U.S. 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, 2003

[ ] 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 1-13463

                         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)



 111 PRESIDENTIAL BOULEVARD, SUITE 165
            BALA CYNWYD, PA                               19004
----------------------------------------              -------------
(Address of Principal Executive Offices)                (Zip Code)

                                 (610) 771-0680
   --------------------------------------------------------------------------
                (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 (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____




<PAGE>


         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. [X]

         State issuer's revenues for its most recent fiscal year:    -0-   .
                                                                 ----------

         The aggregate market value of the voting common equity held by
non-affiliates of the registrant based on the closing sale price of the
registrant's common stock as reported on the OTC Bulletin Board on April 26,
2004, was $52,440,700.

         As of April 26, 2004, 50,000,000 shares of the registrant's common
stock were outstanding.

         Transitional Small Business Disclosure Format (check one):

         Yes       No    X
             -----    -----


                       DOCUMENTS INCORPORATED BY REFERENCE

         None.



<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 the Company's 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
the Company  believes that the  expectations  reflected in such  forward-looking
statements are reasonable,  it can give no assurance that such expectations will
prove to have been correct.

         Important  factors that could cause actual results to differ materially
from the Company's  expectations  include, but are not limited to, the Company's
assumptions about energy markets,  production levels, reserve levels,  operating
results,  competitive  conditions,   technology,  the  availability  of  capital
resources,  capital  expenditure  obligations,  the  supply  and demand for oil,
natural gas, and other products or services,  the price of oil, natural gas, and
other products or services, currency exchange rates, 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  the  Company  or  any of its  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 7. Plan of  Operation"  and
elsewhere  in this  report.  All  subsequent  written  and oral  forward-looking
statements  attributable  to the Company,  or persons acting on its behalf,  are
expressly  qualified  in their  entirety  by these  cautionary  statements.  The
Company assumes no duty to update or revise its 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. (f/k/a The Coffee Exchange, Inc.) is a
Delaware corporation formed on March 5, 2001. Our offices are located at 111
Presidential Boulevard, Suite 165, Bala Cynwyd, Pennsylvania 19004. 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 formerly  engaged in the business of developing  internet cafes
in  Orange  County,  California.  On March 15,  2004,  all of our  officers  and
directors  resigned  and  Stephen  P.  Harrington  was  appointed  as our  Chief


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<PAGE>

Executive Officer, Treasurer, Secretary and sole Director. Immediately following
the change in  management,  we  implemented  a new business  plan of  acquiring,
exploring  and  developing  domestic  and  international  oil  and  natural  gas
properties.

GENERAL

         We are an independent  energy company engaged  primarily in oil and gas
exploration,  development  and  production  and  the  acquisition  of  producing
properties.  We target  high-potential  oil and gas assets located  primarily in
Texas,  Louisiana and other  traditional  oil  producing  states in the southern
United States, as well as in New Zealand.

         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  in  projects  directly  and  indirectly  as equity
participants in limited  partnerships and limited liability  companies.  We also
act as the operator of certain of the properties in which we acquire  interests,
drilling the wells  thereon and producing  any oil and gas located  therein.  We
assist  and  advise  companies  and  partnerships  in  identifying  and  leasing
properties on favorable  terms.  We also provide such  entities with  additional
reserve  assessment  analysis and  engineering  services in connection  with the
exploration and development of prospects.

         Our primary objectives are to build reserves, production, cash flow and
earnings per share by acquiring  oil and gas  properties,  exploring for new oil
and gas reserves,  and optimizing production and value from existing oil and gas
properties. We seek to achieve these objectives by acquiring and developing high
profit margin  properties,  disposing of producing,  marginal and  non-strategic
properties,  balancing  reserves  between oil and gas,  and  maintaining  a high
degree of financial flexibility.

RECENT ACQUISITIONS

         On March 23,  2004,  we acquired  from  Touchstone  Resources,  Ltd., a
British  Columbia  corporation  ("Touchstone  Canada"),  100% of the  issued and
outstanding  shares of  capital  stock,  no par value per share,  of  Touchstone
Resources USA, Inc.  ("Touchstone  Texas"), a Texas corporation and wholly-owned
subsidiary of Touchstone  Canada, in consideration for which we issued 7,000,000
shares of our common stock to Touchstone Canada.  Touchstone Texas is an oil and
gas exploration company  historically focused on projects located in the Permian
Basin, the East Texas Basin, and the Texas and Louisiana Gulf Coast.

         Also on March 23,  2004:  (i)  Touchstone  Louisiana,  Inc., a Delaware
corporation and one of our wholly-owned  subsidiaries  ("Touchstone Louisiana"),
purchased a 10% membership interest in LS Gas, LLC, a Delaware limited liability
company,  from Touchstone  Canada,  in consideration for which we issued 100,000
shares of common stock to Touchstone Canada, (ii) Touchstone Vicksburg,  Inc., a
Delaware  corporation  and  one of our  wholly-owned  subsidiaries  ("Touchstone
Vicksburg"),  purchased a 10%  limited  partnership  interest in PHT  Vicksburg,
L.P., a Delaware limited partnership ("PHT Vicksburg"), from Montex Exploration,
Inc.,  a  Delaware  corporation  and  one of our  shareholders  ("Montex"),  for


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<PAGE>

$48,000,  and (iii) Touchstone Awakino,  Inc., a Delaware corporation and one of
our  wholly-owned   subsidiaries   ("Touchstone  Awakino"),   purchased  a  4.6%
membership  interest  in Awakino  South  Exploration,  LLC,  a Delaware  limited
liability company ("Awakino South"), from Montex for $150,000.

         On March 24, 2004, we purchased a 75% membership  interest in Knox Gas,
LLC ("Knox Gas"), a Delaware limited  liability  company that owns a 99% limited
partnership  interest  in  Knox  Miss.   Partners,   L.P.,  a  Delaware  limited
partnership  ("Knox Miss LP"),  and we purchased a one percent  (1%)  membership
interest  in Knox  Miss.,  LLC, a Delaware  limited  liability  company  and the
general  partner in Knox Miss LP ("Knox  Miss LLC"),  each from FEQ Gas,  LLC, a
Delaware limited  liability  company ("FEQ Gas"), in consideration  for which we
agreed to make capital  contributions to Knox Gas in the amount of $5,000,000 to
fund Knox Gas' obligations under a secured  promissory note due from Knox Gas to
Endeavour International Corporation, a Nevada corporation ("Endeavour").

         On March 26, 2004, we made an initial capital  contribution of $475,000
to PHT Stent Partners,  L.P., a Delaware limited  partnership ("PHT Stent"),  in
exchange for a 23.95% limited partnership interest in PHT Stent, and on April 4,
2004,  we made an  initial  capital  contribution  of  $550,000  to PHT  Wharton
Partners,  L.P., a Delaware limited partnership ("PHT Wharton"), in exchange for
a 24.53% limited partnership interest in PHT Wharton.

         On April 30, 2004,  Touchstone  Louisiana  purchased a 24.9975% Class A
limited partnership interest in Louisiana Shelf from Endeavour, in consideration
for which we agreed  to pay  Endeavour  $250,000  and  issue a note  payable  to
Endeavour in the amount of $2 million.

DRILLING, EXPLORATION AND PRODUCTION ACTIVITIES

         Set forth below is a description of the Company's significant drilling,
exploration and production  activities,  including the number of gross wells and
net  wells  in  the  process  of  being  drilled  (including  wells  temporarily
suspended),  waterfloods in the process of  installation,  pressure  maintenance
operations and other related operations of material  importance,  by appropriate
geographic region, all as of April 26, 2004.  References to wells in the process
of being  drilled  include only those wells  actually  being  drilled as of such
date.  No  information  has been provided  regarding  wells the Company plans to
drill but had not yet commenced drilling as of April 26, 2004.

PHT Vicksburg, L.P.

         We own a 10% limited partnership  interest in PHT Vicksburg and are the
operator of the underlying prospects. PHT Vicksburg owns a leasehold interest in
over 4,000 acres in 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 6,000 feet to 11,000 feet.  To date,  two (2) wells have been drilled
and  completed  and the  drilling  of a  third  well is  currently  in  process.
Historically,  approximately  400 fields in this  trend  owned and  operated  by
non-Company  affiliated  entities have produced over 300 million barrels of oil,
30 million barrels of condensate, and 5 trillion cubic feet of gas.



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<PAGE>

Louisiana Shelf Partners, L.P.

         We own a 24.9975%  limited  partnership  interest  in  Louisiana  Shelf
Partners,  L.P.  ("Louisiana  Shelf"),  and a 10% membership interest in LS Gas,
LLC, which owns a 24.99% limited  partnership  interest in Louisiana Shelf and a
one percent (1%) general  partnership  interest in Louisiana Shelf. We will also
be the operator of the prospects  underlying such interests.  Louisiana Shelf is
engaged in an exploration  program  involving 2 lease areas covering portions of
East Cameron Offshore Blocks 4 and 17. The leases are located in Louisiana state
waters  between 1 and 3 miles  offshore,  where water depths range from 10 to 35
feet, in the  transition  zone of the south  Louisiana  producing  region.  This
region encompasses the onshore and in-land waters of southern Louisiana lying in
the southern half of the state,  and is one of the most prolific oil and natural
gas producing sedimentary basins in the world. Our leases cover over 1,730 acres
and are positioned  peripheral to and amongst two producing gas fields. To date,
certain wells in these lease areas owned and operated by non-Company  affiliated
entities have produced over 25 billion cubic feet of gas, and certain reservoirs
in these lease areas have a considerable wet gas component.

PHT Wharton Partners, L.P.

         We own a 24.53% limited  partnership  interest in PHT Wharton Partners,
L.P.  ("PHT  Wharton")  and are the operator of the  underlying  prospects.  PHT
Wharton owns a leasehold  interest in 767 acres in the Colorado  Bend,  which is
part of a trend that has been  producing gas for over 50 years.  The prospect is
less than 30 miles  west of  Houston in the  northern  part of  Wharton  County,
Texas.  Production occurs at a depth of between 3,000 feet and upwards of 13,000
feet from  sandstone  reservoirs in the Paleocene  Wilcox,  Eocene Yegua and the
Oligocene  Frio  formations.  From  1999  to the  date of our  purchase  of this
interest,  8 wells had been  completed  on these lease  areas,  with  cumulative
historical  production  ranging  from 2.5 to 5.1  billion  cubic feet of gas and
100,000 to 256,000 barrels of oil.  Historically,  initial daily rates for wells
in this trend owned and operated by non-Company  affiliated entities have ranged
from 1.6 to 9.6 million  cubic feet of gas per day and 100 to 533 barrels of oil
per day. We expect to complete the drilling of our initial well on this property
by the middle of May 2004.

