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

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

                                   FORM 10-KSB

[X]   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934

                  For the fiscal year ended: December 31, 2005
                                            ------------------

[_]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

              For the transition period from _________ to ________.

                          Commission File Number: 50228
                                                 ------

                         TOUCHSTONE RESOURCES USA, INC.
 -----------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

                Delaware                                 33-0967974
--------------------------------------      ------------------------------------
    (State or other jurisdiction of         (IRS Employer Identification Number)
     incorporation of organization)

     1600 Smith Street, Suite 5100
              Houston, TX                                   19004
--------------------------------------      ------------------------------------
(Address of Principal Executive Offices)                  (Zip Code)

                                 (713) 784-1113
               ---------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

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

     Title of Each Class             Name of Exchange on which Registered
     -------------------             ------------------------------------
             None                                    None

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

                     Common stock, $.001 par value per share

      Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [_]


<PAGE>

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_]

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. [_]

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

      State issuer's revenues for its most recent fiscal year: $488,532

      The aggregate market value of the voting common equity held by
non-affiliates of the registrant based on the average bid and asked price of the
registrant's common stock as reported on the OTC Bulletin Board on March 29,
2006, was $72,752,429

                 (ISSUERS INVOLVED IN THE BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS)

      Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [_] No [_]

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

      As of March 29, 2006, 78,903,313 shares of the registrant's common stock
were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.

            Transitional Small Business Disclosure Format (check one):
            Yes [_] No [X]


<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                           ANNUAL REPORT ON 10-KSB FOR
                       FISCAL YEAR ENDED DECEMBER 31, 2004

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                     PART I


Item 1.  Description of Business..............................................1
Item 2.  Description of Property.............................................24
Item 3.  Legal Proceedings...................................................31
Item 4.  Submission of Matters to a Vote of Security Holders.................32

                                     PART II

Item 5.  Market for Common Equity, Related Stockholder Matters and
           Small Business Issuer Purchases of Equity Securities..............33
Item 6.  Management's Discussion and Analysis ...............................34
Item 7.  Financial Statements................................................48
Item 8.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosures.........................................48
Item 8A. Controls and Procedures.............................................49
Item 8B. Other Information...................................................51

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control
           Persons; Compliance with Section 16(a) of the Exchange Act .......51
Item 10. Executive Compensation..............................................55
Item 11. Security Ownership of Certain Beneficial Owners and
           Management and Related Stockholder Matters........................59
Item 12. Certain Relationships and Related Transactions......................62
Item 13. Exhibits List ......................................................63
Item 14. Principal Accountant Fees and Services..............................68


<PAGE>

                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected revenues, projected costs and
plans and objective of management for future operations, are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"intend," "project," "estimate," "anticipate," or "believe" or the negative
thereof or any variation thereon or similar terminology. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct.

      Important factors that could cause actual results to differ materially
from our expectations include, but are not limited to, our assumptions about
energy markets, production levels, reserve levels, operating results,
competitive conditions, technology, the availability of capital resources,
capital expenditure obligations, the price, supply and demand for oil, natural
gas and other products or services, limited operating history, the weather,
inflation, the availability of goods and services, successful exploration and
drilling, drilling risks, future processing volumes and pipeline throughput,
general economic conditions, either nationally or internationally or in the
jurisdictions in which we or any of our subsidiaries are doing business,
legislative or regulatory changes, including changes in environmental
regulation, environmental risks and liability under federal, state and foreign
environmental laws and regulations, the securities or capital markets and other
factors disclosed under "Risk Factors" and "Item 6. Management's Discussion and
Analysis" and elsewhere in this report. All subsequent written and oral
forward-looking statements attributable to us, or persons acting on its behalf,
are expressly qualified in their entirety by these cautionary statements. Except
as require by law, we assume no duty to update or revise our forward-looking
statements based on changes in internal estimates or expectations or otherwise.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Background

      Touchstone Resources USA, Inc. is a Delaware corporation formed on March
5, 2001. Our executive offices are located at 1600 Smith Street, Suite 5100,
Houston, Texas 77002. Unless the context otherwise requires, references to the
"Company," "Touchstone," "we," "us" or "our," mean Touchstone Resources USA,
Inc. and our consolidated subsidiaries.

      We were originally engaged in the business of developing internet cafes in
Orange County, California. On March 15, 2004, all of our officers and directors
resigned and new management was appointed to fill such vacancies. Immediately
following the change in management, we implemented a new business plan of
acquiring, exploring and developing domestic and international oil and gas
properties.


<PAGE>

Overview

      We are an independent energy company engaged primarily in oil and gas
exploration, development and production. We target both unconventional resource
plays and traditional exploration in such areas as the Arkoma Basin in Oklahoma,
the Fayetteville Shale in Arkansas, and South Texas.

      Our operations are focused on the identification and evaluation of
prospective oil and gas properties and the contribution of capital to projects
that we believe have the potential to produce oil or gas in commercial
quantities. We participate directly in projects as owners of a working interest.
We act as the operator of certain of the projects in which we own interests.

      Our primary objective is to build reserves, production, cash flow and
earnings per share by optimizing production and value from existing oil and gas
properties and acquiring new oil and gas prospects. We plan to achieve this
objective by acquiring and developing high profit margin properties, disposing
of low producing, marginal and non-strategic properties, and maintaining a high
degree of financial flexibility. We seek to balance our risk profile by
balancing our acquisition of long-lived, lower-risk reserves through
unconventional shale plays with acquisition of conventional deep sand Gulf Coast
gas plays. By doing so, we believe we can maximize the use of our otherwise
limited resources, reduce the risk of unsuccessful drilling efforts, and
capitalize on the experience of our management team and consultants.

Business Strategy

      Our business strategy is to provide long-term growth in shareholder value
by optimizing production and value from our existing oil and gas reserves and
acquiring additional interests in oil and gas properties. The key elements of
our business strategy are as follows:

      Exploit and Develop Existing Property Base. We seek to maximize the value
of the properties we acquire by developing and exploiting properties with the
highest production and reserve growth potential. We perform continuous field
studies of such properties using advanced technologies, and seek to minimize
costs by controlling operations to the extent possible.

      Selectively Grow Through Exploration. We have developed and implemented an
active exploration program that is designed to complement our exploitation and
development efforts with exploration projects offering superior reserve
potential. We utilize seismic data and other technical applications, as
appropriate, to manage our exploration risks.

      Participate in Joint Ventures. We intend to participate in joint ventures
and seek joint venture partners in order to reduce our investment in projects
and share the costs associated with operating the underlying prospects in
situations where our assessment of risk dictates that it is desirable to assume
a lower proportionate risk.

      Rationalize Property Portfolio. We seek to rationalize the portfolio of
properties we acquire by selling marginal properties in order to redeploy
capital to exploitation, development and exploration projects that offer a
potentially higher overall return.


                                       2
<PAGE>

      Pursue Strategic Acquisitions. We seek to leverage our extensive regional
knowledge base by acquiring leasehold acreage and producing or non-producing
properties in areas along the Gulf Coast that are in mature fields with complex
geology that have multiple reservoirs and existing infrastructure.

      We seek to acquire significant operating interests in properties with the
following characteristics:

      o     Locations within or close to areas with an established production
            history and infrastructure;

      o     Multiple productive sands and reservoirs; and

      o     Low current production levels with significant identified proven and
            potential reserve opportunities.

      To date, we have conducted our acquisition, exploration and development
activities primarily in Arkansas, Oklahoma, Texas, Louisiana, Mississippi and
New Zealand. These regions encompass both unconventional and conventional gas
plays and are generally characterized by long-lived reserves with multiple
geologic targets that decrease risk, strong natural gas prices, competitive
service costs, a favorable regulatory environment that encourages drilling
efforts, and virtually no federal land or land access impediments.

      We believe that these regions will continue to generate attractive
acquisition opportunities as unconventional gas plays emerge to constitute a
significant amount of onshore oil and gas production. We also believe there will
be continued opportunities in conventional gas plays that we will be able to
exploit.

Drilling, Exploration and Production Activities

      We have acquired interests in 13 oil and gas projects consisting of
approximately 536,000 aggregate gross acres. Our projects have aggregate net
estimated proved developed producing and proved developed non-producing reserves
of almost 81.1 thousand barrels of oil and over 505.31 million cubic feet of gas
in Texas and Louisiana.

      Of these projects, several wells in our South Texas Vicksburg Project in
Starr and Hidalgo counties in South Texas are currently in production, one well
in our Louisiana Shelf Project located offshore in Southern Louisiana has been
drilled and is now shut in awaiting hook-up to production facilities, one well
in our Vela Project located in Zapata County, Texas is in production, and three
wells in our Wharton Project in Wharton County, Texas shut-in. Our remaining
projects are in various stages of exploration, development and testing. We are
presently drilling wells or participating as a non-operator in the drilling of
wells in McIntosh County, Oklahoma and Woodruff County, Arkansas. A description
of our principal projects is set forth under "ITEM 2. DESCRIPTION OF PROPERTIES
- Current Oil And Gas Projects" of this report.


                                       3
<PAGE>

      Our exploration efforts are balanced between discovering new reserves
associated with acquisitions and discovering reserves on acreage already under
lease. The investment associated with drilling a well and future development of
a project depends principally upon the complexity of the geological formations
involved, the depth of the well or wells, whether the well or project can be
connected to existing infrastructure or will require additional investment in
infrastructure, and, if applicable, the water depth of the well or project.

      Approximately two percent of the 536,000 gross acres comprising our
prospects are "held-by-production." Acreage held-by-production is attractive
because it permits us to maintain all of our exploration and development rights
in the leased area as long as production continues. Our held-by-production
acreage has significant existing infrastructure, which reduces development lead
times and cost. This infrastructure frequently allows for relatively quick tie
back of production from discoveries.

      A major focus for us at this time is the continued acquisition,
exploration and development of our unconventional gas plays in the Arkoma Basin
in Oklahoma and Arkansas. The acquisition of these assets starting in 2005
represents a change in direction for us, establishing us as a resource player.
Our investment in these two plays will constitute the majority of our capital
expenditures for 2006, which we expect will result in the addition of
substantial reserves to our portfolio.

Operator Activities

      We currently act as the operator for the Checotah, Wharton, Maverick Basin
and Jefferson County Hackberry Projects. Our wholly owned subsidiary Touchstone
Resources USA, Inc, is qualified as an operator in Texas, and our wholly-owned
subsidiary CE Operating, LLC is qualified as an operator in Oklahoma.

      As operator, we design and manage the development of wells and supervise
operation and maintenance activities on a day-to-day basis. We do not own
drilling rigs or other oil field services equipment used for drilling or
maintaining wells in our projects. Independent contractors engaged by us provide
all the equipment and personnel associated with these activities. We contract
with drilling, production and reservoir engineers, geologists, and other
specialists who work to improve production rates, and increase reserves.

      By serving as the operator of projects, we are better able to exercise
control over the timing, logistics and capital expenditures relating to these
projects. In addition, we receive producing well overhead fees, drilling well
overhead fees and other fees related to the operation of the projects for which
we are the operator. The other participants in our projects reimburse us for
their allocated shares. The related costs that we incur as an operator of
projects (which are reimbursed to us by the participants in the projects) are
generally comprised of several components, including direct operating costs,
repair and maintenance expenses, transportation expenses, production taxes and
workover costs. Our operating costs are driven in part by the type of product
produced, the level of workover activity, and the geological location of the
properties.


                                       4
<PAGE>

Sales and Marketing

      We market the majority of the oil and gas production from properties we
operate for both our account and the account of the other working interest
owners in the applicable projects. We market the products several different ways
depending upon a number of factors, including the availability of purchasers for
the product at the wellhead, the availability and cost of pipelines near the
well or related production platform, market prices, pipeline constraints and
operational flexibility.

      The principal target customers for the crude oil production are refiners,
remarketers and other companies, some of which have pipeline facilities near the
producing properties we acquire. The principal target customers for the gas
production are pipelines, utilities, gas marketing firms, industrial users and
local distribution companies. In the event pipeline facilities are not
conveniently available to transport crude oil, we intend to truck or barge the
oil to storage, refining or pipeline facilities.

      We normally sell production to a relatively small number of customers, as
is customary in the oil and gas exploration, development and production
business. We sell the oil and gas under both short-term (less than one year) and
long-term (one year or more) agreements at prices negotiated with third parties.
Under both short-term and long-term contracts, typically either the entire
contract (in the case of short-term contracts) or the price provisions of the
contract (in the case of long-term contracts) are renegotiated in intervals
ranging in frequency from daily to annual. Sales prices for oil and gas are
negotiated based on factors normally considered in the industry, such as the
posted price for oil, the index or spot price for gas, price regulations,
distance from the well to the pipeline, well pressure, estimated reserves,
commodity quality and prevailing supply conditions. We are not dependent on any
individual customer or customers for the sale of any oil or gas we generate.

      We use existing third-party gathering systems and interstate and
intrastate pipelines to transport our oil and gas, and incur gathering and
transportation expenses to move our oil and gas through these gathering systems
and pipelines. These expenses vary based on the volume and distance shipped and
the fee charged by the third-party transporter. Transportation space on these
gathering systems and pipelines is occasionally limited and at times unavailable
because of repairs or improvements, or as a result of priority transportation
agreements with other oil and gas shippers. While our ability to market our oil
and natural gas has been only infrequently limited or delayed, if transportation
space is restricted or is unavailable, our cash flow from the affected
properties could be adversely affected.

Technology

      In the areas in which it is available, we use 2-D and 3-D geophysical data
to guide our exploration activities, as well as geological interpretation. To
date, the 3-D data has been available in most cases to support our conventional
gas plays, whereas our unconventional plays tend to rely more heavily on
geological interpretation. For our conventional plays, horizontal drilling is
utilized for maximum recovery from the target formation. In order to optimize
the chance of success, our logging and coring programs are carefully designed
and extensively reviewed.


                                       5
<PAGE>

Title to Properties

      We believe that the title to our leasehold properties is good and
defensible in accordance with standards generally acceptable in the oil and gas
industry, subject to exceptions that are not so material as to detract
substantially from the use of the properties. Our leasehold properties are
subject to royalty, overriding royalty and other outstanding interests customary
in the industry. The properties may be subject to burdens such as liens incident
to operating agreements and taxes, development obligations under oil and gas
leases, and other encumbrances, easements and restrictions. We do not believe
any of these burdens will materially interfere with our use of these properties.

      As is customary in the oil and gas industry, only a preliminary title
examination is conducted at the time we acquire properties that we believe are
suitable for drilling operations. We rely upon the brokers of the properties to
conduct these title examinations. We intend to perform necessary curative work
with respect to any significant defects in title before proceeding with
operations.

Competition

      The oil and natural gas business is highly competitive. We compete with
private, public and state-owned companies in all facets of the oil and gas
business, including suppliers of energy and fuel to industrial, commercial and
individual customers. Numerous independent oil and gas companies, oil and gas
syndicates and major oil and gas companies actively seek out and bid for oil and
gas prospects and properties as well as for the services of third-party
providers, such as drilling companies, upon which we rely. Many of these
companies not only explore for, produce and market oil and gas, but also carry
out refining operations and market the resultant products on a worldwide basis.
A substantial number of our competitors have longer operating histories and
substantially greater financial and personnel resources than we do.

      Competitive conditions may be substantially affected by various forms of
energy legislation and/or regulation considered from time to time by the
government of the United States and other countries, as well as factors that we
cannot control, including international political conditions, overall levels of
supply and demand for oil and gas, and the markets for synthetic fuels and
alternative energy sources. Intense competition occurs with respect to
marketing, particularly of natural gas.

Regulation

      General. The availability of a ready market for oil and gas production
depends upon numerous factors beyond our control. These factors include local,
state, federal and international regulation of oil and gas production and
transportation, as well as regulations governing environmental quality and
pollution control, state limits on allowable rates of production by a well or
proration unit, the amount of oil and gas available for sale, the availability
of adequate pipeline and other transportation and processing facilities, and the
marketing of competitive fuels. For example, a productive gas well may be
"shut-in" because of an over-supply of gas or lack of an available pipeline in
the areas in which we may conduct operations. State and federal regulations are
generally intended to prevent waste of oil and gas, protect rights to produce
oil and gas between owners in a common reservoir, and control contamination of
the environment. Pipelines and gas plants are also subject to the jurisdiction
of various federal, state and local agencies that may affect the rates at which
they are able to process or transport gas from our properties.


                                       6
<PAGE>

      Applicable legislation is under constant review for amendment or
expansion. These efforts frequently result in an increase in the regulatory
burden on companies in our industry and a consequent increase in the cost of
doing business and decrease in profitability. Numerous federal and state
departments and agencies issue rules and regulations imposing additional burdens
on the oil and gas industry that are often costly to comply with and carry
substantial penalties for non-compliance. Our production operations may be
affected by changing tax and other laws relating to the petroleum industry,
constantly changing administrative regulations and possible interruptions or
termination by government authorities.

      United States Federal and State Regulation of Oil & Natural Gas. The
transportation and certain sales of natural gas in interstate commerce are
heavily regulated by agencies of the federal government and are affected by the
availability, terms and cost of transportation. The price and terms of access to
pipeline transportation are subject to extensive federal and state regulation.
The Federal Energy Regulatory Commission ("FERC") is continually proposing and
implementing new rules and regulations affecting the natural gas industry, most
notably interstate natural gas transmission companies that remain subject to the
FERC's jurisdiction. The stated purpose of many of these regulatory changes is
to promote competition among the various sectors of the natural gas industry.
Some recent FERC proposals may, however, adversely affect the availability and
reliability of interruptible transportation service on interstate pipelines.

      Pipelines. Pipelines that we use to gather and transport our oil and gas
will be subject to regulation by the Department of Transportation ("DOT") under
the Hazardous Liquids Pipeline Safety Act of 1979, as amended ("HLPSA"),
relating to the design, installation, testing, construction, operation,
replacement and management of pipeline facilities. The HLPSA requires pipeline
operators to comply with regulations issued pursuant to HLPSA designed to permit
access to and allowing copying of records and to make certain reports and
provide information as required by the Secretary of Transportation.

      State Restrictions. State regulatory authorities have established rules
and regulations requiring permits for drilling operations, drilling bonds and
reports concerning operations. Many states have statutes and regulations
governing various environmental and conservation matters, including the
unitization or pooling of oil and gas properties and establishment of maximum
rates of production from oil and gas wells, and restricting production to the
market demand for oil and gas. Such statutes and regulations may limit the rate
at which oil and gas could otherwise be produced from our properties.


                                       7
<PAGE>

      Most states impose a production or severance tax with respect to the
production and sale of crude oil, natural gas and natural gas liquids within
their respective jurisdictions. State production taxes are generally applied as
a percentage of production or sales. In addition, in the event we conduct
operations on federal or state oil and gas leases, such operations must comply
with numerous regulatory restrictions, including various nondiscrimination
statutes, royalty and related valuation requirements, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other appropriate permits issued by the Bureau of Land Management or the
Minerals Management Service or other appropriate federal or state agencies.

      Other. Oil and gas rights may be held by individuals and corporations,
and, in certain circumstances, by governments having jurisdiction over the area
in which such rights are located. As a general rule, parties holding such rights
grant licenses or leases to third parties, such as us, to facilitate the
exploration and development of these rights. The terms of the licenses and
leases are generally established to require timely development. Notwithstanding
the ownership of oil and gas rights, the government of the jurisdiction in which
the rights are located generally retains authority over the manner of
development of those rights. Additionally, the government of New Zealand
regulates the exploration, production, sales, and transportation of oil and
natural gas.

Environmental

      General. Our activities are subject to local, state and federal laws and
regulations governing environmental quality and pollution control in the United
States and may be subject to similar laws and regulations in New Zealand. The
exploration, drilling and production from wells, natural gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing natural gas and
other products, are subject to stringent environmental laws and regulations by
state and federal authorities, including the Environmental Protection Agency
("EPA"). These laws and regulations may require the acquisition of a permit by
operators before drilling commences, prohibit drilling activities on certain
lands lying within wilderness areas, wetlands, and other ecologically sensitive
and protected areas, and impose substantial remedial liabilities for pollution
resulting from drilling operations. Such regulation can increase our cost of
planning, designing, installing and operating such facilities.

      Failure to comply with these laws and regulations may result in the
assessment of administrative, civil, and criminal penalties, the imposition of
significant investigatory or remedial obligations, and the imposition of
injunctive relief that limits or prohibits our operations. Moreover, some
environmental laws provide for joint and several strict liability for
remediation of releases of hazardous substances, rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person. In addition, we may be subject to claims alleging personal injury or
property damage as a result of alleged exposure to hazardous substances, such as
oil and gas related products.

      Changes in environmental laws and regulations occur frequently, and any
changes that result in more stringent and costly waste handling, storage,
transport, disposal, or cleanup requirements could materially adversely affect
our operations and financial position, as well as those of the oil and gas
industry in general. While we believe that we are in substantial compliance with
current environmental laws and regulations and have not experienced any material
adverse effect from such compliance, there is no assurance that this trend will
continue in the future.


                                       8
<PAGE>

      Waste Disposal. We currently lease, and intend in the future to own or
lease, additional properties that have been used for production of oil and gas
for many years. Although we and our operators utilize operating and disposal
practices that are standard in the industry, hydrocarbons or other wastes may
have been disposed of or released on or under the properties that we currently
own or lease or properties that we may in the future own or lease. In addition,
many of these properties have been operated in the past by third parties over
whom we had no control as to such entities' treatment of hydrocarbons or other
wastes or the manner in which such substances may have been disposed of or
released. State and federal laws applicable to oil and gas wastes and properties
may require us to remediate property, including ground water, containing or
impacted by previously disposed wastes (including wastes disposed of or released
by prior owners or operators) or to perform remedial plugging operations to
prevent future or mitigate existing contamination.

      We may generate wastes, including hazardous wastes, that are subject to
the federal Resource Conservation and Recovery Act ("RCRA") and comparable state
statutes. The EPA has limited the disposal options for certain wastes that are
designated as hazardous under RCRA ("Hazardous Wastes"). Furthermore, it is
possible that certain wastes generated by our oil and gas projects that are
currently exempt from treatment as Hazardous Wastes may in the future be
designated as Hazardous Wastes, and therefore be subject to more rigorous and
costly operating and disposal requirements.

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

      Air Emissions. Our projects are subject to local, state and federal
regulations for the control of emissions of air pollution. Major sources of air
pollutants are subject to more stringent, federally imposed permitting
requirements, including additional permits. Producing wells, gas plants and
electric generating facilities generate volatile organic compounds and nitrogen
oxides. Some of our producing wells may be in counties that are designated as
non-attainment for ozone and may be subject to restrictive emission limitations
and permitting requirements. If the ozone problems in the applicable states are
not resolved by the deadlines imposed by the federal Clean Air Act, or on
schedule to meet the standards, even more restrictive requirements may be
imposed, including financial penalties based upon the quantity of ozone
producing emissions. If we fail to comply strictly with air pollution
regulations or permits, we may be subject to monetary fines and be required to
correct any identified deficiencies. Alternatively, regulatory agencies could
require us to forego construction, modification or operation of certain air
emission sources.


                                       9
<PAGE>

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

      Oil Pollution Act. The Oil Pollution Act of 1990 ("OPA"), which amends and
augments oil spill provisions of the Clean Water Act, and similar legislation
enacted in Texas, Louisiana and other coastal states, imposes certain duties and
liabilities on certain "responsible parties" related to the prevention of oil
spills and damages resulting from such spills in United States waters and
adjoining shorelines. A liable "responsible party" includes the owner or
operator of a facility or vessel that is a source of an oil discharge or poses
the substantial threat of discharge, or the lessee or permittee of the area in
which a facility covered by OPA is located. OPA assigns joint and several
liability, without regard to fault, to each liable party for oil removal costs,
remediation of environmental damage and a variety of public and private damages.
OPA also imposes ongoing requirements on a responsible party, including proof of
financial responsibility to cover at least some costs of a potential spill. Few
defenses exist to the liability imposed by OPA. In the event of an oil
discharge, or substantial threat of discharge from our properties, vessels and
pipelines, we may be liable for costs and damages.

      New Zealand Environmental Regulation. Our operations in New Zealand could
also potentially be subject to similar foreign governmental controls and
restrictions pertaining to protection of human health and the environment. These
controls and restrictions may include the need to acquire permits, prohibitions
on drilling in certain environmentally sensitive areas, performance of
investigatory or remedial actions for any releases of petroleum hydrocarbons or
other wastes caused by us or prior operators, closure and restoration of
facility sites, and payment of penalties for violations of applicable laws and
regulations.


                                       10
<PAGE>

      While we believe that we are in substantial compliance with current
environmental laws and regulations in each of the jurisdictions in which we
operate. Although we have not experienced any material adverse effect from such
compliance, there is no assurance that this trend will continue in the future.

Insurance

      In those projects for which we are the operator, we maintain insurance of
various types to cover our operations with policy limits and retention liability
customary in the industry, including limited coverage for sudden environmental
damages and for existing contamination. We do not believe that insurance
coverage for environmental damages that occur over time or insurance coverage
for the full potential liability that could be caused by sudden environmental
damages is available at a reasonable cost. As a result, we may be subject to
liability or may lose substantial portions of our properties in the event of
certain environmental damages.

      In those projects for which we are not the operator, but in which we own a
working interest, a third-party operator is responsible for maintaining
insurance to cover our operations with policy limits and retention liability
customary in the industry. We believe the coverage and types of insurance
maintained by the operators for such prospects are adequate and therefore, we
have not acquired our own insurance for such prospects. However, the occurrence
of a significant adverse event on such prospects, the risks of which are not
fully covered by the applicable operator's insurance, could have a material
adverse effect on our ownership interests and, as a result, have a material
adverse effect on our business, financial condition and results of operations.

Seasonality

      Generally, but not always, the demand for oil and natural gas decreases
during the summer months and increases during the winter months. Seasonal
anomalies such as mild winters sometimes lessen the effect of this seasonal
fluctuation in demand. In addition, pipeline operators, utility operators, local
distribution companies and industrial users utilize oil and natural gas storage
facilities and purchase some of their anticipated winter requirements during the
summer. This can also lessen seasonal fluctuations in demand. We do not expect
seasonal fluctuations in the demand for oil and gas to have a material effect on
our future sales of oil and gas.

Employees and Consultants

      We currently have eight employees consisting of four executive officers
and four administrative staff. We do not have any part time employees. We also
utilize the services of several consultants who provide, among other things,
engineering, geological and geophysical support and outside accounting services
to the Company. We anticipate retaining additional personnel during the next 12
months.


                                       11
<PAGE>

                                  RISK FACTORS

      An investment in our common stock is speculative and involves a high
degree of risk. You should carefully consider the following risk factors in
addition to other information in this report before purchasing our common stock.
The risks and uncertainties described below are those that we currently deem to
be material and that we believe are specific to our company and our industry. In
addition to these risks, our business may be subject to risks currently unknown
to us. If any of these or other risks actually occurs, our business may be
adversely affected, the trading price of our common stock may decline and you
may lose all or part of your investment.

                        Risks Associated With Our Company

We have operating losses and limited revenues, need additional capital to
execute our business plan, and do not expect to be profitable in the foreseeable
future.

      We have experienced net losses in each fiscal quarter since our inception,
and we expect to continue to incur substantial losses for the foreseeable
future. Net loss applicable to common stockholders for the fiscal year ended
December 31, 2005 was $15,595,304 and for our fiscal year ended December 31,
2004 was $15,595,304. As of December 31, 2005, we had an accumulated deficit of
$31,110,372.

      We have also had limited revenues to date. Revenues for the fiscal year
ended December 31, 2005 were $588,532 and for our fiscal year ended December 31,
2004 were $200,809. We may not be able to generate significant revenues in the
future and expect our operating expenses to continue to increase over the next
12 months as we continue to pursue our oil and gas exploration activities. As a
result, we expect to continue to experience negative cash flow for the
foreseeable future and cannot predict when, if ever, we might become profitable.
We will need approximately $32.6 million of additional funds in order to conduct
operations at our current level over the next 12 months. Such funds may not be
available on commercially acceptable terms, if at all. If we cannot raise funds
on acceptable terms, we may not be able to execute our business plan, take
advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements. This may require us to delay or scale back
operations on current projects, investments in new projects or in certain cases
result in the forfeiture of our interests in project.

We are a development stage company with a limited operating history.

      We are a development stage company with only a limited operating history
upon which to base an evaluation of our current business and future prospects.
We have only been engaged in the oil and gas exploration and development
business since March 2004 and do not have an established history of locating and
developing properties that have oil and gas reserves. Although our management
team has extensive operating experience, we have limited experience as a
company. As a result, the revenue and income potential of our business is
unproven. Because of our limited operating history, we have limited insight into
trends that may emerge and affect our business. We may make errors in predicting
and reacting to relevant business trends and will be subject to the risks,
uncertainties and difficulties frequently encountered by early-stage companies.
If we are unable to successfully address any or all of these risks and
uncertainties, our business, results of operations and financial condition will
suffer.


                                       12
<PAGE>

Our operations will require significant capital expenditures for which we may
not have sufficient funding.

      We intend to make capital expenditures in excess of our existing capital
resources to exploit our existing reserves and to discover new oil and gas
reserves. Specifically, we expect to incur capital expenditure and production
costs of approximately $38.7 million over the next 12 months. We intend to rely
on external sources of financing to meet our capital requirements, to continue
acquiring, exploring and developing oil and gas properties, and to otherwise
implement our business plan. We plan to obtain such funding through the debt and
equity markets, but we cannot assure you that we will be able to obtain
additional funding when it is required or that it will be available to us on
commercially acceptable terms, if at all.

      We also intend to continue to acquire leaseholds, which will drive our
continued need for capital. If we fail to obtain the funding that we need when
it is required, we may have to forego or delay potentially valuable
opportunities to acquire new oil and gas properties or default on existing
funding commitments to third parties and forfeit or dilute our rights in
existing oil and gas properties.

If we are unable to satisfy our debt obligations to third parties, our business
may be adversely affected.

      As of the date of this report, we had outstanding term indebtedness to
third parties in principal aggregate amount of approximately $5.5 million, $3.8
million of which becomes due during the next 12 months. Of this amount, $2.05
million is secured by substantially all of our assets. We do not currently have
the funds available to repay this existing indebtedness. If we are unable to
repay this indebtedness as it becomes due, the lenders will have the right to
declare the indebtedness in default and seek all available remedies against us,
including executing its lien upon all of our assets. In addition, the presence
of this indebtedness may have a negative effect on our ability to obtain
additional financing. There can be no assurance that additional debt or equity
financing or cash generated by operations will be available to meet these
requirements.

Our future performance is dependent upon our ability to identify, acquire and
develop oil and gas prospects.

      Our future performance depends upon our ability to identify, acquire and
develop properties that contain oil and gas reserves in quantities that are
economically recoverable. Our success will depend upon our ability to acquire
interests in properties upon which oil and gas reserves are ultimately
discovered in commercial quantities, and our ability to develop prospects to the
point of production. Without successful acquisition and exploration activities,
we will not be able to develop oil and gas reserves or generate revenues. We
cannot provide you with any assurance that we will be able to identify and
acquire properties on acceptable terms, or that oil and gas deposits will be
discovered in sufficient quantities to enable us to recover our exploration and
development costs or sustain our business.


                                       13
<PAGE>

      The successful acquisition and development of oil and gas properties
requires an assessment of potential reserves, future oil and gas prices and
operating costs, potential environmental and other liabilities, and other
factors. Such assessments are necessarily inexact and subjective. For this
reason, we cannot assure you that our exploration and development activities
will result in the discovery of any reserves. Our operations may be curtailed,
delayed or canceled as a result of lack of adequate capital and other factors,
such as title problems, weather, compliance with governmental regulations or
price controls, mechanical difficulties, or unusual or unexpected formations,
pressures or work interruptions. In addition, the costs of exploration and
development may materially exceed our initial estimates.

Our ability to produce sufficient quantities of oil and gas from our properties
may be adversely affected by a number of factors outside of our control.

      The business of exploring for and producing oil and gas involves a
substantial risk of investment loss. Drilling oil and gas wells involves the
risk that the wells may be unproductive or that, although productive, the wells
may not produce oil and/or gas in economic quantities. Other hazards, such as
unusual or unexpected geological formations, pressures, fires, blowouts, loss of
circulation of drilling fluids or other conditions may substantially delay or
prevent completion of any well. Adverse weather conditions can also hinder
drilling operations. A productive well may become uneconomic due to pressure
depletion, water encroachment, mechanical difficulties, or some other unforeseen
reason, which impair or prevent the production of oil and gas from the well.

      There can be no assurance that oil and gas will be produced from the
properties in which we have interests. In addition, the marketability of oil and
gas that may be acquired or discovered may be influenced by numerous factors
beyond our control. These factors include:

      o     the proximity and capacity of oil and gas pipelines and processing
            equipment, market fluctuations in oil and gas prices;

      o     taxes;

      o     royalties;

      o     land tenure; and

      o     allowable production and environmental protection. We cannot predict
            how these factors may affect our business.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel
and oil field services could adversely affect our ability to execute our
exploration and development plans on a timely basis and within our budget.

      Shortages or the high cost of drilling rigs, equipment, supplies or
personnel could delay or adversely affect our exploration and development
operations, which could have a material adverse effect on our business,
financial condition and results of operations. Since our operations and
properties are concentrated in Texas, Arkansas and Oklahoma, we could be
materially and adversely affected if the unavailability or high cost of rigs,
equipment supplies or personnel is particularly severe in this region. We must
currently schedule rigs several months in advance to ensure availability for a
particular project.


                                       14
<PAGE>

The geographic concentration of substantially all of our present production from
properties in Texas subjects us to an increased risk of loss of revenue or
curtailment of production from factors affecting that region.

      The geographic concentration of substantially all of our projects in the
states of Texas, Arkansas and Oklahoma means that some or all of our properties
could be affected by the same event should the region experience:

      o     severe weather;

      o     delays or decreases in production, the availability of equipment,
            facilities or services;

      o     delays or decreases in the availability of capacity to transport,
            gather or process production; or

      o     changes in the regulatory environment.

Because substantially all of our properties could experience the same condition
at the same time, these conditions could have a relatively greater impact on our
results of operations than they might have had our properties been dispersed
over a greater geographic area. In certain circumstances, all of our production
revenue could be temporarily interrupted.

We may be unable to identify liabilities associated with the properties we
acquire or obtain protection from sellers against such liabilities.

      The properties we acquire may be subject to liabilities that we are unable
to identify or from which we are unable to obtain protection from the seller.
Our reviews of acquired properties are inherently incomplete because it is not
feasible to review in depth every individual property involved in each
acquisition. Our assessment may not reveal all existing or potential problems,
nor will it permit us to become familiar enough with the properties to assess
fully their capabilities and deficiencies. Inspections may not reveal structural
or environmental problems, such as pipeline corrosion or groundwater
contamination, when they are made. Even a detailed review of records and
properties may not necessarily reveal existing or potential problems, nor will
it permit us to become sufficiently familiar with the properties to assess fully
their deficiencies and potential.

      In addition, we may not be able to obtain contractual indemnities from
sellers for liabilities relating to the properties we acquire. We often assume
certain environmental and other risks and liabilities in connection with the
acquired properties. We may also be required to assume the risk of the physical
condition of the properties in addition to the risk that they may not perform in
accordance with our expectations.

We are dependent on our management team and the loss of any member of this team
may prevent us from successfully executing our business plan.


                                       15
<PAGE>

      We have four executive officers and a limited number of additional
employees and consultants. Our success depends largely upon the continued
services of these individuals, particularly our executive officers. Although we
have an employment agreement with our chief executive officer, we do not
maintain key person life insurance policies on, any of these individuals. The
loss of one or more of these individuals could seriously harm our business,
financial condition and results of operations. In such an event, we may not be
able to recruit personnel to replace these individuals in a timely manner, or at
all, on acceptable terms.

      We continue to experience rapid growth in our operations, which has
placed, and will continue to place, a significant strain on our management,
administrative, operational and financial infrastructure. Our future success
will depend in part upon the ability of our executive officers to manage growth
effectively. This may require us to hire and train additional personnel to
manage our expanding operations. In addition, we must continue to improve our
operational, financial and management controls and our reporting systems and
procedures. If we fail to successfully manage our growth, we may be unable to
execute our business plan.

We are dependent upon the efforts of various third parties that we do not
control and, as a result, we may not be able to control the timing of
development efforts, the associated costs, or the rate of production of
reserves.

      The success of our business is dependent upon the efforts of various third
parties that we do not control. We serve as the operator for the Checotah,
Wharton, Maverick Basin and Jefferson County Projects. As we do not serve as the
operator for our remaining projects, we may have limited ability to exercise
influence over the operations of these properties or their associated costs
depending on the provisions of the associated joint operating agreement. Our
dependence on the operator and other working interest owners for these projects
and our limited ability to influence operations and associated costs could
prevent the realization of our targeted returns on capital in drilling or
acquisition activities. The success and timing of exploration and development
activities on properties operated by others depend upon a number of factors that
will be largely outside of our control, including:

      o     the timing and amount of capital expenditures;

      o     operator's expertise and financial resources;

      o     approval of other participants in drilling wells;

      o     selection of technology;

      o     the rate of production of the reserves; and

      o     the availability of suitable drilling rigs, drilling equipment,
            production and transportation infrastructure, and qualified
            operating personnel.

Pipeline capacity may be inadequate to meet our gas transportation needs.

      There may be periods of time when pipeline capacity is inadequate to meet
our gas transportation needs. This is often the case that as new development
comes on line, pipelines are close to or at capacity. During periods when
pipeline capacity is inadequate, we may be forced to reduce production.


                                       16
<PAGE>

      Our reliance on third parties for gathering and distribution could curtail
future exploration and production activities.

      The marketability of our production will depend on the proximity of our
reserves to, and the capacity of, third party facilities and services, including
oil and natural gas gathering systems, pipelines, trucking or terminal
facilities, and processing facilities. The unavailability or insufficient
capacity of these facilities and services could force us to shut-in producing
wells, delay the commencement of production, or discontinue development plans
for some of our properties, which would adversely affect our financial condition
and performance.

We may be required to write-down the carrying values and/or estimates of total
reserves of our oil and gas properties.

      We are required by applicable accounting rules to periodically review the
carrying value of our oil and gas properties for possible impairment. Based on
specific market factors and circumstances at the time of prospective impairment
reviews and the continuing evaluation of development plans, production data,
economics and other factors, we may be required to write down the carrying value
of our oil and gas properties.

