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

                                   FORM 10-KSB

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

                  For the fiscal year ended: December 31, 2004


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

             For the transition period from _________ to __________.

                          Commission File Number: 50228

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

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


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. [ ]

      State issuer's revenues for its most recent fiscal year: $200,809

      The aggregate market value of the voting common equity held by
non-affiliates of the registrant based on the average bid and asked price of the
registrant's common stock as reported on the OTC Bulletin Board on April 11,
2005, was $51,856,376.

      As of April 11, 2005, 60,756,757 shares of the registrant's common stock
were outstanding.

      Transitional Small Business Disclosure Format (check one):

      Yes     No  X
          ---    ---
<PAGE>

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

                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>
<S>           <C>                                                                               <C>
Item 1.        Description of Business                                                             1
Item 2.        Description of Property                                                            25
Item 3.        Legal Proceedings                                                                  33
Item 4.        Submission of Matters to a Vote of Security Holders                                33

                                     PART II

Item 5.        Market for Common Equity, Related Stockholder Matters and Small Business
               Issuer Purchases of Equity Securities                                              33
Item 6.        Management's Discussion and Analysis                                               35
Item 7.        Financial Statements                                                               48
Item 8.        Changes in and Disagreements With Accountants on Accounting and Financial
               Disclosures                                                                        48
Item 8A.       Controls and Procedures                                                            48
Item 8B.       Other Information                                                                  48

                                    PART III

Item 9.        Directors and Executive Officers of the Registrant                                 49
Item 10.       Executive Compensation                                                             52
Item 11.       Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters                                        54
Item 12.       Certain Relationships and Related Transactions                                     55
Item 13.       Exhibits List and Reports on Form 8-K                                              56
Item 14.       Principal Accountant Fees and Services                                             59
</TABLE>

<PAGE>
                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Background

      Touchstone Resources USA, Inc. is a Delaware corporation formed on March
5, 2001. Our 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 originally engaged in the business of developing internet cafes in
Orange County, California. On March 15, 2004, all of our officers and directors
resigned and Stephen P. Harrington was appointed as our Chief 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 gas properties.
<PAGE>

Overview

      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, Mississippi and other traditional oil and gas 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 indirectly as equity participants in
limited partnerships and limited liability companies, and act as the operator of
certain of the projects in which we own interests. We also assist and advise
companies and partnerships in identifying and leasing properties on favorable
terms, and provide such entities with additional reserve assessment analysis and
engineering services in connection with the exploration and development of
prospects.

      Our primary objective is to build reserves, production, cash flow and
earnings per share by optimizing production and value from existing oil and gas
properties and acquiring new oil and gas prospects. We plan to achieve this
objective by acquiring and developing high profit margin properties, disposing
of low producing, marginal and non-strategic properties, balancing reserves
between oil and gas, and maintaining a high degree of financial flexibility. We
seek to balance our risk profile by alternating exploration projects with
development wells and recompletions of wells in our existing lease and well
portfolio. By doing so, we believe we can maximize the use of our otherwise
limited resources, reduce the risk of unsuccessful drilling efforts, and
capitalize on the experience of our management team and consultants.

Business Strategy

      Our business strategy is to provide long-term growth in shareholder value
by optimizing production and value from our existing oil and gas reserves and
acquiring additional interests in oil and gas properties. 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 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 have developed and
            implemented an active exploration program that is designed to
            complement our exploitation and development efforts with exploration
            projects offering superior reserve potential. We utilize seismic
            data and other technical applications, as appropriate, to manage our
            exploration risks.

      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 Texas and Louisiana,
            that are in mature fields with complex geology that have multiple
            reservoirs and existing infrastructure.

                                       2
<PAGE>

      o     Participate in Joint Ventures. We intend to participate in joint
            ventures and seek joint venture partners in order to reduce our
            investment in projects and share the costs associated with operating
            the underlying prospects.

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

      o     Retain Additional Executive Management. As our business continues to
            grow, we expect to retain additional executive management personnel
            with substantial experience in the oil and gas exploration and
            development business.

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

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

      o     Multiple productive sands and reservoirs; and

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

      To date, we have conducted our acquisition, exploration and development
activities primarily in Texas, Louisiana, Mississippi and New Zealand. These
regions are characterized by long-lived reserves with predictable and relatively
low production depletion rates, multiple geologic targets that decrease risk,
strong natural gas prices, lower service costs than in more competitive or
remote areas, a favorable regulatory environment that encourages drilling
efforts, and virtually no federal land or land access impediments.

      We believe that these regions will continue to generate attractive
acquisition opportunities as the major integrated oil companies and other large
independent oil and gas exploration and production companies continue to divest
small, less capital-intensive properties to focus on larger, more
capital-intensive projects that better match their long-term strategic goals. We
believe that these asset divestitures as well as the resource constraints of
major integrated oil companies and other large upstream companies may allow us
to acquire attractive prospects at favorable prices with a significant portion
of the up-front development expenses, such as infrastructure and seismic,
already invested.

Drilling, Exploration and Production Activities

      We have acquired interests in 15 oil and gas projects with approximately
536,000 aggregate gross acres. Our projects have aggregate net estimated proved
developed producing, proved developed non-producing, and possible reserves of
almost 6.3 million barrels of oil and over 118 million cubic feet of gas in
Texas, Louisiana, Mississippi and New Zealand.

                                       3
<PAGE>

      Of these projects, several wells in our Vicksburg Project located in Starr
and Hidalgo counties in South Texas are currently in production, one well in our
Louisiana Shelf Project located offshore in Southern Louisiana has been drilled
and is now shut in awaiting hook-up to production facilities, one well in our
Maverick Basin Project located in Maverick County in South Texas is in
production and one is shut in, one well in our Vela Project located in Zapata
County, Texas is in production, and one well in our Wharton Project located in
Wharton County, Texas has been drilled and is now shut in. Our remaining
projects are in various stages of exploration, development and testing. We
abandoned our West Pleito Project in Kern County, California during our third
fiscal quarter of 2004. A description of our principal projects is set forth
under "Item 2. Description of Property - Current Oil and Gas Projects" of this
report.

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

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

Operator Activities

      We currently act as the operator for the Vicksburg Project, Wharton
Project, Maverick Basin Project, Martinez Ranch Project and Pierce Ranch
Project. In the future, we may seek to act as the operator of additional
properties in which we acquire an interest.

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

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

                                       4
<PAGE>

Sales and Marketing

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

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

      We normally sell production to a relatively small number of customers, as
is customary in the oil and gas exploration, development and production
business. We sell our oil and gas under both short-term (less than one year) and
long-term (one year or more) agreements at prices negotiated with third parties.
Under both short-term and long-term contracts, typically either the entire
contract (in the case of short-term contracts) or the price provisions of the
contract (in the case of long-term contracts) are renegotiated from intervals
ranging in frequency from daily to annual. Sales prices for oil and gas are
negotiated based on factors normally considered in the industry, such as the
posted price for oil, the index or spot price for gas, price regulations,
distance from the well to the pipeline, well pressure, estimated reserves,
commodity quality and prevailing supply conditions.

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

                                       5
<PAGE>

Technology

      In each of our core operating areas, we have accumulated detailed
geological and geophysical knowledge and have developed significant technical
and operational expertise. We have developed considerable expertise in "2-D" and
"3-D" seismic imaging and interpretation. "3-D" seismic data is geophysical data
that depict the subsurface strata in three dimensions, and typically provides a
more detailed and accurate interpretation of the subsurface strata than "2-D,"
or two-dimensional, seismic data. We use 2-D and 3-D seismic data and other
technical applications to identify prospects and develop prospects having the
highest production and reserve growth potential. We also use state-of-the-art
geological and geophysical computer applications and hardware to analyze this
information.

Title to Properties

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

      As is customary in the oil and gas industry, only a preliminary title
examination is conducted at the time properties believed to be suitable for
drilling operations are acquired by us. 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 gas
business, including suppliers of energy and fuel to industrial, commercial and
individual customers. Numerous independent oil and gas companies, oil and gas
syndicates and major oil and gas companies actively seek out and bid for oil and
gas prospects and properties as well as for the services of third-party
providers, such as drilling companies, upon which we rely. Many of these
companies not only explore for, produce and market oil and gas, but also carry
out refining operations and market the resultant products on a worldwide basis.
A substantial number of our competitors have longer operating histories and
substantially greater financial and personnel resources than we do.

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

                                       6
<PAGE>

Regulation

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

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

      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.

                                       7
<PAGE>

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

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

      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 local, state and federal laws and
regulations governing environmental quality and pollution control in the United
States and may be subject to similar laws and regulations in New Zealand. The
exploration, drilling and production from wells, natural gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing natural gas and
other products, are subject to stringent environmental regulation by state and
federal authorities, including the Environmental Protection Agency ("EPA"). Such
regulation can increase our cost of planning, designing, installing and
operating such facilities.

                                       8
<PAGE>

      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
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 in the past by third parties over
whom we had no control as to such entities' treatment of hydrocarbons or other
wastes or the manner in which such substances may have been disposed of or
released. State and federal laws applicable to oil and gas wastes and properties
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 projects that are
currently exempt from treatment as Hazardous Wastes may in the future be
designated as Hazardous Wastes, and therefore be subject to more rigorous and
costly operating and disposal requirements.

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

                                       9
<PAGE>

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

      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 that may require us to obtain permits to
discharge storm water runoff, including discharges associated with construction
activities. In the event of an unauthorized discharge of wastes, we may be
liable for penalties and costs.

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

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

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

Seasonality

      Generally, but not always, the demand for oil and natural gas decreases
during the summer months and increases during the winter months. Seasonal
anomalies such as mild winters sometimes lessen the effect of this seasonal
fluctuation in demand. In addition, 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 fluctuations in demand. We do not expect seasonal
fluctuations in the demand for oil and gas to have a material effect on our
future sales of oil and gas.

Employees and Consultants

      We currently have three employees consisting of our two executive officers
and one administrative person. We also utilize the services of several
consultants who provide, among other things, technical support and accounting
services to the Company. We anticipate retaining additional personnel during the
next 12 months, including additional executive management personnel with
substantial experience in the oil and gas exploration and development business.

                                       11
<PAGE>

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

      We have experienced net losses in each fiscal quarter since our inception,
and we expect to continue to incur substantial losses for the foreseeable
future. Net loss applicable to common stockholders for our fiscal year ended
December 31, 2004 was approximately $15,595,304, and as of December 31, 2004, we
had an accumulated deficit of approximately $15,680,932. We have also had
limited revenues to date. Revenues for our fiscal year ended December 31, 2004
were $200,809.

      We may not be able to generate significant revenues in the future and
expect our operating expenses to increase substantially over the next 12 months
as we continue to pursue our gas and oil exploration activities. As a result, we
expect to continue to experience negative cash flow for the foreseeable future
and cannot predict when, if ever, we might become profitable. We will need to
raise additional funds, and such funds may not be available on commercially
acceptable terms, if at all. If we cannot raise funds on acceptable terms, we
may not be able to execute on our business plan, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements. This may seriously harm our business, financial condition and
results of operations.

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

      We are a development stage company with only a limited operating history
upon which to base an evaluation of our current business and future prospects.
We have only been engaged in the oil and gas exploration and development
business since March 2004 and do not have an established history of locating and
developing properties that have oil and gas reserves. As a result, the revenue
and income potential of our business is unproven. 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, 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.

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

      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. Specifically, we expect to incur capital calls and production
costs of approximately $8.5 million over the next 12 months. We intend to rely
on external sources of financing to meet our capital requirements to continue
acquiring, exploring and developing oil and gas properties and to otherwise
implement our corporate development and investment strategies. We plan to obtain
such funding through the debt and equity markets, but we cannot assure you that
we will be able to obtain additional funding when it is required or that it will
be available to us on commercially acceptable terms, if at all.

                                       12
<PAGE>

      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 properties.

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

      As of the date of this report, we had outstanding term indebtedness to
third parties in the aggregate amount of approximately $4.05 million, all of
which is due during the next 12 months. Of this amount, $2.05 million is secured
by substantially all of our assets. We do not currently have the funds available
to repay this existing indebtedness. If we are unable to repay this indebtedness
as it becomes due, the lenders will have the right to declare the indebtedness
in default and seek all available remedies against us, including executing upon
all of our assets. In addition, the presence of this indebtedness may have a
negative effect on our ability to obtain additional financing. There can be no
assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements.

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

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

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

                                       13
<PAGE>

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

      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 assurance 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 our initial
estimates.

We rely heavily upon reserve estimates when determining whether or not to
acquire or invest in a particular oil or gas property.

      The oil and gas reserve information that we present in our filings with
the Securities and Exchange Commission ("SEC") and use in evaluating oil and gas
prospects is based on reserve estimates involving a great deal of subjectivity.
Different reserve engineers may make different estimates of reserves and cash
flows based on the same available data. Reserve estimates 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 the following:

                                       14
<PAGE>

      o     geological characteristics of the reservoir structure;

      o     reservoir fluid properties;

      o     the size and boundaries of the drainage area;

      o     reservoir pressure; and

      o     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:

      o     the price at which recovered oil and natural gas can be sold;

      o     the costs of recovery;

      o     assumptions concerning future operating costs, severance and excise
            taxes, development costs and workover and remedial costs;

      o     prevailing environmental conditions associated with drilling and
            production sites;

      o     availability of enhanced recovery techniques, ability to transport
            oil and natural gas to markets and governmental regulation; and

      o     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 to produce. 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 SEC to be used to calculate discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with us
or the oil and gas industry in general.

We have a very small management team and the loss of any member of this team may
prevent us from implementing our business plan in a timely manner.

      We have two executive officers and a limited number of additional
employees and consultants. Our success depends largely upon the continued
services of these individuals, particularly our executive officers. We do not
have an employment agreement with, nor do we maintain key person life insurance
policies on, any of these individuals. The loss of one or more of these
individuals could seriously harm our business, financial condition and results
of operations. In such an event, we may not be able to recruit personnel to
replace these individuals in a timely manner, or at all, on acceptable terms.

                                       15
<PAGE>

Our continued growth could strain our personnel and infrastructure resources,
and if we are unable to implement appropriate controls and procedures to manage
our growth, we may not be able to successfully implement our business plan.

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

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

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

      o     severe weather;

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

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

      o     changes in the regulatory environment.


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

      In addition, our ability to add reserves through drilling is dependent
upon our ability to timely obtain drilling permits and regulatory approvals. The
permitting and approval process has been more difficult in recent years due to
increased activism from environmental and other groups and has extended the time
it takes to receive permits. Because of our relatively small size and
concentrated property base, we can be disproportionately disadvantaged by delays
in obtaining or failing to obtain drilling approvals compared to companies with
larger or more dispersed property bases. For example, we are less able to shift
drilling activities to areas where permitting may be easier, and we have fewer
properties over which to spread the costs of complying with these regulations
and the cost of foregone opportunities resulting from delays.

                                       16
<PAGE>

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

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

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

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

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

      o     weather conditions in the United States and elsewhere;

      o     economic conditions in the United States and elsewhere;

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

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

      o     governmental regulations, both domestic and foreign;

      o     domestic and foreign tax policy;

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

      o     the price of foreign imports of oil and gas;

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

      o     the discovery rate of new oil and gas reserves;

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

      o     available pipeline and other oil and gas transportation capacity;

      o     the ability of oil and gas companies to raise capital;

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

      o     the availability of alternate fuel sources.

                                       17
<PAGE>

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

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

      The business of exploring for and producing oil and gas involves a
substantial risk of investment loss. Drilling oil and gas wells involves the
risk that the wells may be unproductive or that, although productive, the wells
may not produce oil and/or gas in economic quantities. Other hazards, such as
unusual or unexpected geological formations, pressures, fires, blowouts, loss of
circulation of drilling fluids or other conditions may substantially delay or
prevent completion of any well. Adverse weather conditions can also hinder
drilling operations. A productive well may become uneconomic if water or other
deleterious substances are encountered that 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.
There can be no assurance that oil and gas will be produced from the properties
in which we have interests. In addition, the marketability of oil and gas that
may be acquired or discovered may be influenced by numerous factors beyond our
control. These factors include the proximity and capacity of oil and gas
pipelines and processing equipment, market fluctuations in oil and gas prices,
taxes, royalties, land tenure, allowable production and environmental
protection. We cannot predict how these factors may affect our business.

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

      The success of our business is dependent upon the efforts of various third
parties that we do not control. We serve as the operator for the Vicksburg
Project, Wharton Project, Maverick Basin Project, Martinez Ranch Project and
Pierce Ranch Project. We do not serve as the operator for the remaining
projects. As a result, we may have limited ability to exercise influence over
the operations of some non-operated properties or their associated costs. Our
dependence on the operator and other working interest owners for these projects
and our limited ability to influence operations and associated costs could
prevent the realization of our targeted returns on capital in drilling or
acquisition activities. The success and timing of development and exploitation
activities on properties operated by others depend upon a number of factors that
will be largely outside of our control, including:

                                       18
<PAGE>

      o     the timing and amount of capital expenditures;

      o     the operator's expertise and financial resources;

      o     approval of other participants in drilling wells;

      o     selection of technology;

      o     the rate of production of the reserves; and

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

      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. 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.

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

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

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

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

                                       19
<PAGE>

      For our fiscal year ended December 31, 2004, we recorded impairment
charges of $315,322 related primarily to an impairment of the carrying value of
unproved properties acquisition and drilling costs incurred in PHT West Pleito,
LLC and the carrying value of our equity investment in the Stent Project. A
write-down constitutes a noncash charge to earnings. See "Item 6. Management's
Discussion and Analysis - Critical Accounting Policies - Impairment of
Properties" for a discussion of when and how impairment of properties charges
are determined. We may incur noncash charges for impairment of our properties in
the future, which could have a material adverse effect on our results of
operations in the period taken. We may also reduce our estimates of the reserves
that may be economically recovered, which could have the effect of reducing the
total value of our reserves.

