UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2006

                                       OR

|_|   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: 000-50229

                            FALCON NATURAL GAS CORP.
             (Exact name of Registrant as specified in its charter)

           Nevada                                       98-0403897
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                   Westchase Center, 2500 City West Boulevard
                                    Suite 300
                              Houston, Texas 77042
          (Address of principal executive offices, including zip code)

                                 (713) 267-2240
              (Registrant's telephone number, including area code)

      Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|

      The number of shares of the Registrant's common stock outstanding at May
15, 2006, was 65,862,000.

      Transitional Small Business Disclosure Format:Yes |_| No |X|

<PAGE>

                            FALCON NATURAL GAS CORP.
                 MARCH 31, 2006 QUARTERLY REPORT ON FORM 10-QSB
                                TABLE OF CONTENTS

                                                                           PAGE

            Special Note Regarding Forward Looking Statements .................3

                         PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements...............................................4
Item 2.     Plan of Operation.................................................26
Item 3.     Controls and Procedures...........................................28

                           PART II - OTHER INFORMATION

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.......28
Item 3.     Defaults Upon Senior Securities...................................29
Item 4.     Submission of Matters to a Vote of Security Holders...............30
Item 5.     Other Information.................................................30
Item 6.     Exhibits..........................................................33

                                       2
<PAGE>

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

To the extent that the information presented in this Quarterly Report on Form
10-QSB for the quarter ended March 31, 2006, discusses financial expectations,
information or expectations about our sales and marketing activities, financing
and operating strategies, or otherwise makes statements about future events,
such statements are forward-looking. We are making these forward-looking
statements in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Although we believe that the expectations
reflected in these forward-looking statements are based on reasonable
assumptions, there are a number of risks and uncertainties that could cause our
actual results to differ materially from such forward-looking statements. These
risks and uncertainties are described, among other places in this Quarterly
Report, in "Plan of Operation".

In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.

                                       3
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS                                      PAGE
                                                                            ----

            Consolidated Balance Sheets as at March 31, 2006 (unaudited)
            and December 31, 2005                                              5

            Consolidated Statements of Operations for the three months
            ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)
            and for the period from inception (March 1, 2004) to March 31,
            2006 (unaudited)                                                   6

            Consolidated Statements of Stockholders' Equity (Deficit)
            (unaudited)                                                        7

            Consolidated Statement of Cash Flows for the three months
            ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)
            and for the period from inception (March 1, 2004) to March 31,
            2006 (unaudited)                                                   8

            Notes to Consolidated Financial Statements (unaudited)             9

                                       4
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
CONSOLIDATED BALANCE SHEET

                                                     March 31,     December 31,
                                                       2006            2005
                                                   (Unaudited)
                                                   ------------    ------------
ASSETS

    CURRENT ASSETS
      Cash and cash equivalents                    $  1,671,635    $  3,832,998
      Accounts receivable                                    --            --
                                                   ------------    ------------
        Total Current Assets                          1,671,635       3,832,998
                                                   ------------    ------------

    PROPERTY & EQUIPMENT
      Equipment, net of depreciation                      2,449           2,654
      Software, net of depreciation                       8,927           9,904
                                                   ------------    ------------
        Total Property & Equipment                       11,376          12,558
                                                   ------------    ------------

    OTHER ASSETS
      Proved oil & gas properties                     1,794,004       1,755,370
      Unproved oil & gas properties                   2,344,007         867,965
      Prepaid expenses                                    2,920            --
      Rent deposit                                        1,243           1,243
                                                   ------------    ------------
        Total Other Assets                            4,142,174       2,624,578
                                                   ------------    ------------
    TOTAL ASSETS                                   $  5,825,185    $  6,470,134
                                                   ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY

    CURRENT LIABILITIES
      Accounts payable                             $    872,882    $  1,121,878
      Convertible debt, net of discount               5,955,405       5,709,221
      Derivative on convertible debt                    350,000         116,667
      Interest payable                                  428,483         209,029
                                                   ------------    ------------
        Total Current Liabilities                     7,606,770       7,156,795
                                                   ------------    ------------

    LONG-TERM LIABILITIES
      Convertible debt                                  567,683         693,878
      Derivative on convertible debt                     87,500          16,667
                                                   ------------    ------------
        Total Long-Term Liabilities                     655,183         710,545

    COMMITMENTS AND CONTINGENCIES                          --              --
                                                   ------------    ------------

    STOCKHOLDERS' EQUITY
      Common stock, $0.00001 par value;
        200,000,000 shares authorized,
        65,762,000 and 63,262,000 shares
        issued and outstanding                              657             632
      Additional paid-in capital                      8,171,561       7,167,419
      Additional paid-in capital -
        warrants                                      5,567,710          98,960
      Deficit accumulated during
        exploration stage                           (16,176,696)     (8,664,217)
                                                   ------------    ------------
        Total Stockholders' Equity                   (2,436,768)     (1,397,206)
                                                   ------------    ------------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $  5,825,185    $  6,470,134
                                                   ============    ============

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

                                       5
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               Three months ending               From
                                        --------------------------------     March 1, 2004
                                          March 31,          March 31,       (Inception) to
                                             2006              2005          March 31, 2006
                                         (Unaudited)        (Unaudited)       (Unaudited)
                                        --------------    --------------    --------------
<S>                                     <C>               <C>               <C>
REVENUES                                $         --      $         --      $         --
                                        --------------    --------------    --------------

GENERAL AND ADMINISTRATIVE EXPENSES
     Depreciation and amortization               1,182               918             8,284
     Investor relations                         12,391            56,866           332,267
     Advisory services                          93,943           115,854         4,141,231
     Lease exploration                         178,145            18,302         1,474,426
     Lease expense                             710,418              --             875,588
     Internet/webhosting                         2,765               558            24,008
     Officers & directors fees                  61,500            69,936           916,913
     Office and general expenses                 5,300            36,389            85,758
     Professional fees                          42,035            46,426           443,765
     Travel and entertainment                    6,634            15,948            76,897
     Rent and related expenses                   8,215             6,083            64,343
                                        --------------    --------------    --------------
        Total Expenses                       1,122,528           367,280         8,443,480
                                        --------------    --------------    --------------

LOSS FROM OPERATIONS                        (1,122,528)         (367,280)       (8,443,480)
                                        --------------    --------------    --------------

OTHER INCOME (EXPENSES)
     Other expenses                             (4,450)             --              (4,450)
     Other income                                 --                --                 500
     Financing fees                         (5,881,241)          (21,232)       (7,606,503)
     Interest expense                         (219,452)         (125,778)         (882,722)
     Interest income                            23,525                88            85,828
     Gain (loss) on derivatives               (308,333)             --             670,815
     Forgiveness of debt                          --                --               3,316
                                        --------------    --------------    --------------
        Total Other Income (Expenses)       (6,389,951)         (146,922)       (7,733,216)
                                        --------------    --------------    --------------

LOSS BEFORE INCOME TAXES                    (7,512,479)         (514,202)      (16,176,696)

PROVISION FOR TAXES                               --                --                --
                                        --------------    --------------    --------------

NET LOSS                                $    7,512,479)   $     (514,202)   $  (16,176,696)
                                        ==============    ==============    ==============

NET LOSS PER COMMON SHARE,
     BASIC AND DILUTED                  $        (0.12)   $        (0.01)
                                        ==============    ==============

WEIGHTED AVERAGE NUMBER
     OF COMMON SHARES OUTSTANDING,
     BASIC AND DILUTED                      64,095,333        60,286,557
                                        ==============    ==============
</TABLE>

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

                                       6
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDES' EQUITY

<TABLE>
<CAPTION>
                                                                      Common Stock
                                                              ------------------------------     Additional
                                                                Number of                         Paid-in
                                                                 Shares           Amount          Capital
                                                             -------------    -------------    -------------
<S>                                                          <C>              <C>              <C>
Stock issued for $0.001 per share for services
    on March 1, 2004                                            20,000,000    $         200    $      19,800

Shares issued for acquisition of leases at $0.25 per share         900,000                9          224,991

Reverse merger acquisition and recapitalization                 45,000,000              450           (4,671)

Shares issued  for cash at $1.00 per share
    net of expenses of $60                                         632,000                6          631,934

Shares issued for cash at approximately $0.93 per
    share net of expenses of $12                                 1,500,000               15        1,399,973

Shares issued for services at $1.25 per share                       50,000             --             62,500

Shares issued for services at $1.42 per share                    2,500,000               25        3,549,975

Shares issued for services at $1.34 per share                      100,000                1          133,999

Shares issued for services at $1.32 per share                      100,000                1          131,999

Rescission of shares from officer received at merger            (9,000,000)             (90)             934

Shares issued for financing costs and charges related
    to services provided                                           400,000                4          499,996


Net loss for period ending December 31, 2004                          --               --               --

                                                             -------------    -------------    -------------
BALANCE, December 31, 2004                                      62,182,000              621        6,651,430

Shares issued for services at $0.45 per share                       80,000                1           35,999

Warrrants issued

Sharees issued for officer fees at $0.48
    per share                                                    1,000,000               10          479,990


Net loss for period ending December 31, 2005                          --               --               --