PHT Stent Partners, L.P.

         We own a 23.95%  limited  partnership  interest in PHT Stent  Partners,
L.P. ("PHT Stent"). PHT Stent is a participant in a group of independent oil and
gas companies led by Discovery Geo (Australia) Corporation that is exploring the
Taranaki  Basin.  The Taranaki Basin lies offshore along the western side of New
Zealand's North Island and is the premier  hydrocarbon  province in New Zealand.
The group currently  controls nearly 2 million acres in five government  license
areas in the basin.  The PHT Stent  Prospect is located  onshore on the southern
tip of the  Taranaki  basin and has  objective  formations  with  reserve  sizes
ranging from 60 million to over 200 million  barrels of oil and gas  equivalent.
We intend to commence drilling the initial well on this prospect in July 2004.



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<PAGE>

Awakino South Exploration Corp, LLC.

         We own a 9.14% membership interest in Awakino South. Awakino South is a
participant in a group led by Discovery Geo (Australia) Corp. in the exploration
of the Taranaki Basin in New Zealand.  The Awakino  concession  contains 355,000
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
approximately 9,000 feet. The drilling of the first exploratory well is expected
to be completed by the end of 2004.

Knox Miss. Partners, L.P.

         We own a 75% membership  interest in Knox Gas, which owns a 99% limited
partnership interest in Knox Miss LP, and a one percent (1%) membership interest
in Knox Miss LLC,  which is the  general  partner in Knox Miss LP.  Knox Miss LP
owns a leasehold interest in a 120,000-acre  position in the Black Warrior Basin
of northern  Mississippi with Clayton  Williams  Energy,  Inc. of Midland Texas.
Targeted  objectives  in  the  Black  Warrior  Basin  are  Pennsylvanian  sands,
Mississippian  aged  carbonates  and sands and Ordovician  dolomites.  Prospects
range in depth from 7,000 feet to 15,000  feet.  At the time of our  purchase of
these  interests,  eleven wells in the field owned and  operated by  non-Company
affiliated  entities were  producing at a daily rate of 32 million cubic feet of
gas per day,  and  reserves  for the field were  estimated to exceed 100 billion
cubic feet of gas.

OPERATOR ACTIVITIES

         The  Company  acts as the  operator of PHT  Vicksburg,  PHT Wharton and
Louisiana  Shelf  projects,  and  may in the  future  act  as  the  operator  of
additional properties in which the Company acquires an interest.

CUSTOMERS

         The  principal  target  customers  for our  crude  oil  production  are
expected to be  refiners,  remarketers  and other  companies,  some of which are
expected to have pipeline  facilities near the producing  properties we acquire.
In the event pipeline  facilities are not conveniently  available,  we intend to
truck or barge crude oil to storage, refining or pipeline facilities.

         The principal  target  customers for our gas production are expected to
be  pipelines,  utilities,  gas  marketing  firms,  industrial  users  and local
distribution  companies.  We  intend  to  use  existing  gathering  systems  and
interstate  and  intrastate  pipelines  are used to  consummate  gas  sales  and
deliveries.


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<PAGE>

MARKETING

         We  intend  to sell  our oil and  natural  gas  production  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  from intervals  ranging in frequency from daily to
annual.

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 such  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 current 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  properties  believed to be suitable for
drilling operations are acquired by the Company. We rely upon the brokers of the
properties  to conduct  the title  examination.  We intend to perform  necessary
curative  work  with  respect  to any  significant  defects  in  title  prior to
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 natural
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 natural 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.


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<PAGE>

REGULATION

         General.  The availability of a ready market for oil and gas projection
depends upon numerous  factors beyond our control.  These factors  include state
and federal 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.

         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.  Production operations are affected by
changing  tax and other laws  relating  to the  petroleum  industry,  constantly
changing administrative regulations and possible interruptions or termination by
government authorities.

         Sales of Oil and Natural Gas.  Sales of any oil that we produce will be
affected  by the  availability,  terms and costs of  transportation.  The rates,
terms and  conditions  applicable  to the  interstate  transportation  of oil by
pipelines are regulated by the Federal  Energy  Regulatory  Commission  ("FERC")
under the  Interstate  Commerce  Act.  FERC has  implemented  a  simplified  and
generally  applicable  ratemaking  methodology  for  interstate oil pipelines to
fulfill  the  requirements  of  Title  VIII  of the  Energy  Policy  Act of 1992
comprised of an indexing system to establish ceilings on interstate oil pipeline
rates.  FERC  has  announced  several  important  transportation-related  policy
statements  and rule  changes,  including a  statement  of policy and final rule
issued   February  25,  2000,   concerning   alternatives   to  its  traditional
cost-of-serve   rate-making   methodology  to  establish  the  rates  interstate
pipelines may charge for their  services.  The final rule revises FERC's pricing
policy and current regulatory  framework to improve the efficiency of the market
and further enhance competition in natural gas markets.

         Sales  of any  natural  gas that we  produce  will be  affected  by the
availability, terms and costs of transportation. The rates, terms and conditions
applicable to the interstate transportation of gas by pipelines are regulated by
FERC under the Natural Gas Acts, as well as under Section 311 of the Natural Gas
Policy  Act.  Since  1985,  the FERC has  implemented  regulations  intended  to
increase  competition within the gas industry by making gas transportation  more
accessible  to gas buyers  and  sellers  on an  open-access,  non-discriminatory
basis.

         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"),


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<PAGE>

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.

         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.

ENVIRONMENTAL

         General.  Our activities  are subject to federal,  state and local 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  regulation by state and
federal authorities, including the Environmental Protection Agency ("EPA"). Such
regulation  can  increase  the  cost  of  planning,  designing,  installing  and
operating such facilities.

         Significant  fines and  penalties  may be  imposed  for the  failure to
comply with environmental laws and regulations.  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


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<PAGE>

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

         Waste Disposal.  We currently own or lease, and intend in the future to
own or lease,  numerous 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 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  have  become
stricter in recent  years.  Under new laws,  we could be  required 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  operations  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 actions 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  in the course of our
operations,  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 operations are subject to local,  state and federal
regulations for the control of emissions of air pollution.  Major sources of air
pollutants  are  subject  to  more  stringent,   federally  imposed   permitting
requirements,  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


                                       9
<PAGE>

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.  Administrative  enforcement actions for failure to comply
strictly with air  pollution  regulations  or permits are generally  resolved by
payment  of  monetary  fines  and  correction  of any  identified  deficiencies.
Alternatively,  regulatory  agencies  could  require us to forego  construction,
modification or operation of certain air emission  sources,  although we believe
that in the latter cases we would have enough permitted or permittable  capacity
to continue our operations  without a material  adverse effect on any particular
producing field.

         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.  These controls have become more  stringent  over the years,  and it is
probable that  additional  restrictions  will be imposed in the future.  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  what 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, impose 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.

         We  believe  that  we  are  in  substantial   compliance  with  current
applicable environmental laws and regulations and that, absent the occurrence of
an extraordinary event,  compliance with existing federal, state and local laws,
rules and  regulations  governing the release of materials in the environment or
otherwise relating to the protection of the environment will not have a material
effect upon our business, financial condition or results of operations.



                                       10
<PAGE>

INSURANCE

         In those projects for which we are an operator,  we maintain  insurance
of various  types to cover our  operations  with  policy  limits  and  retention
liability customary in the industry.  In those projects for which we are not the
operator, but in which we own a non-operating interest directly or own an equity
interest  in a limited  partnership  that  owns a  non-operating  interest,  the
operator  for the  prospect  maintains  insurance  to cover our  operations.  We
believe the coverage and types of insurance maintained by the operators for such
prospects  are adequate and  therefore,  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  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 this  fluctuation.  In addition,
pipelines,  utilities, 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  demand
fluctuations. While 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 one  employee  who  serves as our  Chief  Executive
Officer,  Treasurer and Secretary.  We utilize the services of approximately six
(6)  consultants  who  provide,  among  other  things,   technical  support  and
accounting services to the Company. We anticipate retaining additional personnel
during the next 12 months.

                                  RISK FACTORS

         The  following  risk factors,  among  others,  may affect the Company's
financial condition and results of operations.

                       RISKS ASSOCIATED WITH OUR BUSINESS

WE ARE A DEVELOPMENT STAGE COMPANY IMPLEMENTING A NEW BUSINESS PLAN.

         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,  and we have  just  begun to  implement  our new  business  plan.  In
addition, 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,


                                       11
<PAGE>

uncertainties and difficulties  frequently  encountered by early-stage companies
in evolving markets such as ours. We may not be able to successfully address any
or all of these risks and uncertainties. Failure to adequately do so could cause
our business, results of operations and financial condition to suffer.

THE  SUCCESSFUL  IMPLEMENTATION  OF OUR NEW  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,  including
the necessity of 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.

EXPANSION OF OUR OPERATIONS WILL REQUIRE  SIGNIFICANT  CAPITAL  EXPENDITURES FOR
WHICH WE MAY BE UNABLE TO PROVIDE SUFFICIENT FINANCING.

         We intend to make  capital  expenditures  far in excess of our existing
capital  resources to exploit our existing  reserves and to discover new oil and
gas  reserves.  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 corporate  development and investment
strategies.  We plan to obtain the future funding that we will need through 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.

         We also intend to make offers to acquire oil and gas  properties in the
ordinary course of our business. If these offers are accepted, our capital needs
may increase  substantially.  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 property interests.

WE EXPECT OUR OPERATING EXPENSES TO INCREASE SUBSTANTIALLY IN THE FUTURE AND MAY
NEED TO RAISE ADDITIONAL FUNDS.

         We have a history of net losses and expect that our operating  expenses
will increase  substantially over the next 12 months as we continue to implement
our new business  plan. In addition,  we may  experience a material  decrease in
liquidity due to unforeseen capital calls or other events and uncertainties.  As
a  result,  we may need to raise  additional  funds,  and such  funds may not be
available on favorable  terms, if at all. If we cannot raise funds on acceptable
terms,  we may not be able to execute on our business  plan,  take  advantage of


                                       12
<PAGE>

future  opportunities  or  respond to  competitive  pressures  or  unanticipated
requirements.  This may  seriously  harm our business,  financial  condition and
results of operations.

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 indebtedness to third parties in
the aggregate amount of approximately $10.2 million.  This indebtedness consists
primarily of promissory notes in the aggregate principal amount of approximately
$9.7 million.  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 PROPERTIES.

