valuation  acceptable  to the
independent  members of our Board of Directors  that  determined  the underlying
value of the assets of Oak Hills;  (ii) the prior audit of Oak Hills;  and (iii)
mutual due diligence.  During  December  2005, we obtained an independent  third
party valuation of the underlying assets of Oak Hills.

     On January 23, 2006, we entered into a definitive share exchange  agreement
(the "Oak Hills Share Exchange Agreement") with Oak Hills  International,  Inc.,
Oak Hills,  and each of the shareholders of Oak Hills  International,  Inc. (the
"Oak  Hills  International  Shareholders"),  pursuant  to  which  the Oak  Hills
International Shareholders agreed to sell to us the total issued and outstanding
shares of Oak Hills  International,  Inc. and its wholly owned  subsidiary,  Oak
Hills in  consideration  of the  issuance  by us to the Oak Hills  International
Shareholders of an aggregate of 6,000,000  shares of restricted  common stock in
the capital of the Company at a price of approximately  $0.64 per share. See " -
Material Contracts";  "Item 5. Market for Registrant's Common Equity and Related
Stock holder Matters - Recent Issuances of Unregistered  Securities";  and "Item
12. Certain Relationships and Related Transactions."

     Oak Hills is currently our  designated oil and gas operator for our Company
operated Coal Bed Methane  ("CBM") well interests in the Arkoma Basin,  Oklahoma
and Barnett Shale,  Texas Project  leases.  Oak Hills was originally  created to
drill and operate  according to its exploration and development  program when we
had  difficultly  obtaining  drilling rigs during the latter half of fiscal year
2004.  On November 9, 2004,  we had entered into an agreement  with Oak Hills to
drill a ten  well  program  (the  "Drilling  Agreement").  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. We believe
that by having Oak Hills drill our prospects,  we will immediately  decrease our
drilling costs on a consolidated basis and increase our control over our oil and
gas leasehold  developments  enabling us to evolve into a vertically  integrated
junior  oil and gas  company  with the  capacity  to take oil and gas from  land
acquisition through drilling and to completion and production.

                                       6
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     Oak Hills is a full service well drilling, operating and completion company
and owns a 10,000 foot operating depth Wilson Giant triple  mechanical  drilling
rig outfitted with both triplex and duplex mud pumps capable of drilling acreage
owned by us in both the  Barnett  Shale  areas of Texas and the Arkoma  Basin in
Oklahoma.  In addition to its Wilson  Giant  drilling  rig, Oak Hills has a well
workover rig, trucks, dozer, backhoe,  trailers and well and pipeline completion
equipment.  Oak Hills operates at least 75 wells for private clients in addition
to us on a contractual  basis.  Oak Hills employs  approximately 30 to 35 people
and its Wilson Giant drilling rig operates on a twenty-four  hour basis.  Fiscal
year 2005 was Oak Hills' first year of substantial operating since acquiring its
drilling  rig in late 2004.  Oak Hills spent the latter  quarter of 2004 and the
first quarter of 2005 rebuilding and updating its Wilson Giant drilling rig. The
drilling rig has been  operating  since April 2005 drilling  horizontal  Barnett
Shale wells in the Dallas/Ft.  Worth Basin drilling as a third party contractor,
and most recently, for the Company on its Oliver Lease in Tarrant County, Texas.

OIL AND GAS PROPERTIES

     As of December 31, 2005,  we maintain an aggregate of  approximately  2,814
gross  developed  acres and 8,959  gross  undeveloped  acres  pursuant to leases
and/or   concessions  as  described   below.   Of  that  acreage,   we  maintain
approximately  2,814 gross developed acres and 6,634 gross  undeveloped acres in
the Arkoma Basin in the State of Oklahoma and 2,325 gross  undeveloped  acres in
the Barnett Shale play in North Texas. As at the date of this annual report,  we
have acquired a further 912 gross undeveloped acres in the Barnett Shale play in
North  Texas and  entered  into an  agreement  to acquire a further  50% working
interest in a further 5,000 gross undeveloped acres in the Barnett Shale play in
North Texas.

Wagnon Lease

     We purchased a 80% working  interest  and a 60.56% net revenue  interest in
approximately  590 gross  acres of a gas lease  located on the  Wagnon  Lease in
Pittsburg County, Oklahoma (the "Wagnon Lease"). 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,  as well as Oak Hills  Energy,  Inc.,  and the  lessee of the  Wagnon
Property.

     As of the date of this Annual Report, we have drilled,  completed,  and put
four coal bed methane gas wells into  production on this prospect,  the Kellster
#1-5,  the Kyndal #2-2, the Bryce #3-2, and the Calleigh #4-2. The Kellster #1-5
was drilled to a depth of  approximately  2,400 feet  vertically  and 2,200 feet
horizontally and has been producing since the middle of February 2004.

     The  Kyndal  #2-2 was  completed  in June 2004 to a depth of  approximately
2,400  feet  vertically  and 2,200  feet  horizontally  and is  located in close
proximity to the Kellster  #1-5 well.  The Kyndal #2-2 well feeds  directly into
the  existing  pipeline and  compressor  station  infrastructure  located on the
Wagnon Lease.

     The Bryce #3-2 was completed in August 2004 and is in production. The Bryce
#3-2  well is also  located  in  close  proximity  to the  Kellster  #1-5  well.
Completion  of  drilling of the Bryce #3-2 well  resulted in vertical  depths of
approximately  2,400 feet with an approximate  2,000 foot  horizontally  drilled


                                       7
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

section utilizing drilling protocols similar to those previously utilized in the
drilling of the Kellster #1-5 and Kyndal #2-2 wells.

     The last well drilled on the Wagnon Prospect was completed on April 2, 2005
when the Calleigh #4-2 commenced production.  The Calleigh #4-2 well resulted in
vertical  depths of  approximately  2,600  feet with an  approximate  1,800 foot
horizontally drilled section.

     As of the date of this Annual Report, 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,  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 12.17% 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 the working  interest  capital is repaid and Lexington Oil & Gas
will "back-in" to a reversionary 53.2% working interest. Pursuant to the further
terms and provisions of the Funding Agreements,  all wells drilled on the Wagnon
Lease 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.
During  fiscal year 2005, we 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 19, 2005, the
Company had repaid the funding  investors  the balance of their unpaid  capital,
which totaled $1,180,915 as of December 31, 2004 to acquire  Lexington's back-in
53.2%  working  interest  and  32.22%  net  revenue  interest  in the four wells
developed on the Wagnon lease under the Funding Agreements. Therefore, as of the
date of this Annual Report,  our back-in  working  interest of 53.2% (32.22% net
revenue  interest)  in each of the four wells on the Wagnon  Property has vested
and the private  investors have reverted to an aggregate 20.1% working  interest
and a 12.17% net revenue interest.

Coal Creek Prospect

     During fiscal year 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 Gas 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.  In
accordance with the terms and provisions of a consulting  agreement with Douglas
Humphreys, one of our directors (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 to be drilled on the Coal Creek Gas Prospect that
has been completed and is in production.  See "Item 10. Executive Compensation -
Consulting   Agreement"  and  "Item  12.  Certain   Relationships   and  Related
Transactions."

                                       8
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     As of the date of this Annual  Report,  the total  acreage  acquired in the
Coal Creek Gas Prospect is  approximately  1,932 gross leasehold  acres. One 320
lease terminated by its terms during fiscal year 2005.  Certain other leases may
terminate in accordance with their terms; however,  ongoing drilling activity is
expected to preclude lease termination.

     On March 31,  2005,  we began  drilling  the first  well on the 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.  The Lex #1-34 well was
drilled to a depth of approximately  3,200 vertical feet and approximately 2,000
horizontal feet.

     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. The
Brumbaugh  #1-10 was drilled to a vertical  depth of 3,350 feet and a horizontal
lateral section of 2,350 feet.

     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 encountered a shallow  "Bartlesville Sand" 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.  As of the date of this Annual
Report,  we believe that Ellis #1-15 will be  re-completed  via horizontal  well
development in accordance with contractual  arrangements  with Dylan Peyton LLC.
See " - Material Agreements."

During June 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 December 31, 2005, we have repaid the Coal Creek Loans in
the aggregate  principal  amount of $1,165,000  and accrued  interest of $41,058
from proceeds received from our recent private placement offering of convertible
notes,  thus discharging the security  interest against our Coal Creek Prospect.
See "Item 5. Market for  Registrant's  Common  Equity and Related  Stock  holder
Matters - Recent Issuances of Unregistered Securities".

     We have agreed to  contribute  our  undeveloped  inventory of leases in the
Coal Creek Prospect to jointly develop  gas-producing wells with Dylan Peyton on
a 50/50  equal  working  interest  basis.  Our  subsidiary,  Oak Hills,  will be
utilized for well  completion and service as well as geological and  engineering
work associated with joint exploration. See " - Material Contracts."



Panther Creek Prospect

     On March 12, 2004, we entered into a three year lease for approximately 292
gross 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.

                                       9
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     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  had
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's  working  interest  in the well it  elected to
participate in is 25.78%.

     Newfield has proceeded with the drilling and completion of one of the wells
in which  Lexington  has  leased  acreage  and in  which  Lexington  elected  to
participate. The vertical well targeted a Woodford Shale gas zone, the POE 1-29,
commenced  drilling on February 9, 2005 and began  producing  on March 21, 2005.
Based on  results  of the POE  1-29 and  increased  revised  estimated  costs to
complete a further  horizontal  well  proposed by Newfield,  the Company has not
elected to  participate in any further wells operated by Newfield on the Panther
Creek Prospect.

South Lamar Prospect

     On April 22, 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 previously  prepared the drill site
for the first  proposed  coal bed methane  Hartshorne  Coal targeted gas well on
this prospect, the Goodson #1-24 well.  Subsequently,  we decided not to proceed
with the drilling of the planned  "Goodson #1-24" pending  reassessment of costs
and techniques  utilized to drill and complete wells.  Various well drilling and
completion related cost reduction techniques were evaluated by our management. A
189 acre lease expired during 2005 according to its terms.

     As of the date of this  Annual  Report,  drilling is slated to begin on our
South Lamar Prospect by approximately April 1, 2006 with drilling rigs targeting
vertical wells to test Hartshorne Coal,  shallow gas sand, and possibly Woodford
gas targets in the area in addition to  horizontal  CBM gas wells.  We intend on
drilling  three  wells at the outset of our current  exploration  program on the
South Lamar Prospect, with further direction on drilling targets to be guided by
the drilling results of the first test wells in the program. We believe that two
drilling rigs provided by Dylan Peyton,  LLC, a Texas limited  liability company
("Dylan  Peyton"),  will allow for fast deployment and simultaneous  drilling on
both vertical and  horizontal  targets in different  sections of the South Lamar
Prospect to test certain targets.  Shallower vertical wells are to be drilled by
a small more cost  effective  drilling  rig.  We have agreed to  contribute  our
inventory of leases in the South Lamar Prospect to jointly develop gas-producing
wells with Dylan Peyton on a 50/50 equal working interest basis. Our subsidiary,
Oak  Hills,  will  be  utilized  for  well  completion  and  service  as well as
geological and  engineering  work  associated  with joint  exploration.  See " -
Material Contracts."

     The coal bed  methane  gas target  zones on the South  Lamar  Prospect  are
estimated to be  approximately  2,800 feet deep,  while shallow gas sands in the
area are  estimated  to be in the 1,000 to 2,000  foot  depth  range.  Our first
vertical well will begin  drilling rig  mobilization  on site  approximately  by
April 1, 2006 to drill the coal bed  methane  and shall gas sand  targets.  Road
access work is currently under  development in addition to well staking and site
preparation work.

                                       10
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

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,
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.

     We have agreed to  contribute  our  undeveloped  inventory of leases in the
Coal Creek Prospect to jointly develop  gas-producing wells with Dylan Peyton on
a 50/50  equal  working  interest  basis.  Our  subsidiary,  Oak Hills,  will be
utilized for well  completion and service as well as geological and  engineering
work associated with joint exploration. See " - Material Contracts."


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,  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  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.

     We have agreed to contribute our undeveloped inventory of leases in the H-9
Prospect to jointly  develop  gas-producing  wells with Dylan  Peyton on a 50/50
equal working  interest basis. Our subsidiary,  Oak Hills,  will be utilized for
well  completion  and  service  as  well  as  geological  and  engineering  work
associated with joint exploration. See " - Material Contracts."


Barnett Pathway Prospect

     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 Pathway Prospect").  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 72.5%,
and to increase  the initial  acreage up to  approximately  3,600 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 to 72.5% 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


                                       11
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

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  Pathway
Prospect. We acquired approximately 2,325 net leasehold acres for $1,107,000. On
January 5, 2006, we acquired an additional three leases comprising approximately
601 net leasehold acres for $439,000.  The acquisition of the additional 601 net
leasehold acres provides us with a 100% working interest and a 72.5% net revenue
interest.  We estimate the new acquired  leases to contain  Barnett  Shale zones
with minimum thickness of 250 feet.

Geneva Prospect

     On December  5, 2005,  we entered  into an asset  purchase  agreement  with
Geneva Energy Corp., a Nevada corporation ("Geneva"),  and Lexington Oil and Gas
(the "Asset Purchase Agreement"). In accordance with the terms and provisions of
the Asset Purchase Agreement, we purchased a 100% working interest and a 70% net
revenue  interest  in and  to  certain  petroleum  and  natural  gas  rights  on
approximately  312  acres  located  in  Tarrant  County,   Texas  (the  "Tarrant
Prospect"), for an aggregate consideration of $779,798.

     The recent  acquisitions  increase our total Barnett Shale  targeted  lease
inventory to a total of 3,238 net mineral acres or targets for 23-25  horizontal
wellbores  diversified in Hood, Parker,  Tarrant,  Palo Pinto, and Jack Counties
with access to existing pipeline networks.

     During first quarter of 2006,  through Oak Hills, we completed the drilling
portion of a  horizontal  Barnett  Shale gas well named the Oliver Unit #1H. The
2,300 foot  horizontal  section of the Oliver Unit #1H is now  completed  with a
total depth of 9,300 feet. Additional,  production casing has been installed and
cemented in place. With this portion of the Oliver Unit #1H well completed,  Oak
Hills' drilling rig is undergoing routine  maintenance and  demobilization  from
the well site.  Well  fracturing  required to  stimulate  the Barnett  Shale gas
bearing  rock in order to begin gas  production  is being  schedule  for  second
quarter of 2006.

     As of the date of this Annual  Report,  the  pipeline to tie the Oliver #1H
into a gas  marketing  line  in the  area  is in  process  to be  permitted  and
subsequently  constructed.  Further,  we are  currently  securing  contracts for
metering, compression, gas dehydration and treatment, transportation, as well as
gas marketing.  We intend to tie in Oliver Unit #1H to an existing pipeline that
crosses our lease leading to gas processing and marketing.

DRILLING ACTIVITY

     The  following  table sets forth the  results of our coal bed  methane  gas
drilling activity as of December 31, 2005:

  --------------------------------- ----------------------------
  Gross Wells                       Net Wells
  --------------------------------- ----------------------------
  Total         Producing    Dry    Total       Producing  Dry
  ------------- ------------ ------ ----------- ---------- -----
  7             7            0      3.1         3.1        0
  ------------- ------------ ------ ----------- ---------- -----

                                       12
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

Production Information

     During years ended 2003 and previous, we had no oil and gas production.

Net Production, Average Sales Price and Average Production Costs

     The table below sets forth the net quantities of gas production (net of all
royalties, overriding royalties and production due to others) attributable to us
for fiscal year ended December 31, 2005,  and the average sales prices,  average
production costs and direct lifting costs per unit of production.


                     For Fiscal Year Ended December 31, 2005

         Net production (Mcf)                         130,942

         Average Sales price (per Mcf)                  $5.30

         Average Production Cost (per Mcf)*             $1.63

     *Includes direct lifting costs,  which are comprised of labor,  repairs and
maintenance,  materials and supplies,  workover  costs,  insurance and property,
gathering, compression, marketing and severance taxes.

     The table below sets forth the net quantities of gas production (net of all
royalties, overriding royalties and production due to others) attributable to us
for fiscal year ended December 31, 2004,  and the average sales prices,  average
production costs and direct lifting costs per unit of production.


                     For Fiscal Year Ended December 31, 2004

         Net production (Mcf)                         160,412

         Average Sales price (per Mcf)                  $4.44

         Average Production Cost (per Mcf)*             $0.79

     *Includes direct lifting costs,  which are comprised of labor,  repairs and
maintenance,  materials and supplies,  workover  costs,  insurance and property,
gathering, compression, marketing and severance taxes.

Gross and Net Productive  Gas Wells,  Developed  Acreage and Overriding  Royalty
Interests



                                       13
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     Productive Wells and Developed Acres

     The tables below set forth our leasehold interest in productive and shut-in
gas wells, and in developed acres, as of the date of this Annual Report:

     ------------------ ---------------- ----------------
     Prospect                  Gross(1)          Net (2)
     ------------------ ---------------- ----------------
     Wagnon                           4             2.13

     Panther                          1             0.25

     Coal Creek                       2             0.72
     ------------------ ---------------- ----------------
     Total                            7             3.10
     ------------------ ---------------- ----------------

     (1) A gross well is a well in which a working interest is owned. The number
of gross  wells is the  total  number of wells in which a  working  interest  is
owned.

     (2) A net well is  deemed  to exist  when the sum of  fractional  ownership
working  interest in gross wells  equals one. The number of net wells is the sum
of the  fractional  working  interests  owned in gross wells  expressed as whole
numbers and fractions thereof.

         Developed Acreage Table(1)

               ------------------ ---------------- ----------------
               Prospect                 Gross (2)          Net (3)

               ------------------ ---------------- ----------------
               Wagnon                         590           313.88
               ------------------ ---------------- ----------------
               Panther                        165            38.28
               ------------------ ---------------- ----------------
               Coal Creek                   1,043           591.67
               ------------------ ---------------- ----------------
               Middle Creek                   320           248.60
               ------------------ ---------------- ----------------

               Total                        2,118          1,192.4
               ------------------ ---------------- ----------------

     (1) Consists of acres spaced or assignable to productive wells.

     (2) A gross  acre is an acre in which a  working  interest  is  owned.  The
number of gross acres is the total  number of acres in which a working  interest
is owned.

     (3) A net acre is  deemed  to exist  when the sum of  fractional  ownership
working  interests in gross acres equals one. The number of net acres is the sum
of the  fractional  working  interests  owned in gross acres  expressed as whole
numbers and fractions thereof.

                                       14
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

Undeveloped Acreage

     The table below sets forth our leasehold interest in undeveloped acreage as
of the date of this Annual Report:

                  ------------------ --------------- -----------------
                  Prospect           Gross           Net*
                  ------------------ --------------- -----------------
                  South Lamar                   955             859.5
                  ------------------ --------------- -----------------
                  Panther                       127             114.3
                  ------------------ --------------- -----------------
                  Coal Creek                    569             512.1
                  ------------------ --------------- -----------------
                  H-9                         5,170           4,653.0
                  ------------------ --------------- -----------------
                  Barnett-Pathway             2,926           2,633.4
                  ------------------ --------------- -----------------
                  Geneva                        312             280.8
                  ------------------ --------------- -----------------

                  Total                      10,059           9,053.1
                  ------------------ --------------- -----------------

Gas Delivery Commitments

     We have no gas delivery  commitments.  Lexington Oil & Gas  contracts  with
Unimark LLC and through its operator, Oak Hills Drilling & Operating, LLC., with
Williams Arkoma  Gathering  Company,  LLC, and Hughes Gas System LLC to sell gas
produced.

Drilling Commitments

     As of the date of this Annual Report,  we are not committed to drilling any
wells.

Reserve Information

2004 Reserve and Economic Evaluation Report

     On September 9, 2004, we obtained a reserve and economic  evaluation report
regarding the Wagnon Lease,  which was conducted by Fletcher Lewis  Engineering,
Inc.  of  Oklahoma  dated  September  9, 2004 (the "2004  Reserve  and  Economic
Evaluation  Report").  The 2004 Reserve and Economic Evaluation Report estimates
recoverable  reserves from the Wagnon Lease,  the present value and a discounted
present  value of 10% of future  cash flow  there  from.  The 2004  Reserve  and
Economic  Evaluation  Report  indicates  that as of September 1, 2004,  there is
approximately  1,531,026  MCF,  with future net revenue of $5,274,000 in net gas
reserve from proven producing wells and proven  undeveloped  sites on the Wagnon
Lease  when  using a gas price of $4.57 MCF and a present  value 10%  discounted
cash flow on net production of approximately $4,073,000.

                                       15
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     -------------------- -------------- --------------- ----------------
                            Net Gas MCF      Future Net    Present Worth
                                              Cash flow    Discounted 10%
     -------------------- -------------- --------------- ----------------
     Proved Developed
     Producing                1,176,008       4,353,737        3,446,997
     -------------------- -------------- --------------- ----------------
     Summary Undeveloped        355,018         920,224          626,324
     -------------------- -------------- --------------- ----------------
     Total                    1,531,026       5,273,961        4,073,322

     -------------------- -------------- --------------- ----------------

2006 Reserves and Economic Evaluation Report

     On January 6, 2006,  we  obtained  an  independent  reserves  and  economic
evaluation report regarding the nine producing wells in the Arkoma Basin and the
approximately  7,506  acres of  undeveloped  leasehold  in Hughes  and  McIntosh
Counties in Oklahoma, and the approximately 3,240 acres of undeveloped leasehold
in the counties  located in Texas (the "2006  Reserves  and Economic  Evaluation
Report").  The Reserves and Economic  Evaluation Report was prepared by Pinnacle
Energy Services,  LLC of Oklahoma City, Oklahoma. The 2006 Reserves and Economic
Evaluation  Report  provides  a summary  of the  proven  results  regarding  our
interests  in  nine  proved  developed  producing  wells  and  the  five  proved
undeveloped well sites in Oklahoma and the six proved undeveloped well sites and
16 proven  probable  wells in Texas.  Portions of the 2006 Reserves and Economic
Evaluation Report are shown below redacted for "possible category" reserves.

     Several producing and  non-producing  assets of Lexington  Resources,  Inc.
("Lexington") were evaluated as January 1, 2006. Included in the assets are nine
producing  wells in the Arkoma Basin of Eastern  Oklahoma,  approximately  7,506
acres of  undeveloped  leasehold  in Hughes  and  McIntosh  Counties  in Eastern
Oklahoma,  and  approximately  3,240 acres of undeveloped  leasehold in the five
north Texas Counties of Hood, Jack, Palo Pinto, Parker and Tarrant.

     Six of the producing wells are operated  horizontal  Hartshorne Coal wells,
two are shallow  Gilcrease  and Savannah  producers,  and one is a  non-operated
Woodford shale producer.  The Arkoma  undeveloped  leasehold is located in fifty
(50) sections located in seven townships between 4N-11E to 9N-14E. The leasehold
is primarily limited to the Hartshorne and shallower  intervals and is generally
in an active and multi-horizon  production area. Seven Leases comprise the North
Texas leasehold which is primarily for Barnett Shale  (horizontal)  development,
but has other  uphole  secondary  targets as well.  A portion of the  acreage is
nearby  commercial  activity,  while  most of the  acreage is in areas of likely
future  activity.  The attached  Exhibits A and B lists the wells and  leasehold
acreage, respectively.

     Due to several  factors,  this is currently  considered as a  "preliminary"
evaluation  to  be  supplemented  within  2-4  weeks.   Operations  to  increase
production on several of the existing Hartshorne wells is scheduled for January,
2006,  to include  but not  limited to  additional  stimulations,  tubing  depth
changes, and plunger installations. XXXXXX. Additional time will also allow more
investigation,  identification and evaluation of potential additional Hartshorne
wells to be drilled on the Arkoma  undeveloped  leasehold as well as the Barnett
Shale development in Texas.