      For our fiscal year ended December 31, 2005, we recorded impairment
charges of $1.8 million related primarily to an impairment of the carrying value
of unproved properties, acquisition and drilling costs incurred in our Knox Miss
Project and the carrying value of our equity investment in the Vela, Good
Friday, Wharton, Las Palomas, Maverick Basin, and South Texas Vicksburg
Projects. A write-down constitutes a noncash charge to earnings. See "Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS - Critical Accounting Policies - Impairment
of Properties" for a discussion of when and how impairment of properties charges
are determined. We may incur noncash charges for impairment of our properties in
the future, which could have a material adverse effect on our results of
operations in the period taken. We may also reduce our estimates of the reserves
that may be economically recovered, which could have the effect of reducing the
total value of our reserves.

We may be unable to retain our leases and working interests in leases.

      Some of our properties are held under leases and working interests in
leases. If we or the operator of the property, as applicable, fail to meet the
specific requirements of each lease concerning continuous development or similar
terms, portions of the acreage lease may terminate or expire. We cannot assure
you that any of the obligations required to maintain each lease will be met. The
termination or expiration of our leases or our working interest relating to a
lease may reduce our opportunity to exploit a given prospect for oil or gas
production.

      In addition, we will need significant funds to meet capital calls,
drilling and production costs on our various interests in oil and gas prospects
to explore, produce, develop, and eventually sell the underlying natural gas and
oil products. Specifically, we expect to incur capital calls expenditures and
production costs of approximately $38.7 million over the next 12 months. If any
of the other owners of the leasehold interests in any of the projects in which
we participate or in which we own an interest fails to pay its equitable portion
of development costs or capital calls, we may need to pay additional funds to
protect our ownership interests or risk losing our interest in such projects.


                                       17
<PAGE>

Title deficiencies could render our leases worthless.

      The existence of a material title deficiency can render a lease worthless
and can result in a large expense to our business. It is our practice in
acquiring oil and gas leases or undivided interests in oil and gas leases to
forgo the expense of retaining lawyers to examine the title to the oil or gas
interest to be placed under lease or already placed under lease. Instead, we
rely upon the judgment of oil and gas lease brokers or landmen who perform the
fieldwork in examining records in the appropriate governmental office before
attempting to place under lease a specific oil or gas interest. This is
customary practice in the oil and gas industry. However, we do not anticipate
that we, or the person or company acting as operator of the wells located on the
properties that we intend to lease, will obtain counsel to examine title to the
lease until the well is about to be drilled. As a result, we may be unaware of
deficiencies in the marketability of the title to the lease. Such deficiencies
may render the lease worthless.

If we or our operators fail to maintain adequate insurance, our business could
be materially and adversely affected.

      Our operations are subject to risks inherent in the oil and gas industry,
such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or
well fluids, fires, pollution, earthquakes and other environmental risks. These
risks could result in substantial losses due to injury and loss of life, severe
damage to and destruction of property and equipment, pollution and other
environmental damage, and suspension of operations. Any offshore operations that
we engage in will be subject to a variety of operating risks peculiar to the
marine environment, such as hurricanes or other adverse weather conditions, to
more extensive governmental regulation, including regulations that may, in
certain circumstances, impose strict liability for personal injuries, property
damage, oil spills, discharge of hazardous materials, remediation and clean-up
costs, and other environmental damages. We could be liable for environmental
damages caused by previous property owners. As a result, substantial liabilities
to third parties or governmental entities may be incurred, the payment of which
could have a material adverse effect on our financial condition and results of
operations.

      For the projects for which we act as the operator, we maintain insurance
coverage for our operations with policy limits and retention liability customary
in the industry, including limited coverage for sudden environmental damages and
for existing contamination. We do not believe that insurance coverage for
environmental damages that occur over time or insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. As a result, we may be subject to liability or
may lose substantial portions of our properties in the event of certain
environmental damages.


                                       18
<PAGE>

      For the projects for which we do not act as the operator, the operator for
the project maintains insurance of various types to cover our operations with
policy limits and retention liability customary in the industry. We believe the
coverage and types of insurance maintained by the operators of such projects are
adequate and, therefore, have not acquired our own insurance coverage for such
projects. The occurrence of a significant adverse event on such projects that is
not fully covered by insurance could result in the loss of all or part of our
investment in a particular projects which could have a material adverse effect
on our financial condition and results of operations.

Complying with environmental and other government regulations could be costly
and could negatively impact our production.

      Our business is governed by numerous laws and regulations at various
levels of government in the United States and other countries in which we
operate. These laws and regulations govern the operation and maintenance of our
facilities, the discharge of materials into the environment and other
environmental protection issues. Such laws and regulations may, among things,
require that we acquire permits before commencing drilling, restrict the
substances that can be released into the environment with drilling and
production activities, limit or prohibit drilling activities on protected areas
such as wetlands or wilderness areas, require that reclamation measures be taken
to prevent pollution from former operations, require remedial measures to
mitigate pollution from former operations, such as plugging abandoned wells and
remediating contaminated soil and groundwater, and require remedial measures to
be taken with respect to property designated as a contaminated site.

      Under these laws and regulations, we could be liable for personal injury,
clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain limited insurance
coverage for sudden and accidental environmental damages as well as
environmental damage that occurs over time. However, we do not believe that
insurance coverage for the full potential liability of environmental damages is
available to us at a reasonable cost. Accordingly, we could be liable, or could
be required to cease production on properties, if environmental damage occurs.

      The costs of complying with environmental laws and regulations in the
future may harm our business. Furthermore, future changes in environmental laws
and regulations could occur that result in stricter standards and enforcement,
larger fines and liability, and increased capital expenditures and operating
costs, any of which could have a material adverse effect on our financial
condition or results of operations.

Our international investments in oil and gas interests may be subject to risks
associated with the legal, tax, economic and political environment of the
country in which the interest is located.

      Our foreign investments may be subject to certain risks, including
uncertain political, economic, legal and tax environments and the expropriation
or nationalization of assets. We attempt to conduct our business and financial
affairs so as to protect against political and economic risks applicable to
operations in the various countries where we operate, but there can be no
assurance that we will be successful in protecting against such risks.


                                       19
<PAGE>

      Our international assets and operations are subject to various political,
economic and other uncertainties, including, among other things, the risks of
war, expropriation or nationalization of assets or properties, renegotiation or
nullification of existing contracts, taxation policies, foreign exchange
restrictions, changing political conditions, international monetary
fluctuations, currency controls and foreign regulations that favor or require
the awarding of drilling contracts to local contractors or require foreign
contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction. In addition, if a dispute arises with foreign operations, we may
be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons, especially foreign oil ministries and
national oil companies, to the jurisdiction of the United States.

      Our private ownership of oil and gas reserves under oil and gas leases in
the United States differs distinctly from our ownership of oil and gas
properties in foreign countries. In the foreign countries in which we may
operate, the state generally retains ownership of the reserves and consequently
retains control of, and in many cases participates in, the exploration and
production of hydrocarbon reserves. Accordingly, operations outside the United
States and estimates of reserves attributable to properties located outside the
United States may be materially affected by host governments through royalty
payments, export taxes and regulations, surcharges, value-added taxes,
production bonuses and other charges.

Our compliance with the Sarbanes-Oxley Act and SEC Rules concerning internal
controls may be time consuming, difficult and costly for us.

      It may be time consuming, difficult and costly for us to develop and
implement provisions of the Sarbanes-Oxley Act applicable to us, including the
internal controls and reporting procedures which we expect we will be required
to implement for our fiscal year ending December 31, 2006. We expect that we
will need to hire additional financial reporting, internal controls and other
finance staff in order to develop and implement appropriate internal controls
and reporting procedures. If we are unable to comply with the internal controls
and other requirements of the Sarbanes-Oxley Act, we may not be able to obtain
the independent accountant certifications that the Sarbanes-Oxley Act requires
publicly-traded companies to obtain.

                          Risks Related to Our Industry

The successful implementation of our business plan is subject to risks inherent
in the oil and gas business.

      Our oil and gas operations are subject to the economic risks typically
associated with exploration, development and production activities. These
include making significant expenditures to locate and acquire properties and to
drill exploratory wells. In addition, the cost and timing of drilling,
completing and operating wells is often uncertain. In conducting exploration and
development activities, the presence of unanticipated pressure or irregularities
in formations, miscalculations or accidents may cause our exploration,
development and production activities to be unsuccessful. This could result in a
total loss of our investment in a particular property. If exploration efforts
are unsuccessful in establishing proved reserves and exploration activities
cease, the amounts accumulated as unproved costs will be charged against
earnings as impairments.


                                       20
<PAGE>

      In addition, market conditions or the unavailability of satisfactory oil
and gas transportation arrangements may hinder our access to oil and gas markets
or delay our production. The availability of a ready market for our oil and gas
production depends on a number of factors, including the demand for and supply
of oil and gas and the proximity of reserves to pipelines and terminal
facilities. Our ability to market our production depends in substantial part on
the availability and capacity of gathering systems, pipelines and processing
facilities, which are owned and operated by third parties. Our failure to obtain
such services on acceptable terms could materially harm our business. We may be
required to shut in wells for lack of a market or because of inadequacy or
unavailability of pipelines or gathering system capacity. If that occurs, we
would be unable to realize revenue from those wells until arrangements are made
to deliver our production to market.

The oil and gas exploration and production industry historically is a cyclical
industry and market fluctuations in the prices of oil and gas could adversely
affect our business.

      Prices for oil and gas tend to fluctuate significantly in response to
factors beyond our control. These factors include, but are not limited to:

      o     actions by OPEC, the Organization of Petroleum Exporting Countries;

      o     political instability in the Middle East and other major oil and gas
            producing regions;

      o     governmental regulations, both domestic and foreign;

      o     domestic and foreign tax policy;

      o     the pace adopted by foreign governments for the exploration,
            development, and production of their national reserves;

      o     the price of foreign imports of oil and gas;

      o     the cost of exploring for, producing and delivering oil and gas;

      o     the discovery rate of new oil and gas reserves;

      o     the rate of decline of existing and new oil and gas reserves;

      o     available pipeline and other oil and gas transportation capacity;

      o     weather conditions in the United States and elsewhere;

      o     economic conditions in the United States and elsewhere;

      o     the overall supply and demand for oil and gas; and

      o     the availability of alternate fuel sources.

      Changes in commodity prices may significantly affect our capital
resources, liquidity and expected operating results. Price changes directly
affect revenues and can indirectly impact expected production by changing the
amount of funds available to reinvest in exploration and development activities.
Reductions in oil and gas prices not only reduce revenues and profits, but could
also reduce the quantities of reserves that are commercially recoverable.
Significant declines in prices could result in non-cash charges to earnings due
to impairment. We do not currently engage in any hedging program to mitigate our
exposure to fluctuations in oil and gas prices.


                                       21
<PAGE>

      Changes in commodity prices may also significantly affect our ability to
estimate the value of producing properties for acquisition and divestiture and
often cause disruption in the market for oil and gas producing properties, as
buyers and sellers have difficulty agreeing on the value of the properties.
Price volatility also makes it difficult to budget for and project the return on
acquisitions and the development and exploitation of projects. We expect that
commodity prices will continue to fluctuate significantly in the future.

The oil and gas industry is highly competitive.

      The oil and gas industry is highly competitive. We compete with oil and
natural gas companies and other individual producers and operators, many of
which have longer operating histories and substantially greater financial and
other resources than we do, as well as companies in other industries supplying
energy, fuel and other needs to consumers. Many of these companies not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on a worldwide basis. Our
larger competitors, by reason of their size and relative financial strength, can
more easily access capital markets than we can and may enjoy a competitive
advantage in the recruitment of qualified personnel. They may be able to absorb
the burden of any changes in laws and regulation in the jurisdictions in which
we do business and handle longer periods of reduced prices for oil and gas more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Further,
these companies may enjoy technological advantages and may be able to implement
new technologies more rapidly than we can. Our ability to acquire additional
properties in the future will depend upon our ability to conduct efficient
operations, evaluate and select suitable properties, implement advanced
technologies and consummate transactions in a highly competitive environment.

                           Risks Related to Our Stock

There is no significant market for our common stock.

      There is no active trading market for our common stock. Our common stock
is not listed on any national or regional securities exchange or the Nasdaq
Stock Market. Our common stock is currently traded on the OTC Bulletin Board.
This market tends to be substantially less liquid than national and regional
securities exchanges or the Nasdaq Stock Market. We cannot provide you with any
assurance that an active trading market for our common stock will develop, or if
such a market develops, that it will be sustained.

New investors will suffer immediate and substantial dilution in the tangible net
book value of their shares.

      The net tangible book value of one share of our common stock was only
$0.26 as of December 31, 2005. The current trading price of our common stock
significantly exceeds the net tangible book value of our common stock. As a
result, investors purchasing common stock may incur immediate and substantial
dilution.


                                       22
<PAGE>

We intend to raise additional capital in the future, and such additional capital
may be dilutive to stockholders or impose operational restrictions.

      We intend to raise additional capital in the future to help fund our
operations through sales of shares of our common stock or securities convertible
into shares of our common stock, as well as issuances of debt. Additional equity
financing may be dilutive to our stockholders and debt financing, if available,
may involve restrictive covenants that may limit our operating flexibility. If
additional capital is raised through the issuance of shares of our common stock
or securities convertible into shares of our common stock, the percentage
ownership of our stockholders will be reduced. These stockholders may experience
additional dilution in net book value per share and any additional equity
securities may have rights, preferences and privileges senior to those of the
holders of our common stock.

Our existing stockholders may experience substantial dilution of their ownership
interests due to the issuance of additional shares of our common stock.

      As of the date of this report, we have 78,908,313 shares of common stock
issued and outstanding, outstanding warrants exercisable into 19,812,837 shares
of our common stock, promissory notes convertible into 4,494,832 shares of our
common stock, and outstanding preferred stock convertible into 7,100,630 shares
of our common stock. We expect to raise additional funds through the issuance of
convertible debt and equity securities. Some of these securities contain
anti-dilution provisions that may result in the issuance of additional shares in
the event we sell additional shares of our common stock at a price less than the
exercise or conversion price of such securities. The issuance of additional
shares of common stock upon the exercise or conversion of these securities may
result in substantial dilution to the equity interests of our existing
stockholders. We may also issue additional shares of our common stock in
connection with the hiring of additional personnel, future acquisitions of oil
and gas prospects, future offerings of our securities, and other business
purposes. Such issuances may further dilute the interests of our existing
stockholders.

Applicable SEC Rules governing the trading of "penny stocks" may limit the
trading and liquidity of our common stock, which may affect the trading price of
our common stock.

      Our common stock currently trades on the OTC Bulletin Board. If our common
stock continues to trade below $5.00 per share and the value of net tangible
assets falls below $5,000,000, our common stock will be considered a "penny
stock" and would be subject to SEC rules and regulations that impose limitations
upon the manner in which our shares could be publicly traded. These regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure document explaining the penny stock market and the associated risks.
Under these regulations, brokers who recommend penny stocks to persons other
than established customers or certain accredited investors must make a special
written suitability determination for the purchaser and receive the purchaser's
prior written agreement to a transaction. These regulations may have the effect
of limiting the trading activity of our common stock and reducing the liquidity
of an investment in our common stock.


                                       23
<PAGE>

The trading price of our common stock is likely to be highly volatile.

      The trading price of our shares has from time to time fluctuated widely
and in the future may be subject to similar fluctuations. The trading price may
be affected by a number of factors including events described in the risk
factors set forth in this report as well as the following:

      o     our operating results;

      o     financial condition;

      o     announcements regarding our oil and gas activities; and

      o     general conditions in the oil and gas exploration and development
            industry.

      In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the price of many small
capitalization companies and that often have been unrelated or disproportionate
to the operating performance of these companies. Market fluctuations such as
these may seriously harm the market price of our common stock. Further,
securities class action suits have been filed against companies following
periods of market volatility in the price of their securities. If such an action
is instituted against us, we may incur substantial costs and a diversion of
management attention and resources, which would seriously harm our business,
financial condition and results of operations.

As we do not intend to pay dividends in the foreseeable future, investors in our
shares will not receive any dividend income.

      We have never declared or paid a dividend on our common stock. We intend
to retain earnings, if any, for use in the operation and expansion of our
business and, therefore, do not anticipate paying any dividends in the
foreseeable future. In addition, the terms of our Series A Convertible Preferred
Stock prevent us from declaring or paying any dividends on our common stock
unless and until all accrued or declared and unpaid dividends on such shares
have been paid in full. As a result, in the event we have retained earnings
available for distribution as dividends, we must first pay any accrued or
declared and unpaid dividends on any outstanding shares of Series A Convertible
Preferred Stock before we pay any dividends on shares of our common stock.
Accordingly, investors seeking dividend income should not purchase our shares.

ITEM 2. DESCRIPTION OF PROPERTY

      The properties in which we have an interest consist of our principal
executive offices and the oil and gas properties on which we conduct our
exploration, development and production activities.

Principal Executive Offices

      Our principal executive offices are located at 1600 Smith Street, Suite
5100, Houston, Texas 77002. We rent this office space for approximately $8,000
per month. We believe our current offices will be adequate to support our
operations for the near future but are actively seeking expansion space.


                                       24
<PAGE>

Current Oil and Gas Projects

      We currently conduct our acquisition, exploitation and development
activities in Texas, Louisiana, Mississippi, Arkansas, Oklahoma and New Zealand.
To date, we have acquired interests in 13 oil and gas projects consisting of an
aggregate of approximately 536,000 gross acres. A description of our principal
projects is provided below.

Vicksburg Project

      We own non-operated working interests in twelve wells that are producing
or capable of production, and the associated leasehold that range from 2.8125%
to 7.5%. These interests are owned through our wholly-owned subsidiary
Touchstone Texas Properties, Inc. Our productive and non-productive leasehold
interest encompasses over 4,000 acres overlying the Oligocene Vicksburg
Formation. This formation is located in the southern part of the U.S. Gulf Coast
and is believed to contain petroleum reservoirs in the Rio Grande embayment.
This region encompasses both South Texas and Northeastern Mexico in Starr and
Hidalgo Counties. Depths for the prospects range from approximately 6,000 to
11,000 feet. We will continue to develop the probable reserves in the project.

Louisiana Shelf Project

      We own a non-operating 24.98% working interest in State Lease 17742 in
offshore Louisiana. We have participated in one well that was drilled and is
currently shut in awaiting tie-in to existing production facilities if
available, or construction of production facilities. The wellbore and the
balance of the 600 acre lease is held by periodic payment of shut-in royalties
to the State of Louisiana.

Wharton Project

      We own a 17.82% operating interest in approximately 4000 acres in Wharton
and Jackson counties in multiple prospect areas. The prospect is less than 30
miles southwest of Houston in the northern part of Wharton County, and in
Jackson County, Texas. To date, we have drilled and completed three wells in the
Yegua formation. All three wells are presently shut in and will be plugged and
abandoned unless production can be successfully re-established.

Stent Project

      We own an approximate 18.56% non-operating working interest in Petroleum
exploration permit 38722 in the Taranaki Basin in the form of a beneficial
interest held and administered by the operator. The Taranaki Basin lies offshore
along the western side of New Zealand's North Island, a premier hydrocarbon
province in New Zealand. The Stent Prospect consists of approximately 96,000
acres located onshore on the southern tip of the Taranaki basin. Discovery Geo
is the operator of the underlying prospects. The initial test well was
unsuccessful and we expect to abandon this prospect.


                                       25
<PAGE>

Awakino South Project

      We own a 5.95% non-operating working interest in Petroleum Exploration
Permit 38479 in New Zealand in the form of a beneficial interest held and
administered by the operator. The Awakino Concession contains approximately
380,000 acres and includes the Awakino South Prospect and the Kahu Prospect. The
Awakino South Prospect, or the "Big Bump," is a large structure that folded
Eocene-aged sediments above a late Tertiary-aged thrust fault. The objectives
for the prospect are shallow marine sandstones of the Kapuni Group, which is the
main producing interval in the basin. The Kahu Prospect, or the "Floor Fan," is
believed to be a shelf-bypassed turbidite sequence positioned basin-ward off the
Awakino South Prospect. Depths for each of these prospects are estimated to be
at approximately 9,000 feet. Discovery Geo is the operator of the underlying
prospects. The prospect is currently scheduled for initial drilling in 2007.

Knox Miss Project

      We own non-operating interests between approximately 27% and 68% in
approximately 60,000 gross acres in the Black Warrior Basin in Northern
Mississippi. Targeted objectives in the Black Warrior Basin are Pennsylvanian
sands, Mississippian-aged carbonates and sands, and Ordovician dolomites.
Prospects range in depth from approximately 7,000 to 15,000 feet. The project is
currently under geological review for further exploration.

Maverick Basin Project

      We own an approximate 25% Class B membership interest in Maverick Basin
Exploration, LLC ("Maverick Basin"), representing an aggregate membership
interest in Maverick Basin of approximately 12.5%, and are the operator of the
underlying prospects. Maverick Basin is a party to an exploration agreement with
Blue Star Oil and Gas, Ltd. and Maverick Oil and Gas, Inc. pursuant to which
Maverick Basin acquired the right to earn 50% of the revenues generated from any
wells drilled on approximately 10,000 acres in the Maverick Basin in South
Texas. The three wells drilled on the prospect are all shut in, and operations
and the leasehold will be surrendered to Blue Star Operating, Ltd. in the first
quarter of 2006.

Martinez Ranch Project

      We own a non-operating 15% working interest in three producing wells and
the associated leasehold in approximately 1,600 acres in Zapata County in South
Texas.

La Paloma Project

      We own a non-operating 4.85% working interest in three wellbores and the
associated leasehold in approximately 1,425 acres in Zapata County in South
Texas. The prospect is operated by ConocoPhillips. Two wells are currently
producing, with the third shut in for evaluation.


                                       26
<PAGE>

Good Friday Project

      We own a non-operating 15.36% working interest in one wellbore and the
associated leasehold in approximately 2,000 acres in Zapata County in South
Texas. The well is shut in for evaluation.

Vela Project

      We own a 15.84% non-operating working interest in one wellbore and the
associated leasehold in approximately 1,600 acres in Zapata County, Texas. The
well is currently producing.

Checotah Prospect

      We own up to a 50% operated working interest in approximately 11,000
leasehold acres in McIntosh County, Oklahoma overlying the Woodford and Caney
Shales in the Arkoma Basin. There are eight wellbores on the property which are
presently shut in, with one well drilling the first quarter of 2006.

Fayetteville Prospect

      We own a 45% non-operated working interest in approximately 150,000 leased
and committed acres in Woodruff, Monroe and St. Francis counties overlying the
Fayetteville Shale in the Arkoma Basin. The initial well is drilling in the
first quarter of 2006.

Selected Oil and Gas Data

      We entered into the oil and natural gas business on March 15, 2004.
Accordingly, we did not engage in any production or drilling activities, and
were not a party to any contracts or agreements calling for the provision of
fixed and determinable quantities of oil and gas, during the fiscal years ended
December 31, 2003 and 2002, and thus, we were not required to provide any of the
production data required by Statement of Financial Accounting Standards No. 69
("SFAS 69") for such years. We do not have any obligations under existing
contracts or agreements calling for the provision of fixed and determinable
quantities of oil and gas over the next three (3) years, and have not filed any
information or reports with any federal authority or agency since January 1,
2004, containing estimates of total, proved developed or undeveloped net oil or
gas reserves.

      Our oil and gas properties consist primarily of oil and gas wells and our
ownership in leasehold acreage, both developed and undeveloped. A description of
selected data regarding our oil and gas properties and interests is set forth
below.

Productive Wells


                                       27
<PAGE>

      The following table sets forth as of December 31, 2005, information
regarding the total gross and net productive wells, expressed separately for oil
and gas. As of December 31, 2005, all of our productive oil and gas wells were
located in Texas and Louisiana. For the purposes of this subsection: (i) one or
more completions in the same bore hole have been counted as one well, and (ii) a
well with one or multiple completions at least one of which is an oil completion
has been classified as an oil well. As of December 31, 2005, we did not have any
wells with multiple completions.

                                    Oil              Gas
                               --------------   --------------
                               Gross    Net     Gross    Net
                               -----   ------   -----   ------
Louisiana                          0        0       1   0.2498

Texas                              1    0.075      16   1.4173
                               -----   ------   -----   ------

      Total Productive Wells       1    0.075      17   1.6671
                               =====   ======   =====   ======


      A productive well is an exploratory well, development well, producing well
or well capable of production, but does not include a dry well. A dry well, or a
hole, is an exploratory or a development well found to be incapable of producing
either oil or gas in sufficient quantities to justify completion as an oil or
gas well.

      A gross well is a well in which a working interest is owned, and a net
well is the result obtained when the sum of fractional ownership working
interests in gross wells equals one. The number of gross wells is the total
number of wells in which a working interest is owned, and the number of net
wells is the sum of the factional working interests owned in gross wells
expressed as whole numbers and fractions thereof. The "completion" of a well
means the installation of permanent equipment for the production of oil or gas,
or, in the case of a dry hole, to the reporting of abandonment to the
appropriate agency.

Production and Price History

      The following table sets forth as of December 31, 2005 information
regarding net production of oil and gas and certain price and cost information.
For the purposes of this table, the following terms have the following meanings:
(i) "Bbl" means one stock tank barrel or 42 U.S. gallons liquid volume; (ii)
"MBbls" means one thousand barrels of oil; (iii) "Mcf" means one thousand cubic
feet; (iv) "Mcfe" means one thousand cubic feet equivalent, determined using the
ratio of six Mcf of natural gas to one Bbl of oil; (v) "MMcfe/d" means one
million cubic feet equivalent per day, determined by using the ratio of six Mcf
of natural gas to one Bbl of oil; and (vi) "MMcf" means one million cubic feet.


                                       28
<PAGE>

Production Data:                            2004        2005
    Oil  MBbls)                               1.5         2.1
    Natural gas (MMcf)                       33.4        88.4
    Total (MMcfe)                            42.5       101.

Average Prices:
    Oil (per Bbl)                          $43.38      $60.56
    Natural gas (per Mcf)                    6.80        8.89
        Total (per Mcfe)                     7.04      $ 9.49

Average Costs (per Mcfe):
    Lease operating expenses               $ 0.32      $ 0.50
    Gathering and transportation expense     0.25        0.01
    Production tax expense                   0.43        0.14
    General and administrative expenses      0.03(1)    44.32

(1) The 2004 General and administrative expenses are based on expenditures of
Touchstone Resources, USA, Inc. (Texas) as the operator of the properties.

      Net production includes only production that is owned by us whether
directly or beneficially and produced to our interest, less royalties and
production due to others. Production of natural gas includes only marketable
production of gas on an "as sold" basis. Production of natural gas includes only
dry, residue and wet gas, depending on whether liquids have been extracted
before we passed title, and does not include flared gas, injected gas and gas
consumed in operations. Recovered gas, lift gas and reproduced gas are not
included until sold.

Reserves

      The following table sets forth as of December 31, 2004 and 2005
information with respect to our reserves

Thousands of Barrels of Oil and Condensate at December 31,

                                                  2004    2005
                                                 -----   -----
Proved developed and undeveloped reserves
     Beginning of year                               0       0
     Production                                      0    (0.1)
     Purchase of proved oil reserves                 0   152.2
     Discoveries and extensions                      0       0
     Revisions                                       0       0
                                                 -----   -----
     End of year                                     0   152.1
                                                 =====   =====
Proved developed reserves at end of year             0    81.1
                                                 =====   =====
Equity in reserves of equity method investees     95.1       0
                                                 =====   =====


                                       29
<PAGE>

Millions of Cubic feet of natural gas at December 31,

                                                  2004     2005
                                                ------   ------
Proved developed and undeveloped reserves
 Beginning of year                                   0        0
 Production                                          0    (23.5)
 Purchase of proved natural gas reserves             0   2068.9
 Discoveries and extensions                          0        0
 Revisions                                           0        0
                                                ------   ------
 End of year                                         0   2045.4
                                                ======   ======
Proved developed reserves at end of year             0    607.3
                                                ======   ======
Equity in reserves of equity method investees    760.7        0
                                                ======   ======

Reserve estimates and valuations were performed by John E. Nicol, P.E. and C.
Glenn Harrison, P.E. of PGH Engineers.

Drilling Activity

      The following table sets forth information with respect to wells completed
during the fiscal year ended December 31, 2005. The information should not be
considered indicative of future performance, nor should it be assumed that there
is necessarily any correlation between the number of productive wells drilled,
quantities of reserves found or economic value.

                                Gross     Net
                                ------   ------
Exploratory:
    Productive                       7   0.4720
    Dry                              2    .2897
                                ------   ------
        Total                        9    .7617
                                ======   ======

Development:
    Productive                       2   0.3000
    Dry                              1   0.0750
                                ------   ------
        Total                        3   0.3750
                                ======   ======


      The number of wells drilled refers to the number of wells (holes)
completed at any time during the fiscal year ended December 31, 2005, regardless
of when drilling was initiated. The "completion" of a well means the
installation of permanent equipment for the production of oil or gas, or, in the
case of a dry hole, to the reporting of abandonment to the appropriate agency.

      During the fiscal year ended December 31, 2005, we participated in
drilling 12 gross wells, of which 9 were completed and producing and three were
determined to be dry holes. None of the gross wells were in the process of being
completed or dewatered. Also during that time, we recompleted three gross wells
that were not included in the totals above.

      None of the development wells in progress at December 31, 2005 were
subsequently determined to be dry holes.

      As of March 30, 2006, we are presently drilling three wells - a Caney
Shale horizontal test in McIntosh County, Oklahoma, a Fayetteville Shale test in
Woodruff County, Arkansas, and a Vicksburg Sand development well in Hidalgo
County, Texas.


                                       30
<PAGE>

Acreage

      The following table sets forth information regarding the Company's gross
and net developed and undeveloped oil and natural gas acreage under lease as of
December 31, 2005.

                          Gross           Net
                        ---------      ---------
Developed Acreage
        Louisiana          600.00         149.88
        Texas             9016.20         961.95
        Oklahoma          3052.49(1)     1526.25(1)

Undeveloped Acreage
Oklahoma                 11412.93(1)     5706.47(1)
        Mississippi      68983.00       27607.00
        Texas             3987.15         299.04

        New Zealand     379095.10       26634.79
                        ---------      ---------
Arkansas                 60369.72       27166.37
                Total   536516.59       90051.75
                        =========      =========

(1) With regard to the Checotah Prospect, the gross acreage cited includes the
leasehold acreage to be earned under the farmout agreement.


      A developed acre is an acre spaced or assignable to productive wells, a
gross acre is an acre in which a working interest is owned, and a net acre is
the result that is obtained when the sum of fractional ownership working
interests in gross acres equals one. The number of net acres is the sum of the
fractional working interests owned in gross acres expressed as whole numbers and
fractions thereof.

      Undeveloped acreage is considered to be those lease acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil or natural gas, regardless of whether or not
such acreage contains proved reserves, but does not include undrilled acreage
held by production under the terms of a lease. As is customary in the oil and
gas industry, we can retain our interest in undeveloped acreage by drilling
activity that establishes commercial production sufficient to maintain the lease
or by payment of delay rentals during the remaining primary term of the lease.
The oil and natural gas leases in which we have an interest are for varying
primary terms; however, most of our developed lease acreage is beyond the
primary term and is held so long as oil or natural gas is produced.

ITEM 3. LEGAL PROCEEDINGS


                                       31
<PAGE>

      We are not a party to any material pending legal proceeding, nor are we
aware of any proceeding contemplated by any governmental authority involving us.

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

      None.


                                       32
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

      Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "TSNU." The following table sets forth the high and low bid prices for
our common stock for the periods indicated, as reported by OTC Bulletin Board,
and reflect a 25-for-1 forward split effective March 19, 2004. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not necessarily represent actual transactions.

                                                                Bid
                                                         -----------------
                                                          High        Low
                                                         -----       -----
      Fiscal year ended December 31, 2005
         Quarter ended December 31                       $1.01       $0.78
         Quarter ended September 30                      $1.07       $0.79
         Quarter ended June 30                           $1.20       $0.69
         Quarter ended March 31                          $1.61       $0.92

      Fiscal year ended December 31, 2004
         Quarter ended December 31                       $1.23       $1.02
         Quarter ended September 30                      $1.53       $0.87
         Quarter ended June 30                           $1.85       $1.28
         Quarter ended March 31                          $1.51       $0.10


      The last price of our common stock as reported on the OTC Bulletin Board
on March 29, 2006 was $1.10 per share.

Holders

      As of March 29, 2006, there were 78,903,313 shares of our common stock
outstanding owned by 131 holders of record. We believe there are a substantial
number of beneficial owners of our shares who hold their shares in street name.

Dividends

      We have not paid any cash dividends on our common stock to date, and have
no intention of paying such cash dividends in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of our Board
of Directors and to certain limitations imposed under Delaware corporation law.
The terms of our Series A Convertible Preferred Stock preclude us from declaring
or paying any dividends on our common stock unless and until all accrued or
declared and unpaid dividends on any outstanding shares of Series A Convertible
Preferred Stock have been paid in full. The timing, amount and form of
dividends, if any, will depend on, among other things, our results of
operations, financial condition, cash requirements and other factors deemed
relevant by our Board of Directors.


                                       33
<PAGE>

Transfer Agent

      The transfer agent for our common stock is StockTrans, Inc., 44 West
Lancaster Avenue, Ardmore, Pennsylvania, 19003, (610) 649-7300.

Recent Sales of Unregistered Securities

      On October 10, 2005, Maverick Woodruff County, LLC issued a $1,000,000
principal amount secured promissory note convertible into shares of our common
stock. The note is secured by all ownership interests in Maverick Woodruff
County, LLC, matures October 10, 2006 and accrues interest at the rate of 10%
per annum payable at maturity. The note and all accrued and unpaid interest due
thereon is convertible at anytime at the option of the holder into shares of our
common stock at a conversion price of $.90 per share. The note automatically
converts into shares of our common stock upon our subsidiary acquiring a
leasehold interest in certain acreage or our subsidiary assigning its right to
certain leasehold interests to us. In connection with the issuance of the note,
we issued a warrant to the holder to purchase 555,556 shares of our common
stock. The warrant is immediately exercisable at an exercise price of $1.50 per
share for a term of three years. The note and warrant was issued to Westwood AR,
Inc. for cash consideration of $1,000,000, which was paid to Maverick Woodruff
County, LLC for credit of the Company to fund the Company's proportionate share
of certain lease acquisition costs. On February 13, 2006, the note and $34,167
of accrued interest due thereunder was converted into 1,149,074 shares of common
stock. The forgoing securities were issued to one accredited investor in a
private placement transaction exempt from the registration requirement of the
Securities Act of 1933, as amended, pursuant to section 4(2) thereof without
payment of underwriting discounts or commissions to any person.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

      This Management's Discussion and Analysis and other parts of this report
contain forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this report are based on information
available to us on the date hereof and except as required by law, we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth in the
section captioned "Risk Factors" in Item 1 and elsewhere in this report. The
following should be read in conjunction with our audited financial statements
and the related notes included elsewhere herein.

Overview

      We are an independent energy company engaged in the acquisition,
development and production of oil and natural gas reserves. Our present emphasis
is on unconventional gas plays, primarily horizontal completions in such
oil-producing shales as the Caney and Fayetteville shales, although we continue
to derive production from our previous efforts at exploration in conventional
gas plays.

      We currently own working interests in approximately 13 oil and gas
projects in Texas, Louisiana, Mississippi, Oklahoma, Arkansas, and New Zealand.
These include producing properties in Starr, Hidalgo, Wharton, and Zapata
Counties in Texas. We also own a working interest in an offshore well in
Southern Louisiana which is capable of production but currently awaiting
facilities and additional interests in non-producing acreage in Mississippi,
Oklahoma and Arkansas. We are currently awaiting assignment of a record title
interest in our Awakino and Stent projects in New Zealand.


                                       34
<PAGE>

      Our vision is to build a high growth, high efficiency, cost-effective
developer of energy resources and infrastructure. We seek to create shareholder
value through building oil and gas reserves, production revenues, and operating
cash flow by:

      o     engaging in a program of high potential exploration projects within
            proven petroleum basins while mitigating risk through the use of
            advanced geophysical modeling;

      o     participating in the development of unconventional, resource based
            gas projects;

      o     participating in low risk energy gathering and transportation
            systems where competition is limited and that generate stable cash
            flow and provide sufficient upside opportunity through expansion;

      o     utilizing the most cost effective development and completion
            techniques for development; and

      o     constantly evaluating our portfolio of assets to assess potential
            reward versus further development risk, and selling or trading
            assets when deemed appropriate.

      We believe that building oil and gas reserves on a cost-effective basis
are the most important indicators of performance success for an independent oil
and gas company. We have recently made, and will continue to make, large capital
expenditures to acquire significant leasehold acreage in unconventional gas
plays. The leasehold acreage that we have acquired is situated in areas that
have recently been the focus of acquisition and exploration by larger industry
competitors. Our initial geological and engineering review leads us to believe
that we will be able to successfully produce hydrocarbons from this leasehold,
and the drilling of the initial exploratory wells, if successful, will allow us
to add reserves to our portfolio and these reserves will continue to grow with
each successive development well. The unconventional shale plays continue to
emerge as an important source of domestic onshore gas production. We believe
that through our participation in such plays, we will ensure our future in
onshore exploration.

Outlook

      Our ability to generate future revenues, operating cash flow and earnings
is dependent on the successful development of our inventory of capital projects,
the volume and timing of our production, our ability to identify, acquire and
successfully exploit properties containing oil and gas reserves in commercial
quantities, and the commodity prices for oil and gas. Such pricing factors are
largely beyond our control, and may result in fluctuations in our financial
condition and results of operations. Our ability to generate future revenues,
operating cash flow and earnings will also be influenced by our exploration and
development efforts. Our exploration and development expenditures will initially
be weighted towards shale gas resource plays. We intend to remain active in
searching for high potential exploration opportunities, but may find ourselves
leveraging them until such time, if ever, that funding is more readily available
from the asset development by shale gas, through project based financing or
otherwise. We will also seek to create alliances with significant holders of
exploration data resources to increase our exposure to discovery.


                                       35
<PAGE>

      The investment associated with drilling a well and future development of a
project depends principally upon the complexity of the geological formations
involved, the depth of the well or wells, whether the well or project can be
connected to existing infrastructure or will require additional investment in
infrastructure, and, if applicable, the water depth of the well or project. If
we underestimate the amount of exploration and development costs necessary to
exploit the oil or gas reserves of our prospects, we may incur substantially
more exploration and development costs than planned, which may have a material
adverse effect on our financial condition and results of operations.