         Our future  performance  depends upon our ability to find,  develop and
acquire  oil  and  gas  reserves  that  are  economically  recoverable.  Without
successful exploration,  exploitation or acquisition activities,  we will not be
able to develop reserves or generate revenues. No assurance can be given that we
will be able to find and develop or acquire  reserves on  acceptable  terms,  or
that commercial quantities of oil and gas deposits will be discovered sufficient
to enable us to recover our  exploration  and  development  costs or sustain our
business.

         The successful  acquisition  and  development of oil and gas properties
requires an assessment of  recoverable  reserves,  future oil and gas prices and
operating  costs,  potential  environmental  and  other  liabilities  and  other
factors.  Such assessments are necessarily inexact and their accuracy inherently
uncertain.  In addition,  no assurances can be given that our  exploitation  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 and work interruptions. In addition, the
costs of exploitation and development may materially exceed initial estimates.

         We can  provide  you  with  no  assurance  that  oil  and  gas  will be
discovered in commercial  quantities in any of the  properties we currently hold
interests in or properties in which we may acquire interests in the future.  Our
success will depend upon our ability to acquire working and revenue interests in
properties  upon  which  gas and  oil  reserves  are  ultimately  discovered  in
commercial  quantities.  We do not have an  established  history of locating and
developing properties that have oil and gas reserves.

WE RELY HEAVILY UPON RESERVE ESTIMATES WHEN DETERMINING WHETHER OR NOT TO INVEST
IN A PARTICULAR OIL OR GAS PROPERTY.

         The oil and gas reserve  information  that we use in evaluating oil and
gas  prospects  is  based  on  reserve  estimates  involving  a  great  deal  of
uncertainty.  Different  reserve  engineers  may  make  different  estimates  of
reserves  and cash flows based on the same  available  data.  Reserve  estimates


                                       13
<PAGE>

depend in large part upon the reliability of available  geologic and engineering
data which is inherently  imprecise.  Geologic and engineering  data are used to
determine  the  probability  that a reservoir of oil and natural gas exists at a
particular  location,  and whether oil and  natural gas are  recoverable  from a
reservoir.  Recoverability  is  ultimately  subject  to  the  accuracy  of  data
including,  but not  limited to,  geological  characteristics  of the  reservoir
structure,  reservoir fluid properties,  the size and boundaries of the drainage
area,  reservoir pressure,  and the anticipated rate of pressure depletion.  The
evaluation  of these and other  factors is based upon  available  seismic  data,
computer  modeling,  well tests and information  obtained from production of oil
and natural gas from adjacent or similar properties,  but the probability of the
existence and recoverability of reserves is less than 100% and actual recoveries
of proved reserves usually differ from estimates.

         Reserve  estimates  also  require  numerous   assumptions  relating  to
operating  conditions  and  economic  factors,  including  the  price  at  which
recovered  oil and natural gas can be sold,  the costs of recovery,  assumptions
concerning future operating costs, severance and excise taxes, development costs
and workover and remedial costs, prevailing  environmental conditions associated
with  drilling  and  production   sites,   availability  of  enhanced   recovery
techniques, ability to transport oil and natural gas to markets and governmental
and other regulatory  factors,  such as taxes and environmental laws. A negative
change in any one or more of these factors could result in quantities of oil and
natural gas previously  estimated as proved reserves  becoming  uneconomic.  For
example,  a decline in the market  price of oil or natural gas to an amount that
is less than the cost of recovery  of such oil and  natural gas in a  particular
location  could  make  production  commercially  impracticable.  The risk that a
decline in price  could have that  effect is  magnified  in the case of reserves
requiring  sophisticated  or expensive  production  enhancement  technology  and
equipment,  such as some types of heavy oil. Each of these factors, by having an
impact on the cost of recovery and the rate of production,  will also affect the
present value of future net cash flows from estimated reserves.

         In  addition,  the  10%  discount  factor,  which  is  required  by the
Securities and Exchange  Commission  ("SEC") to be used to calculate  discounted
future  net cash  flows for  reporting  purposes,  is not  necessarily  the most
appropriate discount factor based on interests rates in effect from time to time
and risks associated with us or the oil and gas industry in general.

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,  that 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 if water or other
deleterious substances are encountered which impair or prevent the production of
oil  and/or  gas from the well.  In  addition,  production  from any well may be
unmarketable if it is impregnated  with water or other  deleterious  substances.


                                       14
<PAGE>

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 which
may be acquired or discovered  may be influenced by numerous  factors beyond our
control.  These  factors  include  the  proximity  and  capacity  of oil and gas
pipelines  and  processing  equipment,  market  fluctuations  of prices,  taxes,
royalties,  land tenure, allowable production and environmental  protection.  We
cannot predict how these factors may affect our business.

         In addition,  the success of our business is dependent upon the efforts
of various third parties that we do not control.  We rely upon various companies
to assist us in  identifying  desirable  oil and gas prospects to acquire and to
provide  us with  technical  assistance  and  services.  We also  rely  upon the
services of geologists, geophysicists,  chemists, engineers and other scientists
to explore and analyze oil and gas  prospects to determine a method in which the
oil and gas prospects may be developed in a cost-effective  manner. In addition,
we rely upon the owners and  operators  of oil rigs and  drilling  equipment  to
drill and develop  our  prospects  to  production.  Although  we have  developed
relationships with a number of third-party  service providers,  we cannot assure
you that we will be able to  continue to rely on such  persons.  If any of these
relationships   with  third-party   service  providers  are  terminated  or  are
unavailable on commercially  acceptable terms, we may not be able to execute our
business plan.

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, the
continued  threat of war in the Middle East and actions of the  Organization  of
Petroleum Exporting Countries and its maintenance of production constraints, the
U.S. economic  environment,  weather  conditions,  the availability of alternate
fuel  sources,  transportation  interruption,  the impact of drilling  levels on
crude oil and natural gas supply,  an the  environmental  and access issues that
limit future drilling activities for the industry.

         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.

         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  development  and  exploitation  of  projects.  We expect that
commodity prices will continue to fluctuate significantly in the future.



                                       15
<PAGE>

OUR  BUSINESS  MAY BE HARMED IF WE ARE 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 holder of the lease fail to meet the specific  requirements
of each lease, such 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 harm
our business.  Some of our property  interests will terminate  unless we fulfill
certain   obligations  under  the  terms  of  our  agreements  related  to  such
properties.  If we are unable to satisfy these  conditions on a timely basis, we
may lose our rights in these  properties.  The  termination  of our interests in
these properties may harm our business.

         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 and  production
costs  of  approximately  $4.6  million  with  respect  to our  various  limited
partnership and limited  liability  company interests during the next 12 months.
If any of the other owners of the leasehold  interests in any of the projects in
which we  participate,  or any of the limited  partners or  membership  interest
holders  in  our   limited   partnerships   or  limited   liability   companies,
respectively,  fails to pay their  equitable  portion  of  development  costs or
capital  calls,  we may need to pay  additional  funds to protect our  ownership
interests.

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  mineral
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
field work in examining  records in the appropriate  governmental  office before
attempting to place under lease a specific mineral  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 leases.  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


                                       16
<PAGE>

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.

         In the projects in which we own a  non-operating  interest  directly or
own an equity  interest  in a limited  partnership  which  owns a  non-operating
interest,  the operator for the prospect 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 prospects are adequate and,  therefore,  have not acquired our
own  insurance  coverage for such  prospects.  The  occurrence  of a significant
adverse event on such  prospects  that is not fully  covered by insurance  could
result in the loss of all or part of our  investment  in a  particular  prospect
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  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.  The laws and  regulations  may,  among  other  potential  consequences,
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 at a reasonable  cost.  Accordingly,  we could be liable,  or could be
required to cease production on properties, if environmental damage occurs.



                                       17
<PAGE>

         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.

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 of gas and oil 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.

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 expropriation and
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.

         Our  international   assets  and  operations  are  subject  to  various
political, economic and other uncertainties,  including, among other things, the
risks of war, expropriation, nationalization,  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


                                       18
<PAGE>

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 minerals 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.

                           RISKS RELATED TO OUR STOCK

THE TRADING PRICE OF OUR COMMON STOCK MAY BE 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 our  operating  results,  financial
condition,  announcements or drilling activities,  general conditions in the oil
and gas exploration and development  industry,  and other events or factors.  In
recent years, broad stock market indices, in general, and smaller capitalization
companies, in particular, have experienced substantial price fluctuations.  In a
volatile market,  we may experience wide fluctuations in the market price of our
common stock.  These fluctuations may have a negative effect on the market price
of our common stock.

WE WILL  SEEK TO RAISE  ADDITIONAL  FUNDS  IN THE  FUTURE,  AND SUCH  ADDITIONAL
FUNDING MAY BE DILUTIVE TO STOCKHOLDERS OR IMPOSE OPERATIONAL RESTRICTIONS.

         We expect to seek to raise  additional  capital  in the  future to help
fund  our  operations.  Additional  equity  financing  may  be  dilutive  to our
stockholders and debt financing, if available, may involve restrictive covenants
which may limit our  operating  flexibility.  If  additional  capital  is raised
through the  issuance of equity  securities,  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  WILL  EXPERIENCE   SUBSTANTIAL  DILUTION  OF  THEIR
OWNERSHIP  INTERESTS  DUE TO THE  ISSUANCE  OF  ADDITIONAL  SHARES OF OUR COMMON
STOCK.

         We  currently  have  50,000,000  shares  of  common  stock  issued  and
outstanding.  As of April 26, 2004, we had issued and  outstanding  warrants and
convertible  promissory notes convertible into 7 million shares of common stock.
Some of these securities  contain  anti-dilution  provisions that will result in
the issuance of additional  shares in the event we sell additional shares of our
common stock at a price less than $1.00 per share.  In  addition,  we are in the
process of issuing  additional  warrants and convertible  promissory  notes in a
private  offering.  In the  event  that  the  maximum  number  of  warrants  and


                                       19
<PAGE>

convertible  promissory notes not yet sold are issued in this private  offering,
such securities  will be convertible  into 13.35 million shares of common stock.
The issuance of these shares of common stock may result in substantial  dilution
to the equity interests of our existing stockholders.

OUR  EXECUTIVE  OFFICERS,  DIRECTORS  AND  PRINCIPAL  STOCKHOLDERS  OWN A  LARGE
PERCENTAGE OF OUR VOTING STOCK.

         Our executive officers, directors and principal stockholders, and their
respective  affiliates,  beneficially own  approximately  38% of our outstanding
common stock. These stockholders,  if acting together,  would be able to control
substantially all matters requiring approval by our stockholders,  including the
election of all directors and approval of significant corporate transactions.