                                       16
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     The economic evaluation was performed using a year-end SEC pricing adjusted
for gathering, contract, compression, etc. estimates. Operating expense data was
provided by Lexington and average monthly cost of approximately  $1,000 per well
per month were applied to the Oklahoma  producing wells, held constant.  Capital
costs for new  horizontal  Hartshorne  wells was estimated at $500,000 per well.
For the undeveloped Texas assets, operating expenses of $XXXX per well per month
were  applied to account for water,  compressions,  etc.  Capital  expenses  for
drilling, completing and equipping a horizontal Barnett Shale well was estimated
to be $XXXXXXX.  A summary of the proven  results are as below (volumes in MMcf,
values in M$),  while a discussion  of  leasehold  value for  non-proven  assets
follows.
<TABLE>
<CAPTION>

                        Gross      Gross          Net        Total Net      BFIT      Other BFIT
       Asset             EUR      Rem'gGas     Rem'g Gas     Cash flow     PV 10%     PV      %
-------------------     -----     --------     ---------     ---------     ------     ----------
<S>                      <C>        <C>           <C>            <C>        <C>           <C>
OK, 9 PDP wells         2,339      1,618           622          3,918       2,826            10%
OK, 5PUD                1,970      1,970           745          4,126       2,572     1,808  20%
  Total Oklahoma        4,309      3,587         1,367          8,044       5,398
TX, Barnett 6 PUD       8,889      8,889         6,222         29,462      15,074     8,987  20%
TX, Barnett 16 Prob     XXXXX      XXXXX         XXXXX         XXXXXX      XXXXXX     XXXXX  XXX
  Total Texas           XXXXX      XXXXX         XXXXX         XXXXXX      XXXXXX     XXXXX  XXX
GRAND TOTAL             XXXXX      XXXXX         XXXXX         XXXXXX      XXXXXX     XXXXX  XXX
</TABLE>

     Five PUDS  were  forecasted  in the Coal  Creek  area of 5N-11E  offsetting
existing  horizontal  Hartshorne  wells.  Although likely, no other drilling was
forecasted  for the  undeveloped  leasehold in Eastern  Oklahoma at this time in
this  evaluation.  Additional  work will be performed to determine how many more
wells can be  identified  and  forecasted.  The  location  of these  leases in a
producing  region and proximity to producing  wells allows for a current valuing
of the assets by assessing a reasonable acreage value.  Current leasehold in the
area  ranges from $150 to $500 per acre.  The  Panther  Creek area of 4N-11E was
valued at XXX$/acre,  the Coal Creek area valued at XXX$/acre, and the remaining
H-9 area  (8N-12E  to 9N-14)  was  valued at  XXX$/acre.  The total  acreage  is
currently estimated to have a value of at least $XXXXXXX for the 7,506.52 acres.

     Development  drilling of the Barnett Shale on a 120 acre per well basis was
performed on the Texas Acreage.  Three leases (Oliver,  Martin,  Riley) totaling
1,108.66 acres have known producing offset Barnett Shale wells and six PUD wells
were identified. A present value, discounted at 20% for these wells is 8.99 $MM,
or approximately 8,100$/acre.

     The remaining  2,130.37 acres also have Barnett Shale potential of 16 wells
and 19+ Bcf but don't have any (known) current offset  horizontal wells by which
to form a  Proven  Undeveloped  basis.  Uphole  potential  in  other  formations
(Conglomerate,  Strawn),  their location in the basin and trending Barnett Shale
activity leads the value of these leases to be estimated at $XXXX per acre (X.XX
$MM).  Value of these  leases  will  increase or  decrease  depending  on future
activity in and around these leases.

                                       17
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     Total Asset Value is  currently  estimated  to be  approximately  17,800 M$
using the following parameters.

  State                     Description                  PV,M$
---------     ----------------------------------------   -----

Oklahoma:     9 Wells, PDP @ PV 10%                      2,826
              5 PUDs @ PV 20%                            1,808
              Undeveloped Leasehold (7,506.52 acres)     XXXXX

Texas:        6 PUDs @ PV 20% (1,109acres)               8,987
              16 Prob Locations @ PV 40% (2,130 acres)   XXXXX
                                                         ------
TOTAL                                                    XXXXMS

     As stated earlier,  additional well work and development  evaluations  will
likely increase the overall asset value.

         PRICING ASSUMPTIONS

     A December 31, 2005 SEC price was adjusted for Index differential and other
deductions  and applied at a constant  rate. The year ending NYMEX gas price was
approximately  11.58$MMBtu with most Oklahoma/Texas  natural gas Index prices at
approximately  8.70$/Mcf.  This  price was  adjusted  by 0.50 $/Mcf to arrive at
estimated wellhead price for all properties.  This is different than the 10% off
NYMEX calculated for 2005 for existing wells, but the high year-end differential
caused a different pricing to be applied. A 3.00 $/BBI adjustment was applied to
the oil pricing of 61.63 $/BBI, held flat.

     Six of the existing wells are Hartshorne Coal horizontal producers. Monthly
and daily  production  data was used with  analogy  declines to forecast  future
production.  Four of the wells are located in Sec 2-8N-17E while two are located
in sections 34-6N-11E and 10-5N-11E.  Combined, the six wells are producing at a
rate of approximately 900 Mcf/d, but field activities  scheduled in January 2006
may increase production significantly. A follow-up evaluation after well work is
concluded will likely increase the value of these wells. Five proven undeveloped
locations  were  identified  at this time in the Coal  Creek  area  including  a
re-entry  of a  horizontal  wellbore  previously  drilled in Section 15 near the
Brumbaugh 1-10.

     Much of the  undeveloped  leasehold  in Oklahoma is adjacent to or contains
wells producing from Booch, Cromwell, Gilcrease, Bartlesville, Hartshorne sands,
and other  intervals.  Most but not all on the  leasehold  is  limited to depths
ranging from the surface to the base of the Hartshorne Coal.  Expirations  occur
in varying months of 2006 and 2007.  Additional mapping and reservoir evaluation
is  ongoing to  identify  additional  wells to be drilled in 2006 and 2007.  The
undeveloped  value of these wells will likely  increase the value  significantly
above the current valuation using the $/acre method.

         Barnett Shale development on the Texas leasehold is scheduled to begin
in early 2006 and continue at the rate of approximately 8-10 wells per year.
XXXXX. Approximately 1/3 of the leasehold is adjacent or nearby commercially
producing Barnett Shale producers. The remaining 2/3rds of the leasehold is in
the area identified as likely productive but have not been developed to the
extent of other areas.

     We have not filed any  estimates  of total  proved net oil or gas  reserves
with,  or included  such  information  in reports to, any federal  authority  or
agency other than the Securities and Exchange Commission on this Form 10-KSB.

                                       18
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

MATERIAL AGREEMENTS

Oak Hills Share Exchange Agreement

     On January 23, 2006, we entered into a definitive share exchange  agreement
(the "Oak Hills Share Exchange Agreement") with Oak Hills  International,  Inc.,
Oak Hills,  and each of the shareholders of Oak Hills  International,  Inc. (the
"Oak Hills International Shareholders"). Pursuant to the terms and provisions of
the Oak Hills Share Exchange Agreement, the Oak Hills International Shareholders
agreed  to sell to us the  total  issued  and  outstanding  shares  of Oak Hills
International  in  consideration  of  the  issuance  by  us  to  the  Oak  Hills
International  Shareholders  of an aggregate of 6,000,000  shares of  restricted
common  stock at a price of  approximately  $0.637645  per share.  The per share
consideration  was  calculated  by  reference  to the of the assets of Oak Hills
obtained from the independent  third party valuation,  and management's  further
calculation of net tangible  value  inclusive of all other balance sheet assets,
current,  and long-term  liabilities of the acquired companies  resulting in the
shares  issued as  consideration,  with such shares issued at a 6.3% discount to
the  trading  value of our stock as at December  22-23,  2005,  the  transaction
valuation date.

     Additionally,  we  negotiated  favorable  terms of repayment for the $1.292
million in secured  promissory notes assumed in the acquisition owing to the Oak
Hills International  Shareholders by Oak Hills International,  Inc. that require
no payment of  interest  (9% per annum) or  principle  for a period of two years
from the date of acquisition.  See "Item 5. Market for  Registrant's  Securities
and Related Stockholder  Matters - Recent Issuances of Unregistered  Securities"
and "Item 6.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operation - Material  Commitments." Also see Financial Statements for
the year ended 2005, Note 14 - Subsequent Events.

     As a consequence of the Oak Hills Share Exchange Agreement, we acquired Oak
Hills  International,  Inc. as a wholly-owned  subsidiary and we also indirectly
acquired Oak Hills,  as a  wholly-owned  subsidiary of Oak Hills  International,
Inc.

Dylan Peyton LLC

Exploration Agreements

Arkoma Basin Exploration Agreement

     Effective January 31, 2006, Lexington Oil & Gas entered into an exploration
agreement and operating agreement  (collectively,  the "Arkoma Basin Exploration
Agreement"),  with Dylan Peyton,  LLC, a Texas limited liability company ("Dylan
Peyton").  Pursuant to the terms and provisions of the Arkoma Basin  Exploration
Agreement:  (i) we agreed with Dylan  Peyton to conduct  joint  exploration  and
development  operations,  including the drilling of  exploratory  or development
wells for the  discovery of and for the  production of oil and/or gas on certain
of our  leasehold  interests  located in the Arkoma Basin in McIntosh and Hughes
Counties,  Oklahoma; (ii) Avatar Energy LLC, an affiliate of Dylan Peyton, shall
be the  operator of the initial  test well and any test well  drilled  under the
terms of the Arkoma Basin  Exploration  Agreement;  (iii)  Lexington Oil and Gas
shall assign to Dylan Peyton an undivided 50% interest in all the  leaseholds in
Coal Creek, South Lamar,  Middlecreek,  and H-9 Prospects; and (iv) Dylan Peyton
shall pay to Lexington Oil and Gas $575,000 in consideration of the assignment.

                                       19
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

Comanche County Barnett Shale Exploration Agreement

     Effective January 31, 2006, Lexington Oil & Gas entered into an exploration
agreement and operating  agreement  (collectively,  the "Comanche County Barnett
Shale  Exploration  Agreement"),  with Dylan  Peyton.  Pursuant to the terms and
provisions of the Comanche  County Barnett Shale  Exploration  Agreement:(i)  we
agreed  with  Dylan  Peyton  to  conduct  joint   exploration   and  development
operations,  including the drilling of exploratory or development  wells for the
discovery  of and for the  production  of oil and/or  gas on  certain  leasehold
interests  owned by Dylan  Peyton  located in the Barnett  Shale and shallow gas
targets in Comanche County,  Texas;  (ii) Oak Hills shall be the operator of the
project;  and (iii)  Lexington Oil & Gas will pay to Dylan Peyton  approximately
$1,250,000  for a 50%  working  interest  in  approximately  5,000  acres of new
acreage located in Comanche  County,  Texas through a combination of $575,000 in
cash and approximately $675,000 of carried drilling costs in the first test well
expected to be drilled on or before  September 2006. The Company's other Barnett
shale acreage in the Barnett  Pathway  Prospect or the Geneva  Prospect does not
form part of Comanche County Barnett Shale Exploration Agreement.

EurXchange Consulting Ltd.

     On  February  15,  2006,  we  entered  into  a  consulting  agreement  (the
"EurXchange Consulting Agreement"),  with EurXchange Consulting Ltd., a Canadian
corporation  ("EurXchange").  Pursuant  to  the  terms  and  provisions  of  the
EurXchange  Consulting  Agreement:   (i)  EurXchange  agreed  to  render  to  us
consulting  services  including,  but not limited to,  translations  of webpage,
business  plan and new releases  into  German,  establishment  of  communication
during European  business  hours,  chat line  coordination,  web portal presence
through  Wallstreet  Online,  production  and  distribution  of a MIDAS research
report and a penny  stock  report,  presentation  of  roadshows,  production  of
certain mailers,  and  establishment of a Stock Hotline  telephone line; (ii) we
will pay to EurXchange a cash  retainer in the aggregate  amount of 293,000 EUR,
with the  first  installment  of  153,000  EUR due on date of  execution  of the
EurXchange  Consulting  Agreement and the second and third installment of 70,000
EUR payable on April 15, 2006 and May 15, 2006, respectively; and (iii) we shall
issue to  EurXchange  an aggregate of 400,000  shares of our  restricted  common
stock. See "Item 5. Market for Registrant's Securities and Stockholder Matters -
Recent Sales of Unregistered Securities."

COAL BED METHANE GAS

     Natural gas consists  primarily of methane,  which is produced when organic
material is physically turned into coal under extreme geologic conditions.  When
the coal and methane  conversion  process occurs such that the resultant coal is
saturated with water and methane is trapped within the coal, the result is "coal
bed methane."  Water  permeates  coal beds and the water  pressure traps the gas
within the coal.  Because coal has a large and complex internal surface area, it
can store volumes of gas six or seven time as much as a conventional  nature gas
reservoir of equal rock volume. Coal bed methane is kept in place usually by the
presence  of  water.  Thus the  production  of coal bed  methane  in many  cases
requires the  dewatering of the coal gas to be extracted.  Therefore,  in a coal
bed gas well, water is produced in large volumes  especially in the early stages
of  production.  As the amount of water in the coal  decreases,  gas  production
increases.

                                       20
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ITEM 1. DESCRIPTION OF BUSINESS - continued


     The United States Geological Survey has estimated coal bed gas resources of
at least 700 trillion cubic feet.  About 100 trillion cubic feet of that appears
to be economically recoverable with existing technology.  Coal bed gas currently
accounts for about 7.5% of total natural gas production in the United States.

BARNETT SHALE GAS

     The  Barnett  Shale in the Fort Worth Basin in North Texas has grown from a
sub-economic,  unconventional  natural gas play to the largest  onshore U.S. gas
producing area with predictions  that it may become the most prolific  domestic,
onshore play.

     Production from the play now exceeds 1.2 billion cubic feet (Bcf) a day. An
estimated 1.5 trillion  cubic feet (Tcf) of gas has been  commercially  produced
from the Barnett  Shale.  More then 100 companies  have drilled a total of about
4,000 successful wells in the field.

     The U.S.  Geological  Survey,  in a study now more than two years old,  had
estimated the Barnett Shale at 262 Tcf.

COMPETITION

     We operate in a highly competitive  industry,  competing with major oil and
gas companies, independent producers and institutional and individual investors,
which are actively seeking oil and gas properties  throughout the world together
with the equipment, labor and materials required to operate properties.  Most of
our competitors have financial  resources,  staffs and facilities  substantially
greater than ours.  The principal  area of  competition  is  encountered  in the
financial  ability to acquire good acreage  positions and drill wells to explore
for oil and  gas,  then,  if  warranted,  drill  production  wells  and  install
production  equipment.  Competition  for the acquisition of oil and gas wells is
intense with many oil and gas properties and or leases or concessions  available
in a competitive bidding process in which we may lack technological  information
or expertise available to other bidders.  Therefore, we may not be successful in
acquiring and developing  profitable properties in the face of this competition.
No assurance can be given that a sufficient number of suitable oil and gas wells
will be available for acquisition and development.

GOVERNMENT REGULATION

General

     The  production  and sale of oil and gas are  subject to  various  federal,
state and local governmental regulations, which may be changed from time to time
in  response  to economic or  political  conditions  and can have a  significant
impact upon overall operations.  Matters subject to regulation include discharge
permits for drilling operations,  drilling bonds, reports concerning operations,
the  spacing  of  wells,  unitization  and  pooling  of  properties,   taxation,
abandonment  and  restoration  and  environmental  protection.  These  laws  and
regulations are under constant  review for amendment or expansion.  From time to
time,  regulatory  agencies  have  imposed  price  controls and  limitations  on
production  by  restricting  the rate of flow of oil and gas wells below  actual
production  capacity  in order to conserve  supplies of oil and gas.  Changes in
these  regulations  could require us to expend  significant  resources to comply
with new laws or regulations or changes to current requirements and could have a
material adverse effect on us.

                                       21
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

Oil and Gas Regulation

     The governmental laws and regulations which could have a material impact on
the oil and gas exploration and production industry are as follows:

     Drilling and Production

     Our  operations  are  subject to various  types of  regulation  at federal,
state,  local and Native  American  tribal  levels.  These  types of  regulation
include requiring permits for the drilling of wells,  drilling bonds and reports
concerning operations. Most states, and some counties, municipalities and Native
American tribes, in which we operate also regulate one or more of the following:
(i) the location of wells;  (ii) the method of drilling and casing wells;  (iii)
the rates of production or "allowables"; (iv) the surface use and restoration of
properties  upon  which  wells are  drilled  and other  third  parties;  (v) the
plugging and  abandoning of wells;  and (vi) notice to surface  owners and other
third parties.

     State laws  regulate  the size and shape of drilling  and spacing  units or
proration units  governing the pooling of oil and natural gas  properties.  Some
states allow forced pooling or  integration of tracts to facilitate  exploration
while  other  states  rely on  voluntary  pooling of lands and  leases.  In some
instances, forced pooling or unitization may be implemented by third parties and
may  reduce  our  interest  in  the  unitized  properties.  In  addition,  state
conservation laws establish maximum rates of production from oil and natural gas
wells,  generally  prohibit  the  venting or  flaring of natural  gas and impose
requirements regarding the ratability of production.  These laws and regulations
may limit the amount of  natural  gas and oil we can  produce  from our wells or
limit the number of wells or the locations at which we can drill. Moreover, each
state  generally  imposes a  production  or  severance  tax with  respect to the
production  and sale of oil,  natural gas and  natural  gas  liquids  within its
jurisdiction.

     Natural Gas Sales Transportation

     Historically, federal legislation and regulatory controls have affected the
price of the  natural  gas we  produce  and the  manner in which we  market  our
production.  The Federal Energy Regulatory  Commission ("FERC") has jurisdiction
over the  transportation  and sale  for  resale  of  natural  gas in  interstate
commerce  by natural  gas  companies  under the  Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978.

     FERC also regulates interstate natural gas transportation rates and service
conditions,  which affects the marketing of natural gas that we produce, as well
as the  revenues we receive for sales of our natural  gas.  Commencing  in 1985,
FERC  promulgated  a  series  of  orders,  regulations  and  rule  makings  that
significantly fostered competition in the business of transporting and marketing
gas.   Today,   interstate   pipeline   companies   are   required   to  provide
nondiscriminatory  transportation  services to  producers,  marketers  and other
shippers,  regardless of whether such shippers are affiliated with an interstate
pipeline company. Under FERC's current regulatory regime,  transmission services
must be provided on an open-access, non-discriminatory basis at cost-based rates
or at market-based rates if the  transportation  market at issue is sufficiently
competitive.

                                       22
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     Mineral Act

     The  Mineral  Leasing  Act of 1920  ("Mineral  Act")  prohibits  direct  or
indirect  ownership of any  interest in federal  onshore oil and gas leases by a
foreign  citizen  of a country  that  denies  "similar  or like  privileges"  to
citizens   of  the  United   States.   Such   restrictions   on  citizens  of  a
"non-reciprocal"  country include ownership or holding or controlling stock in a
corporation  that holds a federal onshore oil and gas lease. If this restriction
is violated,  the corporation's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the Bureau of
Land  Management  (which   administers  the  Mineral  Act)  provide  for  agency
designations  of   non-reciprocal   countries,   there  are  presently  no  such
designations in effect.

Environmental Regulation

     Our activities  will be subject to existing  federal,  state and local laws
and  regulations  governing  environmental  quality and pollution  control.  Our
operations  will be subject to stringent  environmental  regulation by state and
federal authorities including the Environmental  Protection Agency ("EPA"). Such
regulation  can increase the cost of such  activities.  In most  instances,  the
regulatory requirements relate to water and air pollution control measures.

Waste Disposal

     The Resource  Conservation and Recovery Act ("RCRA"),  and comparable state
statutes,  affect oil and gas exploration and production  activities by imposing
regulations on the generation, transportation,  treatment, storage, disposal and
cleanup of "hazardous wastes" and on the disposal of non-hazardous wastes. Under
the auspices of the EPA, the  individual  states  administer  some or all of the
provisions of RCRA,  sometimes in  conjunction  with their own,  more  stringent
requirements.  Drilling fluids,  produced  waters,  and most of the other wastes
associated  with the  exploration,  development,  and  production  of crude oil,
natural gas, or geothermal energy constitute "solid wastes", which are regulated
under  the  less  stringent  non-hazardous  waste  provisions,  but  there is no
guarantee  that the EPA or the  individual  states will not adopt more stringent
requirements  for the  handling  of  non-hazardous  wastes  or  categorize  some
non-hazardous wastes as hazardous for future regulation.

Comprehensive Environmental Response, Compensation and Liability Act

     The  federal  Comprehensive   Environmental   Response,   Compensation  and
Liability  Act  ("CERCLA")  imposes  joint and  several  liability  for costs of
investigation and remediation and for natural resource  damages,  without regard
to fault or the legality of the original conduct,  on certain classes of persons
with respect to the release into the environment of substances  designated under
CERCLA as  hazardous  substances  ("Hazardous  Substances").  These  classes  of
persons or potentially  responsible parties include the current and certain past
owners and  operators  of a facility  or  property  where there is or has been a
release or threat of release of a Hazardous  Substance  and persons who disposed
of or arranged  for the  disposal of the  Hazardous  Substances  found at such a
facility.  CERCLA also  authorizes the EPA and, in some cases,  third parties to
take actions in response to threats to the public health or the  environment and
to seek to recover the costs of such action.  Although CERCLA generally  exempts
petroleum from the definition of Hazardous  Substances in the course operations,
we may in the future  generate  wastes that fall within  CERCLA's  definition of
Hazardous Substances. We may also in the future become an owner of facilities on
which  Hazardous  Substances have been released by previous owners or operators.

                                       23
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

We may in the future be responsible under CERCLA for all or part of the costs to
clean up facilities or property at which such  substances have been released and
for natural resource damages.

Air Emissions

     Our operations are subject to local, state and federal  regulations for the
control of emissions  of air  pollution.  Major  sources of air  pollutants  are
subject  to  more  stringent,   federally   imposed   permitting   requirements.
Administrative  enforcement  actions  for  failure to comply  strictly  with air
pollution  regulations or permits are generally  resolved by payment of monetary
fines and correction of any identified deficiencies.  Alternatively,  regulatory
agencies could require us to forego  construction,  modification or operation of
certain air emission sources.

Clean Water Act

     The Clean  Water Act  ("CWA")  imposes  restrictions  and  strict  controls
regarding the discharge of wastes,  including  produced waters and other oil and
natural gas wastes,  into waters of the United States,  a term broadly  defined.
Permits must be obtained to discharge  pollutants into federal  waters.  The CWA
provides  for civil,  criminal and  administrative  penalties  for  unauthorized
discharges  of oil,  hazardous  substances  and  other  pollutants.  It  imposes
substantial  potential  liability  for  the  costs  of  removal  or  remediation
associated with discharges of oil or hazardous substances.  State laws governing
discharges  to water also provide  varying  civil,  criminal and  administrative
penalties and impose  liabilities  in the case of a discharge of petroleum or it
derivatives,  or other hazardous substances, into state waters. In addition, the
EPA has  promulgated  regulations  that may  require  us to  obtain  permits  to
discharge  storm water  runoff.  In the event of an  unauthorized  discharge  of
wastes, we may be liable for penalties and costs.

     Management  believes  that we are in  substantial  compliance  with current
applicable environmental laws and regulations.

RESEARCH AND DEVELOPMENT ACTIVITIES

     No research and development expenditures have been incurred,  either on our
account or sponsored by customers, during the past three years.

EMPLOYEES

     We do not employ any persons on a full-time or on a part-time basis.  Grant
Atkins is our President and Chief Executive Officer,  Vaughn Barbon is our Chief
Financial Officer,  and Douglas Humphreys is the Drilling  Operations Manager of
Lexington Oil & Gas. All of these individuals are primarily  responsible for all
our  day-to-day   operations.   Other  services  are  provided  by  outsourcing,
consultant,  and special  purpose  contracts.  Our current  designated  drilling
contractor and well operator is Oak Hills. Oak Hills was acquired  subsequent to
the  year  ended  December  31,  2005  and has  approximately  30-35  full  time
employees.

                                       24
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

RISK FACTORS

     An  investment  in our common stock  involves a number of very  significant
risks.  You should carefully  consider the following risks and  uncertainties in
addition to other  information in evaluating our company and its business before
purchasing  shares of our common  stock.  Our  business,  operating  results and
financial condition could be seriously harmed due to any of the following risks.
The risks  described  below are all of the material  risks that we are currently
aware of that are facing our company. Additional risks not presently known to us
may also  impair  our  business  operations.  You could lose all or part of your
investment due to any of these risks.

Risks Related to Our Business

     Our business is difficult to evaluate  because we have a limited  operating
history.  In  considering  whether  to invest in our  common  stock,  you should
consider  that  there  is  only  limited  historical   financial  and  operating
information  available on which to base your evaluation of our performance.  Our
inception  as an oil and gas  exploration  company was  November  2003 and, as a
result, we have a limited operating history.