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

      Some of our properties are held under leases and working interests in
leases. If we or the 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 $8.5 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 the limited partnerships or limited liability companies,
respectively, in which we own an interest fails to pay its equitable portion of
development costs or capital calls, we may need to pay additional funds to
protect our ownership interests.

Title deficiencies could render our leases worthless.

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

                                       20
<PAGE>

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

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

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

      In the projects in which we own an equity interest in a limited
partnership that 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. Such 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.

                                       21
<PAGE>

      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.

      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 for oil and gas more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Further,
these companies may enjoy technological advantages and may be able to implement
new technologies more rapidly than we can. Our ability to acquire additional
properties in the future will depend upon our ability to conduct efficient
operations, evaluate and select suitable properties, implement advanced
technologies and consummate transactions in a highly competitive environment.

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.

                                       22
<PAGE>

      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 purchase
supplies from, a particular jurisdiction. In addition, if a dispute arises with
foreign operations, we may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons, especially
foreign oil ministries and national oil companies, to the jurisdiction of the
United States.

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

                           Risks Related to Our Stock

There is no significant market for our common stock.

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

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 may have the effect of limiting the trading activity of our common
stock and reducing the liquidity of an investment in our common stock.

                                       23
<PAGE>

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

      We intend to raise additional capital in the future to help fund our
operations through sales of shares of our common stock or securities convertible
into shares of our common stock, as well as issuances of debt. For example, we
are currently seeking to raise as much as $22 million in two concurrent
offerings of units comprised of shares of our Series A Convertible Preferred
Stock and warrants. Additional equity financing may be dilutive to our
stockholders and debt financing, if available, may involve restrictive covenants
that may limit our operating flexibility. If additional capital is raised
through the issuance of shares of our common stock or securities convertible
into shares of our common stock, the percentage ownership of our stockholders
will be reduced. These stockholders may experience additional dilution in net
book value per share and any additional equity securities may have rights,
preferences and privileges senior to those of the holders of our common stock.

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

      We currently have 60,756,757 shares of common stock issued and
outstanding. As of April 1, 2005, we had outstanding warrants exercisable into
9,295,708 shares of our common stock, promissory notes convertible into
4,009,091 shares of our common stock, and preferred stock convertible into
4,518,270 shares of our common stock. We are currently seeking to raise
additional funds through the issuance of convertible debt and equity securities.
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 the exercise or conversion price of such
securities. The issuance of additional shares of common stock upon the exercise
or conversion of these securities may result in substantial dilution to the
equity interests of our existing stockholders.

      We may also issue additional shares of our common stock in connection with
the hiring of additional personnel, future acquisitions of oil and gas
prospects, future offerings of our securities, and other business purposes. Such
issuances may further dilute the interests of our existing stockholders.

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

      The trading price of our shares has from time to time fluctuated widely
and in the future may be subject to similar fluctuations. The trading price may
be affected by a number of factors including events described in the risk
factors set forth in this report as well as our operating results, financial
condition, announcements regarding our oil and gas activities, general
conditions in the oil and gas exploration and development industry, and other
events or factors. In addition, the stock market has experienced significant
price and volume fluctuations that have particularly affected the price of many
small capitalization companies and that often have been unrelated or
disproportionate to the operating performance of these companies. Market
fluctuations such as these may seriously harm the market price of our common
stock. Further, securities class action suits have been filed against companies
following periods of market volatility in the price of their securities. If such
an action is instituted against us, we may incur substantial costs and a
diversion of management attention and resources, which would seriously harm our
business, financial condition and results of operations.

                                       24
<PAGE>

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. In addition, the terms of our Series A Convertible Preferred
Stock prevent us from declaring or paying any dividends on our common stock
unless and until all accrued or declared and unpaid dividends on such shares
have been paid in full. As a result, in the event we have retained earnings
available for distribution as dividends, we must first pay any accrued or
declared and unpaid dividends on any outstanding shares of Series A Convertible
Preferred Stock before we pay any dividends on shares of our common stock.

ITEM 2.  DESCRIPTION OF PROPERTY

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

Principal Executive Offices

      Our principal executive offices are located 111 Presidential Boulevard,
Suite 165, Bala Cynwyd, Pennsylvania 19004. We rent this office space for
approximately $560 per month. We also have offices located at 1600 Smith Street,
Suite 5100, Houston, Texas 77002. We rent this office space for approximately
$8,000 per month. We believe our current offices will be adequate to support our
operations for the foreseeable future.

Current Oil and Gas Projects

      We currently conduct our acquisition, exploitation and development
activities in Texas, Louisiana, Mississippi and New Zealand. To date, we have
acquired interests in 15 oil and gas projects consisting of an aggregate of
approximately 536,000 gross acres. A description of our 12 principal projects is
provided below.

Vicksburg Project

      We own a 27.5% limited partnership interest in PHT Vicksburg, L.P. ("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 approximately 6,000 to 11,000
feet. To date, twelve wells have been drilled, of which eight are in production,
two are dry holes, and the remainder are in various stages of evaluation or
completion. We expect to drill three additional wells by June 30, 2005, and to
recomplete several of our existing wells during the remainder of 2005.

                                       25
<PAGE>

Louisiana Shelf Project

      We own an approximate 25% limited partnership interest in Louisiana Shelf
Partners, L.P. ("Louisiana Shelf"), and a 10% membership interest in LS Gas,
LLC, which owns a one percent (1%) general partnership interest in Louisiana
Shelf and serves as the operator of the prospects underlying these interests.
Louisiana Shelf is engaged in an exploration program involving approximately 600
offshore acres owned by the State of Louisiana approximately one mile offshore,
where water depths range from 10 to 25 feet. We have completed one well in this
project which is currently shut in and awaiting production facilities. We expect
to drill a second well as soon as a suitable drilling rig becomes available and
expect to drill approximately five wells in this project over the next two
years.

Wharton Project

      We own a 17.82% 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 approximately 4,000 acres in the Colorado Bend. The
prospect is less than 30 miles west of Houston in the northern part of Wharton
County, Texas. Production is expected to occur at a depth of between
approximately 3,000 and 13,000 feet in sandstone reservoirs in the Paleocene
Wilcox, Eocene Yegua and the Oligocene Frio formations. To date, three wells
have been drilled, completed and tested. We expect to complete the construction
of the facilities necessary to begin production by June 30, 2005.

Stent Project

      We own an approximate 24% 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
("Discovery GEO") that is exploring the Taranaki Basin. The Taranaki Basin lies
offshore along the western side of New Zealand's North Island, a premier
hydrocarbon province in New Zealand. The PHT Stent Prospect consists of
approximately 96,000 acres located onshore on the southern tip of the Taranaki
basin. Discovery GEO is the operator of the underlying prospects. Discovery GEO
completed the drilling of one well which was a dry hole and are currently
reevaluating available data.

Awakino South Project

      We own a 7.93% membership interest in Awakino South Exploration, LLC
("Awakino South"). Awakino South is a participant in a group led by Discovery
Geo in the exploration of the Taranaki Basin in New Zealand. The Awakino
concession contains approximately 380,000 acres and includes the Awakino South
Prospect and the Kahu Prospect. The Awakino South Prospect, or the "Big Bump,"
is a large structure that folded Eocene-aged sediments above a late
Tertiary-aged thrust fault. The objectives for the prospect are shallow marine
sandstones of the Kapuni Group, which is the main producing interval in the
basin. The Kahu Prospect, or the "Floor Fan," is believed to be a shelf-bypassed
turbidite sequence positioned basin-ward off the Awakino South Prospect. Depths
for each of these prospects are estimated to be at approximately 9,000 feet.
Discovery GEO is the operator of the underlying prospects. The prospect is
currently under geological review to determine an appropriate location for the
first well to be drilled.

                                       26
<PAGE>

Knox Miss Project

      We own a 68.18% membership interest in Knox Gas LLC ("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 approximately 60,000 acres 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 approximately 7,000 to 15,000 feet.
Clayton Williams Energy, Inc. ("Clayton Williams") is the operator of the
project. We participated with Clayton Williams in the drilling of two wells, the
first of which was a dry hole and the second of which experienced a mechanical
failure. We and Clayton Williams are currently evaluating the best location to
drill a third well.

Maverick Basin Project

      We own an approximate 25% Class B membership interest in Maverick Basin
Exploration, LLC ("Maverick Basin"), representing an aggregate membership
interest in Maverick Basin of approximately 12.5%, and are the operator of the
underlying prospects. Maverick Basin is a party to an exploration agreement with
Blue Star Oil and Gas, Ltd. ("Blue Star") and Maverick Oil and Gas, Inc.
pursuant to which Maverick Basin acquired the right to earn 50% of the revenues
generated from any wells drilled on approximately 10,000 acres in Maverick Basin
in South Texas and 10,000 acres covered by an option granted to Maverick Basin
under the exploration agreement, if and when the option is exercised. To date,
two wells have been drilled and completed, one of which is currently in
production and the other of which is currently shut in. We have commenced
drilling one additional well that we expect to complete in April 2005. Based on
the success of these wells, and assuming the exercise of our option, Maverick
Basin may drill as many as 80 horizontal wells in the currently owned and
optioned acreage in the project.

Martinez Ranch Project

      We own a 19.8% limited partnership interest in PHT Martinez Partners, L.P.
("Martinez Partners") and are the operator of the underlying prospects. Martinez
Partners owns a leasehold interest in approximately 1,600 acres in Zapata County
in South Texas. We are currently evaluating the prospect to identify an initial
drill site.

                                       27
<PAGE>

La Paloma Project

      We own an 11% limited partnership interest in PHT La Paloma Partners, L.P.
("La Paloma"). La Paloma owns a leasehold interest in approximately 1,425 acres
in Zapata County in South Texas, the underlying prospects of which are operated
by Reichmann Petroleum ("Reichmann Petroleum"). Reichmann Petroleum has
completed an initial exploration well that we are presently testing and is
currently drilling a second well. If the initial exploration well is successful,
the project may drill up to six additional wells on the acreage in the project.

Good Friday Project

      We own a 15.3% limited partnership interest in PHT Good Friday Partners,
L.P. ("Good Friday"). Good Friday owns a leasehold interest in approximately
2,000 acres in Zapata County in South Texas, the underlying prospects of which
are operated by Reichmann Petroleum. An initial well has been drilled on the
prospect and is currently shut in.

Pierce Ranch Project

      We are the sole member of Touchstone Pierce Exploration, LLC ("Touchstone
Pierce"), and are the operator of the underlying prospects. Touchstone Pierce
owns the rights to acquire leasehold interests underlying several prospects in
the 26,000 acre Pierce Ranch in Matagorda County, Texas. We are undertaking
geophysical and technical analysis to identify the acreage to be leased and to
determine a suitable location for an initial exploration well.

Vela Project

      We own a 28.8% limited partnership interest in PHT Vela Partners, L.P.
("Vela Partners"), which owns an approximate 50% interest in approximately 1,600
acres in Zapata County, Texas. Reichmann Petroleum acts as the operator of this
project. Reichmann Petroleum has completed one well on this project which is
currently producing.

                                       28
<PAGE>

Selected Oil and Gas Data

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

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

Productive Wells

      The following table sets forth as of March 20, 2005 information regarding
the total gross and net productive wells, expressed separately for oil and gas.
As of March 20, 2005, all of our productive oil and gas wells were located in
Texas and Louisiana. For the purposes of this subsection: (i) one or more
completions in the same bore hole have been counted as one well, and (ii) a well
with one or multiple completions at least one of which is an oil completion has
been classified as an oil well. As of March 20, 2005, we did not have any wells
with multiple completions.

                                      Oil                          Gas
                             ---------------------        ---------------------
                              Gross          Net           Gross          Net
                             -------       -------        -------       -------
Louisiana                         0             0              1          0.25
Mississippi                       0             0              0             0
Texas                             1        0.0495             14        1.2982

New Zealand                       0             0              0             0
                             -------       -------        -------       -------
  Total Productive Wells           1        0.0495             15        1.5482
                             =======       =======        =======       =======

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

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

                                       29
<PAGE>

Production and Price History

      The following table sets forth as of December 31, 2004 information
regarding net production of oil and gas and certain price and cost information.
For the purposes of this table, the following terms have the following meanings:
(i) "Bbl" means one stock tank barrel or 42 U.S. gallons liquid volume; (ii)
"MBbls" means one thousand barrels of oil; (iii) "Mcf" means one thousand cubic
feet; (iv) "Mcfe" means one thousand cubic feet equivalent, determined using the
ratio of six Mcf of natural gas to one Bbl of oil; (v) "MMcfe/d" means one
million cubic feet equivalent per day, determined by using the ratio of six Mcf
of natural gas to one Bbl of oil; and (vi) "MMcf" means one million cubic feet.

Production Data:
      Oil (MBbls)                                                      1,515.48
      Natural gas (MMcf)                                              33,367.20
      Total (Mcfe)                                                    42,460.08
      Daily (MMcfe/d)                                                    285.49

Average Prices:
      Oil (per Bbl)                                                      $43.68
      Natural gas (per Mcf)                                                6.80
           Total (per Mcfe)                                                7.04

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

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

      The average price of oil and gas is the average sales price (including
transfers) per unit of oil and gas produced and has been determined in
accordance with SFAS No. 69. The average cost of oil and gas are the average
production cost (lifting cost) per unit of oil and gas produced and has been
computed using production costs required to be disclosed pursuant to and in
accordance with SFAS No. 69.

                                       30
<PAGE>

Drilling Activity

      The following table sets forth information with respect to wells completed
during the fiscal year ended December 31, 2004. The information should not be
considered indicative of future performance, nor should it be assumed that there
is necessarily any correlation between the number of productive wells drilled,
quantities of reserves found or economic value.

                                               Gross                 Net
                                              --------            ---------
Exploratory:
      Productive                                    10               1.2069
      Dry                                            3               0.2890
                                              --------            ---------
           Total                                    13               1.4959
                                              ========            =========

Development:
      Productive                                     0                    0
      Dry                                            0                    0
                                              --------            ---------
           Total                                     0                    0
                                              ========            =========

      A productive well is an exploratory well, development well, producing well
or well capable of production, but does not include a dry well. A dry well
(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. The number of wells drilled refers to the number of wells
(holes) completed at any time during the fiscal year ended December 31, 2004,
regardless of when drilling was initiated. The "completion" of a well means the
installation of permanent equipment for the production of oil or gas, or, in the
case of a dry hole, to the reporting of abandonment to the appropriate agency.

      During the fiscal year ended December 31, 2004, we participated in
drilling eighteen gross wells, of which ten were completed and producing and
three were determined to be dry holes. None of the gross wells were in the
process of being completed or dewatered. Also during that time, we recompleted
three gross wells that were not included in the totals above. None of the
development wells in progress at December 31, 2004 were subsequently determined
to be dry holes.

                                       31
<PAGE>

Acreage

      The following table sets forth information regarding the Company's gross
and net developed and undeveloped oil and natural gas acreage under lease as of
March 20, 2005.

                                                   Gross                Net
                                                -----------         ----------
Developed Acreage
        Louisiana                                       600                150
        Mississippi                                       0                  0
        Texas                                      6,816.09(1)        1,315.58

        New Zealand                                       0                  0

Undeveloped Acreage
        Louisiana                                         0                  0
        Mississippi                               69,189.21          27,685.05
        Texas                                     24,365.17(1)        4,746.79

        New Zealand                                 476,000             53,126
                                                -----------         ----------

                Total                            576,970.47          87,023.42
                                                ===========         ==========

(1)   With regard to Maverick Basin, the gross acreage cited includes the option
      acreage under its drill-to-earn arrangement.

      A developed acre is an acre spaced or assignable to productive wells, a
gross acre is an acre in which a working interest is owned, and a net acre is
the result that is obtained when the sum of fractional ownership working
interests in gross acres equals one. The number of net acres is the sum of the
fractional working interests owned in gross acres expressed as whole numbers and
fractions thereof. Undeveloped acreage is considered to be those lease acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil or natural gas, regardless of whether
or not such acreage contains proved reserves, but does not include undrilled
acreage held by production under the terms of a lease.

      As is customary in the oil and gas industry, we can retain our interest in
undeveloped acreage by drilling activity that establishes commercial production
sufficient to maintain the lease or by payment of delay rentals during the
remaining primary term of the lease. The oil and natural gas leases in which we
have an interest are for varying primary terms; however, most of our developed
lease acreage is beyond the primary term and is held so long as oil or natural
gas is produced.

                                       32
<PAGE>

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.

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

      None.

                                     PART II

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

      Our common stock currently trades on the OTC Bulletin Board under the
symbol "TSNU." The first reported trade in our common stock occurred on July 24,
2003. The following table sets forth the range of high and low bid prices per
share of our common stock for each of the calendar quarters identified below as
reported by Nasdaq. These quotations represent inter-dealer prices, without
retail mark-up, markdown or commission, and may not represent actual
transactions.

Fiscal Year Ended December 31, 2004                      High              Low
                                                         ----              ---

         Quarter ended December 31                      $1.23            $1.02
         Quarter ended September 30                      1.53              .87
         Quarter ended June 30                           1.85             1.28
         Quarter ended March 31                          1.51              .10

Fiscal Year Ended December 31, 2003                      High              Low
                                                         ----              ---

         Quarter ended December 31                       $.10             $.10
         Quarter ended September 30                       .10              .01

      The last price of our common stock as reported on the OTC Bulletin Board
on April 11, 2005 was $1.16 per share. The foregoing prices reflect a 25-for-1
forward stock split effective March 19, 2004.