APPLICABLE SEC RULES  GOVERNING THE TRADING OF "PENNY STOCKS" LIMITS 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.  Since our
common  stock  continues  to trade  below $5.00 per share,  our common  stock is
considered  a "penny  stock" and is subject  to SEC rules and  regulations  that
impose  limitations  upon the manner in which our shares can 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  written  agreement  to a  transaction  prior  to  sale.  These
regulations have the effect of limiting the trading activity of our common stock
and reducing the liquidity of an investment in our common stock.

WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.

         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.

ITEM 2.  DESCRIPTION OF PROPERTY

         Our principal  offices are located 111  Presidential  Boulevard,  Suite
165, Bala Cynwyd,  PA 19004.  This office space is provided to us without charge
by Stephen P.  Harrington,  our sole officer and director.  We also have offices
located at 5858 Westheimer, Suite 708, Houston, Texas 77057. We rent this office
space for approximately $8,000 per month. We believe our current offices will be
adequate for the foreseeable future.

         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 our oil and gas properties and interests is set forth below.


                                       20
<PAGE>

GENERAL

         We entered  into the oil and  natural gas  business on March 15,  2004.
Accordingly,  (i) we did not  engage in any  production  activities  during  the
fiscal years ended December 31, 2003 and 2002 or for the period commencing March
11, 2001  (inception) to December 31, 2001, nor did we have any proved  reserves
at the end of such  periods,  and thus,  were not required to provide any of the
production data required by Statement of Financial  Accounting  Standards No. 69
("SFAS 69"),  and (ii) we did not engage in any drilling  activities  during the
fiscal years ended December 31, 2003 and 2002 or for the period commencing March
11, 2001 (inception) to December 31, 2001.

         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, 2003, containing estimates
of total, proved developed or undeveloped net oil or gas reserves.

PRODUCTIVE WELLS

         Set forth below are the total gross and net productive wells, expressed
separately  for oil and gas, all as of April 26, 2004.  For the purposes of this
subsection:  (i) one or more completions in the same bore hole have been counted
as one; 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.

<TABLE>
<CAPTION>
                                                        Oil                               Gas
                                                 Gross  ---    Net                Gross   ---    Net
                                                 -----         ---                -----          ---
<S>                                            <C>           <C>                  <C>         <C>
Louisiana                                         ---          ---                 ---           ---
Mississippi                                       ---          ---                 ---           ---
Texas                                             ---          ---                  2            .04

New Zealand                                       ---          ---                 ---           ---
                                               ----------    ---------           ---------    ----------

        Total Productive Wells                    ---          ---                  2            .04
                                               ==========    =========           =========    ==========
</TABLE>

         A  productive  well is  considered  to  include  an  exploratory  well,
development  well,  producing well and well capable of production,  but does not
include a dry 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.  A dry well (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.


                                       21
<PAGE>

ACREAGE

         The following  table  summarizes the Company's  gross and net developed
and undeveloped oil and natural gas acreage under lease as of April 26, 2004.

                                 Gross                       Net
                                 -----                       ---
Developed Acreage
        Louisiana                 ---                        ---
        Mississippi               ---                        ---
        Texas                     763                       29.35

        New Zealand               ---                        ---

Undeveloped Acreage
        Louisiana                1,730                       519
        Mississippi             104,211                     39,079
        Texas                    2,535                      335.26

        New Zealand             380,000                     34,200
                          ---------------------      ---------------------

                Total           489,239                   74,162.61
                          =====================      =====================

         A developed acre is considered to mean those acres 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 wells or acres equals one. The number of
net acres is the sum of the  factional  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, the Company can retain its interest in undeveloped acreage
by drilling  activity  that  establishes  commercial  production  sufficient  to
maintain the leases or by payment of delay rentals during the remaining  primary
term of such a lease. The oil and natural gas leases in which the Company has an
interest are for varying primary terms; however, most of the Company's developed
lease  acreage is beyond the primary  term and is held so long as oil or natural
gas is produced.

ITEM 3. LEGAL PROCEEDINGS

         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,
except for the following:

         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
Energy, Inc. (the "Defendant") as a result of Defendant's breach of that certain
Exploration  and  Development  Agreement  dated on or about  May 23,  2002  (the


                                       22
<PAGE>

"Agreement").  Under the Agreement, Knox Miss LP has the right to participate in
a 50% share of  certain  leases  acquired  by  Defendant  during the term of the
Agreement.  Although Knox Miss LP had elected to participate in the  acquisition
of certain  additional  leases and paid in excess of $1.7  million to  Defendant
between July and December 2002 in payment of its share of the acquisition costs,
in April  2003,  Defendant  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  seeks a
declaratory  judgment  establishing its right under the Agreement to participate
in the acquisition of the leases at issue and damages  arising from  Defendant's
breach of the Agreement together with attorney's fees, interest and court costs.
Defendant has denied all allegations.

         On October 31, 2003,  Defendant filed a counterclaim  against Knox Miss
LP and a third party  petition  against PHT Gas, LLC ("PHT Gas")  alleging  that
Knox Miss LP breached the Agreement by assigning an overriding  royalty interest
to PHT Gas in the area of mutual  interest  subject to the Agreement to PHT Gas.
Defendant  seeks 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 Defendant together with attorney's fees.

         The parties are  currently in  settlement  discussions  with respect to
both claims and are in the process of  completing  a settlement  agreement  with
respect to such claims.

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

         None.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's  common stock currently  trades on the OTC Bulletin Board
under the symbol "TSNU".  The first reported trade in the Company's common stock
occurred on August 25, 2003.  The  following  table sets forth the range of high
and low bid  prices  per  share of the  Company's  common  stock for each of the
calendar quarters  identified below as reported by the OTC Bulletin Board. These
quotations represent  inter-dealer prices,  without retail mark-up,  markdown or
commission, and may not represent actual transactions.

         2003                                      High    Low

         Quarter ended December 31, 2003           $.10    $.10
         Quarter ended September 30, 2003           .10     .10

         The last price of the  Company's  common  stock as  reported on the OTC
Bulletin  Board on April 26,  2004 was $1.69 per share.  This  price  reflects a
twenty-five (25) for one (1) forward stock split effective March 19, 2004



                                       23
<PAGE>

HOLDERS

         As of April  26,  2004 the  number  of  stockholders  of  record of the
Company's common stock was 54.

DIVIDENDS

         The  Company  has not paid any cash  dividends  on our common  stock to
date,  and has no  intention of paying such cash  dividends  in the  foreseeable
future. The declaration and payment of dividends is subject to the discretion of
the  Company's  Board of  Directors  and to certain  limitations  imposed  under
Delaware corporate law. The timing,  amount and form of dividends,  if any, will
depend on, among other things,  the Company's  results of operations,  financial
condition,  cash requirements and other factors deemed relevant by the Company's
Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

1. In March 2004, we commenced a private  offering of up to $12 million of units
comprised of convertible promissory notes and warrants. The principal amount and
all accrued  interest due under the notes is  convertible  into shares of common
stock at a conversion  price of $1.00 per share, and each warrant is exercisable
into one share of Common  Stock at an  exercise  price of $2.00 per share,  each
subject to adjustment.  To date, $3.1 million of units has been purchased in the
offering. The offering is being made to a limited number of accredited investors
in a private placement transaction exempt from the registration  requirements of
the  Securities  Act of 1933, as amended,  pursuant to Section 4(2)  promulgated
thereunder,  without  payment of  underwriting  discounts or  commissions to any
person.

2. On March 23, 2004, we issued  7,000,000  shares of common stock to Touchstone
Resources,  Ltd, a British Columbia  corporation,  to purchase all of the issued
and outstanding shares of common stock of Touchstone  Resources USA, Inc., Texas
corporation.  The shares  were  issued to one  accredited  investor in a private
placement   transaction  exempt  from  the  registration   requirements  of  the
Securities  Act of 1933,  as  amended,  pursuant  to  Section  4(2)  promulgated
thereunder,  without  payment of  underwriting  discounts or  commissions to any
person.

3. On March 23, 2004,  we issued  100,000  shares of common stock to  Touchstone
Resources,  Ltd, a British  Columbia  corporation,  to purchase a 10% membership
interest in LS Gas, LLC. The shares were issued to one accredited  investor in a
private placement  transaction exempt from the registration  requirements of the
Securities  Act of 1933,  as  amended,  pursuant  to  Section  4(2)  promulgated
thereunder,  without  payment of  underwriting  discounts or  commissions to any
person.

4. On March 23, 2004, we issued  280,000 shares of common stock to HMA Advisors.
Inc., in  consideration  of consulting and advisory  services in connection with
our  acquisition of Touchstone  Resources USA, Inc. and interests in certain oil
and gas prospects The shares were issued to one accredited investor in a private
placement   transaction  exempt  from  the  registration   requirements  of  the


                                       24
<PAGE>

Securities  Act of 1933,  as  amended,  pursuant  to  Section  4(2)  promulgated
thereunder,  without  payment of  underwriting  discounts or  commissions to any
person.

5.  On  March  23,  2004,  we  issued  a  $2,100,000  principal  amount  secured
convertible  promissory note and a warrant to purchase 250,000 shares of commons
stock to Trident  Growth  Fund,  L.P.  in  consideration  of gross  proceeds  of
$2,100,000.  The  note  is due  and  payable  March  23,  2005,  is  immediately
convertible  at the  option of the  holder  into  shares  of  common  stock at a
conversion price of $1.00 per share and is secured by  substantially  all of our
assets.  The warrants are immediately  exercisable at an exercise price of $1.00
per share and terminate ten years from the date of grant. The shares were issued
to one accredited  investor in a private placement  transaction  exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) promulgated  thereunder,  without payment of underwriting discounts
or commissions to any person.

ITEM 6.  PLAN OF OPERATIONS

         This  Plan  of  Operations  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 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 entered the oil and gas  business in March 2004 upon the  completion
of a change in the Company's management.  Following the change in management, we
changed our name from The Coffee  Exchange,  Inc. to Touchstone  Resources  USA,
Inc. and effected a 25-for-1 stock split of our shares of common stock.

         We seek to create  shareholder  value by building oil and gas reserves,
production  revenues and  operating  cash flow. We believe that building oil and
gas reserves and production,  on a cost-effective  basis, are the most important
indicators of performance success for an independent oil and gas company such as
Touchstone Resources USA, Inc. We seek to build oil and gas reserves, production
and cash flow  through a  balanced  program of  capital  expenditures  involving
acquisition, exploitation and exploration activities. We intend to place primary
emphasis  on  issuances  of public and  private  debt and equity to finance  our
business.

         Our ability to generate future revenues and operating cash flow will be
dependent on the successful  development  of our inventory of capital  projects,
the volume and timing of our production, as well as commodity prices for oil and
gas.  Such pricing  factors are largely  beyond our  control,  and may result in
fluctuations in our earnings.