      To execute our plan, we have built an executive management team with
 substantial experience in the oil and gas exploration and development business.
 In that regard, during the third quarter of 2005 we retained a chief executive
 officer and a vice president of land and business development, and in 2006 we
 retained a chief financial officer and chief operating officer, all with
 substantial experience in the oil and gas industry. Our future success will
 continue to be dependent upon our ability to identify projects that are capable
 of producing oil and gas in commercial quantities which in turn is dependent
 upon our access to the capital necessary to exploit such opportunities.

      As of the date of this report, we have generated minimal revenues,
 sustained substantial losses, our expected capital expenditures exceed our
 available cash resources, and we need to raise substantial additional capital
 to execute our business plan. Our prospects must be considered in light of the
 forgoing and the risks, expenses and difficulties encountered by companies at
 an early stage of development.

Direct Ownership of Oil and Gas Assets

      Since commencing operations in the oil and gas exploration and development
business in March 2004, we have acquired a number of interests in oil and gas
projects. Most of these interests were acquired by limited liability companies
or limited partnerships in which we owned an equity interest. Under this
structure, the limited liability company or limited partnership, rather than the
Company, owned the direct working interest in the prospect.

      This structure had the following effects:

      o     As an equity interest owner in most of the limited liability
            companies and partnerships, we did not have sole management control
            over the working interest owned by the limited liability company or
            limited partnership.


                                       36
<PAGE>

      o     When a limited partnership or limited liability company in which we
            owned an equity interest received a request for expenditure,
            although we were only required to pay our proportionate share of
            such expense, if any of the other partners or members failed to make
            payment of its proportionate share, the limited partnership or
            limited liability company would be at risk of losing its entire
            working interest as a result of the delinquency of a single member
            or partner. As a result, we were exposed to unnecessary risks
            associated with the financial stability of our partners.

      o     The transactions related to the limited liability companies and
            limited partnerships are accounted for under the equity method of
            accounting. This resulted in all of the expenses and revenues
            applicable to each entity being combined into a single line item on
            our statement of operations captioned "Loss (Profit) from Limited
            Partnerships and Limited Liability Companies)" and all assets being
            accounted for on our balance sheet as "Investments in Limited
            Partnerships and Limited Liability Companies." In order to
            accurately record the forgoing, we were dependent on the underlying
            limited partnerships and limited liability companies timely
            generating and delivering accurate financial reports to us.

      During the fourth quarter of 2005 and the first quarter of 2006, we
withdrew from a variety of limited partnerships in which we held an equity
interest, executing a settlement agreement with each. This had the effect of
converting our beneficial interests in the properties to working interests. As a
result, the relative rights and responsibilities of us, our operators and
related participants are now governed by joint operating agreements or
participation agreements and we have substantially more control as to whether to
acquire acreage or participate in operations with respect to the drilling,
completing or equipping of wells. In most cases, we are also billed directly by
the operator for our proportionate share of costs incurred.

Critical Accounting Policies

      Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our
financial statements requires us to make estimates and judgments that affect the
reported amount of assets, liabilities, revenues and expenses. These estimates
are based on information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary significantly from those estimates under different
assumptions and conditions.

      Critical accounting policies are defined as those significant accounting
policies that are most important to the portrayal of the Company's financial
condition and results and require management's most difficult, subjective, or
complex judgment - often because of the need to make estimates about the effects
of inherently uncertain matters. We consider an accounting estimate or judgment
to be critical if: (i) the nature of the estimates and assumptions is material
because of the subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change, and (ii) the
impact of the estimates and assumptions on financial condition or operating
performance is material.


                                       37
<PAGE>

      We believe that the following significant accounting policies will be most
critical to an evaluation of our future financial condition and results of
operations.

Revenue Recognition

      Oil and gas revenues are recognized when production is sold to a purchaser
at a fixed or determinable price, when delivery has occurred and title has
transferred, and if the collection of the revenue is probable. When we have an
interest in a property with other producers, we use the sales method of
accounting for our oil and gas revenues. Under this method of accounting,
revenue is recorded based upon our physical delivery of oil and gas to our
customers, which can be different from our net working interest in field
production.

Proved Oil and Natural Gas Reserves

      Proved reserves are defined by the SEC as the estimated quantities of
crude oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty are recoverable in future
years from known reservoirs under existing economic and operating conditions.
Prices include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future conditions.
Prices do not include the effect of derivative instruments, if any, entered into
by the Company.

      Proved developed reserves are those reserves expected to be recovered
through existing equipment and operating methods. Additional oil and gas
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery are included as proved developed reserves only after testing
of a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.

      Proved undeveloped oil and gas reserves are reserves that are expected to
be recovered from new wells on non-drilled acreage, or from existing wells where
a relatively major expenditure is required for re-completion. Reserves on
non-drilled acreage are limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other non-drilled units are claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation.

      Volumes of reserves are estimates that, by their nature, are subject to
revision. The estimates are made using all available geological and reservoir
data as well as production performance data. There are numerous uncertainties in
estimating crude oil and natural gas reserve quantities, projecting future
production rates and projecting the timing of future development expenditures.
Oil and gas reserve engineering must be recognized as a subjective process of
estimating underground accumulations of oil and gas that cannot be measured in
an exact way and estimates of engineers that we use may differ from those of
other engineers. The accuracy of any reserve estimate is a function of the
quantity of available data and of engineering and geological interpretation and
judgment. Accordingly, future estimates are subject to change as additional
information becomes available.


                                       38
<PAGE>

Successful Efforts Accounting

      We utilize the successful efforts method to account for our crude oil and
natural gas operations. Under this method of accounting, all costs associated
with oil and gas lease acquisition costs, successful exploratory wells and all
development wells are capitalized and amortized on a unit-of-production basis
over the remaining life of proved developed reserves and proved reserves on a
field basis. Unproved leasehold costs are capitalized pending the results of
exploration efforts. Exploration costs, including geological and geophysical
expenses, exploratory dry holes and delay rentals, are charged to expense when
incurred.

Impairment of Properties

      We review our proved properties at the field level when management
determines that events or circumstances indicate that the recorded carrying
value of the properties may not be recoverable. Such events include a projection
of future oil and natural gas reserves that will be produced from a field, the
timing of this future production, future costs to produce the oil and natural
gas, and future inflation levels. If the carrying amount of an asset exceeds the
sum of the undiscounted estimated future net cash flows, we recognize impairment
expense equal to the difference between the carrying value and the fair value of
the asset, which is estimated to be the expected present value of discounted
future net cash flows from proved reserves, utilizing a risk-free rate of
return. We cannot predict the amount of impairment charges that may be recorded
in the future. Unproved leasehold costs are reviewed periodically and a loss is
recognized to the extent, if any, that the cost of the property has been
impaired.

Property Retirement Obligations

      We are required to make estimates of the future costs of the retirement
obligations of our producing oil and gas properties. This requirement
necessitates that we make estimates of property abandonment costs that, in some
cases, will not be incurred until a substantial number of years in the future.
Such cost estimates could be subject to significant revisions in subsequent
years due to changes in regulatory requirements, technological advances and
other factors that may be difficult to predict.

      For a more complete discussion of our accounting policies and procedures,
see our Notes to Financial Statements beginning on page F-1.

Recent Accounting Pronouncements

      In December 2004, accounting standards were revised and now require all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The pro
forma disclosures previously permitted will no longer be an alternative to
financial statement recognition. The new accounting standard is effective for
fiscal years beginning after June 15, 2005. The guidance also provides for
classifying awards as either liabilities or equity, which impacts when and if
the awards must be remeasured to fair value subsequent to the grant date. We
adopted the new accounting standard effective January 1, 2006.


                                       39
<PAGE>

      The impact of adoption on our reported results of operations for future
periods will depend on the level of share-based payments granted in the future.
However, had we adopted the revised accounting standards in prior periods, the
impact of that standard would have approximated the impact as described in the
disclosure of pro forma net income and net income per share in the table
included in Stock-Based Compensation Arrangements in Note 2 to the Consolidated
Financial Statements. Also, benefits of tax deductions in excess of recognized
compensation costs to be reported as financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. We believe this reclass will not have a material impact on our
Consolidated Statements of Cash Flows.

      In November 2005, accounting standards were revised to provide guidance
for determining and measuring other-than-temporary impairments of debt and
equity securities. The new guidance is effective for reporting periods beginning
after December 15, 2005. At December 31, 2005, available-for-sale investments in
our marketable securities had unrealized losses totaling $0.9 million which are
recorded in Other Accumulated Comprehensive Income. We do not believe that the
securities with unrealized losses

      On April 4, 2005 the FASB adopted FASB Staff Position (FSP) FSB 19-1
"Accounting for Suspended Well Costs" that amends SFAS 19, "Financial Accounting
and Reporting by Oil and Gas Producing Companies," to permit the continued
capitalization of exploratory well costs beyond one year if the well found a
sufficient quantity of reserves to justify its completion as a producing well
and the entity is making sufficient progress assessing the reserves and the
economic and operating viability of the project. In accordance with the guidance
in the FSP, the Company applied the requirements prospectively in its third
quarter of fiscal 2005. The adoption of FSP 19-1 by the Company during the third
quarter of 2005 did not have an immediate affect on the consolidated financial
statements. However, it could impact the timing of the recognition of expenses
for exploratory well costs in future periods.

      In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value can be reasonably estimated even though
uncertainty exists about the timing and (or) method of settlement. The Company
is required to adopt Interpretation No. 47 prior to the end of 2006. The Company
is currently assessing the impact of Interpretation No. 47 on its results of
operations and financial condition.


      In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets" that amends Accounting Principles Board (APB) Opinion No. 29,
"Accounting for Nonmonetary Transactions" and Amends FAS 19 "Financial
Accounting and Reporting by Oil and Gas Producing Companies", paragraphs 44 and
47(e). ARB No. 29 is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged and SFAS 153
amended ABP 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaced it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Company is
required to adopt SFAS No. 153 for nonmonetary asset exchanges occurring in the
first quarter of 2006 and its adoption is not expected to have a significant
effect on the Company's results of operations or financial condition.


                                       40
<PAGE>

      In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3
("Statement 154"). SFAS 154 requires retrospective application to prior periods'
financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The implementation of FAS 154 is not expected to have a significant effect on
the Company's results of operations or financial condition.

Comparison of Fiscal Years Ended December 31, 2005 and 2004

        Set forth below is a discussion of our results of operation for the
fiscal years ended December 31, 2005 and 2004. We entered the oil and gas
exploration and development business in March 2004. Before that time, we were
unsuccessful in the execution of our business plan and thus, did not generate
any revenues or incur any significant operating expenses. As a result of the
foregoing, we believe that our consolidated revenues and operating expenses for
the year ended December 31, 2005 are not comparable to our consolidated revenues
and operating expenses for the year ended December 31, 2004. Accordingly, any
differences between our consolidated revenues and operating expenses for such
years should not be relied upon as an indication of our future results of
operations or performance.

Revenues

      Revenues consist of production revenue from our producing oil and gas
properties and fees generated from the operation of various oil and gas wells
for which we or our wholly-owned subsidiaries served as the operator. We
generated $488,532 of revenue during the fiscal year ended December 31, 2005 as
compared to $200,809 during the fiscal year ended December 31, 2004. The
increase was due to an increase in the number of projects for which we serve as
the operator and to $229,875 of oil and gas sales in 2005. We expect revenues to
increase in the future as we continue to expand and increase production.

Exploration Expenses

      Exploration expenses consist of geological and geophysical costs,
exploratory dry hole expenses, leasehold abandonment expenses, and other
exploration expenses. Exploration expenses were $419,277 for the fiscal year
ended December 31, 2005 and $1,501,398 for the fiscal year ended December 31,
2004. Exploration expenses resulted primarily from geological and geophysical
expenditures supportive of the exploration activities we conducted on our Texas
properties. We expect exploration expenses to continue to increase during 2006
as we continue to conduct exploration activities on our current prospects and as
we engage in exploration activities on various prospects that we may acquire in
the future.


                                       41
<PAGE>

Impairment of Oil and Gas Properties and Equity Investments

      We review our long-lived assets, including our oil and gas properties and
equity investments, whenever events or circumstances indicate that the carrying
value of those assets may not be recoverable. We incurred $1,752,272 in non-cash
charges associated with the impairment of the carrying value of certain of our
oil and gas properties and equity investments during the fiscal year ended
December 31, 2005 and $315,322 of such expenses during the fiscal year ended
December 31, 2004. These non-cash charges resulted from a $457,515 write off by
PF Louisiana, LLC when it elected not to make the delay rental payment on State
Lease #18219 located in Ibera Parish, Louisiana, and a $1,151,839 impairment of
the carrying value of unproved properties acquisition costs related to our
Mississippi properties. These amounts were partially offset by credits received
for over-billed drilling costs on our PHT West Pleito Project. We may incur
additional charges associated with the impairment of our oil and gas properties
in the event we abandon or withdraw from additional oil and gas projects in the
future.

Impairment of Goodwill

      On March 23, 2004, we acquired Touchstone Resources USA, Inc., a Texas
corporation ("Touchstone Texas"), from Touchstone Resources, Ltd., a British
Columbia corporation ("Touchstone Canada"). In connection with the acquisition,
the original payables of Touchstone Texas were to be assumed by Touchstone
Canada. Touchstone Texas was unable to obtain releases from certain of its
creditors relating to a portion of the payables assumed by Touchstone Canada.
According to Emerging Issues Task Force 02-10, "Determining Whether a Debtor is
Legally Released as Primarily Obligor When the Debtor Becomes Secondarily Liable
under the Original Obligation", unless and until a novation agreement (an
agreement that is binding on a creditor and modifies the original debt so that
the creditor accepts assets or new obligations in satisfaction of the original
liability and discharges the original debt agreement with the debtor) exists
between the original debtor and the creditor or all requirements for legal
defeasance have been met, the creditor has the legal right to pursue the
original debtor under the original obligation before it pursues a new debtor.
Since Touchstone Texas had not received the releases from certain of its
creditors for net liabilities amounting to approximately $752,000 it was still
liable for those net liabilities and required to reflect them on its balance
sheet. We, therefore, recorded an additional amount of net liabilities of
$752,000 and increased the goodwill by the same amount. Subsequent to the
acquisition, we recorded a post-closing acquisition adjustment to the balance of
accounts payable of Touchstone Texas that were assumed by Touchstone Canada in
connection with the acquisition. The full amount of this goodwill was impaired
at December 31, 2004 after using a present value technique to measure fair
value. We did not incur any charge for impairment of good will during the year
end December 31, 2005.

General and Administrative Expenses


                                       42
<PAGE>

      General and administrative expenses consist of consulting and engineering
fees, professional fees, employee compensation, office rents, travel and
utilities, and other miscellaneous general and administrative costs. General and
administrative expenses increased $1,192,274 to $3,506,016 for the fiscal year
ended December 31, 2005 from $2,313,742 for the fiscal year ended December 31,
2004. The increase resulted partly from our conducting operations in the oil and
gas exploration and development business for the full year in 2005 as compared
to only nine (9) months during 2004. The increase consisted primarily of
$920,000 of professional fees incurred in connection with financing transactions
and compliance with our reporting obligations under federal securities laws,
$261,000 of consulting and engineering fees incurred in connection with our oil
and gas operations, and $317,000 of payroll and related expenses, offset by a
decrease of $175,000 in general office expenses and a decrease of $46,000 in
travel and related expenses. We expect general and administrative expenses to
increase in future periods as a result of increased compensation expense for
executive management personnel, increased consulting and engineering fees
related to our oil and gas operations, and continued expenditures for
professional fees associated with acquisitions of additional oil and gas
properties and compliance with SEC public reporting and corporate governance
requirements.

Loss (Profit) From Limited Partnerships and Limited Liability Companies

      Loss from limited partnerships and limited liability companies includes
the income or losses that we recognize from the financial performance of the oil
and gas limited partnerships and limited liability companies in which we own an
equity interest of greater than 5% but less than 50% of the applicable entity.
Loss (profit) from limited partnerships and limited liability companies was
$5,120,552 for the fiscal year ended December 31, 2005 as compared to $3,506,244
for the fiscal year ended December 31, 2004. The loss from limited partnerships
and limited liability companies consisted primarily of the $231,000 loss that we
recognized from our leasehold interest in Zapata County, Texas (the "Vela
Project") the $142,000 loss we recognized from the PHT Vicksburg project, the
$795,000 loss that we recognized from our leasehold interest in Zapata County,
Texas (the "Good Friday Project"), the $1,994,000 loss that we recognized from
our leasehold interest in Wharton County, Texas (the "Wharton Project"), the
$707,000 loss we recognized from the PHT La Paloma project, the $295,000 loss
that we recognized from our leasehold interest in the Taranaki Basin in New
Zealand (the "Awakino South Project"), the $895,000 loss that we recognized from
our leasehold interests in the Maverin Basin projects and approximately $61,000
of recognized losses from various other limited partnerships and limited
liability companies. The loss (profit) from limited partnerships and limited
liability companies during 2004 consisted primarily of the $935,335 loss that we
recognized from the Wharton Project, the $876,573 loss that we recognized from
the Louisiana Shelf Project, the $750,081 loss that we recognized from the Vela
Project, and the $537,903 loss that we recognized from the Stent Project.

      During most of the period covered by this report, most of our oil and gas
interests were owned by limited liability companies in which we owned greater
than 5% but less than 50% of the applicable entity's equity interests. As a
result, loss (profit) from limited partnerships and limited liability companies
constituted a material component of our overall financial performance for the
foreseeable future. As we have obtained direct ownership interest of most of our
working interests, in future periods, cash generated by these interests will be
recorded as revenue, and related expenditures will be recorded in the
appropriate expense account. Accordingly, we do not expect loss (profit) from
limited partnerships and limited liability companies to constitute a material
component of our results of operations in future periods.


                                       43
<PAGE>

Interest Expense

      Interest expense consists of certain noncash charges and interest accrued
on our various debt obligations. Interest expense decreased $6,022,361 to
$1,939,590 for the fiscal year ended December 31, 2005 as compared to $7,961,951
for the fiscal year ended December 31, 2004. The decrease resulted primarily
from a decrease in noncash charges of $6,899,049 associated with the beneficial
conversion feature of the convertible notes and the ascribed value of the
warrants issued in our July 2004 private offering of units, noncash charges of
$212,393 associated with the beneficial conversion feature of the Westwood Note,
noncash charges of $135,602 associated with the beneficial conversion feature of
the DDH Note and the ascribed value of the warrants issued with the Note without
similar transactions in 2005. The decrease was partially offset by an increase
of $592,000 in interest recorded on the DDH Note, an increase of $328,000
associated with the conversion of and amortization of the discount on the
Westwood Note, and an increase of $40,000 of interest recorded on the Trident
Note. A description of each of these promissory notes is set forth below under
"Liquidity and Capital Resources" of this report. We may incur similar noncash
charges in the future and expect interest expense under our various debt
obligations to remain constant for the foreseeable future.

Registration Rights Penalty

      Holders of our Series A Convertible Preferred Stock have registration
rights which require us to register the public sale of the shares of common
stock issuable upon conversion of the preferred shares.  In the event that we
fail to register such shares by a certain time, we are required to pay
penalties to such holders.  As of the date of this report, we have failed to
timely register these shares and for the year ended December 31, 2005, we
recorded an accrual of $1,698,913 and a corresponding expense.  The foregoing
penalties are payable by issuance of shares of our common stock.

Minority Interest and Pre-Acquisition (Profits) Losses

      Minority interest and pre-acquisition (profits) losses consist of the
aggregate profits and losses from the operations of each of our consolidated
subsidiaries (entities in which we own greater than 50% of the outstanding
equity interest) allocated to prior ownership of our current minority interests.
Minority interest and pre-acquisition losses were $302,082 for the fiscal year
ended December 31, 2005 as compared to $467,107 for the fiscal year ended
December 31, 2004. Pre-acquisition losses in 2004, consisted primarily of the
$99,174 loss that we incurred prior to the acquisition of Touchstone Texas, and
the $54,321 loss that we incurred prior to the acquisition of Knox Miss
Partners, L.P. Losses allocated to our minority interest in Knox Miss Partners,
L.P. were $151,112, and losses allocated to our minority interest in PHT West
Pleito, LLC were $162,500. We do not expect minority interest and
pre-acquisition (profits) losses to continue to constitute a material component
of our overall financial performance in the foreseeable future.

Liquidity and Capital Resources

      Net cash used in operating activities increased to $3,276,110 in 2005 from
$1,942,052 in 2004. The increase of $1,334,058 in 2005 in our use of cash for
operations was primarily the result of additional losses incurred from our
conducting twelve months of operations in 2005 as compared to nine months of
operations in 2004 (after adjusted for non-cash charges for amortization of debt
discounts, property impairment, equity loss in limited partnerships and goodwill
impairment, which decreased by $4,813,196 in 2005 as compared to 2004). These
amounts were offset by an increase of cash of $1,359,446 from the lifting of the
restrictions on previously restricted cash in 2005 whereas we were required to
fund those amounts in 2004. In addition, the timing of our payments to suppliers
and collections of joint interest receivables accounted for a decrease in cash
provided by operations of $466,254 in 2005 as compared to 2004.

                                       44
<PAGE>

      Net cash used in investing activities during the fiscal year ended
December 31, 2005 was $7,282,725 as compared to $10,625,874 used during the
fiscal year ended December 31, 2004. The $3,343,149 decrease in cash used in
investing activities was due primarily to a decrease in investments in limited
partnership interests and limited liability companies of $4,666,965, as we
shifted our focus away from making such investments in 2005, and to a lesser
extent, increased distributions from limited partnerships of $396,369, which
amounts were offset by increased purchases of oil and gas interests and drilling
costs of $1,932,761.

      Net cash provided by financing activities during the fiscal year ended
December 31, 2005 was $14,597,641 as compared to $13,070,530 during the fiscal
year ended December 31, 2004. The $1,527,111 increase in net cash provided by
financing activities was due to an increase in net proceeds from sales of our
equity securities.

      At December 31, 2005, we had a working capital of $1,311,144, compared to
a working capital deficit of $1,312,131 at December 31, 2004. The increase in
unrestricted cash of approximately $4 million and the improvement of the joint
interest working capital deficit of $1.1 million was largely offset by a $3.5
million increase in accounts payable and accrued expenses, and an increase in
convertible debentures payable of $2.0 million.

       Since our inception, we have funded our operations primarily through
private sales of equity securities and the use of short-term and long-term debt.
Our principal sources of financing during the past 18 months are described below

      On or about March 23, 2004, we obtained gross proceeds of $2,100,000
through the issuance of a $2,100,000 principal amount secured convertible
promissory note (the "Trident Note") and warrants to Trident Growth Fund, LP
("Trident"). The Trident Note was originally due March 23, 2005, accrues
interest at 12% per annum payable monthly in arrears, is secured by
substantially all of our assets, is convertible at the option of Trident into
shares of our common stock at an initial conversion price of $1.00 per share
(subject to adjustment pursuant to anti-dilution and reset provisions), and is
redeemable at our option at 100% of par prior to maturity. Interest is payable
in cash unless Trident elects to have it paid in shares of common stock. The
Trident Note contains various financial covenants with which we are required to
comply and various negative covenants that prohibit us from taking certain
action without obtaining the prior written consent of Trident. These include
incurring additional liens on our property, incurring indebtedness in excess of
$100,000, selling any of our assets other than in the ordinary course of
business, and making capital expenditures in excess of $50,000. On March 23,
2006, Trident extended the maturity date of the Trident Note to no later than
May 7, 2006 waived compliance with certain negative covenants to permit us to
raise additional capital and waived compliance with all financial covenants
contained in the Trident Note until no later than March 7, 2006. In the event
that we raise gross proceeds from sales of our debt or equity securities of at
least $2.05 million, we will be required to pay all amounts due under the
Trident Note within ten days after such sale. The current outstanding balance of
the Trident Note is $2,050,000 and pursuant to anti-dilution adjustment, the
conversion price is currently $.90.


                                       45
<PAGE>

      In connection with the issuance of the Trident Note and the extension of
the maturity date of the Trident Note, we issued to Trident warrants to purchase
250,000 shares of our common stock at an exercise price of $1.00 per share. The
warrants are immediately exercisable and terminate on March 31, 2014 and
pursuant to anti-dilution adjustment, the exercise price is $.90 as of the date
of this report.

      On November 18, 2004, we obtained gross proceeds of $1,000,000 through the
issuance of the DDH Note to DDH Resources. The note is due May 18, 2006, accrues
interest at the rate of 12% per annum, and is convertible into shares of our
common stock at a conversion price of $1.00 per share.

      On February 21, 2005, we completed a private offering of common stock and
warrants in which we received aggregate gross proceeds of $879,590. The shares
of common stock and warrants were issued in units at a purchase price of $2.10
per unit. Each unit consisted of two shares of common stock and one warrant. The
warrants are immediately exercisable at an exercise price of $2.00 per share and
terminate three years from the date of grant.

      On April 19, 2005 we completed two concurrent offerings of units comprised
of shares of our Series A Convertible Preferred Stock and warrants. Each unit
was comprised of one share of our Series A Convertible Preferred Stock and one
warrant and was sold for a purchase price of $11.00 per unit. We sold 710,063
units for aggregate gross proceeds of $7,810,693 in the offerings.

      Each share of our Series A Convertible Preferred Stock is initially
convertible into ten shares of our common stock at an initial conversion price
of $1.10 per share. Holders of our Series A Convertible Preferred Stock are
entitled to receive dividends at the rate of 8% per annum, provided, however,
that at the option of the holder, such dividends shall be payable in kind at the
rate of 12% per annum by issuance of shares of our common stock having a fair
market value equal to the amount of the dividend. Our Series A Convertible
Preferred Stock is convertible at any time at the discretion of the holder, and
is subject to mandatory conversion in the event that: (i) there is an effective
registration statement covering the public sale of the shares of our common
stock underlying the Series A Convertible Preferred Stock; and (ii) the volume
weighted average closing price per share of our common stock for 20 consecutive
trading days is equal to or greater than 150% of the conversion price.

      Each warrant is exercisable at an initial exercise price of $1.50 per
share and terminates three years after the date of issuance. The warrants are
subject to a call provision that provides that if the volume weighted average
closing price per share of our common stock for 20 consecutive trading days
following the effectiveness of the registration of the shares underlying the
warrants is equal to or greater than 150% of the then applicable exercise price,
we may call the warrants for surrender 15 business days after we provide written
notice to the holders. If the warrants are not exercised during the 15 business
day period, they will terminate.


                                       46
<PAGE>

      Between August 2005 and January 2006, we raised gross proceeds of
$14,076,501 through the issuance of shares of common stock and warrants. The
securities were sold in units consisting of two shares of our common stock and
one common stock purchase warrant at a purchase price of $1.80 per unit. Each
warrant is immediately exercisable into one (1) share of common stock at an
exercise price of $1.50 per share for a term of three years.

      We do not currently maintain a line of credit or term loan with any
commercial bank or other financial institution.

      We will need significant funds to meet capital costs and drilling and
production costs in our various oil and gas projects to explore, develop,
produce and eventually sell the underlying oil and gas reserves. Specifically,
we expect to incur capital expenditures and production costs of approximately
$38.7 million with respect to our jointly owned properties during the next 12
months as follows (each amount an approximation):

      o     $28,200,000 for development and operating costs in the Fayetteville
            Shale Project;

      o     $9,200,000 for development and operating costs in the Caney Shale
            Project;

      o     $90,000 for operating costs in the Martinez - Lobo Wilcox Project;

      o     $9,000 for exploration costs in the Knox Miss Project;

      o     $23,000 for exploration and operating costs in the Las Paloma
            Project;

      o     $700,000 for exploration, development and operating costs in the
            Flores Field- Vicksburg Project;

      o     $300,000 for exploration, development and operating costs in the
            Sullivan City Field - Vicksburg Project;

      o     $170,000 for exploration and operating costs in the Wharton -
            Guenther Offset Project;

      If any of the other owners of leasehold interests in any of the projects
in which we participate fails to pay their equitable portion of development
costs or capital calls, we may need to pay additional funds to protect our
ownership interests.

      We will also need significant funds to meet our obligations under our
outstanding term indebtedness during the next 12 months. Specifically, we will
need to repay approximately $3.1 million of term indebtedness during the next 12
months if the underlying notes are not converted into shares of our common stock
as follows:

      o     $1,000,000 outstanding under the DDH Note due May 18, 2006; and

      o     $2,050,000 outstanding under the Trident Note due March 24, 2006.


                                       47
<PAGE>

      In addition, Touchstone Louisiana, Inc., our wholly-owned subsidiary,
issued a $2,000,000 promissory note (the "Endeavour Note") to Endeavour
International Corporation as partial consideration for the purchase of our
interest in the Louisiana Shelf Project. The Endeavour Note accrues interest at
the rate of 3% per annum. The repayment of principal and payment of accrued
interest under the Endeavour Note is based on 25% of the monthly cash flows (as
defined in the note) of the project. The Endeavour Note contains accelerated
payment provisions in the event certain production levels for any of the oil and
gas wells are met or exceeded. We expect payments to commence once the wells
start producing per the terms of the Endeavour Note.

      As of the date of this report, we had cash resources of approximately $1.1
million. We will need a total of approximately $47.7 million to execute our
business plan, satisfy capital expenditures, and pay drilling and production
costs on our various interests in oil and gas prospects during the next 12
months. Of this amount, we will need approximately $38.7 million for capital
calls and production costs with respect to our various jointly owned properties,
approximately $3.1 million to repay our outstanding term indebtedness, and
approximately $5.9 million for general corporate expenses. In the event we
locate additional prospects for acquisition, experience cost overruns at our
current prospects or fail to generate projected revenues, we will need funds in
excess of the foregoing amounts during the next 12 months. Based on our
available cash resources, cash flows that we are currently generating from our
various oil and gas properties, and projected cash flows that we expect to
generate from our various oil and gas projects in the future, we will not have
sufficient funds to continue to meet such capital calls, make such term debt
payments, and operate at current levels for the next 12 months. Accordingly, we
will be required to raise approximately $32.6 million of additional funds
through sales of our securities or otherwise to sustain operations at current
levels and satisfy our existing financial obligations. If we are unable to
obtain additional funds on terms favorable to us, if at all, we may be required
to delay, scale back or eliminate some or all of our exploration and well
development programs and may be required to relinquish our interests in one or
more of our projects.

Off-Balance Sheet Arrangements

      As of December 31, 2005, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities, which had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

ITEM 7. FINANCIAL STATEMENTS

      Our consolidated financial statements as of December 31, 2005 and December
31, 2004 and for each of the years then ended, and the footnotes related
thereto, are included beginning at page F-1 of this report located after the
signature page of this report.

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


                                       48
<PAGE>

None.

ITEM 8A. CONTROLS AND PROCEDURES

      An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon that
evaluation, our CEO and CFO concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were not effective to
provide reasonable assurance that (i)information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms (ii) that such information is accumulated
and communicated to our management, including our CEO and CFO, in order to allow
timely decisions regarding required disclosure.

      As part of this evaluation, our CEO and CFO considered a letter dated July
11, 2005 from L J Soldinger Associates LLC, our independent registered
accountants, addressed to our Board of Directors that identified a number of
reportable conditions that it considers to be material weaknesses in our
internal control over financial reporting that were discovered during its audit
of our financial statements for the year ended December 31, 2004. The
significant deficiencies noted were: (a) inability to timely and accurately
close books and records at the end of each reporting period; (b) insufficient
number of accounting and financial personnel; (c) deficiencies in the recording
and classification of unproved and proved oil and gas properties and in the
calculation of the working percentage interests in or impairments of certain of
wells; (d) insufficient procedures to detect errors in the books of the limited
liability companies and limited partnerships in which the Company has an equity
interest; (e) improper or lack of accounting for and/or failure to identify
transactions; (f) inadequate controls relating to the receipt and disbursement
of cash received in accordance with joint interest agreements; and (g) weakness
in the process and tools used to consolidate the financial statements of the
Company and our subsidiaries.

      We believe that all adjustments required as a result of the foregoing
deficiencies were detected in the audit process and were appropriately recorded
and disclosed in our annual report on Form 10-KSB. Likewise, we believe that all
adjustments required in subsequent periods were detected in connection with the
preparation of our quarterly and annual reports and appropriately recorded and
disclosed in such reports.

      Upon entering the oil and gas exploration and development industry, we had
a very limited management team that was primarily focused on acquiring interests
in oil and gas prospects. Many of the deficiencies in our internal controls
identified above are likely the result of a combination of our limited
management team and staff, the large number of interests in oil and gas
prospects we acquired during 2004 and early 2005 and the structural complexity
of the ownership of the interests.


                                       49
<PAGE>

      During the third quarter of 2005, we retained a chief executive officer
with over 35 years of industry experience and an additional executive officer
with more than 7 years of experience in the legal and business aspects of oil
and gas exploration transactions. Since his appointment, our new CEO has devoted
substantial time addressing each of the material weaknesses in our internal
controls over financial reporting identified above, and is committed to
effectively remediating them as soon as possible. As part of this plan, we have
retained a chief financial officer with over 20 years of industry experience.
Under the direction of our CEO and CFO, we have established a plan to address
our deficiencies and improve our control environment. The principal components
of the plan are: (i) establishing and implementing additional controls and
procedures related to improving the supervision and training of our accounting
staff, particularly with respect to SEC guidelines relating to oil and gas
operations; (ii) retaining additional persons to serve on our accounting staff;
(iii) retaining a chief accounting officer, and additional executive management
with extensive experience in preparing natural gas and oil reserve estimates and
in petroleum accounting matters; (iv) modifying systems and/or procedures to
ensure appropriate segregation of responsibilities for accounting personnel; (v)
establishing and implementing procedures to require our engineering staff to
communicate all information regarding all wells and properties in which we have
an interest to our accounting staff on a "real time" basis; (vi) establishing
and implementing procedures to require our accounting staff to engage in
constant communication with the operators of our prospects to ensure timely
reporting to us; (vii) engaging an independent, industry recognized reservoir
engineering firm to perform an audit of our oil and gas reserves; and (viii)
obtaining direct ownership of our working interests in order to eliminate any
reliance on the management and accounting functions of the limited partnerships
and limited liability companies in which we have an interest. We have already
accomplished certain of these objectives, including retaining an experienced
chief financial officer and obtaining direct ownership of our working interests.
We expect the forgoing actions and controls to be fully in place by no later
than the end of the third quarter 2006.

      Concurrent with the establishment of the forgoing, we initiated a project
to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or SOX,
which we expect will apply to us as of December 31, 2006. This project will
entail a detailed review and documentation of the processes that impact the
preparation of our financial statements, an assessment of the risks that could
adversely affect the accurate and timely preparation of those financial
statements, and the identification of the controls in place to mitigate the
risks of untimely or inaccurate preparation of those financial statements.

      As we continue the forgoing compliance efforts, including the testing of
the effectiveness of our internal controls, we may identify additional
deficiencies in our system of internal controls over financial reporting that
either individually or in the aggregate may represent a material weakness
requiring additional remediation efforts. We are committed to effectively
remediating known deficiencies as expeditiously as possible and continuing our
efforts to comply with Section 404 of SOX by December 31, 2006.

      There has been no change in our internal control over financial reporting
identified in connection with that evaluation that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.


                                       50
<PAGE>

ITEM 8B. OTHER INFORMATION

      None

                                    PART III

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

      Directors and Executive Officers

      The following sets forth certain information about each of our directors
and executive officers.

Name                           Age                   Positions Held
----                           ---                   --------------
Roger L. Abel                   62          Chief Executive Officer and Director

Robert E. Irelan                59          Director

R. Gerald Bennett               63          Director

Patrick R. Oenbring             54          Chief Operating Officer

Jerry Walrath                   39          Vice President of Land and Project
                                            Development and Secretary

Stephen C. Haynes               49          Chief Financial Officer


      The following is a brief summary of the business experience of each of our
directors and executive officers:

      Roger L. Abel has served as our chief executive officer and chairman of
the board of directors since August 15, 2005 of the Company effective August 15,
2005. Mr. Abel has over 35 years of experience in the oil and gas industry.
Between 1968 and 1996, Mr. Abel held a number of domestic and international
positions at Conoco, most recently serving as Chairman of Conoco Exploration and
Production for Europe where he was responsible for all of Conoco's upstream
activities in Europe and Russia. Prior to that, he served as Vice President and
General Manager, Dubai Petroleum Company, Manager of Operations for the U.K. and
Europe, Manager of Planning, Administration and Engineering for North America,
Vice President and General Manager of Conoco's Engineering and Research
Department, and Vice President and General Manager of Russia. From 1997 through
1999, Mr. Abel served as President and Chief Operating Officer of Occidental Oil
and Gas Corporation, a wholly owned subsidiary of Occidental Petroleum and
Executive Vice President of Occidental in Bakersfield, CA where he lead
Occidental's oil and gas operations through a major restructuring. During this
time, Occidental Petroleum disposed of a number of less profitable assets,
consummated major property exchanges, acquired significant new interests in
several large producing assets, streamlined its organization, and completed the
acquisition of the U.S. Government's interests in the Elk Hills Naval Petroleum
reserve.


                                       51
<PAGE>

      Since retiring from Occidental in 1999, Mr. Abel has continued to actively
participate in oil and gas exploration and development projects in the United
States. Before joining the Company, he served as the President of Rio Nuevo,
Ltd., a private company engaged in developing water resources for distribution
and sales to municipalities in West Texas and obtaining certain water rights in
state owned lands along the Rio Grande River. Mr. Abel also served as President
of Austex Production Company, LLC before joining the Company. Mr. Abel earned a
M.S. degree in Management from MIT's Sloan School of Management and a Petroleum
Engineering degree from Colorado School of Mines.

      Robert E. Irelan has served as a member of our board of directors since
November 29, 2005. Mr. Irelan has over 37 years of experience in the oil and gas
industry. From 1998 until his retirement in December 2002, Mr. Irelan served as
Executive Vice President of Worldwide Operations of Occidental Oil and Gas
Corporation. Prior to that, he worked for Conoco, Inc. in a series of
increasingly responsible positions, including Manager of Projects and
Engineering for Conoco's worldwide engineering organization, Manager of Conoco's
Worldwide Production Budgets and Planning, Managing Director of Conoco United
Kingdom Ltd., and Regional Manager for Conoco Upstream Onshore. Since
retirement, Mr. Irelan has engaged in several entrepreneurial ventures,
including Rapid Retail Solutions, LLC, a developer of computer solutions for the
restaurant business, and BISS Product Development LLC, a new product design
company. Mr. Irelan is a graduate of Colorado School of Mines with a B.S. in
Petroleum Engineering, including advanced studies in Mineral Economics.