Holders

      As of April 11, 2005, the number of stockholders of record of our common
stock was 100.

Dividends

      We have 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 our Board
of Directors and to certain limitations imposed under Delaware corporate law.
The terms of our Series A Convertible Preferred Stock preclude us from declaring
or paying any dividends on our common stock unless and until all accrued or

                                       33
<PAGE>

declared and unpaid dividends on any outstanding shares of Series A Convertible
Preferred Stock have been paid in full. The timing, amount and form of
dividends, if any, will depend on, among other things, our results of
operations, financial condition, cash requirements and other factors deemed
relevant by our Board of Directors.

Transfer Agent

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

Recent Sales of Unregistered Securities

      During the period commencing October 1, 2004 and ending February 18, 2005,
we issued and sold the following securities without registration under the
Securities Act:

1. On November 18, 2004, we issued a convertible promissory note (the "DDH
Note") to DDH Resources II, Ltd for aggregate gross proceeds of $1,000,000. The
DDH Note is due May 18, 2005, accrues interest at the rate of 12% per annum, and
is convertible into shares of our common stock at a conversion price of $1.10
per share. The note was issued to one accredited investor in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) promulgated thereunder, without payment of underwriting
discounts or commissions to any person.

2. Between November 19, 2004 and February 18, 2005, we sold 418,852 units at a
purchase price of $2.10 per unit for aggregate gross proceeds of $879,590. Each
unit consisted of two (2) shares of common stock and one (1) warrant. The
warrants are immediately exercisable into shares of our common stock at an
exercise price of $2.00 per share and terminate three years from the date of
grant. The offering was made to a limited number of accredited investors in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder. We paid sales commissions of $87,959 to Duncan
Securities, Inc., a broker-dealer registered under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act").

                                       34
<PAGE>


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

Overview

      We are an independent energy company engaged in the acquisition,
development and production of oil and natural gas reserves. We entered the oil
and gas business in March 2004 upon the completion of a change in our
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 reverse 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. 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. Our business model has been specifically designed to
exploit the unique opportunities currently available to small companies in the
oil and gas industry. Major integrated oil companies and other large independent
oil and gas exploration and production companies are divesting themselves of
small, less capital-intensive properties to focus on larger, more
capital-intensive projects that better match their long-term strategic goals. We
believe that these asset divestitures as well as the resource constraints of
major integrated oil companies and other large upstream companies may allow us
to acquire attractive prospects at favorable prices with a significant portion
of the up-front development expenses, such as infrastructure and seismic,
already invested.

      We currently own interests in 15 oil and gas projects in Texas, Louisiana,
Mississippi and New Zealand. Of these projects, several wells in our Vicksburg
Project located in Starr and Hidalgo counties in South Texas are currently in
production, one well in our Louisiana Shelf Project located offshore in Southern
Louisiana has been drilled and is now shut in awaiting hook-up to production
facilities, one well in our Maverick Basin Project located in Maverick County in
South Texas is in production and one is shut in, one well in our Vela Project
located in Zapata County, Texas is in production, and one well in our Wharton
Project located in Wharton County, Texas has been drilled and is now shut in.
Our remaining projects are in various stages of exploration, development or
testing. We abandoned our West Pleito project in Kern County, California in late
2004.

                                       35
<PAGE>

      We expect to continue to acquire additional projects and may sell all or
part of our interest in existing projects to further diversify our holdings,
spread risk and reduce our obligations to make additional capital contributions.
As our business continues to grow, we expect to retain additional executive
management with substantial experience in the oil and gas exploration and
development business. We intend to place primary emphasis on issuances of public
and private debt and equity to finance the growth of our business.

      Our ability to generate future revenues, operating cash flow and earnings
is dependent on the successful development of our inventory of capital projects,
the volume and timing of our production, our ability to identify, acquire and
successfully exploit properties containing oil and gas reserves in commercial
quantities, and the commodity prices for oil and gas. Such pricing factors are
largely beyond our control, and may result in fluctuations in our financial
condition and results of operations. Our ability to generate future revenues,
operating cash flow and earnings will also be influenced by exploration and
development expenses we incur. Our exploration efforts are balanced between
discovering new reserves associated with acquisitions and discovering reserves
on acreage already under lease. The investment associated with drilling a well
and future development of a project depends principally upon the complexity of
the geological formations involved, the depth of the well or wells, whether the
well or project can be connected to existing infrastructure or will require
additional investment in infrastructure, and, if applicable, the water depth of
the well or project. If we underestimate the amount of exploration and
development costs necessary to exploit the oil or gas reserves of our prospects,
we may incur substantially more exploration and development costs than planned,
which may have a material adverse effect on our financial condition and results
of operations.

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 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.

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

Revenue Recognition

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

                                       36
<PAGE>

liability only when the estimated remaining reserves will not be sufficient to
enable the under-produced party to recoup its entitled share through production.
As of December 31, 2004, deliveries of oil and gas in excess of or less than our
working interest were not significant.

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.

Successful Efforts Accounting

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

                                       37
<PAGE>

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. We cannot
predict the amount of impairment charges that may be recorded in the future.
Unproved leasehold costs are reviewed periodically and a loss is recognized to
the extent, if any, that the cost of the property has been impaired.

Property Retirement Obligations

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

Comparison of Fiscal Year Ended December 31, 2004 and 2003

      We were organized in March 2001 for the purpose of developing Internet
cafes in Orange County, California, and surrounding areas. We were unable to
successfully implement this business plan and thus did not generate any revenues
or incur any significant operating expenses from those activities. We entered
the oil and gas business in March 2004 upon the completion of a change in our
management and have since engaged in significant oil and gas activities. As a
result of the foregoing, we believe that our consolidated revenues and operating
expenses for the year ended December 31, 2004 are not comparable to our
consolidated revenues and operating expenses for the year ended December 31,
2003 and, therefore, any differences between our consolidated revenues and
operating expenses for such years should not be relied upon as an indication of
our future results of operations or performance.

Revenues

      Revenues consist of fees generated from the operation of various oil and
gas wells for which we or our wholly-owned subsidiaries served as the operator.
We generated $200,809 of revenue during the fiscal year ended December 31, 2004.
We did not generate any revenue during the fiscal year ended December 31, 2003
as we did not engage in any revenue-producing activities during that year. We
expect revenues to increase in the future as we continue to serve as the
operator for existing and new wells. We also expect to generate revenues from
the sale of oil and gas that we may produce from our prospects.

                                       38
<PAGE>

Exploration Expenses

      Exploration expenses consist of geological and geophysical costs,
exploratory dry hole expenses, leasehold abandonment expenses, and other
exploration expenses. Exploration expenses were $1,501,398 during the fiscal
year ended December 31, 2004. We did not incur any exploration expenses during
the fiscal year ended December 31, 2003 as we did not operate in the oil and gas
exploration and development business during this period. Exploration expenses
resulted primarily from geological and geophysical expenditures supportive of
the exploration activities we conducted on our Texas and Louisiana prospects. We
expect exploration expenses to continue to increase during 2005 as we continue
to conduct exploration activities on our current prospects and as we engage in
exploration activities on various prospects that we may acquire in the future.

Impairment of Oil and Gas Properties and Equity Investments

      We review our long-lived assets, including our oil and gas properties and
equity investments, whenever events or circumstances indicate that the carrying
value of those assets may not be recoverable. We incurred $315,322 in non-cash
charges associated with the impairment of the carrying value of certain of our
oil and gas properties and equity investments during the fiscal year ended
December 31, 2004. We did not have any impaired property expenses during the
fiscal year ended December 31, 2003 as we did not operate in the oil and gas
exploration and development business during this period. The $315,322 in
non-cash charges consisted of $175,820 for impairment of our oil and gas
properties related primarily to an impairment of the carrying value of unproved
properties acquisition and drilling costs incurred in PHT West Pleito Gas, LLC,
and $139,502 for impairment of our equity investments related primarily to an
impairment of the carrying value of our equity investment in the Stent Project.
We may incur additional charges associated with the impairment of our oil and
gas properties in the event we abandon or withdrawal from additional oil and gas
projects in the future.

Impairment of Goodwill

      On March 23, 2004, we acquired Touchstone Resources USA, Inc., a Texas
corporation ("Touchstone Texas"), from Touchstone Resources, Ltd., a British
Columbia corporation ("Touchstone Canada"). In connection with the acquisition,
the original payables of Touchstone Texas were to be assumed by Touchstone
Canada. Touchstone Texas was unable to obtain releases from certain of its
creditors relating to a portion of the payables assumed by Touchstone Canada.
According to Emerging Issues Task Force 02-10, "Determining Whether a Debtor is
Legally Released as Primarily Obligor When the Debtor Becomes Secondarily Liable
under the Original Obligation", unless and until a novation agreement (an
agreement that is binding on a creditor and modifies the original debt so that
the creditor accepts assets or new obligations in satisfaction of the original
liability and discharges the original debt agreement with the debtor) exists


                                       39
<PAGE>

between the original debtor and the creditor or all requirements for legal
defeasance have been met, the creditor has the legal right to pursue the
original debtor under the original obligation before it pursues a new debtor.
Since Touchstone Texas had not received the releases from certain of its
creditors for net liabilities amounting to approximately $752,000 it was still
liable for those net liabilities and required to reflect them on its balance
sheet. The Company, therefore, recorded an additional amount of net liabilities
of $752,000 and increased the goodwill by the same amount. Subsequent to the
acquisition, we recorded a post-closing acquisition adjustment to the balance of
accounts payable of Touchstone Texas that were assumed by Touchstone Canada in
connection with the acquisition. The full amount of this goodwill was impaired
at December 31, 2004 after using a present value technique to measure fair
value.

General and Administrative Expenses

      General and administrative expenses consist of consulting and engineering
fees, professional fees, employee compensation, office rents, travel and
utilities, and other miscellaneous general and administrative costs. General and
administrative expenses increased $2,277,905 to $2,313,742 for our fiscal year
ended December 31, 2004 from $35,837 for our fiscal year ended December 31,
2003. The increase of $2,277,905 resulted primarily from our commencement of
operations in the oil and gas exploration and development business, and
consisted primarily of $929,792 of professional fees incurred in connection with
our acquisitions of interests in oil and gas prospects, financing transactions
and compliance with our reporting obligations under federal securities laws,
$279,612 of consulting and engineering fees incurred in connection with our oil
and gas operations, $333,100 of payroll taxes and expenses, and $190,294 of
travel expenses. We expect general and administrative expenses to increase in
future periods as a result of increased compensation expense for executive
management personnel that we intend to hire, increased consulting and
engineering fees related to our oil and gas operations, and continued
expenditures for professional fees associated with acquisitions of additional
oil and gas properties and compliance with SEC public reporting and corporate
governance requirements.

Loss (Profit) From Limited Partnerships and Limited Liability Companies

      Loss (profit) from limited partnerships and limited liability companies
includes the income or losses that we recognize from the financial performance
of the oil and gas limited partnerships and limited liability companies in which
we own an equity interest of greater than 5% but less than 50% of the applicable
entity. Loss (profit) from limited partnerships and limited liability companies
was $3,506,244 for our fiscal year ended December 31, 2004. We did not have any
loss (profit) from limited partnerships and limited liability companies for our
fiscal year ended December 31, 2003 as we did not own any investments in such
entities during that year. The loss (profit) from limited partnerships and
limited liability companies consisted primarily of the $935,335 loss that we
recognized from the Wharton Project, the $876,573 loss that we recognized from
the Louisiana Shelf Project, the $750,081 loss that we recognized from the Vela
Project, and the $537,903 loss that we recognized from the Stent Project. Since
several of our equity interests in oil and gas entities is currently greater
than 5% but less than 50% of the applicable entity's equity interests, and since
we intend to make similar equity investments in additional limited partnerships
and limited liability companies in the future, we expect loss (profit) from
limited partnerships and limited liability companies to continue to constitute a
material component of our overall financial performance for the foreseeable
future.

                                       40
<PAGE>

Interest Expense

      Interest expense consists of certain noncash charges and interest accrued
on our various debt obligations. Interest expense increased $7,955,704 to
$7,961,951 for our fiscal year ended December 31, 2004 from $6,247 for our
fiscal year ended December 31, 2003. The increase of $7,955,704 resulted
primarily from noncash charges of $6,899,049 associated with the beneficial
conversion feature of the convertible notes and the ascribed value of the
warrants issued in our July 2004 private offering of units, noncash charges of
$212,393 associated with the beneficial conversion feature of the Westwood Note,
noncash charges of $135,602 associated with the beneficial conversion feature of
the DDH Note and the ascribed value of the warrants issued with the Note,
$358,250 of finance costs related to our July 2004 private offering of
convertible notes and warrants, and $269,956 of interest expense under our
various term debt obligations issued for the purpose of funding our oil and gas
exploration and development business. Specifically, we incurred interest expense
of $193,529 under the Trident Note, $59,726 under the Westwood Note, and $14,137
under the DDH Note. A description of each of these promissory notes is set forth
below under "Item 6. Management's Discussion and Analysis - Liquidity and
Capital Resources" of this report. We may incur similar noncash charges in the
future and expect interest expense under our various debt obligations to remain
constant for the foreseeable future.

Minority Interest and Pre-Acquisition (Profits) Losses

      Minority interest and pre-acquisition (profits) losses consist of the
aggregate profits and losses from the operations of each of our consolidated
subsidiaries (entities in which we own greater than 50% of the outstanding
equity interest) allocated to prior ownership of our current minority interests.
Minority interest and pre-acquisition losses were $467,107 for our fiscal year
ended December 31, 2004. We did not have any minority interest and
pre-acquisition (profits) losses for our fiscal year ended December 31, 2003 as
we did not acquire any entities during that period. Pre-acquisition losses
consisted primarily of the $99,174 loss that we incurred prior to the
acquisition of Touchstone Texas, and the $54,321 loss that we incurred prior to
the acquisition of Knox Miss Partners, L.P. Losses allocated to our minority
interest in Knox Miss Partners, L.P. were $151,112, and losses allocated to our
minority interest in PHT West Pleito, LLC were $162,500. Since our consolidated
subsidiaries currently own the majority of our interests in oil and gas
projects, and since we intend to acquire interests in additional entities that
may be considered consolidated entities in the future, we expect minority
interest and pre-acquisition (profits) losses to continue to constitute a
material component of our overall financial performance for the foreseeable
future.

Liquidity and Capital Resources

      Since our inception, we have funded our operations primarily through
private sales of equity securities and the use of short-term and long-term debt.
As of December 31, 2004, we had a cash balance of $1,733,935.

                                       41
<PAGE>

      Net cash used in operating activities was $1,942,052 for our fiscal year
ended December 31, 2004 compared to $17,823 for the fiscal year ended December
31, 2004. The $1,924,229 increase in cash used in operating activities was
primarily due to an increase in accounts receivable of $6,480,337, and an
increase in net loss (excluding the $7,315,999 noncash charges associated with
our July 2004 private offering of units comprised of convertible notes and
warrants, the Westwood Note and the DDH Note, and $2,282,010 for impairment of
capitalized losses and goodwill) of $6,655,209, partially offset by an increase
in accounts payable of $8,035,845, and an increase in loss from our various
equity investments in limited partnerships and limited liability companies of
$3,506,244.

      Net cash used in investing activities was $10,625,874 for the fiscal year
ended December 31, 2004. We did not have any cash flows from investing
activities for fiscal year ended December 31, 2003. The $10,625,874 increase in
cash used by investing activities was due primarily to an increase in
investments in our various limited partnership interests and limited liability
companies of $8,086,875, and purchases of oil and gas interests and drilling
costs of $2,328,453.

      Net cash provided by financing activities was $13,070,530 for our fiscal
year ended December 31, 2004 compared to $100,000 for our fiscal year ended
December 31, 2003. The $12,970,530 increase in net cash provided by financing
activities was due primarily to an increase in the amount of proceeds received
from the issuance of convertible notes of $10,890,000 (of which $6,890,000 has
been converted into shares of our common stock), an increase in net proceeds
from the issuance of common stock of $3,194,430, an increase in net minority
contributions of $3,325,500 consisting primarily of capital contributions from
members of Knox Gas, LLC, and an increase in net proceeds from the issuance of
promissory notes of $1,086,100, partially offset by repayments on promissory
notes in the amount of $5,345,000 and loan costs of $104,000.

      At December 31, 2004, we had a working capital deficit of $1,312,131,
compared to a working capital deficit of $38,928 at December 31, 2003. The
$1,273,203 decrease in working capital was due primarily to an increase in
accounts payable and accrued expenses of $9,047,883, notes payable of $834,764,
limited partnership subscriptions payable of $200,000, and convertible
debentures payable of $1,080,287, partially offset by an increase in cash and
cash equivalents of $1,642,357, accounts receivable of $6,299,889, and prepaid
expenses and advances to operators of $1,592,338.

      On or about March 23, 2004, we obtained gross proceeds of $2,100,000
through the issuance of a $2,100,000 principal amount secured convertible
promissory note (the "Trident Note") and warrants to Trident Growth Fund, LP
("Trident"). The Trident Note was originally due March 23, 2005, accrues
interest at 12% per annum payable monthly in arrears, is secured by
substantially all of our assets, is convertible at the option of Trident into
shares of our common stock at an initial conversion price of $1.00 per share
(subject to adjustment pursuant to anti-dilution and reset provisions), and is
redeemable at our option at 100% of par prior to maturity. Interest is payable
in cash unless Trident elects to have it paid in shares of common stock. The
Trident Note contains various financial covenants with which we are required to
comply and various negative covenants that prohibit us from taking certain
action without obtaining the prior written consent of Trident. These include


                                       42
<PAGE>

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 extended the maturity date of the Trident Note to March 24, 2006,
waived compliance with certain negative covenants to permit us to issue up to
$12 million in promissory notes and waived compliance with all financial
covenants contained in the Trident Note until March 24, 2006. The current
outstanding balance of the Trident Note is $2,050,000.