                                       25
<PAGE>

BUSINESS STRATEGY

         Our business strategy is to provide long-term growth in net asset value
per share through the  acquisition  of oil and gas reserves and  production.  We
plan on building  reserve value through the careful  evaluation  and  aggressive
pursuit of oil and gas drilling and acquisition opportunities.

         Some of the key elements of our business strategy are as follows:

     o   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
         intend to perform  continuous  field studies of such  properties  using
         advanced  technologies,  and  seek to  minimize  costs  by  controlling
         operations to the extent possible.

     o   Selectively  Grow  Through  Exploration.  We  are  in  the  process  of
         implementing  an  active  exploration   program  that  is  designed  to
         complement our  exploitation  and development  efforts with exploration
         projects  offering superior reserve  potential.  We utilize 2-D and 3-D
         seismic  data and other  technical  applications,  as  appropriate,  to
         manage our exploration risks.

     o   Pursue  Strategic  Acquisitions.  We seek  to  leverage  our  extensive
         regional knowledge base by acquiring leasehold acreage and producing or
         non-producing  properties in areas,  such as Louisiana and Texas,  that
         are in mature fields with complex geology that have multiple reservoirs
         and existing infrastructure.

     o   Joint Venture  Formation.  We may seek to form joint  ventures and seek
         joint  venture  partners  in  order  to  reduce  our  investment  in  a
         particular project and share the costs of operating the prospect.

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

RESEARCH AND DEVELOPMENT; EMPLOYEES

         We anticipate that our research and  development  efforts over the next
12 months will be limited to our  analysis of 2-D and 3-D seismic data and other
technical  applications to identify  prospects and develop properties having the
highest  production and reserve growth  potential.  We also  anticipate that the
number of employees and consultants  that we will utilize will increase over the
next 12 months as we continue to implement our business plan.

LIQUIDITY AND CAPITAL RESOURCES

         We are a  development  stage  company  with  no  significant  operating
history.  Our principal  requirements for cash are for working capital needs for
existing  operations,  costs of development of oil and gas  properties,  and the


                                       26
<PAGE>

acquisition of oil and gas  properties.  We do not currently  maintain a line of
credit or term loan with any commercial bank or other financial institution, nor
do we expect to during the next twelve months.  We expect to raise all necessary
capital  through  public and private  placements  of debt or equity  securities,
property divestitures and joint ventures with industry participants.

         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 "Convertible Note") and warrants to Trident Growth Fund, LP
("Trident"). The Convertible Note is 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  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 Convertible  Note contains  various
financial  covenants  with which we are required to comply and various  negative
covenants  which 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.  Trident  subsequently waived compliance with
certain  negative  covenants  contained in the Convertible  Note that would have
been breached upon our issuance of convertible notes in our private placement of
up to $12 million of  convertible  notes and  warrants  (described  below),  and
waived compliance with all financial covenants contained in the Convertible Note
until  the  maturity  date  of the  convertible  notes  issued  in  the  private
placement.

         In  connection  with the issuance of the  Convertible  Note,  we issued
warrants to Trident to purchase 250,000 shares of common stock. The warrants are
immediately  exercisable  at an  exercise  price of $1.00 per share  (subject to
adjustment pursuant to anti dilution provisions of the warrant) and terminate 10
years from the date of grant.

         During  April 2004,  we raised  gross cash  proceeds  of  approximately
$3,100,000  through the issuance of convertible  notes and warrants in a private
placement which is continuing.  The notes  automatically  convert into shares of
common stock at a conversion price of $1.00 per share upon the effective date of
an  amendment  to our  certificate  of  incorporation  to increase the number of
shares we are authorized to issue.  We intend to raise up to an additional  $8.9
million in this offering.

         The forgoing  constitutes our principal sources of financing during the
past twelve months.

         We  recently  purchased  interests  in the  various oil and gas limited
partnerships and limited liability  companies for consideration  consisting of a
combination of cash,  shares of our common stock and promissory notes. We issued
promissory notes in the following amounts to purchase interests in the following
entities:

     o   a $2,000,000 note for the purchase of our interest in Louisiana  Shelf;
         and



                                       27
<PAGE>

     o   a $3,000,000 note for the purchase of our interest in Knox Gas.

         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 and  production
costs with  respect to our various  limited  partnership  and limited  liability
company  interests  during  the  next 12  months  as  follows  (each  amount  an
approximation):

     o   $300,000  for  exploration  costs  on PHT  Vicksburg  over  the next 12
         months;

     o   $1.2 million for exploration costs on Louisiana Shelf by June 30, 2004;

     o   $2 million for exploration costs on Knox Gas over the next 12 months;

     o   $400,000 for exploration costs on PHT Wharton over the next 12 months;

     o   $500,000  for  exploration  costs  on PHT  Stent  over the next six (6)
         months; and

     o   $150,000 for  exploration  costs on Awakino South over the next six (6)
         months.

         If any of the other  owners of the  leasehold  interests  in any of the
projects in which we participate,  or any of the limited  partners or membership
interest  holders in our limited  partnerships or limited  liability  companies,
respectively,  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 need  approximately $5 million to execute our business plan and
satisfy capital calls,  drilling and production costs. In addition, we will need
approximately  $10.2 million to repay our  outstanding  indebtedness  during the
next twelve  months.  Based on available cash  resources,  the completion of the
current  private  offering of our  securities  and  projected  revenue  from our
various  oil and gas  projects,  we  believe  we will have  sufficient  funds to
continue to meet such capital  calls and operate at current  levels for the next
twelve  months.  However,  if we locate  additional  prospects for  acquisition,
experience  cost  overruns  at our  prospects  or  fail  to  generate  projected
revenues,  we will be required to raise  additional  funds  through sales of our
securities or otherwise.  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 interest in certain prospects.

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 critical to an  understanding  of a company's
financial condition and results of operation. We consider an accounting estimate


                                       28
<PAGE>

or judgment to be critical if (i) it requires  assumptions  to be made that were
uncertain at the time the estimate was made, and (ii) changes in the estimate or
different  estimates that could have been selected could have a material  impact
on our results of operations or financial condition.

         Our recent  entrance  into the oil and gas business  subjects us to new
accounting  policies that we were not previously subject to. We believe that the
following significant accounting policies will be most critical to an evaluation
of our future financial condition and results of operations.

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 increase 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.


                                       29
<PAGE>

Successful Efforts Accounting

         The Company intends to 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 charge 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 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.

Property Retirement Obligations

         The Company is required to make  estimates  of the future  costs of the
retirement obligations of its producing oil and gas properties. This requirement
necessitates  the Company to make  estimates of its 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.

Income Taxes

         The  Company is subject to income and other  related  taxes in areas in
which it operates.  When  recording  income tax expense,  certain  estimates are
required  by  management  due to timing and the impact of future  events on when
income tax expenses and benefits are recognized by the Company. The Company will
periodically  evaluate  its  tax  operating  loss  and  other  carryforwards  to
determine  whether a gross  deferred tax asset,  as well as a related  valuation
allowance, should be recognized in its financial statements.


                                       30
<PAGE>

ITEM 7. FINANCIAL STATEMENTS



                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)



                          INDEX TO FINANCIAL STATEMENTS


Independent Auditors' Report L J Soldinger Associates                          2

Independent Auditors' Report Stonefield Josephson                              3

Balance Sheets                                                                 4

Statements of Operations                                                       5

Statements of Stockholders' Equity (Deficit)                                   6

Statements of Cash Flows                                                       7

Notes to Financial Statements                                                  8



                                        1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
The Coffee Exchange, Inc.
Bala Cynwyd, Pennsylvania

We have audited the balance sheet of The Coffee Exchange, Inc. (a development
stage enterprise) as of December 31, 2003, and the related statement of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 statements presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of The Coffee Exchange, Inc. as
of December 31, 2003, and the results of operations, stockholders' equity, and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $42,084 during 2003 and, as of December 31,
2003 had a working capital deficiency of $38,928. Also as disclosed 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. 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
April 21, 2004


                                       2
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
The Coffee Exchange, Inc.
Newport Beach, California

We have audited the accompanying balance sheet of The Coffee Exchange, Inc. (a
development stage company) as of December 31, 2002 and the related statement of
operations, stockholders' equity, and cash flows for the year ended December 31,
2002 and the period from March 5, 2001 (inception) to December 31, 2002. These
financials 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 The Coffee Exchange, Inc. as of
December 31, 2002 and the results of its operations and cash flows for the year
ended December 31, 2002 and the period from March 5, 2001 to December 31, 2002
in conformity with accounting principles generally accepted in the United
States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in Note 3 to the
accompanying financial statements, the Company has no established source of
revenue, which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are discussed in Note 3.
These financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

STONFIELD JOSEPHSON, INC.

Santa Monica, California
April 10, 2003


                                       3
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                                 Balance Sheets


                                     ASSETS


<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                  ---------------------------------
                                                                                        2003             2002
                                                                                  ----------------- ---------------
<S>                                                                                   <C>              <C>
Current Assets
   Cash and cash equivalents                                                          $   91,578       $   9,401
    Prepaid expenses                                                                         741               -
                                                                                  ----------------- ---------------

Total Current Assets                                                                  $   92,319       $   9,401
                                                                                  ================= ===============


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
   Accounts payable and accrued expenses                                              $   31,247       $   6,245
   Convertible debenture                                                                 100,000               -
                                                                                  ----------------- ---------------

Total Current Liabilities                                                                131,247           6,245
                                                                                  ----------------- ---------------

Stockholders' Equity
   Preferred stock; $.001 par value; authorized - 5,000,000 shares; shares
       issued and outstanding - 0 at 2003 and 2002                                             -               -
   Common stock; $.001 par value; authorized - 50,000,000 shares; shares
       issued and outstanding - 166,775,000 at 2003 and 2002 (See Note 6)                166,775         166,775
   Discount on common stock from stock split (See Note 6)                               (120,075)       (120,075)
   Deficit accumulated during the development stage                                      (85,628)        (43,544)
                                                                                  ----------------- ---------------

Total Stockholders' Equity (Deficit)                                                     (38,928)          3,156
                                                                                  ----------------- ---------------

                                                                                      $   92,319       $   9,401
                                                                                  ================= ===============
</TABLE>

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

                                       4
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                            Statements of Operations

<TABLE>
<CAPTION>
                                                                            For the Years               March 5, 2001
                                                                         Ended December 31,            (Inception) to
                                                                 ------------------------------------   December 31,
                                                                       2003                2002             2003
                                                                 ------------------  ----------------  ----------------
<S>                                                              <C>                  <C>               <C>
Revenues                                                               $       -          $      -          $      -

General and Administrative Expenses                                       35,837            25,026            79,381
                                                                 ------------------  ----------------  ----------------