                                                             -------------    -------------    -------------
BALANCE, December 31, 2005                                      63,262,000              632        7,167,419

Shares issued for convertible debt at $0.10 per share            2,500,000               25        1,004,142

Warrants issued related to Source Capital agreement                   --               --               --

Warrants issued in settlement of the forbearance agreement            --               --               --

Net loss for period ending March 31, 2006                             --               --               --

                                                             -------------    -------------    -------------
BALANCE, March 31, 2006 (unaudited)                             65,762,000    $         657    $   8,171,561
                                                             =============    =============    =============

<CAPTION>

                                                                                Deficit
                                                                              Accumulated
                                                                                During           Total
                                                                              Exploration     Stockholders'
                                                                Warrants         Stage           Equity
                                                             -------------   -------------    -------------
<S>                                                          <C>             <C>              <C>
Stock issued for $0.001 per share for services
    on March 1, 2004                                         $        --     $        --      $      20,000

Shares issued for acquisition of leases at $0.25 per share            --              --            225,000

Reverse merger acquisition and recapitalization                       --              --             (4,221)

Shares issued  for cash at $1.00 per share
    net of expenses of $60                                            --              --            631,940
                                                                                                       --
Shares issued for cash at approximately $0.93 per                     --
    share net of expenses of $12                                      --              --          1,399,988
                                                                                                       --
Shares issued for services at $1.25 per share                         --              --             62,500

Shares issued for services at $1.42 per share                         --              --          3,550,000

Shares issued for services at $1.34 per share                         --              --            134,000

Shares issued for services at $1.32 per share                         --              --            132,000

Rescission of shares from officer received at merger                  --              --                844

Shares issued for financing costs and charges related
    to services provided                                              --              --            500,000

                                                                                                       --
Net loss for period ending December 31, 2004                          --        (5,530,778)      (5,530,778)

                                                             -------------   -------------    -------------
BALANCE, December 31, 2004                                            --        (5,530,778)       1,121,273

Shares issued for services at $0.45 per share                         --              --             36,000
                                                                                                          0
Warrrants issued                                                    98,960          98,960           98,960
                                                                                                          0
Sharees issued for officer fees at $0.48
    per share                                                         --                            480,000
                                                                                                          0
                                                                                                          0
Net loss for period ending December 31, 2005                          --        (3,133,439)      -3,133,439
                                                                                                          0
                                                             -------------   -------------    -------------
BALANCE, December 31, 2005                                          98,960      (8,664,217)      (1,397,206)

Shares issued for convertible debt at $0.10 per share                 --              --          1,004,167

Warrants issued related to Source Capital agreement                688,750            --            688,750

Warrants issued in settlement of the forbearance agreement       4,780,000            --          4,780,000

Net loss for period ending March 31, 2006                             --        (7,512,479)      (7,512,479)

                                                             -------------   -------------    -------------
BALANCE, March 31, 2006 (unaudited)                          $   5,567,710   $ (16,176,696)   $  (2,436,768)
                                                             =============   =============    =============
</TABLE>

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

                                       7
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOWS
<TABLE>
<CAPTION>
                                                                              Three months ending             From
                                                                      --------------------------------     March 1, 2004
                                                                         March 31,        March 31,       (Inception) to
                                                                           2006             2005          March 31, 2006
                                                                       (Unaudited)       (Unaudited)        (Unaudited)
                                                                      --------------    --------------    --------------
<S>                                                                   <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net loss                                                       $   (7,512,479)   $     (514,202)   $  (16,176,696)

       Adjustments to reconcile net loss to net cash
          (used) by operating activities:
       Depreciation and amortization                                           1,182               918             8,284
       Amortization of debt discount                                         560,747                --         1,120,368
       Common stock issued for services                                           --            36,000         4,415,332
       Common stock and warrant issued for financing costs                 5,530,000                           6,128,960
       Loss (gain) on derivative                                             308,333                            (670,814)
       Forgiveness of debt                                                        --                              (3,216)
       Interest expense for beneficial conversion feature                         --           111,111                --

       Changes in assets and liabilities:
             Decrease (increase) in accounts receivable                           --            (6,537)               --
             Decrease (increase) in prepaid expenses                          (2,920)            5,398            (2,920)
             Increase (decrease) in accounts payable                         248,996            29,963         1,363,972
             Increase (decrease) in accrued liabilities                           --                14                --
             Increase (decrease) in interest payable                         219,454            14,666           428,483
                                                                      --------------    --------------    --------------
                   Net cash used by operating activities                    (646,687)         (322,669)       (3,388,247)
                                                                      --------------    --------------    --------------

CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
             Purchase of equipment                                                --           (15,000)          (19,660)
             Additions to oil and gas properties                          (1,514,676)          (87,392)       (3,913,011)
             Decrease (increase) in rent deposit                                  --                --            (1,243)
             Cash received through recapitalization and acquisition               --                --             2,681
                                                                      --------------    --------------    --------------
                  Net cash used by investing activities                   (1,514,676)         (102,392)       (3,931,233)
                                                                      --------------    --------------    --------------

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
             Proceeds from notes payable                                                            --           140,000
             Payment on notes payable                                                                           (140,000)
             Proceeds from convertible debt                                       --           427,186         6,959,187
             Issuance of common stock for cash                                    --                --         2,031,928
                                                                      --------------    --------------    --------------
                Net cash provided by financing activities                         --           427,186         8,991,115
                                                                      --------------    --------------    --------------

       Net increase (decrease) in cash and cash equivalents               (2,161,363)            2,125        (1,671,635)

Cash and cash equivalents beginning of period                              3,832,998           162,227                --
                                                                      --------------    --------------    --------------

Cash and cash equivalents end of period                               $    1,671,635    $      164,352    $   (1,671,635)
                                                                      ==============    ==============    ==============

SUPPLEMENTAL CASH FLOW DISCLOSURES:
       Income taxes paid                                              $           --    $           --    $           --
                                                                      ==============    ==============    ==============
       Interest paid                                                  $           --    $           --    $           --
                                                                      ==============    ==============    ==============

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
       Common stock issued for services                               $           --    $       36,000    $    3,899,332
       Interest expense for beneficial conversion feature             $           --    $      111,111    $      236,111
       Common stock issued for financing costs and charges            $           --    $           --    $      500,000
       Warrants issued for accounts payable                           $      688,750    $           --    $      688,750
       Common stock issued for convertible debt                       $      250,000    $           --    $      250,000
</TABLE>

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

                                       8
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Falcon Natural Gas Corporation was incorporated on March 1, 2004. On April 16,
2004, Countryside Review, Inc. entered into a reverse merger transaction
agreement with Falcon Natural Gas Corporation, which transaction was completed
on May 6, 2004. In contemplation of this transaction and a change in business
focus, Countryside Review, Inc. changed its name to Falcon Natural Gas Corp.
("the Company") effective April 12, 2004. As a result of this transaction,
Falcon Natural Gas Corporation became a wholly-owned subsidiary. The Company's
operations are conducted through this wholly-owned subsidiary. The Company's
year-end is December 31.

The Company is in the exploration stage as a natural gas exploration company
and, as such, has not realized any revenues from its planned operations. The
Company's principal office is located in Houston, Texas.

Basis of Presentation
The foregoing unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B as
promulgated by the Securities and Exchange Commission ("SEC"). Accordingly,
these financial statements do not include all of the disclosures required by
generally accepted accounting principles in the United States of America for
complete financial statements. These unaudited interim financial statements
should be read in conjunction with the Company's audited financial statements
for the year ended December 31, 2005. In the opinion of management, the
unaudited interim financial statements furnished herein include all adjustments,
all of which are of a normal recurring nature, necessary for a fair statement of
the results for the interim period presented. Operating results for the period
ended March 31, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies is presented to assist in
understanding the financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the U.S. and have been consistently applied in
the preparation of the financial statements.

Accounting Methods
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.

Accounts Receivable
The Company carries its accounts receivable at cost

                                       9
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140." This statement requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in any of the following situations: a transfer of the
servicer's financial assets that meets the requirements for sale accounting; a
transfer of the servicer's financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities or trading securities; or an acquisition or assumption of an
obligation to service a financial asset that does not relate to financial assets
of the servicer or its consolidated affiliates. The statement also requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable and permits an entity to choose either
the amortization or fair value method for subsequent measurement of each class
of servicing assets and liabilities. The statement further permits, at its
initial adoption, a one-time reclassification of available for sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available for sale securities under
Statement 115, provided that the available for sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value and requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with early adoption permitted
as of the beginning of an entity's fiscal year. Management believes the adoption
of this statement will have no impact on the Company's financial condition or
results of operations.

In May 2005, the Financial Accounting Standards Board issued Statement of
Financial ccounting Standards No. 154, "Accounting Changes and Error
Corrections," (hereinafter SFAS No. 154") which replaces Accounting Principles
Board Opinion No. 20, accounting Changes", and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28".
SFAS No. 154 provides guidance on accounting for and reporting changes in
accounting principle and error corrections. SFAS No. 154 requires that changes
in accounting principle be applied retrospectively to prior period financial
statements and is effective for fiscal years beginning after December 15, 2005.
Management does not expect SFAS No. 154 to have a material impact on the
Company's financial position, results of operations, or cash flows.