     We have a history of  operating  losses and there can be no  assurances  we
will be profitable in the future. We have a history of operating losses,  expect
to  continue  to  incur  losses,  and may  never be  profitable,  and we must be
considered to be in the development  stage.  Further,  we have been dependent on
sales of our equity securities and debt financing to meet our cash requirements.
We have incurred losses totaling approximately  $8,538,863 for fiscal year ended
December 31, 2005. As of December 31, 2005, we had a working  capital deficit of
$2,372,426.  Further, we do not expect positive cash flow from operations in the
near term. There is no assurance that actual cash  requirements  will not exceed
our estimates.  In particular,  additional  capital may be required in the event
that:  (i) the costs to acquire  additional  leases  are more than we  currently
anticipate;  (ii) drilling and completion  costs for  additional  wells increase
beyond our  expectations;  or (iii) we encounter  greater costs  associated with
general and administrative expenses or offering costs.

     Our development of and  participation  in an increasingly  larger number of
oil and gas  prospects  has  required and will  continue to require  substantial
capital  expenditures.  The  uncertainty and factors  described  throughout this
section may impede our  ability to  economically  find,  develop,  exploit,  and
acquire natural gas and oil reserves. As a result, we may not be able to achieve
or sustain profitability or positive cash flows from operating activities in the
future.

     We have  received a going  concern  opinion from our  independent  auditors
report  accompanying  our  December  31,  2005 and 2004  consolidated  financial
statements.  The independent auditor's report accompanying our December 31, 2005
and 2004 consolidated  financial  statements  contains an explanatory  paragraph
expressing  substantial  doubt about our ability to continue as a going concern.
The  consolidated  financial  statements  have been prepared  "assuming that the
Company  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.  Our ability to continue as a going  concern is dependent on
raising  additional  capital to fund our operations and ultimately on generating
future profitable operations.  There can be no assurance that we will be able to
raise sufficient  additional  capital or eventually have positive cash flow from
operations  to address  all of our cash flow  needs.  If we are not able to find
alternative sources of cash or generate positive cash flow from operations,  our
business and shareholders will be materially and adversely affected.

                                       25
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     We will require additional funding in the future. Based upon our historical
losses from operations,  we will require additional funding in the future. If we
cannot obtain capital  through  financings or otherwise,  our ability to execute
our development plans and achieve production levels will be greatly limited. Our
current  development  plans  require  us to make  capital  expenditures  for the
exploration and development of our oil and natural gas properties. Historically,
we have funded our operations through the issuance of equity and short-term debt
financing  arrangements.  We may not be able to obtain  additional  financing on
favorable  terms,  if at all.  Our  future  cash flows and the  availability  of
financing  will  be  subject  to a  number  of  variables,  including  potential
production and the market prices of oil and natural gas. Further, debt financing
could lead to a diversion of cash flow to satisfy debt-servicing obligations and
create restrictions on business operations. If we are unable to raise additional
funds, it would have a material adverse effect upon our operations.

     Our acquisitions may not be successful.  As part of our growth strategy, we
intend  to  acquire   additional  oil  and  gas  production   properties.   Such
acquisitions may pose substantial  risks to our business,  financial  condition,
and results of operations. In pursuing acquisitions,  we will compete with other
companies,  many of which have greater  financial and other resources to acquire
attractive  properties.  Even  if we  are  successful  in  acquiring  additional
properties,  some of the  properties  may not produce  revenues  at  anticipated
levels or failure to conduct drilling on prospects within specified time periods
may  cause  the  forfeiture  of the  lease  in that  prospect.  There  can be no
assurance that we will be able to successfully  integrate  acquired  properties,
which  could  result  in  substantial  costs and  delays  or other  operational,
technical,  or financial problems.  Further,  acquisitions could disrupt ongoing
business  operations.  If any of these  events  occur,  it would have a material
adverse effect upon our operations and results from operations.

     Our exploratory and development drilling and production  operations may not
be  successful.  We intend to drill  additional  wells and  continue  production
operations  on our  current  wells.  There can be no  assurance  that our future
drilling  activities will be successful,  and we cannot be sure that our overall
drilling success rate or our production operations within a particular area will
not decline.  We may not recover all or any portion of our capital investment in
the wells or the underlying  leaseholds.  Unsuccessful drilling activities would
have a material  adverse  effect upon our results of  operations  and  financial
condition.  The  cost of  drilling,  completing,  and  operating  wells is often
uncertain,  and a number of  factors  can delay or prevent  drilling  operations
including:  (i) unexpected drilling conditions;  (ii) pressure or irregularities
in  formation;  (iii)  equipment  failures or  accidents;  (iv) adverse  weather
conditions;  and (iv) shortages or delays in  availability  of drilling rigs and
delivery of equipment.

     Further,  the coal beds in the Arkoma  Basin in the State of Oklahoma  from
which we produce  methane gas  frequently  contain  water,  which may hamper our
ability to produce gas in commercial quantities.  The amount of coal bed methane
that can be commercially  produced  depends upon the coal quality,  the original
gas content of the coal seam, the thickness of the seam, the reservoir pressure,
the rate at which  gas is  released  from the  coal,  and the  existence  of any
natural fractures through which the gas can flow to the well bore. However, coal
beds  frequently  contain  water  that must be  removed  in order for the gas to
detach from the coal and flow to the well bore.  The average  life of a coal bed
well is only five to six years.  Our ability to remove and dispose of sufficient
quantities  of water  from the coal seam will  determine  whether  or not we can
produce coal bed methane in commercial quantities.

                                       26
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     There is no guarantee that the potential drilling locations that we have or
acquire in the future will ever produce  natural gas or oil,  which could have a
material adverse effect upon our results of operations.

     A decline  in the price of our common  stock  could  affect our  ability to
raise further working capital and adversely impact our operations.  A decline in
the price of our common stock could  result in a reduction  in the  liquidity of
our common stock and a reduction in our ability to raise additional  capital for
our operations.  Because our operations to date have been  principally  financed
through  the sale of equity  securities,  a decline  in the price of our  common
stock  could  have an  adverse  effect  upon  our  liquidity  and our  continued
operations.  A reduction  in our ability to raise  equity  capital in the future
would have a material  adverse  effect upon our  business  plan and  operations,
including  our ability to continue  our current  operations.  If our stock price
declines,  we may not be able to raise additional capital or generate funds from
operations sufficient to meet our obligations.

     We are a new  entrant  into  the oil and gas  industry  without  profitable
operating  history.  Since November  2003,  our activities  have been limited to
organizational efforts, obtaining working capital and acquiring and developing a
very limited number of  properties.  As a result,  there is limited  information
regarding  production  or revenue  generation.  Further,  a Reserve and Economic
Evaluation dated January 6, 2006 prepared by Pinnacle Energy Services, LLC shows
proved developed  producing future net revenue of $3,918,000 at a 10% discounted
present worth. As a result, our future revenues may be limited.

     The Wagnon  Lease is the oil and gas  property  where most of our  drilling
capital resources have been employed.  This prospect is still in the development
stage, and estimates made at this time by our contracted  independent  reservoir
engineer  as to  proved or  probable  oil and  natural  gas  reserves  cannot be
guaranteed  that  sufficient   reserves  will  be  maintained  or  new  reserves
discovered for  production.  Although four wells have been drilled on the Wagnon
Lease to date, two wells on our Coal Creek Lease,  one well on our Panther Creek
Lease, and one well on our Geneva Prospect in development stages, the absence of
a sustained  production  history  provides risk  regarding  independent  reserve
estimates.  No  assurance  of the  accuracy  of the  estimates  of oil  and  gas
reserves. We have obtained a report on the estimated reserves. Reserve estimates
are based upon various  assumptions,  including  assumptions relating to oil and
gas  prices,  drilling  and  operating  expenses,   production  levels,  capital
expenditures,  taxes and  availability of funds. No one can measure  underground
accumulations  of oil and natural  gas in an exact way.  As a result,  estimated
quantities of proved reserves,  projections of future  production rates, and the
timing of development  expenditures may be incorrect.  Any significant  variance
from these  assumptions  to actual figures could greatly affect our estimates of
reserves,  the  economically  recoverable  quantities  of oil  and  natural  gas
attributable  to any particular  group of  properties,  the  classifications  of
reserves based on risk of recovery, and estimates of the future net cash flows.

     Further,  the  present  value of  future  net cash  flows  from our  proved
reserves  is not  necessarily  the  same  as the  current  market  value  of our
estimated  oil and natural gas  reserves.  Actual future net cash flows from our
oil and natural  gas  properties  also will be affected by factors  such as: (i)
actual  prices we receive for oil and natural gas; (ii) the amount and timing of
actual production;  (iii) supply of and demand for oil and natural gas; and (iv)
changes in governmental regulations or taxation.

                                       27
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     The  timing  of both our  production  and our  incurrence  of  expenses  in
connection with the development and production of oil and natural gas properties
will affect the timing of actual future net cash flows from proved reserves, and
thus their actual present value. In addition,  the 10% discount factor used when
calculating  discounted  future net cash  flows may not be the most  appropriate
discount  factor  based on interest  rates in effect from time to time and risks
associated with us or the oil and natural gas industry in general. Actual future
production,  oil and gas  prices,  revenues,  taxes,  development  expenditures,
operating  expenses and quantities of recoverable oil and gas reserves will most
likely  vary from those  estimates  and any  significant  variance  could have a
material adverse effect on our future results from operations.

     Unless we replace  our oil and  natural  gas  reserves,  our  reserves  and
production will decline,  which would adversely  affect our business,  financial
condition and results of  operations.  Producing oil and natural gas  reservoirs
generally are  characterized  by declining  production rates that vary depending
upon  reservoir  characteristics  and other  factors.  Thus,  our future oil and
natural gas reserves and production and, therefore, our cash flow and income are
highly  dependent on our success in  efficiently  developing  and exploiting our
current reserves and economically  finding or acquiring  additional  recoverable
reserves.  We may not be able to develop, find or acquire additional reserves to
replace our current and future production at acceptable costs.

     Prospects  that we  decide to drill  may not  yield  natural  gas or oil in
commercially  viable  quantities.  We describe some of our current  prospects in
this prospectus. Our prospects are in various stages of evaluation, ranging from
a prospect  that is ready to drill to a prospect  that will require  substantial
additional  seismic data  processing  and  interpretation.  However,  the use of
seismic data and other  technologies  and the study of  producing  fields in the
same area will not enable us to know conclusively  prior to drilling and testing
whether  natural gas or oil will be present or, if present,  whether natural gas
or oil  will  be  present  in  sufficient  quantities  to  recover  drilling  or
completion costs or to be economically viable. If we drill additional wells that
we  identify  as dry holes in our current  and future  prospects,  our  drilling
success rate may decline and materially  harm our business.  In sum, the cost of
drilling,  completing  and operating any wells is often  uncertain and new wells
may not be productive.

     We are substantially  dependent on properties  located in the Arkoma Basin,
which causes our risk to be concentrated.  All of our producing wells and leases
are located in the Arkoma Basin in the State of Oklahoma. As a result, we may be
disproportionately   exposed  to  the  impact  of  delays  or  interruptions  of
production  from these  wells  caused by  significant  governmental  regulation,
transportation  capacity constraints,  curtailment of production or interruption
of transportation of natural gas produced from the wells in this basin.

     Properties that we buy may not produce as projected and we may be unable to
determine reserve potential, identify liabilities associated with the properties
or obtain  protection from sellers against them. One of our growth strategies is
to capitalize  on  opportunistic  acquisitions  of oil and natural gas reserves.
However, our reviews of acquired properties are inherently incomplete because it
generally is not feasible to review in depth every individual  property involved
in each  acquisition.  A  detailed  review of  records  and  properties  may not
necessarily reveal existing or potential problems, nor will it permit a buyer to
become  sufficiently   familiar  with  the  properties  to  assess  fully  their
deficiencies  and potential.  Further,  environmental  problems,  such as ground
water contamination,  are not necessarily  observable even when an inspection is
undertaken.  Acquiring properties with liabilities would have a material adverse
effect upon our results of operations.

                                       28
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     The potential  profitability  of oil and gas ventures  depends upon factors
beyond our control.  The potential  profitability  of oil and gas  properties is
dependent upon many factors beyond our control.  For instance,  world prices and
markets for oil and gas are unpredictable,  highly volatile, potentially subject
to governmental fixing, pegging, controls, or any combination of these and other
factors, and respond to changes in domestic,  international,  political, social,
and economic environments.  Additionally, due to worldwide economic uncertainty,
the availability and cost of funds for production and other expenses have become
increasingly difficult,  if not impossible,  to project. These and other changes
and events may materially affect our financial performance.

     Adverse  weather  conditions  can  also  hinder  drilling   operations.   A
productive  well may become  uneconomic in the event water or other  deleterious
substances are encountered  which impair or prevent the production of oil and/or
gas from the well. In addition,  production from any well may be unmarketable if
it is impregnated with water or other deleterious substances.  The marketability
of oil and gas, which may be acquired or discovered will be affected by numerous
factors beyond our control.  These factors include,  but are not limited to, the
proximity and capacity of oil and gas pipelines and processing equipment, market
fluctuations of prices, taxes, royalties,  land tenure, allowable production and
environmental  protection.  These factors cannot be accurately predicted and the
combination  of these factors may result in us not receiving an adequate  return
on our invested capital.

     We are dependent upon transportation and storage services provided by third
parties. We will be dependent on the transportation and storage services offered
by various  interstate  and intrastate  pipeline  companies for the delivery and
sale of our gas supplies.  Both the  performance of  transportation  and storage
services by  interstate  pipelines  and the rates  charged for such services are
subject to the jurisdiction of the Federal Energy Regulatory Commission or state
regulatory  agencies.  An  inability  to obtain  transportation  and/or  storage
services  at  competitive  rates  could  hinder  our  processing  and  marketing
operations and/or affect our sales margins.

     Our results of  operations  are  dependent  upon market  prices for oil and
natural gas,  which  fluctuate  widely and are beyond our control.  Our revenue,
profitability,  and cash flow  depend  upon the  prices  and  demand for oil and
natural  gas.  The  markets for these  commodities  are very  volatile  and even
relatively modest drops in prices can significantly affect our financial results
and impede our  growth.  Prices  received  also will affect the amount of future
cash flow available for capital expenditures and may affect our ability to raise
additional  capital.  Lower prices may also affect the amount of natural gas and
oil that  can be  economically  produced  from  reserves  either  discovered  or
acquired.

     Factors  that  can  cause  price  fluctuations  include:  (i) the  level of
consumer  product demand;  (ii) weather  conditions;  (iii) domestic and foreign
governmental regulations;  (iv) the price and availability of alternative fuels;
(v) technical advances affecting energy consumption; (vi) proximity and capacity
of oil and gas pipelines and other  transportation  facilities;  (vii) political
conditions  in natural gas and oil  producing  regions;  (viii) the domestic and
foreign  supply  of  natural  gas and  oil;  (ix)  the  ability  of  members  of
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and  production  controls;  (x) the price of foreign  imports;  and (xi) overall
domestic and global economic conditions.

                                       29
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     The  availability  of a ready  market  for our  oil  and gas  depends  upon
numerous factors beyond our control, including the extent of domestic production
and  importation  of oil and  gas,  the  relative  status  of the  domestic  and
international  economies,  the  proximity  of our  properties  to gas  gathering
systems,  the capacity of those  systems,  the  marketing  of other  competitive
fuels,   fluctuations  in  seasonal  demand  and   governmental   regulation  of
production,  refining,  transportation and pricing of oil, natural gas and other
fuels.

     The oil and gas industry in which we operate  involves many operating risks
that can cause substantial  losses. Our drilling  activities are subject to many
risks,  including  the risk that we will not  discover  commercially  productive
reservoirs.  Drilling for oil and natural gas can be unprofitable, not only from
dry holes, but from productive wells that do not produce sufficient  revenues to
return a profit.  In  addition,  our drilling and  producing  operations  may be
curtailed,  delayed or canceled  as a result of other  factors,  including:  (i)
fires;   (ii)   explosions;   (iii)  blow-outs  and  surface   cratering;   (iv)
uncontrollable  flows of underground  natural gas, oil, or formation  water; (v)
natural disasters;  (vi) facility and equipment failures;  (vii) title problems;
(viii)  shortages or delivery  delays of equipment and  services;  (ix) abnormal
pressure  formations;  and (x) environmental  hazards such as natural gas leaks,
oil spills, pipeline ruptures and discharges of toxic gases.

     If any of these events occur, we could incur substantial losses as a result
of (i)  injury  or loss of  life;  (ii)  severe  damage  to and  destruction  of
property,   natural   resources  or   equipment;   (iii)   pollution  and  other
environmental   damage;   (iv)   clean-up   responsibilities;   (v)   regulatory
investigation and penalties; (vi) suspension of our operations; or (vii) repairs
necessary to resume operations.  If we were to experience any of these problems,
it could affect well bores, gathering systems and processing facilities, any one
of which could  adversely  affect our ability to conduct  operations.  We may be
affected  by any of these  events  more  than  larger  companies,  since we have
limited working capital. We currently maintain $2 million of liability insurance
on bodily  injury per year,  for up to 25 wells,  which  includes  coverage  for
pollution, environmental damage and chemical spills. However, for some risks, we
may elect not to obtain insurance if we believe the cost of available  insurance
is  excessive  relative  to the risks  presented.  In  addition,  pollution  and
environmental risks generally are not fully insurable. If a significant accident
or other event occurs and is not fully covered by insurance,  it could adversely
affect operations. Moreover, we cannot provide assurance that we will be able to
maintain adequate insurance in the future at rates considered reasonable.

     The oil and gas  industry is highly  competitive  and there is no assurance
that we will be  successful  in  acquiring  the leases.  The oil and natural gas
industry is intensely competitive, and we compete with other companies that have
greater resources.  Many of these companies not only explore for and produce oil
and natural gas, but also carry on refining  operations and market petroleum and
other products on a regional,  national or worldwide basis.  These companies may
be  able  to pay  more  for  productive  oil  and  natural  gas  properties  and
exploratory prospects or define, evaluate, bid for and purchase a greater number
of properties and prospects  than our financial or human  resources  permit.  In
addition,  these  companies may have a greater  ability to continue  exploration
activities  during periods of low oil and natural gas market prices.  Our larger
competitors  may be able to absorb  the burden of  present  and future  federal,
state, local and other laws and regulations more easily than we can, which would
adversely  affect our competitive  position.  Our ability to acquire  additional
properties  and to discover  reserves in the future will be  dependent  upon our
ability  to  evaluate  and  select   suitable   properties   and  to  consummate

                                       30
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

transactions in a highly competitive environment.  In addition,  because we have
fewer financial and human resources than many companies in our industry,  we may
be at a disadvantage in bidding for exploratory  prospects and producing oil and
natural gas properties.

     There can be no assurance we will be able to obtain  drilling  equipment to
meet our  drilling  requirements.  There is currently a high demand for drilling
equipment  in the Arkoma  Basin in the State of  Oklahoma.  We have  experienced
delays in the past in obtaining drilling rigs due to the high drilling demand in
the Arkoma Basin where we have been concentrating our coal bed methane and other
gas targeted production and leasing programs. While we have entered into the Oak
Hills Share Exchange  Agreement and acquired the drillings  assets of Oak Hills,
there can be no assurance that we will be able to obtain the requisite  drilling
equipment to meet our planned drilling  initiatives  according to our timetable.
In the event  that we are unable to obtain  drilling  equipment  to conduct  our
exploration  operations,  it  could  have a  material  adverse  effect  upon our
business and our results of operations.

     The marketability of natural resources will be affected by numerous factors
beyond our control  which may result in us not  receiving an adequate  return on
invested  capital to be  profitable  or  viable.  The  marketability  of natural
resources which may be acquired or discovered by us will be affected by numerous
factors beyond our control. These factors include market fluctuations in oil and
gas pricing and demand,  the proximity and capacity of natural  resource markets
and  processing  equipment,  governmental  regulations,  land tenure,  land use,
regulation   concerning   the  importing  and  exporting  of  oil  and  gas  and
environmental  protection regulations.  The exact effect of these factors cannot
be accurately  predicted,  but the combination of these factors may result in us
not receiving an adequate return on invested capital to be profitable or viable.

     Oil and gas operations are subject to  comprehensive  regulation  which may
cause  substantial  delays  or  require  capital  outlays  in  excess  of  those
anticipated causing an adverse effect on our company. Oil and gas operations are
subject to federal,  state,  and local laws  relating to the  protection  of the
environment,  including laws  regulating  removal of natural  resources from the
ground  and  the  discharge  of  materials  into  the  environment.  Oil and gas
operations are also subject to federal,  state,  and local laws and  regulations
which seek to maintain health and safety  standards by regulating the design and
use of drilling  methods and equipment.  Various permits from government  bodies
are required for drilling operations to be conducted;  no assurance can be given
that such permits will be received.  Environmental standards imposed by federal,
provincial,  or local  authorities  may be changed and any such changes may have
material adverse effects on our activities.  Moreover, compliance with such laws
may cause  substantial  delays or  require  capital  outlays  in excess of those
anticipated,  thus  causing an  adverse  effect on us.  Additionally,  we may be
subject to liability for pollution or other  environmental  damages which we may
elect not to insure against due to prohibitive  premium costs and other reasons.
To date we have not been required to spend material  amounts on compliance  with
environmental  regulations.  However,  we may be required to do so in future and
this may affect our ability to expand or maintain our operations.

     Exploration and production  activities are subject to certain environmental
regulations  which may prevent or delay the  commencement  or continuance of our
operations. In general, our exploration and production activities are subject to
certain federal,  state and local laws and regulations relating to environmental
quality and pollution control.  Such laws and regulations  increase the costs of
these  activities and may prevent or delay the  commencement or continuance of a
given  operation.  Compliance  with  these  laws and  regulations  has not had a

                                       31

<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

material effect on our operations or financial condition to date.  Specifically,
we are subject to legislation  regarding  emissions into the environment,  water
discharges  and  storage and  disposition  of  hazardous  wastes.  In  addition,
legislation  has been  enacted  which  requires  well and  facility  sites to be
abandoned and reclaimed to the satisfaction of state authorities.  However, such
laws and  regulations  are  frequently  changed and we are unable to predict the
ultimate cost of compliance. Generally, environmental requirements do not appear
to affect us any  differently  or to any  greater  or lesser  extent  than other
companies in the industry.

     We believe that our operations comply, in all material  respects,  with all
applicable environmental regulations.  However, we are not fully insured against
all possible environmental risks.

     Any change to  government  regulation/administrative  practices  may have a
negative  impact on our  ability to  operate  and our  profitability.  The laws,
regulations,  policies or current  administrative  practices  of any  government
body,  organization  or  regulatory  agency  in the  United  States or any other
jurisdiction,  may be changed,  applied or  interpreted  in a manner  which will
fundamentally alter our ability to carry on business.  The actions,  policies or
regulations, or changes thereto, of any government body or regulatory agency, or
other special interest groups,  may have a detrimental  effect on us. Any or all
of these  situations may have a negative impact on our ability to operate and/or
our profitably.

     We may be  unable  to  retain  key  employees  or  consultants  or  recruit
additional  qualified  personnel.  Our extremely limited personnel means that we
would be  required  to spend  significant  sums of money to locate and train new
employees in the event any of our employees resign or terminate their employment
with us for any reason.  Due to our  limited  operating  history  and  financial
resources,  we are entirely  dependent on the continued service of Grant Atkins,
Chief Executive Officer and Douglas  Humphreys,  Drilling  Operations Manager of
Lexington Oil & Gas. Further, we do not have key man life insurance on either of
these individuals. We may not have the financial resources to hire a replacement
if one or both of our  officers  were to die.  The loss of  service of either of
these  employees  could  therefore   significantly   and  adversely  affect  our
operations.

     Our officers  and  directors  may be subject to conflicts of interest.  Our
officers  and  directors  serve only part time and are subject to  conflicts  of
interest.  Each of our executive  officers and  directors  serves only on a part
time basis.  Each devotes part of his working time to other business  endeavors,
much time to  devote  to our  affairs,  as well as what  business  opportunities
should be presented to the company.  Such  conflicts  include  deciding how much
time to devote to our affairs, as well as what business  opportunities should be
presented  to the  company.  Because of these  relationships,  our  officers and
directors will be subject to conflicts of interest.