      R. Gerald Bennett has served as a member of our board of directors since
November 29, 2005. Mr. Bennett has nearly 40 years of experience in the
petroleum and related industries. From July 2000 until March 2005, he served as
President and CEO of Total Safety, Inc., a safety services provider to the
energy industry. From June 1996 until November 1999, he worked for Equitable
Resources, Inc. as President and CEO of ERI Supply and Logistics where he
directed oil and gas exploration, midstream operations, and wholesale marketing
efforts. During his career, Mr. Bennett has served as President of Enron Gas
Services, Chairman and CEO of Houston Pipeline Company, President and COO of
Perry Gas Companies, Vice President of Parker Drilling Company, and Manager of
Gas Activities for Conoco, Inc. Mr. Bennett is currently a Director of the
Memorial Hermann Healthcare System Board, a Texas based not-for-profit
healthcare system, and Chairman of the Memorial Hermann Hospital Board. Mr.
Bennett is a graduate of Oklahoma State University with a B.S. and M.S. in
Industrial Engineering and Management, and a graduate of The Harvard Business
School Program for Management Development.


                                       52
<PAGE>

      Patrick R. Oenbring has served as our Chief Operating Officer since March
1, 2006. Mr. Oenbring has over 30 years of experience in the oil and gas
industry having held several senior executive management positions at Conoco,
Inc. and Occidental Petroleum. Mr. Oenbring began his career in 1974 with Conoco
as a process engineer. During his 23 year career with Conoco, Mr. Oenbring held
a number of increasingly responsible management positions. These included
managing projects in Alaska, the Gulf of Mexico, the North Sea, the Middle East,
and the Far East, serving as Vice President, Business Development and
Production, of Conoco Canada Ltd. where he was responsible for all production
operations, business development activities, property acquisitions and
divestitures, serving as Manager of Infrastructure Technology for Conoco's
central engineering and construction organization, and Manager of Conoco Energy
Nigeria. In 1997, Mr. Oenbring joined Occidental Petroleum as President and
General Manager, Occidental Petroleum of Qatar where he had complete operational
and P&L responsibility as well as overall management responsibility for
Occidental's non-operated interests in Yemen and Pakistan. Following
Occidental's acquisition of Altura Energy Ltd. in 2000, Mr. Oenbring served as
President and General Manager of Occidental Permian, where he managed the due
diligence preparation, transition and integration of all personnel and
properties of Altura Energy Ltd. into Occidental and managed a three fold
increase in drilling activity. During his tenure, Occidental Permian was the
largest oil and gas producer in Texas with annual revenues of approximately $1.4
billion.

      After retiring from Occidental in June 2003, Mr. Oenbring was self
employed as an independent consultant to the oil and gas industry until May
2005. During this time, he provided executive management and technical
consulting services to various independent oil and gas exploration companies
regarding production operations, optimization, project management and producing
property acquisitions. Since May, 2005, Mr. Oenbring has served as Senior
Project Manager for Technip Offshore, Inc., a Houston, Texas based petroleum and
engineering and construction firm, where he has managed a larger engineering
project offshore Nigeria. Mr. Oenbring earned a Bachelor of Science in Chemical
Engineering from the University of Kansas, is a graduate of the University of
Pittsburgh executive development program, and is a registered Professional
Engineer in the State of Texas.

      Jerry Walrath has served as our Vice President of Land and Project
Development since September 1, 2005. From 1997 until joining the Company, Mr.
Walrath was a solo legal practitioner in Houston, Texas. During that time, he
served as counsel to a number of small oil and gas operators, providing land and
legal advice concerning transactional and operational issues, providing
litigation and litigation management services, and examining title for
acquisitions, drilling and development. Between 1991 and 1997, Mr. Walrath
provided mental health administration and services as an Associate Clinical
Psychologist. Mr. Walrath earned a Bachelor of Sciences in Psychology from the
University of Houston, a Master of Arts in Clinical Psychology from Sam Houston
State University, and a Juris Doctorate from the University of Houston Law
Center. He is licensed to practice law in Texas.

      Stephen C. Haynes has served as our Chief Financial Officer since February
6, 2006. Mr. Haynes has over 20 years of experience in the petroleum and related
industries. From May, 2005 until joining the Company, Mr. Haynes served as the
Controller of Carrizo Oil & Gas, Inc., a Houston, Texas based oil and gas
exploration and development company whose shares are publicly traded. As
Controller, Mr. Haynes was primarily responsible for developing and managing
financial controls and reporting. In January 2001, Mr. Haynes founded Stephen C.
Haynes, CPA where he provided financial consulting services to the oil and gas
exploration, power generation and pipeline companies from January 2001 until May
2005. Prior to that, he worked for British Gas for eleven years holding a series
of increasingly responsible positions culminating in his appointment as Vice
President - Finance of Atlantic LNG, a joint venture of British Gas and several
industry partners in Trinidad and Tobago. Mr. Haynes earned a Bachelor of
Business Administration in accounting from Sam Houston State University and a
Master of Business Administration with a concentration in finance from the
University of Houston. Mr. Haynes is a certified public accountant and has
attended the Executive Development Program at Harvard University.


                                       53
<PAGE>

Board of Directors

      Our board of directors consists of Roger Abel, Robert E. Irelan and R.
Gerald Bennett, each of whom will serve until the next annual meeting of
shareholders or until his successor is duly elected and qualified or until the
earlier of their death, resignation or removal. Officers are elected by our
board of directors and serve at the discretion of our board.

Directors Compensation

      Members of our board of directors who are also employees of the Company do
not receive any compensation for serving on our board, except that each director
is entitled to be reimbursed for the reasonable costs and expenses incurred in
attending board meetings. Members of our board of directors who are not
employees of the Company receive compensation consisting of options upon joining
our board, an annual stipend, and fees for attendance at board and committee
meetings. Upon appointment, non-employee directors receive options to purchase
100,000 shares of common stock at an exercise price equal to the closing price
of our common stock on the date of grant which vest in full one year form the
date of grant and have a term of ten years. The annual stipend for board service
is $40,000, and $55,000 in the case of the chairman of the audit committee,
together with options to purchase 40,000 shares of common stock, and 55,000
shares in the case of the chairman of the audit committee, issuable on the last
trading day of each year at an exercise price equal to the closing price of our
common stock on the date of grant. Such options will be vested in full upon
issuance and have a term of ten years. The stipend and the options are applied
pro-rata based upon the time of service by the board member during that year.

      In accordance with the forgoing policy, we issued options under the
Touchstone Resources USA, Inc. 2005 Stock Incentive Plan to purchase 100,000
shares of common stock to each of Robert E. Irelan and R. Gerald Bennett upon
their appointment to the Board of Directors on November 29, 2005. The options
have an exercise price of $0.83 per share, the last sales price of our common
stock on the date of grant, vest one year from the date of grant, expire
November 28, 2015, and are otherwise subject to the terms of the Plan.

Audit Committee Financial Expert

      Our Board of Directors has concluded that R. Gerald Bennett qualifies as
an "audit committee financial expert," as that term is defined in Item 401(e) of
Regulation S-B promulgated under the Securities Act. Mr. Bennett satisfies the
definition of "independent director" established by the American Stock Exchange
as set forth in Section 121A of the American Stock Exchange Company Guide.


                                       54
<PAGE>

Section 16 Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires our officers and directors and
persons who own more than ten percent (10%) of our common stock to file with the
SEC initial reports of ownership and reports of changes in ownership of our
common stock. Such officers, directors and ten percent (10%) stockholders are
also required by applicable SEC rules to furnish us copies of all forms filed
with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on our
review of the copies of such forms received by us or written representations
from such persons that no other reports were required for such persons, we
believe that during the fiscal year ended December 31, 2004, all Section 16(a)
filing requirements applicable to our officers, directors and ten percent (10%)
stockholders were satisfied in a timely fashion, except that Jerry Walrath did
not timely file a Form 3 and Form 4 upon his being appointed to serve as an
executive officer of the Company and receiving options in connection therewith.

Code of Business Conduct and Ethics

      We have adopted a Code of Business Conduct and Ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, and persons performing similar functions. Our Code of
Business Conduct and Ethics is designed to deter wrongdoing and promote: (i)
honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; (ii)
full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC and in our other public
communications; (iii) compliance with applicable governmental laws, rules and
regulations; (iv) the prompt internal reporting of violations of our Code of
Business Conduct and Ethics to an appropriate person or persons identified in
the code; and (v) accountability for adherence to our Code of Business Conduct
and Ethics. Our Code of Business Conduct and Ethics is filed as an exhibit to
this report.

ITEM 10. EXECUTIVE COMPENSATION

      The following table provides certain summary information concerning
compensation paid to or accrued by the executive officers named below during the
fiscal years ended December 31, 2005 and 2004. We did not pay any compensation
to our chief executive officer or to any of our other officers in 2003.

                           Summary Compensation Table

<TABLE>
<CAPTION>
Name and                                 Fiscal                                All Other
Principal Position                        Year    Salary($)      Bonus($)   Compensation($)
--------------------------------------   ------   ---------      --------   ---------------
<S>                                      <C>      <C>            <C>        <C>
Roger L. Abel (1)                          2005     217,500            --                --
Chief Executive Officer

Stephen P. Harrington (2)                  2005      75,000            --                --
Chief Executive Officer, Treasurer and     2004      90,000            --
  Secretary

Wesley A. Franklin (3)                     2005                                     240,252(4)
Executive Vice President                   2004      87,000(5)         --            73,627(4)
</TABLE>


                                       55
<PAGE>

(1) Mr. Abel has served as our chief executive officer since August 15, 2005.

(2) Mr. Harrington served as our chief executive officer, treasurer and
secretary from March 15, 2004 until August 15, 2005. Prior to that, George Sines
served as our president and treasurer. Mr. Sines was not paid any compensation
for such services.

(3) Mr. Franklin served as our executive vice president from July 7, 2004 until
November 15, 2005.

(4) Represents fees paid to Mr. Franklin by us, our wholly-owned subsidiary
Touchstone Resources USA, Inc., a Texas corporation, and CE Operating LLC, our
wholly-owned subsidiary for consulting and technical services rendered and other
payments made on his behalf.

(5) Includes $72,000 which was settled by issuance of 300,000 shares of common
stock of the Company to Mr. Franklin.

                      Option/SAR Grants in Last Fiscal Year
                               (Individual Grants)

      The following table sets forth, for each named executive officer,
information regarding options granted to the officers during our fiscal year
ended December 31, 2005. We have not granted any stock appreciation rights
("SARs") to any of our named executive officers.

                               Percent of
                 Number of       Total
                Securities      Options
                Underlying     Granted to     Exercise or
                  Options     Employees in    Base Price    Expiration
Name            Granted (#)   Fiscal Year      ($ / Sh)        Date
-------------   -----------   ------------    -----------   ----------
Roger L. Abel     4,876,540             98%          0.86   8/14/2012


                       Aggregated Option/SAR Exercises in
             Last Fiscal Year and Fiscal Year-End Option/SAR Values

      The following table sets forth, for each named executive officer,
information regarding the number and value of stock options held by the named
executive officers at December 31, 2005, each on an aggregated basis. We have
not issued any SARs to any of our named executive officers. No stock options
were exercised by any of our executive officers during our fiscal year ended
December 31, 2005.


                                       56
<PAGE>

                     Number Of Unexercised        Value Of Unexercised
                       Options At Fiscal     In-The-Money Options At Fiscal
                     Year-End Exercisable/       Year-End Exercisable/
Name                   Unexercisable (#)         Unexercisable ($) (1)
------------------   ---------------------   ------------------------------
Roger L. Abel                 0/ 4,876,450                             0 /0
Wesley A. Franklin                    0 /0                               --

* Not applicable.

(1) Based on $0.78, the last sales price of the Company's Common Stock as
reported on the OTC Bulletin Board on December 30, 2005.


Employment Agreements

      On July 13, 2005, we entered into an employment agreement with Mr. Abel to
serve as the chief executive officer of the Company effective August 15, 2005.
The agreement has a term of two years, provides for an annual base salary of
$580,000, and contains standard and customary non-solicitation, non-competition,
work made for hire, and non-confidentiality provisions which prohibit Mr. Abel
from engaging in such conduct during the term of the agreement or during any
period in which he is receiving severance payment from us. In the event that Mr.
Abel is terminated without cause, he will be entitled to receive severance
payment equal to one year's base salary, if such termination occurs prior to
August 15, 2006, and six month's base salary if such termination occurs prior to
August 15, 2007.

      In connection with his employment agreement, we issued an option to Mr.
Abel to purchase 4,876,540 shares of common stock at an exercise price of $.86
per share, the last sales price of the Company's common stock as reported on the
OTC Bulletin Board on the date of grant. The option has a term of 7 years and
vests in two equal installments on August 15, 2006 and 2007 provided that Mr.
Abel remains continuously employed by us through the applicable vesting date or
is receiving severance payment from us in accordance with his employment
agreement. In the event that Mr. Abel is terminated "for cause," as defined in
his employment agreement, the option shall forthwith terminate. Unless Mr. Abel
is terminated "for cause", as defined in his employment agreement, once vested,
the option can be exercised at any time prior to expiration. The option contains
a change in control provision which is describe below under the caption, "Change
in Control Arrangements."

Change In Control Arrangements

      The Touchstone Resources USA, Inc. 2005 Stock Incentive Plan (the "Plan")
contains the following change in control provision.

      Unless otherwise provided in any agreement relating to any awards issued
under the Plan or in a written employment or other agreement directly addressing
the same subject matter as addressed below, in the event that the Plan is
terminated as a result of or following a "Change in Control" (as defined in the
Plan), all vested options, SARs, and stock awards then outstanding at the time
of such Plan termination may be exercised for a period of thirty (30) days from
the date of notice of the proposed termination. In such event, all participants
shall be credited with an additional six (6) months of service for the purpose
of any otherwise unvested options, SARs, and stock awards. Upon a Change in
Control in which the Plan is either assumed or otherwise not subject to
termination, if during the remaining term of such a participant's options, SARs
or stock awards, the participant is terminated other than for cause, as defined
in the Plan, the participant will, at the time of such termination, be credited
with an additional six (6) months of service for the purpose of any otherwise
unvested options, SARs and stock awards; however, in the event of a termination
for Cause, as defined in the Plan, all options and SARs shall immediately
terminate and all unvested portions of stock awards shall immediately terminate.


                                       57
<PAGE>

      Under the Plan, a "Change in Control" shall be deemed to have occurred if:
(i) any "person" (as such term is used in Section 13(d) and 14(d) of the
Exchange Act) acquires "beneficial ownership" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the voting power of the then
outstanding securities of the Company except where the acquisition is approved
by the Board; or (ii) if the Company is to be consolidated with or acquired by
another entity in a merger or other reorganization in which the holders of the
outstanding voting stock of the Company immediately preceding the consummation
of such event, shall, immediately following such event, hold, as a group, less
than a majority of the voting securities of the surviving or successor entity or
in the event of a sale of all or substantially all of the Company's assets or
otherwise.

      Notwithstanding anything in the Plan to the contrary, the acceleration of
vesting and exercisability shall not occur in the event that such acceleration
would make the transaction causing the Change in Control to be ineligible for
pooling of interests accounting treatment, provided pooling of interest
treatment is then still available and, in the absence of such acceleration, the
transaction would qualify for such treatment and the Company intends to use such
treatment with respect to such transaction. a "Change In Control Event," unless
specifically provided to the contrary in any specific option

      The option granted to Mr. Abel also contains a change in control provision
which is triggered in the event that we are acquired by merger, share exchange
or otherwise, sell all or substantially all of its assets, or all of our
outstanding stock is acquired by a third party (each, a "Fundamental
Transaction"). In the event of a Fundamental Transaction, we may terminate the
option unless provision is made in connection with such Fundamental Transaction
for the option to be assumed or for the issuance of a substitute option. In the
event we decide to terminate the option, we shall either: (i) pay an amount to
Mr. Abel equal to the excess of the per share purchase price in such transaction
over the exercise price of the option multiplied by the total number of shares
issuable upon exercise of the option; or (ii) provide for the option to vest in
full and permit Mr. Abel to exercise the option for a period of at least 30 days
prior to the date of such termination.


                                       58
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The following table sets forth, as of March 29, 2006, information with
respect to the securities holdings of all persons that we have reason to
believe, pursuant to filings with the SEC, may be deemed the beneficial owner of
more than five percent (5%) of our outstanding common stock. The following table
also sets forth, as of such date, the beneficial ownership of our common stock
by all executive officers and directors, individually and as a group.

      The beneficial owners and amount of securities beneficially owned have
been determined in accordance with Rule 13d-3 under the Exchange Act and, in
accordance therewith, includes all shares of our common stock that may be
acquired by such beneficial owners within 60 days of March 29, 2006 upon the
exercise or conversion of any options, warrants or other convertible securities.
This table has been prepared based on 78,903,313 shares of common stock
outstanding on March 29, 2006. Unless otherwise indicated, each person or entity
named below has sole voting and investment power with respect to all common
stock beneficially owned by that person or entity, subject to the matters set
forth in the footnotes to the table below, and has an address of 1600 Smith
Street, Suite 5100 Houston, Texas 77002.

<TABLE>
<CAPTION>
                                                 Amount and
                                            Nature of Beneficial       Percentage
Name and Address of Beneficial Owner             Ownership              of Class
-----------------------------------------   --------------------       ----------
<S>                                         <C>                        <C>
Roger L. Abel                                            416,667(1)        *

R. Gerald Bennett                                        420,000(2)        *

Robert E. Irelan                               50,000(3)                       --

Patrick R. Oenbring                                 0(4)                       --

Jerry Walrath                                            100,000(3)        *

Stephen C. Haynes                                        100,000(5)        *

All officers and directors as a group                  1,086,667(6)           1.4%
(6) persons

AltaFin BV                                             6,001,558(7)           7.4%
Pareraweg 45
P.O. Box 4914
Curaco Netherlands Antilles

Stephen P. Harrington                                  8,375,000             10.6%
111 Presidential Boulevard
Suite 158A
Bala Cynwyd, PA 19004

Millennium Global High Yield Fund Limited              8,703,463(8)          10.5%
64 St. James's Street
London United Kingdom SW1A 1NF

Michael Marcus                                         7,667,521(9)           9.5%
1600 Rockcliff Road
Austin, TX 78746

John Paul DeJoria                                      4,035,000(10)          5.1%
P.O. Box 34540
Las Vegas, NV 89133-4540
</TABLE>


                                       59
<PAGE>

* less than one percent (1%).

(1) Includes 138,889 shares issuable upon exercise of warrants. Does not include
4,876,540 shares issuable upon exercise of options which are subject to vesting.

(2) Includes 140,000 shares issuable upon exercise of warrants. Does not include
100,000 shares issuable upon exercise of options which are subject to vesting.

(3) Does not include 100,000 shares issuable upon exercise of options which are
subject to vesting.

(4) Does not include 150,000 shares issuable upon exercise of options which are
subject to vesting.

(5) Consists of shares issuable upon exercise of options.

(6) Includes 378,889 shares issuable upon exercise of options.

(7) Includes 2,000,000 shares issuable upon exercise of warrants.

(8) Includes 2,000,000 shares issuable upon conversion of convertible preferred
stock and 2,300,000 shares issuable upon exercise of warrants.

(9) Includes 1,729,542 shares issuable upon exercise of warrants.

(10) Includes 845,000 shares issuable upon exercise of warrants.


                                       60
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

      The following table sets forth information regarding the number of stock
options, warrants, rights and similar securities that were outstanding at
December 31, 2005 under equity compensation plans.

<TABLE>
<CAPTION>
------------------------------- ---------------------------- ---------------------------- ----------------------------
                                                                                             Number of securities
                                                                                            remaining available for
                                Number of securities to be    Weighted-average exercise      future issuance under
                                  issued upon exercise of       price of outstanding       equity compensation plans
                                 outstanding warrants and       options, warrants and        (excluding securities
                                          rights                       rights              reflected in column (a))
        Plan Category                       (a)                          (b)                          (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
<S>                             <C>                          <C>                          <C>
Equity    Compensation   Plans
approved by security holders                     0                 Not applicable                         0
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity  compensation plans not
approved by security holders             5,176,540                      $0.86                           9,700,000(1)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total                                     5,176,540                       $0.86                           0
------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>

(1) Represents shares reserved for issuance under the Touchstone Resources USA,
Inc. 2005 Stock Incentive Plan.

2005 Stock Incentive Plan

      On September 30, 2005, our board of directors adopted and on February 9,
2006 our board amended, the Touchstone Resources USA, Inc. 2005 Stock Incentive
Plan (as amended, the "Plan"). The Plan reserves 10,000,000 shares of common
stock for issuance pursuant to stock options, stock appreciation rights,
restricted stock awards, restricted stock units, unrestricted stock awards, and
other equity based or equity related awards to employees, officers, directors,
or advisors to the Company or any of our subsidiaries as well as individuals who
have entered into an agreement with us under which they will be employed by the
Company or any of our subsidiaries in the future.

      The Plan is administered by the board of directors (the "Board") of the
Company which has full and final authority to interpret the Plan, select the
persons to whom awards may be granted, and determine the amount and terms of any
award. In order to comply with certain rules and regulations of the Securities
and Exchange Commission or the Internal Revenue Code, the Board can delegate
authority to appropriate committees of the Board. Although the Plan provides for
the issuance of options that qualify as incentive stock options ("ISOs") under
the Internal Revenue Code of 1986, as amended, since the Plan was not approved
by our stockholders, we cannot issue ISOs unless and until we obtain the
requisite shareholder approval.


                                       61
<PAGE>

      Stock options issued under the Plan have a term of no more than 10 years,
an exercise price equal to at least 85% of the fair market value of our common
stock on the date of grant (100% in the case of ISOs), are subject to vesting as
determined by the Board, and unless otherwise determined by the Board, may not
be transferred except by will, the laws of descent and distribution, or pursuant
to a domestic relations order. Unless otherwise determined by the Board, awards
terminate three (3) months after termination of employment or other association
with the Company, one (1) year after termination due to disability, death or
retirement, or in the event that termination of employment or association is for
a cause, as that term is defined in the Plan, or due to a participant
voluntarily leaving the employ of the Company, awards terminate within 15 days'
notice of such termination. As of the date of this report, we have issued
options under the Plan to purchase 550,000 shares of common stock.

      On July 13, 2005, we issued an option to Mr. Abel to purchase 4,876,540
shares of commons stock. The material terms of the option are described
elsewhere in this report. See "ITEM 10. EXECUTIVE COMPENSATION- Employment
Agreements."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On March 23, 2004, Stephen P. Harrington, our former Chairman, Chief
Executive Officer and Treasurer and former director of the Company, surrendered
7,380,000 shares of our common stock to enable us to purchase Touchstone
Resources USA, Inc., a Texas corporation ("Touchstone Texas"), and a membership
interest in LS Gas, LLC, a Delaware limited liability company ("LS Gas"), from
Touchstone Resources, Ltd., a British Columbia corporation ("Touchstone
Canada"), all on that same date. Immediately prior to Mr. Harrington's surrender
of the shares, all 50 million of our authorized shares of common stock were
issued and outstanding. Upon Mr. Harrington's surrender of the shares, we: (i)
purchased 100% of the issued and outstanding shares of capital stock of
Touchstone Texas in consideration for which we issued 7,000,000 shares of our
common stock to Touchstone Canada, (ii) purchased a 10% membership interest in
LS Gas in consideration for which we issued 100,000 shares of our common stock
to Touchstone Canada, and (iii) issued 280,000 shares of our common stock in
consideration for consulting and advisory services rendered to us in connection
with the above transactions and our acquisition of other interests in certain
oil and gas projects on that date.

      On May 12, 2004, we entered into a settlement agreement with Wesley A.
Franklin, our executive Vice President, regarding payment of $72,000 of accrued
salary owed to him. Under the agreement, we issued 300,000 shares of common
stock to Mr. Franklin in full satisfaction of the unpaid salary.

      On June 6, 2004, SPH Investments, Inc., a company controlled by Stephen P.
Harrington, our former Chairman, Chief Executive Officer and Treasurer and
former director of the Company, made a loan to us in the amount of $150,000 in
consideration for which we issued SPH Investments, Inc. a demand promissory note
in the principal amount of $150,000. The note accrues interest at the rate of 3%
per annum. The current outstanding balance due under the note is $75,000.


                                       62
<PAGE>

      On November 29, 2005, we entered into a securities purchase agreement with
The Abel Family Trust (the "Trust") pursuant to which we issued 138,889 units to
the Trust for a purchase price of $250,000. Roger Abel, our Chairman and Chief
Executive Officer, serves as the trustee and is a beneficiary of the Trust. On
January 20, 2005, we entered into a securities purchase agreement with G & S
Bennett Ltd ("GS") pursuant to which we issued 140,000 units to GS for a
purchase price of $252,000. R. Gerald Bennett, a member of our Board of
Directors, is a principal equity owner and managing partner of GS. Each unit
consisted of two shares of our common stock and one common stock purchase
warrant. The purchase price per unit was $1.80. Each warrant is immediately
exercisable into one share of common stock at an exercise price of $1.50 per
share for a term of three years. The forgoing securities were issued in a
private offering under the same agreement and on the same terms and conditions
as all other participants in the offering.

      On October 10, 2005, Maverick Woodruff County, LLC, a Delaware limited
liability company ("MWC"), borrowed $1,000,000 from Michael P. Marcus pursuant
to a secured promissory note. The promissory note was secured by all ownership
interest in MWC, had a maturity date of October 10, 2006, accrued interest at
the rate of 10% per annum payable at maturity, and the principal amount together
with all accrued and unpaid interest due thereon was convertible at anytime at
the option of Mr. Marcus into shares of our common stock at a conversion price
of $.90 per share. The note would automatically convert into shares of our
common stock upon MWC acquiring a leasehold interest in certain acreage or MWC
assigning its right to certain leasehold interests to us. In connection with the
issuance of the note, we issued an immediately exercisable warrant to Mr. Marcus
to purchase 555,556 shares of our common stock at an exercise price of $1.50 per
share for a term of three years. The funds were transferred to MWC for credit of
the Company to fund the Company's proportionate share of acquisition of
leasehold. On February 13, 2006, the note and $34,1667 of accrued interest due
thereunder was converted into 1,149,074 shares of common stock. At that time of
the issuance of the note and warrant and conversion of the note, Mr. Marcus was
the beneficial owner of more than 5% of our issued and outstanding shares of
common stock.

      On January 27, 2006, we entered into a securities purchase agreement with
Michael P. Marcus pursuant to which we issued 550,000 units to Mr. Marcus for a
purchase price of $990,000. Each unit consisted of two shares of our common
stock and one common stock purchase warrant. The purchase price per unit was
$1.80. Each warrant is immediately exercisable into one share of common stock at
an exercise price of $1.50 per share for a term of three years. The forgoing
securities were issued in a private offering under the same agreement and on the
same terms and conditions as all other participants in the offering. At that
time of the transaction, Mr. Marcus was the beneficial owner of more than 5% of
our issued and outstanding shares of common stock.

ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K

(a) The following documents are filed as exhibits to this Report.


                                       63
<PAGE>

 Exhibit No.                          Exhibit

       2.1    Stock Purchase Agreement, dated March 15, 2004, by and between
              Touchstone Resources, Ltd. and the Company, (incorporated by
              reference to Exhibit 2.1 to the Company's Current Report on Form
              8-K filed April 15, 2004)

       2.2    Agreement and Plan of Merger, dated March 18, 2004, by and between
              the Company and Touchstone Resources USA, Inc. (incorporated by
              reference to Exhibit 2.2 to the Company's Quarterly Report on Form
              10-QSB filed May 24, 2004)

       3.1    Certificate of Incorporation (incorporated by reference to Exhibit
              3.1 to the Registrant's Registration Statement on Form SB-2 filed
              on December 7, 2001)

       3.2    Certificate of Ownership Merging Touchstone Resources USA, Inc
              into The Coffee Exchange, Inc. dated March 18, 2004 (incorporated
              by reference to Exhibit 3.3 to the Registrant's Quarterly Report
              on Form 10-QSB filed May 24, 2004)

       3.3    Certificate of Designation of Series A Convertible Preferred Stock
              (incorporated by reference to Exhibit 3.1 to the Registrant's
              Current Report on Form 8-K filed April 5, 2005.)

       3.4    Amended and Restated Bylaws of the Registrant (incorporated by
              reference to Exhibit 3.1 to the Registrant's Current Report on
              Form 8-K file December 5, 2005.)

      10.1    Series A Stock Redemption Agreement, dated February 28, 2004, by
              and between Scott Yancey and the Company (incorporated by
              reference to Exhibit 10.1 to the Company's Current Report on Form
              8-K filed March 30, 2004)

      10.2    Stock Redemption Agreement, dated February 28, 2004, by and
              between George Sines, and the Company (incorporated by reference
              to Exhibit 10.2 to the Company's Current Report on Form 8-K filed
              March 30, 2004)

      10.3    Stock Purchase Agreement dated February 28, 2004 between Stephen
              P. Harrington and Scott Yancey (incorporated by reference to
              Exhibit 10.3 to the Company's Current Report on Form 8-K filed
              March 30, 2004)

      10.4    Stock Purchase Agreement dated February 28, 2004 between Stephen
              P. Harrington and George Sines (incorporated by reference to
              Exhibit 10.4 to the Company's Current Report on Form 8-K filed
              March 30, 2004)

      10.5    Interest Purchase Agreement, dated March 23, 2004, by and among
              the Company, Touchstone Louisiana, Inc. and Touchstone Resources,
              Ltd. (incorporated by reference to Exhibit 10.1 to the Company's
              Current Report on Form 8-K filed April 15, 2004)


                                       64
<PAGE>

      10.6    Interest Purchase Agreement, dated March 23, 2004, by and among
              Touchstone Vicksburg, Inc., Touchstone Awakino, Inc. and Montex
              Exploration, Inc. (incorporated by reference to Exhibit 10.2 to
              the Company's Current Report on Form 8-K filed April 15, 2004)

      10.7    Loan Agreement, dated March 23, 2004, by and between the Company
              and Trident Growth Fund, L.P. ("Trident") (incorporated by
              reference to Exhibit 10.7 to the Company's Quarterly Report on
              Form 10-QSB filed May 24, 2004)

      10.8    12% Secured Convertible Promissory Note, dated March 23, 2004, in
              the principal amount of $2,100,000 issued to Trident (incorporated
              by reference to Exhibit 2.2 to the Company's Quarterly Report on
              Form 10-QSB filed May 24, 2004)

      10.9    Security Agreement, dated March 23, 2004, by and between the
              Company and Trident (incorporated by reference to Exhibit 10.9 to
              the Company's Quarterly Report on Form 10-QSB filed May 24, 2004)

     10.10    Warrant to purchase 250,000 shares of common stock dated March 23,
              2004 issued to Trident (incorporated by reference to Exhibit 10.10
              to the Company's Quarterly Report on Form 10-QSB filed May 24,
              2004)

     10.11    Form of Convertible Note relating to the Company's July 2004
              offering of convertible notes and warrants (incorporated by
              reference to Exhibit 10.11 to the Company's Quarterly Report on
              Form 10-QSB filed May 24, 2004)

     10.12     Securities Purchase Agreement, dated March 24, 2004, by and among
               the Company, FEQ Gas, LLC, Knox Gas, LLC and Knox Miss., LLC
               (incorporated by reference to Exhibit 10.1 to the Company's
               Current Report on Form 8-K filed May 24, 2004)

     10.13    Secured Promissory Note, dated February 26, 2004, made by Knox
              Gas, LLC in favor of Endeavour International Corporation
              (incorporated by reference to Exhibit 10.2 to the Company's
              Current Report on Form 8-K filed May 24, 2004)

     10.14    Interest Pledge Agreement, dated February 26, 2004, by and between
              Knox Gas, LLC and Endeavour International Corporation
              (incorporated by reference to Exhibit 10.3 to the Company's
              Current Report on Form 8-K filed May 24, 2004)

     10.15    Subscription Agreement, dated March 26, 2004, by and between the
              Company and PHT Stent Partners, L.P. (incorporated by reference to
              Exhibit 10.4 to the Company's Current Report on Form 8-K filed May
              24, 2004)

     10.16    Subscription Agreement, dated April 4, 2004, by and between the
              Company and PHT Wharton Partners, L.P. (incorporated by reference
              to Exhibit 10.5 to the Company's Current Report on Form 8-K filed
              May 24, 2004)

     10.17    Interest Purchase Agreement, dated April 30, 2004, by and between
              Touchstone Louisiana, Inc. and Endeavour International Corporation
              (incorporated by reference to Exhibit 10.6 to the Company's
              Current Report on Form 8-K filed May 24, 2004)


                                       65
<PAGE>

     10.18     Promissory Note, dated April 30, 2004, made by Touchstone
               Louisiana, Inc. in favor of Endeavour International Corporation
               (incorporated by reference to Exhibit 10.7 to the Company's
               Current Report on Form 8-K filed May 24, 2004)

     10.19    Subscription Agreement, dated April 1, 2004, by and between the
              Company and PHT Vela Partners, L.P. (incorporated by reference to
              Exhibit 10.10 to the Company's Current Report on Form 8-K/A filed
              July 21, 2004)

     10.20    Operating Agreement of Maverick Basin Exploration, LLC, dated June
              23, 2004, by and between the Company and PHT Gas, LLC
              (incorporated by reference to Exhibit to the Company's Quarterly
              Report on Form 10-QSB filed August 30, 2004)

     10.21    Amendment to the Operating Agreement of Maverick Basin
              Exploration, LLC, dated July 14, 2004, by and among the Company,
              PHT Gas, LLC and South Oil, Inc. (incorporated by reference to
              Exhibit 14.1 to the Company's Quarterly Report on Form 10-QSB
              filed August 30, 2004)

     10.22    Amendment and Waiver to 12% Secured Convertible Promissory Note,
              dated March 23, 2004, by and between the Company and Trident
              (incorporated by reference to Exhibit 10.22 to the Company's
              Annual Report on Form 10-KSB filed April 15, 2005)

     10.23    Form of Warrant to Purchase Shares of Common Stock issued to
              Purchasers in the Regulation D Offering of Shares of Series A
              Convertible Preferred Stock and Warrants (incorporated by
              reference to Exhibit 4.1 to the Company's Current

              Report on Form 8-K filed April 5, 2005)

     10.24    Form of Warrant to Purchase Shares of Common Stock issued to
              Purchasers in the Regulation S Offering of Shares of Series A
              Convertible Preferred Stock and Warrants (incorporated by
              reference to Exhibit 4.2 to the Company's Current

              Report on Form 8-K filed April 5, 2005)

     10.25    Form of Registration Rights Provisions for Purchasers in the
              Regulation S Offering and Regulation D Offering of Shares of
              Series A Convertible Preferred Stock and Warrants (incorporated by
              reference to Exhibit 4.3 to the Company's Current Report on Form
              8-K filed April 5, 2005)

     10.26    Employment Agreement, dated July 13, 2005, by and between Roger
              Abel and the Company (incorporated by reference to Exhibit 10.1 to
              the Company's Current Report on Form 8-K filed July 27, 2005)


                                       66
<PAGE>

     10.27    Option Agreement, dated July 13, 2005, by and between Roger Abel
              and the Company (incorporated by reference to Exhibit 10.2 to the
              Company's Current Report on Form 8-K filed July 27, 2005)

     10.28    Touchstone Resources USA, Inc. 2005 Stock Incentive Plan
              (incorporated by reference to Exhibit 10.1 to the Company's
              Current Report on Form 8-K filed October 6, 2005)

     10.29    Stock Option Agreement Under The Touchstone Resources USA, Inc.
              2005 Stock Incentive Plan, dated September 30, 2005, issued to
              Jerry Walrath (incorporated by reference to Exhibit 10.2 to the
              Company's Current Report on Form 8-K filed October 6, 2005)

     10.30    Securities Purchase Agreement, dated November 29, 2005, by and
              between The Abel Family Trust and the Registrant (incorporated by
              reference to Exhibit 10.1 to the Company's Current Report on Form
              8-K filed December 5, 2005)

     10.31    Warrant, dated November 29, 2005, issued to The Abel Family Trust
              (incorporated by reference to Exhibit 10.2 to the Company's
              Current Report on Form 8-K filed December 5, 2005)

     10.32    Touchstone Resources USA, Inc. Director Compensation Policy
              Adopted November 29, 2005 (incorporated by reference to Exhibit
              10.3 to the Company's Current Report on Form 8-K filed December 5,
              2005)

     10.33    Form of Securities Purchase Agreement by and between the Company
              and Purchasers in the Regulation D Offering of Units consisting of
              shares of Common Stock and Warrants (incorporated by reference to
              Exhibit 10.1 to the Company's Current Report on Form 8-K filed
              January 30, 2006)

     10.34    Form of Warrant issued to Purchasers in the Regulation D Offering
              of Units consisting of shares of Common Stock and Warrants
              (incorporated by reference to Exhibit 10.2 to the Company's
              Current Report on Form 8-K filed January 30, 2006)

     10.35    Form of Warrant issued to Placement Agents in the Regulation D
              Offering of Units of shares of Common Stock and Warrants
              (incorporated by reference to Exhibit 10.3 to the Company's
              Current Report on Form 8-K filed January 30, 2006)

     10.36    Form of Securities Purchase Agreement by and between the Company
              and Non US Purchasers in the Regulation S Offering of Units
              consisting of shares of Common Stock and Warrants (incorporated by
              reference to Exhibit 10.4 to the Company's Current Report on Form
              8-K filed January 30, 2006)

     10.37    Form of Warrant issued to Non US Purchasers in the Regulation S
              Offering of Units consisting of shares of Common Stock and
              Warrants (incorporated by reference to Exhibit 10.5 to the
              Company's Current Report on Form 8-K filed January 30, 2006)


                                       67
<PAGE>

     10.38    Agreement dated March 23, 2006 by and between the Company and
              Trident Growth Fund, L.P.

     10.39    Amended and Restated Touchstone Resources USA, Inc. 2005 Stock
              Incentive Plan

      14.1    Code of Business Conduct and Ethics applicable to Chief Executive
              Officer and Senior Financial Officers (incorporated by reference
              to Exhibit 14.1 to the Company's Current Report on Form 8-K filed
              December 5, 2005)

      21.1    Subsidiaries of the Company

      31.1    Certification of Chief Executive Officer of the Company required
              by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
              amended

      31.2    Certification of Chief Financial Officer of the Company required
              by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
              amended

      32.1    Certification of Chief Executive Officer and Chief Financial
              Officer of the Company required by Rule 13a-14(b) under the
              Securities Exchange Act of 1934, as amended

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The following table presents fees for professional audit services
performed by L J Soldinger Associates, LLC for the audit of our annual financial
statements for our fiscal years ended December 31, 2005 and 2004, and fees
billed for other services rendered by L J Soldinger during such years.