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date of this statement is issued. The Company has not yet determined the impact
to its financial statements from the adoption of this statement.

                                       10
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments (or short-term debt) with original maturities of three months
or less to be cash equivalents.

Concentration of Credit Risk
The Company maintains its cash in two commercial accounts at a major financial
institution. Although the financial institution is considered creditworthy, at
March 31, 2006 the Company's cash balance exceeded Federal Deposit Insurance
Corporation (FDIC) limits by $1,571,635.

Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.

The Company has determined that derivatives existed because of features of
convertible debt as of the balance sheet date of March 31, 2006 (See Note 6.)

                                       11
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

Earnings Per Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
which provides for calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Although there were common stock
equivalents outstanding December 31, 2005, they were not included in the
calculation of earnings per share because they would have been considered
anti-dilutive.

Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.

Exploration Costs
In accordance with accounting principles generally accepted in the United States
of America, the Company expenses lease exploration costs as incurred. As of
March 31, 2006, the exploration costs expensed during the Company's exploration
stage have been approximately $1,474,426

Exploration Stage Activities
The Company has been in the exploration stage since its formation on March 1,
2004. It is primarily engaged in natural gas exploration.

Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standard No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash, trade accounts receivable, accounts payable and
accrued expenses and short-term borrowings. All instruments other than the
derivative on the convertible debt are accounted for on a historical cost basis,
which, due to the short maturity of these financial instruments, approximates
fair value at March 31, 2006 and December 31, 2005.

Going Concern
As shown in the accompanying financial statements, the Company has generated no
revenues since inception. From inception to March 31, 2006, the Company recorded
losses of approximately $16,100,000 and had no revenues. The Company, being an
exploration stage enterprise, is currently implementing a revised business plan
that will, if successful, mitigate these factors that raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.

                                       12
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

Impaired Asset Policy
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for Impairment of Long-lived
Assets." In complying with this standard, the Company reviews its long-lived
assets quarterly to determine if any events or changes in circumstances have
transpired which indicate that the carrying value of its assets may not be
recoverable. The Company determines impairment by comparing the undiscounted
future cash flows estimated to be generated by its assets to their respective
carrying amounts.

The Company does not believe any adjustments are needed to the carrying value of
its assets at March 31, 2006.

Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.

Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives.

On the sale or retirement of a complete unit of a proven property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proven property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.

On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any unrecorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
      Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which is three years.

Provision for Taxes
Income taxes are provided based upon the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (hereinafter "SFAS No. 109"). Under this approach, deferred income taxes
are recorded to reflect the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at each year-end. A valuation allowance is recorded against deferred tax
assets if management does not believe the Company has met the "more likely than
not" standard imposed by SFAS No. 109 to allow recognition of such an asset.
(See Note 9.)

                                       13
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

Stock Split
In April, 2004, the Company entered into a 5 for 1 forward stock split. The
number of shares of the registrant company outstanding at the time of the
adoption of the 5 for 1 forward stock split was 9,000,000 shares which were
restated to 45,000,000 shares. All references in the accompanying financial
statements have been restated to reflect this stock split. (See Note 3.)

NOTE 3 - SHARE EXCHANGE

On May 6, 2004, the Company, Falcon Natural Gas Corporation (the "Corporation")
and shareholders of the Corporation completed a share exchange whereby the
Corporation became a wholly owned subsidiary of Falcon Natural Gas Corp when the
Company issued 20,000,000 shares of its common stock to the Corporation's
shareholders in exchange for services received. The Company computed the number
of shares issued in this transaction based on the par value of the Corporation's
common stock on the date of issuance and recognized an expense of $20,000 for
services. In addition, 900,000 shares of common stock were issued in partial
payment of an oil and gas lease valued at $0.25 per share, or $225,000. Pursuant
to the share exchange, the Company issued 20,900,000 shares of its common stock
in exchange for 20,900,000 shares of common stock, which represented 100% of the
Corporation's issued and outstanding common stock. This acquisition was
accounted for as a reverse merger and recapitalization whereby the operating
company, Falcon Natural Gas Corporation, is the continuing entity for all
accounting purposes.

The recapitalization of the Company required the following accounting adjustment
in order to properly reflect the accumulated deficit in the financial
statements:

<TABLE>
<CAPTION>

                                                                                 Additional
                                 Number of                        Paid-in          Deficit       Shareholders'
                                  Shares          Amount          Capital        Accumulated        Equity
                               -------------   -------------   -------------    -------------    -------------
<S>                            <C>             <C>             <C>              <C>              <C>
Prior to recapitalization         45,000,000   $         450   $      99,550    $    (104,221)   $      (4,221)
Recapitalization adjustment
  to close deficit accumulated            --              --        (104,221)         104,221               --
                               -------------   -------------   -------------    -------------    -------------

Total                             45,000,000   $         450   $      (4,671)   $          --    $      (4,221)
                               =============   =============   =============    =============    =============
</TABLE>

The net liabilities assumed consisted of the following items:

        Cash and cash equivalents                 $     2,681
        Less:        Accounts payable                  (3,686)
        Accounts payable shareholders                  (3,216)
                                                  -----------

        Net liabilities assumed                   $    (4,221)
                                                  ===========

                                       14
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

The following transactions involved the majority shareholder of the Company
prior to the share exchange with Falcon Natural Gas Corporation:

On March 22, 2004, an investor acquired an aggregate of 20,000,000 shares of
common stock of Countryside Review, Inc. in exchange for $500,000 pursuant to
three stock purchase agreements with three shareholders. On March 23, 2004, the
investor returned 5,000,000 shares of common stock to Countryside Review, Inc.,
which shares were subsequently cancelled, returned to treasury, and then retired
and restored to the status of authorized and unissued. As a result of these
transactions, control of Countryside Review, Inc. shifted to the investor who
owned 15,000,000 shares of the common stock of Countryside Review, Inc. prior to
the share exchange agreement with Falcon Natural Gas Corporation.

Effective April 12, 2004, Countryside Review, Inc. changed its name to Falcon
Natural Gas Corp. and authorized a 5 to1 forward stock split of the originally
issued and outstanding Countryside Review Inc. shares. All references in the
accompanying financial statements and notes to the common shares and per share
amounts have been restated to reflect the forward stock split. The Company also
reauthorized two hundred million (200,000,000) shares of common stock with a par
value of $0.00001 per share.

NOTE 4 - CONVERTIBLE DEBT

In November, 2004 and January, 2005, the Company entered into loan agreements
with Cornell Capital Partners, LP ("the Investor") in which the Company received
a $1,000,000 loan less related expenses of $300,190, which has been allocated as
discount on debt and will be amortized over a two year period. The convertible
securities are guaranteed by the assets of the Company. The convertible debt
instrument underlying this loan agreement will automatically convert into common
stock at either 120% of the closing bid price by the second anniversary date of
issuance or 80% of the average of the three lowest daily volume weighted average
price of the common stock for the 30 trading days immediately preceding the
conversion date. This feature was deemed a liability derivative with $233,695
being the initial value of the November, 2004 debenture under this agreement and
$295,454 as the initial value of the January, 2005 debenture. Under the
agreement, the Company is required to keep available common stock duly
authorized for issuance in satisfaction of the convertible. The conversion
amount will be the face amount of the convertible plus interest at the rate of
5% per annum from the closing date of November, 2004 and January, 2005 to the
conversion date, which is the date on which the Company receives a notice of
conversion from the investor exercising the right to convert the convertible
into common shares of the Company. The convertible debt will automatically
convert into common stock on the second anniversary date of issuance. The terms
of the debt do not require regular monthly payments. Interest is accrued at 5%.

                                       15
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

On April 19, 2005, the Company and Cornell terminated the securities purchase
agreement entered into November 19, 2004, and the related convertible debt
agreements in the amount of $1,000,000, the security agreement, escrow
agreement, investor registration rights agreement and irrevocable transfer agent
instruction. On April 19, 2005, the Company entered into new securities purchase
agreement with Cornell. Pursuant to the new securities purchase agreement,
Cornell issued a convertible debenture to the Company in the principal amount of
$1,000,000. On June 20, 2005, the April 19, 2005 secured debenture was amended
and restated. The amended and restated $1,000,000 debenture is convertible at
Cornell's option any time up to maturity at a fixed conversion price of $0.60.
The debenture is secured by the assets of the Company. The debenture has a two
year term and accrues interest at 5% per year. After the earlier to occur of a)
the date a registration statement related to the shares issuable upon conversion
of the debentures is declared effective by the United States Securities and
Exchange commission or b) September 1, 2005, if the closing bid price of the
Company's common stock is less than $0.60 per share, Cornell, at its sole
option, can elect cash repayment of the debentures by requiring the Company to
make 5 payments of $200,000 each month from September 1, 2005 to January 1, 2006
plus accrued interest of each such installment. If there is an event of default
pursuant to any of the documents and/or agreements, including this debenture,
the conversion price shall be $0.10 per share. During the year ended December
31, 2005 and 2004, the Company recognized embedded derivatives in the
convertible debentures. (See Note 6.) Effective January 1, 2006, the Company was
in default under the $1,000,000 loan and entered into a forbearance agreement as
a negotiated settlement with Cornell Capital Partners, LP and Highgate House
Funds, LLP. (See Note 14.)