      In connection with the issuance of the Trident Note and the extension of
the maturity date of the Trident Note, we issued to Trident warrants to purchase
250,000 shares of our common stock at an exercise price of $1.00 per share and
warrants to purchase 100,000 shares of our common stock at an exercise price of
$1.20 per share, respectively. The warrants are immediately exercisable and
terminate 10 years from the date of grant.

      On May 27, 2004, we obtained gross proceeds of $1,000,000 through the
issuance of a $1,000,000 principal amount convertible promissory note (the
"Westwood Note") to Westwood AR, Inc., a Nevada corporation ("Westwood"). The
Westwood Note is due August 31, 2005 and accrues interest at 10% per annum
payable at maturity. The principal amount of the Westwood Note and any accrued
interest thereon is convertible, in whole or in part, at the option of Westwood
into: (i) shares of our common stock at an initial conversion price of $1.00 per
share, (ii) five (5) membership interests in Knox Gas, LLC, a Delaware limited
liability company ("Knox Gas"); or (iii) any of certain specified combinations
of the foregoing. Under the terms of the Westwood Note, we are subject to a
prepayment option such that, in the event we complete any equity offerings after
January 1, 2005, Westwood has the right to require that we distribute to
Westwood up to thirty percent (30%) of the amount of the net proceeds received
by us in any or all of such offerings towards repayment of the Westwood Note. As
of the date of this report, Westwood has not exercised this right.

      In July 2004, we completed a private offering of convertible notes and
warrants that we had commenced in April 2004 through which we received aggregate
gross proceeds of approximately $6,890,000. The notes contained a mandatory
conversion feature that provided that all of the notes would convert
automatically into shares of our common stock at a conversion price of $1.00 per
share on the earlier of: (i) the effective date of an amendment to our
certificate of incorporation to increase the number of shares we are authorized
to issue sufficient to enable all of the notes to be converted into shares of
our common stock, or (ii) the first business day after the effective date of a
reverse stock split of the outstanding shares of our common stock such that a
sufficient number of shares is authorized so that each note can be converted
into shares of our common stock. The warrants contain a similar provision that
provides that on the earlier of the date on which such an amendment or reverse
stock split occurred, the warrants would become exercisable if such amendment or
reverse stock split enabled all of the notes and warrants to be converted and
exercised, respectively, into shares of our common stock. The warrants have an
exercise price of $2.00 per share and terminate three years from the date of
grant.

      On June 4, 2004, an amendment to our certificate of incorporation became
effective that increased the number of shares of common stock we are authorized
to issue from 50 million to 150 million. As a result, all of the notes were
automatically converted into shares of our common stock and all of the warrants
became exercisable into shares of our common stock.

                                       43
<PAGE>

      On July 19, 2004, we obtained gross proceeds of $3,000,000 from AltaFin,
B.V., a Netherlands Antilles company, in consideration for which we issued units
comprised of 3,000,000 shares of common stock and warrants to acquire 1,500,000
shares of common stock. Each warrant is immediately exercisable into one share
of common stock at an exercise price of $2.00 per share and terminates three
years from the date of grant.

      On November 18, 2004, we obtained gross proceeds of $1,000,000 through the
issuance of a convertible promissory note (the "DDH Note") to DDH Resources II,
Ltd ("DDH Resources"). The DDH Note is due May 18, 2005, accrues interest at the
rate of 12% per annum, and is convertible into shares of our common stock at a
conversion price of $1.10 per share.

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

      We are currently engaged in two concurrent $11 million offerings of units
comprised of shares of our Series A Convertible Preferred Stock and warrants.
Each unit is comprised of one share of our Series A Convertible Preferred Stock
and one warrant and is being sold for a purchase price of $11.00 per unit. As of
April 1, 2005, we had sold 451,827 units for aggregate gross proceeds of
$4,970,097.

      Each share of our Series A Convertible Preferred Stock is initially
convertible into ten shares of our common stock at an initial conversion price
of $1.10 per share. Holders of our Series A Convertible Preferred Stock are
entitled to receive dividends at the rate of eight percent (8%) per annum,
provided, however, that at the option of the holder, such dividends shall be
payable in kind at the rate of 12% per annum by issuance of shares of our common
stock having a fair market value equal to the amount of the dividend. Our Series
A Convertible Preferred Stock is convertible at any time at the discretion of
the holder, and is subject to mandatory conversion in the event that: (i) there
is an effective registration statement covering the public sale of the shares of
our common stock underlying the Series A Convertible Preferred Stock; and (ii)
the volume weighted average closing price per share of our common stock for 20
consecutive trading days is equal to or greater than 150% of the conversion
price. If, prior to June 30, 2005, we issue additional shares of our common
stock or securities convertible or exercisable into shares of our common stock
in certain capital-raising transactions for consideration that is less than the
conversion price of the Series A Convertible Preferred Stock, the conversion
price of our shares of Series A Convertible Preferred Stock will automatically
be adjusted to a price equal to the aggregate consideration per share received
by us for the issuance of such securities.

      Each warrant is exercisable at an initial exercise price of $1.50 per
share and terminates three years after the date of issuance. If, prior to June
30, 2005, we issue additional warrants or options in certain capital-raising
transactions that have an exercise price that is less than the exercise price of
the warrants, the exercise price of the warrants will automatically be adjusted
to a price equal to the exercise price per share of such other warrants or
options. The warrants are subject to a call provision that provides that if the
volume weighted average closing price per share of our common stock for 20
consecutive trading days following the effectiveness of the registration of the
shares underlying the warrants is equal to or greater than 150% of the then
applicable exercise price, we may call the warrants for surrender 15 business
days after we provide written notice to the holders. If the warrants are not
exercised during the 15 business day period, they will terminate.

                                       44
<PAGE>

      The forgoing constitutes our principal sources of financing during the
past twelve months. We do not currently maintain a line of credit or term loan
with any commercial bank or other financial institution.

      We will need significant funds to meet capital calls, drilling and
production costs in our various oil and gas projects to explore, produce,
develop, and eventually sell the underlying oil and gas reserves. Specifically,
we expect to incur capital calls and production costs of approximately $8.5
million with respect to our various limited partnership and limited liability
company interests during the next 12 months as follows (each amount an
approximation):

      o     $700,000 for exploration costs in the Awakino South Project;

      o     $1,600,000 for exploration and operating costs in the Knox Miss
            Project;

      o     $1,100,000 for exploration and operating costs in the Louisiana
            Shell Project;

      o     $800,000 for exploration and operating costs in the Good Friday
            Project;

      o     $600,000 for exploration and operating costs in the La Paloma
            Project;

      o     $600,000 for exploration and operating costs in the Martinez Ranch
            Project;

      o     $500,000 for exploration and operating costs in the Maverick Basin
            Project;

      o     $300,000 for exploration and operating costs in the Vicksburg
            Project;

      o     $1,300,000 for exploration and operating costs in the Vela Project;
            and

      o     $1,000,000 for exploration and operating costs in the Wharton
            Project.

We do not expect to incur any capital calls or production costs with respect to
our limited partnership interest and limited liability company interest in the
Stent Project and the Pierce Ranch Project, respectively, during the next 12
months.

      If any of the other owners of leasehold interests in any of the projects
in which we participate, or any of the limited partners or membership interest
holders in the limited partnerships or limited liability companies in which we
have invested, 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.

                                       45
<PAGE>

      We will also need significant funds to meet our obligations under our
outstanding term indebtedness during the next 12 months. Specifically, we will
need to repay approximately $4.1 million of term indebtedness during the next 12
months if the underlying notes are not converted into shares of our common stock
as follows:

      o     $1,000,000 outstanding under a convertible promissory note to DDH
            Resources due May 18, 2005;

      o     $1,000,000 outstanding under a convertible promissory note to
            Westwood due August 31, 2005; and

      o     $2,050,000 outstanding under a secured convertible promissory note
            to Trident due March 24, 2006.

      In addition, Touchstone LSP, Inc., our wholly-owned subsidiary, issued a
$2,000,000 promissory note (the "Endeavour Note") to Endeavour International
Corporation as partial consideration for the purchase of our interest in the
Louisiana Shelf Project. The Endeavour Note accrues interest at the rate of
three percent (3%) per annum. The repayment of principal and payment of accrued
interest under the Endeavour Note is contingent upon the completion of the first
producing oil or gas well in the project and, thereafter, is based on the
production level of all oil and gas wells in the project. In addition, the
Endeavour Note contains accelerated payment provisions in the event certain
production levels for any of the oil and gas wells are met or exceeded. We
expect payments to commence during our third fiscal quarter of 2005.

      We will need a total of approximately $14.1 million to execute our
business plan, satisfy capital calls, and pay drilling and production costs on
our various interests in oil and gas prospects during the next 12 months. Of
this amount, we will need approximately $8.5 million for capital calls and
production costs with respect to our various limited partnership and limited
liability company interests, approximately $4.1 million to repay our outstanding
term indebtedness, and approximately $1.5 million for general corporate
expenses. In the event we locate additional prospects for acquisition,
experience cost overruns at our current prospects or fail to generate projected
revenues, we will need funds in excess of the forgoing amounts during the next
12 months. Based on our available cash resources, cash flows that we are
currently generating from our various oil and gas properties, and projected cash
flows that we expect to generate from our various oil and gas projects in the
future, we will not have sufficient funds to continue to meet such capital
calls, make such term debt payments and operate at current levels for the next
12 months. Accordingly, we will be required to raise 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 interests in one or more of our projects.

Off-Balance Sheet Arrangements

      As of December 31, 2004, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities, that had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

                                       46
<PAGE>

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 Accounting Research Bulletin No. 51" ("FIN 46") to address
the consolidation by business enterprises of variable interest entities. The
primary objective of FIN 46 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 variable interest entities.
FIN 46 requires an enterprise to consolidate a variable interest entity 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. FIN 46 applies to all variable interest entities created after
January 31, 2004. In December 2003, FASB issued a revision to FIN 46 that, among
other things, deferred the effective date for certain variable interest entities
created prior January 31, 2004. Our adoption of FIN 46, as revised, did not have
a material impact on our financial statements.

      In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149") to amend and clarify financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 149 requires
that contracts with comparable characteristics be accounted for similarly to
achieve more consistent reporting of contracts as either derivative or hybrid
instruments. The statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003, and is being applied prospectively. Since we do not currently hedge our
production, the adoption of SFAS No. 149 did not have a material impact on our
financial statements.

      In May 2003, FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS No. 150") to classify certain financial
instruments as liabilities in statements of financial position. Specifically,
SFAS No. 150 applies to mandatorily redeemable shares which the issuing company
is obligated to buy back in exchange for cash or other assets, put options and
forward contracts, instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets, and obligations that
can be settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable, such as a market index, or varies inversely with
the value of the issuer's shares. SFAS No. 150 is generally effective for all
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. Our adoption of SFAS No. 150 did not have a material impact on our
financial instruments.

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


                                       47
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

      Our consolidated financial statements as of December 31, 2004 and December
31, 2003 and for each of the years then ended and the footnotes related thereto,
are included at page F-1 of this report located after the signature page of this
report.

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

None.

ITEM 8A. CONTROLS AND PROCEDURES

      An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and 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 SEC
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.

ITEM 8B. OTHER INFORMATION

      The description set forth below is included herewith for the purpose of
providing the disclosure required under Item 1.01 - Entry into a Material
Definitive Agreement of Form 8-K in connection with our entry into an amendment
and waiver to the Trident Note with Trident on March 23, 2005.

      On or about March 23, 2004, we obtained gross proceeds of $2,100,000
through the issuance of a $2,100,000 principal amount secured convertible
promissory note (the "Trident Note") and warrants to Trident Growth Fund, LP
("Trident"). The Trident Note was originally due March 23, 2005, accrues
interest at 12% per annum payable monthly in arrears, is secured by
substantially all of our assets, is convertible at the option of Trident into
shares of our common stock at an initial conversion price of $1.00 per share
(subject to adjustment pursuant to anti-dilution and reset provisions), and is
redeemable at our option at 100% of par prior to maturity. Interest is payable
in cash unless Trident elects to have it paid in shares of common stock. The
Trident Note contains various financial covenants with which we are required to
comply and various negative covenants that prohibit us from taking certain
action without obtaining the prior written consent of Trident. These include
incurring additional liens on our property, incurring indebtedness in excess of


                                       48
<PAGE>

$100,000, selling any of our assets other than in the ordinary course of
business, and making capital expenditures in excess of $50,000. The warrants
were immediately exercisable into 250,000 shares of our common stock at an
initial exercise price of $1.00 per share and terminate 10 years from the date
of grant. Trident subsequently waived compliance with certain negative covenants
to permit us to issue up to $12 million in promissory notes and waived
compliance with certain financial covenants contained in the Trident Note until
the maturity date of the Trident Note.

      On March 23, 2005, we entered into an amendment and waiver to the Trident
Note with Trident pursuant to which Trident extended the maturity date of the
Trident Note to March 24, 2006 and extended its waiver of our compliance with
certain financial covenants contained in the Trident Note until March 24, 2006.
In connection therewith, we issued warrants to Trident to purchase 100,000
shares of our common stock at an exercise price of $1.20 per share,
respectively. The warrants were immediately exercisable and terminate 10 years
from the date of grant.

      Except as disclosed in this Item 8B - Other Information, there was no
material relationship between us or our affiliates, on the one hand, and
Trident, on the other hand, at the time we entered into the amendment and waiver
to the Trident Note.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Name                        Age         Positions Held
----                        ---         --------------
Stephen P. Harrington       48          Chief Executive Officer, Treasurer,
                                        Secretary and Director
Wesley A. Franklin          58          Executive Vice President and Director

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

      Stephen P. Harrington has served as our Chairman, 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 that merged with NSNV
Inc., a Texas corporation, in February 2004. 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 B.A. from Yale University in
1980.

                                       49
<PAGE>

      Wesley A. Franklin has served as our Executive Vice President and a member
of our Board of Directors since July 7, 2004. He has also served as the
Executive Vice President of Touchtone Resources USA, Inc., a Houston, Texas
based oil and gas exploration and development company that we acquired in March
2004, since January 2001. Mr. Franklin has over 30 years of oil and gas
exploration and production experience and has worked in almost all areas of
exploration and production. Mr. Franklin has served as the President of Quantum
Oil & Gas LLC, a Texas-based oil and gas exploration company, since co-founding
the company in December 1998, and co-founded Mantle Resources, LLC, a
Texas-based oil and gas consulting company, in December 2002. Mr. Franklin
served as a director of BPK Resources, Inc., a publicly-traded oil and gas
company, from January 2003 until July 2004. Between 1982 and 1997, Mr. Franklin
held senior management positions at Tenneco Oil Company and Fina Oil and
Chemical Company ("Fina Oil and Chemical"). At Fina Oil and Chemical, he was
involved in the discovery of 200 million barrels of oil and 200 billion cubic
feet of natural gas and directed exploration for Fina Oil and Chemical in the
United States, including Alaska, and parts of Alberta, Canada.

Board of Directors

      Our Board of Directors consists of Stephen P. Harrington and Wesley A.
Franklin, each of whom will serve until the next annual meeting of shareholders
or until his or her successor is duly elected and qualified. Directors hold
office until the next annual meeting of shareholders and the election and
qualification of their successor. Officers are elected by our Board of Directors
and serve at the discretion of the Board. We do not currently have any
committees of our Board of Directors.

Directors Compensation

      Members of our Board of Directors receive no compensation for serving on
our Board, except that each director is entitled to be reimbursed for the
reasonable costs and expenses incurred in attending Board meetings.

Director Nominations

      We currently have only three employees and have only been operating in the
oil and gas business since March 2004. As a result, our Board of Directors is
currently comprised of only two individuals, Stephen P. Harrington and Wesley A.
Franklin. Each of Messrs. Harrington and Franklin are integrally involved with
our business and operations and are able to contribute valuable insights into
the identification of suitable candidates for nomination to the Board. As a
result, we believe that it is in our best interest that our entire Board oversee
the composition and operations of our Board of Directors and therefore, we have
not created a standing nominating committee of the Board.

Shareholder Communications

      In light of our limited operating history and the limited number of record
shareholders that we have, we have not implemented any formal procedures for
shareholder communication with our Board of Directors. Any matter intended for
the Board, or for any individual member or members of the Board, should be
directed to our Secretary at Touchstone Resources USA, Inc., 111 Presidential
Boulevard, Suite 165, Bala Cynwyd, PA 19004. In general, all shareholder
communications delivered to the Secretary for forwarding to the Board or
specified Board members will be forwarded in accordance with the shareholder's
instructions. However, the Secretary reserves the right to not forward to Board
members any abusive, threatening or otherwise inappropriate materials.

                                       50
<PAGE>

Audit Committee and Audit Committee Financial Expert

      Our Board of Directors has not created a standing audit committee of the
Board. Instead, our full Board of Directors acts as our audit committee.