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

Audit Fees:           $794,000   $789,000

Audit-Related Fees:     35,000     90,000

Tax Fees:                2,000      2,000

All Other Fees:              0          0
                      --------   --------

Total:                $831,000   $867,000
                      ========   ========


                                       68
<PAGE>

      Audit Fees consist of fees billed for professional services rendered for
 the audit of our financial statements and review of the interim financial
 statements included in quarterly reports and services that are normally
 provided by our independent accountants in connection with statutory and
 regulatory filings or engagements.

      Audit-Related Fees consist of fees billed for assurance and related
 services that are reasonably related to the performance of the audit or review
 of the our consolidated financial statements and are not reported under "Audit
 Fees" and relate to services performed in connection with registration
 statements and our acquisitions during the year.

      Tax Fees consists of fees billed for professional services for tax
 compliance, tax advice and tax planning. These services include assistance
 regarding federal and state tax compliance, tax audit defense, customs and
 duties, and mergers and acquisitions.

      All Other Fees consist of fees billed for products and services provided
 by the principal accountant, other than those services described above.

Audit Committee Pre-Approval Procedures

      Our Board of Directors serves as our audit committee. Our Board of
Directors approves the engagement of our independent auditors, and meets with
our independent auditors to approve the annual scope of accounting services to
be performed and the related fee estimates. It also meets with our independent
auditors, on a quarterly basis, following completion of their quarterly reviews
and annual audit and prior to our earnings announcements, if any, to review the
results of their work. During the course of the year, our chairman has the
authority to pre-approve requests for services that were not approved in the
annual pre-approval process. The chairman reports any interim pre-approvals at
the following quarterly meeting. At each of the meetings, management and our
independent auditors update the Board of Directors with material changes to any
service engagement and related fee estimates as compared to amounts previously
approved. During 2005, all audit and non-audit services performed by our
independent accountants were pre-approved by the Board of Directors in
accordance with the foregoing procedures.



                                       69
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)

                          INDEX TO FINANCIAL STATEMENTS

                                                                          Page
                                                                          ----

Report of Independent Registered Public Accounting Firm                    F2

Consolidated Balance Sheets                                                F3

Consolidated Statements of Operations                                      F4

Consolidated Statements of Stockholders' Equity                            F5

Consolidated Statements of Cash Flows                                     F11

Notes to Consolidated Financial Statements                                F13


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Touchstone Resources USA, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Touchstone
Resources USA, Inc. (a development stage entity) as of December 31, 2005 and
2004, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended and the period March 5, 2001
(date of inception) through December 31, 2005. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Touchstone Resources USA, Inc.
as of December 31, 2005 and 2004, and the results of its operations, changes in
stockholders' equity and its cash flows for the years then ended and the period
March 5, 2001 (date of inception) through December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred net losses since inception and as
of December 31, 2005, had a working capital deficiency of $1,657,345 and a net
loss in 2005 of $16,406,818. Also as described in Note 3 to the financial
statements, the Company does not currently have sufficient funds to execute its
business plan. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are also describe in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

L J SOLDINGER ASSOCIATES, LLC

Deer Park, Illinois
March 24, 2006


                                      F-2
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                          December 31,
                                                                                  ----------------------------
                                                                                      2005            2004
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
Current assets
   Cash and cash equivalents                                                      $  4,632,988    $    594,182
   Restricted cash                                                                          --          81,133
   Restricted cash - joint interest                                                    382,525       1,058,620
   Accounts receivable                                                                 159,559              --
   Accounts receivable - joint interest                                              1,075,746       2,945,421
   Accounts receivable - joint interest related party                                  492,988       3,354,468
   Notes and interest receivable                                                        30,371          66,559
   Due from related party                                                              359,559         188,588
   Prepaid expenses and advances to operators                                        1,547,671       1,593,079
                                                                                  ------------    ------------
Total current assets                                                                 8,681,407       9,882,050

Oil and gas properties using successful efforts:
   Developed oil and gas interests net                                               3,507,316              --
   Undeveloped                                                                       4,125,578       4,763,311
Investment in limited partnerships and liability companies                              54,141       5,458,698
Fixed assets, net                                                                       66,360          50,958
Deposits                                                                                30,149          30,149
                                                                                  ------------    ------------
                                                                                  $ 16,464,951    $ 20,185,166
                                                                                  ============    ============

                                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable and accrued expenses                                          $  4,392,582    $    854,798
   Accounts payable - joint interest                                                 2,412,060       8,224,332
   Notes payable                                                                       369,105         618,223
   Notes payable - related party                                                       115,005         216,541
   Limited partnership subscriptions payable                                                --         200,000
   Convertible debenture, net                                                        3,050,000       1,080,287
                                                                                  ------------    ------------

Total current liabilities                                                           10,338,752      11,194,181
                                                                                  ------------    ------------

Note payable and convertible debentures, net - noncurrent                            1,534,660       3,210,652
                                                                                  ------------    ------------

Total liabilities                                                                   11,873,412      14,404,833
                                                                                  ------------    ------------

Commitment and contingencies

Minority interest                                                                           --       3,078,820

Stockholders' equity
   Preferred stock; $.001 par value; authorized - 5,000,000 shares; shares
     issued and outstanding - 710,063 shares at 2005 and 0 at December 31, 2004                             --
    Liquidation preference: $8,276,520                                                     710
   Common stock; $.001 par value; authorized - 150,000,000 shares;
     63,982,329 and 59,919,053 shares issued and outstanding and
     6,763,333 and 364,476 issuable at 2005 and 2004                                    70,746          60,284
   Additional paid-in capital                                                       36,607,833      18,338,761
   Discount on common stock from stock split                                                --              --
   Deferred compensation                                                                    --         (16,600)
   Deficit accumulated during the development stage                                (32,087,750)    (15,680,932)
                                                                                  ------------    ------------

Total stockholders' equity                                                           4,591,539       2,701,513
                                                                                  ------------    ------------
                                                                                  $ 16,464,951    $ 20,185,166
                                                                                  ============    ============
</TABLE>

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


                                      F-3
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                 For the Years            March 5, 2001
                                                               Ended December 31,         (Inception) to
                                                          ----------------------------     December 31,
                                                              2005            2004             2005
                                                          ------------    ------------    --------------
<S>                                                       <C>             <C>             <C>

Operator revenues                                         $    488,532    $    200,809    $      689,341
                                                          ------------    ------------    --------------
Expenses:
   Exploration expenses                                        106,359       1,501,398         1,607,757
   Operating expenses                                          312,918              --           312,918
   Impairment of oil and gas properties                      1,752,272         175,820         1,928,092
   Impairment of goodwill - related party                           --         657,914           657,914
   Bad debt expense - related party                            136,607              --           136,607
   Bad debt expense                                             25,000          15,454            40,454
   Depletion and depreciation                                  180,975              --           180,975
   General and administrative                                3,506,016       2,313,742         5,899,139
                                                          ------------    ------------    --------------

Total expenses                                               6,020,147       4,664,328        10,763,856
                                                          ------------    ------------    --------------

Loss from operations                                        (5,531,615)     (4,463,519)      (10,074,515)
                                                          ------------    ------------    --------------

Other (income) expense
   Loss from limited partnerships and limited liability
     companies                                               5,120,552       3,506,244         8,626,796
   Impairment of equity investment                                  --         139,502           139,502
   Interest income                                             (29,630)         (8,805)          (38,435)
   Interest expense                                          1,939,590       7,961,951         9,907,788
   Other income                                               (273,987)             --          (273,987)
   Registration rights penalty                               1,698,913              --         1,698,913
                                                          ------------    ------------    --------------

Total other expense                                          8,455,438      11,598,892        20,060,577
                                                          ------------    ------------    --------------

Loss before minority interest and pre-acquisition
  losses                                                   (13,987,053)    (16,062,411)      (30,135,092)
                                                          ------------    ------------    --------------

Addback:
      Minority interest                                        302,082         255,792           557,874
      Pre-acquisition losses                                        --         211,315           211,315
                                                          ------------    ------------    --------------

Total minority and pre-acquisition losses                      302,082         467,107           769,189
                                                          ------------    ------------    --------------

Net loss                                                  $(13,684,971)   $(15,595,304)   $  (29,365,903)

Preferred dividend on Series A                              (2,721,847)             --        (2,721,847)
                                                          ------------    ------------    --------------
Net loss to common shareholders                           $(16,406,818)   $(15,595,304)   $  (32,087,750)
                                                          ============    ============    ==============

Net loss per common share  - basic and diluted            $      (0.26)   $      (0.20)   $        (0.27)
                                                          ============    ============    ==============

Weighted average number of common shares
  outstanding - basic and diluted                           63,297,308      79,396,172       119,711,144
                                                          ============    ============    ==============
</TABLE>

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


                                      F-4
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                    Common Stock         Preferred Stock - Series A
                                                              -------------------------   -------------------------
                                                                Shares        Amount        Shares        Amount
                                                              -----------   -----------   -----------   -----------
<S>                                                           <C>           <C>           <C>           <C>

Balance at March 5, 2001
  (Date of Inception)                                                  --   $        --            --   $        --

Issuance of founders' shares  for  services at $0.00004 per
  share in March 2001                                          58,125,000        58,125            --            --

Issuance of common stock for services from a director at
  $0.00004 per share in May 2001                               83,125,000        83,125            --            --

Issuance of stock for cash at $0.002 per share during June
  through December 2001,  net of costs                         25,525,000        25,525            --            --

Net loss                                                               --            --            --            --
                                                              -----------   -----------   -----------   -----------

Balance at December 31, 2001                                  166,775,000       166,775            --            --
                                                              -----------   -----------   -----------   -----------

Net loss                                                               --            --            --            --
                                                              -----------   -----------   -----------   -----------

Balance at December 31, 2002                                  166,775,000       166,775            --            --
                                                              -----------   -----------   -----------   -----------

Net loss                                                               --            --            --            --
                                                              -----------   -----------   -----------   -----------

Balance at December 31, 2003                                  166,775,000   $   166,775            --   $        --
                                                              -----------   -----------   -----------   -----------
</TABLE>

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


                                      F-5
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                                                  Deficit
                                                                 Discount on                    Accumulated
                                                    Additional   Common Stock                   During the          Total
                                                     Paid-in      From Stock       Deferred     Development     Stockholders'
                                                     Capital        Split        Compensation      Stage       Equity (Deficit)
                                                    ----------   ------------    ------------   -----------    ----------------
<S>                                                 <C>          <C>             <C>            <C>            <C>

Balance at March 5, 2001
  (Date of Inception)                               $       --   $         --    $         --   $        --    $             --

Issuance of founders' shares for services at
  $0.00004 per share in March 2001                          --        (55,800)             --            --               2,325

Issuance of common stock for services from a
  director at $0.00004 per share in May 2001                --        (79,800)             --            --               3,325

Issuance of stock for cash at $0.002 per share
  during June through December 2001, net of costs           --         15,525              --            --              41,050

Net loss                                                    --             --              --       (18,518)            (18,518)
                                                    ----------   ------------    ------------   -----------    ----------------

Balance at December 31, 2001                                --       (120,075)             --       (18,518)             28,182
                                                    ----------   ------------    ------------   -----------    ----------------

Net loss                                                    --             --              --       (25,026)            (25,026)
                                                    ----------   ------------    ------------   -----------    ----------------

Balance at December 31, 2002                                --       (120,075)             --       (43,544)              3,156
                                                    ----------   ------------    ------------   -----------    ----------------

Net loss                                                    --             --              --       (42,084)            (42,084)
                                                    ----------   ------------    ------------   -----------    ----------------

Balance at December 31, 2003                        $       --   $   (120,075)   $         --   $   (85,628)   $        (38,928)
                                                    ----------   ------------    ------------   -----------    ----------------
</TABLE>

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


                                      F-6
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                           Common Stock             Preferred Stock - Series A
                                                                    ----------------------------    ---------------------------
                                                                       Shares          Amount          Shares         Amount
                                                                    ------------    ------------    ------------   ------------
<S>                                                                 <C>             <C>             <C>            <C>


Balance at December 31, 2003                                         166,775,000    $    166,775              --   $         --

Shares purchased on March 15, 2004 and cancelled in July 2004       (116,775,000)       (116,775)             --             --
Reclassification of discount on common stock                                  --              --              --             --
Shares cancelled by officer in March 2004                             (7,380,000)         (7,380)             --             --
Legal fees related to acquisition                                             --              --              --             --
Capital contributed by officer of Company in March 2004                       --              --              --             --
Issuance of common stock for acquisition of LS Gas, LLC                  100,000             100                             --
  in March 2004                                                               --              --
Issuance of common stock for acquisition of Touchstone Texas
  in March 2004                                                        7,000,000           7,000              --             --
Issuance of common stock for advisory fee related to the
  acquisition of Touchstone Texas in March 2004                          280,000             280              --             --
Issuance of warrants to Trident in March 2004                                 --              --              --             --
Issuance of common stock upon conversion of debt in June and
  July 2004                                                            6,899,053           6,899              --             --
Issuance of warrants in private offering of convertible notes
in June
  and July 2004                                                               --              --              --             --
Beneficial conversion feature of convertible note issued in June
  and July 2004                                                               --              --              --             --
Beneficial conversion feature of convertible note to Westwood
  AR in May 2004                                                              --              --              --             --
Issuance of common stock for cash at $1.00 per share in July 2004      3,000,000           3,000              --             --
Issuance of common stock for services at $1.24 in July 2004               20,000              20              --             --
Offering costs on private offering                                            --              --              --             --
Issuance of common stock for cash in November 2004                        99,000              99              --             --
Issuance of common stock for cash in December 2004                       265,476             266              --             --
Offering costs on private offering                                            --              --              --             --
Beneficial conversion feature of convertible note issued in
  November 2004                                                               --              --              --             --
Deferred compensation                                                         --              --              --             --
Net loss                                                                      --              --              --             --
                                                                    ------------    ------------    ------------   ------------

Balance at December 31, 2004                                          60,283,529    $     60,284              --   $         --
                                                                    ------------    ------------    ------------   ------------
</TABLE>

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


                                      F-7
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                                                       Deficit
                                                                      Discount on                    Accumulated
                                                       Additional     Common Stock                   During the         Total
                                                        Paid-in        From Stock      Deferred      Development    Stockholders'
                                                        Capital          Split       Compensation       Stage          Equity
                                                      ------------    ------------   ------------    -----------    -------------
<S>                                                   <C>             <C>            <C>             <C>            <C>

Balance at December 31, 2003                          $         --    $   (120,075)  $         --    $   (85,628)   $     (38,928)

Shares purchased on March 15, 2004 and cancelled
  in July 2004                                             116,775              --             --             --               --
Reclassification of discount on common stock              (120,075)        120,075             --             --               --
Shares cancelled by officer in March 2004                       --              --             --             --           (7,380)
Legal fees related to acquisition                          (13,618)             --             --             --          (13,618)
Capital contributed by officer of Company in
  March 2004                                                15,000              --             --             --           15,000
Issuance of common stock for acquisition of LS Gas,          1,000              --             --             --            1,100
  LLC in March 2004
Issuance of common stock for acquisition of
  Touchstone Texas in March 2004                            70,000              --             --             --           77,000
Issuance of common stock for advisory fee related
  to the acquisition of Touchstone Texas in
  March 2004                                                 2,800              --             --             --            3,080
Issuance of warrants to Trident in March 2004                1,175              --             --             --            1,175
Issuance of common stock upon conversion of debt in
  June and July 2004                                     6,892,150              --             --             --        6,899,049
Issuance of warrants in private offering of
  convertible notes in June and July 2004                3,211,400              --             --             --        3,211,400
Beneficial conversion feature of convertible note
  issued in June and July 2004                           3,678,600              --             --             --        3,678,600
Beneficial conversion feature of convertible note
  to Westwood AR in May 2004                               540,000              --             --             --          540,000
Issuance of common stock for cash at $1.00 per
  share in July 2004                                     2,997,000              --             --             --        3,000,000
Issuance of common stock for services at $1.24 in
  July 2004                                                 24,780              --        (24,800)            --               --
Offering costs on private offering                        (150,000)             --             --             --         (150,000)
Issuance of common stock for cash in November 2004         103,851              --             --             --          103,950
Issuance of common stock for cash in December 2004         278,484              --             --             --          278,750
Offering costs on private offering                         (38,270)             --             --             --          (38,270)
Beneficial conversion feature of convertible note
  issued in November 2004                                  727,709              --             --             --          727,709
Deferred compensation                                           --              --          8,200             --            8,200
Net loss                                                        --              --             --    (15,595,304)     (15,595,304)
                                                      ------------    ------------   ------------    -----------    -------------

      Balance at December 31, 2004                    $ 18,338,761    $         --   $    (16,600)   (15,680,932)   $   2,701,513
                                                      ------------    ------------   ------------    -----------    -------------
</TABLE>

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


                                      F-8
<PAGE>

<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                         Common Stock        Preferred Stock - Series A
                                                                    -----------------------   -----------------------
                                                                      Shares       Amount       Shares       Amount
                                                                    ----------   ----------   ----------   ----------
<S>                                                                 <C>          <C>          <C>          <C>

Balance at December 31, 2004                                        60,283,529   $   60,284           --   $       --

Issuance of common stock for cash at $1.05 per share in February
  and March 2005                                                       473,228          473           --           --
Issuance of common stock for cash at $.90 per unit in private
  offering during August through December 2005                       8,541,111        8,541           --           --
Issuance of common stock upon conversion of Westwood AR note         1,247,794        1,248           --           --
Offering costs on private offering                                          --           --           --           --
Issuance of warrants to Trident for extension of Trident Note
  and waivering of financial covenants and registration rights in           --           --           --           --
  March 2005
Issuance of preferred stock for cash in February, March and
  April 2005                                                                --           --      710,063          710
Offering costs on preferred stock offering                                  --           --           --           --
Issuance of common stock for consulting services at $0.83 per
  share in May 2005                                                    200,000          200           --           --
Issuance of warrants to Legend for consulting service in
  June 2005                                                                 --           --           --           --
Issuance of warrant to Trident for conversion of DDH II Note in
  May 2005                                                                  --           --           --           --
Issuance of warrants to Michael Marcus in connection with the
  Marcus transaction in October 2005                                        --           --           --           --
Preferred stock dividend                                                    --           --           --           --
Deferred compensation                                                       --           --           --           --
Net loss                                                                    --           --           --           --
                                                                    ----------   ----------   ----------   ----------

Balance at December 31, 2005                                        70,745,662   $   70,746      710,063   $      710
                                                                    ----------   ----------   ----------   ----------
</TABLE>

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


                                      F-9
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
            Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                                                         Deficit
                                                                         Discount on                   Accumulated
                                                          Additional     Common Stock                  During the         Total
                                                           Paid-in        From Stock      Deferred     Development    Stockholders'
                                                           Capital          Split       Compensation      Stage          Equity
                                                         ------------    ------------   ------------   -----------    -------------
<S>                                                      <C>             <C>            <C>            <C>            <C>
Balance at December 31, 2004                             $ 18,338,761    $         --   $    (16,600)  $(15,680,932)  $   2,701,513

Issuance of common stock for cash at $1.05 per share
  in February and March 2005                                  496,416              --             --            --          496,889
Issuance of common stock for cash at $.90 per unit in
  private offering during August through December 2005      7,678,460              --             --            --        7,687,001
Issuance of common stock upon conversion of Westwood
  AR note                                                   1,342,160              --             --            --        1,343,408
Offering costs on private offering                           (644,649)             --             --            --         (644,649)
Issuance of warrants to Trident for extension of
  Trident Note and waivering of financial covenants
  and registration rights in March 2005                        80,000              --             --            --           80,000
Issuance of preferred stock for cash in February,
  March and April 2005                                      7,809,985              --             --            --        7,810,695
Offering costs on preferred stock offering                   (959,121)             --             --            --         (959,122)
Issuance of common stock for consulting services at
  $0.83 per share in May 2005                                 165,800              --             --            --          166,000
Issuance of warrants  to Legend for consulting
  service in June 2005                                         30,000              --             --            --           30,000
Issuance of warrant to Trident for conversion of DDH
  II Note in May 2005                                          14,000              --             --            --           14,000
Issuance of warrants to Michael Marcus in connection
  with the Marcus transaction in October 2005                      --              --             --            --               --
Preferred stock dividend                                    2,256,021              --             --    (2,721,847)        (465,826)
Deferred compensation                                              --              --         16,600            --           16,600
Net loss                                                           --              --             --   (13,684,971)     (13,684,971)
                                                         ------------    ------------   ------------   -----------    -------------

 Balance at December 31, 2005                            $ 36,607,833    $         --   $         --   $(32,087,750)  $   4,591,539
                                                         ------------    ------------   ------------   -----------    -------------
</TABLE>

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


                                      F-10
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                             For the Years Ended
                                                                                December 31,               March 5, 2001
                                                                         ----------------------------     (Inception) to
                                                                             2005            2004        December 31, 2005
                                                                         ------------    ------------    -----------------
<S>                                                                      <C>             <C>             <C>
Cash flows from operating activities
      Net loss                                                           $(13,684,971)   $(15,595,304)   $     (29,365,903)
      Adjustments to reconcile net loss to net cash used in operations
           Minority interest and pre-acquisition losses                      (302,082)       (467,107)            (769,189)
           Depreciation                                                        16,851          11,670               28,521
       Depletion                                                              164,124              --              164,124
           Impairment of capitalized acquisition and exploration costs      1,752,272       1,624,096            3,376,368
           Warrants and stock issued for interest expense                      14,000          10,224               24,224
           Shares issued for services rendered                                166,000              --              171,650
           Equity loss in limited partnerships                              5,120,552       3,506,244            8,626,796
           Amortization of deferred compensation                               26,600           8,200               34,800
           Amortization of discount on notes payable                        1,418,233       7,315,999            8,734,232
           Exploration expense applied to prepayments to operator                  --          62,499               62,499
           Impairment of goodwill                                                  --         657,914              657,914
           Bad debt expense                                                   161,607          15,454              177,061
       Assignments of units in Knox Gas for conversion of note                 60,813              --               60,813
      Change in assets and liabilities
      (Increase) Decrease in assets
           Accounts receivable - joint interest                             1,749,514      (3,166,397)          (1,416,883)
           Accounts receivable - joint interest related party               2,861,480      (3,313,940)            (452,460)
           Restricted cash                                                    758,291        (601,155)             157,136
           Prepaid expenses                                                   (13,531)        (46,264)             (60,536)
           Other receivables                                                  (24,093)             --              (24,093)
      Increase in liabilities
           Accounts payable and accrued expenses                           (3,521,770)      8,035,815            4,545,292
                                                                         ------------    ------------    -----------------

Net cash used in operating activities                                    $ (3,276,110)   $ (1,942,052)   $      (5,267,634)
                                                                         ------------    ------------    -----------------

Cash flows from investing activities
      Cash acquired from acquisition of wholly-owned subsidiaries
        and limited partnership interest                                           --           4,715                4,715
      Repayment of note receivable - related party                            750,000          21,639              771,639
      Notes receivable                                                         13,898        (181,369)            (167,471)
      Notes receivable - related party                                       (750,000)        (54,975)            (804,975)
      Purchase of oil and gas interests and drilling costs                 (4,261,214)     (2,328,453)          (6,589,667)
      Investment in limited partnership interests                          (3,425,910)     (8,086,875)         (11,512,785)
      Distributions from limited partnerships                                 422,754          26,385              449,139
      Purchase of fixed assets                                                (32,253)        (26,941)             (59,194)
                                                                         ------------    ------------    -----------------
Net cash used in investing activities                                      (7,282,725)    (10,625,874)         (17,908,599)
                                                                         ------------    ------------    -----------------
</TABLE>

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


                                      F-11
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                           For the Years Ended
                                                                              December 31,               March 5, 2001
                                                                       ----------------------------     (Inception) to
                                                                           2005            2004        December 31, 2005
                                                                       ------------    ------------    -----------------
<S>                                                                    <C>             <C>             <C>

Cash flows from financing activities
    Advances from stockholder                                                    --              --               10,000
    Repayments to stockholder                                                    --              --              (10,000)
    Proceeds from notes payable                                                  --         807,100              807,100
    Proceeds from notes payable - related party                                  --         279,000              279,000
    Repayment of notes payable                                             (105,644)     (5,345,000)          (5,450,644)
    Repayment of notes payable - related party                             (157,048)        (91,500)            (248,548)
    Proceeds from issuance of convertible debt                                   --      10,990,000           11,090,000
    Loan costs                                                                   --        (104,000)            (104,000)
    Capital contributed by officer                                               --          15,000               15,000
    Minority contributions, net of issuance costs                                --       3,325,500            3,325,500
    Proceeds from issuance of common stock, net of issuance costs         7,920,252       3,194,430           11,155,732
    Proceeds from issuance of preferred stock, net of issuance costs      6,940,081              --            6,940,081
                                                                       ------------    ------------    -----------------

Net cash provided by financing activities                                14,597,641      13,070,530           27,809,221
                                                                       ------------    ------------    -----------------

Net increase in cash and cash equivalents                                 4,038,806         502,604            4,632,988

Cash and cash equivalents at beginning of year                              594,182          91,578                   --
                                                                       ------------    ------------    -----------------

Cash and cash equivalents, end of year                                 $  4,632,988         594,182    $       4,632,988
                                                                       ============    ============    =================
</TABLE>

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


                                      F-12
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

NOTE 1 - DESCRIPTION OF BUSINESS

Touchstone Resources USA, Inc. was incorporated under the laws of Delaware on
March 5, 2001.

On March 15, 2004, the Company experienced a change in management when all of
its directors and officers resigned from their positions and a new officer and
director was appointed. The Company's new management implemented a new business
plan and completed a series of material transactions and the Company became
engaged in oil and gas acquisition, exploration, development and producing
activities focusing on projects located in Texas, Mississippi, Louisiana, and
New Zealand.

During the third and fourth quarter of 2005, the Company experienced another
organizational change when all of its directors and officers resigned and a new
board of directors and management team were appointed. The Company's new
management team is currently focusing on oil and gas lease acquisition and
exploration activities on projects located in Oklahoma and Arkansas.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") and have been presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.

Consolidated Financial Statements

The accompanying consolidated financial statements include all of the accounts
of Touchstone Resources USA, Inc. and its nine subsidiaries consisting of:

      o     Touchstone Resources USA, Inc. ("Touchstone Texas"), a wholly-owned
            Texas corporation incorporated in May 2000

      o     Touchstone New Zealand, Inc. ("Touchstone New Zealand"), formerly
            known as Touchstone Awakino, Inc. ("Touchstone Awakino"), a
            wholly-owned Delaware corporation incorporated in March 2004

      o     Touchstone Louisiana, Inc. ("Touchstone Louisiana"), a wholly-owned
            Delaware corporation incorporated in March 2004

      o     Touchstone Texas Properties, Inc. ("Touchstone Texas Properties"),
            formerly known as Touchstone Vicksburg, Inc. ("Touchstone
            Vicksburg"), a wholly-owned Delaware corporation incorporated in
            March 2004

      o     Touchstone Oklahoma, LLC ("Touchstone Oklahoma"), formerly known as
            Touchstone Pierce Exploration, LLC ("Touchstone Pierce"), a
            wholly-owned Delaware limited liability company formed in June 2004

      o     PF Louisiana, LLC ("PF Louisiana"), a wholly-owned Delaware limited
            liability company formed in August 2004.

      o     Touchstone Mississippi, LLC ("Touchstone Mississippi"), a
            wholly-owned Delaware limited liability company formed in October
            2005.

      o     CE Operating, LLC ("CE Operating"), a wholly-owned Oklahoma limited
            liability company formed in May 2005

      o     PHT West Pleito Gas, LLC ("PHT West"), a 86% owned Delaware limited
            liability company formed in 2004


                                      F-13
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Affiliate companies in which the Company directly or indirectly owns more than
50% of the outstanding voting interest are accounted for under the consolidation
method of accounting. Under this method, an affiliate company's results of
operations are reflected within the Company's consolidated statement of
operations. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Equity Method

Under the guidance of Emerging Issues Task Force D-46, "Accounting for Limited
Partnership Investments" the Company uses the equity method to account for all
of its limited partnership and membership interests that represent an ownership
interest that exceeds 5% of the applicable entity, but is less than 50% of the
applicable entity. Under the equity method of accounting, the Company's
proportionate share of the investees' net income or loss is included in "Loss
from limited partnerships and limited liability companies" in the consolidated
statements of operations. Any excess investment is evaluated each reporting
period for impairment.

Development Stage Enterprise

The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting for
Development Stage Enterprises." Under SFAS No. 7, certain additional financial
information is required to be included in the financial statements for the
period from inception of the Company to the current balance sheet date.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Management believes that it is reasonably possible that the following material
estimates affecting the financial statements could significantly change within
the next year: (1) estimates of any proved oil and gas reserves, (2) estimates
as to the expected future cash flow from any proved oil and gas properties, and
(3) estimates of future dismantlement and restoration costs.

The Company's business makes it vulnerable to changes in wellhead prices of
crude oil and natural gas. Such prices have been volatile in the past and can be
expected to be volatile in the future.

By definition, proved reserves are based on current oil and gas prices. Price
declines reduce the estimated quantity of proved reserves and increase annual
amortization expense (which is based on proved reserves).

Oil and Gas Accounting

The Company uses the successful efforts method of accounting for oil and gas
producing activities. Under this method of accounting, all costs associated with
oil and gas lease acquisition costs, successful exploratory wells and all
development wells are capitalized and amortized on a unit-of-production basis
over the remaining life of proved reserves on a field basis. Unproved leasehold
costs are capitalized pending the results of exploration efforts. Exploration
costs, including geological and geophysical expenses, exploratory dry holes and
delay rentals, are charged to expense when incurred.

Capitalized costs of producing oil and gas properties, after considering
estimated salvage values, are depreciated and depleted by the unit-of-production
method.


                                      F-14
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Upon the sale or retirement of a complete unit of a proved property, the
cost and related accumulated depreciation, depletion, and amortization are
eliminated from the property accounts, and the resultant gain or loss is
recognized. Upon the retirement or sale of a partial unit of proved 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 recorded impairment as 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.

Impairment of Properties

The Company reviews its proved properties at the field level when management
determines that events or circumstances indicate that the recorded carrying
value of the properties may not be recoverable. Such events include a projection
of future oil and natural gas reserves that will be produced from a field, the
timing of this future production, future costs to produce the oil and natural
gas, and future inflation levels. If the carrying amount of an asset exceeds the
sum of the undiscounted estimated future net cash flows, the Company recognizes
impairment expense equal to the difference between the carrying value and the
fair value of the asset, which is estimated to be the expected present value of
discounted future net cash flows from proved reserves, utilizing a risk-free
rate of return. The Company cannot predict the amount of impairment charges that
may be recorded in the future. Unproved leasehold costs are reviewed
periodically and a loss is recognized to the extent, if any, that the cost of
the property has been impaired.

Unproved properties are reviewed at least annually for impairment. Impairment of
unproved properties is based on such factors as the date of expiration of the
Company's oil and gas leases and the existence of events which may serve to
condemn a prospect such as failure of a well.

Revenue Recognition

Oil and gas revenues are recognized when production is sold to a purchaser at a
fixed or determinable price, when delivery has occurred and title has
transferred, and if the collection of the revenue is probable. When the Company
has an interest in a property with other producers, it uses the sales method of
accounting for its oil and gas revenues. Under this method of accounting,
revenue is recorded based upon the Company's physical delivery of oil and gas to
its customers, which can be different from its net working interest in field
production.

The Company's operator division accounts for drilling and management contract
revenue in accordance with the term of the underlying drilling or management
contract. These contracts generally provide that revenue is earned and
recognized on a daily basis for drilling operations and a monthly basis for
production operations.

Capitalized Interest

The Company's policy is to capitalize interest on expenditures for significant
exploration and development projects while activities are in progress to bring
the assets to their intended use. As of December 31, 2005 and 2004, the Company
has recorded immaterial amount of capitalized interest.

Segment Information

Under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has determined it has one reportable operating
segment; which is the acquisition, exploration and development of natural gas
and oil properties. The Company's operations are conducted in two geographic
areas as follows:


                                      F-15
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Operating revenues for the years ended December 31, 2005 and 2004 by
geographical area were as follows:

                                                  December 31,
                                      --------------------------------
                                           2005               2004
                                      -------------    ---------------
  United States                          $  488,532         $  200,809
  New Zealand                                                       --
                                      -------------    ---------------
                                         $  488,532         $  200,809
                                      =============    ===============

Long-lived assets as of December 31, 2005 and 2004 by geographical area were as
follows:

                                                  December 31,
                                      --------------------------------
                                           2005              2004
                                      -------------    ---------------
  United States                         $ 7,588,456       $ 10,010,718
  New Zealand                               164,939            262,249
                                      -------------    ---------------
                                        $ 7,753,395      $  10,272,967
                                      =============    ===============

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and investments in money market
funds. The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents.

Fixed Assets

Fixed assets are recorded at cost, less accumulated depreciation and are
depreciated using the straight-line method over the estimated useful life of the
assets which ranges from five to seven years.

Goodwill

The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," which addresses the financial
accounting and reporting standards for the acquisition of intangible assets
outside of a business combination and for goodwill and other intangible assets
subsequent to their acquisition. This accounting standard requires that goodwill
be separately disclosed from other intangible assets on the balance sheet, and
no longer be amortized, but tested for impairment on at least an annual basis.
The Company impaired $657,914 of goodwill in 2004.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits at financial institutions or
unsecured loans. At various times during the year, the Company may exceed the
federally insured limits. To mitigate this risk, the Company places its cash
deposits only with high credit quality institutions. Management believes the
risk of loss is minimal.

RECLASSIFICATION

For comparability, the 2004 figures have been reclassified where appropriate to
conform with the financial statement presentation used in 2005. These
reclassifications had no effect on reported net loss.


                                      F-16
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Financial Instruments

The carrying value of the convertible notes is recorded at face value less
unamortized discounts for beneficial conversion features. Face value is
disclosed in Note 13.

The registration rights agreement associated with the Series A Preferred Stock
and related warrants has been determined to be subject to derivative accounting
and is recorded at fair value.

Income Taxes

Income taxes are recorded in the period in which the related transactions have
been recognized in the financial statements. Deferred tax assets and liabilities
are recorded for expected future tax consequences of loss carryforwards and
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities in the financial statements and their
tax basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion of, or all
of, the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

Dismantlement, Restoration and Environmental Costs

The Company follows the guidance of SFAS No. 143, "Accounting for Asset
Retirement Obligations" using a cumulative effect approach to recognize
transition amounts for asset retirement obligations, asset retirement costs and
accumulated depreciation. SFAS No. 143 requires liability recognition for
retirement obligations associated with tangible long-lived assets, such as
producing well sites, offshore production platforms, and natural gas processing
plants. The obligations included within the scope of SFAS No. 143 are those for
which a company faces a legal obligation. The initial measurement of the asset
retirement obligation is to record a separate liability at its fair value with
an offsetting asset retirement cost recorded as an increase to the related
property and equipment on the consolidated balance sheet. The asset retirement
cost is depreciated using a systematic and rational method similar to that used
for the associated property and equipment. As of December 31, 2005, the
Company's liability for retirement obligations was $33,341.

Retirement Obligations consist of the following as of December 31:

                                           2005       2004
                                         --------   --------
Balance as of January 1                  $     --   $     --
Cumulative effect of change in
  accounting principle                         --         --
Additional liabilities incurred (1)        33,341         --
Liabilities settled                            --         --
Accretion expense                              --         --
Revision of estimates                          --         --
                                         --------   --------
Balance as of December 31                $ 33,341      $-
                                         ========   ========


(1) In the fourth quarter of 2005, as discussed more fully in Notes 4 and 8, the
Company acquired direct working interests in certain in-development and
producing wells in exchange for the Company's investment ownership in certain
limited partnerships and limited liability companies, which prior to that period
held those well interests. Upon receiving their direct working interests in
those wells, the Company also recorded their proportionate share of the expected
future dismantlement and retirement obligations associated with those wells.


                                      F-17
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Stock-Based Compensation Arrangements

The Company follows the provisions of SFAS No. 123. As permitted under SFAS No.
123, the Company continues to utilize Accounting Principles Board ("APB") No. 25
in accounting for its stock-based compensation to employees and directors. Had
compensation expense for 2005 and 2004 been determined under the fair value
provisions of SFAS No. 123, as amended by SFAS 148, the Company's net loss to
common shareholders and net loss per share would have been as follows:

                                            2005              2004
                                       --------------    --------------
Net loss, to common stockholders
  as reported                          $  (16,406,818)   $  (15,595,304)
Add: Stock-based employee
  compensation expense included
  in reported net income determined
  under APB No. 25, net of related
  tax effects                                      --                --
Deduct: Total stock-based employee
  compensation expense determined
  under fair-value-based method for
  all awards, net of related tax           (2,453,974)               --
  effects
                                       --------------    --------------

Pro forma net income to common
  stockholders                         $  (18,860,792)   $  (15,595,304)
                                       --------------    --------------

Net loss per common share:
     Basic and diluted - as reported   $        (0.26)   $        (0.20)
     Basic and diluted - pro forma     $        (0.30)   $        (0.20)


The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2005; risk free interest rate of 4.04 - 4.48%; dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of 47% - 49%; and a weighted-average expected life of the options of 7-10
years.

Loss Per Share

Loss per common share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." Basic loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted loss per share is computed similarly to basic loss
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and if the additional common shares were
dilutive. Shares associated with stock options, warrants and convertible
preferred stock and debt are not included because their inclusion would be
antidilutive (i.e., reduce the net loss per share).

The number of shares of common stock and the loss per share for the years ended
December 31, 2005 and 2004 have been updated to reflect the 25 for 1 stock split
effected in March 2004 (see Note 15).


                                      F-18
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The common shares potentially issuable arising from these instruments, which
were outstanding during the periods presented in the financial statements,
consisted of:

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

Warrants                               16,423,117    5,943,015
Options                                 5,176,540           --
Convertible debt                        3,277,778    4,009,091
Series A convertible preferred stock    7,100,630           --
                                       ----------   ----------

                                       31,978,065    9,952,106
                                       ==========   ==========


Recent Accounting Pronouncements

In December 2004, accounting standards were revised and now require all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The pro
forma disclosures previously permitted will no longer be an alternative to
financial statement recognition. The new accounting standard is effective for
fiscal years beginning after June 15, 2005. The guidance also provides for
classifying awards as either liabilities or equity, which impacts when and if
the awards must be remeasured to fair value subsequent to the grant date. The
Company adopted the new accounting standard effective January 1, 2006.