Risks Related to Our Common Stock

     Sales of a substantial number of shares of our common stock into the public
market by certain  stockholders may result in significant  downward  pressure on
the price of our common  stock and could  affect  your  ability  to realize  the
current  trading  price of our common stock.  Sales of a  substantial  number of
shares of our common stock in the public  market by certain  stockholders  could
cause a reduction  in the market  price of our common  stock.  As of the date of
this  Annual  Report,  we have  28,573,654  shares of common  stock  issued  and
outstanding.

                                       32
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     As of the date of this  Annual  Report,  certain  stockholders  are able to
resell up to an aggregate of 10,566,500 shares of our common stock pursuant to a
registration  statement  declared effective on November 30, 2005. As a result of
the  registration  statement:  (i)  233,000  shares of common  stock  underlying
certain common stock purchase  warrants  issuable at an exercise price of $3.00;
(ii) 200,000 shares of our common stock;  (iii) up to 3,627,500 shares of common
stock underlying  certain secured  convertible  notes;  (iv) 2,930,000 shares of
common stock  underlying Class A common stock purchase  warrants  issuable at an
exercise  price of $1.50  per  share;  (v)  2,930,000  shares  of  common  stock
underlying Class B common stock purchase  warrants issuable at an exercise price
of $1.25 per share, and (vi) 586,000 shares of common stock  underlying  finders
warrants  issuable  at an  exercise  price of $1.00 per share  were  registered,
which,  if  exercised,  would have an adverse  effect on the price of our common
stock. To the extent  stockholders  exercised the warrants and resold the shares
of  common  stock  issued  to them upon such  exercise  (subject  to  applicable
securities law restrictions),  the price of our common stock may decrease due to
the additional shares of common stock in the market.

     As of the date of this  Annual  Report,  there are  16,254,251  outstanding
shares  of our  common  stock  that are  restricted  securities  as that term is
defined  in  Rule  144  under  the  Securities  Act of  1933,  as  amended  (the
"Securities  Act").  Although  the  Securities  Act and Rule 144  place  certain
prohibitions on the sale of restricted securities,  restricted securities may be
sold into the public market under certain  conditions.  Further,  as of December
31,  2005,  there are an  aggregate of  2,935,000  Stock  Options and  6,679,000
Warrants outstanding.

     Any significant  downward  pressure on the price of our common stock as the
selling stockholders sell their shares of our common stock could encourage short
sales by the selling  stockholders  or others.  Any such short sales could place
further downward pressure on the price of our common stock.

     The trading  price of our common stock on the OTC  Bulletin  Board has been
and may continue to fluctuate significantly and stockholders may have difficulty
reselling their shares.  Our common stock has traded as low as $0.17 and as high
as $7.46  (adjusted for pre split share prices on a 3 new shares for 1 old share
effected  January 28, 2004). In addition to volatility  associated with Bulletin
Board  securities in general,  the value of your investment could decline due to
the impact of any of the  following  factors upon the market price of our common
stock:  (i)  changes  in the world  wide  price  for oil or  natural  gas;  (ii)
disappointing  results from our discovery or development efforts;  (iii) failure
to meet our revenue or profit goals or operating budget;  (iv) decline in demand
for our common stock; (v) downward revisions in securities  analysts'  estimates
or changes in general  market  conditions;  (vi)  technological  innovations  by
competitors or in competing  technologies;  (vii) lack of funding  generated for
operations;  (viii)  investor  perception of our industry or our prospects;  and
(ix) general economic trends.

     In addition,  stock markets have experienced price and volume  fluctuations
and  the  market  prices  of  securities  have  been  highly   volatile.   These
fluctuations  are often  unrelated to operating  performance  and may  adversely
affect  the market  price of our common  stock.  As a result,  investors  may be
unable to sell their shares at a fair price and you may lose all or part of your
investment.

                                       33
<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS - continued

     One of our  shareholders  may exercise voting power of more than 30% of our
common stock.  As of the date of this Annual Report,  Orient  Exploration,  Inc.
("Orient  Exploration")  owns 6,000,000  shares of our common stock, or 20.1% of
our outstanding common stock as of the date of this Annual Report, and is one of
our largest shareholders.  Due to its stock ownership, Orient Exploration may be
in a viable  position  to affect the  election  of the Board of  Directors  and,
therefore,  to affect the control our  business  and affairs  including  certain
significant  corporate  actions  such as  acquisitions,  the sale or purchase of
assets, and the issuance and sale of our securities. Further, Orient Exploration
may be able to affect the  prevention  of or cause a change in control.  We also
may be prevented from entering into  transactions that could be beneficial to us
without  Orient  Exploration's  consent.  The  interest  of one  of our  largest
shareholders may differ from the interests of other shareholders.

     Additional  issuances  of equity  securities  may result in dilution to our
existing stockholders.  Our Articles of Incorporation  authorize the issuance of
200,000,000 shares of common stock and 75,000,000 shares of preferred stock. The
Board of Directors has the authority to issue  additional  shares of our capital
stock to provide additional financing in the future and the issuance of any such
shares  may  result in a  reduction  of the book  value or  market  price of the
outstanding  shares of our  common  stock.  If we do issue  any such  additional
shares, such issuance also will cause a reduction in the proportionate ownership
and voting power of all other stockholders. As a result of such dilution, if you
acquire shares of our common stock, your  proportionate  ownership  interest and
voting power could be decreased.  Further,  any such issuances could result in a
change of control.

     Possible  Issuance of Preferred  Stock.  We are  authorized  to issue up to
75,000,000  shares of preferred  stock. The preferred stock may be issued in one
or more series,  the terms of which may be determined at the time of issuance by
the board of directors, without further action by shareholders,  and may include
voting  rights,  preferences  as to dividends and  liquidation,  conversion  and
redemption  rights and sinking fund  provisions  as  determined  by the board of
directors.  Although we have no present  plans to issue any shares of  preferred
stock,  the issuance of preferred stock in the future could adversely affect the
rights of the holders of common stock and reduce the value of the common stock.

     Our common  stock is  classified  as a "penny  stock" under SEC rules which
limits the market for our  common  stock.  Because  our stock is not traded on a
stock exchange or on the NASDAQ  National Market or the NASDAQ Small Cap Market,
and because the market price of the common stock is less than $5 per share,  the
common stock is classified as a "penny stock." Our stock has not traded above $5
per share since June 28,  2004.  SEC Rule 15g-9 under the  Exchange  Act imposes
additional  sales practice  requirements  on  broker-dealers  that recommend the
purchase or sale of penny  stocks to persons  other than those who qualify as an
"established   customer"  or  an  "accredited   investor."   This  includes  the
requirement that a broker-dealer  must make a determination  that investments in
penny stocks are suitable for the customer and must make special  disclosures to
the customers  concerning the risk of penny stocks. Many broker-dealers  decline
to participate  in penny stock  transactions  because of the extra  requirements
imposed on penny stock transactions. Application of the penny stock rules to our
common stock reduces the market  liquidity of our shares,  which in turn affects
the ability of holders of our common  stock to resell the shares they  purchase,
and they may not be able to resell at prices at or above the prices they paid.

                                       34
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTIES

     We lease our  principal  office space  located at 7473 West Lake Mead Road,
Las Vegas,  Nevada 89128.  We currently  utilize  office space,  warehouse,  and
fenced yard,  located at 225 Kingsberry  Road,  Holdenville,  Oklahoma 74848. We
intend to lease this space in the future from Douglas Humphreys or an affiliated
entity on terms no less  favorable  than those that may be  obtained  from third
parties.

ITEM 3. 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 Annual 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     During fiscal year ended  December 31, 2005,  no matters were  submitted to
our stockholders for approval.

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR COMMON EQUITY

     Shares of our common stock are traded on the OTC  Bulletin  Board under the
symbol "LXRS" and on the Frankfurt and Berlin stock  exchanges  under the symbol
"LXR";  WKN:  AOBKLP.  The market for our common  stock is  limited,  and can be
volatile.  The following table sets forth the high and low sales prices relating
to our common stock on a quarterly basis for the last two fiscal years as quoted
by the NASDAQ.  These  quotations  reflect  inter-dealer  prices  without retail
mark-up, mark-down, or commissions, and may not reflect actual transactions.

Quarter Ended                High Bid          Low Bid
December 30, 2005            $0.89             $0.81
September 30, 2005           $1.75             $1.25
June 30, 2005                $1.89             $1.15
March 31, 2005               $2.20             $1.25
December 31, 2004            $3.20             $1.16
September 30, 2004           $5.40             $1.40
June 30, 2004                $7.46             $2.30
March 31, 2004               $4.95             $2.95



     As of March 15, 2006,  we had 144  shareholders  of record,  which does not
include  shareholders  whose  shares  are held in street or  nominee  names.  We
believe  that  there are  approximately  2,500  beneficial  owners of our common
stock.

DIVIDEND POLICY

     No  dividends  have ever been  declared  by the Board of  Directors  on our
common stock.  Our losses do not currently  indicate the ability to pay any cash
dividends,  and we do not indicate the intention of paying cash dividends either
on our common stock in the foreseeable future.

                                      35
<PAGE>

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES - continued

SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS

     We have one equity  compensation  plan, the Lexington  Resources Inc. Stock
Option Plan. The table set forth below  presents the  securities  authorized for
issuance with respect to the Stock Option Plan under which equity securities are
authorized for issuance as of the date of this Annual Report:

                      Equity Compensation Plan Information
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                           Number of Securities      Weighted-Average Exercise  Number of Securities
                            To be Issued Upon          Price of Outstanding     Remaining Available for
Plan Category          Exercise of Outstanding           Options, Warrants      Future Issuance Under
                          Options, Warrants                 and Rights           Equity Compensation Plans
                                 and Rights                                      (excluding column (a))
                                    (a)                          (b)                     (c)
----------------------------------------------------------------------------------------------------------
<S>                                 <C>                          <C>                     <C>
Equity Compensation
Plans Approved by
Security Holders

Stock Options                         50,000                       $0.167                     n/a
                                       5,000                         1.00                     n/a
                                     380,000                         3.00                     n/a

                                     850,000                         1.25                    800,000

Total Stock Options                2,935,000

Equity Compensation
Plans Not Approved by
Security Holders -
Warrants                             233,000                        $3.00                       0
                                   2,930,000                        $1.25                       0
                                   2,930,000                        $1.50                       0
                                     586,000                        $1.00                       0

Total Warrants                     6,679,000

Total                              7,964,000
----------------------------------------------------------------------------------------------------------
</TABLE>

Lexington Resources, Inc. Stock Option Plan

     On August 7, 2003, our Board of Directors  unanimously approved and adopted
a stock option plan (the "Stock Option  Plan").  The purpose of the Stock Option
Plan is to advance  our  interests  and the  interests  of the  shareholders  by
affording our key personnel an opportunity for investment in the Company and the
incentive advantages inherent in stock ownership in the Company. Pursuant to the
provisions of the Stock Option Plan, stock options (the "Stock Options") will be
granted only to our key personnel,  generally  defined as a person designated by
the board of directors upon whose  judgment,  initiative and efforts we may rely
including any director, officer, employee or consultant.

                                       36
<PAGE>

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES - continued

     The Stock  Option Plan is  administered  by our Board of  Directors,  which
shall  determine:  (i) the persons to be granted  Stock  Options under the Stock
Option  Plan;  (ii) the number of shares  subject to each  option,  the exercise
price of each  Stock  Option;  and  (iii)  whether  the  Stock  Option  shall be
exercisable  at any time  during the option  period of ten (10) years or whether
the Stock Option shall be exercisable in installments or by vesting only.

     The Stock Option Plan  originally  provided  authorization  to our Board of
Directors  to grant Stock  Options to  purchase a total  number of shares of our
common stock,  not to exceed  1,000,000 shares as at the date of adoption by our
Board of Directors of the Stock Option Plan.  Effective  December 31, 2003,  our
Board of Directors amended the Stock Option Plan to increase the total number of
shares of common stock to be purchased  pursuant to exercise of Stock Options to
4,000,000.  Effective  July 2, 2004,  our Board of  Directors  amended the Stock
Option  Plan to  increase  the total  number  of  shares  of common  stock to be
purchased  pursuant to exercise of Stock Options to 5,000,000.  Effective August
19,  2005,  our Board of  Directors  further  amended  the Stock  Option Plan to
increase the total  number of share of common stock to be purchased  pursuant to
exercise of Stock Options to 7,500,000.

     During April 2004, we registered  500,000 Stock Options  pursuant to an S-8
registration  statement  with the  Securities  and Exchange  Commission.  During
February  2006,  we  registered   500,000  Stock  Options  pursuant  to  an  S-8
registration statement with the Securities and Exchange Commission.  And, during
March  2006,  we  registered   1,150,000  Stock  Options   pursuant  to  an  S-8
registration statement with the Securities and Exchange Commission.

     At the time a Stock  Option is granted  under the Stock  Option  Plan,  our
Board of  Directors  shall fix and  determine  the  exercise  price at which our
shares  of  common  stock  may be  acquired;  provided,  however,  that any such
exercise  price  shall  not be less  than  that  permitted  under  the rules and
policies of any stock exchange or over-the-counter market which is applicable to
us.

     In the event an optionee who is our director or officer  ceases to serve in
that  position,  any  Stock  Option  held  by  such  optionee  generally  may be
exercisable within up to ninety (90) calendar days after the effective date that
his position ceases,  and after such 90-day period any unexercised  Stock Option
shall expire.  In the event an optionee who is our employee or consultant ceases
to be employed by us, any Stock Option held by such  optionee  generally  may be
exercisable within up to sixty (60) calendar days (or up to thirty (30) calendar
days where the optionee provided only investor  relations  services to us) after
the  effective  date that his  employment  ceases,  and after such 60- or 30-day
period any unexercised Stock Option shall expire.

     The Board of Directors shall determine the acceptable form of consideration
for  exercising  a  Stock  Option,   including  the  method  of  payment.   Such
consideration  may consist  entirely of: (i) cash; (ii) check;  (iii) promissory
note;  (iv) other shares which (A) in the case of shares  acquired upon exercise
of a Stock  Option,  have been owned by the optionee for more than six months on
the date of surrender, and (B) have a fair market value on the date of surrender
equal to the  aggregate  exercise  price of the  shares as to which  said  Stock
Option shall be  exercised;  (v)  consideration  received by us under a cashless
exercise  program  implemented  by us in connection  with the Stock Option Plan;
(vi) a reduction in the amount of any of our  liability to the  optionee;  (vii)
such other consideration and method of payment for the issuance of shares to the
extent  permitted by applicable laws; or (viii) any combination of the foregoing
methods of payment.  Notwithstanding the foregoing,  any method of payment other


                                       37
<PAGE>

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES - continued

than in case may be used only with the consent of our board of  directors  or if
and to the extent so provided in an agreement.

     As of the date of this Annual  Report,  an  aggregate  of  6,700,000  Stock
Options have been  granted,  an aggregate of 5,415,000  Stock  Options have been
exercised,  and an aggregate of 1,285,000  Stock Options remain  outstanding and
exercisable.

COMMON STOCK PURCHASE WARRANTS

2004 Warrants

     Pursuant to the terms of a registration  statement  filed on Form SB-2, SEC
File No. 333-121301 (the  "Registration  Statement"),  which was filed under the
Securities  Act of 1933,  as amended  (the "1933  Securities  Act"),  and became
effective  on  January  21,  2005 at 2:00  p.m.,  registering  an  aggregate  of
1,947,039 common stock purchase warrants.  (collectively,  the "2004 Warrants").
The 2004 Warrants to purchase  shares of common stock,  and the shares of common
stock underlying the 2004 Warrants,  were issued in private  placements by us in
April and November 2004. Of the 1,947,039 2004 Warrants, 1,747,039 2004 Warrants
were  exercisable  by  certain  stockholders  and their  transferees,  donees or
successors  to purchase an aggregate  of 1,747,039  shares of common stock at an
exercise price of $1.68 per share).  As of December 31, 2005, a total of 304,367
of the 2004  Warrants  have been  exercised  and the  remaining  1,642,672  2004
Warrants have expired by their terms as of July 24, 2005.

2005 Warrants

     Pursuant to the terms of a registration  statement  filed on Form SB-2, SEC
File No.  333- (the  "Registration  Statement),  which was filed  under the 1993
Securities  Act and  became  effective  on  November  30,  2005  registering  an
aggregate of 6,679,000  common stock  purchase  warrants as follow:  (i) 233,000
common  stock  purchase  warrants to purchase  shares of our common  stock at an
exercise  price of $3.00 per share,  which  relate to  promissory  notes  issued
between  June 1,  2005  and  August  22,  2005  expiring  on May 31,  2010  (the
"Warrants");  (ii) 2,930,000 Class A common stock purchase  warrants to purchase
shares of our common stock at an exercise  price of $1.50 per share  expiring on
December 1, 2008 (the "Class A Warrants");  (iii) 2,930,000 Class B common stock
purchase warrants to purchase shares of our common stock at an exercise price of
$1.25 per share expiring on December 1, 2006 (the "Class B Warrants");  and (iv)
586,000 finder's common stock purchase warrants to purchase shares of our common
stock at an exercise  price of $1.00 per share expiring on December 1, 2008 (the
"Finder's  Warrants").  The Class A Warrants,  Class B Warrants and the Finder's
Warrants  and the shares of common  stock  under such  warrants  were  issued in


                                       38
<PAGE>

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES - continued

connection with certain secured convertible notes in September and October 2005.
As of the date of this Annual  Report,  none of the Warrants,  Class A Warrants,
Class B Warrants nor the Finder's  Warrants  have been  exercised.  See "Item 6.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation - Material Commitments."

RECENT SALES OF UNREGISTERED SECURITIES

     As of the date of this Annual Report and during fiscal year ended  December
31, 2005,  to provide  capital,  we sold stock in private  placement  offerings,
issued stock in exchange for our debts or pursuant to contractual  agreements as
set forth below.

C.K. Cooper & Co. Settlement Agreement

     During  fiscal year ended  December  31,  2005,  we issued an  aggregate of
200,000 shares of our restricted common stock to C.K. Cooper & Co. ("CK Cooper")
relating  to a  termination  and  settlement  agreement  regarding  the  private
placement  offering  during fiscal year 2004 of 1,351,953  Units and exchange of
convertible  promissory note for which CK Cooper served as placement  agent. The
shares were issued at $1.31 per share for an  aggregate  valuation  of $262,000.
These shares were subject to the Registration Statement,  which became effective
on November 30, 2005.

Exercise of 2004 Warrants

     During  fiscal year ended  December  31,  2005,  we issued an  aggregate of
304,367 shares of our common stock pursuant to the exercise of the 2004 Warrants
at an exercise price of $1.68 resulting in net proceeds of $495,964.  The shares
were subject to the  Registration  Statement,  which became effective on January
21, 2005.

Convertible Loan

     During  fiscal year ended  December  31,  2005,  we issued an  aggregate of
1,024,118  shares of our common stock pursuant to the conversion of an aggregate
amount of $1,024,118  of principal  and interest at a conversion  price of $1.00
per share. The shares were subject to the Registration  Statement,  which became
effective  of  November  30,  2005.  See "Item 6.  Management's  Discussion  and
Analysis  of   Financial   Condition   and  Results  of   Operation  -  Material
Commitments."

Stock Options

     During  fiscal year ended  December  31,  2005,  we issued an  aggregate of
100,000  shares of our common stock  pursuant to the  exercise of 100,000  Stock
Options at an exercise  price of $0.16667  per share for  aggregate  proceeds of
$16,667.  The  shares  of  common  stock  were  subject  to an S-8  registration
statement.

     As of the date of this Annual  Report,  we issued an  additional  1,650,000
shares of our common  stock  pursuant to the  exercise  of a total of  1,650,000
Stock Options,  of which 500,000 were exercised at $1.00 per share and 1,150,000
at $1.25 per share, for aggregate  proceeds of $1,937,500.  The shares of common
stock were subject to S-8 registration statements.

                                       39
<PAGE>

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES - continued

Oak Hills Share Exchange Agreement

     On January 23, 2006,  we issued an  aggregate  of  6,000,000  shares of our
restricted  common stock to Oak Hills  International at a price of approximately
$0.637645 per share in accordance with the terms and provisions of the Oak Hills
Share  Exchange  Agreement.  The  per  share  consideration  was  calculated  by
reference to the of the assets of Oak Hills obtained from the independent  third
party  valuation,  and  management's  further  calculation of net tangible value
inclusive of all other balance sheet assets,  current, and long-term liabilities
of the acquired companies resulting in the shares issued as consideration,  with
such shares  issued at a 6.3%  discount to the  trading  value of the  Company's
stock as at December  22-23,  2005, the  transaction  valuation date. The shares
were issued pursuant to an exemption from registration under Section 4(2) of the
1933 Securities Act.

EurXchange Consulting Ltd.

     On February  15,  2006,  we issued an  aggregate  of 400,000  shares of our
restricted  common  stock in  accordance  with the terms and  provisions  of the
EurXchange Consulting Agreement. The shares were issued pursuant to an exemption
from registration under Section 4(2) of the 1933 Securities Act.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The summarized  consolidated financial data set forth in the table below is
derived  from and should be read in  conjunction  with our audited  consolidated
financial  statements  for the period from  inception  (September  29,  2003) to
December 31, 2004 and the year ended  December 31, 2005,  including the notes to
those financial statements which are included in this Annual Report.

     The acquisition of Lexington by Lexington  Resources,  Inc. on November 19,
2003,  has been  accounted for as a reverse  acquisition  with  Lexington  being
treated  as the  accounting  parent and  Lexington  Resources,  Inc.,  the legal
parent,   being  treated  as  the  accounting   subsidiary.   Accordingly,   our
consolidated  results of  operations  include  those of Lexington for the period
from its inception on September 29, 2003 and those of Lexington Resources,  Inc.
since the date of the reverse acquisition. The acquisition of Lexington has been
accounted  for  using  the  purchase  method  of  accounting.   All  significant
intercompany transactions and account balances have been eliminated.

                                       40
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued

       ----------------------------------- ------------------------------------
                                           For the Period from Inception
                                          (September 29, 2003) to December 31,
                                            2004
       ----------------------------------- ------------------------------------
       Revenues                            $   472,140
       ----------------------------------- ------------------------------------
       Net Loss                            ($6,092,689)
       ----------------------------------- ------------------------------------
                                           For the Year Ended December 31, 2005
       ----------------------------------- ------------------------------------
       Oil and Gas Revenue                 $   693,860
       ----------------------------------- ------------------------------------
       Depletion                               259,609
       ----------------------------------- ------------------------------------
       Operating costs and taxes               213,377
       ----------------------------------- ------------------------------------
       Operating Profit                        220,874
       ----------------------------------- ------------------------------------
       Consulting Expenses- Stock Based      1,913,991
       ----------------------------------- ------------------------------------
       General and Administrative            2,070,707
       Interest expense/finance fees         4,775,039
       ----------------------------------- ------------------------------------
       Net Loss for the Year               ($8,538,863)
       ----------------------------------- ------------------------------------
                                           As of December 31, 2005 (audited)
       ----------------------------------- ------------------------------------
       Working Capital                     $(2,372,426)
       ----------------------------------- ------------------------------------
       Total Assets                          7,706,042
       ----------------------------------- ------------------------------------
       Total Number of Shares of Common
       Stock Outstanding                    18,627,523
       ----------------------------------- ------------------------------------
       Deficit                             (16,107,018)
       ----------------------------------- ------------------------------------
       Total Stockholders Equity            $3,006,058
       ----------------------------------- ------------------------------------

MANAGEMENT'S DISCUSSION AND ANALYSIS

Results of Operation

     For Fiscal  Year Ended  December  31,  2005  Compared  to Fiscal Year Ended
     December 31, 2004

     Our net loss during fiscal year ended  December 31, 2005 was  approximately
($8,538,863)  compared to  ($6,092,689)  for fiscal year ended December 31, 2004
(an increase of $2,446,174).