      We currently have only three employees, two of which serve on our Board of
Directors and are actively involved in our operations. 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 provide
reasonable assurance that financial information is recorded, processed,
summarized and reported in a timely and accurate manner in accordance with
applicable rules and regulations of the SEC. Accordingly, our Board of Directors
concluded that the benefits of retaining an individual who qualifies as an
"audit committee financial expert," as that term is defined in Item 401(e) of
Regulation S-B promulgated under the Securities Act, would be outweighed by the
costs of retaining such a person. As a result, no member of our Board of
Directors is an "audit committee financial expert."

Section 16 Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires our officers and directors and
persons who own more than ten percent (10%) of our common stock to file with the
SEC initial reports of ownership and reports of changes in ownership of our
common stock. Such officers, directors and ten percent (10%) stockholders are
also required by applicable SEC rules to furnish us copies of all forms filed
with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on our
review of the copies of such forms received by us or written representations
from such persons that no other reports were required for such persons, we
believe that during the fiscal year ended December 31, 2004, all Section 16(a)
filing requirements applicable to our officers, directors and ten percent (10%)
stockholders were satisfied in a timely fashion, except that: (i) Stephen P.
Harrington failed to timely file a Form 3 upon being appointed as our Chief
Executive Officer, Treasurer and Secretary and a member of our Board of
Directors on March 15, 2004, (ii) Mr. Harrington failed to timely file a Form 4
upon his surrender of 7,380,000 shares of our common stock to us for
cancellation on March 23, 2004, (iii) Wesley A. Franklin failed to timely file a
Form 3 upon being appointed as our Executive Vice President and a member of our
Board of Directors on July 7, 2004, and (iv) Mr. Harrington failed to timely a
Form 4 in connection with his disposition of 595,000 shares of our common stock
on November 19, 2004.

Code of Business Conduct and Ethics

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

                                       51
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

      The following table provides certain summary information concerning
compensation paid to or accrued by the executive officers named below during the
fiscal years ended December 31, 2004, 2003 and 2002.

                           Summary Compensation Table


Name and                     Fiscal                              All Other
Principal Position           Year     Salary ($)   Bonus ($)  Compensation ($)
------------------           ----     ----------   ---------  ----------------

Stephen P. Harrington (1)     2004      90,000        -0-             -0-
Chief Executive Officer,
Treasurer and Secretary

Wesley A. Franklin (2)        2004      15,000        -0-         73,627 (3)
Executive Vice President

(1)   Mr. Harrington was appointed our Chief Executive Officer, Treasurer and
      Secretary on March 15, 2004. Prior to that, George Sines served as our
      President and Treasurer. Mr. Sines was not paid any compensation for such
      services.

(2)   Mr. Franklin was appointed our Executive Vice President on July 7, 2004.

(3)   This amount represents fees paid to Mr. Franklin by Touchstone Resources
      USA, Inc., a Texas corporation and our wholly-owned subsidiary
      ("Touchstone Texas"), for consulting and technical services rendered
      during the period commencing on March 23, 2004, the date we completed our
      acquisition of Touchstone Texas, and ending on December 31, 2004.

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

      We did not grant any stock options or stock appreciation rights to any of
our named executive officers during the fiscal year ended December 31, 2004.

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

      No stock options or stock appreciation rights were exercised by any of our
named executive officers during the fiscal year ended December 31, 2004, and no
stock options or stock appreciation rights were issued and outstanding at the
end of such fiscal year.

                                       52
<PAGE>

            Long-Term Incentive Plans and Awards in Last Fiscal Year

      We did not make any awards under long-term incentive plans to any of our
named executive officers during the fiscal year ended December 31, 2004.

                      Equity Compensation Plan Information

      We have not implemented any equity compensation plans since our inception
on March 5, 2001, and thus, have not issued any securities or authorized any
securities for issuance to participants in any such plans.

                                       53
<PAGE>

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

      The following table sets forth, as of April 11, 2005, information with
respect to the securities holdings of all persons that we have reason to
believe, pursuant to filings with the SEC, may be deemed the beneficial owner of
more than five percent (5%) of our outstanding common stock. The following table
also sets forth, as of such date, the beneficial ownership of our common stock
by all executive officers and directors, individually and as a group.

      The beneficial owners and amount of securities beneficially owned have
been determined in accordance with Rule 13d-3 under the Exchange Act and, in
accordance therewith, includes all shares of our common stock that may be
acquired by such beneficial owners within 60 days of April 11, 2005 upon the
exercise or conversion of any options, warrants or other convertible securities.
Unless otherwise indicated, each person or entity named below has sole voting
and investment power with respect to all common stock beneficially owned by that
person or entity, subject to the matters set forth in the footnotes to the table
below.

                                               Amount and
                                           Nature of Beneficial    Percentage
Name and Address of Beneficial Owner           Ownership (1)       of Class (1)
------------------------------------           ---------           --------
Stephen P. Harrington                          8,375,000             13.8%
111 Presidential Boulevard, Suite 165
Bala Cynwyd, PA 19004

Wesley A. Franklin                               300,000                *
1600 Smith Street, Suite 5100
Houston, Texas 77002

Touchstone Resources, Ltd.                     3,376,427              5.6%
5858 Westheimer, Suite 708
Houston, Texas 77057

AltaFin BV                                     5,501,558(2)           8.8%
Pareraweg 45
P.O. Box 4914 Curaco Netherlands Antilles

All officers and directors as a group          8,675,000             14.3%
(2) persons

*     less than one percent (1%).

(1)   These percentages have been calculated based on 60,756,757 shares of
      Common Stock outstanding on April 11, 2005.

(2)   Includes 1,500,000 issuable upon the exercise of warrants.

                                       54
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

                                       55
<PAGE>

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

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

Exhibit No.                        Exhibit
-----------                        -------

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

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

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

3.2         Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's
            Registration Statement on Form SB-2 filed on December 7, 2001)

3.3         Certificate of Amendment to Certificate of Incorporation

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

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

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

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

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

                                       56
<PAGE>




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

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

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

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

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

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

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

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

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

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

                                       57
<PAGE>




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

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

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

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

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

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

10.22       Amendment and Waiver to 12% Secured Convertible Promissory Note,
            dated March 23, 2004, by and between the Company and Trident

14.1        Code of Business Conduct and Ethics (incorporated by reference to
            Exhibit 14.1 to the Company's Annual Report on Form 10-KSB filed May
            7, 2004)

21.1        Subsidiaries of the Company

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

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

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

                                       58
<PAGE>

(b) Reports on Form 8-K.

      We did not file any reports on Form 8-K during our fiscal quarter ended
December 31, 2004.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The following table presents fees for professional audit services
performed by L J Soldinger Associates, LLC for the audit of our annual financial
statements for our fiscal years ended December 31, 2004 and 2003, and fees
billed for other services rendered by L J Soldinger during such years.

                                                    2004          2003
                                                  --------       -------

Audit Fees:                                       $775,000       $30,000

Audit-Related Fees:                                 90,400             0

Tax Fees:                                            2,200         1,000

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

Total:                                            $867,600       $31,000
                                                  ========       =======

      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 our consolidated financial statements and are not reported under "Audit
Fees" and relate to services performed in connection with our acquisitions
during the year.

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

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

Audit Committee Pre-Approval Procedures

      Our Board of Directors serves as our audit committee. Our Board of
Directors approves the engagement of our independent auditors, and meets with
our independent auditors to approve the annual scope of accounting services to
be performed and the related fee estimates. It also meets with our independent


                                       59
<PAGE>

auditors, on a quarterly basis, following completion of their quarterly reviews
and annual audit and prior to our earnings announcements, if any, to review the
results of their work. During the course of the year, our chairman has the
authority to pre-approve requests for services that were not approved in the
annual pre-approval process. The chairman reports any interim pre-approvals at
the following quarterly meeting. At each of the meetings, management and our
independent auditors update the Board of Directors with material changes to any
service engagement and related fee estimates as compared to amounts previously
approved. During 2004, 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.


                                       60
<PAGE>

                                   SIGNATURES

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

                                          TOUCHSTONE RESOURCES USA, INC.



Date:  April 15, 2005                     /s/  Stephen P. Harrington
                                          --------------------------------------
                                          Stephen P. Harrington
                                          Chief Executive Officer and Treasurer

      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,            April 15, 2005
--------------------------    Treasurer and Director
Stephen P. Harrington         (Principal Executive
                              Officer and Principal
                              Financial and
                              Accounting Officer)

/s/  Wesley A. Franklin       Executive Vice President            April 15, 2005
--------------------------    and Director
Wesley A. Franklin

                                       61

<PAGE>

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


                          INDEX TO FINANCIAL STATEMENTS

                                                                        Page
                                                                    ------------

Report of Independent Registered Public Accounting Firm                  F2


Consolidated Balance Sheets                                              F3


Consolidated Statements of Operations                                    F4


Consolidated Statements of Stockholders' Equity                          F5


Consolidated Statements of Cash Flows                                    F9


Notes to Consolidated Financial Statements                              F11


                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Touchstone Resources USA, Inc.
Bala Cynwyd, Pennsylvania

We have audited the accompanying consolidated balance sheets of Touchstone
Resources USA, Inc. (a development stage entity) as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended and the period March 5, 2001
(date of inception) through December 31, 2004. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Touchstone Resources USA, Inc.
as of December 31, 2004 and 2003, and the results of its operations, changes in
stockholders' equity and its cash flows for the years then ended and the period
March 5, 2001 (date of inception) through December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred net losses since inception and as
of December 31, 2004, had a working capital deficiency of $1,312,131. Also as
described in Note 3 to the financial statements, the Company does not currently
have sufficient funds to execute its business plan. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
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 11, 2005


                                      F-2
<PAGE>


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

                                     ASSETS
                                     ------
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                               ----------------------------
                                                                                       2004            2003
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
Current assets
   Cash and cash equivalents                                                   $    594,182    $     91,578
   Restricted cash                                                                   81,133              --
   Restricted cash - joint interest                                               1,058,620
   Accounts receivable - joint interest                                           2,945,421              --
   Accounts receivable - joint interest related party                             3,354,468
   Notes and interest receivable                                                     66,559              --
   Due from related party                                                           188,588              --
   Prepaid expenses and advances to operators                                     1,593,079             741
                                                                               ------------    ------------
Total current assets                                                              9,882,050          92,319

Undeveloped oil and gas interests, using successful efforts                       4,763,311              --
Investment in limited partnerships and liability companies                        6,117,046              --
Fixed assets, net                                                                    50,958              --
Deposits                                                                             30,149              --
                                                                               ------------    ------------
                                                                               $ 20,843,514    $     92,319
                                                                               ============    ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                 ----------------------------------------------

Current liabilities
   Accounts payable and accrued expenses                                       $    854,798    $     31,247
   Accounts payable - joint interest                                              8,224,332
   Notes payable                                                                    618,223              --
   Notes payable - related party                                                    216,541              --
   Limited partnership subscriptions payable                                        200,000              --
   Convertible debenture, net                                                     1,080,287         100,000
                                                                               ------------    ------------
Total current liabilities                                                        11,194,181         131,247
                                                                               ------------    ------------
Note payable and convertible debentures, net - noncurrent                         3,869,000              --
                                                                               ------------    ------------
Total liabilities                                                                15,063,181         131,247
                                                                               ------------    ------------
Commitment and contingencies

Minority interest                                                                 3,078,820              --

Stockholders' equity
   Preferred stock; $.001 par value; authorized - 5,000,000 shares; shares
       issued and outstanding - 0 at December 31, 2004 and December 31, 2003             --              --
   Common stock; $.001 par value; authorized - 150,000,000 shares at 2004;
       shares issued and outstanding - 59,919,053 and 649,476 issuable at
       December 31, 2004 and 166,775 at December 31, 2003                            60,569         166,775
   Additional paid-in capital                                                    18,338,476              --
   Discount on common stock from stock split                                             --        (120,075)
   Deferred compensation                                                            (16,600)             --
   Deficit accumulated during the development stage                             (15,680,932)        (85,628)
                                                                               ------------    ------------

Total stockholders' equity (deficit)                                              2,701,513         (38,928)
                                                                               ------------    ------------
                                                                               $ 20,843,514    $     92,319
                                                                               ============    ============
</TABLE>

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


                                      F-3
<PAGE>


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



<TABLE>
<CAPTION>

                                                                     For the Years                March 5, 2001
                                                                   Ended December 31,            (Inception) to
                                                            --------------------------------       December 31,
                                                                 2004               2003               2004
                                                            -------------      -------------      -------------
<S>                                                         <C>                <C>                <C>
Operator revenues                                           $     200,809      $          --      $     200,809
                                                            -------------      -------------      -------------
Expenses:
   Exploration expenses                                         1,501,398                 --          1,501,398
   Impairment of oil and gas properties                           175,820                 --            175,820
   Impairment of goodwill                                         657,914                 --            657,914
   Bad debt expense                                                15,454                 --             15,454
   General and administrative                                   2,313,742             35,837          2,393,123
                                                            -------------      -------------      -------------
Total expenses                                                  4,664,328             35,837          4,743,709
                                                            -------------      -------------      -------------
Loss from operations                                           (4,463,519)           (35,837)        (4,542,900)
                                                            -------------      -------------      -------------
Other (income) expense
   Loss from limited partnerships and limited liability
    companies                                                   3,506,244                 --          3,506,244
   Impairment of equity investment                                139,502                 --            139,502
   Interest income                                                 (8,805)                --             (8,805)
   Interest expense                                             7,961,951              6,247          7,968,198
                                                            -------------      -------------      -------------
Total other expense                                            11,598,892              6,247         11,605,139
                                                            -------------      -------------      -------------
Loss before minority interest and pre-acquisition
  losses                                                      (16,062,411)           (42,084)       (16,148,039)
                                                            -------------      -------------      -------------
Minority interest and pre-acquisition
  losses                                                          467,107                 --            467,107
                                                            -------------      -------------      -------------
Net loss to common stockholders                             $ (15,595,304)     $     (42,084)     $ (15,680,932)
                                                            =============      =============      =============
Net loss per common share  - basic and diluted              $       (0.20)     $       (0.00)     $       (0.12)
                                                            =============      =============      =============
Weighted average number of common shares
  outstanding - basic and diluted                              79,396,172        166,775,000        134,450,626
                                                            =============      =============      =============
</TABLE>


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


                                      F-4
<PAGE>


Page 1 of 4

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


<TABLE>
<CAPTION>

                                                                                                                    Discount on
                                                                                                                      Common
                                                                               Common Stock           Additional       Stock
                                                                       ---------------------------     Paid-in      From Stock
                                                                         Shares          Amount        Capital         Split
                                                                       -----------     -----------     --------     -----------
<S>                                                                    <C>             <C>             <C>          <C>
Balance at March 5, 2001
  (Date of Inception)                                                           --     $               $     --     $        --

Issuance of founders' shares  for  services at $0.00004 per
  share in March 2001                                                   58,125,000          58,125           --         (55,800)

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

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

Net loss                                                                        --              --           --              --
                                                                       -----------     -----------     --------     -----------
Balance at December 31, 2001                                           166,775,000         166,775           --        (120,075)
                                                                       -----------     -----------     --------     -----------
Net loss                                                                        --              --           --              --
                                                                       -----------     -----------     --------     -----------
Balance at December 31, 2002                                           166,775,000         166,775           --        (120,075)
                                                                       -----------     -----------     --------     -----------
Net loss                                                                        --              --           --              --
                                                                       -----------     -----------     --------     -----------
Balance at December 31, 2003                                           166,775,000     $   166,775     $     --     $  (120,075)
                                                                       -----------     -----------     --------     -----------
</TABLE>


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



                                      F-5
<PAGE>


Page 2 of 4

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

<TABLE>
<CAPTION>
                                                                                    Deficit
                                                                                   Accumulated         Total
                                                                                   During the      Stockholders'
                                                                  Deferred         Development         Equity
                                                                Compensation         Stage           (Deficit)
                                                                -----------------------------------------------
<S>                                                             <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                                                     --               --             2,325

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

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

Net loss                                                                  --          (18,518)          (18,518)
                                                                ------------     ------------      ------------
Balance at December 31, 2001                                              --          (18,518)           28,182
                                                                ------------     ------------      ------------
Net loss                                                                  --          (25,026)          (25,026)
                                                                ------------     ------------      ------------
Balance at December 31, 2002                                              --          (43,544)            3,156
                                                                ------------     ------------      ------------
Net loss                                                                  --          (42,084)          (42,084)
                                                                ------------     ------------      ------------
Balance at December 31, 2003                                    $         --     $    (85,628)     $    (38,928)
                                                                ------------     ------------      ------------

</TABLE>

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


                                      F-6
<PAGE>


Page 3 of 4

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

<TABLE>
<CAPTION>

                                                                                                                     Discount on
                                                                                                                       Common
                                                                           Common Stock              Additional         Stock
                                                                    ----------------------------      Paid-in        From Stock
                                                                       Shares          Amount         Capital           Split
                                                                    ------------    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>             <C>
Balance at December 31, 2003                                         166,775,000    $    166,775    $         --    $   (120,075)