Loss From Operations                                                     (35,837)          (25,026)          (79,381)
                                                                 ------------------  ----------------  ----------------

Interest Expense                                                           6,247                 -             6,247
                                                                 ------------------  ----------------  ----------------

Net Loss to Common Stockholders                                       $  (42,084)        $ (25,026)        $ (85,628)
                                                                 ==================  ================  ================

 Net Loss Per Common Share - Basic and Diluted                        $    (0.00)        $   (0.00)
                                                                 ==================  ================

Weighted Average Number of Common Shares
   Outstanding - Basic and Diluted                                   166,775,000       166,775,000
                                                                 ==================  ================
</TABLE>

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

                                       5
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                  Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                                        Discount           Deficit
                                                                           On            Accumulated
                                                                      Common Stock       During the           Total
                                             Common Stock              from Stock        Development      Stockholders'
                                         Shares         Amount            Split             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              58,125,000         58,125           (55,800)                -              2,325

Issuance of common stock
  for services from a director at
  $0.00004 per share in May 2001       83,125,000         83,125           (79,800)                -              3,325

Issuance of stock for cash at
  $0.002 per share during June
  through December 2001,
  net of costs                         25,525,000         25,525             15,525                -             41,050

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

Balance at December 31, 2001          166,775,000        166,775          (120,075)          (18,518)            28,182
                                     --------------- -------------- ------------------ ----------------  -----------------

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

Balance at December 31, 2002          166,775,000        166,775          (120,075)          (43,544)             3,156
                                     --------------- -------------- ------------------ ----------------  -----------------

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

Balance at December 31, 2003          166,775,000      $ 166,775      $   (120,075)      $   (85,628)      $    (38,928)
                                     =============== ============== ================== ================  =================
</TABLE>

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

                                       6
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                             For the Years Ended
                                                                                December 31,              March 5, 2001
                                                                       --------------------------------   (Inception) to
                                                                            2003             2002       December 31, 2003
                                                                       ---------------  --------------- -------------------
<S>                                                                       <C>             <C>               <C>
Cash Flows from Operating Activities
    Net loss                                                              $ (42,084)      $  (25,026)       $    (85,628)
    Adjustments to reconcile net loss to net cash used in operations
       Shares issued for services rendered                                        -                -               5,650
    Changes in assets and liabilities
         (Increase) in assets
         Prepaid expenses                                                      (741)               -                (741)
         Increase in liabilities
         Accounts payable and accrued expenses                               25,002           (1,623)             31,247
                                                                       ---------------  --------------- -------------------

Net Cash Used in Operating Activities                                       (17,823)         (26,649)            (49,472)
                                                                       ---------------  --------------- -------------------

Cash Flows From Financing Activities
    Advances from stockholder                                                     -                -              10,000
    Repayments to stockholder                                                     -                -             (10,000)
    Proceeds from convertible debenture                                     100,000                -             100,000
    Proceeds from issuance common stock issued, net of issuance costs             -                -              41,050
                                                                       ---------------  --------------- -------------------

Net Cash Provided by Financing Activities                                   100,000                -             141,050
                                                                       ---------------  --------------- -------------------

Net Increase (Decrease) in Cash and Cash Equivalents                         82,177          (26,649)             91,578

Cash and Cash Equivalents, Beginning of Period                                9,401           36,050                   -
                                                                       ---------------  --------------- -------------------

Cash and Cash Equivalents, End of Period                                 $   91,578        $   9,401        $     91,578
                                                                       ===============  =============== ===================
</TABLE>

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

                                       7
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 1 - DESCRIPTION OF BUSINESS

The Coffee Exchange, Inc. (the "Company") was incorporated under the laws of
Delaware on March 5, 2001. The Company intended to develop Internet cafes in
Orange County, California that would feature Internet and electronic mail access
along with coffee, pastries and related items. However, the Company was unable
to implement this plan.

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.

DEVELOPMENT STAGE ENTERPRISE

The Company has been devoting most of its efforts to raising capital and
developing a business plan and, consequently, meets the definition of 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 generally accepted
accounting principles 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, 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.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits at financial institutions. 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.

FINANCIAL INSTRUMENTS

The carrying amounts reflected in the balance sheets for cash and equivalents
and short-term payables approximate their fair value due to the short maturity
of the instruments. The carrying value of the convertible debenture is recorded
at its face value.


                                       8
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

INCOME TAXES

The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes." Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
deferred tax liabilities are recognized for taxable 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.

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 debt
are not included because their inclusion would be antidilutive (i.e., reduce the
net loss per share). As of December 31, 2003, there were 1,000,000 common shares
potentially issuable, using a nominal share price of $0.10, upon the conversion
of the convertible debenture which were not included in the loss per share
calculator.

The number of shares of common stock and the loss per share for the years ended
December 31, 2003 and 2002 have been updated to reflect the 25 to 1 stock split
effected in March 2004 (See Note 8).

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51" (FIN 46 or Interpretation). FIN 46 is an
interpretation of Accounting Research Bulletin 51, "Consolidated Financial
Statements," and addresses consolidation by business enterprises of variable
interest entities ("VIE"s). The primary objective of the Interpretation is to
provide guidance on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting rights; such
entities are known as VIEs. The Interpretation requires an enterprise to
consolidate a VIE if that enterprise has a variable interest that will absorb a
majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur or both. An enterprise is
required to consider the rights and obligations conveyed by its variable
interests in making this determination. On October 9, 2003, the FASB issued
Staff Position No. 46-6 which deferred the effective date for applying the
provisions of FIN 46 for interests held by public entities in variable interest
entities or potential variable interest entities created before February 1,
2003. On December 24, 2003, the FASB issued a revision to FIN 46. Under the
revised interpretation, the effective date was delayed to periods ending after
March 15, 2004 for all variable interest entities, other than SPEs. The adoption
of FIN 46 is not expected to have an impact on the Company's financial
statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. The statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The provisions of SFAS No. 149
generally are to be applied prospectively only. The adoption of SFAS No. 149 did
not have a material impact on the Company's results of operations or financial
position.


                                       9
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for classification and measurement by an issuer of certain
financial instruments with characteristics of both liabilities and equity. The
statement requires that an issuer classify a financial instrument that is within
its scope as a liability (or asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement also addresses
questions about the classification of certain financial instruments that embody
obligations to issue equity shares. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except as it relates to consolidated limited-life subsidiaries. The FASB
indefinitely deferred the effective date of this statement as it relates to
certain mandatorily redeemable non-controlling interests in consolidated
limited-life subsidiaries. The adoption of the effective provisions of SFAS No.
150 did not have a material impact on the Company's results of operations or
financial position.

On December 17, 2003, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition,"
which supersedes Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 104's primary purpose is to rescind the
accounting guidance contained in SAB 101 related to multiple-element revenue
arrangements that was superseded as a result of the issuance of Emerging Issues
Task Force ("EITF") 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." Additionally, SAB 104 rescinds the SEC's related "Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers"
issued with SAB 101 that had been codified in SEC Topic 13, "Revenue
Recognition." While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104, which was effective upon issuance. The
adoption of SAB 104 did not have a material effect on the Company's financial
position or results of operations.


NOTE 3 - GOING CONCERN

The Company is in the development stage and has incurred losses since its
inception. Also, liabilities exceeded its assets and the Company has also
incurred additional debt in the subsequent period. 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 completion of its private offerings of securities
and its projected revenues from oil and gas operations will provide sufficient
funds to fund its operations through December 2004. The Company will be required
to raise funds through additional offerings of its securities in order to have
the funds necessary to meet its working capital requirements, and cash calls
related to various interest in oil and gas prospects, complete other
acquisitions and continue its operations.

The Company's ability to continue as a going concern is dependent upon raising
capital through debt and equity 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
license third parties to develop or market products that the Company would
otherwise seek to develop or market itself, or even be required to relinquish
its interest in the 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.


                                       10
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 4 - 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, 2003:

<TABLE>
<CAPTION>
<S>                                                                             <C>
      Deferred tax asset
          Tax benefit arising from net operating loss carryforward              $   20,100

      Less valuation allowance                                                     (20,100)
                                                                             ----------------

      Net deferred tax asset                                                      $      -
                                                                             ================


Income tax benefit (liability) consists of the following at December 31, 2003:

      Deferred
      Federal and state benefit of net operating loss carryforward              $   20,100

      Less valuation allowance                                                     (20,100)
                                                                             ----------------

      Income Tax Benefit                                                          $      -
                                                                             ================
</TABLE>

As of December 31, 2003, the Company had losses which resulted in net operating
loss ("NOL") carryforwards for tax purposes amounting to approximately $47,784
that may be offset against future taxable income. These NOL carryforwards expire
beginning 2021 through 2023. However, these carryforwards may be significantly
limited due to changes in the ownership of the Company as a result of future
equity offerings (see Note 8).

Recognition of the benefits of the deferred tax assets 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 earning in future
years. Therefore, the Company has established a valuation allowance for deferred
tax assets (net of liabilities) of approximately $20,100 as of December 31,
2003.

The following table presents the principal reasons for the difference between
the Company's effective tax rates and of United States federal statutory income
tax rate of 35% at December 31, 2003:

<TABLE>
<CAPTION>
<S>                                                                             <C>
      Federal income tax benefit at statutory rate                              $   14,700
      State income tax benefit (net of effect of federal benefit)                    3,400
      Change in valuation allowance                                                (18,100)
                                                                             ----------------

      Income Tax Benefit                                                          $      -
                                                                             ================

      Effective Income Tax Rate                                                        0 %
                                                                             ================
</TABLE>


                                       11
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 5 - CONVERTIBLE DEBENTURE

In March 2003, the Company issued a $100,000, 8% convertible debenture due March
27, 2004. All or any portion of the convertible debenture can be converted at
any time into fully paid and nonassessable shares of the Company's $.001 par
value common stock. The conversion or purchase price of the common stock
indebtedness is the market price of the Company's common stock at the time of
conversion. The Company is obligated to adjust the conversion price and number
of shares to be issued under the convertible debenture (i) if the Company
consolidates with, merges into or sells substantially all of its assets to
another company, (ii) if the Company changes, by subdivision, combination or
reclassification of securities, any of the securities purchasable under this
convertible debenture, or (iii) if the Company issues and sells or otherwise
distributes any shares of its common stock (otherwise than as provided in (ii))
at a price per share that is less than the conversion price in effect at the
time of such issuance. Cash proceeds from the convertible debenture amounted to
$100,000. As of December 31, 2003, the principal amount of $100,000 along with
$6,247 in accrued interest remained outstanding. On March 12, 2004, the company
repaid the principal amount of the convertible debenture and the accrued
interest was forgiven by the debt holder. (See Note 8).