     During fiscal year ended December 31, 2005, we generated  $693,860 in gross
revenue compared to $472,140 in gross revenue generated during fiscal year ended
December 31, 2004 (an increase of $221,720 or 47.0%),  resulting  primarily from
the sale of gas produced from an increasing  number of coal bed methane gas well
interests  brought into  production.  Depletion and operating costs and taxes of
$259,609 and $213,377, respectively, increased during fiscal year ended December

                                       41
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued

31, 2005  compared to depletion  and  operating  costs and taxes of $161,328 and
$83,893, respectively,  incurred during fiscal year ended December 31, 2004. The
increase in depletion and operating  expenses (an aggregate increase of $227,765
or 93%).  The  increase in  depletion  and  operating  expenses and taxes during
fiscal year ended December 31, 2005 from fiscal year ended December 31, 2004 was
primarily the result of the increase in operating costs and estimated  depletion
resulting from the increased number of operating wells. Gross profit of $220,874
generated  during fiscal year ended December 31, 2005 was further  reduced by an
aggregate of $8,759,737 from other expenses incurred, resulting in a net loss of
($8,538,863).  The gross profit of $226,919  generated  during fiscal year ended
December 31, 2004 was reduced by an aggregate of $6,319,608  from other expenses
incurred, resulting in a net loss of ($6,092,689).

     During fiscal year ended  December 31, 2005, we incurred  other expenses of
approximately  $8,759,737 compared to other expenses of $6,319,608 during fiscal
year ended December 31, 2004 (an increase of $2,440,129 or 38.6%). The operating
expenses  incurred  during fiscal year ended December 31, 2005 consisted of: (i)
$1,913,991 (2004:  $2,989,221) in stock-based  compensation relating to the fair
valuation  of stock  options  granted to  consultants;  (ii)  $2,070,707  (2004:
$3,268,455) as general and administrative  expenses; and (iii) $4,775,039 (2004:
$61,932) as interest and finance fees. The increase in other  expenses  incurred
during  fiscal  year ended  December  31,  2005  compared  to fiscal  year ended
December 31, 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. See " - Material Commitments."

     Of the  $8,759,737  incurred  as other  expenses  during  fiscal year ended
December   31,  2005,   an  aggregate  of  $130,000  was  incurred   payable  to
International  Market Trend  ("IMT") for amounts due and owing for  operational,
administrative and financial services rendered during fiscal year ended December
31, 2005. On November 10, 2003, we entered into a consulting  agreement with IMT
(the  IMT  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 and on
March 1, 2006, these options were re-assigned from IMT to two consultants of IMT
at $1.25 per share in  connection  with  business  development  services for the
Company.  Of the $8,759,737  incurred as other expenses during fiscal year ended
December  31,  2005,  an  aggregate of $179,150 was incurred to our officers for
management fees.  Furthermore,  $160,708 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
fiscal year ended December 31, 2005. See "Item 10. Executive Compensation."

     As  discussed  above,  the  increase in net loss  during  fiscal year ended
December  31,  2005  compared  to  fiscal  year  ended   December  31,  2004  is
attributable primarily to the increase in interest and finance fees expense. Our
net loss during fiscal year ended December 31, 2005 was ($8,538,863)) or ($0.49)
per share compared to a net loss of ($6,092,689) or ($0.39) per share for fiscal
year ended December 31, 2004. The weighted average number of shares  outstanding
was 17,470,971 at December 31, 2005 compared to 15,817,033 at December 31, 2004.

                                       42
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued

LIQUIDITY AND CAPITAL RESOURCES

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

     As at fiscal  year  ended  December  31,  2005,  our  current  assets  were
$1,106,593 and our current  liabilities were $3,479,019,  resulting in a working
capital  deficit of  $2,372,426.  As at fiscal  year ended  December  31,  2005,
current  assets were  comprised  of: (i) $520,332 in cash and cash  equivalents;
(ii) $184,546 in accounts  receivable;  and (iii) $401,715 in current portion of
deferred  finance  fees.  As at fiscal year ended  December  31,  2005,  current
liabilities  were  comprised  of: (i)  $936,265 in accounts  payable and accrued
liabilities; (ii) $-0- in current portion of drilling obligations; (ii) $601,973
in current portion of promissory note and accrued interest;  and (iv) $1,940,781
in current portion of convertible notes and accrued  interest.  See " - Material
Commitments."

     As at fiscal year ended December 31, 2005, our total assets were $7,706,042
comprised  of: (i)  $1,106,593  in current  assets;  (ii)  $267,810  in deferred
finance  fees;  (iii)  $2,329,448  in  carrying  value  of  proved  oil  and gas
properties  (net of  accumulated  depletion of  $420,937);  (iii)  $4,000,024 in
carrying  value of  unproved  oil and gas  properties;  and (iv) $2,167 in other
property and equipment (net of accumulated depreciation).  The increase in total
assets  during  fiscal  year ended  December  31,  2005 from  fiscal  year ended
December 31, 2004 was primarily due to the increase in carrying  value of proved
and unproved oil and gas properties and an increase in current assets.

     As at fiscal year ended  December  31,  2005,  our total  liabilities  were
$4,699,984  comprised of: (i)  $3,479,019 in current  liabilities;  (ii) $-0- in
long-term drilling  obligations;  and (iii) $1,220,965 in long-term  convertible
notes. The increase in total  liabilities  during fiscal year ended December 31,
2005 from fiscal year ended  December 31, 2004 was primarily due to the increase
in convertible notes and promissory notes and accrued interest thereon.

     Stockholders'  equity  increased  from  $1,685,514 for December 31, 2004 to
$3,006,058 for December 31, 2005.

     We have not generated  positive cash flows from operating  activities.  For
fiscal year ended December 31, 2005, net cash flow used in operating  activities
was  ($1,428,552)  compared  to net cash flow used in  operating  activities  of
($2,229,966)  for fiscal year ended  December  31,  2004.  Net cash flow used in
operating  activities  during  fiscal year ended  December  31,  2005  consisted
primarily of a net loss of ($8,538,863)  adjusted by $1,913,991 to reconcile the
non-cash  expense of the grant of Stock  Options and by  $4,614,238 to reconcile
the non-cash expense of interest and finance fees.

     During fiscal year ended December 31, 2005, net cash flow used in investing
activities  was  ($3,510,559)  compared  to net  cash  flow  used  in  investing
activities of  ($2,791,234)  for fiscal year ended  December 31, 2004.  Net cash
flow used in investing activities during fiscal year ended December 31, 2005 was
as a result of  acquisition  and  exploration  costs  related to our oil and gas
properties.

     During fiscal year ended  December 31, 2005,  net cash flow from  financing
activities was $5,133,150 compared to net cash flow from financing activities of
$4,996,073 for fiscal year ended December 31, 2004. Net cash flow from financing

                                       43
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued

activities  during fiscal year ended  December 31, 2005  pertained  primarily to
$5,201,435 received as proceeds from the convertible notes and $600,000 received
as proceeds from promissory notes.

     As at December  31,  2005,  our current  assets  were  $1,106,593,  current
liabilities  were  $3,479,019,   resulting  in  a  working  capital  deficit  of
$2,372,426.  We expect that working  capital  requirements  will  continue to be
funded through a combination of our existing  funds,  cash flow from  operations
and further  issuances  of  securities.  Our working  capital  requirements  are
expected to increase in line with the growth of our business.

Plan of Operation and Funding

     On  September  16,  2005 and  October  11,  2005,  we  issued  secured  and
convertible  notes and certain  warrants  pursuant to a private  placement  with
certain accredited  investors for gross proceeds of $5,860,000 (the "Convertible
Note Offering").  Pursuant to the Convertible Note financing,  we issued: (i) an
aggregate of $5,860,000 secured,  convertible  two-year promissory notes bearing
8% interest,  which are convertible into 5,860,000 shares of common stock on the
basis of one share of common  stock for every $1.00 in value of the  convertible
notes (collectively,  the "Convertible Notes"); (ii) for every two shares of our
common stock  purchasable in accordance  with the  conversion  provisions of the
Convertible  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 until December 1, 2008; (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 until December 1, 2006; and (iv) 586,000 Finder's Warrants to purchase
shares  of our  common  stock at an  exercise  price of $1.00  per  share  until
December 1, 2008.

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

     The  report  of the  independent  registered  public  accounting  firm that
accompanys  our December 31, 2005 and December 31, 2004  consolidated  financial
statements contains an explanatory paragraph expressing  substantial doubt about
our  ability  to  continue  as  a  going  concern.  The  consolidated  financial
statements  have  been  prepared  "assuming  that  we will  continue  as a going

                                       44
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued

concern,"  which  contemplates  that we will  realize our assets and satisfy our
liabilities and commitments in the ordinary course of business.

MATERIAL COMMITMENTS

Convertible Notes

     During  fiscal  year  2006,  a  material  commitment  for us relates to the
repayment  to  convertible  debenture  holders  of the  outstanding  amounts  of
principal  and interest  accruing at 8% per annum on an aggregate  face value of
$5,860,000 in Convertible Notes.  Twenty monthly principal and interest payments
are  payable in either  cash or shares of our common  stock at the rate of $1.00
per share (the "Fixed Conversion  Price") beginning on or about January 16, 2006
if our share  price is  trading  above  $1.00 per share at the date of  payment.
Commencing on the fourth month  anniversary  of the closing date of the issue of
the  Convertible  Notes  (September  16, 2005 and October 11, 2005),  and on the
first day or each month thereafter, the Convertible Notes must be repaid in cash
in amount equal to 5% of the  principal  amount of the Notes  together  with all
accrued  interest due and payable up to the  repayment  date.  If our shares are
trading at less than $1.00 per share at the date of repayment, then we may repay
outstanding  monthly  principal  and  interest  in either  cash or shares in our
capital  at a  different  rate than the Fixed  Conversion  Price.  If the volume
weighted  average  share price (the  "VWAP") of the five trading days prior to a
monthly payment date is less than the Fixed  Conversion  Price,  then we may pay
the monthly  amount in cash or  registered  shares of our common stock at 75% of
the VWAP for the five trading days prior to the monthly payment date.

     The holders of the  Convertible  Notes have a secured first interest in our
assets.  To  December  31,  2005,  the  holders  of the  Convertible  Notes have
converted an aggregate $1,024,118 of principal and accrued interest at $1.00 per
share resulting in the issuance of 1,024,118  shares of our common stock leaving
a Convertible Notes outstanding balance of $4,854,314.

     As of the date of this Annual Report,  the holders of the Convertible Notes
have  converted  further  amounts of notes and the  Company  has made three cash
monthly  payments  of  accrued  principle  and  interest  under the terms of the
Convertible  Note  agreements.  The Company has paid  $581,836 in principle  and
$171,433 in interest during the first quarter of 2006. In addition,  the holders
of the  Convertible  Notes have converted a further  $1,846,081 of principal and
accrued  interest at $1.00 per share during the first quarter of 2006  resulting
in the issuance of 1,846,081  shares of our common stock. As of the date of this
Annual Report,  the outstanding  balance of the Convertible Notes is $2,211,776.
Required monthly  payments of principle and interest is  approximately  $160,000
if the company elects to repay in cash.

Promissory Note

     During  fiscal  year  2006,  a  material  commitment  for us  relates to an
unsecured promissory note from one of our shareholders aggregating $600,000 (the
"Promissory  Note"). The provisions of the Promissory Note are:(i) two-year term
with  interest at the rate of 10% per annum;  and (ii)  interest to be paid on a
quarterly basis with the principal to be repaid on or before the due date of the
Promissory Note.

PURCHASE OF SIGNIFICANT EQUIPMENT

     We do not intend to  purchase  any  significant  equipment  during the next
twelve months,  other than equipment  relating to Oak Hills by virtue of the Oak
Hills Share Exchange Agreement.

                                       45
<PAGE>


ITEM 7. FINANCIAL STATEMENTS


                            LEXINGTON RESOURCES, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2005


REPORT OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM
DATED MARCH 27, 2006 ...................................................... 47

CONSOLIDATED  BALANCE  SHEETS AS AT  DECEMBER  31,  2005 AND
DECEMBER 31, 2004 ......................................................... 48

CONSOLIDATED  STATEMENTS OF OPERATIONS FOR FISCAL YEAR ENDED
DECEMBER 31, 2005 AND FISCAL YEAR ENDED DECEMEBR 31, 2004 ................. 49

CONSOLIDATED  STATEMENT  OF  STOCKHOLDERS'  EQUITY  FOR  THE
PERIOD FROM  SEPTEMBER 29, 2003  (INCEPTION) TO DECEMBER 31,
2005 ...................................................................... 50

CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR FISCAL YEAR ENDED
DECEMBER 31, 2005 AND FISCAL YEAR ENDED DECEMBER 31, 2004 ................. 51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................ 52

                                       46
<PAGE>

                 DALE MATHESON
           CARR-HILTON LABONTE
------------------------------
         CHARTERED ACCOUNTANTS

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
________________________________________________________________________________

To the Stockholders and Board of Directors of Lexington Resources, Inc.

We have audited the consolidated balance sheets of Lexington Resources,  Inc. as
at December  31, 2005 and 2004 and the  consolidated  statement  of  operations,
stockholders'  equity and cash flows for the years then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  an audit to obtain  reasonable  assurance  whether  the  financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion,  these consolidated  financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2005
and 2004 and the results of its operations and its cash flows and the changes in
stockholders'  equity  for the years then ended in  conformity  with  accounting
principles generally accepted in the United States of America.

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


                                             "Dale Matheson Carr-Hilton LaBonte"

                                                           CHARTERED ACCOUNTANTS


Vancouver, Canada
March 27, 2006

                                       47
<PAGE>

                            LEXINGTON RESOURCES, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                             December 31,     December 31,
                                                                                 2005           2004
--------------------------------------------------------------------------- ---------------- ----------------
<S>                                                                               <C>            <C>
                                                            ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                     $ 520,332       $  326,293
   Accounts receivable                                                             184,546          136,573
    Current portion of deferred finance fees ( Note 7)                             401,715                -
--------------------------------------------------------------------------- ---------------- ----------------
                                                                                 1,106,593          462,866
--------------------------------------------------------------------------- ---------------- ----------------

DEFERRED FINANCE FEES (Note 7)                                                     267,810                -
--------------------------------------------------------------------------- ---------------- ----------------

PROPERTY AND EQUIPMENT (Note 4)
   Oil and gas properties full cost method of accounting
           Proved, net of accumulated depletion $420,937 (2004 - $161,328)       2,329,448        1,209,938
           Unproved                                                              4,000,024        1,419,447
--------------------------------------------------------------------------- ---------------- ----------------
                                                                                 6,329,472        2,629,385
   Other equipment, net of accumulated depreciation                                  2,167            2,997
--------------------------------------------------------------------------- ---------------- ----------------
                                                                                 6,331,639        2,632,382
--------------------------------------------------------------------------- ---------------- ----------------
                                                                               $ 7,706,042      $ 3,095,248
=========================================================================== ================ ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued liabilities                                      $  936,265      $  228,819
   Current portion of drilling obligations (Note 5)                                      -          617,000
     Promissory note (Note 6)                                                       601,973               -
     Current portion of convertible notes and accrued interest (Note 7)           1,940,781               -
--------------------------------------------------------------------------- ---------------- ----------------
                                                                                  3,479,019         845,819
CONVERTIBLE NOTES (Note 7)                                                        1,220,965               -
DRILLING OBLIGATIONS (Note 5)                                                            -          563,915
--------------------------------------------------------------------------- ---------------- ----------------
                                                                                 4,699,984        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:
   18,627,523 common shares (2004 - 16,999,038)                                      5,575            4,250
     Additional paid-in capital                                                 16,297,665        8,947,604
   Common stock purchase warrants                                                2,809,836          301,815
    Accumulated deficit                                                        (16,107,018)      (7,568,155)
--------------------------------------------------------------------------- ---------------- ----------------
                                                                                 3,006,058        1,685,514
--------------------------------------------------------------------------- ---------------- ----------------
                                                                               $ 7,706,042      $ 3,095,248
=========================================================================== ================ ================
</TABLE>
        The accompanying notes are an integral part of these consolidated
                              financial statements.


                                       48
<PAGE>

                            LEXINGTON RESOURCES, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS



                                               For the Year     For the Year
                                             Ended December    Ended December
                                                   31,              31,
                                                  2005              2004
------------------------------------------------------------- -----------------

OIL AND GAS REVENUE                           $      693,860      $    472,140

------------------------------------------------------------- -----------------

OPERATING EXPENSES
     Depletion                                       259,609           161,328
     Operating costs and taxes                       213,377            83,893
------------------------------------------------------------- -----------------
                                                     472,986           245,221
------------------------------------------------------------- -----------------

OPERATING PROFIT                                     220,874           226,919
------------------------------------------------------------- -----------------

OTHER EXPENSES
   Consulting - stock based (Note 9)               1,913,991         2,989,221
   General and administrative                      2,070,707         3,268,455
   Interest and finance fees (Notes 6 and 7)       4,775,039            61,932
------------------------------------------------------------- -----------------

                                                   8,759,737         6,319,608
------------------------------------------------------------- -----------------

NET LOSS FOR THE YEAR                          $  (8,538,863)     $ (6,092,689)
============================================================= =================




BASIC AND FULLY DILUTED NET LOSS PER SHARE        $    (0.49)       $    (0.39)
============================================= =============== =================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING        17,470,971        15,817,033
============================================= =============== =================

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

                                       49
<PAGE>


                            LEXINGTON RESOURCES, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                              Additional   Common Stock
                                                           Common stock        Paid-In       Purchase    Accumulated
                                                      Shares       Amount      Capital       Warrants      Deficit        Total
                                                  ----------- ------------- ------------- ------------- ------------- -------------
<S>                                                    <C>           <C>         <C>            <C>          <C>            <C>
Issued for cash at $.0001 per share                 3,000,000  $        300  $       --    $       --    $       --    $        300
                                                  ----------- ------------- ------------- ------------- ------------- -------------

Lexington balance, November 19, 2003                3,000,000           300          --            --            --             300
LRI balance, November 19, 2003                     10,593,552        39,833    15,981,933          --     (17,452,735)   (1,430,969)
Reverse acquisition recapitalization adjustment    (3,000,000)      (37,485)  (15,981,933)         --      16,019,418          --
                                                  ----------- ------------- ------------- ------------- ------------- -------------

Balance post-reverse acquisition                   10,593,552         2,648          --            --      (1,433,317)   (1,430,669)
Private placement at $0.83 per unit                   300,000            75       237,425        12,500          --         250,000
Issuance of common stock on exercise of options     1,650,000           413       274,587          --            --         275,000
Issuance of common stock on settlement of
    debt at $0.83 per share                           300,000            75       249,925          --            --         250,000
Net loss, period ended December 31, 2003                 --            --            --            --         (42,149)      (42,149)
                                                  ----------- ------------- ------------- ------------- ------------- -------------


Balance, December 31, 2003                         12,843,552         3,211       761,937        12,500    (1,475,466)     (697,818)
Common stock purchase warrants expired                   --            --          12,500       (12,500)         --            --
Stock based compensation                                 --            --       2,989,221          --            --       2,989,221
Private placement at $2.50 per unit                   439,800           110       954,890        45,000          --       1,000,000
Discount on Convertible Debenture (Note 6)               --            --          50,000          --            --          50,000
Private placement at $1.47 per unit for cash and
     settlement of Convertible Debentures ( Note 7) 1,700,686           425     2,035,355       256,815          --       2,292,795
Fair market value of additional consideration on
    conversion of Convertible Debentures (Note 6)        --            --         489,205          --            --         489,005
Issuance of common stock on exercise of options at
 $0.167 per share                                   1,200,000           300       199,700          --            --         200,000
Issuance of common stock on exercise of options at
  $1.00 per share                                     495,000           124       494,876          --            --         495,000
Issuance of common stock on exercise of options at
  $3.00 per share                                     320,000            80       959,920          --            --         960,000
Net loss, year ended December 31, 2004                   --            --            --            --      (6,092,689)   (6,092,689)
                                                  ----------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004                         16,999,038  $      4,250     8,947,604  $    301,815  $ (7,568,155) $  1,685,514
                                                  =========== ============= ============= ============= ============= =============
</TABLE>
        The accompanying notes are an integral part of these consolidated
                              financial statements.

                                       50
<PAGE>

                            LEXINGTON RESOURCES, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - continued
<TABLE>
<CAPTION>

                                                                            Additional Common Stock
                                                        ommon stock          Paid-In     Purchase    Accumulated
                                                   Shares        Amount      Capital     Warrants      Deficit        Total
                                               ------------ ------------ ------------  ------------  ------------  ------------
<S>                                                  <C>            <C>         <C>           <C>           <C>           <C>
Balance, December 31, 2004, carried forward      16,999,038 $      4,250 $  8,947,604  $    301,815  $ (7,568,155) $  1,685,514

Common stock purchase warrants exercised
  between Feb 2, 2005 and Mar. 31, 2005 at
  $1.68 per share                                   278,014           70      510,090       (43,096)         --         467,064
Fees paid regarding warrants exercised between
  Feb. 2 and Mar. 31, 2005                             --           --        (12,433)         --            --         (12,433)
Common stock purchase warrants exercised on
  April 1 and 18, 2005 at $1.68 per share            26,353            6       48,351        (4,085)         --          44,272
Fees paid regarding warrants exercised on
 April 1 and 18, 2005                                  --           --         (2,940)         --            --          (2,940)
Options exercised May 11, 2005 at $0.16667
 per share                                          100,000           25       16,642          --            --          16,667
Fair value of 233,000 warrants attached to
  May 31, 2005 promissory notes (Note 6)               --           --           --         286,664          --         286,664
Issuance of common stock at $1.31 per share as
 finder's fee on convertible notes (Note 7)         200,000          200      261,800          --            --         262,000
Stock based compensation                               --           --      1,913,991          --            --       1,913,991
Discount on Convertible Notes (Note 7) and
 issuance of Class A& B warrants                       --           --      3,336,828     2,523,172          --       5,860,000
Conversion of Convertible Notes to common
 stock at $1.00 per share between
    Nov. 30 and Dec 20,2005 (Note 7)              1,024,118        1,024    1,023,098          --            --       1,024,122
Common stock purchase warrants expired                 --           --        254,634      (254,634)         --            --

Net loss year ended, December 31, 2005                 --           --           --            --      (8,538,863)   (8,538,863)
                                               ------------ ------------ ------------  ------------  ------------  ------------

Balance, December 31, 2005                       18,627,523 $      5,575 $ 16,297,665  $  2,809,836  $(16,107,018) $  3,006,058
                                               ============ ============ ============  ============  ============  ============
</TABLE>

All share  amounts  have been  restated  to reflect the 300:1  reverse  split in
November 2003 and the 3:1 forward split in January 2004 (refer to Note 8).

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

                                       51
<PAGE>

                            LEXINGTON RESOURCES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                For the Year       For the Year
                                                                                    Ended              Ended
                                                                                 December 31,       December 31,
                                                                                    2005               2004
--------------------------------------------------------------------------- ------------------ -----------------
<S>                                                                                  <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss for the year                                                          $ (8,538,863)     $ (6,092,689)
  Adjustments to reconcile net loss to net cash from operating activities:
       Stock-based compensation                                                     1,913,991         2,989,221
           Non-cash management fees (Note 3)                                          160,708           117,030
       Oil and gas depletion                                                          259,609           161,328
           Depreciation                                                                   830               494
       Non-cash interest and finance fees (Notes 6 and 7)                           4,614,238           512,538
  Changes in working capital assets and liabilities
       Prepaid expenses                                                                     -               450
       Accounts receivable                                                            (47,973)         (136,573)
       Accounts payable                                                                97,601           205,598
       Accrued interest payable                                                       111,307            12,637
--------------------------------------------------------------------------- ------------------ -----------------

NET CASH FLOWS USED IN OPERATING ACTIVITIES                                        (1,428,552)       (2,229,966)
--------------------------------------------------------------------------- ------------------ -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of equipment                                                                     -            (3,491)
  Oil and gas properties                                                           (3,510,559)       (2,787,743)
--------------------------------------------------------------------------- ------------------ -----------------

NET CASH FLOWS USED IN INVESTING ACTIVITIES                                        (3,510,559)       (2,791,234)
--------------------------------------------------------------------------- ------------------ -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Drilling obligation (repayments) advances                                      (1,180,915)          830,915
  Advances payable                                                                          -          (101,467)
    Convertible notes, net  (Note 7)                                                5,201,435           500,000
    Promissory notes (Note 6)                                                         600,000                 -
  Net proceeds on sale of common stock                                                512,630         3,766,625
--------------------------------------------------------------------------- ------------------ -----------------

NET CASH FLOWS FROM FINANCING ACTIVITIES                                            5,133,150         4,996,073
--------------------------------------------------------------------------- ------------------ -----------------

INCREASE (DECREASE) IN CASH                                                           194,039           (25,127)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                          326,293           351,420
--------------------------------------------------------------------------- ------------------ -----------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                              $ 520,332        $  326,293
=========================================================================== ================== =================
</TABLE>

SUPPLEMENTAL CASH FLOW INFORMATION (Note 12).