Shares purchased on March 15, 2004 and cancelled in July 2004       (116,775,000)       (116,775)        116,775              --
Reclassification of discount on common stock                                  --              --        (120,075)        120,075
Shares cancelled by officer in March 2004                             (7,380,000)         (7,380)             --              --
Legal fees related to acquisition                                             --              --         (13,618)             --
Capital contributed by officer of Company in March 2004                       --              --          15,000              --
Issuance of common stock for acquisition of LS Gas, LLC
  in March 2004                                                          100,000             100           1,000              --
Issuance of common stock for acquisition of Touchstone Texas
  in March 2004                                                        7,000,000           7,000          70,000              --
Issuance of common stock for advisory fee related to the
  acquisition of Touchstone Texas in March 2004                          280,000             280           2,800              --
Issuance of warrants to Trident in March 2004                                 --              --           1,175              --
Issuance of common stock upon conversion of debt in June and
  July 2004                                                            6,899,053           6,899       6,892,150              --
Issuance of warrants in private offering of convertible notes in
  June and July 2004                                                          --              --       3,211,400              --
Beneficial conversion feature of convertible note issued in June
  and July 2004                                                               --              --       3,678,600              --
Beneficial conversion feature of convertible note to Westwood AR
  in May 2004                                                                 --              --         540,000              --
Issuance of common stock for cash at $1.00 per share in July 2004      3,000,000           3,000       2,997,000              --
Issuance of common stock for services at $1.24 in July 2004               20,000              20          24,780              --
Offering costs on private offering                                       285,000             285        (150,285)             --
Issuance of common stock for cash in November 2004                        99,000              99         103,851              --
Issuance of common stock for cash in December 2004                       265,476             266         278,484              --
Offering costs on private offering                                            --              --         (38,270)             --
Beneficial conversion feature of convertible note issued in
 November 2004                                                                --              --         727,709              --
Deferred compensation                                                         --              --              --              --
Net loss                                                                      --              --              --              --
                                                                    ------------    ------------    ------------    ------------
Balance at December 31, 2004                                          60,568,529    $     60,569    $ 18,338,476    $         --
                                                                    ------------    ------------    ------------    ------------
</TABLE>

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


                                      F-7
<PAGE>


Page 4 of 4

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

<TABLE>
<CAPTION>
                                                                                              Deficit
                                                                                            Accumulated
                                                                                             During the            Total
                                                                              Deferred       Development       Stockholders'
                                                                            Compensation        Stage              Equity
                                                                          --------------    --------------    --------------
<S>                                                                       <C>               <C>               <C>
Balance at December 31, 2003                                              $           --    $      (85,628)   $      (38,928)

Shares purchased on March 15, 2004 and cancelled in July 2004                         --                --                --
Reclassification of discount on common stock                                          --                --                --
Shares cancelled by officer in March 2004                                             --                --            (7,380)
Legal fees related to acquisition                                                     --                --           (13,618)
Capital contributed by officer of Company in March 2004                               --                --            15,000
Issuance of common stock for acquisition of LS Gas, LLC
  in March 2004                                                                       --                --             1,100
Issuance of common stock for acquisition of Touchstone Texas
  in March 2004                                                                       --                --            77,000
Issuance of common stock for advisory fee related to the acquisition of
  Touchstone Texas in March 2004                                                      --                --             3,080
Issuance of warrants to Trident in March 2004                                         --                --             1,175
Issuance of common stock upon conversion of debt in June and
  July 2004                                                                           --                --         6,899,049
Issuance of warrants in private offering of convertible notes in June
  and July 2004                                                                       --                --         3,211,400
Beneficial conversion feature of convertible note issued in June
  and July 2004                                                                       --                --         3,678,600
Beneficial conversion feature of convertible note to Westwood AR in
 May 2004                                                                             --                --           540,000
Issuance of common stock for cash at $1.00 per share in July 2004                     --                --         3,000,000
Issuance of common stock for services at $1.24 in July 2004                      (24,800)               --                --
Offering costs on private offering                                                    --                --          (150,000)
Issuance of common stock for cash in November 2004                                    --                --           103,950
Issuance of common stock for cash in December 2004                                    --                --           278,750
Offering costs on private offering                                                    --                --           (38,270)
Beneficial conversion feature of convertible note issued in
 November 2004                                                                        --                --           727,709
Deferred compensation                                                              8,200                --             8,200
Net loss                                                                              --       (15,595,304)      (15,595,304)
                                                                          --------------    --------------    --------------
Balance at December 31, 2004                                              $      (16,600)   $  (15,680,932)   $    2,701,513
                                                                          --------------    --------------    --------------
</TABLE>


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


                                      F-8
<PAGE>


Page 1 of 2

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

                                                                               For the Years Ended       March 5, 2001
                                                                                  December 31,           (Inception) to
                                                                         ------------------------------   December 31,
                                                                              2004            2003            2004
                                                                         --------------  --------------  --------------
<S>                                                                      <C>             <C>             <C>
Cash flows from operating activities
      Net loss                                                           $  (15,595,304) $      (42,084) $  (15,680,932)
      Adjustments to reconcile net loss to net cash used in operations
           Minority interest and pre-acquisition losses                        (467,107)             --        (467,107)
           Depreciation                                                          11,670              --          11,670
           Impairment of capitalized acquisition and exploration costs        1,624,096              --       1,624,096
           Warrants and stock issued for interest expense                        10,224              --          10,224
           Shares issued for services rendered                                       --              --           5,650
           Equity loss in limited partnerships                                3,506,244              --       3,506,244
           Amortization of deferred compensation                                  8,200              --           8,200
           Amortization of discount on notes payable                          7,315,999              --       7,315,999
           Exploration expense applied to prepayments to operator                62,499              --          62,499
           Impairment of goodwill                                               657,914              --         657,914
           Bad debt expense                                                      15,454              --          15,454
      Change in assets and liabilities
      (Increase) Decrease in assets
           Accounts receivable - joint interest                              (3,166,397)             --      (3,166,397)
           Accounts receivable - joint interest related party                (3,313,940)             --      (3,313,940)
           Restricted cash                                                     (601,155)             --        (601,155)
           Prepaid expenses                                                     (46,264)           (741)        (47,005)
      Increase in liabilities
           Accounts payable and accrued expenses                              8,035,815          25,002       8,067,062
                                                                         --------------  --------------  --------------
Net cash used in operating activities                                    $   (1,942,052) $      (17,823) $   (1,991,524)
                                                                         --------------  --------------  --------------
Cash flows from investing activities
    Cash acquired from acquisition of wholly-owned subsidiaries
      and limited partnership interest                                            4,715              --           4,715
    Repayment of note receivable - related party                                 21,639              --          21,639
    Notes receivable                                                           (181,369)             --        (181,369)
    Notes receivable - related party                                            (54,975)             --         (54,975)
    Purchase of oil and gas interests and drilling costs                     (2,328,453)             --      (2,328,453)
    Investment in limited partnership interests                              (8,086,875)             --      (8,086,875)
    Distributions from limited partnerships                                      26,385              --          26,385
    Purchase of fixed assets                                                    (26,941)             --         (26,941)
                                                                         --------------  --------------  --------------
Net cash used in investing activities                                       (10,625,874)             --     (10,625,874)
                                                                         --------------  --------------  --------------
</TABLE>

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


                                      F-9
<PAGE>


Page 2 of 2

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

<TABLE>
<CAPTION>

                                                                           For the Years Ended        March 5, 2001
                                                                              December 31,           (Inception) to
                                                                    ------------------------------    December 31,
                                                                          2004            2003             2004
                                                                    --------------  --------------  --------------
<S>                                                                 <C>             <C>             <C>
Cash flows from financing activities
    Advances from stockholder                                                   --              --          10,000
    Repayments to stockholder                                                   --              --         (10,000)
    Proceeds from notes payable                                            807,100              --         807,100
    Proceeds from notes payable - related party                            279,000              --         279,000
    Repayment of notes payable                                          (5,345,000)             --      (5,345,000)
    Repayment of notes payable - related party                             (91,500)             --         (91,500)
    Proceeds from issuance of convertible debt                          10,990,000         100,000      11,090,000
    Loan costs                                                            (104,000)             --        (104,000)
    Capital contributed by officer                                          15,000              --          15,000
    Minority contributions, net of issuance costs                        3,325,500              --       3,325,500
    Proceeds from issuance of common stock, net of issuance costs        3,194,430              --       3,235,480
                                                                    --------------  --------------  --------------
Net cash provided by financing activities                               13,070,530         100,000      13,211,580
                                                                    --------------  --------------  --------------
Net increase in cash and cash equivalents                                  502,604          82,177         594,182

Cash and cash equivalents at beginning of year                              91,578           9,401              --
                                                                    --------------  --------------  --------------
Cash and cash equivalents, end of year                              $      594,182  $       91,578  $      594,182
                                                                    ==============  ==============  ==============
</TABLE>

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


                                      F-10
<PAGE>


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


NOTE 1 - DESCRIPTION OF BUSINESS

Touchstone Resources USA, Inc. (formerly The Coffee Exchange, Inc.) was
incorporated under the laws of Delaware on March 5, 2001. The Company was
organized to develop Internet coffee cafes in Orange County, California.

On March 15, 2004, the Company experienced a change in management when all of
its directors and officers resigned from their positions and it appointed a new
officer and director. The Company's new management implemented a new business
plan and completed a series of material transactions and the Company became
engaged in oil and gas exploration, development and production and the
acquisition of oil and gas properties focusing on projects located in Texas,
Mississippi, Louisiana and other traditional oil and gas producing states in the
Southern United States, as well as in New Zealand. One of the Company's
wholly-owned subsidiaries is an operator of approximately five different oil
projects.

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Consolidated Financial Statements

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

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

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

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

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

      o     Knox Gas, LLC ("Knox Gas"), a 68.18% owned Delaware limited
            liability company formed in February 2004

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

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

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

All significant intercompany accounts and transactions have been eliminated in
consolidation.


                                      F-11
<PAGE>


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


Equity Method

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

Development Stage Enterprise

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

Use of Estimates

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

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

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

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

Oil and Gas Accounting

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

Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Capitalized costs of
producing oil and gas properties, after considering estimated salvage values,
are depreciated and depleted by the unit-of-production method. Support equipment
and other property and equipment are depreciated over their estimated useful
lives.


                                      F-12
<PAGE>


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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company reviews the carrying values of its long-lived assets whenever events
or changes in circumstances indicate that such carrying values may not be
recoverable. If, upon review, the sum of the undiscounted pretax cash flows is
less than the carrying value of the asset group, the carrying value is written
down to estimated fair value. Individual assets are grouped for impairment
purposes at the lowest level for which there are identifiable cash flows that
are largely independent of the cash flows of other groups of assets, generally
on a field-by-field basis. The fair value of impaired assets is determined based
on quoted market prices in active markets, if available, or upon the present
values of expected future cash flows using discount rates commensurate with the
risks involved in the asset group. The long-lived assets of the Company, which
are subject to evaluation, consist primarily of oil and gas properties.
Impairments are provided if the net capitalized costs of gas and oil properties
at the field level exceed their realizable values based upon expected future
cash flows.

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

On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment as if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.

Revenue Recognition

Revenue is recognized at the time title passes on oil and gas quantities, less
any royalties due. Revenues related to natural gas are recognized using the
entitlement method of accounting for gas imbalances. Any quantities that are in
excess of sales quantities are recorded as a receivable at the lower of the
current market price or the market price at the time the imbalance occurred. Any
quantities that are lower than the sales quantities are recorded as deferred
revenue at the market price at the time the imbalance occurred. There were no
gas imbalances as of December 31, 2004 and 2003.

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

Capitalized Interest

The Company's policy is to capitalize interest on expenditures for significant
exploration and development projects while activities are in progress to bring
the assets to their intended use. The Company had capitalized interest of $1,689
and $0 as of December 31, 2004 and 2003, respectively.

Segment Information

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


                                      F-13
<PAGE>


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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Operating revenues for the years ended December 31, 2004 and 2003 by
geographical area were as follows:

                                         December 31,
                                   ------------------------
                                      2004          2003
                                   ---------      ---------
United States                      $ 200,809      $      --
New Zealand                               --             --
                                   ---------      ---------
                                   $ 200,809      $      --
                                   =========      =========

Long-lived assets as of December 31, 2004 and 2003 by geographical area were as
follows:

                                           December 31,
                                   ---------------------------
                                       2004            2003
                                   -----------     -----------
United States                      $10,669,066     $        --
New Zealand                            262,249              --
                                   -----------     -----------
                                   $10,931,315     $        --
                                   ===========     ===========

Cash and Cash Equivalents

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

Fixed Assets

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

Goodwill

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

Concentrations of Credit Risk

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


                                      F-14
<PAGE>


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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial Instruments

The carrying amounts reflected in the consolidated balance sheets for cash and
equivalents, short-term receivables and short-term payables approximate their
fair value due to the short maturity of the instruments. The carrying value of
the convertible notes is recorded at face value less unamortized discounts for
beneficial conversion features. Face value is disclosed in Note 13.

Income Taxes

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

Dismantlement, Restoration and Environmental Costs

The Company follows the guidance of SFAS No. 143, "Accounting for Asset
Retirement Obligations" using a cumulative effect approach to recognize
transition amounts for asset retirement obligations, asset retirement costs and
accumulated depreciation. SFAS No. 143 requires liability recognition for
retirement obligations associated with tangible long-lived assets, such as
producing well sites, offshore production platforms, and natural gas processing
plants. The obligations included within the scope of SFAS No. 143 are those for
which a company faces a legal obligation. The initial measurement of the asset
retirement obligation is to record a separate liability at its fair value with
an offsetting asset retirement cost recorded as an increase to the related
property and equipment on the consolidated balance sheet. The asset retirement
cost is depreciated using a systematic and rational method similar to that used
for the associated property and equipment. As of December 31, 2004 and 2003, the
Company's liability for retirement obligations was minimal.

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).

The number of shares of common stock and the loss per share for the years ended
December 31, 2004 and 2003 have been updated to reflect the 25 for 1 stock split
effected in March 2004 (see Note 14).


                                      F-15
<PAGE>


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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

                                                              2004        2003
                                                           ---------   ---------
             Warrants                                      5,943,015          --
             Convertible debt                              4,009,091          --
                                                           ---------   ---------
                                                           9,952,106          --
                                                           =========   =========

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued FASB Statement
("SFAS") No. 123 (revised 2004), Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. Generally, the approach in SFAS 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. Statement 123(R) must be adopted no
later than January 1, 2006 and early adoption is permitted in periods in which
financial statements have not yet been issued.

As required, the Company will adopt SFAS No. 123(R) by January 1, 2006. Upon
implementation of SFAS No. 123(R), the Company may either recognize compensation
cost for share-based payments to employees based on the grant-date fair value
from the beginning of the period in which the provisions are first applied,
without restating periods prior to adoption, or may elect to restate prior
periods by recognizing compensation costs in the amounts previously reported in
the pro-forma footnote disclosures under the provisions of SFAS 123. The Company
is evaluating the impact of the two adoption methods and as yet has not
determined which method it will utilize.

The Company cannot estimate the impact of adopting Statement No. 123(R) because
it will depend on levels of share-based payments granted in the future but,
based solely upon the pro-forma disclosures for prior periods, it believes that
the impact will not be material to its results of operations.


NOTE 3 - GOING CONCERN

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

The Company believes that the proceeds that it plans to raise from private
offerings of securities and its current and projected revenues from oil and gas
operations will be sufficient to fund its operations through December 2005. The
Company will need to raise additional funds in the event it locates additional
prospects for acquisition, experiences cost overruns at its current prospects,
or fails to generate projected revenues.



                                      F-16
<PAGE>


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


NOTE 3 - GOING CONCERN (Continued)

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


NOTE 4 - BUSINESS COMBINATIONS

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

Acquisition of Touchstone Texas

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

Cash                                            $   509,329
Other current assets                                188,616
Fixed assets                                         35,687
                                                -----------
Total assets                                    $   733,632
                                                ===========
Accounts and notes payable                      $ 1,301,383
Deposits from working interest owners               183,973
                                                -----------
Total liabilities                               $ 1,485,356
                                                ===========
Net deficit acquired                            $  (751,724)
                                                ===========

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

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


                                      F-17
<PAGE>


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


NOTE 4 - BUSINESS COMBINATIONS (Continued)

Acquisition of Knox Gas

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

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

Notes and interest receivable                   $    32,335
Advance payments to operators                       884,191
Unproved oil and gas property                     4,079,702
Subscription receivable                           4,500,000
Miscellaneous                                           (83)
                                                -----------
Total assets                                    $ 9,496,145
                                                ===========
Accrued expenses                                $    41,314
Notes payable                                     4,504,500
Minority interest                                     8,151
                                                -----------
Total liabilities and minority interest         $ 4,553,965
                                                ===========
Net assets acquired                             $ 4,942,180
                                                ===========

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

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

Available cash will be distributed among the members of Knox Gas in proportion
to their respective percentage interests. Profits and losses of Knox gas will be
allocated, after giving effect to certain regulatory allocations and cumulative
prior allocations, to the members in proportion to their percentage interests.

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

On February 26, 2004, Knox Gas acquired a 99% limited partnership interest in
Knox Miss L.P. and 1% membership interest in Knox Miss LLC from Endeavour
International Corporation ("Endeavour"), in consideration of which Knox Gas paid
$500,000 in cash and issued a secured promissory note of $4,500,000 to Endeavour
(see Note 11).