On April 19, 2005, the Company issued a 1,000,000 stock purchase warrant to
Cornell Capital Partners, LP as a financing fee. On June 20, 2005 the April,
2005 stock purchase warrant was amended and restated. Following EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settle in, a Company's Own Stock," and SFAS No. 133, the Company has recognized
an embedded equity derivative in the warrant. For accounting and fair value
purposes, the equity derivative will be accounted for as a stock option,
following SFAS No. 123(R) for valuation purposes. (See Note 12.)

On October 17, 2005, the Company entered into secured convertible debentures
with Cornell Capital Partners, LP and Highgate House Funds, LLP ("the
Investors") in which the Company received a $7,000,000 loan less related
expenses of $406,742 of which $185,424 was retained by the investors as interest
accrued on the $6,000,000 promissory note (See Note 5.) The expenses will be
allocated as discount on debt and will be amortized over the term of the note.
The debentures are due on October 17, 2006 and accrue interest at a rate of 12%
interest. The debentures shall be paid by monthly scheduled payments beginning
January 19, 2006 until maturity and paid in full. The debentures shall be
convertible into shares of common tock at the option of the investors, in whole
or in part at any time and from time to time. The number of common shares
issuable upon conversion equals the quotient obtained by dividing the
outstanding amount of these debentures to be converted by the conversion price
of $0.60 per share and may be adjusted in the event of default. During the year
ended December 31, 2005, the Company recognized embedded derivatives in the
convertible debentures. (See Note 6.) Effective January 19, 2006, the Company
was in default under the $1,000,000 loan and entered into a forbearance
agreement as a negotiated settlement with Cornell Capital Partners, LP and
Highgate House Funds, LLP.

                                       16
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

Effective March 28, 2006, the Company entered into a forbearance agreement (the
"Forbearance Agreement") with Cornell Capital Partners, LP ("Cornell") in
connection with its defaults under the $1,000,000 April 19, 2005 and $7,000,000
October 17, 2005 debentures with Cornell ("Debentures"). As at March 28, 2006,
the Company owed Cornell interest of $88,767 and $151,509 under the April, 2005
and October, 2005 debentures, respectively. Under the Forbearance Agreement, the
maturity dates of the April, 2005 and October, 2005 debentures have been
extended until December 31, 2007. As of March 31, 2006, Cornell converted the
outstanding balance of $250,000 and reduced the principal balance of the
convertible debenture by $250,000 and the Company issued 2,500,000 shares to
Cornell. Additionally, the Company issued to Cornell 23,000,000 warrants valued
according to Black Scholes in the amount of $4,780,000. On April 1, 2007, and
the first business day of each month thereafter until the debentures are paid in
full, the Company is required to make payments of principal and interest. Each
monthly payment will be equal to the outstanding principal balance of the
debentures on the date such payment is due divided by 10, plus accrued and
unpaid interest. The Forbearance Agreement further provides that the Company is
required to re-file the Registration Statement for the resale of the shares of
common stock underlying (i) the Debentures and (ii) the warrants issued pursuant
to the Forbearance Agreement on or before May 15, 2006 and to have such
Registration Statement declared effective on or before July 31, 2006.

Standby Equity Distribution Agreement
In November, 2004, the Company entered into a standby equity distribution
agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant to this
agreement, Cornell will purchase up to $10,000,000 of the Company's common stock
through a placement agent over a two-year period after the effective
registration of the shares. In addition, the Company issued 400,000 shares of
its common stock to Cornell and the placement agent upon the inception of the
standby equity distribution agreement. The $500,000 value of these shares was
based on the fair market value of the shares on the date of the contract and is
recognized as a period expense due to the fact that the 400,000 shares have been
deemed to be fully earned as of the date of the agreement.

On April 19, 2005, the Company entered into an agreement with Cornell Capital
Partners, LP to terminate the standby equity distribution agreement, dated
November 19, 2004, and the related registration rights agreement, placement
agent agreement and escrow agreement, of same date. On April 19, 2005, upon
execution of the termination agreement, the Company entered into a new standby
equity distribution agreement with Cornell Capital Partners, LP ("Cornell".)
Pursuant to the standby equity distribution agreement, the Company may, at its
discretion, periodically sell to Cornell shares of common shares for a total
purchase price of $20,000,000. For each share of common stock purchased under
the standby equity distribution agreement, Cornell will pay the Company 100% of
the lowest volume weighted average price of the Company's common stock as quoted
by Bloomberg, LP on the over-the-counter bulletin board or other principal
market on which the Company's common stock is traded for the 5 days immediately
following the notice date. Cornell will also retain 5% of each advance under the
standby equity distribution agreement. Cornell's obligation to purchase shares
of the Company's common stock under the standby equity distribution agreement is
subject to the Company's obtaining an effective registration statement for
shares of common stock sold under the standby equity distribution agreement and
is limited to $750,000 per weekly advance.

                                       17
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

NOTE 5 - LOAN AGREEMENT

The Company borrowed $140,000 from Blue Mint Exploration on November 24, 2004.
The loan, which was unsecured, with interest at 12% per annum, was paid in full
as of December 31, 2005.

The Company borrowed $200,000 from Blue Mint Exploration on May 13, 2005. The
loan, which was unsecured, with interest at 12% per annum, was paid in full as
of December 31, 2005.

On July 15, 2005, the Company entered into a promissory note with Cornell
Capital Partners, LP and Highgate House Funds, LLP ("the Investors") in which
the Company received a $6,000,000 loan less related expenses of $1,382,727,
which will be allocated as discount on debt and will be amortized over the term
of the note. This note is due on February 10, 2006 and accrues interest at a
rate of 12% interest. The note shall be payable in 23 equal weekly installments
of an aggregate of $250,000, plus interest accrued, and one installment of
$505,452, plus interest accrued, of which the first payment is due on the
earlier of September 2, 2005, or the first Friday after such date as the
Company's registration statement is declared effective. The Company made no
payments on the promissory note and on October 17, 2005, the promissory note was
superseded by a $7,000,000 secured debenture in which the Company entered into
with Cornell Capital Partners, LP and Highgate House Funds, LLP. (See Note 4.)

NOTE 6 - DERIVATIVES

Derivatives have been accounted for in accordance with SFAS 133, as amended, and
EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has identified that
the debentures described in Notes 4 and 5 have embedded derivatives. These
embedded derivatives have been bifurcated from their respective host debt
contracts and accounted for as derivative liabilities in accordance with EITF
00-19. When multiple derivatives exist within the loan agreements, they have
been bundled together as a single hybrid compound instrument in accordance with
SFAS No. 133, Derivatives Implementation Group Implementation Issue No. B-15,
"Embedded Derivatives: Separate Accounting for Multiple Derivative Features
Embedded in a Single Hybrid Instrument".

The embedded derivatives within the loan agreements have been recorded at fair
value at the date of issuance and are marked-to-market each reporting period
with changes in fair value recorded on the Company's income statement as gain
(loss) on derivatives.

                                       18
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

The fair value of the derivative liabilities are subject to the changes in the
trading value of the Company's common stock, as well as other factors. As a
result, the Company's financial statements may fluctuate from quarter-to-quarter
based on factors, such as the price of the Company's stock at the balance sheet
date and the amount of shares converted by note holders. Consequently, the
Company's financial position and results of operations may vary from
quarter-to-quarter based on conditions other than its operating revenues and
expenses.

The initial fair value of the derivative embedded in the November, 2004 $500,000
convertible debenture was $233,695 and at December 31, 2004, the embedded
derivative was revalued to its fair value of $370,968. The initial fair value of
the derivative embedded in the January, 2005 $500,000 convertible debenture was
$295,454. Each of the $500,000 debentures were subsequently superseded by the
April, 2005 $1,000,000 debenture, and the initial fair value of the derivative
embedded in the $1,000,000 convertible debenture was $166,667 and the initial
fair value of the derivative embedded in the $7,000,000 convertible debenture
was $583,333. At March 31, 2006, the embedded derivatives were revalued to their
fair value of $87,500 for the $1,000,000 convertible debenture and $350,000 for
the $7,000,000 convertible debentures. Any change to the fair value of the
derivatives is recognized on the income statement and recorded as gain/(loss) on
derivatives. At March 31, 2006 the Company recognized an increase in the fair
value of the derivatives of $308,333 and a corresponding loss on derivatives on
the consolidated statements of operation.


NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over five years. The following is a summary of
property, equipment and accumulated depreciation at March 31, 2006, and December
31, 2005:

                                                   March 31,        December 31,
                                                     2006              2005
                                                   -------            -------
Computer Equipment                                 $ 4,660            $ 4,660
Software                                            15,000             15,000
                                                   -------            -------
Total Assets                                        19,660             19,660
Less: Accumulated Depreciation                       8,284              7,102
                                                   -------            -------
Total Property & Equipment                         $11,376            $12,558
                                                   =======            =======

Depreciation expense for the period ending March 31, 2006 and December 31, 2005
were $1,182 and $6,484, respectively.