The impact of adoption on our reported results of operations for future periods
will depend on the level of share-based payments granted in the future. However,
had the Company adopted the revised accounting standards in prior periods, the
impact of that standard would have approximated the impact as described in the
disclosure of pro forma net income and net income per share in the table
included in Stock-Based Compensation Arrangements in Note 2 to the Consolidated
Financial Statements. Also, benefits of tax deductions in excess of recognized
compensation costs to be reported as financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. The Company believes this reclass will not have a material
impact on its Consolidated Statements of Cash Flows.

In November 2005, accounting standards were revised to provide guidance for
determining and measuring other-than-temporary impairments of debt and equity
securities. The new guidance is effective for reporting periods beginning after
December 15, 2005. At December 31, 2005, available-for-sale investments in our
marketable securities had unrealized losses totaling $0.9 million which are
recorded in Other Accumulated Comprehensive Income. The Company does not believe
that the securities with unrealized losses

On April 4, 2005 the FASB adopted FASB Staff Position (FSP) FSB 19-1 "Accounting
for Suspended Well Costs" that amends SFAS 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies," to permit the continued
capitalization of exploratory well costs beyond one year if the well found a
sufficient quantity of reserves to justify its completion as a producing well
and the entity is making sufficient progress assessing the reserves and the
economic and operating viability of the project. In accordance with the guidance
in the FSP, the Company applied the requirements prospectively in its third
quarter of fiscal 2005. The adoption of FSP 19-1 by the Company during the third
quarter of 2005 did not have an immediate affect on the consolidated financial
statements. However, it could impact the timing of the recognition of expenses
for exploratory well costs in future periods. At December 31, 2005, the Company
did not have any exploratory wells in process on undeveloped acreage.

In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value can be reasonably estimated even though
uncertainty exists about the timing and (or) method of settlement. The Company
is required to adopt Interpretation No. 47 prior to the end of 2006. The Company
is currently assessing the impact of Interpretation No. 47 on its results of
operations and financial condition.


                                      F-19
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets"
that amends Accounting Principles Board (APB) Opinion No. 29, "Accounting for
Nonmonetary Transactions" and Amends FAS 19 "Financial Accounting and Reporting
by Oil and Gas Producing Companies", paragraphs 44 and 47(e). ARB No. 29 is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged and SFAS 153 amended ABP 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaced it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company is required to adopt SFAS No.
153 for nonmonetary asset exchanges occurring in the first quarter of 2006 and
its adoption is not expected to have a significant effect on the Company's
results of operations or financial condition.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3
("Statement 154"). SFAS 154 requires retrospective application to prior periods'
financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The implementation of FAS 154 is not expected to have a significant effect on
the Company's results of operations or financial condition.

NOTE 3 - GOING CONCERN

The Company is in the development stage and has incurred losses since its
inception. Also, its current liabilities exceed its current assets and it will
need additional cash to fund operations. There are no assurances the Company
will receive funding necessary to implement its business plan. This raises
substantial doubt about the ability of the Company to continue as a going
concern.

The Company believes that the proceeds that it plans to raise from private
offerings of securities and its current and projected revenues from oil and gas
operations will be sufficient to fund its operations through December 2006. The
Company will need to raise additional funds in the event it locates additional
prospects for acquisition, experiences cost overruns at its current prospects,
or fails to generate projected revenues.

The Company's ability to continue as a going concern is dependent upon the
Company raising additional financing on terms desirable to the Company. If the
Company is unable to obtain additional funds when they are required or if the
funds cannot be obtained on terms favorable to the Company, management may be
required to delay, scale back or eliminate its well development program or even
be required to relinquish its interest in one or more properties or in the
extreme situation, cease operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

NOTE 4 - CORPORATE STRUCTURE REORGANIZATION

Since commencing operation in the oil and gas exploration and development
business in March 2004, the Company has acquired a number of interests in oil
and gas projects. Most of these interests were acquired by limited liability
companies or limited partnerships in which the Company owned an equity interest.
Under this structure, the limited liability company or limited partnership,
rather than the Company, owned the direct working interest in the prospect.

This structure had the following effects:


                                      F-20
<PAGE>

      -     As an equity interest owner in most of the limited liability
            companies and limited partnerships, the Company did not have sole
            management control over the working interest owned by the limited
            liability company or limited partnership.

      -     When a limited partnership or limited liability company in which the
            Company owned an equity interest received a request for expenditure,
            although the Company was only required to pay its proportionate
            share of such expense, if any of the other partners or members
            failed to make payment of its proportionate share, the limited
            partnership or limited liability company would be at risk of losing
            its entire working interest as a result of the delinquency of a
            single member or partner. As a result, the Company was exposed to
            unnecessary risks associated with the financial stability of its
            partners.

      -     The transactions related to the limited liability companies and
            limited partnerships were accounted for under the equity method of
            accounting. This resulted in all of the expenses and revenues
            applicable to each entity being combined into a single line item on
            the Company statement of operations captioned "Loss (Profit) from
            Limited Partnerships and Limited Liability Companies)" and all
            assets being accounted for on the Company balance sheet as
            "Investments in Limited Partnerships and Liability Companies." In
            order to accurately record the forgoing, the Company was dependent
            on the underlying partnerships and limited liability companies
            generating timely and accurate financial reports to it.

During the fourth quarter of 2005, the Company withdrew from a variety of
limited partnerships and limited liability companies in which it held an equity
interest, executing a settlement agreement with each. This had the effect of
converting the Company's beneficial interests in the properties to working
interests. As a result, the relative rights and responsibilities of the Company,
its operators and related participants are now governed by joint operating
agreements or participation agreements and the Company decides whether to
acquire acreage or participate in operations with respect to the drilling,
completing, or equipping of wells. In most cases, the Company is also billed
directly by the operator for its proportionate share of costs incurred. These
exchanges also resulted in a reduction in "Investment in limited partnerships
and liability companies" and increased "Undeveloped oil and gas interests, using
successful efforts" on the consolidated balance sheets.

See Note 8 for more details.

During the fourth quarter of 2005, the Company withdrew from Knox Gas, LLC
("Knox Gas"), a limited liability company in which the Company held 68.18%
membership interest (see Note 5) and from Knox Miss Partners, LP ("Knox Miss
LP"), a limited partnership in which Knox Gas owns 99% of the limited
partnership interest, pursuant to a settlement agreement entered into among the
Company, Knox Gas, and Knox Miss LP. In return, Knox Miss, LP assigned to
Touchstone Mississippi 68.18% of the working interest held by Knox Miss LP in
the Mississippi project valued at $1,151,090. In addition, Touchstone
Mississippi received total assets of $352,405 and assumed a liability of
$10,000, allocated by Knox Gas and Knox Miss LP.

The Company determined that the corporate structure reorganization was an
exchange of nonmonetary assets, to which APB Opinion No. 29, Accounting for
Nonmonetary Transactions applies. The exchange was not essentially the
culmination of an earning process, and the accounting for the exchange of a
nonmonetary asset between the Company and its investee was based on the recorded
amount (after reduction, if appropriate, for an indicated impairment of value)
of the nonmonetary asset relinquished. Therefore, the reorganization was
recorded based on the book value of assets exchanged.


                                      F-21
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

NOTE 5 - BUSINESS COMBINATIONS

In accordance with Accounting Research Bulletin No. 51 "Consolidated Financial
Statements," the financial operations of the acquired subsidiaries have been
reflected in the financial statements as if they had been acquired as of January
1, 2004, with the related pre-acquisition losses being deducted at the bottom of
the condensed consolidated statement of operations.

Acquisition of Touchstone Texas

On March 23, 2004, the Company acquired 100% of the issued and outstanding
shares of common stock of Touchstone Texas from Touchstone Resources, Ltd.
("Touchstone Canada"), in consideration for which the Company issued 7,000,000
shares of its common stock to Touchstone Canada. The 7,000,000 shares were
valued at $70,000. The purchase price was allocated to the assets and
liabilities in accordance with SFAS No. 141 "Business Combinations." In
connection with this acquisition, the Company issued 280,000 shares of its
common stock to an investment advisor valued at $2,800. On March 23, 2004,
Touchstone Texas had a deficit of $751,724, which consisted of the following
components:

Cash                                    $   509,329
Other current assets                        188,616
Fixed assets                                 35,687
                                        -----------
Total assets                            $   733,632
                                        ===========

Accounts and notes payable              $ 1,301,383
Deposits from working interest owners       183,973
                                        -----------
Total liabilities                       $ 1,485,356
                                        ===========

Net deficit acquired                    $  (751,724)
                                        ===========


The excess purchase price of $824,524 was recognized as goodwill. Subsequent to
March 23, 2004, the Company recorded a post closing acquisition adjustment to
the balance of accounts payable of Touchstone Texas assumed by Touchstone Canada
at March 23, 2004, as a result of which the goodwill originally recognized was
reduced to $657,914.

In connection with the acquisition, the original payables of Touchstone Texas
were to be assumed by Touchstone Canada. Touchstone Texas was unable to obtain
releases from certain of its creditors relating to a portion of the payables
assumed by Touchstone Canada. According to Emerging Issues Task Force 02-10,
"Determining Whether a Debtor is Legally Released as Primarily Obligor When the
Debtor Becomes Secondarily Liable under the Original Obligation", unless and
until a novation agreement (an agreement that is binding on a creditor and
modifies the original debt so that the creditor accepts assets or new
obligations in satisfaction of the original liability and discharges the
original debt agreement with the debtor) exists between the original debtor and
the creditor or all requirements for legal defeasance have been met, the
creditor has the legal right to pursue the original debtor under the original
obligation before it pursues a new debtor. Since Touchstone Texas had not
received the releases from certain of its creditors for net liabilities
amounting to approximately $752,000 it was still liable for those net
liabilities and required to reflect them on its balance sheet. The Company,
therefore, recorded an additional amount of net liabilities of $752,000 and
increased the goodwill by the same amount. This full amount of goodwill was
impaired at December 31, 2004 using a present value technique to measure fair
value. In 2005, the Company obtained additional releases from the creditors
totaling $95,262. The 2005 releases were recorded as a reduction in accounts
payable and an increase in other income.


                                      F-22
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Acquisition of Knox Gas

On March 24, 2004 the Company purchased from FEQ Gas, LLC, ("FEQ Gas"), a 75%
membership interest in Knox Gas, which owns a 99% limited partnership interest
in Knox Miss LP, and a 1% membership interest on Knox Miss, LLC ("Knox Miss
LLC"), a Delaware limited liability company and the general partner in Knox Miss
LP. The Company agreed to assume FEQ Gas' obligation to make capital
contributions to Knox Gas in the amount of $5 million, which was subsequently
reduced pursuant to the August 2004 amendment to the operating agreement
described below. As of December 31, 2004 the Company had contributed $2,877,500
to Knox Gas.

Following is the condensed consolidated balance sheet of Knox Gas and its Knox
Miss LP subsidiary on March 24, 2004:

Notes and interest receivable             $    32,335
Advance payments to operators                 884,191
Unproved oil and gas property               4,079,702
Subscription receivable                     4,500,000
Miscellaneous                                     (83)
                                          -----------
Total assets                              $ 9,496,145
                                          ===========

Accrued expenses                          $    41,314
Notes payable                               4,504,500
Minority interest                               8,151
                                          -----------
Total liabilities and minority interest   $ 4,553,965
                                          ===========

Net assets acquired                       $ 4,942,180
                                          ===========


The excess purchase price of Knox Gas in the amount of $57,820 was allocated to
unproved oil and gas property.

In August 2004, Knox Gas amended its operating agreement to admit a new member
which reduced Touchstone's membership interest in Knox Gas from 75% to 68.18%.
The amendment resulted in the new member becoming the sole Class B Member and
all other members as Class A Members.

Knox Gas' Acquisition of Knox Miss Partners, L.P.

On February 26, 2004, Knox Gas acquired a 99% limited partnership interest in
Knox Miss L.P. and 1% membership interest in Knox Miss LLC from Endeavour
International Corporation ("Endeavour"), in consideration of which Knox Gas paid
$500,000 in cash and issued a secured promissory note of $4,500,000 to
Endeavour.

The following is the condensed balance sheet of Knox Miss LP on February 26,
2004:

Cash                                      $    3,404
Notes and interest receivable                 45,368
Advance payments to operators                905,024
Unproved oil and gas property              2,766,623
                                          ----------
Total assets                              $3,720,419
                                          ==========

Accrued expenses                          $   23,687
Notes payable                                  1,250
Minority interest                              8,562
                                          ----------
Total liabilities and minority interest   $   33,499
                                          ==========

Net assets acquired                       $3,686,920
                                          ==========


                                      F-23
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The excess purchase price of $1,313,080 was allocated to unproved oil and gas
property.

The following pro forma presentation assumes the Company's acquisitions of
Touchstone Texas and Knox Gas, and Knox Gas' acquisition of Knox Miss LP took
place on January 1, 2004 and shows the pro forma effect on loss from operations.
The historical column presents the audited financial information of the Company
for the period indicated.

                                                  Year Ended
                                              December 31, 2004
                                        ----------------------------
                                         Historical      Pro Forma
                                        ------------    ------------

Revenue                                 $    200,809    $    200,809
Operating expenses                         4,664,328       4,664,328
Loss from operations                      (4,463,519)     (4,463,519)
Other (income) loss                       11,598,892      11,598,892
Net loss before minority
  interest and pre-acquisition losses    (16,062,411)    (16,062,411)
Minority interest and pre-acquisition
  losses                                     467,107         255,792
Net loss to common
  stockholders                           (15,595,304)    (15,806,619)
Net loss per common share -
  basic and diluted                            (0.20)          (0.20)
Weighted average number of
  common shares outstanding -
  basic and diluted                       79,396,172      79,396,172


During the fourth quarter of 2005, the Company withdrew as the 68.18% member
from Knox Gas. See Note 4.

NOTE 6 - INCOME TAXES

Deferred income taxes result from the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities reflected on
the financial statements and the amounts recognized for income tax purposes. The
tax effects of temporary differences and net operating loss carryforwards that
give rise to significant portions of deferred tax assets and liabilities are as
follows at December 31:

<TABLE>
<CAPTION>
                                                                   2005            2004
                                                               ------------    ------------
<S>                                                            <C>             <C>
Deferred tax asset
    Tax benefit arising from net operating loss carryforward   $ 12,981,000    $  8,731,000
    Accruals and reserves                                           671,000              --
    Amortization, depreciation and depletion                         31,400              --
    Deferred compensation                                            74,400           3,200
    Goodwill impairment                                             260,200         260,200
                                                               ------------    ------------
                                                                 14,018,000       8,994,400
Deferred tax liability
    Intangible drilling costs                                       343,800              --
    Excess of tax losses for equity investments                          --         280,200
                                                               ------------    ------------
                                                                    343,800         280,200
                                                               ------------    ------------
Net deferred assets                                              13,674,200       8,714,200

Less valuation allowance                                        (13,674,200)     (8,714,200)
                                                               ------------    ------------

Net deferred tax asset                                         $         --    $         --
                                                               ============    ============
</TABLE>


                                      F-24
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                               --------------------------
                                                                   2005           2004
                                                               -----------    -----------
<S>                                                            <C>            <C>
Deferred
    Federal                                                    $   613,400    $   (13,800)
    State                                                           96,600         (3,000)
Federal and state benefit of net operating loss carryforward     4,250,000      8,710,900
                                                               -----------    -----------
                                                                 4,960,000      8,694,100
Less valuation allowance                                        (4,960,000)    (8,694,100)
                                                               -----------    -----------

Income tax expense                                             $        --    $        --
                                                               ===========    ===========
</TABLE>


As of December 31, 2005, the Company had losses which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $32,800,000 that
may be offset against future taxable income. These NOL carryforwards expire
beginning 2018 through 2020. However, these carryforwards may be significantly
limited due to changes in the ownership of the Company as a result of future
equity offerings.

Recognition of the benefits of the deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company has established a valuation
allowance for deferred tax assets (net of liabilities) of approximately
$13,674,200 and $8,714,200 as of December 31, 2005 and 2004, respectively.

The following table presents the principal reasons for the difference between
the Company's effective tax rates and the United States federal statutory income
tax rate of 35%.

<TABLE>
<CAPTION>
                                                                      December 31,
                                                              ---------------------------
                                                                  2005            2004
                                                              -----------     -----------
<S>                                                           <C>             <C>

Federal income tax benefit at statutory rate                  $ 4,895,000     $ 5,458,300
State income tax benefit (net of effect of federal benefit)       636,400         709,600
Non-deductible expenses                                          (496,000)     (2,810,600)
Touchstone Texas NOL carryforward                                      --       5,407,200
Other                                                             (75,400)     (70, 400)
Change in valuation allowance                                  (4,960,000)     (8,694,100)
                                                              -----------     -----------

Income tax benefit                                            $        --     $        --
                                                              ===========     ===========

Effective income tax rate                                               0%              0%
                                                              ===========     ===========
</TABLE>


                                      F-25
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

NOTE 7 - DUE FROM RELATED PARTY

As of December 31, 2005, Touchstone Mississippi, Touchstone New Zealand, and
Touchstone Louisiana had receivables of $95,167, $30,011, and $171,452 due from
Knox Miss LP, Awakino South, and LSP, respectively, as a result of the corporate
structure reorganization (see Note 4).

As of December 31, 2004, the Company had advanced $50,975 to PHT Vicksburg and
$35,000 to Touchstone Canada, respectively. Mark Bush, the president of
Touchstone Canada served as the president of Touchstone Texas until his
resignation on June 2, 2004. In addition, the Company was owed $101,607
(approximately $752,000 less an impairment of $650,393) from Touchstone Canada
for payment of accounts payable, which Touchstone Canada had agreed to assume
prior to the Company's acquisition of Touchstone Texas. During 2005,the Company
recorded an additional impairment of $136,607.

NOTE 8 - OIL AND GAS PROSPECT AND OPERATIONS

Fayetteville Prospect

In October 2005, the Company entered into an Exploration and Development
Agreement with two industry partners to acquire acreage for development in
Northern Arkansas. Under the agreement, the Company owns forty-five percent
(45%) of the leasehold acquired and bears forty-five percent (45%) of the costs
attributable thereto. Pursuant to this Agreement, as of December 31, 2005, the
Company has acquired leases in the total amount of $1,846,893. The Company also
prepaid the operator $1,172,511 for future leasehold acquisition and drilling
costs as of December 31, 2005. During the first quarter of 2006, the Company
made total payments of $6,853,202 to the operator for its share of the lease
acquisition, exploration and drilling costs incurred on the project. The initial
test well for the prospect was commenced in March 2006, and the Company bears
forty-five percent (45%) of the costs of drilling, completing, testing and
equipping the well.

Touchstone Oklahoma, LLC

On June 28, 2004, the Company formed Touchstone Pierce Exploration, LLC as the
sole managing member. Pursuant to the operating agreement of Touchstone Pierce,
the Company may be called upon from time to time for contributions so as to meet
the reasonable capital requirements of Touchstone Pierce.

In July 2004, Touchstone Pierce acquired an option to purchase various leases on
the Pierce Ranch in Matagorda County, Texas from South Oil, Inc. ("South Oil").
As of December 31, 2004, the Company had cancelled its option and recorded an
impairment charge of $42,500.

At the discretion of the Company, the managing member of Touchstone Pierce,
available cash will be distributed based on the value of aggregate capital
contributions.

During 2005, the Company changed the name of "Touchstone Pierce Exploration,
LLC" into "Touchstone Oklahoma, LLC".

On August 31, 2005, Touchstone Oklahoma, entered into a farmout agreement with
Checotah Exploration, LP. Touchstone Oklahoma acquired approximately 10,600 net
mineral acres in McIntosh County, Oklahoma for $350,000. The agreement calls for
the drilling of two test wells in which Touchstone Oklahoma will be responsible
for the first $1,000,000 in costs; after which the costs of drilling will be
split equally between Touchstone Oklahoma and Checotah Exploration, LP. Upon
successful completion of the two test wells ("additional wells"), Touchstone
Oklahoma will earn a 25% working interest in and to the farmout acreage. After
completion of the two test wells, Touchstone Oklahoma has the right to drill two
or more test wells in which Touchstone Oklahoma will be responsible for the
first $1,000,000 in costs; after which the costs of drilling will be split
equally between Touchstone Oklahoma and Checotah Exploration, LP. Upon
successful completion of the additional wells, Touchstone Oklahoma will earn an
additional 25% working interest in and to the farmout acreage (cumulative
working interest of 50%).


                                      F-26
<PAGE>

CE Operating, LLC

In September 2005, the Company acquired one hundred percent (100%) of the
membership interest of CE Operating, LLC, a qualified Oklahoma oil and gas
operator, from Austex Production Company, LLC for $8,000. CE Operating purchased
two certificates of deposit in the amount of twenty-five thousand dollars
($25,000) to back letters of credit required by governmental authorities of the
State of Oklahoma, which haven't been drawn as of December 31, 2005. The Company
serves as the sole and managing member.

Touchstone Mississippi

During 2002, Knox Miss LP entered into exploration agreements ("Exploration
Agreements") with SKH Exploration, Inc. and SKH Energy Partners II, LP
(collectively, "SKH") to jointly cooperate and participate in the exploration
and development of oil, gas and mineral leases in the Livingston Transform Area,
Longview and Osborn prospects which cover several counties in Mississippi.
Pursuant to the Exploration Agreements, Knox Miss LP purchased a 50% share in
various leasehold interests from SKH for an aggregate purchase price of
$2,646,184. Subsequently, the remaining 50% interest was purchased from SKH by
Clayton Williams Energy, Inc. During 2005, Knox Miss LP impaired its entire
leasehold interest in the Longview and Osborn prospects as a result of a dry
hole in the total amount of $510,794.

On May 23, 2002, Knox Miss LP entered into an Exploration and Development
Agreement (the "Agreement") with Clayton Williams Energy, Inc. ("Clayton
Williams") to jointly cooperate and participate in the exploration and
development of oil, gas and mineral leases in certain prospects which cover
several counties in Mississippi. Pursuant to the Agreement, Knox Miss LP was
required to pay Clayton Williams a management fee in the aggregate amount of
$500,000 payable in twenty-four monthly installments.

As a result of the settlement of Knox Miss LP's lawsuit with Clayton Williams on
May 26, 2004, Knox Miss LP assigned its various leasehold interests to Clayton
Williams (see Note 16).

In October 2005, the Company formed a new wholly owned subsidiary - Touchstone
Mississippi. During the fourth quarter of 2005, as a result of the corporate
structure reorganization (see Note 4), Touchstone Mississippi was assigned 67.4%
of the leasehold interest held by Knox Miss LP valued at $1,151,090.

PHT West Pleito Gas, LLC

On April 22, 2004, the Company made an initial capital contribution of $373,500
to PHT West Pleito Gas, LLC ("PHT West"), in exchange for an 83.4% membership
interest in PHT West. In July 2004, the Company made an additional capital
contribution of $749,000 to PHT West.

In May and June 2004, the operating agreement of PHT West was amended to reflect
the addition of another member, which reduced the Company's membership interest
to 71.5%.

During July of 2004, due to certain drilling difficulties, Touchstone Texas
resigned as the operator in the West Pleito Fan and PHT West notified the other
non-operators that it decided to surrender its entire working interest in the
prospect to the remaining non-operators. As a result, PHT West has impaired all
of the leasehold acquisition and drilling costs incurred as of December 31, 2004
and recorded an impairment charge of $1,338,028.


                                      F-27
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In August 2004, the operating agreement of PHT West was amended to reflect the
addition of another member and additional paid-in capital by the member, which
increased the Company's membership interest to 86%.

PF Louisiana LLC

On August 13, 2004, the Company made an initial capital contribution of $150,000
to PF Louisiana LLC, in exchange for a 100% membership interest in PF Louisiana.
Pursuant to the operating agreement of PF Louisiana, the Company may be called
upon from time to time for additional contributions to meet the reasonable
capital requirements of PF Louisiana. On August 13, 2004, PF Louisiana acquired
1,030.54 acres in Iberia Parish, Louisiana.

At the discretion of the Company, the managing member of PF Louisiana, available
cash will be distributed based on the value of the aggregate capital
contributions.

On August 11, 2005, PF Louisiana elected not to make the delay rental payment on
State Lease #18219 located in Ibera Parish, Louisiana. This resulted in PF
Louisiana impairing its total investment in the lease in the amount of $457,515.

Touchstone Louisiana

During the fourth quarter of 2005, as a result of the corporate structure
reorganization (see Note 4 and Note 8), Touchstone Louisiana was assigned 24.98%
of the working interest held by Louisiana Shelf Partners, LP ("LSP") in
Louisiana State Lease 17742 valued at $2,281,858. Touchstone Louisiana recorded
an adjustment of $658,348, which reduced the value of proved property costs to
$1,623,510 as of December 31, 2005.

Touchstone New Zealand

During 2005, the Company changed the name of "Touchstone Awakino, Inc." to
"Touchstone New Zealand, Inc."

During the fourth quarter of 2005, as a result of the corporate structure
reorganization (see Note 4 and Note 8), Touchstone New Zealand was assigned
7.93% of the working interest held by Awakino South Exploration, LLC ("Awakino
South") in New Zealand Petroleum Permit 38479 valued at $164,939 and 24.75% of
the working interest held by PHT Stent Partners, LP ("PHT Stent") in New Zealand
Petroleum Permit 38722 with zero value.

Touchstone Texas Properties

During 2005, the Company changed the name of "Touchstone Vicksburg, Inc." to
"Touchstone Texas Properties, Inc".

During the fourth quarter of 2005, as a result of the corporate structure
reorganization (see Note 4 and Note 8), Touchstone Texas Properties was assigned
working interest in various oil and gas properties as follows:

      o     41.67% of the working interest held by PHT Vicksburg Partners, LP
            ("PHT Vicksburg") in the Vicksburg project valued at $622,379.


                                      F-28
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

      o     28.8% of the working interest held by PHT Vela Partners, LPC ("PHT
            Vela") in the Vela project valued at $ 165,130.

      o     20% of the working interest held by PHT Martinez Partners, LP ("PHT
            Martinez") in the Martinez project valued at $551,886.

      o     15.36% of the working interest held by PHT Good Friday Partners, LP
            ("PHT Good Friday") in the PHT Good Friday project with zero value.

      o     17.82% of the working interest held by PHT Wharton Partners, LP
            ("PHT Wharton") in the Wharton project valued at $71,315.

      o     4.85% and 6.94% of the working interest in various leases in the La
            Paloma project valued at $154,041.

Touchstone Texas

Since its acquisition by the Company on March 23, 2004, the principal business
activity of Touchstone Texas has been serving as the operator to manage the
development and operations for several oil and gas projects. During the year
ended December 31, 2005, Touchstone Texas operated on various projects including
the Vicksburg, Wharton, Maverick, and Hackberry projects, all of which were
located in Texas. The Company's former equity Investees, PHT Vicksburg, PHT
Wharton and Maverick Basin were the working interest holder and non-operators
("Joint Interest Owners") in the Vicksburg, Wharton, and Maverick projects,
respectively. During the fourth quarter of 2005, as a result of the corporate
structure reorganization, the Company's wholly-owned subsidiary, Touchstone
Texas Properties was assigned direct working interest in various projects
including the Vicksburg and Wharton projects.

As an operator of the oil and gas projects, Touchstone Texas pays and discharges
all costs and expenses incurred in the development and operations of the joint
interest area and charges all of the Joint Interest Owners their proportionate
shares in accordance with the joint operating agreement ("JOA"). Touchstone
Texas bills the Joint Interest Owners monthly through the joint interest billing
statement for their share of costs, credits, and operating fees relating to the
joint operations. As of December 31, 2005 and 2004, Touchstone Texas maintained
restricted cash related to the joint operations received from the Joint Interest
Owners in the amount of $382,525 and $1,058,620, accounts receivable from the
Joint Interest Owners of $1,562,612 and $6,299,889, and accounts payable for
costs and expenses incurred on the joint operations of $2,400,744 and
$8,224,332, respectively. As of December 31, 2005 and 2004, the Company did not
deem it necessary to set up an allowance for the accounts receivable due from
the Joint Interest Owners.

Touchstone Texas is the general partner and owns a 1.81% interest in 2001
Hackberry Drilling Fund, LP ("2001 HDF").

During December 2005, Touchstone Texas resigned as the operator in the Vicksburg
project.

Summary

Oil and gas properties consisted of the following at December 31:

                                                 2005           2004
                                             -----------    -----------
Unproved properties acquisition costs        $ 3,938,666    $ 4,763,311
Unproved properties working in progress          186,912             --
Proved property acquisition costs              1,055,542             --
Proved property well and development costs     2,615,898             --
Accumulated depletion                           (164,124)            --
                                             -----------    -----------

Net capitalized oil and gas properties       $ 7,632,894    $ 4,763,311
                                             ===========    ===========


                                      F-29
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The Company recorded $164,124 in depletion expense for the year ended December
31, 2005, which is equivalent to $7 per mcf. on a units of production bases.

NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES

Checotah Pipeline, LLC

In September 2005, the Company formed Checotah Pipeline, LLC. The Company owns
50% of the membership interest of the limited liability company, with Checotah
Exploration, LP owning the other 50%. The Company contributed $45,000 in initial
capital to the limited liability company, which was used to fund acquisition of
a gathering system in McIntosh County, Oklahoma. The Company and the other
member of the limited liability company may be subject to capital calls as
necessary to fund the operation, maintenance, and expansion of the pipeline. The
company will serve as managing member.

PHT Vicksburg Partners, L.P.

On March 23, 2004, Touchstone Vicksburg purchased a 9.9% limited partnership
interest in PHT Vicksburg Partners, LP, a Delaware limited partnership, from
Montex Exploration, Inc. ("Montex"), a Delaware corporation, for $48,000. After
the purchase, the Company invested an additional $414,503 (net of partner
distributions) in PHT Vicksburg. On April 1, 2004, the limited partnership
agreement was amended to remove seven limited partners, which increased
Touchstone Vicksburg's limited partnership interest to 27.50%. As of December
31, 2004, PHT Vicksburg had acquired various leasehold interests in East Coastal
Field Prospect and Sullivan City Prospect located in Starr and Hidalgo Counties,
Texas.

In general, profits were allocated, after giving effect to certain regulatory
allocations and cumulative prior allocations, 75% to the limited partner and 25%
to PHT Gas, LLC. Losses in general were allocated, after giving effect to
regulatory allocations and certain proportionate allocations, to all partners
with a positive capital account in proportion to the extent of their balances
and then entirely to PHT Gas, LLC.

During the fourth quarter of 2005, Touchstone Texas Properties withdrew as the
27.5% limited partner from PHT Vicksburg. Pursuant to the settlement agreement
entered into between the Company and PHT Vicksburg, Touchstone Texas Properties
was assigned 41.67% of the working interest held by PHT Vicksburg (see Note7).
In addition, Touchstone Texas Properties assumed liabilities of PHT Vicksburg in
the total amount of $71,264. Touchstone Texas Properties was also billed
directly by the operator for its proportionate share of the costs incurred by
PHT Vicksburg prior to the corporate structure reorganization which were not yet
recorded by PHT Vicksburg at the time of the settlement and therefore not
reflected on the settlement agreement.

Awakino South Exploration, LLC

On March 23, 2004, Touchstone Awakino purchased a 4.6% Class B membership
interest in Awakino South Exploration, LLC, a Delaware limited liability
company, from Montex for $150,000. After the purchase, Touchstone Awakino
invested an additional $196,154 in Awakino South, and received an additional
4.54% membership interest. During 2003, Awakino South acquired a 75% working
interest in the Petroleum Exploration Permit No. PEP38479 oil and gas prospect
located in New Zealand for $3,000,000.


                                      F-30
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In August 2004, the operating agreement of Awakino South was amended to reflect
the addition of two other members, which reduced the Company's membership
interest to 7.93%.

During the fourth quarter of 2005, Touchstone New Zealand withdrew as the 7.93%
member from Awakino South. Pursuant to the settlement agreement entered into
between the Company and Awakino South, Touchstone New Zealand was assigned 7.93%
of the working interest held by Awakino South in New Zealand Petroleum Permit
38479 (see Note 7). In addition, Touchstone New Zealand received assets of
$30,011 from Awakino South. Touchstone New Zealand was also billed directly by
the operator for its proportionate share of the costs incurred by Awakino South
prior to the corporate structure reorganization which were not yet recorded by
Awakino South at the time of the settlement and therefore not reflected on the
settlement agreement.

PHT Stent Partners, L.P.

On March 26, 2004, the Company became a limited partner in PHT Stent Partners,
L.P. , a Delaware limited partnership for which PHT Gas, LLC is the general
partner.

In August 2004, the limited partnership agreement of PHT Stent was amended to
allow the addition of another limited partner, who became the sole Class B
limited partner. The Company, together with other limited partners, became the
Class A limited partners. On December 31, 2004, the limited partnership
agreement was amended again, which increased the Company's partnership interest
to 24.75%. As of December 31, 2004, the Company had contributed $687,500 for a
19.80% interest in PHT Stent.

In general, profits will be allocated, after giving effect to certain regulatory
allocations and cumulative prior allocations, 56.25% to the Class A limited
partners, 25% to the Class B limited partners and 18.75% to the general partner.
Losses in general will be allocated, after giving effect to regulatory
allocations and certain proportionate allocations, to all partners with a
positive capital account in proportion to the extent of their balances and then
entirely to PHT Gas, LLC.

During the fourth quarter of 2005, the Company withdrew as the 24.75% limited
partner from PHT Stent. Pursuant to the settlement agreement entered into
between Touchstone and PHT Stent, Touchstone New Zealand was assigned 24.75% of
the working interest held by PHT Stent in New Zealand Petroleum Permit 38722
(see Note 7). In addition, Touchstone New Zealand assumed liability of Awakino
South in the amount of $7,765. Touchstone New Zealand was also billed directly
by the operator for its proportionate share of the costs incurred by PHT Stent
prior to the corporate structure reorganization, which were not yet recorded by
PHT Stent at the time of the settlement and therefore not reflected on the
settlement agreement.

LS Gas, LLC

On March 23, 2004, the Company entered into an interest purchase agreement with
Touchstone Louisiana and Touchstone Canada whereby Touchstone Louisiana
purchased a 10% membership interest in LS Gas, LLC, a Delaware limited liability
company, from Touchstone Canada, a related party, in consideration for which the
Company issued 100,000 shares of its common stock to Touchstone Canada. The
shares were valued at $1,000.

Louisiana Shelf Partners, L.P.

In April 2004, Touchstone Louisiana purchased a 24.9975% Class A limited
partnership interest in Louisiana Shelf Partners, LP from Endeavour, in
consideration for which the Company paid Endeavour $250,000 and issued a 3%
promissory note payable to Endeavour in the amount of $2,000,000. The note was
contingent on LSP completing its first well which was completed at December 31,
2004. Payments are to be made against the note once the well starts generating
positive cash flow. There are also conditional accelerated payments that are
contingent upon certain production levels. This is disclosed in more detail in
Note 11. Subsequent to the purchase, Touchstone Louisiana invested an additional
$1,000,000 in LSP. LSP was the holder of State Lease 17666, which was set to
expire in December 2005, as a result of the Company electing not to pay annual
rentals that were due December 2004. Accordingly, LSP recorded an impairment
charge of $3,230,420 related to State Lease 17666 during the year ended December
31, 2004. LSP currently holds State Lease 17742 in the State Water adjoining
Cameron Parish, Louisiana.


                                      F-31
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In August 2004, LSP amended its limited partnership agreement to allow the
addition of another limited partner, who became the sole Class C limited
partner. The Company, together with other limited partners, became the Class A
limited partners. The Company's ownership interest in LSP was reduced to 24.98%.

In general, profits and losses were allocated, after giving effect to the
regulatory allocations per the amended limited partnership agreement, 13% to the
capital accounts of the Class C limited partners and the general partner, in the
order of priority. The remainder that is available for allocation to limited
partners were allocated to the capital accounts for the Class A limited
partners, Class B limited partners and general partner per the amended limited
partnership agreement.

During the fourth quarter of 2005, Touchstone Louisiana withdrew as the 24.98%
limited partner from LSP. Pursuant to the settlement agreement entered into
between Touchstone Louisiana and LSP, Touchstone Louisiana was assigned 24.98%
of the working interest held by LSP in Louisiana State Lease 17742 (see Note 7).
In addition, Touchstone Louisiana was assigned $171,542 of assets from LSP and
assumed liabilities of LSP in the total amount of $122,005.

PHT Wharton Partners, L.P.

In April 2004, the Company became a limited partner in PHT Wharton Partners,
L.P., a limited partnership formed in January 2004 for which PHT Gas, LLC is the
general partner. As of December 31, 2004, the Company has contributed $1,170,000
to the partnership for a 17.82% limited partnership interest. Pursuant to the
partnership agreement, the Company and the other limited partners in PHT Wharton
may be called upon from time to time for additional contributions so as to meet
the reasonable capital requirements of PHT Wharton. During 2004, PHT Wharton
acquired various leases in various prospects located in Wharton County, Texas.

In August 2004, PHT Wharton amended its limited partnership agreement to allow
the addition of another limited partner, who became the sole Class B limited
partner. The Company, together with other limited partners, became the Class A
limited partners.

In general, profits will be allocated, after giving effect to certain regulatory
allocations and cumulative prior allocations, 60% to the Class A limited
partners, 20% to the Class B limited partners and 20% to the general partner.
Losses in general will be allocated, after giving effect to regulatory
allocations and certain proportionate allocations, to all partners with a
positive capital account in proportion to the extent of their balances and then
entirely to the general partner.

During the fourth quarter of 2005, Touchstone Texas Properties withdrew as the
17.82% limited partner from PHT Wharton. Pursuant to the settlement agreement
entered into between Touchstone and PHT Wharton, Touchstone Texas Properties was
assigned 17.82% of the working interest held by PHT Wharton in the Wharton
project (see Note 7). In addition, Touchstone Texas Properties assumed
liabilities of PHT Wharton in the total amount of $300,941. Touchstone Texas
Properties was also billed directly by the operator for its proportionate share
of the costs incurred by PHT Wharton prior to the corporate structure
reorganization, which were not yet recorded by PHT Wharton at the time of the
settlement and therefore not reflected on the settlement agreement.

PHT Vela Partners, L.P.