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

                                       52
<PAGE>


LEXINGTON RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
________________________________________________________________________________

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 was 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  $2,372,426  at December  31,  2005,  has  incurred  losses since
inception of $16,107,018  and further losses are  anticipated in the development
of its oil and gas  properties  raising  substantial  doubt as to the  Company's
ability to continue as a going  concern.  The ability of the Company to continue
as a going  concern is dependent on raising  additional  capital to fund ongoing
losses and property  development and ultimately on generating  future profitable
operations.  The Company will continue to fund operations with advances and debt
instruments, as well as further equity placements.

Comparative figures
Certain of the  comparative  figures  have been  reclassified  to conform to the
current year's presentation.

                                       53
<PAGE>

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.

(b)      Oil and Gas Properties, continued
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. Any impairment in value
is included in the amortization base and amortized prospectively, subject to the
ceiling test described below.

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 market prices less future production,  administrative,  financing, 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.

                                       54
<PAGE>

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
________________________________________________________________________________

(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  December  31,  2005  management  has
determined that there are no material asset retirement obligations.

(d)      Earnings (loss) Per Share
The Company  computes loss per share in accordance with SFAS No. 128,  "Earnings
per Share" which requires  presentation  of both basic and diluted  earnings per
share  on the face of the  statement  of  operations.  Basic  loss per  share is
computed by dividing net loss available to common  shareholders  by the weighted
average number of outstanding common shares during the period.  Diluted loss per
share gives effect to all dilutive  potential common shares  outstanding  during
the period  including  stock  options and warrants  using the  treasury  method.
Dilutive loss per share excludes all potential  common shares if their effect is
anti-dilutive.  Loss per share,  as presented,  has been restated to reflect the
forward stock split  described in Note 8. 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. Actual sales of gas are based on sales, net of
the associated  volume charges for processing fees and for costs associated with
delivery,  transportation,  marketing, and royalties in accordance with industry
standards.  Operating costs and taxes are recognized in the same period in which
revenue is earned.

(f)      Financial Instruments
The fair  values of cash and cash  equivalents,  accounts  receivable,  accounts
payable,  accrued  liabilities,  promissory  notes and  convertible  notes  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 cash equivalents and accounts receivable. The
Company's cash and cash  equivalents  are 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.

(f)      Financial Instruments, continued
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.

                                       55
<PAGE>

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
________________________________________________________________________________

(g)      Use of Estimates
The  preparation  of these  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.

(h)      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 Company has  elected to  continue  to account for stock  options  granted to
employees and officers using the intrinsic value based method in accordance with
the  provisions  of  Accounting   Principles   Board  ("APB")  Opinion  No.  25,
"Accounting  for Stock  Issued to  Employees",  and comply  with the  disclosure
provisions of SFAS No. 123 as amended by SFAS No. 148 as described above.  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. In addition, with respect to stock options granted to
employees,  the Company provides  pro-forma  information as required by SFAS No.
123  showing  the  results  of  applying   the  fair  value   method  using  the
Black-Scholes option pricing model. 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.

                                       56
<PAGE>

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - 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 9(e) and (m):
                                                     Year ended     Year ended
                                                     December 31,  December 31,
                                                         2005           2004
                                                    ------------- -------------
Net loss for the year                As reported    $  (8,538,863) $ (6,092,689)
SFAS 123 compensation expense        Pro-forma           (841,307)     (692,051)
                                                    ------------- -------------
Net loss for the year                Pro-forma      $  (9,380,170) $ (6,784,740)
                                                    ============= =============

Pro-forma basic net loss per share   Pro-forma      $       (0.54) $      (0.43)
                                                    ============= =============

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 ("EITF") 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.

(h)      Stock-Based Compensation, continued
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.

(i)      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.

(j)      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.

                                       57
<PAGE>

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
________________________________________________________________________________

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004,  the FASB issued SFAS No. 123R,  "Share Based  Payment".  SFAS
123R  establishes  standards for the  accounting  for  transactions  in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions  in which an entity  incurs  liabilities  in exchange  for goods or
services that are based on the fair value of the entity's equity  instruments or
that may be settled  by the  issuance  of those  equity  instruments.  SFAS 123R
focuses  primarily on accounting  for  transactions  in which an entity  obtains
employee services in share-based payment  transactions.  SFAS 123R requires that
the compensation cost relating to share-based payment transactions be recognized
in financial  statements.  That cost will be measured based on the fair value of
the equity or liability  instruments issued.  Public entities that file as small
business  issuers  will be required  to apply SFAS 123R in the first  interim or
annual  reporting  period that begins after  December 15,  2005.  Management  is
currently  evaluating  the  impact  of the  adoption  of  this  standard  on the
Company's results of operations and financial position.

In March 2005,  the SEC staff  issued  Staff  Accounting  Bulletin No. 107 ("SAB
107") to give  guidance on the  implementation  of SFAS 123R.  The Company  will
consider SAB 107 during its implementation of SFAS 123R.

In March 2005, the FASB issued FASB  Interpretation  ("FIN") No. 47, "Accounting
for  Conditional  Asset  Retirement  Obligations,   an  interpretation  of  FASB
Statement No. 143". Asset retirement  obligations  (AROs) are legal  obligations
associated  with the  retirement  of  long-lived  assets  that  result  from the
acquisition,  construction,  development and/or normal operation of a long-lived
asset,  except  for  certain  obligations  of  lessees.  FIN 47  clarifies  that
liabilities  associated  with  asset  retirement  obligations  whose  timing  or
settlement  method are  conditional  on future events should be recorded at fair
value  as soon as fair  value  is  reasonably  estimable.  FIN 47 also  provides
guidance on the  information  required to reasonably  estimate the fair value of
the liability.  FIN 47 is intended to result in more  consistent  recognition of
liabilities  relating to AROs among companies,  more information  about expected
future  cash  outflows  associated  with  those  obligations  stemming  from the
retirement of the asset(s) and more information  about investments in long-lived
assets  because   additional  asset  retirement  costs  will  be  recognized  by
increasing the carrying amounts of the assets  identified to be retired.  FIN 47
is effective  for fiscal years ending  after  December 15, 2005.  Management  is
currently  evaluating the impact,  which the adoption of this standard will have
on the Company's financial statements.

In July 2005,  the FASB issued SFAS No.  154,  Accounting  for Changes and Error
Corrections  - A  Replacement  of APB Opinion No. 20 and FASB  Statement  No. 3.
Under the provisions of SFAS No. 154, a voluntary change in accounting principle
requires retrospective application to prior period financial statements,  unless
it is  impracticable  to  determine  either the  period-specific  effects or the
cumulative  effect of the change.  A change in  depreciation,  amortization,  or
depletion method for long-lived,  nonfinancial assets must be accounted for as a
change in accounting estimate effected by a change in accounting principle.  The
guidance  contained in Opinion 20 for  reporting  the  correction of an error in
previously issued financial  statements and a change in accounting  estimate was
not changed.  The Company will implement this new standard  beginning January 1,
2006.  This  standard  is not  expected  to  have a  significant  effect  on the
Company's reported financial position or earnings.

                                       58
<PAGE>

NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
________________________________________________________________________________

RECENT ACCOUNTING PRONOUNCEMENTS - continued

In November  2005, the FASB issued Staff Position  ("FSP")  FAS115-1/124-1,  The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments,  which  addresses  the  determination  as to when an  investment is
considered  impaired,  whether that impairment is other than temporary,  and the
measurement  of  an  impairment   loss.   This  FSP  also  includes   accounting
considerations   subsequent  to  the  recognition  of  an   other-than-temporary
impairment and requires certain  disclosures  about unrealized  losses that have
not been recognized as  other-than-temporary  impairments.  The guidance in this
FSP amends FASB Statements No. 115,  Accounting for Certain  Investments in Debt
and Equity Securities,  and No. 124,  Accounting for Certain Investments Held by
Not-for-Profit  Organizations,  and APB  Opinion  No. 18,  The Equity  Method of
Accounting for Investments in Common Stock.  This FSP is effective for reporting
periods  beginning  after  December 15,  2005.  The Company does not believe the
adoption of this FSP will have a material impact on our financial statements.

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.

This  acquisition  was  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 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.

                                       59
<PAGE>

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

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.

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.

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 9).

During  the year  ended  December  31,  2005  the  Company  recorded  additional
compensation expense to Humphreys of $160,708 (December,  2004 - $117,030) being
the estimated value of his 10% carried  interest in the Company's well interests
that were successfully developed in the period ended December 31, 2005 (refer to
Note 4).


                                       60
<PAGE>

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

Humphreys is a director of the Company and is the Drilling Operations Manager of
Lexington,  and also a director  and General  Manager of 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.  Oak Hills is the wholly owned  subsidiary  of Oak Hills
Drilling and Operating  International,  Inc., a Nevada  private  corporation  of
which  Humphreys  is a 25%  shareholder.  Humphreys  is in charge of oil and gas
operations for Lexington in the United States (refer to Note 10).

On  January  23,  2006,  the  Company  acquired  100% of the shares of Oak Hills
Drilling and  Operating  International,  Inc.,  and its wholly  owned  operating
subsidiary,  Oak Hills.  Oak Hills is a full service oil and gas well  drilling,
operating and completion  company with drilling rig and related well  completion
equipment.  The Oak Hills companies were acquired from the vending  shareholders
for an  aggregate of 6,000,000  restricted  common  shares in the capital of the
Company (refer to Note 14).

Management Compensation Agreement (continued) 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. Humphreys is also the President of Paluca.

NOTE 4:  PROPERTY AND EQUIPMENT
________________________________________________________________________________

Property and equipment includes the following:

                                             December 31,       December 31,
                                                 2005               2004
                                           ------------------ -----------------
Oil and gas properties:                            $                 $
Proved, subject to depletion                    2,750,385
                                                              1,371,266
Unproved, not subject to depletion              4,000,024
                                                                1,419,447
Accumulated depletion                                            (161,328)
                                                 (420,937)
                                           ------------------ -----------------
Net oil and gas properties                      6,329,472       2,629,385
                                           ------------------ -----------------

Other equipment                                                     3,495
                                                    3,495
Accumulated depreciation                                             (498)
                                                   (1,328)
                                           ------------------ -----------------
Net other property and equipment                                    2,997
                                                    2,167
                                           ------------------ -----------------
Property and equipment, net of accumulated
  depreciation  and depletion                   6,331,639       2,632,382
                                           ================== =================

The  Company's  oil and gas  activities  are  currently  conducted in the United
States.  During the  current  year the  Company  incurred  development  costs of
$1,953,882  on its  properties  inclusive  of  carrying  costs to  Humphreys  of
$160,708.

                                       61
<PAGE>

NOTE 4:  PROPERTY AND EQUIPMENT - continued
________________________________________________________________________________

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 year ended  December  31, 2005 the Company has  incurred  $408,524 on
drilling  expenditures  relating to a total of four  producing  gas wells on the
Wagnon lease (refer to Note 5).

All wells  developed by Lexington on the Wagnon  Property were privately  funded
with the funding  investors  receiving an 80% working  interest and a 60.56% net
revenue  interest  until  funded  capital  was  repaid  (refer to Note 5). As of
September 19, 2005, the Company had repaid the funding  investors the balance of
their unpaid  capital,  which  totaled  $1,180,915  as of December 31, 2004,  to
acquire  Lexington's  back-in  53.2%  working  interest  and 32.22% net  revenue
interest in the four wells developed on the Wagnon lease. The funding  investors
continue to receive a residual  20.1% working  interest and a 12.17% net revenue
interest for the remainder of each well's life.

Coal Creek Prospect
In March 2004 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% - 79% 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 (the Lex 1-34). The well began production in
April 2005.  Lexington has  approximately a 50% working interest in the well and
has incurred $353,705 in costs associated with the well.

On April 14,  2005  Lexington  began  drilling  its second  horizontal  coal bed
methane gas well on its Coal Creek Prospect (the Brumbaugh 1-10).  Lexington has
approximately  a 22% working  interest in the well and has incurred  $105,753 in
costs associated with the well. The well began production in May 2005.

                                       62
<PAGE>

NOTE 4:  PROPERTY AND EQUIPMENT (continued)
________________________________________________________________________________

On May 31, 2005 Lexington  began drilling its third  horizontal coal bed methane
gas  well  on  its  Coal  Creek   Prospect  (the  Ellis  1-15).   Lexington  has
approximately an 88% working  interest in the well and has incurred  $404,978 in
costs  associated  with  the  well.  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  had 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's  working
interest in the well it elected to participate in is 25.78%.

Newfield has proceeded  with the drilling and  completion of one of the wells in
which  Lexington  has  leased  acreage  and  in  which   Lexington   elected  to
participate. The vertical well targeted 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  $551,634 for drilling and  completion  costs relating to
the POE 1-29 as of  December  31,  2005.  Based on  results  of the POE 1-29 and
increased revised estimated costs to complete a further horizontal well proposed
by Newfield,  the Company has not elected to  participate  in any further  wells
operated by Newfield on the Panther Creek Prospect.

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 began site  preparation on the first well (Goodson 1-23) to be drilled
on the property but, subsequently 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.

                                       63
<PAGE>

NOTE 4:  PROPERTY AND EQUIPMENT (continued)
________________________________________________________________________________

H-9 Prospect (continued)

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  and a 70%
net  revenue  interest  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 in three separate leases for $1,107,353.

On December 8, 2005 the Company  purchased an additional 601 acres,  with a 100%
working  interest and a 72.5% net revenue  interest of Barnet Shale gas targeted
properties in Parker and Hood Counties, Texas for between $725 and $750 per acre
in three  separate  leases  for  $439,227  of which  $219,614  is unpaid  and is
recorded in accounts payable at December 31, 2005.

Geneva Prospect
On December 5, 2005 the Company entered into an agreement whereby it purchased a
100% working interest and a 70% net revenue interest in approximately  312 acres
of Barnett Shale gas targeted properties in Tarrant County, Texas for $2,500 per
acre or $779,800.

On February 16, 2006, the Company's wholly owned  designated  operator Oak Hills
(see  Note  14)  began  drilling  the  Oliver  Unit 1H  Barnett  Shale  targeted
horizontal  gas  well on the  Geneva  Prospect.  The  well  was  drilled  with a
2,300-foot horizontal section to a total depth of 9,300 feet. Well completion is
scheduled for April,  2006  commensurate  with water  fracture  stimulation  and
pipeline tie in.

Arkoma Basin Joint Exploration Agreement
On March 3, 2006,  effective  January  31,  2006,  the Company  entered  into an
exploration  agreement with Dylan Peyton, LLC of Dallas Texas to jointly develop
Lexington's  Arkoma Basin leases located in Hughes and MacIntosh Counties in the
State of Oklahoma ("Arkoma Basin Exploration  Agreement").  The property will be
developed  on a  50/50  equal  working  interest  basis.  Assignments  to 50% of
Lexington's  leasehold  interests in Coal Creek, South Lamar,  Middle Creek, and
H-9 Prospects  have been effected to Dylan  Peyton,  LLC.  Wellbores and acreage
relating to previously  drilled and completed wells by the Company will not form
part of any assignments under the Arkoma Basin  Exploration  Agreement (refer to
Note 14).

                                       64
<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 (refer to Note 3).  Paluca also owns a non-carried  working
interest of 5% as part of capital participation funding provided by Paluca.

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, 12.17% 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.

During the year ended  December 31, 2005,  $1,180,915  was repaid to the funding
investors to acquire  Lexington's  back-in 53.2% working interest and 32.22% net
revenue  interest in the four wells  developed on the Wagnon lease.  The funding
investors continue to receive a residual 20.1% working interest and a 12.17% net
revenue interest for the remainder of each Wagnon Lease well's life. As a result
of the repayment, the Company's back-in working interest of 53.2% and 32.22% net
revenue interest in the four wells developed on the Wagnon lease has vested.

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).
Subsequently,  an  additional  $65,000 was 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 $286,664 (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
$286,664  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 December 31,
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.

                                       65
<PAGE>

NOTE 6:  PROMISSORY NOTES - continued
________________________________________________________________________________

On December 20, 2005 the Company obtained an unsecured loan by way of promissory
note from a shareholder of the Company totaling  $600,000.  The term of the loan
is for two years with interest  calculated  at 10% per annum.  Interest is to be
paid on a quarterly  basis with the  principal to be repaid on or before the two
year loan period.  As of December  31,  2005,  $1,973 of interest had accrued on
this loan.  The Company  intends to repay this loan during 2006 and therefore it
has been  classified  as a current  liability.  Subsequent to December 31, 2005,
this  promissory  note holder became a significant  shareholder  of the Company.
(refer to Note 14(a))

NOTE 7:  CONVERTIBLE NOTES
________________________________________________________________________________

On  September  16, 2005 and on October 11, 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 $5,860,000.  Introduction  and
legal fees  associated  with this financing were $938,550 and have been recorded
as deferred finance fees and are amortized over the term of the Notes.. Pursuant
to the terms of this financing, the Company issued:

(i)  An aggregate of $5,860,000 secured,  convertible  two-year promissory notes
     bearing 8% interest.  The promissory  notes are convertible  into 5,860,000
     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 2,930,000 Class A Warrants,  to purchase a share of its common
     stock at an exercise price of $1.50 per share until December 1, 2008;
(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 2,930,000  Class B Warrants,  to purchase an additional
     share of  common  stock at an  exercise  price of  $1.25  per  share  until
     December 1, 2006; and

(iv) 586,000 Finder's  Warrants to purchase shares of the Company's common stock
     at an exercise price of $1.00 per share for a term until December 1, 2008.

The  repayment  of the notes has been  guaranteed  by  Lexington  supported by a
collateral security agreement covering all the assets of Lexington.

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 6,446,000  warrants issued as of September 30, 2005 and October 11,
2005 were determined to be $6,380,771 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 $8,438,400,  based
upon 6,446,000 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 $3,336,828 and has been completely  charged to interest expense
and  recorded  as   additional   paid  in  capital   because  of  the  immediate
convertibility  of the  debt;  (b) the  fair  value  of the  warrants  has  been
determined  to be $2,523,172  and has been recorded as equity.  The Company will

                                       66
<PAGE>

NOTE 7:  CONVERTIBLE NOTES - continued
________________________________________________________________________________

record  further  interest  expense  over  the term of the  Convertible  Notes of
$2,523,172  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 $5,860,000  to maturity.  To December 31, 2005,
accrued  interest  of  $109,334  has been  included in  convertible  notes,  and
interest  expense of $334,178 has been  accreted.  Between  December 1, 2005 and
December 20, 2005,  $1,024,122  in principal and interest  were  converted  into
1,024,118  common shares of the Company.  As a result,  the Company  immediately
recorded   additional   interest  expense  of  $387,093  which  represented  the
corresponding pro rata portion of the $2,523,172  additional interest expense to
be recorded.

Repayment of Convertible Promissory Notes and Accrued Interest
The  Company  is  committed  to  repay   convertible   promissory  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 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  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. The
Company may be required to repay monthly principal and interest due in shares in
the capital of the Company at a different rate than the Fixed  Conversion  Price
subject  to  volume  restrictions  or  alternative  waiver by  convertible  note
holders.  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 common stock valued at 75% of the VWAP for the five trading days prior to the
monthly  payment date subject to volume  restrictions  or alternative  waiver by
convertible  note holders.  The holders of the Convertible  Notes have a secured
first charge interest in the assets of the Company.

Debt Repayment
As of December  31,  2005,  convertible  debt holders  converted  $1,024,118  of
principal and interest at $1.00 per share resulting in the issuance of 1,024,118
of common  shares in the  Company.  The Company has for its first three  monthly
principal  and  interest  payments  that were due in the first  quarter of 2006,
elected to repay the note holders in cash. (Refer to Note 14(g))

The aggregate amount of principal and interest  payments required in each of the
next two  years to meet  debt  retirement  provisions  after  considering  known
conversions  that  incurred  between  January  1, 2006 and March 20,  2006,  and
assuming the Company continues to repay convertible note repayment in cash is as
follows:

              Year           Principal       Interest        Total
         ---------------- ---------------- ------------- --------------
                                 $              $              $
              2006              1,920,934       289,194      2,210,128
              2007              1,148,025        34,346      1,182,372
                          ---------------- ------------- --------------
                                3,068,959       323,540      3,392,500
                          ================ ============= ==============

                                       67
<PAGE>

NOTE 7:  CONVERTIBLE NOTES (continued)
________________________________________________________________________________

Deferred Finance Fees on Convertible Promissory Notes
Deferred   finance  fees   associated  with  this  financing  are  comprised  of
introduction  and  legal  fees of  $938,550,  $262,000  of which is the value of
200,000 shares issued to settle with a former financier (refer to Note 8).

During the year ended December 31, 2005,  $269,025 of the deferred  finance fees
have been  charged to  interest  expense  and the  balance of  $669,525  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.

Reverse Stock Split
Effective  August  7,  2003 the  Company  completed  a  reverse  stock  split of
one-for-three hundred of the Company's outstanding common stock,  resulting in a
reduction  of the then  outstanding  common  stock  from  156,328,943  shares to
521,184  shares.  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 reverse stock
split.

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.

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.

Common 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 fair
value  respecting  the issue of 200,000  common  shares has been  recorded as an
increase in equity and a charge to deferred  finance fees which will be expensed
over the term of the promissory notes. The shares were  subsequently  registered
for resale pursuant to contractual obligations.

During 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  in  accordance  with the  Company's
agreements with the broker.

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 December 20, 2005, convertible debt holders converted $1,024,122 of principal
and interest at $1.00 per share resulting in the issuance of 1,024,118 of common
shares in the Company.

                                       68
<PAGE>

NOTE 8:  STOCKHOLDERS' EQUITY - continued
________________________________________________________________________________

Common 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 Investor Communications International, Inc. ("ICI") which was assigned by ICI
to  International  Market  Trend,  Inc.  ("IMT")  designated  option  holders as
described  in Note 9. IMT is a private  company  that  performs  a wide range of
management, administrative,  financial, and business development services to the
Company.

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.

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 May 3, 2004 the Company concluded and issued 400,000 restricted common shares
at $2.50 per  share  plus  one-half  warrant  at $5.00 per share for each  share
purchased,  with warrants terms to December 31, 2005. The total amount raised in
this  financing  was  $1,000,000.  The value of the warrants was estimated to be
$45,000 and was recorded as a separate  component  of  stockholders'  equity.  A
finder's  fee of  39,800  restricted  common  shares  was paid  pursuant  to the
transaction.

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.

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 warrant  component  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

                                       69
<PAGE>

NOTE 8:  STOCKHOLDERS' EQUITY - continued
________________________________________________________________________________

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 December 31, 2005 are:



                                            Number of         Weighted average
                             Weighted       warrants to    remaining contractual
 Range of exercise prices  average price  purchase shares      life (in years)
--------------------------------------------------------------------------------
      $1.00 - $3.00           $1.40            6,679,000            1.90
================================================================================

A summary of the Company's  stock purchase  warrants as of December 31, 2005 and
2004, and changes during the years ended is presented below:

<TABLE>
<CAPTION>

----------------------------------------------- ---------------- ------------------ ------------------------
                                                                 Weighted average
                                                                  exercise price       Weighted average
                                                   Number of         per share       remaining contractual
                                                   Warrants                             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 on (May 1, Sept. 16 and Oct. 11, 2005)       6,679,000
Expired                                             (1,642,672)
----------------------------------------------- ---------------- ------------------ ------------------------
Balance at December 31, 2005                         6,679,000         1.40                  1.90
=============================================== ================ ================== ========================
</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 (refer to Note 6). The term
of these warrants is five years. The fair value of these warrants at the date of
grant was $286,664 as estimated  using the  Black-Scholes  option  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).

During the year ended December 31, 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.

                                       70
<PAGE>

NOTE 8:  STOCKHOLDERS' EQUITY - continued
________________________________________________________________________________

During the year ended December 31, 2005 1,642,672 warrants expired unexercised.

As a result of the warrants that expired and the warrants that were exercised in
the year ended  December 31, 2005,  the Company  charged  $301,815 to additional
paid in capital.