NOTE 8 - OIL AND GAS LEASES

                                       19
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

On March 25, 2004, the Company paid cash and issued stock for oil and gas
leases. The leases, assigned from Argyle Energy Corp (hereinafter "Argyle"),
entitle the Company to a 100% working interest and 70% net revenue interest in 5
tracts of land in Starr County, Texas.

On August 2, 2004, the Company contracted with Argyle Energy, Inc. ("Argyle")
for various oil, gas and mineral leases located in St. Mary Parish, Louisiana.
The contract provides that the Company will receive a 100% working interest in
these leases in exchange for two cash payments to Argyle of $404,235 and
$454,235 by September 30, 2004. As of March 31, 2005, a cash payment was made in
the amount of $858,470.

During the year ended December 31, 2005, the Company entered signed nonbinding
letters of intent ("LOI") with Blue Ridge Group, Inc ("BRG") and Bayou City
Exploration ("BCE") to purchase working interest in one of BRG's and five of
BCE's oil and gas prospects. According to the LOI with BRG, Falcon will purchase
12.5% of the working interest of Prospect 107 located in Beauregard Parish,
Louisiana and pay 16.67% of all well costs to casing point on the initial well
drilled on the prospect. Additionally, Falcon agrees to pay 16.67% of all G&G
costs, third party prospect fees, land brokerage costs, lease bonus, and all
other similar costs associated with the prospect. Under the terms of the LOI
with BCE, Falcon will purchase 12.5% of the working interest for the Live Oak
County Prospects, which include Jaboncillo Windmill Prospect, Leopard Branch
Prospect, and Frost National Bank Deep Prospect. Additionally, Falcon agrees to
pay 16.67% of all well costs to casing point on the initial well drilled on each
prospect and 16.67% of all G&G costs, third party prospect fees, land brokerage
costs, lease bonus and all similar costs associated with the project. Under the
trade terms for BCE's Jeff David Parish Prospects, including Gemini Prospect and
Zodiac II Prospect, Falcon agrees to purchase 25% of the working interest from
BCE. Also, Falcon agrees to pay 33.33% of all well costs to casing point on the
initial well drilled on each prospect and its proportionate share of all G&G
costs, third party prospect fees, land brokerage costs, lease bonus, and all
other similar costs associated with the prospect.

The Company has obligated itself with WhitMar Exploration Company and their
partners to drill and develop the Deweyville Prospect, located 25 miles
northeast of Beaumont, Texas, and situated in the down-dip section of the Yegua
Trend. Falcon Natural Gas Corp. has purchased 16% of the working interest in
this prospect. Falcon also has agreed to pay 16.00% of all well costs and G&G
costs, third party prospect fees, land brokerage costs, lease bonus and all
other similar costs of the prospect.

The Company with Edwin S. Nichols Exploration, Inc. plans to develop the Hollins
Prospect located along the Eastern Shelf in northwestern Nolan County, Texas
that will target the Canyon Sand over 1,480 acres of leasehold position and
should ultimately result in the drilling of 20 to 25 wells. The total cost to
develop a 20-well field is estimated to be approximately $14 million. Falcon
Natural Gas Corp. has purchased 75% of the working interest (55.80% of the net
revenue interest). Falcon also has obligated itself to pay its proportionate
share of all G&G costs, third party prospect fees, land brokerage costs, lease
bonus and all other similar costs of the prospect as per the agreement with
Edwin S. Nichols Exploration, Inc.

The Company entered into a participation agreement with Stanotex, LLC for the
drilling and completion of a test well on the Brookshire Weido Prospect located
in Waller County, Texas. Participation involves a 50% working interest and 25%
net revenue interest on a authorization for expenditure 1/3 for 1/4 basis. The
estimated cost is $436,557 and the Company's share would be 50% of this amount.
Participation in the well is subject to the Company's prior review of the
results of 2-D seismic to b conducted on the prospect.

The Company entered into a participation agreement with Vincent Oil and Gas Corp
for a test well to be drilled by Vincent Oil and Gas Corp on the Norman prospect
located in Bee County, Texas. The Company will have a 12% working interest and
77% net revenue interest on an authorization for expenditure 1/3 for 1/4 basis
whereby the Company would pay 16% of all costs associated with drilling the well
to the casing point and 12% of all completion and operating costs, if
applicable. The Company's share of drilling costs is estimated to be
approximately $380,000. In February, 2006, the Company paid Vincent Oil and Gas
Corp $41,375 for costs associated.

The Company entered into a participation agreement with Whitmar Exploration
Company in relation to the participation agreement in the drilling of test well
on the South Wilburton Prospect located in Latimer County, Oklahoma.
Participation would involve a 12.5% working interest and 77.5% net revenue
interest on a authorization for expenditure 1/3 for 1/4 basis whereby the
Company would pay 16.67% of drilling costs to the casing point and 12.5% of all
costs after the casing point. The estimated drilling costs for the well is
$2,162,500 and the estimated completion cost is $1,007,000. The Company's
estimated share of such costs would be $360,417 for drilling and $125,875 for
completion.

                                       20
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

NOTE 9 - COMMITMENTS AND CONTINGENCIES

On June 14, 2004, the Company entered into a contract for one year from the date
of the contract for investor relations services. The terms of the contract
include a retainer of $5,000 per month plus any out-of-pocket expenses, and
50,000 restricted shares in the Company's common stock.

On August 2, 2004, the Company entered into a business consultant agreement. The
consultant will be paid $15,000 for work performed in accordance with the
agreement. In addition, the Company agrees to pay the consultant 7.5% in cash
and 10% in warrants for any financing monies raised. As of June 30, 2005, no
financing monies had been raised by the consultant and $15,000 was paid for
services performed.

On August 9, 2004, the Company entered into an agreement for financial advisory
services. The terms of the agreement include compensation of 10% cash and 10%
warrants on all monies raised by the financial advisory company and payment of a
retainer in the amount of $5,000. The agreement states a termination date of
January 1, 2005 but includes automatic extension until notice is provided by
either party. As of December 31, 2004, the financial advisory company was
instrumental in the raising of funds related to Cornell Capital Partners LP and
new terms related to the agreement dated August 9, 2004 were renegotiated. Under
the new terms of the agreement, the Company paid a retainer in the amount of
$5,000 in addition to a fixed one time payment of $35,000 and accrued an
additional $10,000 for fees. The Company valued the warrants at $22,609 and this
amount was estimated using Black Scholes calculation and the following
assumptions were made to value the warrants for the period ending December 31,
2004: estimated risk free interest rate of 4%; estimated volatility of 48%; a
term of two years; no payment of dividends. As of December 31, 2005, the Company
paid an additional $75,000 in fees and accrued an additional $675,000 for fees.
The Company valued the warrants at $341,041 and this amount was estimated using
Black Scholes calculation and the following assumptions were made to value the
warrants for the period ending December 31, 2005: estimated risk free interest
rate of 4%; estimated volatility of 48%; a term of two years; no payment of
dividends. All accrued fees and warrants have been recorded as accounts payable,
and as of December 31, 2005 and none of the warrants granted in the year 2004 or
2005 have been issued. During the period ended March 31, 2006, the Company
entered into a settlement agreement with the parties to the financial advisory
service and agreed to issue 2,000,000, 5 year, common stock purchase warrants
with an exercise price, subject to adjustment, of $0.60 per share. These
warrants have been determined by management to have a value of $688,750.
Additionally, the Company is to pay $400,000 in cash, of which $40,000 has been
previously paid. The remaining balance of $360,000 will be paid pursuant to a
payment plan to be entered into between the parties in the future.

On November 24, 2004, the Company entered into a loan agreement with Blue Mint
Exploration in the amount of $140,000 for a term of six months terminating May
25, 2005 and an interest rate of 12% per annum to be paid at the maturity of the
loan agreement. (See Note 5.) This note was paid in full.

Standby Equity Distribution Agreement
On November 19, 2004, the Company entered into a standby equity distribution
agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant to this
agreement, Cornell was to purchase up to $10,000,000 of the Company's common
stock through a placement agent over a two-year period after the effective
registration of the shares. On April 19, 2005, the Company entered into an
agreement with Cornell Capital Partners, LP to terminate the standby equity
distribution agreement, dated November 19, 2004, and the related registration
rights agreement, placement agent agreement and escrow agreement, of same date.
On April 19, 2005, upon execution of the termination agreement, the Company
entered into a new standby equity distribution agreement with Cornell Capital
Partners, LP ("Cornell".) Pursuant to the standby equity distribution agreement,
the Company may, at its discretion, periodically sell to Cornell shares of
common shares for a total purchase price of $20,000,000. (See Note 4.)

                                       21
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

NOTE 10 - RELATED PARTY TRANSACTIONS

A shareholder advanced the Company $100 to open the Company's bank account. The
funds advanced are unsecured, non-interest bearing, and due on demand. As of
December 31, 2005, the shareholder has elected to forgave the debt.

NOTE 11 - COMMON STOCK

During the period ended March 31, 2006, the Company issued 2,500,000 common
shares for the conversion of debt in the amount of $250,000 on the convertible
debenture dated April 19, 2005 at a default conversion price of $0.10 per share.