                                      F-32
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In April 2004, the Company became a limited partner in PHT Vela Partners, L.P. ,
a limited partnership formed in January 2004 for which PHT Gas, LLC is the
general partner. Pursuant to the partnership agreement, the Company and the
other limited partners in PHT Vela may be called upon from time to time for
additional contributions so as to meet the reasonable capital requirements of
PHT Vela. During 2004, PHT Vela has acquired a 55% working interest in the Vela
leases located in Zapata County, Texas.

In August 2004, PHT Vela amended its limited partnership agreement to allow the
addition of another limited partner, who became the sole Class B limited
partner. The Company, together with other limited partners, became the Class A
limited partners. As of December 31, 2004, the Company had contributed
$1,200,000 to the partnership for a 28.8% limited partnership interest.

In general, profits were allocated, after giving effect to certain regulatory
allocations and cumulative prior allocations, 65.456% to the Class A limited
partners, 18.18% to the Class B limited partners and 16.364% to the general
partner. Losses in general were allocated, after giving effect to regulatory
allocations and certain proportionate allocations, to all partners with a
positive capital account in proportion to the extent of their balances and then
entirely to the general partner.

During the fourth quarter of 2005, Touchstone Texas Properties withdrew as the
28.8% limited partner from PHT Vela. Pursuant to the settlement agreement
entered into between Touchstone and PHT Vela, Touchstone Texas Properties was
assigned 28.8% of the working interest held by PHT Vela in the Vela project (see
Note 7). In addition, Touchstone Texas Properties received cash of $53,710 from
PHT Vela. Touchstone Texas Properties was also billed directly by the operator
for its proportionate share of the costs incurred by PHT Vela prior to the
corporate structure reorganization, which were not yet recorded by PHT Vela at
the time of the settlement and therefore not reflected on the settlement
agreement.

PHT Good Friday Partners, L.P.

In June 2004, the Company became a limited partner in PHT Good Friday Partners,
L.P., a limited partnership formed in June 2004 for which PHT Gas, LLC is the
general partner. Pursuant to the partnership agreement, the Company and the
other limited partners in PHT Good Friday may be called upon from time to time
for additional contributions so as to meet the reasonable capital requirements
of PHT Good Friday.

In August 2004, PHT Good Friday amended its limited partnership agreement to
allow the addition of another limited partner, who became the sole Class B
limited partner. The Company, together with other limited partners, became the
Class A limited partners. As of December 31, 2004, the Company had contributed
$900,000 to the partnership for a 15.36% limited partnership interest.

In general, profits were allocated, after giving effect to certain regulatory
allocations and cumulative prior allocations, 50% to the Class A limited
partners, 33.33% to the Class B limited partners and 16.67% to the general
partner. Losses in general were allocated, after giving effect to regulatory
allocations and certain proportionate allocations, to all partners with a
positive capital account in proportion to the extent of their balances and then
entirely to the general partner.

During the fourth quarter of 2005, Touchstone Texas Properties withdrew as the
15.36% limited partner from PHT Good Friday. Pursuant to the settlement
agreement entered into between Touchstone and PHT Good Friday, Touchstone Texas
Properties was assigned 15.36% of the working interest held by PHT Good Friday
in the Good Friday Project (see Note 7). In addition, Touchstone Texas
Properties received cash of $17,710 from PHT Good Friday. Touchstone Texas
Properties was also billed directly by the operator for its proportionate share
of the costs incurred by PHT Good Friday prior to the corporate structure
reorganization, which were not yet recorded by PHT Good Friday at the time of
the settlement and therefore not reflected on the settlement agreement.


                                      F-33
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

PHT Martinez Partners, L.P.

In June 2004, the Company became a limited partner in PHT Martinez Partners,
L.P. , a limited partnership formed in June 2004 for which PHT Gas, LLC is the
general partner. Pursuant to the partnership agreement, the Company and the
other limited partners in PHT Martinez may be called upon from time to time for
additional contributions so as to meet the reasonable capital requirements of
PHT Martinez.

In August 2004, PHT Martinez amended its limited partnership agreement to allow
the addition of another limited partner, who became the sole Class B limited
partner. The Company, together with other limited partners, became the Class A
limited partners. As of December 31, 2004, the Company had contributed $700,000
of the $900,000 it subscribed to the partnership for a 19.8% limited partnership
interest.

In general, profits were allocated, after giving effect to certain regulatory
allocations and cumulative prior allocations, 50% to the Class A limited
partners, 33.33% to the Class B limited partners and 16.67% to the general
partner. Losses in general were allocated, after giving effect to regulatory
allocations and certain proportionate allocations, to all partners with a
positive capital account in proportion to the extent of their balances and then
entirely to the general partner.

During the fourth quarter of 2005, Touchstone Texas Properties withdrew as the
20% limited partner from PHT Martinez. Pursuant to the settlement agreement
entered into between Touchstone and PHT Martinez, Touchstone Texas Properties
was assigned 20% of the working interest held by PHT Martinez in the Martinez
project (see Note 7). In addition, Touchstone Texas Properties received assets
in the total amount of $281,596 from PHT Martinez. Touchstone Texas Properties
was also billed directly by the operator for its proportionate share of the
costs incurred by PHT Martinez prior to the corporate structure reorganization,
which were not yet recorded by PHT Martinez at the time of the settlement and
therefore not reflected on the settlement agreement.

Maverick Basin Exploration, LLC ("Maverick Basin")

On June 23, 2004, the Company formed Maverick Basin Exploration, LLC ("Maverick
Basin") as the initial Class A member with a 74.25% membership interest and
initial Class B member with a 24.75% membership interest. PHT Gas, LLC was the
initial Class C member with a 1% membership interest. Pursuant to the operating
agreement of Maverick Basin, the Company may be called upon from time to time
for capital contributions to meet the reasonable capital requirements of
Maverick basin.

On July 14, 2004, prior to making any membership contributions to Maverick
Basin, the Company withdrew as the Class A member. Simultaneously, South Oil
agreed to become the Class A member of Maverick Basin and assumed the capital
contribution requirements of the Class A member.

On July 28, 2004, Maverick Oil and Gas, Inc. agreed to assume the Class A
membership from South Oil, Inc.

On August 6, 2004, the operating agreement was amended to change the Company's
initial capital contribution to $100,000, for which the Company had already made
during July 2004.

In January 2006, the Company received $62,928 from Maverick Basin as a refund
for overcontributed capital.

PHT La Paloma Partners, L.P.

On August 12, 2004, the Company became a limited partnership in PHT La Paloma
Partners, L.P., a Delaware limited partnership formed in August 2004 for which
PHT Gas, LLC is the general partner. Pursuant to the partnership agreement, the
Company and the other limited partners in PHT La Paloma may be called upon from
time to time for additional contribution, so as to meet the reasonable capital
requirements of PHT La Paloma. As of December 31, 2004, the Company had
contributed $633,333 to the partnership.


                                      F-34
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In general, profits were allocated after giving effect to certain regulatory
allocations and cumulative prior allocations, 85% to the limited partners and
15% to the general partner. Losses in general were allocated, after giving
effect to regulatory allocations and certain proportionate allocations, to all
partners with a positive capital account in proportion to the extent o their
balances and then entirely to the general partner.

During the fourth quarter of 2005, Touchstone Texas Properties withdrew as the
11% limited partner from PHT La Paloma. Pursuant to the settlement agreement
entered into between Touchstone and PHT La Paloma, Touchstone Texas Properties
was assigned 4.85% and 6.94% of the direct working interest in various leases in
the La Paloma project by Reichmann Petroleum Corporation (see Note 7). In
addition, Touchstone Texas Properties assumed liabilities of PHT La Paloma in
the total amount of $77,359. Touchstone Texas Properties was also billed
directly by the operator for its proportionate share of the costs incurred by
PHT La Paloma prior to the corporate structure reorganization, which were not
yet recorded by PHT La Paloma at the time of the settlement and therefore not
reflected on the settlement agreement.

Summary

The following table summarizes the Company's interests in oil and gas non-public
limited partnerships accounted for under the equity method of accounting:

<TABLE>
<CAPTION>
                                                  December 31, 2005               December 31, 2004
                                            -----------------------------   -----------------------------
                                                             Temporary                       Temporary
                                                             Excess of                       Excess of
                                             Carrying     Carrying Value     Carrying     Carrying Value
                                               Value      Over Net Assets      Value      Over Net Assets
                                            -----------   ---------------   -----------   ---------------
                                            (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)
<S>                                         <C>           <C>               <C>           <C>

PHT Vicksburg Partners, LP                  $        --   $            --   $   404,552   $        47,631
Awakino South Exploration, LLC                       --                --       252,154                --
PHT Stent Partners, LP                               --                --        10,094            47,616
Louisiana Shelf Partners, LP                         --                --     1,826,080           561,149
PHT Wharton Partners, LP                             --                --       234,665                --
PHT Vela Partners, LP                                --                --       449,919            68,987
PHT Good Friday Partners, LP                         --                --       812,737           190,347
PHT Martinez Partners, LP                            --                --       833,981            36,151
PHT La Paloma Partners, LP                           --                --       625,375            73,166
Maverick Basin Exploration, LLC                      --                --            --           345,850
Checotah Pipeline, LLC                           45,000                --            --                --
LS Gas, LLC                                       1,000             1,000         1,000             1,000
2001 Hackberry Drilling Fund Partners, LP         8,141                --         8,141                --
                                            -----------   ---------------   -----------   ---------------
                                            $    54,141   $         1,000   $ 5,458,698   $     1,371,897
                                            ===========   ===============   ===========   ===============
</TABLE>


As of December 31, 2004, management evaluated the excess carrying value and
determined it to be only temporary as a result of the various entities receiving
payment of subscription receivables due them and cash flows from the sale of oil
and gas produced from the proved oil and gas reserves.


                                      F-35
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The following table summarized financial information for the limited
partnerships and limited liability companies accounted for under the equity
method of accounting at December 31, 2004 and has been compiled from the
financial statements of the respective entities:

                         December 31, 2004
                         -----------------

Total Assets             $      30,760,273
                         =================

Total Liabilities        $       7,352,041
                         =================


                         December 31, 2004
                         -----------------
Results of Operations:
Revenue                  $         822,303
Loss from Operations           (18,886,060)
Net Loss                 $     (18,886,060)


NOTE 9 - FIXED ASSETS

Fixed assets consisted of the following at December 31:

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

Computer equipment                $ 68,270    $ 41,407
Furniture and fixtures              50,239      44,851
Less:  accumulated depreciation    (52,150)    (35,300)
                                  --------    --------

                                  $ 66,359    $ 50,958
                                  ========    ========


NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The Company had the following accounts payable and accrued expenses outstanding
at December 31:

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

Accounts payable                      $  579,914   $  274,696
Payables for oil and gas interests       236,785      194,174
Accrued interest                         265,077      180,889
Accrued registration rights penalty    1,696,647           --
Accrued dividend                         465,826           --
Other accrued expenses                 1,148,333      205,039
                                      ----------   ----------

                                      $4,392,582   $  854,798
                                      ==========   ==========


                                      F-36
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

NOTE 11 - NOTES PAYABLE

The following schedule summarizes the current and non-current portion of
Company's debts as of December 31, 2005:

Payable to                           Current     Non-current     Total
---------------------------------   ----------   -----------   ----------

2001 Hackberry Drilling Fund, LP    $   59,494   $        --   $   59,494
LSP                                     54,745            --       54,745
Mark Bush                                  766            --          766
                                    ----------   -----------   ----------
      Subtotal - related parties       115,005            --      115,005
                                    ----------   -----------   ----------

IL Resources - 3%                      110,000            --      110,000
John Paul Dejoria - 10%                138,857            --      138,857
Insurance policies financing - 6%      117,248            --      117,248
Other - Non-interest bearing             3,000            --        3,000
Endeavour - 3%                              --     2,000,000    2,000,000
                                    ----------   -----------   ----------
                                       369,105     2,000,000    2,369,105
Less unamortized discount                   --       465,340      465,340
                                    ----------   -----------   ----------
     Subtotal                          369,105     1,534,660    1,903,765
                                    ----------   -----------   ----------

                                    $  484,110   $ 1,534,660   $2,018,770
                                    ==========   ===========   ==========


The following schedule summarizes the current and non-current portion of
Company's debts as of December 31, 2004:

Payable to                          Current     Non-current     Total
--------------------------------   ----------   -----------   ----------

SPH Investment, Inc.               $   75,000   $        --   $   75,000
Louisiana Shelf Partners, LP           82,047            --       82,047
2001 Hackberry Drilling Fund, LP       59,494            --       59,494
                                   ----------   -----------   ----------
      Subtotal - related parties      216,541            --      216,541
                                   ----------                 ----------

IL Resources - 3%                     210,000            --      210,000
South Oil - 3%                         87,500            --       87,500
John Paul Dejoria - 10%               128,857            --      128,857
Other - Non-interest bearing           10,866            --       10,866
Endeavour - 3%                        181,000     1,819,000    2,000,000
                                   ----------   -----------   ----------
                                      618,223     1,819,000    2,437,223
Less unamortized discount                  --       658,348      658,348
                                   ----------   -----------   ----------
      Subtotal                        618,223     1,160,652    1,778,875
                                   ----------   -----------   ----------

                                   $  834,764   $ 1,160,652   $1,995,416
                                   ==========   ===========   ==========


                                      F-37
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In February 2004, Knox Gas issued a $4,500,000 promissory note to Endeavour as
part of the consideration for its purchase of Knox Miss, LP. The note accrued
interest at 4% per annum. The Company was required to fund Knox Gas' obligations
under the promissory note to Endeavor in the amount of $4,500,000 during 2004.
The note was secured by Knox Gas' 99% limited partnership interest in Knox Miss
LP and 1% membership interest in Knox Miss LLC. As of December 31, 2004, Knox
Gas has paid off the entire principal balance of the note. Knox Gas subsequently
paid off the accrued interest of $63,864 on the note in January 2005.

In April 2004, Touchstone Louisiana purchased a 24.9975% Class A limited
partnership interest in LSP from Endeavour, in consideration for which the
Company, among other things, issued a promissory note payable to Endeavour in
the amount of $2,000,000. The $2,000,000 promissory note was contingent on LSP
completing its first well. The first well was completed as of December 31, 2004,
which has been shut-in awaiting facilities for production. The Company
interpreted this event to be the triggering factor in recording the note payable
during the third quarter of 2004. The note bears interest at 3% per annum. Since
the note bears interest at a rate which is below the rate the Company can
currently obtain in the marketplace, the Company used its borrowing rate of 12%
to recompute the carrying value of the note. The Company also used the project
net revenue stream from the well based on the reserve study to determine the
payment terms in recomputing the value of the note. Accordingly, Touchstone
Louisiana recorded a discount of $658,348 on the note. Amortization of the
discount is recorded as interest expense. For the year ended December 31, 2005,
the Company amortized $193,008 of the discount and recorded accrued interest of
$100,273. Monthly installments are due as follows:

(i)   Regular monthly installments are calculated monthly. The amount is to be
      24.9975% of the monthly cash flow for the immediately preceding calendar
      month. Monthly cash flow is defined as any positive dollar amount that
      results after subtracting from the gross proceeds received during such
      calendar month by LSP, amounts actually paid for royalties and any lease
      operating expenses for the wells (but not including any expenses for
      drilling, completing or reworking the LSP wells).

(ii)  The note is also subject to two conditional accelerated payments which are
      explained below:

      (a)   First, in addition to the monthly payments described above, if the
            initial production rate for any LSP wells meets or exceeds an
            average of five (5) million cubic feet or more per day of natural
            gas during the first five (5) 24-hour days of production; Touchstone
            Louisiana must make a supplemental payment equal to the lesser of:
            a) the remaining unpaid principal balance or b) $800,000.

      (b)   Second, in addition to the monthly payments and accelerated payment
            described above, if the initial production rate for any LSP wells
            meets or exceeds an average of three (3) million cubic feet or more
            per day of natural gas during the first six (6) months of
            production; Touchstone Louisiana must make a supplemental payment
            equal to the lesser of: a) the remaining unpaid principal balance or
            b) $1,200,000.

NOTE 12 - NOTES PAYABLE - RELATED PARTIES

As of December 31, 2005 and 2004, Touchstone Texas owed 2001 Hackberry Drilling
Fund $59,494.


                                      F-38
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

As of December 31, 2005, Touchstone Louisiana owed $54,745 to LSP as a result of
the corporate structure reorganization.

As of December 31, 2004, the Company owed SPH Investments Profit Sharing, Inc.,
a company controlled by Stephen P. Harrington, who was an officer and director
of the Company until August 2005 when he resigned from his positions, $75,000
for a demand loan. The loan was paid off during 2005.

As of December 31, 2004, Touchstone Texas owed LSP $82,047. This amount was paid
off during 2005.

NOTE 13 - CONVERTIBLE DEBENTURES

Convertible debentures consisted of the following at December 31:

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

12% Secured convertible note      $2,050,000   $2,050,000
12% Convertible promissory note    1,000,000    1,000,000
10% Convertible promissory note           --    1,000,000
8% Convertible debenture                  --           --
                                  ----------   ----------

                                   3,050,000    4,050,000

    Less unamortized discount             --      919,713
                                  ----------   ----------

                                   3,050,000    3,130,287

    Less long-term portion                --    2,050,000
                                  ----------   ----------

                                  $3,050,000   $1,080,287
                                  ==========   ==========


In March 2003, the Company issued to Laguna Capital Group LLC, a California
limited liability company, a $100,000, 8% convertible debenture due March 27,
2004. The convertible debenture was convertible at any time into shares of the
Company's $.001 par value common stock. The conversion or purchase price of the
common stock was the market price of the Company's common stock at the time of
conversion. The convertible debenture was repaid on March 11, 2004. The debt
holder forgave the interest and the Company recorded the forgiveness of debt as
income.

On March 23, 2004 the Company entered into a loan agreement to borrow $2,100,000
from Trident Growth Fund, LP ("Trident"), a Delaware limited partnership
pursuant to a 12% secured convertible promissory note (the "Trident Note"). The
Trident Note is secured by substantially all of the assets of the Company and
was scheduled to mature March 23, 2005. On March 23, 2005, the Trident Note was
extended to March 24, 2006. On March 23, 2006, the Trident Note was extended
again to May 7, 2006. The Company has the option to redeem the note at 100% of
par at any time prior to the maturity date. Trident has the option to convert at
any time all or a portion of the principal amount of the Trident Note into
common stock of the Company. Trident was issued a warrant to purchase 250,000
shares of the Company's common stock as an additional incentive to make the
loan. The warrants provide for a cashless exercise at the option of Trident
provided that the per share market price of one share of common stock is greater
than the warrant exercise price. The warrants expire on March 31, 2014. The
initial conversion price of the Trident Note and initial exercise price of the
warrant is $1.00 per share of common stock, subject to anti-dilution provisions.
The notes contain certain reset provisions which, if triggered, would require
the Company to record a beneficial conversion expense for the difference between
the market price and new adjusted price. The Company paid loan commitment and
origination fees of 1% and 4%, respectively, which were recorded as loan costs
and will be amortized over the life of the loan. Interest is due monthly and
payable in cash unless Trident elects to have the interest paid in common stock
of the Company. Repayment of the principal amount of the note has been
guaranteed by subsidiaries of the Company. As defined in the loan agreement, the
Company is required to comply with various financial covenants. Any failure to
comply with such covenants may be deemed a default on the loan by Trident. In
March 2004, Trident waived compliance with certain negative covenants contained
in the Trident Note to permit the Company to issue up to $12 million of
convertible notes and warrants in a private placement.


                                      F-39
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The Company has allocated the proceeds from issuance of the Trident Note and
warrants based on a fair value basis for each item. Consequently, the
convertible Trident promissory note was recorded with discounts of $1,175 based
on the ascribed value of the warrants as determined by using the Black-Scholes
Method. The discount was fully amortized and recorded as interest expense as of
December 31, 2004.

Under the terms of the loan agreement, if the Company files a registration
statement relating to any of its securities, it is required to notify Trident in
writing and, upon Trident's request, will include in the registration statement
the offer and sale of the shares of the common stock issuable upon Trident's
conversion of the note ("Trident Shares").

In the event that the Company fails to include Trident Shares in a piggy back
registration statement as required, Trident shall give notice demanding a
registration and 105 days after the notice the Company shall prepare and file a
registration statement with the SEC with respect to such Trident Shares. If the
Company fails to file within said time period, then, at the option of Trident,
for each full calendar month that the Trident Shares are not fully registered,
the Company shall issue 0.1% of its common shares then outstanding computed on a
fully diluted basis per day until the shares are registered.

The Company evaluated its convertible debt instruments for possible application
of derivative accounting under Statement of Financial Accounting Standard
("SFAS") No 133: Accounting for Derivative Instruments and Hedging Activities,
Emerging Issues Task Force ("EITF") 00-19: Accounting for Derivative Financial
Instrument Indexed to, and Potentially Settled in, a Company's Own Stock, EITF
01-6: The Meaning of "Indexed to a Company's Own Stock" and EITF 05-2: The
Meaning of "Conventional Convertible Debt Instrument" in Issue No. 00-19.

The Company determined its convertible debt was not subject to derivative
accounting as it was deemed a "conventional convertible debt" based on practice
in existence at the time the debt was issued. The Company continues to evaluate
its convertible debt in accordance with the EITF 05-2 which was issued in June
2005 and applies prospectively to any convertible debt which is modified after
that date.

In September 2004, the Company repaid $50,000 of principal outstanding on the
note.

On March 23, 2005, Trident waived compliance with all financial covenants
contained in the Trident Note as well as the registration requirements and
extended the note to March 24, 2006, in consideration for which the Company
issued a warrant to Trident to purchase 100,000 shares of common stock at an
initial exercise price of $1.20 per share, which was reset to $0.90 per share
later in 2005. On February 6, 2006, Trident exercised the warrant through the
cashless exercise provision, as a result of which the Company issued 29,688
shares of common stock to Trident.

On March 23, 2006, Trident waived compliance with all financial covenants
contained in the Trident Note and extended the note to May 7, 2006, in
consideration for which the Company issued a warrant to Trident to purchase
50,000 shares of common stock at an exercise price of $0.90 per share. In
addition, the Company and Trident agreed that in the event that the Company
raises funds sufficient to repay the Trident Note through private placement of
equity or debt during the term of the note, the Company is obligated to repay
the principal plus any accrued interest of the note within ten days of the
closing of such placement.


                                      F-40
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

As disclosed in Note 15, in July 2005, the Company commenced a private offering
of units of its securities consisting of two shares of the Company's common
stock and one common stock purchase warrant for a unit offering price of $1.80.
This offering triggered a reset provision of the Trident Note. As a result, the
Trident Note has been reset to a conversion price of $0.90. Since the reset
price was greater than of fair market value of the stock on the date when the
original note was issued to Trident, no additional beneficial conversion expense
was recorded.

In April and July 2004, the Company commenced a private placement of convertible
promissory notes bearing interest at 1.58% per annum together with warrants to
purchase shares of common stock in the Company at an exercise price of $2.00 per
share. The notes were payable in April and July 2005 and subordinated to the
Trident Note. The notes were mandatorily convertible into shares of the
Company's common stock upon the earlier of: (i) the Company's filing of an
amendment to the Company's Certificate of Incorporation increasing the number of
shares of common stock the Company is authorized to issue such that a sufficient
number of shares is authorized so that all convertible notes issued in the
private placement can be converted into shares of common stock, or (ii) the
first business day after the effective date of a reverse stock split of the
outstanding shares of common stock such that a sufficient number of shares is
authorized so that all convertible notes issued in the private placement can be
converted into shares of common stock. The initial conversion price of the note
is $1.00 per share of common stock subject to certain adjustments. As of
December 31, 2004 the Company issued $6,890,000 in principal of notes, which
were converted into 6,899,053 shares of the Company's common stock as a result
of the Company's filing of an amendment to its Certificate of Incorporation
increasing its authorized shares of common stock. The Company also issued
3,445,000 warrants to purchase shares of common stock in the Company. The
Company has allocated the proceeds from issuance of the convertible notes and
warrants based on a fair value basis for each item.

The convertible promissory notes were recorded with discounts of $3,211,400
based on the ascribed value of the warrants as determined by using the
Black-Scholes Method. Beneficial conversion discounts of $3,678,600 were
recorded since the promissory notes were convertible into common shares of stock
at a rate of $1.00 per share while the prevailing common stock share price was
$1.59 and $1.51 when the notes were made. As of December 31, 2004, the discounts
related to the ascribed value of the warrants and beneficial conversion feature
were fully amortized as the notes were converted into common stock of the
Company. The Company paid offering costs of $358,250 and issued warrants to
purchase 61,250 shares of common stock in payment of consulting fees in
connection with the financing.

On May 27, 2004 the Company entered into a loan agreement to borrow $1,000,000
from Westwood AR, Inc. ("Westwood"), pursuant to a 10% convertible promissory
note (the "Westwood Note"). The Westwood Note matures on August 31, 2005. The
initial conversion price of the Westwood Note was $1.00 per share of common
stock, subject to anti-dilution provisions. Westwood AR had the option to
convert at any time all or a portion of the principal amount of the Westwood
Note into any of the following at the initial conversion price of $1.00:

      a)    1,000,000 shares of the Company's common stock;

      b)    5 membership interests in Knox Gas;

      c)    800,000 shares of the Company's common stock and 1 membership
            interest in Knox Gas;

      d)    600,000 shares of the Company's common stock and 2 membership
            interests in Knox Gas;

      e)    400,000 shares of the Company's common stock and 3 membership
            interests in Knox Gas; or

      f)    200,000 shares of the Company's common stock and 4 membership
            interests in Knox Gas.

A beneficial conversion discount of $540,000 was recorded since the Westwood
Note was convertible into common shares of stock at a rate of $1.00 per share
while the prevailing common stock share price was $1.54 when the note was made.
This discount was amortized over the term of the loan. As of December 31, 2005
and 2004, the Company amortized $540,000 and $212,394 of the discount,
respectively.


                                      F-41
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Interest was due on the earlier of the maturity date or the note conversion date
and payable in cash unless Westwood elects to have the interest paid in common
stock of the Company.

If the Company completed an equity offering after January 1, 2005, Westwood AR
had the option to require the Company to repay Westwood AR up to 30% of the net
proceeds the Company received from the equity offering on the Westwood Note.

On August 18, 2005, the Company entered into an agreement with Westwood AR, to
amend the conversion rights of the Westwood Note. The note was amended so that
Westwood could convert, all or any part, of the original principal amount of the
note, plus accrued interest into units consisting of two (2) shares of common
stock and one (1) three-year common stock purchase warrant for $1.50 per common
share; and 2 membership interests in Knox Gas, LLC. The conversion price per
unit was stated to be $1.80. On August 19, 2005, Westwood AR converted the
entire principal, plus accrued interest into 623,897 units and two membership
interests in Knox Gas, LLC. The Company issued 1,247,794 shares of its common
stock and 623,897 three-year warrants with an exercise price of $1.50 per share.

Under Financial Accounting Standard ("FAS") No. 84, "Induced Conversions of
Convertible Debt an amendment of APB Opinion No. 26," the Company's amendment of
the convertible note was deemed as an inducement for Westwood to convert the
note. Accordingly, the value of the inducement to convert the promissory note
was recorded as interest expense in the amount of $280,324.

On November 18, 2004 the Company entered into a loan agreement to borrow
$1,000,000 from DDH Resources II Limited ("DDH II"), pursuant to a 12%
convertible promissory note (the "DDH II Note"). The DDH II Note matures on the
earlier of May 18, 2005, or the completion of subsequent equity financing in the
total aggregate amount of $3,000,000. The initial conversion price of the DDH II
Note is $1.10 per share of common stock, subject to anti-dilution provisions.
DDH II was issued warrants to purchase 500,000 shares of the Company's common
stock at $2.00 per share as an additional incentive to make the loan. The
warrants expire on November 19, 2007. The DDH II note is subordinated to the
note payable due to Trident or future senior indebtedness.

A beneficial conversion discount of $409,309 was recorded since the DDH II Note
was convertible into common shares of stock at a rate of $1.10 per share while
the prevailing common stock share price was $1.20 when the note was made. In
addition, the convertible promissory note was recorded with a discount of
$318,400 based on the ascribed value of the warrants as determined by using the
Black-Scholes Method. These discounts are being amortized over the term of the
loan. The Company amortized $727,709 and $135,602 of the discount as of December
31,2005 and 2004 respectively.

Interest is due on the earlier of the maturity date or the note conversion date
and payable in cash unless DDH II elects to have the interest paid in common
stock of the Company.

On May 16, 2005, the Company entered into an agreement with DDH II, to extend
the maturity date of its outstanding convertible note from May 18, 2005 to May
18, 2006, in consideration for which the Company reduced the conversion price of
the note from $1.10 to $1.00 and issued an additional 100,000 warrants which had
an ascribed value of $14,000, to purchase common stock at $2.00 per share. The
warrants are exercisable immediately and expire November 2007.


                                      F-42
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

NOTE 14 - NOTES PAYABLE SUMMARY

The following schedule summarizes the current and non-current portion of
Company's debts included in Note 11 through Note 13 as of December 31, 2005:

Payable to                          Current     Non-current     Total
--------------------------------   ----------   -----------   ----------

LSP                                $   54,745   $        --   $   54,745
2001 Hackberry Drilling Fund, LP       59,494            --       59,494
Mark Bush                                 766            --          766
                                   ----------   -----------   ----------
Subtotal - related parties            115,005            --      115,005

IL Resources                          110,000            --      110,000
John Paul Dejoria                     138,857            --      138,857
Insurance policies financing          117,248            --      117,248
Other                                   3,000            --        3,000
Trident                             2,050,000            --    2,050,000
DDH II                              1,000,000            --    1,000,000
Endeavour                                  --     2,000,000    2,000,000
                                   ----------   -----------   ----------
                                    3,534,110     2,000,000    5,534,110
Less: unamortization discounts             --       465,340      465,340
                                   ----------   -----------   ----------

                                   $3,534,110   $ 1,534,660   $5,068,770
                                   ==========   ===========   ==========


Maturities on debts are as follows:

Year Ending December 31:
    2006                                   $   3,534,110
    2007                                         521,146
    2008                                         734,499
    2009                                         745,428
                                           -------------

                                           $   5,535,183
                                           =============


NOTE 15 - STOCKHOLDERS' EQUITY

Preferred Stock

On March 29, 2005, the Company filed a Certificate of Designation with the
Delaware Secretary of State to designate 2,000,000 of its authorized but
unissued shares of preferred stock as Series A Convertible Preferred Stock. Each
share of the Series A convertible preferred stock ("Series A Shares") is
initially convertible into ten (10) shares of the Company's common stock at an
initial conversion price of $1.10 per share. The conversion price is subject to
proportional adjustment for stock splits, combinations, recapitalizations and
stock dividends.

The Series A Shares are convertible at any time at the option of the holder, and
are subject to mandatory conversion in the event that: (i) there is an effective
registration statement covering the public sale of the shares of the Company's
common stock underlying the Series A Shares; and (ii) the volume weighted
average closing price per share of the Company's common stock for 20 consecutive
trading days is equal to or greater than 150% of the conversion price. In the
event of a merger or other transaction in which the Company is not the surviving
corporation, the Series A Shares and all accrued and unpaid dividends due
thereon, will automatically convert into common stock and participate in such
merger or other transaction.


                                      F-43
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Holders of the Series A Shares are entitled to receive dividends at the rate of
eight percent (8%) per annum of the $11.00 stated value of such shares payable
on an annual basis on December 31 of each year after issuance, or upon earlier
conversion, out of funds legally available therefore; provided, however, that at
the option of the holder, such dividends shall be payable in kind at the rate of
12% per annum of the $11.00 stated value of such shares by issuance of shares of
the Company's common stock having a fair market value equal to the amount of the
dividend. For this purpose, fair market value is defined as the average of the
high and low bid prices for the Company's shares of common stock as reported on
the OTC Bulletin Board for the five (5) trading days immediately preceding the
date the dividend is paid. As of December 31, 2005, the Company has recorded an
accrued preferred stock dividend of $465,826.

In the event of liquidation, dissolution or winding up of the Company, the
holders of the Series A Shares shall be entitled to a liquidation preference of
$11.00 per share plus all accrued and unpaid dividends prior to any payment or
distribution to holders of shares of the common stock.

Except as otherwise provided in the Delaware General Corporation Law, the shares
of Series A convertible preferred stock have no voting rights.

During March and April of 2005, the Company completed private offerings (the
"Offerings") of units comprised of shares of its Series A convertible preferred
stock and warrants to purchase shares of its common stock at a purchase price of
$11.00 per unit. Each unit consisted of one share of Series A convertible
preferred stock and one common stock purchase warrant. Each share of Series A
convertible preferred stock is immediately convertible at the option of the
holder into ten (10) shares of common stock at an initial conversion price of
$1.10 per share. Each warrant is immediately exercisable into five (5) shares of
common stock at an exercise price of $1.50 per share for a term of three years.

The warrants have a call provision if the volume weighted average closing price
per share of the Company's common stock for twenty consecutive trading days
following the effectiveness of the registration of the shares underlying the
warrants is equal to or greater than 150% of the exercise price, the Company
will have unlimited discretion to call the warrants for surrender fifteen (15)
business days after it provides written notice to the holders of the warrants.
If the warrants are not exercised during such fifteen (15) business day period,
they will terminate. The exercise price of the warrants will be adjusted for
stock splits, combinations, recapitalization and stock dividends.

The Company has agreed to use its best efforts to prepare and file with the
Securities and Exchange Commission within 60 days after the termination of the
offering, but in no case later than 90 days after the termination of the
offering, a registration statement under the Securities Act of 1933, as amended,
permitting the public resale of the shares of Common Stock issuable upon
conversion or exercise, as applicable, of the Series A Convertible Preferred
Stock and Warrants issued in the offering. The Company has agreed to pay certain
penalties to the subscribers in this offering if the registration statement is
not filed within 90 days after the termination of the offering or if the
registration statement is not declared effective within 180 days after the
termination of the offering. As of the date of this filing, the Company has not
filed the registration statement.

The Company is currently subject to penalty of 2% per month of the amount of the
offering ($7,810,693) until it files a registration statement and then the
penalty decreases to 1% per month until the registration statement is effective.


                                      F-44
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The first offering was conducted on a "best efforts" basis solely to a limited
number of accredited investors in the United States (the "Regulation D
Offering"). The second offering was conducted on a "best efforts" basis solely
to a limited number of accredited investors who are not "U.S. persons" (the
"Regulation S Offering").

During March and April 2005, the Company sold 402,336 units in the Regulation D
Offering for aggregate gross proceeds of $4,425,696. The Company paid
commissions and expenses of $575,333 to Legend Merchant Group, Inc. ("Legend"),
a broker-dealer registered under the Securities Exchange Act of 1934, as
amended, and member of the NASD and the SIPC. In addition, as compensation for
the services provided by Legend in connection with the Regulation D Offering,
the Company issued warrants to Legend to purchase 602,004 shares of common stock
at $1.50 that expire in three years.

During March and April 2005, the Company sold 307,727 units in the Regulation S
Offering for aggregate gross proceeds of $3,384,997. The Company paid investment
banking fees in the amount of $338,500 to independent third party consultants in
connection with this transaction. In addition, as compensation for services
provided by such consultants in connection with the Regulation S Offering, the
Company issued warrants to purchase 107,727 shares of common stock at $1.25 that
expire in three years.

As a result of the Regulation D and Regulation S Offerings during March and
April 2005, the Company has issued a total of 710,063 shares of Series A
preferred stock and warrants to purchase 3,550,315 shares of common stock to the
investors. Under Emerging Issues Task Force ("EITF") 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments," the Company has allocated
the proceeds from issuance of the Series A convertible preferred stock and
warrants based on a fair value basis of each item. Consequently, the convertible
Series A preferred stock was recorded with a discount of $1,109,335 based on the
ascribed value of the warrants as determined by using the Black-Scholes Model.
Under EITF 00-27, the discount for the warrant was recorded as a preferred
dividend. An additional beneficial conversion discount of $1,146,686 was
recorded since the Series A preferred stock is convertible into shares of common
stock at an effective conversion price of $0.95 per share while the prevailing
common stock share prices was $1.10, $1.11 and $1.16 at each closing date. This
discount was also recorded as a preferred dividend.

The Company evaluated its Series A Preferred Stock and related warrants for
possible application of derivative accounting under Statement of Financial
Accounting Standard ("SFAS") No 133: Accounting for Derivative Instruments and
Hedging Activities, Emerging Issues Task Force ("EITF") 00-19: Accounting for
Derivative Financial Instrument Indexed to, and Potentially Settled in, a
Company's Own Stock, EITF 01-6: The Meaning of "Indexed to a Company's Own
Stock". It has determined that registration rights related to the Series A
Preferred Stock and related warrants, were subject to derivative accounting. In
evaluating these registration rights and their related financial instruments the
Company applied the methodology of View C in EITF 05-4 Issue Summary No. 1 and
accounted for them each as a freestanding instrument. The related Series A
Preferred and warrants were not subject to derivative accounting but were
subject to beneficial conversion accounting as described in the paragraph above.
The Company has determined the fair value of the registration rights in
accordance with paragraph 17 of SFAS No. 133. The fair value of these
registration rights agreements was immaterial when they were initially granted
in 2005 and at June 30, 2005. However, the fair value was determined to be
$798,817 at September 30, 2005 and the Company recognized this amount in expense
and correspondingly as a liability. At December 31, 2005 the Company determined
the fair value to be $1,696,647 and recorded an additional $897,830 in expense
and liability.

Common Stock

On March 15, 2004, the Company entered into stock purchase agreements with Scott
Yancey and George Sines, the Company's founding stockholders, pursuant to which
the Company purchased 116,775,000 shares of common stock for $2,000. The Company
subsequently cancelled those shares. The founding stockholders concurrently
entered into secondary stock purchase agreements with Stephen P. Harrington,
pursuant to which they sold their remaining 16,350,000 shares of common stock of
the Company. The founding stockholders subsequently resigned from their
positions as officers and directors of the Company. As a result of Stephen P.
Harrington's acquisition of 32.7% of the then issued and outstanding shares of
common stock of the Company and his appointment as the successor officer and
director of the Company, a change of control may be deemed to have occurred.


                                      F-45
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

On March 19, 2004, the Company effected a twenty-five for one common stock
split. All shares and per share amounts in the financial statements and the
notes thereto have been restated to reflect the stock split.

On March 23, 2004, Stephen P. Harrington surrendered for cancellation 7,380,000
of his shares of the Company's common stock in order to facilitate the
transaction described below.