In September 2005 and October 11, 2005 the Company issued: (a) 2,930,000 Class A
Warrants  exercisable  at $1.50  for 3 years;  (b)  2,930,000  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 convertible
promissory notes totaling $5,860,000 (refer to Note 7).

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

As of December 31, 2005,  6,700,000 options under the Company's current SOP have
been granted of which 3,765,000 have been exercised.

A summary of the Company's  stock options as of December 31, 2005 and 2004,  and
changes during the years 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 December 31, 2005                   2,935,000            2.48                    6.48
======================================== ===================== ======================= =======================
</TABLE>

                                       71
<PAGE>

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

(a) 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.

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.

(b)  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.

(c) 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.

(d) 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.

(e) 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.

(f) 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%.

(g) On February 1, 2005,  100,000 S-8  registered  share 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%.

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

(i) 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%. On November 30, 2005
the 1,150,000 options to IMT were re-assigned. (refer to Note 14(c))

                                       72
<PAGE>

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

(j) 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%, 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
________________________________________________________________________________

The Company previously entered into a one year contract with IMT on November 10,
2003,   a  private   company   that   performs  a  wide  range  of   management,
administrative, financial, and business development services to the Company. The
contract has been renewed annually. The Company incurred $130,000 in fees to IMT
for the year ended December 31, 2005 (2004 - $120,000).

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. On November 30, 2005
the 1,150,000 options to IMT were cancelled (refer to Note 9).

As of December  31,  2005 the Company  owed  $600,000  to a  shareholder  of the
Company  (refer to Note 6) who is also a  significant  shareholder  of Oak Hills
Drilling and Operating International, Inc. (Refer to Note 14)

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. (Refer to Note 3.)

During the year ended December 31, 2005 the Company incurred (a) $179,150 to its
officers for  management  fees (2004 -  $154,000);  and (b) $65,000 in fees to a
director (2004 - $17,500).

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.

Other related party transactions are disclosed in Notes 3, 4, 8, 9 and 14.

NOTE 11: INCOME TAXES
________________________________________________________________________________

The Company has adopted FASB No. 109 for reporting purposes.  As of December 31,
2005,  the  Company  had net  operating  loss carry  forwards  of  approximately
$6,875,000 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.

                                       73
<PAGE>

NOTE 11: INCOME TAXES - continued
________________________________________________________________________________

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.

A  reconciliation  of income tax computed at the federal and state statutory tax
rates and the Company's effective tax rate is as follows:

<TABLE>
<CAPTION>

                                                      Year ended           Year ended
                                                     December 31,         December 31,
                                                         2005               2004
------------------------------------------------- -------------------- --------------------
<S>                                                       <C>                 <C>
Federal income tax provision at statutory rate              35.0%                35.0%
State income tax provision at statutory rate,
   net of federal income tax effect                          6.0                  6.0
Less valuation allowance                                   (41.0)               (41.0)
------------------------------------------------- -------------------- --------------------

Total income tax provision                                        -                    -
================================================= ==================== ====================
</TABLE>

The tax effects of temporary  differences that give rise to the Company's future
tax asset (liability) are as follows:

                                     2005              2004
-------------------------------- --------------- ---------------

Loss carry forwards              $   2,819,000   $   1,330,000
Valuation allowance                 (2,819,000)     (1,330,000)
-------------------------------- --------------- ---------------
                                 $          -    $          -
================================ =============== ===============

As the criteria for  recognizing  future income tax assets have not been met due
to the  uncertainty  of  realization,  a  valuation  allowance  of 100% has been
recorded for the current and prior year.


NOTE 12: SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
________________________________________________________________________________

                                            Year ended            Year ended
                                        December 31, 2005      December 31, 2004
  --------------------------------- --------------------------------------------
  Cash paid during the year for:
           Interest                 $          158,828             $        -
           Income taxes             $               -              $        -
  --------------------------------- --------------------------------------------

                                       74
<PAGE>

NOTE 13: ECONOMIC DEPENDENCE
________________________________________________________________________________

During the year ended December 31, 2005,  three customers  accounted for 100% of
the Company  sales with  totals of 58%,  29% and 13%  respectively  ( year ended
December 31, 2004 - one customer accounted for 100% of the Company's sales).

NOTE 14: SUBSEQUENT EVENTS
________________________________________________________________________________

(a) On January 23, 2006,  the Company  acquired  100% of the shares of Oak Hills
Drilling and  Operating  International,  Inc.,  and its wholly  owned  operating
subsidiary,  Oak Hills Drilling and Operating LLC ("Oak  Hills").  The companies
were  acquired  from the vending  shareholders  for an  aggregate  of  6,000,000
restricted common shares in the capital of the Company. Assets of Oak Hills have
been  independently  valued at  approximately  $5.848 million and management has
determined a net tangible  book value of $3.824  million as the basis for shares
issued at a price per share of $0.637 and  represented  a 6.3%  discount  to the
trading  value  of the  Company's  stock as at  December  22 and 23,  2005,  the
transaction  valuation date. The companies were acquired with secured promissory
notes totaling $1.29 million owed to vendors of the companies. The $1.29 million
in promissory  notes accrue interest at 9% per annum, and require no payments of
interest or principle  until the end of a two year term ending January 22, 2006.
As of December 31, 2005, Oak Hills had further bank debts and equipment loans of
approximately $247,400 subject to audit.

(b) On February 15, 2006 the Company entered into a one year consulting contract
with a  third  party  contractor,  to  provide  financial  and  investor  public
relations and related matters in Germany.  The Company issued 400,000 restricted
common shares of the Company's  stock and agreed to pay  approximately  $353,000
(EUR $293,000) over the term of the agreement.

(c) On March 1, 2006,  1,150,000 share options were  re-assigned from IMT to two
consultants  of IMT at $1.25 per share in connection  with business  development
services  for the  Company.  The term of these  options is 5 years and  replaced
1,150,000 options previously granted to IMT and subsequently cancelled (see Note
9). The exercise  prices,  terms and  conditions of the new share options issued
were on the same terms and conditions as the share options cancelled.

(d) A total of 1,650,000 options were exercised  (500,000 at $1.00 per share and
1,150,000 at $1.25 per share) for cash proceeds of $1,937,500. All shares issued
were registered on Form S-8.

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

                                       75
<PAGE>

NOTE 14: SUBSEQUENT EVENTS - continued
________________________________________________________________________________

(f) On March 3, 2006,  effective  January 31, 2006, the Company  entered into an
exploration  agreement with Dylan Peyton, LLC of Dallas Texas to jointly develop
approximately  5,000 acres of Barnett  Shale and shallow gas targets in Comanche
County, Texas (the "Comanche County Exploration  Agreement").  The property will
be developed on a 50/50 equal working interest basis. The Company's  subsidiary,
Oak Hills Drilling and  Operating,  LLC will become the operator of the project.
The Company will pay  approximately  $1,250,000 for its 50% working  interest in
the new acreage  through a  combination  of  $575,000 in cash and  approximately
$675,000 of carried drilling costs in the first Comanche Barnett Shale test well
expected to be drilled on or before September 2006.

(g) As of March 21, 2006 convertible debt holders converted a further $1,846,091
of  principal  and  interest  at $1.00 per share  resulting  in the  issuance of
1,846,091  of common  shares in the Company  (refer to Note 7). The Company also
repaid a further  $629,405 in  principal  and  $176,688 in interest to March 21,
2006. The outstanding  balance due to the convertible  debt holders at March 21,
2006 was $2,414,554.

NOTE 15: DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (unaudited)
________________________________________________________________________________

All of the Company's Oil and Gas  activities  are conducted in the United States
of America.

       Capitalized Costs Relating to Oil and Gas Producing Activities at:

---------------------------------------- ------------------ ------------------
                                         December 31, 2005   December 31, 2004
---------------------------------------- ------------------ ------------------
                                               Total             Total
---------------------------------------- ------------------ ------------------

---------------------------------------- ------------------ ------------------
Unproved oil and gas properties             $    4,000,024   $     1, 419,447
---------------------------------------- ------------------ ------------------

---------------------------------------- ------------------ ------------------
Proved oil and gas                          $    2,750,385   $      1,371,266
---------------------------------------- ------------------ ------------------
Accumulated depreciation, depletion, and
amortization and valuation allowances       $     (420,937)  $      (161, 328)

---------------------------------------- ------------------ ------------------

---------------------------------------- ------------------ ------------------
Net capitalized costs                       $    6,329,472   $      2,629,385
---------------------------------------- ------------------ ------------------

                                       76
<PAGE>

NOTE 15: DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
         (unaudited) - continued
________________________________________________________________________________

Costs Incurred in Oil and Gas Property Acquisition,  Exploration and Development
Activities For the Year Ended:

----------------------------------------- ----------------- ------------------
                                          December 31, 2005 December 31, 2004
----------------------------------------- ----------------- ------------------
                                                 Total             Total
----------------------------------------- ----------------- ------------------

----------------------------------------- ----------------- ------------------
Acquisition Properties
----------------------------------------- ----------------- ------------------
- Proved                                                  -                  -
----------------------------------------- ----------------- ------------------
- Unproved                                  $     2,327,230 $        1,419,447
----------------------------------------- ----------------- ------------------

----------------------------------------- ----------------- ------------------
Exploration costs                           $             -   $              -
----------------------------------------- ----------------- ------------------
Development costs                           $     1,693,175 $        1,251,266
----------------------------------------- ----------------- ------------------
       Results of Operations for Producing Activities For the Year Ended:

------------------------------------------ ------------------ ------------------
                                           December 31, 2005  December 31, 2004
------------------------------------------ ------------------ ------------------
                                                  Total              Total
------------------------------------------ ------------------ ------------------

------------------------------------------ ------------------ ------------------
Revenues
------------------------------------------ ------------------ ------------------
- Sales                                      $       693,860 $          472,140
------------------------------------------ ------------------ ------------------
- Transfers                                                -                  -
------------------------------------------ ------------------ ------------------
      Totals                                 $       693,860    $       472,140
------------------------------------------ ------------------ ------------------
Production Costs                             $      (213,377)   $       (83,893)
------------------------------------------ ------------------ ------------------
Depreciation, depletion and amortization,
 and valuation provisions                    $      (259,609)          (161,328)
------------------------------------------ ------------------ ------------------
Income tax expense                           $             -    $             -
------------------------------------------ ------------------ ------------------

------------------------------------------ ------------------ ------------------
Results of operations from producing
activities( excluding corporate overhead
 and interest costs)                         $       220,874 $          226,919
------------------------------------------ ------------------ ------------------

                                       77
<PAGE>

NOTE 15: DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
         (unaudited) - continued
________________________________________________________________________________

                Reserve Quantity Information For the Year Ended:
<TABLE>
<CAPTION>

-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
                                                        Oil                  Oil              Gas - mcf           Gas - mcf
                                                 December 31, 2005    December 31, 2004   December 31, 2005   December 31, 2004
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
<S>                                                      <C>                  <C>                  <C>                 <C>
Proved developed and undeveloped reserves:
beginning of year                                             --                    --            1,350,903                --
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
Extensions and discoveries                                    --                    --           11,375,856           1,531,026
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
Production                                                    --                    --             (249,759)           (180,123)
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
Sales of minerals in place                                    --                    --                 --                  --
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
End of year                                                   --                    --           12,477,000           1,350,903
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
Proved developed reserves:
    Beginning of year                                         --                    --            1,176,008                --
    End of year                                               --                    --            1,618,000           1,176,008
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
Oil and gas applicable to long-term supply
 agreements with government or authorities in
 which the enterprise acts as a producer:
    Proved reserves - beginning of year                   --                    --            1,350,903           1,350,903
    Received during the year                              --                    --           11,126,097                --
-----------------------------------------------   ----------------   -------------------   ----------------    ----------------
</TABLE>

                                       78
<PAGE>

NOTE 15: DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
         (unaudited) - continued
________________________________________________________________________________

Standardized  Measure of  Discounted  Future Net Cash Flows and Changes  Therein
Relating to Proved Oil and Gas Reserves at December 31, 2005
<TABLE>
<CAPTION>

----------------------------------------------- ---------------------- ---------------------
                                                 December 31, 2005       December 31, 2004
                                                       Total                   Total
----------------------------------------------- ---------------------- ---------------------
<S>                                                      <C>                     <C>
----------------------------------------------- ---------------------- ---------------------
Future cash inflows                             $         60,228,000     $        5,273,961
----------------------------------------------- ---------------------- ---------------------
Future production and development costs         $        (22,723,000)    $       (1,642,296)
----------------------------------------------- ---------------------- ---------------------
Future income tax expense                                          -                      -
----------------------------------------------- ---------------------- ---------------------
Future net cash flows 10% annual discount For
estimated timing of cash flows                  $        (17,033,000)    $       (1,200,639)

----------------------------------------------- ---------------------- ---------------------
Standardized measure of discounted future net
cash flows                                      $         20,472,000     $        2,431,026
----------------------------------------------- ---------------------- ---------------------
Sales and transfers of oil and gas produced,
net of production costs                         $           220,874      $         226,919
----------------------------------------------- ---------------------- ---------------------
Net changes in prices and production costs                        -                      -
----------------------------------------------- ---------------------- ---------------------
Extensions, discoveries and improved
recovery, less related costs                                      -                      -
----------------------------------------------- ---------------------- ---------------------
Development costs incurred during the period    $          1,693,175      $       1,360,296
----------------------------------------------- ---------------------- ---------------------
</TABLE>



















                                       79
<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

     Our  principal  independent  accountant  from  August 9, 2000 to the period
ended  December  31,  2005  is  Dale  Matheson  Carr-Hilton  Labonte,  Chartered
Accountants,  1300-1140 West Pender Street, Vancouver, British Columbia V6E 4G1.
Effective January 1, 2004,  LaBonte & Co. merged with Dale Matheson  Carr-Hilton
pursuant to which the name of our principal  independent  accountant  changed to
Dale Matheson Carr-Hilton LaBonte.

ITEM 8A. CONTROLS AND PROCEDURES

FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES

     An  evaluation   was  conducted   under  the   supervision   and  with  the
participation  of our management,  including  Grant Atkins,  our Chief Executive
Officer ("CEO") and Vaughn Barbon,  our Chief Financial Officer ("CFO"),  of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures as of December 31, 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  Exchange  Act,  is  recorded,  processed,
summarized  and  reported  within the time  periods  specified  in SEC rules and
forms.  Such  officers  also  confirm  that there was no change in our  internal
control over  financial  reporting  during the year ended December 31, 2005 that
has  materially  affected,  or is reasonably  likely to materially  affect,  our
internal control over financial reporting.

Audit Committee Report

     Our 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 and are  financial
experts.  The audit  committee was organized in April 2004 and operates  under a
written charter adopted by the Board of Directors.

     The audit  committee has reviewed and discussed with management our audited
financial  statements  as of and for fiscal year ended  December 31,  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 audited financial  statements
referred  to above be  included  in our Annual  Report on Form 10-KSB for fiscal
year ended December 31, 2005 filed with the Securities and Exchange Commission.

Ethics Committee

     Our Board of Directors has established an ethics  committee.  The member of
our ethics committee is Mr. Grant Atkins, Mr. Douglas  Humphries,  and Mr. Steve
Jewett. The ethics committee was organized in February 2005 and operates under a
code of business  conduct and ethics policy (the "Code") adopted by the Board of
Directors.

                                       80
<PAGE>

ITEM  8.  ITEM 8A. CONTROLS AND PROCEDURES - continued

     Our Board of Directors  adopted the Code for our  directors  and  officers.
This Code is intended to describe our core values and beliefs and to provide the
foundation for all business  conduct.  The Code is further intended to focus our
board of  directors  and each  director  and  officer on areas of ethical  risk,
provide  guidance to directors and officers to help them recognize and deal with
ethical issues,  provide mechanisms to report unethical conduct, and help foster
a culture of honesty and accountability.  Our guidelines for conducting business
are consistent with the highest standards of business ethics.  Each director and
officer must comply with the letter and spirit of this Code.

     Upon request,  we shall provide to any person  without charge a copy of the
Code. Any such requests should be directed to Mr. Grant Atkins,  President, 7473
West Lake Mead Road, Las Vegas, Nevada 89128.

ITEM 8B. OTHER INFORMATION

         Not applicable.


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

     All of our directors hold office until the next annual  general  meeting of
the  shareholders  or until their  successors  are elected  and  qualified.  Our
officers are  appointed  by our board of  directors  and hold office until their
earlier death, retirement, resignation or removal.

         Our directors and executive officers, their ages, positions held are as
follows:

    -------------------- ----- -----------------------------
    Name                 Age   Position with the Company
    -------------------- ----- -----------------------------
    Grant Atkins         45    President/Chief Executive
                               Officer and Director
    -------------------- ----- -----------------------------
    Vaughn Barbon        49    Treasurer/Chief Financial
                               Officer
    -------------------- ----- -----------------------------
    Douglas Humphreys    53    Director
    -------------------- ----- -----------------------------
    Norman MacKinnon     70    Director
    -------------------- ----- -----------------------------
    Steve Jewett         67    Director
    -------------------- ----- -----------------------------

Business Experience

     The following is a brief  account of the education and business  experience
of each director,  executive  officer and key employee  during at least the past
five years, indicating each person's principal occupation during the period, and
the name  and  principal  business  of the  organization  by which he or she was
employed.

                                       81
<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT - continued

     Grant Atkins.  Grant Atkins has been our Chief Executive Officer since July
2003, our President  since 2001 and our Secretary and a director since September
1998. For the past ten years, Mr. Atkins has been self-employed and has acted as
a financial and project  coordination  consultant  to clients in government  and
private industry.  He has extensive  multi-industry  experience in the fields of
finance,  administration and business development.  From 1998 to March 31, 2004,
Mr.  Atkins  provided  consulting   services  through  Investor   Communications
International,  Inc. to a number of private and public companies,  including us.
Mr. Atkins received a Bachelor of Commerce degree from the University of British
Columbia.

     Vaughn  Barbon.  Vaughn Barbon has been our  Treasurer and Chief  Financial
Officer  since April 1, 2003.  Mr.  Barbon is also a manager of Lexington  Oil &
Gas. Since 1997, Mr. Barbon has provided  consulting and accounting services for
V. Barbon Consulting. Mr. Barbon received a Bachelor of Arts from the University
of Victoria.

Douglas  Humphreys.  Douglas  Humphreys has been a director since April 30, 2004
and is a member of our audit  committee.  Mr. Humphreys is also a manager of Oak
Hills Drilling and  Operating,  LLC., an oil and gas limited  liability  company
organized  under the laws of Oklahoma that acts as "operator" to Lexington.  Oak
Hills Drilling and Operating, LLC and its parent company, Oak Hills Drilling and
Operating  International,  Inc.  was acquired by  Lexington  Resources,  Inc. in
January,  2006. Mr. Humphreys has been Operations Manager of Lexington Oil & Gas
since  November  2003 and an oil and gas  consultant to Paluca  Petroleum,  Inc.
since 1995. Mr.  Humphreys is also an officer,  director and sole shareholder of
Paluca Petroleum,  Inc. and has been a director of GHB Farms, Inc. Mr. Humphreys
received his Bachelor of Science  degree in Business and Geology from  Southwest
Oklahoma State University.

Mr.  Humphreys has been active in the industry for over 30 years,  mostly in his
home state of Oklahoma  and in the  surrounding  oil and gas rich regions of the
mid continent.  His industry knowledge comes from hands-on experience helping to
build several oil and gas producing companies to prominence.

     Norman J.R.  MacKinnon.  Norman J.R.  MacKinnon  has been a director  since
April 30,  2004 and is a member  of our  audit  committee.  Mr.  MacKinnon  is a
Chartered Accountant and has been the principal of NJR MacKinnon, CA since 1984.
Mr. MacKinnon  received his degree as a Chartered  Accountant from the Institute
of Chartered Accountants of British Columbia.

     Steve Jewett.  Steve Jewett has been a director since April 30, 2004. Since
1978, Mr. Jewett has been the owner of Stephen  Jewett - Chartered  Accountants.
During his career,  Mr.  Jewett was  auditor of several  public  companies.  Mr.
Jewett  received  his degree as a Chartered  Accountant  from the  Institute  of
Chartered Accountants of British Columbia and is the audit committee's financial
expert.

                                       82
<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT - continued

Family Relationships

     There are no family relationships among our directors or officers.

Involvement in Certain Legal Proceedings

     During the past five years,  none of our directors,  executive  officers or
persons  that may be  deemed  promoters  is or have been  involved  in any legal
proceeding  concerning  (i) any  bankruptcy  petition  filed by or  against  any
business of which such person was a general partner or executive  officer either
at the time of the  bankruptcy or within two years prior to that time;  (ii) any
conviction  in a criminal  proceeding  or being  subject  to a pending  criminal
proceeding (excluding traffic violations and other minor offenses);  (iii) being
subject to any order, judgment or decree, not subsequently reversed,  suspended,
or vacated,  of any court of competent  jurisdiction  permanently or temporarily
enjoining,  barring, suspending or otherwise limiting involvement in any type of
business,  securities or banking  activity;  or (iv) being found by a court, the
Securities and Exchange  Commission or the Commodity Futures Trading  Commission
to have  violated  a federal or state  securities  or  commodities  law (and the
judgment has not been reversed, suspended or vacated).

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee

     As of the  date  of this  Annual  Report,  Messrs.  Humphreys,  Jewett  and
MacKinnon  have been  appointed  as members to our audit  committee.  Two of the
three  members  are  "independent"  within the  meaning of Rule 10A-3  under the
Exchange Act and are in addition financial experts. The audit committee operates
under a written charter adopted by the Board of Directors on February 2, 2004.

     The audit committee's primary function is to provide advice with respect to
our  financial  matters and to assist the Board of Directors in  fulfilling  its
oversight responsibilities regarding finance,  accounting, and legal compliance.
The audit committee's primary duties and responsibilities  will be to: (i) serve
as an independent and objective party to monitor our financial reporting process
and internal  control system;  (ii) review and appraise the audit efforts of our
independent  accountants;  (iii) evaluate our quarterly financial performance as
well as our  compliance  with laws and  regulations;  (iv) oversee  management's
establishment and enforcement of financial policies and business practices;  and
(v) provide an open avenue of communication  among the independent  accountants,
management and the Board of Directors.

Ethics Committee

     Our Board of Directors has established an ethics committee.  The members of
the ethics committee are Mr. Grant Atkins, Mr. Douglas Humphreys,  and Mr. Steve
Jewett. The ethics committee was organized in February 2005 and operates under a
code of business  conduct and ethics policy (the "Code") adopted by the Board of
Directors.

                                       83
<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT - continued

     The Code was adopted for our directors  and officers.  The Code is intended
to describe  our core values and beliefs and to provide the  foundation  for all
business  conduct.  The Code is further intended to focus our Board of Directors
and each  director  and officer on areas of ethical  risk,  provide  guidance to
directors  and officers to help them  recognize  and deal with  ethical  issues,
provide  mechanisms to report  unethical  conduct,  and help foster a culture of
honesty  and   accountability.   Our  guidelines  for  conducting  business  are
consistent  with the highest  standards of business  ethics.  Each  director and
officer must comply with the letter and spirit of this Code.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Section 16(a) of the Exchange Act requires our directors and officers,  and
the persons who  beneficially  own more than ten percent of our common stock, to
file  reports of  ownership  and changes in ownership  with the  Securities  and
Exchange Commission. Copies of all filed reports are required to be furnished to
us pursuant to Rule 16a-3  promulgated  under the Exchange Act.  Based solely on
the reports received by us and on the  representations of the reporting persons,
we  believe  that  these  persons  have  complied  with  all  applicable  filing
requirements during the fiscal year ended December 31, 2005.

ITEM 10. EXECUTIVE COMPENSATION

     Except as described  below,  none of our directors or officers  received an
annual  salary  and bonus that  exceeded  $100,000  during  fiscal  years  ended
December 31, 2005,  2004 and 2003.  Our officers and directors may be reimbursed
for any out-of-pocket expenses incurred by them on our behalf. We presently have
no pension, health, annuity, insurance, profit sharing or similar benefit plans.
The following table sets forth the compensation received by Grant Atkins, Vaughn
Barbon,  Douglas  Humphreys and Steve Jewett during fiscal years ended  December
31,  2005,  2004  and  2003.  Mr.  Atkins  and  Mr.  Barbon  previously  derived
remuneration from us directly and through Investor Communications International,
Inc.,  which  previously  provided a wide  range of  management,  financial  and
administrative services to us.