                                      F-18
<PAGE>


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


NOTE 4 - BUSINESS COMBINATIONS (Continued)

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

Cash                                                 $    3,404
Notes and interest receivable                            45,368
Advance payments to operators                           905,024
Unproved oil and gas property                         2,766,623
                                                     ----------
Total assets                                         $3,720,419
                                                     ==========
Accrued expenses                                     $   23,687
Notes payable                                             1,250
Minority interest                                         8,562
                                                     ----------
Total liabilities and minority interest              $   33,499
                                                     ==========
Net assets acquired                                  $3,686,920
                                                     ==========


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

The following pro forma presentation assumes the Company's acquisitions of
Touchstone Texas and Knox Gas, and Knox Gas' acquisition of Knox Miss LP took
place on January 1, 2003 and shows the pro forma effect on loss from operations.
The historical column presents the unaudited financial information of the
Company for the periods indicated.
<TABLE>
<CAPTION>

                                                Year Ended                          Year Ended
                                             December 31, 2004                   December 31, 2003
                                        ------------------------------    ------------------------------
                                         Historical        Pro Forma       Historical        Pro Forma
                                        -------------    -------------    -------------    -------------
<S>                                     <C>              <C>              <C>              <C>
Revenue                                 $     200,809    $     200,809    $          --    $     133,133
Operating expenses                          4,664,328        4,664,328           35,837       12,249,002
Loss from operations                       (4,463,519)      (4,463,519)         (35,837)     (12,115,869)
Other (income) loss                        11,598,892       11,598,892            6,247        2,403,935
Net loss before minority
 interest and pre-acquisition losses      (16,062,411)     (16,062,411)         (42,084)     (14,519,804)
Minority interest and pre-acquisition
 losses                                       467,107          255,792               --           15,632
Net loss to common stockholders           (15,595,304)     (15,806,619)         (42,084)     (14,504,172)
Net loss per common share -
 basic and diluted                              (0.20)           (0.20)           (0.00)           (0.08)
Weighted average number of
 common shares outstanding -
 basic and diluted                         79,396,172       79,396,172      166,775,000      174,055,000
</TABLE>


                                      F-19
<PAGE>


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


NOTE 5 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                         2004           2003
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
      Deferred tax asset
          Tax benefit arising from net operating loss carryforward   $ 8,731,000    $    20,100
          Goodwill impairment                                            263,400             --
                                                                     -----------    -----------
                                                                       8,994,400         20,100
      Deferred tax liability
          Excess of tax losses for equity investments                    280,200             --
                                                                     -----------    -----------
                                                                         280,200             --
                                                                     -----------    -----------
      Net deferred assets                                              8,714,200         20,100

      Less valuation allowance                                        (8,714,200)       (20,100)
                                                                     -----------    -----------
      Net deferred tax asset                                         $        --    $        --
                                                                     ===========    ===========
</TABLE>

The income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>

                                                                            December 31,
                                                                     --------------------------
                                                                         2004           2003
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
      Deferred
          Federal                                                    $   (13,800)   $        --
          State                                                           (3,000)            --
      Federal and state benefit of net operating loss carryforward     8,710,900         20,100
                                                                     -----------    -----------
                                                                       8,694,100         20,100
      Less valuation allowance                                        (8,694,100)       (20,100)
                                                                     -----------    -----------
      Income tax expense                                             $        --    $        --
                                                                     ===========    ===========
</TABLE>

As of December 31, 2004, the Company had losses which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $22,076,000 that
may be offset against future taxable income. These NOL carryforwards expire
beginning 2018 through 2019. However, these carryforwards may be significantly
limited due to changes in the ownership of the Company as a result of future
equity offerings.

Recognition of the benefits of the deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company will generate any earnings or any specific level of
earnings in future years. Therefore, the Company has established a valuation
allowance for deferred tax assets (net of liabilities) of approximately
$8,714,200 and $20,100 as of December 31, 2004 and 2003, respectively.


                                      F-20
<PAGE>


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


NOTE 5 - INCOME TAXES (Continued)

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

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                    --------------------------
                                                                        2004           2003
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
      Federal income tax benefit at statutory rate                  $ 5,458,300    $    14,700
      State income tax benefit (net of effect of federal benefit)       709,600          3,400
      Non-deductible expenses                                        (2,810,600)            --
      Touchstone Texas NOL carryforward                               5,407,200             --
      Other                                                             (70,400)            --
      Change in valuation allowance                                  (8,694,100)       (18,100)
                                                                    -----------    -----------
      Income tax benefit                                            $        --    $        --
                                                                    ===========    ===========
      Effective income tax rate                                             0 %            0 %
                                                                    ===========    ===========
</TABLE>


NOTE 6 - DUE FROM RELATED PARTY

As of December 31, 2004, the Company had advanced $50,975 to PHT Vicksburg
Partners, LP ("PHT Vicksburg"), a limited partnership in which the Company has
an equity interest, and $35,000 to Touchstone Canada, respectively. The
president of Touchstone Canada served as the president of Touchstone Texas until
his resignation on June 2, 2004. In addition, the Company was owed $101,607 from
Touchstone Canada for payment of accounts payable, which Touchstone Canada had
agreed to assume prior to the Company's acquisition of Touchstone Texas.


NOTE 7 - OIL AND GAS PROSPECT AND OPERATIONS

Knox Miss LP

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

On May 23, 2002, Knox Miss LP entered into an Exploration and Development
Agreement (the "Agreement") with Clayton Williams Energy, Inc. ("Clayton
Williams") to jointly cooperate and participate in the exploration and
development of oil, gas and mineral leases in certain prospects which cover
several counties in Mississippi. Pursuant to the Agreement, Knox Miss LP was
required to pay Clayton Williams a management fee in the aggregate amount of
$500,000 payable in twenty-four monthly installments. During 2003 and 2002, Knox
Miss LP had purchased 50% working interest in various oil, gas and mineral
leases. As a result of the settlement of Knox Miss LP's lawsuit with Clayton
Williams on May 26, 2004 (see Note 15), Knox Miss LP assigned all of its
leasehold interests it acquired from May 23, 2002 through April 30, 2004 in the
original area of mutual interest back to Clayton Williams, except for the School
Board Lease, which Knox Miss LP acquired in August 2002 for $136,644.


                                      F-21
<PAGE>


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


NOTE 7 - OIL AND GAS PROSPECTS AND OPERATIONS (Continued)

In addition, Knox Miss LP assigned all of its leasehold interests in the
Savannah Lake prospect it acquired from SKH Energy during 2002 to Clayton
Williams, the value of which was approximately $261,474.

During 2003 and 2002, Knox Miss LP acquired various leasehold interests in
Noxubee County, Mississippi. As a result of Knox Miss LP's settlement of its
lawsuit with Clayton Williams, Knox Miss LP assigned half of its leasehold
interests in Noxubee County to Clayton Williams in the amount of $45,124.

Touchstone Pierce Exploration, LLC

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

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

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

PHT West Pleito Gas, LLC

On April 22, 2004, the Company made an initial capital contribution of $373,500
to PHT West Pleito Gas, LLC ("PHT West"), in exchange for an 83.4% membership
interest in PHT West. In July 2004, the Company made an additional capital
contribution of $749,000 to PHT West. Pursuant to operating agreement of PHT
West, the Company and the other non-managing members in PHT West may be called
upon from time to time for additional contributions to meet the reasonable
capital requirements of PHT West. PHT West owned a 35% working interest in
approximately 1,800 acres of leases in Kern County, California, for which
Touchstone Texas was the operator.

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

At the discretion of PHT Gas, LLC, the managing member of PHT West, available
cash will be distributed based on the value of aggregate capital contributions.

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

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


                                      F-22
<PAGE>


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


NOTE 7 - OIL AND GAS PROSPECTS AND OPERATIONS (Continued)

PF Louisiana LLC

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

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

Touchstone Texas

Since its acquisition by the Company on March 23, 2004, the principal business
activity of Touchstone Texas has been serving as the operator to manage the
development and operations for several oil and gas projects. During the year
ended December 31, 2004, Touchstone Texas operated on various projects including
the Vicksburg, Wharton, Maverick, and Hackberry projects, all of which are
located in Texas. The Company's equity Investees, PHT Vicksburg, PHT Wharton and
Maverick Basin are the working interest holder and non-operators ("Joint
Interest Owners") in the Vicksburg, Wharton, and Maverick projects,
respectively. As the operator of the oil and gas projects, Touchstone Texas pays
and discharges all costs and expenses incurred in the development and operations
of the joint interest area and charges all of the Joint Interest Owners their
proportionate shares in accordance with the joint operating agreement ("JOA").
Touchstone Texas bills the Joint Interest Owners monthly through the joint
interest billing statement for their share of costs, credits, and operating fees
relating to the joint operations. As of December 31, 2004, Touchstone Texas
maintained restricted cash related to the joint operations received from the
Joint Interest Owners in the amount of $1,058,620, accounts receivable from the
Joint Interest Owners of $6,299,889, and accounts payable for costs and expenses
incurred on the joint operations of $8,224,332. As of December 31, 2004, the
Company does not deem it necessary to set up an allowance for the accounts
receivable due from the Joint Interest Owners.

Touchstone Texas is the general partner and owns a 1.81% interest in 2001
Hackberry Drilling Fund, LP ("2001 HDF"). During 2004, Touchstone Texas recorded
an impairment charge of $6,600 in its investment in 2001 HDF.

Summary

Oil and gas properties consisted of the following at December 31, 2004:

<TABLE>
<CAPTION>
                                                                       Touchstone
                                                      Knox Miss, LP      Pierce       PF Louisiana         Total
                                                      -------------   -------------   -------------   -------------
<S>                                                   <C>             <C>             <C>             <C>
Unproved properties acquisition costs                 $   2,682,167   $          --   $     444,000   $   3,126,167
Other capitalized costs                                     264,555              --           1,689         266,244
Excess purchase price for Knox Gas' acquisition
   of Knox Miss LP that was allocated to unproved
   oil and gas property (see Note 4)                      1,313,080              --              --       1,313,080
Excess purchase price for the Company's acquisition
   of Knox Gas that was allocated to unproved
   oil and gas property (see Note 4)                         57,820              --              --          57,820
                                                      -------------   -------------   -------------   -------------
Net capitalized oil and gas properties                $   4,317,622   $          --   $     445,689   $   4,763,311
                                                      =============   =============   =============   =============
</TABLE>


                                      F-23
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES

PHT Vicksburg Partners, L.P.

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

At the discretion of PHT Gas, LLC, the general partner of PHT Vicksburg,
available cash will be distributed 99% to the limited partner to the extent of
its unreturned capital balance and 1% to PHT Gas, LLC until all unreturned
capital balances have been returned, and then 75% to the limited partners in
proportion to their respective percentage interests and 25% to PHT Gas, LLC.
Distributions in liquidation of the partnership will be made in accordance with
the capital accounts subject to the above distributions. In general, profits
will be allocated, after giving effect to certain regulatory allocations and
cumulative prior allocations, 75% to the limited partner and 25% to PHT Gas,
LLC. Losses in general will be allocated, after giving effect to regulatory
allocations and certain proportionate allocations, to all partners with a
positive capital account in proportion to the extent of their balances and then
entirely to PHT Gas, LLC.

Awakino South Exploration, LLC

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

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

At the discretion of PHT Gas, LLC, the Class A and managing member, available
cash will be distributed 99% to Class B members to the extent of its unreturned
capital balance and 1% to PHT Gas, LLC until all unreturned capital balances
have been returned and then 80% to the Class B members in proportion to their
respective percentage interests and 20% to the Class A member. Distributions in
liquidation of the limited liability company will be made in accordance with the
capital accounts subject to the above distributions. Profit and loss is
allocated to the members based on their respective distribution percentages.

PHT Stent Partners, L.P.

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


                                      F-24
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)

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

At the discretion of the general partner, available cash will be distributed as
follows:

(i)   If on the date of such distribution there are any Class B limited
      partners, 25% of the cash available for distribution will be distributed
      to the Class B limited partners and the general partner in the order of
      priority indicated on the amended limited partnership agreement.

(ii)  The remainder of the cash available for distribution to limited partners
      will be distributed among the Class A limited partners and the general
      partner in the following order of priority:

      (a)   First, 99% to the Class A limited partners in proportion to and to
            the extent of their unreturned capital balances and 1% to the
            general partner until all unreturned capital balances have been
            reduced to zero.

      (b)   Then, 75% to the limited partners in proportion to their percentage
            interests and 25% to the general partner.

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

LS Gas, LLC

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

At the discretion of the managing member of LS Gas, LLC, available cash will be
distributed to the members pro rata in accordance with their respective
percentage interests. Profits and losses of the company will be allocated to the
members pro rata in accordance with their respective percentage interests.

Louisiana Shelf Partners, L.P.

In April 2004, Touchstone Louisiana purchased a 24.9975% Class A limited
partnership interest in Louisiana Shelf Partners, LP ("LSP") from Endeavour, in
consideration for which the Company paid Endeavour $250,000 and issued a 3%
promissory note payable to Endeavour in the amount of $2,000,000. The note was
contingent on LSP completing its first well which was completed at December 31,
2004. Payments are to be made against the note once the well starts generating
positive cash flow. There are also conditional accelerated payments that are
contingent upon certain production levels. This is disclosed in more detail in
Note 11. Subsequent to the purchase, Touchstone Louisiana invested an additional
$1,000,000 in LSP. LSP is the holder of two leases in the State Waters adjoining
Cameron Parish, Louisiana. State Lease 17742 will expire in March 2006 and State
Lease 17666 is set to


                                      F-25
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)

expire in December 2005, as a result of the Company electing not to pay annual
rentals that were due December 2004. Accordingly, LSP recorded an impairment
charge of $3,230,420 related to State Lease 17666 during the year ended December
31, 2004.

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

At the discretion of LS Gas, LLC, the general partner, available cash will be
distributed as follows:

(i)   If on the date of such distribution there are any Class C limited
      partners, 13% of the cash available for distribution will be distributed
      to the Class C limited partners and the general partner in the order of
      priority per the amended limited partnership agreement.

(ii)  The remainder of the cash available for distribution to limited partners
      will be distributed among the Class A limited partners, Class B limited
      partners and the general partner in the following order of priority:

      (a)   First, to the Class A limited partners, an amount equal to the
            accrued but unpaid Class A preferred return as of the date of the
            distribution, distributed to each Class A limited partner pro rata
            in proportion to the amount of each Class A limited partner's unpaid
            Class A preferred return as of that date;

      (b)   Second, to the general partner and the Class A limited partners in
            proportion to their respective unreturned capital as of the date of
            the distribution, until the general partner's unreturned capital and
            each Class A limited partner's unreturned capital has been reduced
            to zero;

      (c)   Third, to the Class B limited partners in proportion to their
            respective unreturned capital, until each Class B limited partner's
            unreturned capital has been reduced to zero; and

      (d)   Thereafter, 40% to the general partner, and 60% to the Class A
            limited partners, pro rata in proportion to each Class A limited
            partner's percentage interest.

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

PHT Wharton Partners, L.P.

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


                                      F-26
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)

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

At the discretion of the general partner, available cash will be distributed as
follows:

(i)   If on the date of such distribution there are any Class B limited
      partners, 20% of the cash available for distribution will be distributed
      to the Class B limited partners and the general partner per the amended
      limited partnership agreement.

(ii)  The remainder of the cash available for distribution to limited partners
      will be distributed among the Class A limited partners and the general
      partner in the following order of priority:

      (a)   First, 99% to the Class A limited partners in proportion to and to
            the extent of their unreturned capital balances and 1% to the
            general partner until all unreturned capital balances have been
            reduced to zero.

      (b)   Then, 75% to the limited partners in proportion to their percentage
            interests and 25% to the general partner.

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

PHT Vela Partners, L.P.

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

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

At the discretion of the general partner, available cash will be distributed as
follows:

(i)   If on the date of such distribution there are any Class B limited
      partners, 18.18% of the cash available for distribution will be
      distributed to the Class B limited partners and the general partner per
      the amended limited partnership agreement.

(ii)  The remainder of the cash available for distribution to limited partners
      will be distributed among the Class A limited partners and the general
      partner in the following order of priority:


                                      F-27
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)

      (a)   First, 99% to the Class A limited partners in proportion to and to
            the extent of their unreturned capital balances and 1% to the
            general partner until all unreturned capital balances have been
            reduced to zero.

      (b)   Then, 80% to the limited partners in proportion to their percentage
            interests and 20% to the general partner.

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

PHT Good Friday Partners, L.P.

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

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

At the discretion of the general partner, available cash will be distributed as
follows:

(i)   If on the date of such distribution there are any Class B limited
      partners, 33.33% of the cash available for distribution will be
      distributed to the Class B limited partners and the general partner in the
      order of priority per the amended limited partnership agreement.

(ii)  The remainder of the cash available for distribution to limited partners
      will be distributed among the Class A limited partners and the general
      partners in the following order of priority:

      (a)   First, 99% to the Class A limited partners in proportion to and to
            the extent of their unreturned capital balances and 1% to the
            general partner until all unreturned capital balances have been
            reduced to zero.

      (b)   Then, 75% to the limited partners in proportion to their percentage
            interests and 25% to the general partner.

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


                                      F-28
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)

PHT Martinez Partners, L.P.

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

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

At the discretion of the general partner, available cash will be distributed as
follows:

(i)   If on the date of such distribution there are any Class B limited
      partners, 33.33% of the cash available for distribution will be
      distributed to the Class B limited partners and the general partner in the
      order of priority per the amended limited partnership agreement;

(ii)  The remainder of the cash available for distribution to limited partners
      will be distributed among the Class A limited partners and the general
      partner in the following order of priority:

      (a)   First, 99% to the Class A limited partners in proportion to and to
            the extent of their unreturned capital balances and 1% to the
            general partner until all unreturned capital balances have been
            reduced to zero.

      (b)   Then, 75% to the limited partners in proportion to their percentage
            interests and 25% to the general partner.

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

Maverick Basin Exploration, LLC

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

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

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


                                      F-29
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)

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

At the discretion of the manager, available cash will be distributed as follows:

(i)   First, to the Class A and Class B members in proportion to their
      respective capital contributions to the extent of their unreturned capital
      balances.

(ii)  Second, and thereafter, 21.25% to the Class A members, 63.75% to the Class
      B members, and 15% to Class C members. Distribution will be allocated
      among the Class A, Class B, and Class C members in proportion to each
      member's respective percentage interest.

PHT La Paloma Partners, L.P.