On March 23, 2004, the following transactions were consummated:

(a)   Pursuant to a stock purchase agreement by and between the Company and
      Touchstone Canada, the Company purchased 100% of the issued and
      outstanding shares of capital stock, no par value per share, of Touchstone
      Texas, a development stage corporation and wholly-owned subsidiary of
      Touchstone Canada. As consideration for the acquisition, the Company
      issued 7,000,000 shares of its common stock to Touchstone Canada valued at
      $70,000 by an independent valuation consultant. Upon the consummation of
      the acquisition, the Company paid an advisory fee consisting of 280,000
      shares of its common stock, which was valued at $2,800.

(b)   Pursuant to an interest purchase agreement by and among the Company,
      Touchstone Louisiana and Touchstone Canada, Touchstone Louisiana purchased
      a 10% membership interest in LS Gas, LLC from Touchstone Canada, in
      consideration for which the Company issued 100,000 shares of its common
      stock to Touchstone Canada valued at $1,000.

During March 2004, Stephen P. Harrington contributed $15,000 as additional
paid-in capital to fund the operating expenses of the Company.

In June 2004, the Company amended its Certificate of Incorporation to increase
its authorized shares of common stock to 150,000,000.

In April through July 2004, as an incentive for the lenders to loan a total of
$6,890,000 to the Company, the Company issued to the lenders warrants to
purchase a total of 3,445,000 shares of the Company's common stock at an
exercise price of $2.00 exercisable immediately. The warrants expire in three
years (see Note 13).

In June and July 2004, the Company issued 6,899,053 shares of common stock upon
the conversion of the promissory notes in the principal amount of $6,890,000
plus accrued interest due thereon.

On July 15, 2004, the Company issued warrants to purchase 61,250 shares of
common stock in compensation for consulting services provided in connection with
the private placement offering. (See Note 13) The warrants have an exercise
price of $2.00, exercisable immediately and expire in three years.

On July 19, 2004, the Company obtained $3,000,000 from AltaFin, B.V., a
Netherlands Antilles Company, in consideration for which units were issued that
were comprised of 3,000,000 shares of common stock and warrants to acquire
1,500,000 shares of common stock. Each warrant is immediately exercisable into
one share of common stock at an exercise price of $2.00 per share and terminates
three years from the date of grant. In connection with the financing, the
Company incurred offering costs of $150,000.

On September 7, 2004, the Company issued 20,000 shares of common stock to
Sanders Morris Harris, Inc. ("SMH") as compensation for the financial advisory
service SMH will provide for twelve months. The 20,000 shares were valued at
$24,800 and recorded as deferred compensation. During 2005 and 2004, $16,600 and
$8,200, respectively, has been charged to expense.


                                      F-46
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

On November 1, 2004, the Company's Board of Directors approved and commenced an
offering of up to 1,500,000 units of its securities, each unit consisting of two
shares of the Company's common stock and one three-year $2.00 common stock
purchase warrant for a unit offering price of $2.10. During November and
December 2004, the Company sold a total of 182,238 units in which 364,446 shares
of common stock and 182,238 warrants were issued for an aggregate purchase price
of $382,700. Offering costs of $38,270 were paid. During February 2005, the
Company sold 236,614 units in which 473,228 shares of common stock and 236,614
warrants were issued for an aggregate purchase price of $496,890. Offering costs
of $49,689 were paid. In March 2005, the Company issued warrants to the
placement agent to purchase 83,770 shares of common stock in compensation for
services provided by the placement agent.

On May 26, 2005, the Company issued 200,000 shares of common stock to a
consultant in exchange for consulting services for one year. The shares were
valued at the Company's fair market value at the time of issuance in the amount
of $166,000 and fully expensed as of September 30, 2005.

On July 11, 2005, The Company's Board of Directors approved and commenced an
offering of up to 14,000,000 Units of its securities, each unit consisting of
two shares of the Company's common stock and one three-year $1.50 common stock
purchase warrant for a unit offering price of $1.80. The exercise price of the
warrants will be adjusted for stock splits, combinations, recapitalization and
stock dividends. In the event of a consolidation or merger in which we the
Company is not the surviving corporation (other than a merger with a wholly
owned subsidiary for the purpose of incorporating the Company in a different
jurisdiction), all holders of the warrants shall be given at least fifteen (15)
days notice of such transaction and shall be permitted to exercise the warrants
during such fifteen (15) day period. Upon expiration of such fifteen (15) day
period, the warrants shall terminate. The securities were issued in a private
placement transaction to a limited number of accredited investors pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), and Rule 506 of Regulation D. The
Company agreed to include the shares of common stock and shares of common stock
issuable upon exercise of the warrants in any registration statement (excluding
registration statements on SEC Forms S-4, S-8 or any similar or successor form)
they file with the Securities and Exchange Commission under the Securities Act
for the purpose of registering the public sale of any of the Company's
securities.

Between August and December 2005, the Company sold 4,131,667 units in which
8,263,333 shares of common stock and 4,131,667 warrants were issued for a
purchase price of $7,437,001. Each warrant is immediately exercisable into one
(1) share of common stock at an exercise price of $1.50 per share for a term of
three years. The Company paid a total of $175,680 for offering costs during 2005
and as of December 31, 2005, has accrued a total of $419,280 for offering costs
related to this transaction, which was subsequently paid in February 2006.

On November 29, 2005, the Company entered into a securities purchase agreement
with The Abel Family Trust (the "Trust") pursuant to which the Company issued
138,889 units to the Trust for a purchase price of $250,000. Roger Abel, the
Company's Chairman and Chief Executive Officer, serves as the trustee and is a
beneficiary of the Trust. Each unit consisted of two shares of the Company
common stock and one common stock purchase warrant. The purchase price per unit
was $1.80. Each warrant is immediately exercisable into one share of common
stock at an exercise price of $1.50 per share for a term of three years.

Stock options

On September 30, 2005, the Company's Board of Directors adopted the Touchstone
Resources USA, Inc. 2005 Stock Incentive Plan (the "Plan"). The Plan reserves
10,000,000 shares of common stock for issuance pursuant to stock options, stock
appreciation rights, restricted stock awards, restricted stock units,
unrestricted stock awards, and other equity based or equity related awards to
employees, officers, directors, or advisors to the Company or any of the
Company's subsidiaries as well as individuals who have entered into an agreement
with the Company under which they will be employed by the Company or any of its
subsidiaries in the future. The Plan is administered by the Board of Directors
(the "Board") of the Company which has full and final authority to interpret the
Plan, select the persons to whom awards may be granted, and determine the amount
and terms of any award. In order to comply with certain rules and regulations of
the Securities and Exchange Commission or the Internal Revenue Code, the Board
can delegate authority to appropriate committees of the Board. Although the Plan
provides for the issuance of options that qualify as incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended, since the Plan was
not approved by the Company's stockholders, the Company cannot issue ISOs unless
and until it obtains the requisite shareholder approval.


                                      F-47
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Stock options issued under the Plan have a term of no more than 10 years, an
exercise price equal to at least 85% of the fair market value of the Company's
common stock on the date of grant (100% in the case of ISOs), are subject to
vesting as determined by the Board, and unless otherwise determined by the
Board, may not be transferred except by will, the laws of descent and
distribution, or pursuant to a domestic relations order. Unless otherwise
determined by the Board, awards terminate three (3) months after termination of
employment or other association with the Company or one (1) year after
termination due to disability, or death or retirement. In the event that
termination of employment or association is for a cause, as that term is defined
in the Plan, awards terminate immediately upon such termination.

In connection with his employment, the Company issued an option to Mr. Abel to
purchase 4,876,540 shares of common stock at an exercise price of $.86 per
share, the last sales price of the Company's common stock as reported on the OTC
Bulletin Board on the date of grant. The option has a term of 7 years and vests
in two equal installments on August 15, 2006 and 2007 provided that Mr. Abel
remains continuously employed by the Company through the applicable vesting date
or is receiving severance payment from the Company in accordance with his
employment agreement. In the event that Mr. Abel is terminated for a cause
during this period, the option shall forthwith terminate. Unless Mr. Abel is
terminated for a cause, once vested, the option can be exercised at any time
prior to expiration.

On September 30, 2005, the Company issued a nonstatutory stock option under the
Plan to Jerry Walrath, it's Vice President of Land and Project Development, to
purchase 100,000 shares of common stock at an exercise price of $.96 per share,
the last sales price of it's common stock reported on the OTCBB on the date of
grant. The options vest in equal annual installments over a four-year period
commencing September 1, 2005 and are otherwise subject to the terms of the Plan.

In November and December 2005, the Company appointed additional two members to
its board of directors - Richard Gerald Bennett and Robert E. Irelan.

On November 29, 2005, the Company's board of directors adopted a board
compensation policy. The policy provides for a payment to all non-employee
directors consisting of options upon joining the Board, an annual stipend, and
fees for attendance at Board and committee meetings. Upon appointment,
non-employee directors will receive options to purchase 100,000 shares of common
stock at an exercise price equal to the closing price of the Company's common
stock on the date of grant which will vest in full one year form the date of
grant and have a term of ten years. The annual stipend for board service is
$40,000, and $55,000 in the case of the chairman of the audit committee,
together with options to purchase 40,000 shares of common stock, and 55,000
shares in the case of the chairman of the audit committee, issuable on the last
trading day of each year at an exercise price equal to the closing price of the
Company's common stock on the date of grant. Such options will be vested in full
upon issuance and have a term of ten years.

In accordance with the forgoing policy, the Company issued options under the
Touchstone Resources USA, Inc. 2005 Stock Incentive Plan to purchase 100,000
shares of common stock to each of Robert E. Irelan and Richard Gerald Bennett
upon their appointment to the Board of Directors on November 29, 2005. The
options have an exercise price of $0.83 per share, the last sales price of the
Company's common stock on the date of grant, vest one year from the date of
grant, expire November 28, 2015, and are otherwise subject to the terms of the
Plan.


                                      F-48
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

The Company had the following outstanding common stock options to purchase its
securities at December 31:

<TABLE>
<CAPTION>
                                     2005                              2004
                        -------------------------------   -------------------------------
                          Number of      Exercise Price     Number of      Exercise Price
Description of Series   Options issued     Per Share      Options issued     Per Share
---------------------   --------------   --------------   --------------   --------------

                     <C>              <C>              <C>              <C>

Expire July 2012             4,876,540   $         0.86               --   $           --
Expire September 2015          100,000   $         0.96               --               --
Expire November 2015           200,000   $         0.83               --               --
                                                          --------------   --------------
Common Stock                 5,176,540                                --
                        ==============                    ==============
</TABLE>


The following tables summarize the Company's stock option activity and related
information:

                                  Number of
                                   Shares
                                  ---------

Balance as of December 31, 2003          --
Granted                                  --
Exercised                                --
Expired/forfeit                          --
                                  ---------
Balance as of December 31, 2004          --
Granted                           5,176,540
Exercised                                --
Expired/forfeit                          --
                                  ---------
Balance as of December 31, 2005   5,176,540
                                  =========


                                      F-49
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                      -------------------------------------------------------   ---------------------------------
                           Number of            Weighted          Weighted            Number           Weighted
     Range of          Outstanding Shares        Average          Average         Exercisable at       Average
     Exercise           at December 31,         Remaining         Exercise         December 31,        Exercise
      Prices                  2005            Contract Life        Price               2005             Price
-------------------   --------------------   ---------------   --------------   ------------------   ------------
<S>                   <C>                    <C>               <C>              <C>                  <C>
$0.83 - 0.96                     5,176,540      7.2 years      $         0.86                   --   $         --
</TABLE>


<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                      -------------------------------------------------------   ---------------------------------
                           Number of            Weighted          Weighted            Number           Weighted
     Range of          Outstanding Shares        Average          Average         Exercisable at       Average
     Exercise           at December 31,         Remaining         Exercise         December 31,        Exercise
      Prices                         20024    Contract Life        Price                      2004      Price
-------------------   --------------------   ---------------   --------------   ------------------   ------------
<S>                   <C>                    <C>               <C>              <C>                  <C>

$--                                     --                --   $           --                   --   $         --
</TABLE>


Stock Warrants

On June 10, 2005, the Company issued warrants to purchase 250,000 shares of
common stock to Legend with ascribed value of $30,000, in consideration for the
consulting service Legend agreed to provide over a year. The warrants have an
exercise of $1.10 per share and expire in two years. The Company had the
following outstanding common stock warrants to purchase its securities at
December 31:

<TABLE>
<CAPTION>
                                                 2005                                       2004
                                 --------------------------------------   ---------------------------------------
                                      Number of         Exercise Price         Number of         Exercise Price
       Expiration Date             Warrants issued        Per Share         Warrants issued         Per Share
------------------------------   -------------------   ----------------   -------------------   -----------------
<S>                              <C>                   <C>                <C>                   <C>

April 2007 through
  July 2007                                3,445,000   $           2.00             3,445,000   $            2.00
June 2007                                    250,000   $           1.10                    --   $              --
July 2007                                  1,561,250   $           2.00             1,561,250   $            2.00
November 2007                                600,000   $           2.00               500,000   $            2.00
November through December 2007               418,852   $           2.00               186,765   $            2.00
January 2008                                  87,959   $           2.00                    --   $              --
March 2008                                 4,152,319   $           1.50                    --   $              --
June 2008                                    107,727   $           1.25                    --   $              --
August through December 2008               4,894,454   $           1.50                    --   $              --
October 2008                                 555,556   $           1.50                    --   $              --
March 2014                                   350,000   $           0.90               250,000   $            1.00
                                  ------------------                      -------------------

Common Stock                              16,423,117                                5,943,015
                                  ==================                      ===================
</TABLE>


NOTE 16 - SETTLEMENT OF LAWSUIT WITH CLAYTON WILLIAMS

On or about May 3, 2003, Knox Miss LP filed a complaint in the District Court Of
Harris County, Texas, 234th Judicial District against Clayton Williams as a
result of Clayton Williams' breach of the Exploration and Development Agreement.
Under the Agreement, Knox Miss LP had the right to participate in a 50% share of
certain leases acquired by Clayton Williams during the term of the Agreement.
Knox Miss LP elected to participate in the acquisition of certain additional
leases and paid in excess of $1.7 million to Clayton Williams between July and
February 2003 in payment of its share of the acquisition costs. In April 2003,
Clayton Williams notified Knox Miss LP that it would not permit Knox Miss LP to
participate, alleging that the foregoing payments were not received within the
time frame set forth in the Agreement. Knox Miss LP sought a declaratory
judgment establishing its right under the Agreement to participate in the
acquisition of the leases at issue. Clayton Williams denied all allegations.


                                      F-50
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

On October 31, 2003, Clayton Williams filed a counterclaim against Knox Miss LP
and a third party petition against PHT Gas, LLC alleging that Knox Miss LP
breached the Agreement by assigning an overriding royalty interest to PHT Gas,
LLC in the area of mutual interest ("AMI") subject to the Agreement to PHT Gas,
LLC. Clayton Williams sought a declaratory judgment establishing its rights
under the Agreement and an order of specific performance compelling Knox Miss LP
to convey the royalty interest to Clayton Williams together with attorney's
fees.

On May 26, 2004, Knox Miss LP and Clayton Williams entered into a Settlement
Agreement and Mutual Release ("Settlement"), pursuant to which:

      A.    Clayton Williams paid $75,000 to Knox Miss LP;

      B.    Knox Miss LP assigned all of its leasehold interests it acquired
            from May 23, 2002 through April 30, 2004 in the AMI to Clayton
            Williams except for the School Board Lease on the Mathiston
            prospect, in which Knox Miss LP retained its 50% interest;

      C.    Knox Miss LP assigned all of its leasehold interests it acquired
            pursuant to an exploration agreement with SKH Exploration, Inc. in
            the Savannah Lake prospect to Clayton Williams;

      D.    Knox Miss LP assigned half of the leasehold interests it acquired
            for $90,249 in the Noxubee County, Mississippi to Clayton Williams;

      E.    Knox Miss LP received a release of certain deed of trust between
            Knox Miss LP as the grantor and Trident Growth Fund as the
            beneficiary as to the interests assigned by Knox Miss LP to Clayton
            Williams;

      F.    Knox Miss LP was deemed to have paid all amounts owed to Clayton
            Williams as of April 30, 2004 and received a credit from Clayton
            Williams in the amount of $1,000,000. The credit was applied to Knox
            Miss LP's share of the drilling costs of the Inez West No. 1 well,
            which was estimated to be $1,649,999, as well as the final monthly
            payment of Knox Miss LP's AMI management fee owed to Clayton
            Williams in the amount of $20,833. As of December 31, 2004, the
            prepaid advance to the operator was $1,551,233.

      G.    Knox Miss LP withdrew its proposal to drill on the Natchez Trace
            prospect. As a result, the advance payment Knox Miss LP made to
            Clayton Williams in the amount of $549,600 in April 2004 was also
            applied as a credit towards Knox Miss LP's share of the drilling of
            the Gammill well; and

      H.    Knox Miss LP paid the remaining balance of $257,875 for its share of
            the drilling costs of the Inez West No. 1 well to Clayton Williams.

NOTE 17 - COMMITMENTS AND CONTINGENCIES


                                      F-51
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

General

Federal, state and local authorities regulate the oil and gas industry. In
particular, gas and oil production operations and economics are affected by
environmental protection statutes, tax statutes and other laws and regulations
relating to the petroleum industry, as well as changes in such laws, changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. The Company believes it is in compliance with all
federal, state and local laws, regulations, and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.

Operating Hazards and Insurance

The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.

In those projects for which the Company is an operator, the Company maintains
certain insurance of various types to cover its operations with policy limits
and retention liability customary in the industry. In those projects in which
the Company is not the operator, but in which it owns a non-operating interest,
the operator for the prospect maintains insurance to cover its operations.

There can be no assurance that insurance, if any, will be adequate to cover any
losses or exposure to liability. Although the Company believes that the policies
obtained by operators provide coverage in scope and in amounts customary in the
industry, they do not provide complete coverage against all operating risks. An
uninsured or partially insured claim, if successful and of significant
magnitude, could have a material adverse effect on the Company and its financial
condition via its contractual liability to the prospect.

Potential Loss of Oil and Gas Interests/ Cash Calls

The Company is subject to cash calls related to its various investments in oil
and gas prospects. If the Company does not pay its share of future Authorization
For Expenditures ("AFE") invoices, it may have to forfeit all of its rights in
certain of its interests in the applicable prospects and any related profits. If
one or more of the other members of the prospects fail to pay their share of the
prospect costs, the Company may need to pay additional funds to protect its
investments.

NOTE 18 - OPERATING LEASES

During 2004, the Company subleased office space from its former officer and
director for a total of $556 per month. The lease was renewable on a month to
month basis. During the year ended December 31, 2005, the Company paid $5,775 of
rent expense for the office lease. As of December 31, 2005, the lease has been
terminated.

On October 4, 2004, Touchstone Texas, entered into a lease agreement for new
office space in Houston, Texas. The lease is for seven and half years with
annual rent increasing, on a sliding scale, from $68,000 to $130,000 during the
lease period. The Company paid $106,851 under the lease for old office space
that expired in November 2004 and $9,367 for the new lease for the year ended
December 31, 2004. During the year ended December 31, 2005, the Company paid
$131,982 of rent expense for this office lease.

The following is a schedule by year of future minimum rental payments required
under the operating lease as of December 31, 2005:

            2006         $  122,431
            2007            124,138
            2008            130,964
            2009            136,083
            2010            136,083
            Thereafter      170,104
                         ----------

                         $  819,803
                         ==========

                                      F-52
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

NOTE 19 - SUBSEQUENT EVENTS - NOT DISCLOSED ELSEWHERE

In January 2006, in continuation of the July 2005 private offering (see Note 15)
the Company sold 3,490,061 units in which 6,980,122 shares of common stock and
3,490,061 warrants were issued for a purchase price of $6,282,110. Each warrant
is immediately exercisable into one (1) share of common stock at an exercise
price of $1.50 per share for a term of three years. During January and February
2006, the Company paid a total of $830,632 for offering costs related to the
July 2005 offering. The Company also issued a total of 204,627 warrants to
Legend in connection with the offering.

On October 10, 2005, Maverick Woodruff County, LLC, a Delaware limited liability
company ("MWC"), borrowed $1,000,000 from Michael P. Marcus pursuant to a
secured promissory note. The promissory was secured by all ownership interest in
MWC, had a maturity date of October 10, 2006, accrued interest at the rate of
10% per annum payable at maturity, and the principal amount together with all
accrued and unpaid interest due thereon was convertible at anytime at the option
of Mr. Marcus into shares of the Company's common stock at a conversion price of
$.90 per share. The note would automatically convert into shares of the
Company's common stock upon MWC acquiring a leasehold interest in certain
acreage and MWC assigning its right to certain leasehold interests to the
Company. In connection with the issuance of the note, the Company issued an
immediately exercisable warrant to Mr. Marcus to purchase 555,556 shares of its
common stock at an exercise price of $1.50 per share for a term of three years.
On February 13, 2006, the note and $34,167 of accrued interest due thereunder
were converted into 1,149,074 shares of the Company's common stock.

NOTE 20 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for interest expense and income taxes for 2005 and 2004 were as
follows:

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

Interest                                                  $ 330,734   $ 172,200
                                                          =========   =========

Income taxes, net                                         $      --   $      --
                                                          =========   =========


Non-Cash Investing and Financing Transactions:

On March 23, 2004, the Company issued 7,000,000 shares of common stock to
Touchstone Canada valued at $70,000 for the acquisition of 100% ownership
interest in Touchstone Texas. In connection with this acquisition, the Company
issued 280,000 shares of common stock to an investment banker valued at $2,800.

On March 23, 2004, the Company issued 100,000 shares of common stock to
Touchstone Canada valued at $1,000 for Touchstone Louisiana's acquisition of 10%
membership interest in LS Gas, LLC.

The Company recorded a discount of $540,000 related to the beneficial conversion
feature on the Westwood AR Note.

The Company recorded discounts of $3,678,600 and $3,211,400 related to the
beneficial conversion feature and value of attached warrants, respectively, on
the converted notes of $6,890,000.

The Company recorded discounts of $409,309 and $318,400 related to the
beneficial conversion feature and value of attached warrants, respectively, on
the DDH II Note.


                                      F-53
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

In September 2004, the Company issued 20,000 shares of common stock for
financial advisory fee and recorded $24,800 as deferred compensation.

In August 2004, PF Louisiana issued a promissory note of $192,000 to IL
Resources, Inc. for the payment IL Resources, Inc. made to South Oil on behalf
of PF Louisiana to acquire oil and gas leasehold interests.

In April 2004, Touchstone Louisiana issued a promissory note of $2,000,000 to
Endeavour as part of the consideration for its acquisition of the 24.9975% class
A limited partnership interest in LSP.

In February 2004, Knox Gas issued a promissory note of $4,500,000 to Endeavour
as part of the consideration for its acquisition of the 99% limited partnership
interest in Knox Miss LP and 1% membership interest in Knox Miss LLC.

Touchstone Texas Properties surrendered its investment in PHT Vicksburg with a
carrying value of 551,115. In exchange, it assumed accounts payable due to
Touchstone Texas of $20,289, and loan due to the Company of $50,975 and received
ownership in oil and gas properties of $622,379.

The Company surrendered its investment in PHT Wharton with a carrying value of
$0. In exchange, Touchstone Texas Properties assumed $300,941 accounts payable
and received $71,315 of oil and gas properties.

The Company surrendered its investment in PHT La Paloma with a carrying value of
$76,684. In exchange, Touchstone Texas Properties assumed $77,359 of accounts
payable to the Company and received $154,041 of oil and gas properties. The
Company increased its investment in Touchstone Texas Properties by $76,682.

The Company surrendered its investment in PHT Vela with a carrying value of
$218,840. In exchange, Touchstone Texas Properties received 165,130 of oil and
gas properties. The Company increased its investment in Touchstone Texas
Properties by $165,130.

The Company surrendered its investment in PHT Martinez with a carrying value of
$833,511. In exchange, Touchstone Texas Properties received $551,886 of oil and
gas properties, and assumed oil and gas prepayment of $250,000. The Company
increased its investment in Touchstone Texas Properties by $801,886.

Touchstone Texas Properties, Inc. accrued an asset retirement obligation of
$33,341 , and increased oil and gas properties by $33,341.

As a result of the Regulation D and Regulation S Offerings during March and
April 2005, the Company recorded a discount of $1,109,335 based on the ascribed
value of the warrants as determined by using the Black-Scholes Model (See Note
15) and a beneficial conversion discount of $1,146,686.

As of December 31, 2005, the Company has recorded an accrued preferred stock
dividend of $465,826.

As of December 31, 2005, The Company has accrued a total of $419,280 for
offering costs (see Note 15).

On August 19, 2005, Westwood AR converted the Westwood Note into 623,897 units
and two membership interests in Knox Gas, LLC. As a result, The Company reversed
the principal and accrued interest of the note in the total amount of
$1,280,324.

During 2005, The Company financed part of its purchase price of the insurance
policies through a promissory note in the amount of $174,556.


                                      F-54
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

During the fourth quarter of 2005, Touchstone Louisiana surrendered its
investment in LSP with a carrying value of $2,555,400. In exchange, Touchstone
Louisiana received oil and gas interests of $2,281,858 and due from Louisiana
Shelf of $171,452, and assumed accounts payable of $54,745 and due to Touchstone
Texas of $67,260.

During the fourth quarter of 2005, Touchstone New Zealand surrendered its
ownership interest in Awakino South. In exchange, Touchstone New Zealand
received 7.93% of Awakino South's oil and gas interests in the amount of
$242,957.

During the fourth quarter of 2005, the Company surrendered its ownership in Knox
Gas and Knox Miss LP and transferred its investment in Knox Gas to Touchstone
Mississippi in the amount of $1,513,496. Touchstone Mississippi also received
67.4% of Knox Miss' working interest in Mississippi project in the amount of
$1,151,090, plus due from Knox Miss LP of $95,167 and due from Touchstone Texas
of $10,000.

NOTE 21 - SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED

Oil and Gas Reserves

Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.

Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids, which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods. The reserve data
is based on studies prepared by an outside petroleum engineer. All proved
developed reserves of oil and gas are located in the state of Texas in the
United States of America.

The following table presents estimates of the Company's net proved developed oil
and gas reserves:

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

Proved reserves (bbl), beginning of year                          --          --

Purchase of proved developed reserves (bbl), in place (1)    152,200          --
Production                                                      (100)         --
Extension of reservoir                                            --          --
Revisions of previous estimates                                   --          --
Sales of proved reserves                                          --          --
                                                            --------    --------

Proved reserves (bbl), end of year                           152,100          --
                                                            ========    ========
Proved developed reserves (bbl), end of year                      --      95,100

Equity in reserves (bbl) in equity method investees               --          --
                                                            ========    ========


                                      F-55
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

(1) In the fourth quarter of 2005, as discussed more fully in Note 4, the
Company acquired direct working interest in certain in development and producing
wells in exchange for the Company's investment ownership in certain limited
partnerships and limited liability companies, which prior to that period held
those well interests. Recorded here is the amount of proved reserves "acquired"
as part of the exchange with the limited partnerships and limited liability
companies.

                                                               December 31,
                                                            -------------------
                                                              2005       2004
                                                            --------   --------
Proved reserves (mmcf), beginning of year                         --         --

Purchase of proved developed reserves (mmcf), in place (1)   2,068.9         --
Production                                                      (235)        --
Extension of reservoir                                            --         --
Revisions of previous estimates                                   --         --
Sales of proved reserves                                          --         --
                                                             -------    -------

Proved reserves (mmcf), end of year                          2,045.4         --
                                                             =======    =======

Proved developed reserves (mmcf), end of year                  607.3         --

Equity in reserves (mmcf) in equity method investees              --       760.7
                                                             =======    =======


(1) In the fourth quarter of 2005, as discussed more fully in Note 4, the
Company acquired direct working interest in certain in development and producing
wells in exchange for the Company's investment ownership in certain limited
partnerships and limited liability companies, which prior to that period held
those well interests. Recorded here is the amount of proved reserves "acquired"
as part of the exchange with the limited partnerships and limited liability
companies.

Capitalized Costs Relating to Oil and Gas Producing Activities

<TABLE>
<CAPTION>
                                         December 31, 2005                          December 31, 2004
                             ----------------------------------------    ---------------------------------------
                               United           New                        United          New
                               States         Zealand        Total         States        Zealand        Total
                             -----------    -----------   -----------    -----------   -----------   -----------
<S>                          <C>            <C>           <C>            <C>           <C>           <C>
Unproved oil and gas
properties                   $ 3,960,639    $   164,939   $ 4,125,578    $ 4,763,310   $        --   $ 4,763,310
Proved oil and gas
properties                     3,671,440             --     3,671,440             --            --            --
                             -----------    -----------   -----------    -----------   -----------   -----------
Total capitalized costs      $ 7,632,079    $   164,939   $ 7,797,018      4,763,310            --     4,763,310
                             ===========    ===========   ===========    ===========   ===========   ===========

Accumulated depreciation
and amortization,               (164,124)            --      (164,124)            --            --            --
                             -----------    -----------   -----------    -----------   -----------   -----------

Net capitalized costs        $ 7,467,955    $   164,939   $ 7,632,894    $ 4,763,310   $        --   $ 4,763,310
                             ===========    ===========   ===========    ===========   ===========   ===========

Company's share of
  equity method investees'
  net capitalized costs      $        --    $        --   $        --    $ 4,634,629   $   237,900   $ 4,872,529
                             ===========    ===========   ===========    ===========   ===========   ===========
</TABLE>


                                      F-56
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities for the Years Ended December 31:

<TABLE>
<CAPTION>
                                                 2005                                    2004
                                 -------------------------------------    ------------------------------------
                                   United         New                       United        New
                                   States       Zealand       Total         States      Zealand       Total
                                 ----------    ----------   ----------    ----------   ----------   ----------
<S>                              <C>           <C>          <C>           <C>          <C>          <C>
Acquisition of properties
  Proved                         $  891,418    $       --   $  891,418    $       --   $       --   $       --
  Unproved                        3,773,727       164,939    3,938,666       730,596           --      730,596
Exploration costs                   106,359            --      106,359     1,501,398           --    1,501,398
Development costs                 2,615,898            --    2,615,898            --           --           --
                                 ----------    ----------   ----------    ----------   ----------   ----------
  Total                          $7,387,402    $  164,939   $7,552,341    $2,231,994   $       --   $2,231,994
                                 ==========    ==========   ==========    ==========   ==========   ==========

Company's share of equity
  method investees' costs of
  property acquisition,
  exploration, and development   $2,780,137*   $       --*  $2,780,137*   $6,949,203   $  977,899   $7,927,102
                                 ==========    ==========   ==========    ==========   ==========   ==========
</TABLE>

*     Only included Company's share of equity method investees' costs of
      exploration during 2005 since during the fourth quarter of 2005, as a
      result of the corporate structure reorganization, the Company withdrew its
      equity investments in the limited partnership and limited liability
      companies (see Note 4 and Note 8).

Results of operations for oil and gas production activities for the years ended
December 31:
<TABLE>
<CAPTION>
                                                 2005                                     2004
                              -----------------------------------------    ----------------------------------------
                                United            New                         United         New
                                States          Zealand        Total          States       Zealand       Total
                              -----------    ------------   -----------    -----------   -----------   -----------
<S>                           <C>            <C>            <C>            <C>           <C>           <C>
Oil and gas sales             $   229,874    $        --    $   229,874    $        --   $        --   $        --
Production costs                 (254,644)            --       (254,644)            --            --            --
Depreciation, depletion
  and amortization               (164,124)            --       (164,124)            --            --            --
Proved property
  impairment                           --             --             --             --            --            --
Income tax expense                     --             --             --             --            --            --
                              -----------    ------------   -----------    -----------   -----------   -----------
Results of operations         $  (188,894)   $        --    $  (188,894)   $        --   $        --   $        --
                              ===========    ===========    ===========    ===========   ===========   ===========
Company's share of equity
  method investees' results
  of operations               $(1,747,176)   $        --    $(1,747,176)   $        --   $        --   $        --
                              ===========    ===========    ===========    ===========   ===========   ===========
</TABLE>

Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

SFAS No. 69, "Disclosure about Oil and Gas Producing Activities", prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. The Company has followed
these guidelines, which are briefly discussed below.

Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. Estimated future income taxes are computed using current
statutory income tax rates for where production occurs. The resulting future net
cash flows are reduced to present value amounts by applying a 10% annual
discount factor.

The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.

The following summary sets forth the Company's future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in
Statement of Financial Accounting Standards No. 69.

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                  (In thousands)
                                                             -----------------------
                                                                2005         2004
                                                             ----------   ----------
<S>                                                          <C>          <C>
Future cash inflows                                          $   22,314   $       --
Future production costs                                          (1,242)          --
Future development costs                                         (1,716)          --
Future income tax expense                                        (1,598)          --
                                                             ----------   ----------

Future net cash flows (undiscounted)                             17,758           --

Annual discount of 10% for estimated timing                      (4,226)          --
                                                             ----------   ----------

Standardized measure of future net                           $   13,532   $       --
                                                             ==========   ==========

Equity in standardized measure of equity method investees            --   $    4,805
                                                             ==========   ==========
</TABLE>


                                      F-57
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

Changes in Standardized Measure (Unaudited)

The following are the principal sources of change in the standardized measure of
discounted future net cash flows at December 31 (In thousands)

<TABLE>
<CAPTION>
                                                               2005         2004
                                                            ----------   ----------
<S>                                                         <C>          <C>

Standardized measure, beginning of period                   $       --   $       --
Net changes in prices and production costs                          --           --
Future development and abandonment costs                            --           --
Revisions of previous quantity estimates                            --           --
Extension of reservoir                                              --           --
Sale of reserves in place                                           --           --
Accretion of discount                                               --           --
Changes in income taxes, net                                        --           --
Purchased reserves                                              13,532           --
                                                            ----------   ----------
Standardized measure, end of period                         $   13,532   $
                                                            ==========   ==========

Equity in standardized measure of equity method investees   $            $    4,805
                                                            ==========   ==========
</TABLE>

The following schedule listed the total assets, liabilities and results of
operations of the limited partnerships which the Company invested in at December
31, 2004:


                                      F-58
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                       PHT Vicksburg       Awakino South        PHT Stent
                                      Partner's, L.P.    Exploration, LLC     Partners, L.P.
                                      ---------------    -----------------    --------------
<S>                                   <C>                <C>                  <C>

Total Assets                          $     1,721,458    $       3,814,696    $       96,815
                                      ===============    =================    ==============

Total Liabilities                     $       423,562    $         104,974    $      248,115
                                      ===============    =================    ==============

Results of Operations
   Sales                              $       791,041    $              --    $           --
   Gross profit                       $       401,262    $              --    $           --
   Net loss                           $      (224,576)   $      (1,028,445)   $   (2,713,799)

Company's share of equity method
   investees' results of operations
   for producing activities           $       (57,951)   $         (94,000)   $     (537,903)
</TABLE>


<TABLE>
<CAPTION>
                                                     Louisiana Shelf      PHT Wharton
                                      LS Gas, LLC     Partners, L.P.     Partners, L.P.
                                      ------------   ----------------    --------------
<S>                                   <C>            <C>                 <C>

Total Assets                          $         --   $      5,555,342    $    3,579,006
                                      ============   ================    ==============

Total Liabilities                     $         --   $        491,569    $    2,107,617
                                      ============   ================    ==============

Results of Operations
   Sales                              $         --   $             --    $       31,262
   Gross profit                       $         --   $             --    $       21,169
   Net loss                           $         --   $     (3,877,828)   $   (4,940,611)

Company's share of equity method
   investees' results of operations
   for producing activities           $         --   $       (876,573)   $     (935,335)
</TABLE>


<TABLE>
<CAPTION>
                                         PHT Vela        PHT Good Friday      PHT Martinez
                                      Partners, L.P.      Partners, L.P.     Partners, L.P.
                                      ---------------    ----------------    ---------------
<S>                                   <C>                <C>                 <C>

Total Assets                          $     1,322,680    $      4,052,019    $     3,019,341
                                      ===============    ================    ===============

Total Liabilities                     $            --    $             --    $            --
                                      ===============    ================    ===============

Results of Operations
   Sales                              $            --    $             --    $            --
   Gross profit                       $            --    $             --    $            --
   Net loss                           $    (2,602,320)   $       (565,981)   $      (330,659)

Company's share of equity method
   investees' results of operations
   for producing activities           $      (750,081)   $        (87,263)   $       (66,019)
</TABLE>


                                      F-59
<PAGE>

                         TOUCHSTONE RESOURCES USA, INC.
                          (A Development Stage Entity)
                   Notes to Consolidated Financial Statements

                                       Maverick Basin      PHT La Paloma
                                      Exploration, LLC     Partners, L.P.
                                      -----------------    -----------

Total Assets                          $       2,578,831    $ 5,020,085
                                      =================    ===========

Total Liabilities                     $       3,976,204    $        --
                                      =================    ===========

Results of Operations
   Sales                              $              --    $        --
   Gross profit                       $              --    $        --
   Net loss                           $      (2,529,497)   $   (72,344)

Company's share of equity method
   investees' results of operations
   for producing activities           $        (100,000)   $    (7,958)


                                      F-60
<PAGE>

                                   SIGNATURES

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

                                    TOUCHSTONE RESOURCES USA, INC.

Date:  March 31, 2006               /s/ Roger L. Abel
                                    ------------------------------------
                                    Roger L. Abel
                                    Chief Executive Officer


                                       69
<PAGE>

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.

Signature                 Title                                   Date
---------                 -----                                   ----

/s/ Roger L. Abel         Chief Executive Officer and Chairman    March 31, 2006
---------------------     of the Board of Directors
Roger L. Abel


/s/ Stephen C. Haynes     Chief Financial Officer and             March 31, 2006
---------------------     Treasurer  (Principal Financial and
Stephen C. Haynes         Accounting Officer)



/s/ Robert E. Irelan      Director                                March 31, 2006
---------------------
Robert E. Irelan


/s/ R. Gerald Bennett     Director                                March 31, 2006
---------------------


                                       70
<PAGE>

                                  EXHIBIT INDEX

Exhibit

10.38     Agreement dated March 23, 2006 by and between the Company and Trident
          Growth Fund, L.P.

10.39     Amended and Restated Touchstone Resources USA, Inc. 2005 Stock
          Incentive Plan

21.1      Subsidiaries of the Company

31.1      Certification of Chief Executive Officer of the Company required by
          Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

31.2      Certification of Chief Financial Officer of the Company required by
          Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

32.1      Certification of Chief Executive Officer and Chief Financial Officer
          of the Company required by Rule 13a-14(b) under the Securities
          Exchange Act of 1934, as amended