NOTE 6 - STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company has not issued any of its authorized shares of preferred stock as of
December 31, 2003.

COMMON STOCK

In March 2004, the Company effected a 25 for 1 common stock split without
changing the par value or the authorized number of shares of its common stock
(See Note 8). Under US GAAP, a stock split effected after the Company's year end
is required to be treated as if it had occurred as of the balance sheet date.
The financial statements of the Company, therefore, have reflected the stock
split as if it occurred at the date of inception. In addition, under US GAAP, a
stock split increases the amount assigned to common stock by the increase in the
number of shares multiplied by the par value of the common stock of the Company,
and decreases paid-in-capital by the same amount. As a result, the stock split
of the Company had the effect of increasing the amount assigned to common stock
in excess of the total amount paid for or the value assigned to the common
stock, which resulted in the Company recording a discount on common stock as of
December 31, 2003 and 2002.

In March 2001, the Company issued 141,250,000 shares of its $.001 par value
common stock in exchange for services to incorporate the Company. The services
were valued at $5,650, which was deemed to be the fair value at inception. In
May 2001, the Board of Directors declared that the Company had not received
consideration for the issuance of 83,125,000 shares of the previously issued
shares and canceled those shares, leaving 58,125,000 shares totaling $2,325. The
Company has not recognized the issuance of the cancelled shares in the financial
statements.

In May 2001, the Company issued 83,125,000 shares of its $.001 par value common
stock in exchange for services valued at $3,325. These shares were issued to a
Director and Secretary of the Company and were valued using consideration
received, which was deemed to be the fair value.

In June 2001, the Company commenced a private placement of its common stock.
From June to December 2001, the Company issued 25,525,000 shares of its $.001
par value common stock for $51,050 in cash, which was deemed to be the fair
value. Costs related to the private placement amounted to $10,000, which were
netted against the proceeds from the private placement, resulting in net
proceeds of $41,050.


                                       12
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 7 - RELATED PARTY TRANSACTIONS

The Company neither owns nor leases any real or personal property. The
officers/directors of the Company provide office space and other services
without charge. Such costs are immaterial to the financial statements and,
accordingly, have not been reflected therein.

NOTE 8 - SUBSEQUENT EVENTS

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.

On March 18, 2004, the Company changed its name from "The Coffee Exchange, Inc."
to "Touchstone Resources USA, Inc."

On March 19, 2004, the Company effected a twenty-five for one common stock split
(see Note 6).

On March 23, 2004, Stephen P. Harrington cancelled 7,380,000 shares of common
stock.

On March 23, 2004, the following transactions were consummated:

      (a)   Pursuant to a Stock Purchase Agreement by and between the Company
            and Touchstone Resources, Ltd., a British Columbia corporation
            ("Touchstone Canada"), the Company purchased 100% of the issued and
            outstanding shares of capital stock, no par value per share, of
            Touchstone Resources USA, Inc., ("Touchstone USA") a development
            stage Texas corporation and wholly-owned subsidiary of Touchstone
            Canada (the "Acquisition"). As consideration for the Acquisition,
            the Company issued 7,000,000 shares of its common stock to
            Touchstone Canada. As a result of the Acquisition, the Company
            became engaged in oil and gas exploration, development and
            production and the acquisition of producing properties focusing on
            projects located in Texas, Louisiana and other traditional oil and
            gas producing states in the Southern United States, as well as in
            New Zealand. Upon the consummation of the Acquisition, the Company
            paid an advisory fee to HMA Advisors, Inc. consisting of 280,000
            shares of its common stock.

      (b)   Pursuant to an Interest Purchase Agreement by and among the Company,
            Touchstone Louisiana, Inc., a Delaware corporation and wholly-owned
            subsidiary of the Company, and Touchstone Canada, Touchstone
            Louisiana, Inc. purchased a 10% membership interest in LS Gas, LLC,
            a Delaware limited liability company, from Touchstone Canada, in
            consideration for which the Company issued 100,000 shares of its
            common stock to Touchstone Canada; and

      (c)   Pursuant to an Interest Purchase Agreement by and among Touchstone
            Vicksburg, Inc., a Delaware corporation and wholly-owned subsidiary
            of the Company, Touchstone Awakino, Inc., a Delaware corporation and
            wholly-owned subsidiary of the Company, and Montex Exploration,
            Inc., a Delaware corporation ("Montex") and an existing stockholder
            of the Company: (i) Touchstone Vicksburg purchased a 10% limited
            partnership interest in PHT Vicksburg, L.P., a Delaware limited
            partnership, from Montex for $48,000, and (ii) Touchstone Awakino
            purchased a 4.6% membership interest in Awakino South Exploration,
            LLC, a Delaware limited liability company, for $150,000.


                                       13
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 8 - SUBSEQUENT EVENTS (Continued)

In March 2004 the Company entered into a loan agreement to borrow $2,100,000
from Trident Growth Fund, LP ("Trident"), a Delaware limited partnership. The
note is a 12% secured convertible promissory note (the "Trident Note"). The
Trident Note is secured by substantially all of the assets of the Company and
its subsidiaries. The Trident Note matures on March 23, 2005, however the
Company has the option to redeem the Trident Note at 100% of par value at any
time prior to the maturity date. Trident has the option to convert 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 additional
incentive to make the loan. The warrant is exercisable immediately and expires
on the earlier of March 31, 2014 or the date the Trident Note is converted to
common stock. The initial conversion price of the Trident Note and the exercise
price of the warrant is $1.00 subject to certain adjustment provisions. 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 payable in cash unless Trident elects to have the interest paid in
common stock of the Company. Repayment of the principal amount of the Trident
Note has been guaranteed by the Company's subsidiaries. As described 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. Trident subsequently waived compliance with certain negative covenants
contained in the Trident Note that would have been breached upon the Company's
issuance of convertible notes in the Company's ongoing private placement of up
to $12 million of convertible notes and warrants, and waived compliance with all
financial covenants contained in the Trident Note until the maturity date of the
convertible notes issued in the private placement. Under the terms of the loan
agreement, the Company is required to register the resale of all shares of its
common stock issuable upon conversion of the Trident Note or exercise of the
warrants, within 105 days of the date of the closing of the loan.

In March 2004, the Company repaid the principal of the convertible debenture in
the amount of $100,000. The accrued interest on the debenture was forgiven by
the debt holder.

In March 2004, the Company entered into a limited partnership agreement with PHT
Gas, LLC and formed PHT Stent Partners, L.P. ("PHT Stent") of which the Company
is a limited partner with an approximate 23.95% interest and PHT Gas, LLC is the
general partner. The Company originally contributed $200,000 to PHT Stent.
Pursuant to the partnership agreement, the Company and the other limited
partners in PHT Stent may be called upon from time to time for additional
contributions so as to meet the reasonable capital requirements of PHT Stent.

In March 2004, the Company invested an additional $126,000 in PHT Vicksburg
Partners, L.P.

On March 25, 2004 the Company purchased a 75% membership interest in Knox Gas,
LLC ("Knox Gas"), a Delaware limited liability company that owns a 99% limited
partnership interest in Knox Miss Partners, L.P., ("Knox Miss LP"), and
purchased a 1% membership interest in Knox Miss., LLC, a Delaware limited
liability company and the general partner in Knox Miss LP ("Knox Miss LLC"),
each from FEQ Gas, LLC, ("FEQ Gas"), the managing member of which was a
beneficial owner of greater than 5% of the issued and outstanding shares of the
Company, in consideration for which the Company agreed to make capital
contributions to Knox Gas in the amount of $5 million to fund Knox Gas'
obligations under a secured promissory note (the "Promissory Note") due from
Knox Gas to Endeavour International Corporation ("Endeavour"). In March and
April 2004, the Company paid $2,000,000 to Endeavour for partial payment of the
Promissory Note.

In April 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 are payable in April 2005 and subordinated to the Trident Note.
The notes are 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 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


                                       14
<PAGE>

                            THE COFFEE EXCHANGE, INC.
                          (A DEVELOPMENT STAGE ENTITY)
                          Notes to Financial Statements


NOTE 8 - SUBSEQUENT EVENTS (Continued)

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 subject to certain adjustments. As of April 30, 2004, the Company had
raised approximately $3.1 million under the private placement.

On April 12, 2004, the holders of a majority of the issued and outstanding
shares of the Company's common stock acted by written consent to approve a
proposal to amend the Company's Certificate of Incorporation to increase the
number of shares of common stock the Company is authorized to issue from
50,000,000 to 150,000,000.

In April 2004, the Company contributed $350,000 to PHT Vela Partners, L.P. ("PHT
Vela"). PHT Vela is a limited partnership formed in January 2004 of which the
Company is a limited partner with an approximate 35.64% interest and PHT Gas,
LLC is the general partner.

In April 2004, the Company invested an additional $98,000 in Awakino South
Exploration, LLC.

In April 2004, the Company invested an additional $412,500 in Knox Miss
Partners, L.P.

In April 2004, the Company invested an additional $275,000 in PHT Stent
Partners, L.P.

In April 2004, Touchstone Louisiana, Inc. purchased a 24.9975% Class A limited
partnership interest in Louisiana Shelf Partners, LP from Endeavour, in
consideration for which the Company agreed to pay Endeavour $250,000 and issue a
promissory note payable to Endeavour in the amount of $2,000,000.

In April 2004, the Company made an initial capital contribution of $550,000 to
PHT Wharton Partners, L.P. ("PHT Wharton") in exchange for a 24.53% limited
partnership interest in PHT Wharton.


NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

No amounts were paid for taxes or interest.

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

In March 2001, the Company issued 58,125,000 shares of common stock with a fair
market value of $2,325 for services.

In May 2001, the Company issued 83,125,000 shares of common stock with a fair
market value of $3,325 for services.


                                       15

<PAGE>


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

         On April 19, 2004,  the Board of  Directors of the Company  engaged L J
Soldinger Associates, LLC as its independent accountant. During the fiscal years
ended  December 31, 2003 and 2002,  and the interim period ended March 31, 2004,
the  Company  did not  consult  L J  Soldinger  Associates,  LLC  regarding  the
application  of accounting  principles to a specific  completed or  contemplated
transaction or regarding the type of audit opinion that might be rendered by L J
Soldinger  Associates,  LLC  on  the  Company's  financial  statements,  and L J
Soldinger Associates, LLC did not provide any written or oral advice that was an
important factor considered by the Company in reaching a decision as to any such
accounting, auditing or financial reporting issue.