                                       84
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION - continued

                                     Annual Compensation        Long Term
                                                               Compensation
                             Fiscal             Annual     Securities Underlying
Name and Principal Position    Year  Salary  Compensation        Options

Grant Atkins(1)                2005     -      $120,000             250,000
President and Chief            2004     -       $60,000             100,000
Executive Officer              2003     -       $19,625(2)

Vaughn Barbon(3)               2005     -       $59,150              50,000
Treasurer and Chief            2004     -       $64,000             100,000
Financial Officer              2003              15,000(2)

Doug Humphreys(4)
Drilling Operations            2005     -      $220,708             500,000
 Manager                       2004     -      $219,529(5)          200,000
                               2003     -             -              50,000

Norman MacKinnon(4)            2005     -             -              25,000
Director                       2004                                   2,500


Steve Jewett(4)                2005     -       $65,000              25,000
Audit Committee                2004             $17,500               2,500

     1.   Mr. Atkins was appointed our Chief Executive Officer in July of 2003.

     2.   Received pursuant to respective  contractual  arrangements  between us
          and Investor Communications International, Inc.

     3.   Mr. Barbon joined us in 2003.

     4.   Messrs. Humphreys, MacKinnon and Jewett joined us in 2004.

     5.   This amount  represents the direct  payment by us to Mr.  Humphreys of
          aggregate  management  fees  together  with  indirect  payments to Mr.
          Humphreys,  through Paluca Petroleum,  Inc., his affiliate,  of 10% of
          our  working  interest  for  each  well  drilled  by  our  Company  on
          properties held by us pursuant to his Humphreys Consultation Agreement
          with us.

                                       85
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION - continued

STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2005

<TABLE>
<CAPTION>

     ------------------------------------------------------------------------------------------
     OPTION/SAR GRANTS IN LAST FISCAL YEAR
     -------------------------------------------------------------------------------------------
     ----------------------- ----------------------- ------------------- ---------- ------------
     Name                      Number of Securities    Percent of Total   Exercise    Date of
                                 Underlying Options    Options Granted     Price     Expiration
     ----------------------- ----------------------- ------------------- ---------- ------------
      <S>                                     <C>                <C>       <C>           <C>
     Grant Atkins                           250,000             10.0%     $1.25        08/18/10
     ----------------------- ----------------------- ------------------- ---------- ------------
     Douglas Humphreys                      500,000             20.0%     $1.25        08/18/10
     ----------------------- ----------------------- ------------------- ---------- ------------
     Norman MacKinnon                        25,000              1.0%     $1.25        08/18/10
     ----------------------- ----------------------- ------------------- ---------- ------------
     Stephen Jewett                          25,000              1.0%     $1.25        08/18/10
     ----------------------- ----------------------- ------------------- ---------- ------------
     Vaughn Barbon                           50,000              2.0%     $1.25        08/18/10

     International Market(1)                500,000                        $1.00
      Trend AG                            1,150,000              66.0%     $1.25       08/18/10
     ----------------------- ----------------------- ------------------- ---------- ------------
</TABLE>

     (1) The 1,150,000 Stock Options have been returned to us in 2005 by IMT and
were reassigned in 2006 to agents of IMT under identical terms and conditions of
the original grant.

EMPLOYMENT  CONTRACTS  AND  TERMINATION  OF  EMPLOYMENT  AND  CHANGE IN  CONTROL
ARRANGEMENTS

Consultation Agreement

     On July 12, 2004, we entered into a Consultation  Agreement (the "Humphreys
Consultation  Agreement")  with  Lexington  Oil &  Gas  and  Douglas  Humphreys.
Pursuant to the Humphreys Consultation  Agreement,  Mr. Humphreys will assist 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 will be: (i) $7,500 per month effective April
1,  2004,  (ii)  the  assignment  of up  to  10%  carried  working  interest  of
Lexington's  interest  in  every  well  drilled  on all  properties  held by us,
including  the Wagnon  Lease  (during  fiscal year 2004 we  recorded  additional
compensation  expense to Mr.  Humphreys of $117,030 being the estimated value of
his 10% carried interest in our wells developed as at December 31, 2004);  (iii)
the right to purchase up to an  additional  5% working  interest of  Lexington's
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.


                                       86
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION - continued

COMPENSATION OF DIRECTORS

     Generally,  our  directors  do not receive  salaries or fees for serving as
directors,  nor do they receive any compensation  for attending  meetings of the
board of directors. Directors are entitled to reimbursement of expenses incurred
in attending meetings. In addition, our directors are entitled to participate in
our stock option plan. During fiscal year ended December 31, 2005, we paid Steve
Jewett  $65,000 in  connection  with his  service as the  chairman  of the audit
committee.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     As of the date of this  Annual  Report,  the  following  table  sets  forth
certain information with respect to the beneficial ownership of our common stock
by each  stockholder  known by us to be the beneficial  owner of more than 5% of
our common stock and by each of our current  directors and  executive  officers.
Each person has sole voting and  investment  power with respect to the shares of
common stock, except as otherwise indicated.  Beneficial ownership consists of a
direct interest in the shares of common stock, except as otherwise indicated. As
of March 28,  2006,  there are  28,573,654  shares of common  stock  issued  and
outstanding.

---------------------------------- ---------------------- --------------------
Name and Address of                 Amount and Nature of  Percent of Beneficial
Beneficial Owner                    Beneficial Ownership         Ownership
---------------------------------- ---------------------- --------------------
Grant Atkins                       350,000 (1)                          1.22%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
---------------------------------- ---------------------- --------------------
Vaughn Barbon                      50,000  (2)                          0.17%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
---------------------------------- ---------------------- --------------------
Douglas Humphreys                  2,250,000 (3)                        7.87%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
---------------------------------- ---------------------- --------------------
Norman MacKinnon                   27,500(4)                            0.10%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
---------------------------------- ---------------------- --------------------
Steve Jewett                       27,500(5)                            0.10%
7473 West Lake Mead Road
Las Vegas, Nevada 89128
---------------------------------- ---------------------- --------------------
Orient Explorations Ltd.           6,000,000(6)                        21.00%
P.O. Box 97 Leeward
Highway, Provinciales
Turks & Caicos Islands
---------------------------------- ---------------------- --------------------
Longfellow Industries (B.C.) Ltd.  3,000,000(7)                        10.50%
612 - 618 West 45th Avenue
Vancouver, British Columbia
Canada V5Z 4R7
---------------------------------- ---------------------- --------------------

                                       87
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         - continued

---------------------------------- ---------------------- --------------------
Name and Address of                 Amount and Nature of  Percent of Beneficial
Beneficial Owner                    Beneficial Ownership         Ownership
---------------------------------- ---------------------- --------------------
Alexander Cox
428 - 755 Burrard Street           2,155,134                            7.54%
Vancouver, British Columbia
Canada V6Z 1X6
---------------------------------- ---------------------- --------------------
James C. Dow
4001 Aurora Avenue North           2,050,500                            9.47%
Seattle, Washington 98103
---------------------------------- ---------------------- --------------------
All Officers and Directors
 (5 total)                         2,705,000 (8)
---------------------------------- ---------------------- --------------------

     (1) This figure  includes:  (i) the  assumption  of the exercise of 100,000
Stock  Options to  purchase  100,000  shares of our common  stock at an exercise
price of $3.00 per share  expiring on December 31, 2008; and (ii) the assumption
of the  exercise  of 250,000  Stock  Options to purchase  250,000  shares of our
common stock at an exercise price of $1.25 expiring on July 18, 2010.

     (2) This figure  includes  the  assumption  of the exercise of 50,000 Stock
Option to purchase  50,000  shares of our common  stock at an exercise  price of
$.125 per share expiring on July 18, 2010.

     (3) This figure includes:  (i) 1,500,000  shares of common stock;  (ii) the
assumption of the exercise of 200,000 Stock Options to purchase  200,000  shares
of our common stock at an exercise price of $3.00 expiring on December 31, 2008;
(iii) the assumption of the exercise of 50,000 Stock Options to purchase  50,000
shares of our common stock at an exercise  price of $0.50 per share  expiring on
December  31, 2008;  and (iv) the  assumption  of the exercise of 500,000  Stock
Options to purchase  500,000  shares of our common stock at an exercise price of
$1.25 expiring on July 18, 2010.

     (4) This figure includes: (i) the assumption of the exercise of 2,500 Stock
Options to purchase  2,500  shares of our common  stock at an exercise  price of
$1.00 per share  expiring on December 31, 2008;  and (ii) the  assumption of the
exercise of 25,000 Stock  Options to purchase  25,000 shares of our common stock
at an exercise price of $1.25 per share expiring on July 18, 2010.

     (5) This figure includes: (i) the assumption of the exercise of 2,500 Stock
Options to purchase  2,500  shares of our common  stock at an exercise  price of
$1.00 per share  expiring on February 2, 2009;  and (ii) the  assumption  of the
exercise of 25,000 Stock  Options to purchase  25,000 shares of our common stock
at an exercise price of $1.25 per share expiring on July 18, 2010.

     (6) The sole shareholder of Orient Explorations Ltd. is Canopus Limited for
Meridian  Trust.  The sole  director  of Orient  Explorations  Ltd.  is Cockburn
Directors,  Ltd. Mr. Dempsey as authorized  representative of Cockburn Directors
Ltd. has the sole exclusive  voting and disposition  rights  regarding shares of
common stock.

                                       88
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         - continued

     (7) The sole shareholder of Longfellow  Industries  (B.C.) Ltd. is Irene V.
Cox.  The  directors  of  Longfellow  Industries  (B.C.) Ltd.  are Irene V. Cox,
Catherine S.  Lambert and William A. Cox.  The board of directors of  Longfellow
Industries  (B.C.) Ltd. has the sole  exclusive  voting and  disposition  rights
regarding shares of common stock.

     Our Board of Directors was advised that a private transaction not involving
a public  sale  occurred  effective  as of  February  18,  2005  between  Orient
Explorations  Ltd. and Longfellow  Industries  (B.C.) Ltd. Pursuant to the terms
and  provisions  of the  private  transaction,  Orient  Explorations  Ltd.  sold
3,000,000 shares of our restricted  common stock it held of record to Longfellow
Industries  (B.C.) Ltd. at par value $0.00025 for an aggregate  consideration of
approximately  $750.00  in  cash.  At  the  time  of  the  transaction,   Orient
Explorations Ltd. was deemed to be an affiliate of us.

     Our Board of Directors is unaware of any arrangement or understanding among
the members of Orient  Explorations  Ltd. and Longfellow  Industries (B.C.) Ltd.
with respect to election of our directors or other matters.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Except  for  the  transactions  described  below,  none  of our  directors,
officers or  principal  stockholders,  nor any  associate  or  affiliate  of the
foregoing,  have any  interest,  direct or  indirect,  in any  transaction  from
October  1,  2003  to the  date  of  this  Annual  Report,  or in  any  proposed
transactions,  which has materially  affected or will  materially  affect us. As
they relate to the certain  relationships  and  related  transactions  discussed
below, Douglas Humphreys,  one of our directors,  is the sole officer,  director
and shareholder of Paluca  Petroleum,  Inc. Douglas  Humphreys is an officer and
director of Oak Hills Drilling.  Mr. Humphreys is currently a member and officer
of Oak  Hills  Drilling  and  Operating,  LLC.,  and a  previous  owner of a 25%
shareholding  in Oak Hills  Drilling and  Operating  International,  Inc.  until
January 21, 2006.  He is currently a director and officer of Oak Hills  Drilling
and Operating International, Inc.

Oak Hills International Ltd.

     On  January  26,  2006,  we  entered  into  the Oak  Hills  Share  Exchange
Agreement.  For a complete  description,  see "Current Business  Operations." On
January 1, 2005, we appointed Oak Hills as our elected operator for wells on our
Wagnon Lease and for further drilling to be conducted by us.

Saddlebag Oilfield Services

     Saddlebag Oilfield Services  ("Saddlebag") has provided completion services
to Oak Hills Energy Inc.,  Lexington's  previous designated operator during 2004
for Lexington wells,  Kellster #1-5, Kyndal #2-2, and Bryce #3-2 during 2004 and
incurred direct expenses on behalf of Lexington.  Mr. Humphreys is a director of
Saddlebag and Pam Humphreys, Mr. Humphrey's wife, is the president of Saddlebag.
During  fiscal  year ended  December  31,  2004,  Oak Hills  Energy,  Inc.  paid
Saddlebag a total of $44,567 for completion  work on the three wells  previously
mentioned. The work included setting up the surface equipment, swabbing the well
to initiate production,  laying pipeline,  setting up fences, compressor hookups
and other  related  services.  During fiscal year ended  December 31, 2005,  Oak
Hills Drilling and  Operating,  LLC. was the operator and developer of wells for
Lexington and made no payments to Saddlebag on behalf of Lexington.

                                       89
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - continued

Paluca Petroleum Inc.

     On July 19,  2004,  we were  assigned  320 gross acres of leases in the H-9
Prospect from Paluca Petroleum,  Inc. who had entered into a farm-out  agreement
with Faith  Production,  LLC dated  July 19,  2004 for the  acquisition  of this
property. Paluca Petroleum,. Inc. served only as an intermediary and received no
consideration in connection with this transaction.

     On April 22, 2004, we acquired from Paluca  Petroleum,  Inc. three sections
of farm-out  acreage to develop  coal bed  methane  gas wells in Hughes  County,
State of Oklahoma  (the "South  Lamar  Farm-out")  for  $120,000 and on July 14,
2004,  we acquired an  additional  184 gross acres in this  Prospect from Paluca
Petroleum,  Inc. for approximately $13,800. The acreage was purchased originally
by Paluca  Petroleum,  Inc.  for  approximately  $100,000,  and the  exchange of
certain other equipment.

Paluca Agreement

     On January 21, 2004, we entered into the Paluca  Agreement  with  Lexington
Oil & Gas, Paluca Petroleum,  Inc. and Douglas Humphreys.  Pursuant to the terms
and provisions of the Paluca  Agreement:  (i) we assigned to Mr. Humphreys a 10%
carried working  interest in every well drilled by us on the Wagnon Lease;  (ii)
we agreed to allow  Humphreys  to  participate  up to an  additional  5% working
interest in every well drilled by us on the Wagnon  Lease;  (iii) Mr.  Humphreys
agreed to waive any and all other claims, debts or obligations owed to him by us
or  Lexington  Oil & Gas,  (iv) we agreed to transfer to Paluca  certain  assets
previously  acquired by us (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, as previously disclosed in prior filings).

     On January 21,  2004,  Orient  Explorations,  Inc.  and  Douglas  Humphreys
entered into an agreement (the  "Humphreys/Orient  Agreement").  Pursuant to the
terms and provisions of the Humphreys/Orient  Agreement, Mr. Humphreys agreed to
transfer  750,000  shares  of our  restricted  common  stock  held of  record by
Humphreys to Orient Explorations Inc. for $10.

Orient Explorations Ltd.

     On February 18, 2005, Orient  Explorations  Ltd. and Longfellow  Industries
(B.C.) Ltd.  entered into a stock  purchase  agreement  pursuant to which Orient
Explorations  Ltd.  sold  3,000,000  shares of our  restricted  common  stock to
Longfellow  Industries  (B.C) Ltd. for aggregate  consideration of approximately
$750.00 in cash.

Officers/Directors

     On August 19,  2005,  we granted  to: (i)  Norman  MacKinnon  25,000  Stock
Options to acquire  shares of our common stock;  (ii) Grant Atkins 250,000 Stock
Options to acquire shares of our common stock (who is also paid $10,000  monthly
as part of remuneration  for his duties as our  President);  (iii) Vaughn Barbon
50,000 Stock Options to acquire  shares of our common stock (who is also paid up
to $5,000 monthly as part of remuneration  for his duties as our Chief Financial
Officer;  and (iv) Steve Jewett  25,000 Stock  Options to acquire  shares of our
common stock (who was also paid $65,000  during  fiscal year ended  December 31,
2005 for his services as chairman of our audit committee.

                                       90
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - continued

     On July 12, 2004, we entered into the Humphreys Consultation Agreement with
Lexington Oil & Gas and Douglas  Humphreys.  For a complete  description  of the
Humphreys  Consultation  Agreement see "Employment  Contracts and Termination of
Employment  and  Change in  Control  Arrangements."  Pursuant  to the  Humphreys
Consultation Agreement,  Mr. Humphreys or Paluca Petroleum,  Inc. is paid $7,500
per month by us and receives 10% of our working interest of Lexington's interest
as a carried working interest in any well drilled and completed by us. On August
19, 2005, we granted Doug  Humphreys  500,000 Stock Options to acquire shares of
our  common  stock.  During  the year  ended  December  31,  2005,  we  recorded
additional  compensation expense to Mr. Humphreys of $160,708 (December,  2004 -
$117,030)  being the  estimated  value of his 10%  carried  interest in our well
interests  that were  successfully  developed in the period  ended  December 31,
2005. We incurred and paid $60,000 to Mr.  Humphreys during the year pursuant to
provisions of the Humphreys Consultation Agreement.

Financial Consulting Agreement

     On November  10,  2003,  we entered  into a financial  consulting  services
agreement (the "Financial Consulting Agreement") with International Market Trend
AG, a private  company  ("IMT").  Pursuant  to the terms and  provisions  of the
Financial  Consulting  Agreement:  (i) IMT performed a wide range of management,
administrative, financial, business development, and consulting services for us:
(ii) we granted IMT and/or its designates or employees 950,000 pre-forward stock
split Stock Options to purchase  shares of our common stock at an exercise price
of $0.50 per share;  and (iii) we agreed to a  contracted  rate of  $10,000  per
month.  We incurred  $90,000 in fees to IMT for fiscal year ended  December  31,
2004 and nil in fiscal year 2003.  Of the  1,000,000  Stock  Options  granted on
February 2, 2004, 895,000  pre-forward stock split Stock Options were granted to
IMT or its  designates.  The  Financial  Consulting  Agreement was for a term of
twelve months and expired on November 10, 2004, with  subsequent  renewal of the
contract on a month to month basis thereafter.

     On February 1, 2005,  we granted to IMT  600,000  Stock  Options to acquire
shares of our common  stock.  On August 19,  2005,  we granted to IMT  1,150,000
Stock Options to acquire shares of our common stock, which have been returned by
IMT to us and were  subsequently  re-assigned to two consultants of IMT on March
1, 2006. We incurred $120,000 in fees to IMT for the fiscal year ended 2005.

                                       91
<PAGE>

ITEM 13. EXHIBITS

The following exhibits are filed as part of this Annual Report.

     2.1  Share Exchange Agreement (1)

     3.1  Articles of Incorporation (2)

     3.2  Amended and Restated Bylaws of Lexington Resources,  Inc. incorporated
          by reference  to Exhibit 3.1 filed on Form 8-K dated  October 1, 2004.
          (3)

     10.1 Wagnon Farm-Out Agreement dated December 5, 2004. (4)

     10.2 South Lamar Farm-Out Agreement #1 dated April 21, 2004. (4)

     10.3 Assignment of South Lamar Farmouts. (4)

     10.4 South Lamar Farm-Out Agreement #2 dated April 21, 2004. (4)

     10.5 South Lamar Farm-Out Agreement #3 dated April 21, 2004. (4)

     10.6 SISM Research & Investment Services Agreement dated June 2005 (5)

     10.7 Douglas Humphreys Consulting Agreement dated July 12, 2004. (4)

     10.8 Oak  Hills  Drilling  and  Operating,  LLC  Drilling  Agreement  dated
          November 9, 2004. (4)

     10.9 South Lamar Farm-Out Agreement #4 dated July 14, 2004 (2)

    10.10 Settlement  Agreement  with C.K Cooper & Company,  Inc. dated July 26,
          2005 (6)

    10.11 Exploration  Agreement  between Lexington Oil & Gas Ltd. Co. and Rylan
          Peyton, LLC. dated January 31, 2006 filed herewith.

    10.12 Consulting  Agreement between Lexington  Resources Inc. and EurXchange
          Consulting Ltd. dated February 15, 2006 filed herewith.

    10.13 Exploration  Agreement  between  Lexington  Oil & Gas Ltd.  And  Dylan
          Peyton,  LLC dated January 31, 2006,  together  with  Comanche  County
          assignment filed herewith.

    10.14 Share  Exchange  Agreement  between among  Lexington  Resources  Inc.,
          Oakhills  Drilling  and  Operating  International,   Inc.,  Oak  Hills
          Drilling and Operating  LLC., and  shareholders  of Oak Hills Frilling
          and Operating International, Inc. dated January 23, 2006. (8)

    10.15 Agreement between Lexington  Resources Inc. and Pathway  Investment LP
          dated July 14, 2005 filed herewith.

    10.16 Stock  Option Plan of  Lexington  Resources,  Inc.  dated  February 2,
          2004. (2)

    10.17 Charter of Audit Committee of Lexington Resources, Inc.(9)

     14.  Code of Ethics. (9)



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EXHIBITS - continued

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

     32.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or
          15d-14(a) of the Securities Exchange Act.

     33.3 Certification of Chief Executive  Officer and Chief Financial  Officer
          Under  Section  1350  as  Adopted  Pursuant  to  Section  906  of  the
          Sarbanes-Oxley Act.

     99.1 Reserve  and   Economic   Evaluation   prepared   by  Fletcher   Lewis
          Engineering, Inc. (2)

     99.2 Reserve  and  Economic  Evaluation  dated  January 6,  2006,  redacted
          version without graphical  information and production runs on probable
          reserve category information. (7)

     (1)  Incorporated  by reference to Exhibit 4.1 of Lexington  Resources Inc.
          Annual  Report on Form 10-KSB  filed with the  Commission  on April 7,
          2004 (SEC File no. 000-25455).

     (2)  Incorporated  by  reference to Exhibits of  Lexington  Resources  Inc.
          Amendment  No.  2  to  SB-2  Registration  Statement  filed  with  the
          Commission on January 19, 2005.

     (3)  Incorporated  by reference to Exhibit 3.1 of Lexington  Resources Inc.
          Report on Form 8-K filed with the Commission on October 1, 2004.

     (4)  Incorporated by reference to Exhibits 10.1,  10.2,  10.3,  10.4, 10.5,
          10.7, and 10.8 of Lexington Resources Inc. SB-2 Registration Statement
          filed with the Commission on December 15, 2004.

     (5)  Incorporated by reference to Exhibit to Lexington  Resources Inc. Form
          SB-2  Registration  Statement filed with the Commission on October 17,
          2005.

     (6)  Incorporated by reference to Exhibit to Lexington  Resources Inc. Form
          SB-2 Registration  Statement filed with the Commission on November 18,
          2005.

     (7)  Incorporated by reference to Exhibit to Lexington  Resources Inc. From
          8-K filed with the Commission on February 13, 2006.

     (8)  Incorporated by reference to Exhibit to Lexington  Resources Inc. Form
          8-K filed with the Commission on January 24, 2006.

     (9)  Incorporated by reference to Exhibit to Lexington  Resources Inc. Form
          10-KSB filed with the Commission on March 31, 2005.


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ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

     During  fiscal year ended  December  31,  2005,  we incurred  approximately
$65,000  in  fees  to our  principal  independent  accountant  for  professional
services  rendered in connection with the audit of our financial  statements for
fiscal  year  ended  December  31,  2005  and for the  review  of our  financial
statements  for the quarters  ended March 31, 2005,  June 30, 2005 and September
30, 2005.

     During  fiscal year ended  December  31,  2004,  we incurred  approximately
$45,000  in  fees  to our  principal  independent  accountant  for  professional
services  rendered in connection with the audit of our financial  statements for
fiscal  year  ended  December  31,  2004  and for the  review  of our  financial
statements  for the quarters  ended March 31, 2004,  June 30, 2004 and September
30, 2004.

     During fiscal year ended December 31, 2005, we did not incur any other fees
for professional services rendered by our principal  independent  accountant for
all  other  non-audit  services  which  may  include,  but  is not  limited  to,
tax-related services, actuarial services or valuation services.

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: March 31, 2006                     By: /s/GRANT ATKINS
                                              ----------------------------------
                                              Grant Atkins, President/Chief
                                              Executive Officer



Dated: March 31, 2006                     By: /s/ VAUGHN BARBON
                                              ----------------------------------
                                              Vaughn Barbon, Treasurer/Chief
                                              Financial Officer


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