During the year ended December 31, 2005, the Company deposited 24,000,000 shares
of the Company's common stock with an escrow agent as security for its
performance under the Cornell Capital Partners, LP and Highgate House Funds, Ltd
convertible debentures. The escrow shares are considered issued but not
outstanding and are not included in the issued and outstanding balance of common
shares for the period ended.

On October 28, 2005, the Company issued 1,000,000 shares valued at $0.48 per
share to the president of the Company pursuant to an executive employment
agreement, in which the executive shall receive 1,000,000 shares at the end of
each 12 month period in which he is employed by the Company, with an overall
limitation of 5,000,000 shares.

On March 2, 2005, the Company issued 80,000 shares valued at $0.45 per share to
two consultants for geological services.

During the period ended December 31, 2004, the Company issued 20,000,000 shares
valued at $0.001 per share for services received at the founding of the Company.

During the period ended December 31, 2004, the Company issued 900,000 shares of
common stock in partial payment of an oil and gas lease. The shares were valued
at $0.25 per share, or $225,000.

During the period ended December 31, 2004, the Company issued for cash 632,000
shares of common stock at $1.00 per share, less expenses of $60, for a net of
$631,940.

                                       22
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

On October 8, 2004, the Company entered into a subscription agreement to issue
1,500,000 shares at the purchase price of approximately $0.93 per share. The
Company received $1,400,000 less expenses of $12, for a net of $1,399,988.

In October, 2004, an officer of the Company resigned from his position as CEO
and rescinded 9,000,000 shares that he held. The rescinded shares were valued at
par because they were part of the recapitalization of the Company's shares.

In October, 2004, the Company issued 392,000 shares to Cornell Capital and 8,000
to the placement agent related to the standby equity distribution agreement
valued at fair market value of $1.25 per share. (See Note 4.)

On September 7, 2004, the Company issued 100,000 shares valued at $1.34 per
share to an independent consultant for advisory services.

On August 27, 2004, the Company issued 100,000 shares valued at $1.32 per share
to an independent consultant for advisory services.

On August 2, 2004, the Company issued 2,500,000 shares valued at $1.42 per share
for services as part of the Argyle Energy, Inc. lease contract.

On June 14, 2004, the Company issued 50,000 restricted shares valued at $1.25
per share as part of an investor relations contract. (See Note 10.)

In April, 2004, the Company entered into a 5 for 1 forward stock split. The
number of shares of the registrant company outstanding at the time of the
adoption of the 5 for 1 forward stock split was 9,000,000 shares which were
restated to 45,000,000 shares. (See Note 3.)

Warrants
On April 19, 2004, the Company issued 1,000,000 warrants to Cornell Capital
Partners, LP enabling the holder to purchase 1,000,000 shares of common stock at
an exercise price of $0.60 for a term of 2 years. These warrants are recorded on
the balance sheet at $98,960. During the years ended December 31, 2005 and 2004,
the Company issued 1,396,483 warrants to Source Capital Group, Inc. enabling the
holder to purchase 1,396,483 shares of common stock at an exercise price equal
to the price of the common stock subject to adjustment for a term of 5 years.
The warrants were valued $688,750. The amounts were estimated using Black
Scholes calculation and the following assumptions were made to value the
warrants for the period ending December 31, 2005 and 2004: estimated risk free
interest rate of 4%; estimated volatility of 48%; a term of two years; no
payment of dividends.

During the year ended December 31, 2005, the Company issued 1,396,483 warrants
to Source Capital Group, Inc. enabling the holder to purchase 1,396,483 shares
of common stock at an exercise price equal to the price of the common stock
subject to adjustment for a term of 5 years. The warrants were valued at
$341,141 and were recorded in accounts payable. The amounts were estimated using
Black Scholes calculation and the following assumptions were made to value the
warrants for the period ending December 31, 2005 and 2004: estimated risk free
interest rate of 4%; estimated volatility of 48%; a term of two years; no
payment of dividends. On February 3, 2006, the Company entered into a settlement
agreement with Source Capital Group that modified the terms of the original
August, 2004 agreement. (See Note 9) The new agreement states that the Company
agrees to issue 2,000,000, 5 year, common stock purchase warrants with an
exercise price of $0.60 per share. The 2,000,000 purchase warrants were valued
by management at $688,750.

In consideration of the Forbearance Agreement (See Note 4), the Company has also
issued an aggregate of 23,000,000 common stock purchase warrants dated March 29,
2006 to Cornell, each exercisable for a period of five years commencing March
29, 2006 for the purchase of one share of common stock. The warrants provide
that the holder cannot exercise the warrants to the extent such exercise would
cause the holder and its affiliates to own more than 4.99% of our outstanding
common shares, except within 60 days of the warrant expiration date. The
restriction may be waived by the holder upon not less than 65 days prior notice
to us. The warrants have exercise prices, subject to adjustment, ranging from
$0.30 to $0.80 per share and contain cashless exercise provisions.

                                       23
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

                                             Weighted
                                             Average
                          Number of          Remaining          Exercise
                          Warrants           Life               Price
                          ----------------   ----------------   ----------------
Outstanding
and Exercisable-
Cornell Capital           24,000,000         4.50              $0.30 to $0.80

Outstanding
and Exercisable-
Source Capital            2,000,000          4.80              $0.60

                                       24
<PAGE>

FALCON NATURAL GAS CORP.
 (An Exploration Stage Company)
Condensed Notes to Consolidated Financial Statements
March 31, 2006

NOTE 12 - SUBSEQUENT EVENT

In April and May, 2006, the Company issued 50,000 shares of common stock for
each month as payment in lieu of cash on the outstanding payable due Source
Capital Group. (See Note 9) The balance of $360,000 as of March 31, 2006 was
recorded in accounts payable and has been reduced by approximately $40,000, as
of May, 2006, for the value of the common shares issued.

                                       25
<PAGE>

ITEM 2. PLAN OF OPERATION

The following Plan of Operation of ours should be read in conjunction with our
consolidated financial statements and notes thereto included herein.

We are in the exploration stage as a natural gas exploration company. As such,
we have not realized any revenues from our planned operations. We are engaged in
natural gas exploration activities in St. Mary Parish, Louisiana; Starr County,
Texas; Beauregard Parish, Louisiana; Jeff Davis Parish, Louisiana; and Live Oak
County, Texas.

During 2004 and 2005, we raised approximately $9,000,000 from a combination of
equity and debt financing. We estimate that we can satisfy our cash requirements
for the next 12 months which does not take into account our present debt
services requirements which have been recently restructured, the costs for
drilling wells or further exploration work on our leased properties. We
currently use approximately $60,000 of cash per month for general and
administrative expenses such as investor relations, advisory services,
Internet/web-hosting, officer's salaries and director's fees, office and general
expenses, professional fees, travel and entertainment and rent and related
expenses. We estimate that such uses of cash will continue throughout 2006. We
spent approximately $3,500,000 on lease exploration during 2004 and 2005. In
October 2005 we received an additional $1,000,000 of debt financing part of
which were used to make interest payments due on prior debt.

We obtained the services of independent contractors to complete two-dimensional
geophysical studies of our Starr County property and three-dimensional
geophysical seismic studies on our Wyandotte property. The well scheduled to be
drilled on our Wyandotte Property is intended to be a replacement of the
Inglewood 2 well, previously drilled in 1980. We originally anticipated being
able to commence drilling operations on the Wyandotte Property in July 2005 but
due to limited rig availability, we subsequently expected to being able to
commence drilling operations no sooner than October 2005. Now due to Hurricane
Katrina, we do not have any authorized commencement date although we still
intend to proceed with drilling on the Wyandotte Property as and when
circumstances permit. The Wyandotte Property was not damaged by Hurricane
Katrina but the State of Louisiana is behind schedule in issuing drilling
permits. At this time, Louisiana is giving priority to reconstruction efforts
involving public and private infrastructure. For this reason, on October 1, 2005
we executed oil and gas well participation agreements with each of Bayou City
Exploration, Inc. and Blue Ridge Group, Inc. under which two wells have been
drilled and four additional wells are scheduled to be drilled in the next three
to six months. On November 11, 2005 we also executed oil and gas well
participation agreements with Southern Resource Company for up to 11 wells which
are scheduled to be started in mid-2006. In order to establish positive cash
flow and expand our asset base we have also agreed to participation agreements
on low risk wells with Whitmar Exploration Company, Stanotex, LLC, Vincent Oil
and Gas Inc., and Edwin S. Nichols Exploration, Inc. Work on these wells is
expected to start during May 2006 and thereafter. As the result of our July 15,
2005 and October 2005 loans from Cornell Capital Partners, LP and Highgate House
Funds, Ltd. in which we received net proceeds of $5,490,000 and $1,830,000,
respectively, we now have the necessary funds to cover our costs for drilling
these new wells and for drilling part of the Wyandotte Property well.

                                       26
<PAGE>

In connection with the Wyandotte Property, an engineering study has concluded
that the reentry of the old well would be too risky. A new well will therefore
be drilled. We plan to drill the replacement well to develop the Discorbis Bol
Sands.