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  Treasurer   ("Treasurer").   Based  upon  that
evaluation,  our CEO and Treasurer  concluded  that, as of the end of the period
covered by this Annual  Report,  our  disclosure  controls and  procedures  were
effective to provide  reasonable  assurance that  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. There has been no change in
our internal control over financial reporting identified in connection with that
evaluation  that  occurred  during  our  most  recent  fiscal  quarter  that has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

                                    PART III

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

         The following  sets forth certain  information  about each director and
executive officer of the Company.

Name                         Age                  Positions Held
----                         ---                  --------------

Stephen P. Harrington        47          Chief Executive Officer, Treasurer,
                                         Secretary and Director

         The  following is a brief summary of Stephen P.  Harrington's  business
experience:



                                       31
<PAGE>

         Stephen P.  Harrington  has served as our Chairman and Chief  Executive
Officer,  Treasurer,  and Secretary  since March 15, 2004. From February 2002 to
February 2004, Mr. Harrington served as the Chairman and Chief Executive Officer
of Endeavour  International  Corporation (f/k/a Continental  Southern Resources,
Inc.),  a publicly  traded oil and gas  exploration  company (OTC BB: EVOR) that
merged with NSNV Inc., a Texas corporation,  in February 2004. During his tenure
at Endeavour,  the company's market  capitalization  grew from approximately $20
million to over $250 million.  Mr. Harrington has served as the President of SPH
Investments,  Inc. and SPH Equities,  Inc., each a private  investment  company,
since 1992.  Mr.  Harrington  has served as an officer  and  director of several
publicly  held  corporations,  including  BPK  Resources,  Inc.,  an oil and gas
exploration  company,  and Astralis Ltd. (f/k/a Hercules Development Group). Mr.
Harrington graduated with a BA from Yale University in 1980.

DIRECTORS' TERMS OF OFFICE

         Stephen P.  Harrington was appointed as the sole member of the Board of
Directors  on March 15, 2004 will hold office  until the next annual  meeting of
shareholders and the election and qualification of his successor. Directors hold
office  until the next  annual  meeting of  shareholders  and the  election  and
qualification of their successor.  Officers are elected annually by the Board of
Directors and serve at the discretion of the Board.

AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT

         Our Board of Directors  acts as our audit  committee.  No member of our
Board of Directors  is an "audit  committee  financial  expert," as that term is
defined in Item 401(e) of Regulation S-B promulgated under the Securities Act.

         To date,  we have  conducted  limited  operations  and  generated  only
minimal revenue since inception. In light of the foregoing,  and upon evaluating
the Company's  internal  controls,  our Board of Directors  determined  that our
internal controls are adequate to insure that financial information is recorded,
processed, summarized and reported in a timely and accurate manner in accordance
with applicable rules and regulations of the Securities and Exchange Commission.
Accordingly,  our Board of Directors concluded that the benefits of retaining an
individual  who  qualifies as an "audit  committee  financial  expert"  would be
outweighed by the costs of retaining such a person.

SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a) of the U.S.  Securities  and  Exchange  Act of 1934,  as
amended (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  the 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


                                       32
<PAGE>

believe that during the fiscal year ended  December 31, 2003,  all Section 16(a)
filing requirements applicable to our officers,  directors and ten percent (10%)
stockholders were satisfied in a timely fashion.

CODE OF ETHICS

         We  have  adopted  a Code  of  Ethics  that  applies  to our  principal
executive officer,  principal financial officer, principal accounting officer or
controller,  or  persons  performing  similar  functions.  Our Code of 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 the code to an appropriate person or persons
identified in the code; and (v) accountability for adherence to the code.


ITEM 10. EXECUTIVE COMPENSATION

         Any compensation  received by our officers,  directors,  and management
personnel  will be determined  from time to time by our Board of  Directors.  We
have not  compensated  any of our officers or directors  since our  inception in
March 2001 for  services  rendered to the Company,  and have not yet  determined
what, if any,  compensation  will be paid to Stephen P. Harrington,  our current
Chief Executive Officer,  Treasurer,  Secretary and sole Director.  Our officers
and directors will be reimbursed for any out-of-pocket  expenses incurred on our
behalf.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of April 26, 2004,  information with
respect to the securities holdings of all persons which the Company, pursuant to
filings with the Securities and Exchange  Commission,  has reason to believe may
be deemed the beneficial  owners of more than five percent (5%) of the Company's
outstanding  common stock. The following table also sets forth, as of such date,
the  beneficial  ownership  of the  Company's  common  stock by all officers and
directors, individually and as a group.


                                         Amount and Nature
                                           of Beneficial           Percentage
Name and Address of Beneficial Owner       Ownership (1)          of Class (1)
------------------------------------       -------------          ------------
Stephen P. Harrington
111 Presidential Boulevard, Suite 165        8,970,000                17.9%
Bala Cynwyd, PA 19004

Touchstone Resources, Ltd.
5858 Westheimer, Suite 708                  7,100,000                 14.2%
Houston, Texas 77057



                                       33
<PAGE>

FEQ Investments, Inc.
2400 Fountainview                           2,900,000                 5.8%
Houston, Texas 77057

All officers and directors as a group
(3) persons                                 8,970,000                 17.9%

(1) The percentages  have been calculated  based on 50,000,000  shares of Common
Stock outstanding on April 26, 2004.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         As of December 31, 2003, no  relationships or transactions had occurred
that were required to be reported under this Item 12. Subsequent to December 31,
2003, we engaged in the following transactions:

1. On March 23, 2004,  Touchstone  Vicksburg purchased a 10% limited partnership
interest in PHT Vicksburg, L.P., a Delaware limited partnership, from Montex for
$48,000,  and Touchstone Awakino purchased a 4.6% membership interest in Awakino
South Exploration,  LLC, a Delaware limited liability  company,  from Montex for
$150,000.  On the  date  these  transactions  were  completed,  Montex  and  its
affiliates  were a  beneficial  owner of greater  than five  percent (5%) of the
issued and outstanding shares of our common stock.

2. On March 25, 2004, we purchased a 75%  membership  interest in Knox Gas and a
one percent  (1%)  membership  interest in Knox Miss LLC,  each from FEQ Gas, in
consideration  for which we agreed to make capital  contributions to Knox Gas in
the  amount  of $5  million  to fund  Knox  Gas'  obligations  under  a  secured
promissory note due from Knox Gas to Endeavour.  On the date these  transactions
were  completed,  FEQ  Investments  was the managing member of FEQ Gas and was a
beneficial owner of greater than five percent (5%) of the issued and outstanding
shares of our common stock.


                                       34
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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


<TABLE>
<CAPTION>
    Exhibit No.                        Exhibit                                        Method of Filing
    -----------                        -------                                        ----------------
<S>                  <C>                                              <C>
        2.1          Stock  Purchase  Agreement  by and  between      Incorporated  by  reference to Exhibit 2.1 to the
                     Touchstone   Resources,    Ltd.   and   the      Company's  Current Report on Form 8-K filed April
                     Company, dated March 15, 2004                    15, 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          Bylaws                                           Incorporated  by  reference to Exhibit 3.2 to the
                                                                      Registrant's  Registration Statement on Form SB-2
                                                                      filed on   December 7, 2001

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

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

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

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

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



                                       35
<PAGE>

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



                                       36
<PAGE>

       14.1          Code of Business Conduct and Ethics              Filed herewith

       16.1          Letter from MFRC  Accountancy  Corporation,      Incorporated  by reference to Exhibit 16.1 to the
                     certified   public   accountants,   to  the      Company's  Quarterly  Report on Form  10-QSB  for
                     Securities  and Exchange  Commission  dated      the quarter ended March 31, 2003
                     April 3, 2003

       21.1          Subsidiaries of the Registrant                   Filed herewith

       31.1          Certificate  of CEO of Registrant  required      Filed herewith
                     by  Rule  13a-14(a)  under  the  Securities
                     Exchange Act of 1934, as amended

       31.2          Certificate   of  Treasurer  of  Registrant      Filed herewith
                     required  by  Rule   13a-14(a)   under  the
                     Securities Exchange Act of 1934, as amended

       32.1          Certificate  of CEO of Registrant  required      Filed herewith
                     by  Rule  13a-14(b)  under  the  Securities
                     Exchange Act of 1934, as amended
</TABLE>


(b) Reports on Form 8-K.

         The following  reports on Form 8-K were filed during our fiscal quarter
ended  December  31,  2003,  and the period  commencing  on the date thereof and
ending on the date hereof:

1. On March 15, 2004, we filed a report on Form 8-K with the SEC  disclosing the
deemed change in our control.

2. On April 15, 2004, we filed a report on Form 8-K with the SEC  disclosing our
purchase of Touchstone  Texas,  and our interests in LS Gas, LLC, PHT Vicksburg,
L.P., and Awakino South Exploration, LLC.

3. On April 19, 2004, we filed a report on Form 8-K with the SEC  disclosing the
resignation of Stonefield Josephson,  Inc. as our independent accountant and the
engagement of L J Soldinger Associates, LLC as our new independent accountant.



                                       37
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANTS 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 2003 and fees billed for other services rendered by L J Soldinger
in 2003, and professional audit services performed by Stonefield Josephson, Inc.
for the audit of our annual  financial  statements  for 2002 and fees billed for
other services rendered by Stonefield Josephson, Inc. in 2002.

                                      2003                       2002
                                      ----                       ----

Audit Fees:                        $30,000                    $ 8,000

Audit-Related Fees:                $  -0-                     $  -0-

Tax Fees:                          $ 1,000                    $ 1,000

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

Total:                             $31,000                    $ 9,000
                           ================        ===================

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
Company's  consolidated  financial  statements and are not reported under "Audit
Fees."

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


                                       38
<PAGE>

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  2003,  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.




























                                       39
<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:  May 7, 2004                     /s/  Stephen P. Harrington
                                       ----------------------------------------
                                       Stephen P. Harrington
                                       Chief Executive Officer and
                                       Chief Financial Officer


         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/ Stephen P. Harrington   Chief Executive Officer, Treasurer   May 7, 2004
--------------------------- and Director (Principal Executive
Stephen P. Harrington       Officer and Principal Financial and
                            Accounting Officer)


                                       40
<PAGE>

                                  EXHIBIT INDEX

Exhibit Number        Description

         14.1         Code of Business Conduct and Ethics

         21.1         Subsidiaries of the Registrant

         31.1         Certificate   of  CEO  of  Registrant   required  by  Rule
                      13a-14(a)  under the  Securities  Exchange Act of 1934, as
                      amended

         31.2         Certificate  of Treasurer of  Registrant  required by Rule
                      13a-14(a)  under the  Securities  Exchange Act of 1934, as
                      amended

         32.1         Certificate of CEO and Treasurer of Registrant required by
                      Rule 13a-14(b) under the Securities  Exchange Act of 1934,
                      as amended