The estimated cost for drilling and completion of the replacement well is
$6,000,000. Drilling and completion of this or any other well is no guarantee
that we will be able to produce commercial quantities of natural gas. If we do
not discover and produce commercial quantities of natural gas, we will not have
any products or services to offer and our business could fail. Estimates of
reserves are made under conditions of uncertainty. Notwithstanding the
foregoing, we requested and received a reserves report from an independent
petroleum engineering firm with respect to the Wyandotte Property. The report
indicated estimated proved undeveloped reserves of approximately 26 billion
cubic feet of gas (70% of which or 18.2 BCF are owned directly by the Company
and 30% of which is owned by local mineral owners) in the reservoirs comprising
the Discorbis Bol Sands. Proved reserves are those quantities of petroleum and
gas which, by analysis of geological and engineering data, can be estimated with
reasonable certainty to be commercially recoverable, from a given date forward,
from known reservoirs and under current economic conditions, operating methods,
and government regulations. Proved reserves are categorized as developed or
undeveloped.

In general, reserves are considered proved if the commercial producibility of
the reservoir is supported by actual production or formation tests. In this
context, the term proved refers to the actual quantities of petroleum reserves
and not just the productivity of the well or reservoir. In certain cases, proved
reserves may be assigned on the basis of well logs or core analysis that
indicate the subject reservoir is hydrocarbon bearing and is analogous to
reservoirs in the same area that are producing or have demonstrated the ability
to produce on formation tests.

The area of the reservoir considered as proved includes (i) the area delineated
by drilling and defined by fluid contacts, if any, and (ii) the undrilled
portions of the reservoir that can reasonably be judged as commercially
productive on the basis of available geological and engineering data. In the
absence of data on fluid contacts, the lowest known occurrence of hydrocarbons
controls the proved limit unless otherwise indicated by definitive geological,
engineering or performance data.

Reserves may be classified as proved if facilities to process and transport
those reserves to market are operational at the time of the estimate or there is
a reasonable expectation that such facilities will be installed. Reserves in
undeveloped locations may be classified as proved undeveloped provided (i) the
locations are direct offsets to wells that have indicated commercial production
in the objective formation, (ii) it is reasonably certain such locations are
within the known proved productive limits of the objective formation, (iii) the
locations conform to existing well spacing regulations where applicable, and
(iv) it is reasonably certain the locations will be developed. Reserves from
other locations are categorized as proved undeveloped only where interpretations
of geological and engineering data from wells indicate with reasonable certainty
that the objective formation is laterally continuous and contains commercially
recoverable petroleum at locations beyond direct offsets.

                                       27
<PAGE>

We plan to drill the replacement well a few yards away from an existing well. We
believe that we will have to drill the replacement well to a depth of at least
17,000 feet. We have estimated a dry hole cost of $4,340,000 and a completed
cost of $5,500,000.

If we can produce commercial quantities of natural gas that we can sell, we
intend to use the proceeds to fund a second well on the Wyandotte property to
accelerate the recovery time of the natural gas reserves. Based on our letter
agreement with Argyle Energy Inc. for transferring all of our purchased leases
into our name and the leases, we are entitled to receive a 70% net revenue
interest. In addition, we plan to use any proceeds from production to fund
additional exploration and drilling on our leased properties. We estimate that
we will need between $2 million and $7 million of additional financing for each
additional well that we desire to drill. We have not examined the title to our
leased properties.

We do not expect to purchase or sell any plant or significant equipment during
the next twelve months.

ITEM 3. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and
with the participation of our chief executive officer and chief financial
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the "Evaluation Date").
Based on this evaluation, our chief executive officer and chief financial
officer conclude as of the Evaluation Date that our disclosure controls and
procedures were effective such that the information relating to us, including
our consolidated subsidiaries, required to be disclosed in our Securities and
Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. There were no changes
in our internal control over financial reporting that occurred during the period
covered by this report that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.


                           PART II--OTHER INFORMATION

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

Effective February 3, 2006 we issued an aggregate of 2,000,000 common stock
purchase warrants to Source Capital Group, Inc. ("SCGI") and its assignees
pursuant to our August 9, 2004 financial advisory agreement with SCGI (the
"Agreement"). Each warrant is exercisable during the five year period ending
5:00PM New York Time on February 2, 2011 to purchase one share of our common
stock at a price of $0.60 per share, subject to adjustment. The warrants were
issued by us pursuant to the exemption from registration afforded by Section
4(2) of the Act since the foregoing issuance did not involve a public offering,
the recipient had access to information that would be included in a registration
statement, took the shares for investment and not for resale and we took
appropriate measures to restrict resale.

                                       28
<PAGE>

On March 29, 2006 we issued 23,000,000, 5 year common stock purchase warrants to
Cornell Capital Partners, LP ("Cornell"), each exercisable for the purchase of
shares of our common stock with exercise prices, subject to adjustment, ranging
from $0.30 to $0.80 per share. The warrants were issued pursuant to our March
28, 2006 Forbearance Agreement with Cornell and were issued by us pursuant to
the exemption from registration afforded by Section 4(2) of the Act since the
foregoing issuance did not involve a public offering, the recipient had access
to information that would be included in a registration statement, took the
shares for investment and not for resale and we took appropriate measures to
restrict resale.

Effective March 29, 2006 we issued 2,500,000 shares of our restricted common
stock to Cornell Capital Partners, LP ("Cornell") pursuant to Cornell's
conversion of an aggregate of $250,000 of the principal amount of our April 19,
2005 debenture with Cornell. The issuance was made in connection with our March
28, 2006 Forbearance Agreement with Cornell and was made pursuant to the
exemption from registration afforded by Section 3(2)(9) of the Act.

Effective April 1, 2006 we issued 50,000 shares of our restricted common stock
to Source Capital Group, Inc. ("SCGI") and its designees pursuant to our March
15, 2006 Supplemental Settlement Agreement with SCGI. The shares were issued by
us pursuant to Section 4(2) of the Act since the foregoing issuance did not
involve a public offering, the recipient had access to information that would be
included in a registration statement, took the shares for investment and not for
resale and we took appropriate measures to restrict resale.

Effective May 1, 2006 we issued 50,000 shares of our restricted common stock to
designees of Source Capital Group, Inc. ("SCGI") pursuant to our March 15, 2006
Supplemental Settlement Agreement with SCGI. The shares were issued by us
pursuant to Section 4(2) of the Act since the foregoing issuance did not involve
a public offering, the recipient had access to information that would be
included in a registration statement, took the shares for investment and not for
resale and we took appropriate measures to restrict resale.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Effective March 28, 2006 we entered into a Forbearance Agreement (the
"Forbearance Agreement") with Cornell Capital Partners, LP ("Cornell") in
connection with our defaults under our $1,000,000 April 19, 2005 and $7,000,000
October 17, 2005 debentures with Cornell (singly and collectively the
"Debentures"). As at March 28, 2006 we owed Cornell interest of $88,767 and
$151,509 under the April 2005 and October 2005 Debentures, respectively. The
Forbearance Agreement also takes into account our failure to timely register the
common stock underlying the Debentures. Under the Forbearance Agreement, the
maturity dates of the April 2005 and October 2005 Debentures have been extended
until December 31, 2007. Further, we have no interest or principal payment
obligations under the Debentures until April 1, 2007, at which time, and the
first business day of each month thereafter until the Debentures are paid in
full, we are required to make payments of principal and interest. Each monthly
payment will be equal to the outstanding principal balance of the Debentures on
the date such payment is due divided by 10, plus accrued and unpaid interest.
The Forbearance Agreement further provides that we are required to re-file the
Registration Statement for the resale of the shares of common stock underlying
(i) the Debentures and (ii) the warrants issued pursuant to the Forbearance
Agreement (as described below), on or before May 15, 2006 and to have such
Registration Statement declared effective on or before July 31, 2006.

                                       29
<PAGE>

Pursuant to the Debenture defaults, Cornell is entitled, among other things, to
convert the April 19, 2005 Debenture into shares of our common stock at the
default rate of $0.10 per share. In connection there and with the Forbearance
Agreement, Cornell has converted $250,000 of the principal amount of the April
2005 Debenture into 2,500,000 shares of our common stock. In consideration of
the Forbearance Agreement, we have also issued an aggregate of 23,000,000 common
stock purchase warrants dated March 29, 2006 to Cornell, each exercisable for a
period of five years commencing March 29, 2006 for the purchase of one share of
our common stock. The warrants provide that the holder cannot exercise the
warrants to the extent such exercise would cause the holder and its affiliates
to own more than 4.99% of our outstanding common shares, except within 60 days
of the warrant expiration date. The restriction may be waived by the holder upon
not less than 65 days prior notice to us. The warrants have exercise prices,
subject to adjustment, ranging from $0.30 to $0.80 per share and contain
cashless exercise provisions. The number of warrants and applicable exercise
prices thereon are as follows:

         o        3,000,000 warrants - $0.30

         o        3,000,000 warrants - $0.35

         o        3,000,000 warrants - $0.40

         o        3,000,000 warrants - $0.50

         o        3,000,000 warrants - $0.60

         o        3,000,000 warrants - $0.70

         o        5,000,000 warrants - $0.80

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

Not applicable.

ITEM 5. OTHER INFORMATION.

Payments to Source Capital Group, Inc.

Under an August 9, 2004 agreement (the "Agreement") with Source Capital Group,
Inc. ("Source Capital"), we are obligated to pay fees to Source Capital on
monies raised by us during the term of the Agreement, excluding overseas
capital. Pursuant to the Agreement, we were obligated to pay Source Capital a
10% cash and 10% warrant fee with respect to the $7,000,000 in financing
provided to us by Cornell Capital Partners, LP and Highgate House Funds, Ltd.
during the period July 2005 through October 2005 (the "Financings"). We agreed
with Source Capital that a total of 1,166,660 warrants were issuable to Source
Capital with regard to the 10% warrant issuance obligation under the Financings.
We further agreed with Source Capital to issue an additional 833,334 warrants to
Source Capital in partial satisfaction of the 10% cash obligation under the
Financings giving rise to an obligation to issue an aggregate of 2,000,000
warrants which were issued effective February 3, 2006. We paid Source Capital
$40,000 in cash in December 2005 and had a remaining cash obligation to Source
Capital of $360,000 (the "Cash Balance") with respect to the Financings. In
connection with the foregoing, we entered into a Settlement Agreement with
Source Capital dated as of February 3, 2006. Effective March 15, 2006 we entered
into a Supplemental Settlement Agreement (the "SS Agreement") with Source
Capital with respect to the Cash Balance due. Under the SS Agreement we have
agreed that we will make payments to Source Capital in cash or restricted shares
of our common stock. Commencing April 1, 2006, and the first day of each month
thereafter (each an "Issuance Due Date") until payment in full of the Cash
Balance, we shall issue 50,000 shares of our restricted common stock to Source
Capital as payment against the outstanding Cash Balance. The shares shall be
valued at the average closing sale price for our shares on the OTCBB during the
five trading days immediately preceding the applicable Issuance Due Date.
Commencing with the July 1, 2006 Issuance Due Date, and all subsequent Issuance
Due Dates, we may, at our sole option, in lieu of making a monthly payment in
restricted stock, make a cash payment of $20,000 to Source Capital.
Notwithstanding the foregoing, we have agreed that to the extent our cash
position on any Issuance Due Date is sufficient, after taking into consideration
our normal and reasonable cash requirements for operations, to allow us to make
a payment in cash, that we will make a payment in cash. The final payment of the
Cash Balance may consist of less than 50,000 shares or $20,000 inc ash, as
necessary, to complete full payment of the original $360,000 Cash Balance due.
We may prepay the Cash Balance in cash at any time. Effective April 1, 2006 we
issued the initial 50,000 shares due under the SS Agreement to Source Capital
and its designees and effective May 1, 2006 we issued an additional 50,000
shares due under the SS Agreement to designees of Source Capital.

                                       30
<PAGE>

Participation Agreements

During the period December 2005 through March 2006 we entered into various
participation agreements on what we believe to be low risk wells. Our purpose in
doing so is to establish positive cash flow and increase our asset base. These
participation agreements include the following:

o     Pecan Station North Prospect: In March 2006 we entered into a
      participation agreement with Edwin S. Nichols Exploration, Inc. ("ESN")
      respecting our participation in the re-entry, attempted re-drill, and, if
      prudent, completion of up to 3 wells on the Pecan Station North Prospect
      located in Tom Green County, Texas. Our participation involves a 75%
      working interest and 55.8% net revenue interest on an AFE (Authorization
      For Expenditure) 1/3 for 1/4 basis, in which we would pay 100% of the
      costs of drilling and completion. In March 2006 we paid ESN $100,406
      representing our initial fee to participate with ESN in wells drilled on
      the prospect.

                                       31
<PAGE>

      The arrangement will initially consist of the re-entry and attempted
      re-drilling and completion of the Blankenship & Blankenship WCSC #1 well
      to a depth of approximately 4,900 feet to test the Paolo Pinto Lime and
      Harkey Sand formation. The estimated costs to re-enter and re-drill the
      initial well is approximately $185,000 and the estimated completion cost
      of such well is approximately $338,000. Assuming, one or more of the wells
      is completed and producing, we will also be responsible for our
      proportionate share of monthly operating costs associated with maintaining
      the well or wells. Our failure to submit our share of required drilling
      and completion costs on the initial well within the allotted time periods
      will result in the automatic termination of our rights under the
      participation agreement. After the Initial Wells have been drilled or
      re-entered and completed, we have the right but not the obligation to
      participate in all subsequent wells drilled on the prospect on terms to be
      negotiated.

o     Hollins Prospect: In March 2006 we entered into a participation agreement
      with Edwin S. Nichols Exploration Inc. ("ESN") respecting our
      participation in up to 3 wells (the "Initial Wells") intended to be
      drilled on the Hollins Prospect located in Nolan County, Texas. Similar to
      our arrangement with ESN respecting the Pecan Station North Prospect, our
      participation would involve a 75% working interest and 55.8% net revenue
      interest on an AFE 1/3 for 1/4 basis in which we would pay 100% of the
      cost of drilling and completion. In March, 2006 we paid ESN $110,250
      representing location fees for the Initial Wells. The initial plan is to
      drill two wells, the ESN # 1-29 Beal well and the ESN # 1-30 Beal well,
      followed by the drilling of a third well at a mutually agreed upon
      location within the prospect. Each well is intended to be drilled to a
      depth of approximately 5,900 feet or deep enough to test the Canyon Sand
      formation. The anticipated target date for spudding the initial well is on
      or about May 1, 2006. Each well has an estimated cost of approximately
      $344,000 for drilling and testing and an estimated completion cost of
      approximately $428,000. Assuming one or more of the wells is completed and
      producing, we will also be responsible for our proportionate share of
      monthly operating costs associated with maintaining the well or wells. Our
      failure to submit our share of required drilling and completion costs
      within the allotted time period with respect to the first two wells shall
      cause the automatic termination of our rights under the participation
      agreement. After the Initial Wells have been drilled and completed, we
      have the right but not the obligation to participate in all subsequent
      wells drilled on the prospect on terms to be negotiated.

o     Brookshire Weido Prospect: On December 22, 2005 we entered into a
      Participation Agreement with Stanotex, LLC respecting our participation in
      the drilling and completion of a test well on the Brookshire Weido
      Prospect located in Waller County, Texas. Our participation would involve
      a 50% working interest and 25% net revenue interest on an AFE 1/3 for 1/4
      basis. The estimated cost for all operations necessary to drill the test
      well and for evaluation procedures (which include plugging and abandoning
      the well and restoring the drill site if no completion is attempted) is
      approximately $436,557. Our share would be 50% of this amount or
      approximately $218,278. Our participation in the well is subject to our
      prior review of the results of 2-D seismic to be conducted on the
      prospect.

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<PAGE>

o     Norman Prospect: Effective January 30, 2006 we entered into a
      participation agreement with Vincent Oil and Gas Corp. ("Vincent")
      respecting our participation in a test well to be drilled by Vincent on
      the Norman Prospect located in Bee County, Texas. The test well is
      intended to be drilled to a vertical depth of approximately 14,900 feet to
      test the Wilcox sand formation. Our participation would involve a 12%
      working interest and 77% net revenue interest on an AFE 1/3 for 1/4 basis
      whereby we would pay 16% of all costs associated with drilling the well to
      the casing point and 12% of all completion and operating costs, if
      applicable. Our share of the drilling cost is estimated to be
      approximately $380,000. In February, 2006 we paid Vincent $41,375 for
      geological, geophysical and land costs. By participating in the test well
      we have the right to participate in any developmental well proposed in the
      future on the prospect.

o     South Wilburton Prospect: On March 21, 2006 we entered into a
      participation agreement with Whitmar Exploration Company ("Whitmar")
      respecting our participation in the drilling of a test well on the South
      Wilburton Prospect located in Latimer County, Oklahoma. In March 2006 we
      paid Whitmar $45,000 representing our proportionate share of leasehold
      costs. Our participation would involve a 12.5% working interest and 77.5%
      net revenue interest on an AFE 1/3 for 1/4 basis whereby we would pay
      16.67% of drilling costs to the casing point and 12.5% of all costs after
      the casing point. The well is intended to be drilled to a depth of
      approximately 15,000 feet to test the Spiro channel. The estimated
      drilling cost for the well is $2,162,500 and the estimated completion cost
      is $1,007,000. Our estimated share of such costs would be $360,417 for
      drilling and $125,875 for completion. Under the agreement, we also have
      the right to participate in one offset well on the prospect on a
      proportionate basis.

ITEM 6. EXHIBITS

Exhibits

The following exhibits are filed as a part of this report on Form 10-QSB:

Exhibit No.                                     Description

31.1                     Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal
                         Executive Officer

31.2                     Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal
                         Financial Officer

32.1                     Rule 1350 Certification of Principal Executive Officer

32.2                     Rule 1350 Certification of Principal Financial Officer

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                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-QSB to be
signed on its behalf by the undersigned, thereunto duly authorized.

 Dated:  May 18, 2006                    Falcon Natural Gas Corp.

                                         By: /s/ Massimiliano Pozzoni
                                             ----------------------------------
                                         Name:      Massimiliano Pozzoni
                                         Title:     Secretary, Treasurer and
                                                    Chief Financial Officer

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