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

Cash available for distribution will be distributed in the following order of
priority:

(i)   First, to the limited partners in proportion to their respective
      unreturned capital as of the date of distribution, until the limited
      partners' unreturned capital has been reduced to zero.

(ii)  Second, and thereafter, 15% to the general partner and 85% to the limited
      partners pro rata in proportion to each limited partner's percentage
      interest.

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

Summary

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


                                      F-30
<PAGE>


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


NOTE 8 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)


                                                        December 31, 2004
                                               ---------------------------------
                                                                    Temporary
                                                                    Excess of
                                                                 Carrying Value
                                               Carrying Value    Over Net Assets
                                               ---------------   ---------------
PHT Vicksburg                                  $       404,552   $        47,631
Awakino South                                          252,154                --
PHT Stent                                               10,094            47,616
LSP                                                  2,484,428         1,219,497
PHT Wharton                                            234,665                --
PHT Vela                                               449,919            68,987
PHT Good Friday                                        812,737           190,347
PHT Martinez                                           833,981            36,151
PHT La Paloma                                          625,375            73,166
Maverick Basin                                              --           345,850
LS Gas, LLC                                              1,000             1,000
2001 Hackberry Drilling Fund                             8,141                --
                                               ---------------   ---------------
                                               $     6,117,046   $     2,030,245
                                               ===============   ===============

The Company expects the temporary excess carrying value to decrease as the
various entities receive payment of subscription receivables due them and
generate cash flows from the sale of oil and gas produced from the proved oil
and gas reserves.

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

                                                               December 31, 2004
                                                               -----------------
Total Current Assets                                           $       4,243,464
Total Non-Current Assets                                              26,516,809
                                                               -----------------
Total Assets                                                   $      30,760,273
                                                               =================
Total Current Liabilities                                      $       4,768,588
Total Long-term Liabilities                                            2,583,453
                                                               -----------------
Total Liabilities                                              $       7,352,041
                                                               =================

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


                                      F-31
<PAGE>


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


NOTE 9 - FIXED ASSETS

Fixed assets consisted of the following at December 31:

                                                         2004             2003
                                                       --------         --------
       Computer equipment                              $ 41,407         $     --
       Furniture and fixtures                            44,851               --
       Less:  accumulated depreciation                  (35,300)              --
                                                       --------         --------
                                                       $ 50,958         $     --
                                                       ========         ========


NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

                                                          2004            2003
                                                        --------        --------
        Accrued interest                                $180,889        $  6,247
        Accounts payable                                 274,696              --
        Payables for oil and gas interests               194,174              --
        Other accrued expenses                           205,039          25,000
                                                        --------        --------
                                                        $854,798        $ 31,247
                                                        ========        ========


NOTE 11 - NOTES PAYABLE

Notes payable consisted of the following at December 31:

                                                          2004            2003
                                                       ----------       --------
Non-interest bearing notes                             $   10,866       $     --
10% Promissory note                                       128,857             --
3% Promissory note                                        297,500             --
3% Promissory note due to Endeavour                     2,000,000             --
                                                       ----------       --------
                                                        2,437,223             --

Less long-term portion                                  1,819,000             --
                                                       ----------       --------
                                                       $  618,223       $     --
                                                       ==========       ========


                                      F-32
<PAGE>


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


NOTE 11 - NOTES PAYABLE (Continued)

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

In April 2004, Touchstone Louisiana purchased a 24.9975% Class A limited
partnership interest in LSP from Endeavour, in consideration for which the
Company, among other things, issued a promissory note payable to Endeavour in
the amount of $2,000,000. The $2,000,000 promissory note was contingent on LSP
completing its first well. The first well was completed as of December 31, 2004,
which has been shut-in awaiting facilities for production. The Company
interpreted this event to be the triggering factor in recording the note payable
during the third quarter of 2004. The note bears interest at 3% per annum and
monthly installments are due as follows:

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

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

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

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

As of December 31, 2004, PF Louisiana and PHT West Pleito had an outstanding
note payable balance of $150,000 and $87,500, which were due on demand bearing
interest of 3%, respectively. The Company had additional notes payable of
$199,723.


NOTE 12 - NOTES PAYABLE - RELATED PARTIES

As of December 31, 2004, Touchstone Texas owed LSP and 2001 Hackberry Drilling
Fund $82,048 and $59,493, respectively.

As of December 31, 2004, the Company owed SPH Investments Profit Sharing, Inc.,
a company controlled by Stephen P. Harrington, who is an officer and director of
the Company, $75,000 for a demand loan.


                                      F-33
<PAGE>


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


NOTE 13 - CONVERTIBLE DEBENTURES

Convertible debentures consisted of the following at December 31:

                                                        2004             2003
                                                     ----------       ----------
12% Secured convertible note                         $2,050,000       $       --
12% Convertible promissory note                       1,000,000               --
10% Convertible promissory note                       1,000,000               --
8% Convertible debenture                                     --          100,000
                                                     ----------       ----------
                                                      4,050,000          100,000

    Less unamortized discount                           919,713               --
                                                     ----------       ----------
                                                      3,130,287          100,000

    Less long-term portion                            2,050,000               --
                                                     ----------       ----------
                                                     $1,080,287       $  100,000
                                                     ==========       ==========

In March 2003, the Company issued to Laguna Capital Group LLC, a California
limited liability company, a $100,000, 8% convertible debenture due March 27,
2004. The convertible debenture was convertible at any time into shares of the
Company's $.001 par value common stock. The conversion or purchase price of the
common stock was the market price of the Company's common stock at the time of
conversion. The convertible debenture was repaid on March 11, 2004. The debt
holder forgave the interest and the Company recorded the forgiveness of debt as
income.

On March 23, 2004 the Company entered into a loan agreement to borrow $2,100,000
from Trident Growth Fund, LP ("Trident"), a Delaware limited partnership
pursuant to a 12% secured convertible promissory note (the "Trident Note"). The
Trident Note is secured by substantially all of the assets of the Company. The
Trident Note matured on March 23, 2005 and has been extended to March 24, 2006
(see Note 19). The Company has the option to redeem the note at 100% of par at
any time prior to the maturity date. Trident has the option to convert at any
time all or a portion of the principal amount of the Trident Note into common
stock of the Company. Trident was issued a warrant to purchase 250,000 shares of
the Company's common stock as an additional incentive to make the loan. The
warrants provide for a cashless exercise at the option of Trident provided that
the per share market price of one share of common stock is greater than the
warrant exercise price. The warrants expire on March 31, 2014. The initial
conversion price of the Trident Note and initial exercise price of the warrant
is $1.00 per share of common stock, subject to anti-dilution provisions. The
notes contain certain reset provisions which, if triggered, would require the
Company to record a beneficial conversion expense for the difference between the
market price and new adjusted price. The Company paid loan commitment and
origination fees of 1% and 4%, respectively, which were recorded as loan costs
and will be amortized over the life of the loan. Interest is due monthly and
payable in cash unless Trident elects to have the interest paid in common stock
of the Company. Repayment of the principal amount of the note has been
guaranteed by subsidiaries of the Company. As defined in the loan agreement, the
Company is required to comply with various financial covenants. Any failure to
comply with such covenants may be deemed a default on the loan by Trident. In
March 2004, Trident waived compliance with certain negative covenants contained
in the Trident Note to permit the Company to issue of up to $12 million of
convertible notes and warrants in a private placement. In connection with the
recent extension of the Trident Note, Trident waived compliance with all
financial covenants contained in the Trident Note until the maturity date (see
note 19).


                                      F-34
<PAGE>


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


NOTE 13 - CONVERTIBLE DEBENTURES (Continued)

The Company has allocated the proceeds from issuance of the Trident Note and
warrants based on a fair value basis for each item. Consequently, the
convertible Trident promissory note was recorded with discounts of $1,175 based
on the ascribed value of the warrants as determined by using the Black-Scholes
Method. The discount was fully amortized and recorded as interest expense as of
December 31, 2004.

Under the terms of the loan agreement, if the Company files a registration
statement relating to any of its securities, it is required to notify Trident in
writing and, upon Trident's request, will include in the registration statement
the offer and sale of the shares of the common stock issuable upon Trident's
conversion of the note.

In September 2004, the Company repaid $50,000 of principal outstanding on the
note.

In April and July 2004, the Company commenced a private placement of convertible
promissory notes bearing interest at 1.58% per annum together with warrants to
purchase shares of common stock in the Company at an exercise price of $2.00 per
share. The notes are payable in April and July 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 shares of
common stock the Company is authorized to issue such that a sufficient number of
shares is authorized so that all convertible notes issued in the private
placement can be converted into shares of common stock, or (ii) the first
business day after the effective date of a reverse stock split of the
outstanding shares of common stock such that a sufficient number of shares is
authorized so that all convertible notes issued in the private placement can be
converted into shares of common stock. The initial conversion price of the note
is $1.00 per share of common stock subject to certain adjustments. As of
December 31, 2004 the Company issued $6,890,000 in principal of notes, which
were converted into 6,899,053 shares of the Company's common stock as a result
of the Company's filing of an amendment to its Certificate of Incorporation
increasing its authorized shares of common stock. The Company also issued
3,445,000 warrants to purchase shares of common stock in the Company. The
Company has allocated the proceeds from issuance of the convertible notes and
warrants based on a fair value basis for each item.

Consequently, the convertible promissory notes were recorded with discounts of
$3,211,400 based on the ascribed value of the warrants as determined by using
the Black-Scholes Method. Beneficial conversion discounts of $3,678,600 were
recorded since the promissory notes were convertible into common shares of stock
at a rate of $1.00 per share while the prevailing common stock share price was
$1.59 and $1.51 when the notes were made. As of December 31, 2004, the discounts
related to the ascribed value of the warrants and beneficial conversion feature
were fully amortized as the notes were converted into common stock of the
Company. The Company paid offering costs of $358,250 and issued warrant to
purchase 61,250 shares of common stock in payment of consulting fees in
connection with the financing.

On May 27, 2004 the Company entered into a loan agreement to borrow $1,000,000
from Westwood AR, Inc. ("Westwood"), pursuant to a 10% convertible promissory
note (the "Westwood Note"). The Westwood Note matures on August 31, 2005. The
initial conversion price of the Westwood Note is $1.00 per share of common
stock, subject to anti-dilution provisions. Westwood AR has the option to
convert at any time all or a portion of the principal amount of the Westwood
Note into any of the following at the initial conversion price of $1.00:

      a)    1,000,000 shares of the Company's common stock;

      b)    5 membership interests in Knox Gas;

      c)    800,000 shares of the Company's common stock and 1 membership
            interest in Knox Gas;

      d)    600,000 shares of the Company's common stock and 2 membership
            interests in Knox Gas;

      e)    400,000 shares of the Company's common stock and 3 membership
            interests in Knox Gas; or

      f)    200,000 shares of the Company's common stock and 4 membership
            interests in Knox Gas.


                                      F-35
<PAGE>


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


NOTE 13 - CONVERTIBLE DEBENTURES (Continued)

A beneficial conversion discount of $540,000 was recorded since the Westwood
Note was convertible into common shares of stock at a rate of $1.00 per share
while the prevailing common stock share price was $1.54 when the note was made.
This discount is being amortized over the term of the loan. As of December 31,
2004, the Company amortized $212,394 of the discount.

Interest is due on the earlier of the maturity date or the note conversion date
and payable in cash unless Westwood elects to have the interest paid in common
stock of the Company.

If the Company completes an equity offering after January 1, 2005, Westwood AR
has the option to require the Company to repay Westwood AR up to 30% of the net
proceeds the Company received from the equity offering on the Westwood Note.

On November 18, 2004 the Company entered into a loan agreement to borrow
$1,000,000 from DDH Resources II Limited ("DDH II"), pursuant to a 12%
convertible promissory note (the "DDH II Note"). The DDH II Note matures on the
earlier of May 18, 2005, or the completion of subsequent equity financing in the
total aggregate amount of $3,000,000. The initial conversion price of the DDH II
Note is $1.10 per share of common stock, subject to anti-dilution provisions.
DDH II was issued warrants to purchase 500,000 shares of the Company's common
stock at $2.00 per share as an additional incentive to make the loan. The
warrants expire on November 19, 2007. The DDH II note is subordinated to the
note payable due to Trident or future senior indebtedness.

A beneficial conversion discount of $409,309 was recorded since the DDH II Note
was convertible into common shares of stock at a rate of $1.10 per share while
the prevailing common stock share price was $1.20 when the note was made. In
addition, the convertible promissory note was recorded with a discount of
$318,400 based on the ascribed value of the warrants as determined by using the
Black-Scholes Method. These discounts are being amortized over the term of the
loan. As of December 31, 2004, the Company amortized $135,602 of the discounts.

Interest is due on the earlier of the maturity date or the note conversion date
and payable in cash unless DDH II elects to have the interest paid in common
stock of the Company.

NOTE 14 - STOCKHOLDERS' EQUITY

Preferred Stock

The Company has not issued any of its authorized shares of preferred stock.

Common Stock

On March 15, 2004, the Company entered into stock purchase agreements with Scott
Yancey and George Sines, the Company's founding stockholders, pursuant to which
the Company purchased 116,775,000 shares of common stock for $2,000. The Company
subsequently cancelled those shares. The founding stockholders concurrently
entered into secondary stock purchase agreements with Stephen P. Harrington,
pursuant to which they sold their remaining 16,350,000 shares of common stock of
the Company. The founding stockholders subsequently resigned from their
positions as officers and directors of the Company. As a result of Stephen P.
Harrington's acquisition of 32.7% of the then issued and outstanding shares of
common stock of the Company and his appointment as the successor officer and
director of the Company, a change of control may be deemed to have occurred.

On March 19, 2004, the Company effected a twenty-five for one common stock
split. All shares and per share amounts in the financial statements and the
notes thereto have been restated to reflect the stock split.


                                      F-36
<PAGE>


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


NOTE 14 - STOCKHOLDERS' EQUITY (Continued)

On March 23, 2004, Stephen P. Harrington surrendered for cancellation 7,380,000
of his shares of the Company's common stock in order to facilitate the
transaction described below.

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

(a)   Pursuant to a stock purchase agreement by and between the Company and
      Touchstone Canada, the Company purchased 100% of the issued and
      outstanding shares of capital stock, no par value per share, of Touchstone
      Texas, a development stage corporation and wholly-owned subsidiary of
      Touchstone Canada. As consideration for the acquisition, the Company
      issued 7,000,000 shares of its common stock to Touchstone Canada valued at
      $70,000 by an independent valuation consultant. Upon the consummation of
      the acquisition, the Company paid an advisory fee consisting of 280,000
      shares of its common stock, which was valued at $2,800.

(b)   Pursuant to an interest purchase agreement by and among the Company,
      Touchstone Louisiana and Touchstone Canada, Touchstone Louisiana purchased
      a 10% membership interest in LS Gas, LLC from Touchstone Canada, in
      consideration for which the Company issued 100,000 shares of its common
      stock to Touchstone Canada valued at $1,000.

During March 2004, Stephen P. Harrington contributed $15,000 as additional
paid-in capital to fund the operating expenses of the Company.

In June 2004, the Company amended its Certificate of Incorporation to increase
its authorized shares of common stock to 150,000,000.

In April through July 2004, as an incentive for the lenders to loan a total of
$6,890,000 to the Company, the Company issued to the lenders warrants to
purchase a total of 3,445,000 shares of the Company's common stock at an
exercise price of $2.00 exercisable immediately. The warrants expire in three
years (see Note 13).

In June and July 2004, the Company issued 6,899,053 shares of common stock upon
the conversion of the promissory notes in the principal amount of $6,890,000
plus accrued interest due thereon.

On July 15, 2004, the Company issued warrants to purchase 61,250 shares of
common stock in compensation for consulting services provided in connection with
the private placement offering. (See Note 13) The warrants have an exercise
price of $2.00, exercisable immediately and expire in three years.

On July 19, 2004, the Company obtained $3,000,000 from AltaFin, B.V., a
Netherlands Antilles Company, in consideration for which units were issued that
were comprised of 3,000,000 shares of common stock and warrants to acquire
1,500,000 shares of common stock. Each warrant is immediately exercisable into
one share of common stock at an exercise price of $2.00 per share and terminates
three years from the date of grant. In connection with the financing, the
Company incurred offering costs of $150,000 plus it issued 285,000 shares of
common stock for consulting fees.

On September 7, 2004, the Company issued 20,000 shares of common stock to
Sanders Morris Harris, Inc. ("SMH") as compensation for the financial advisory
service SMH will provide for twelve months. The 20,000 shares were valued at
$24,800 and recorded as deferred compensation. As of December 31, 2004, $8,200
has been charged to expense.


                                      F-37
<PAGE>


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


NOTE 14 - STOCKHOLDERS' EQUITY (Continued)

On November 1, 2004, the Company's Board of Directors approved and commenced an
offering of up to 1,500,000 Units of its securities, each unit consisting of two
shares of the Company's common stock and one three-year $2.00 common stock
purchase warrant for a unit offering price of $2.10. During November 2004, the
Company sold 49,500 units in which 99,000 shares of common stock and 49,500
warrants were issued for an aggregate purchase price of $103,950. Offering costs
of $10,395 were accrued but not yet paid for. During December 2004, the Company
sold 132,738 units in which 265,476 shares of common stock and 132,738 warrants
were issued for an aggregate purchase price of $278,750. Offering costs of
$27,875 were accrued but not yet paid for.

Stock Warrants

The Company had the following outstanding common stock warrants to purchase its
securities at December 31:

<TABLE>
<CAPTION>
                                                 2004                                       2003
                                 ---------------------------------------    ----------------------------------------
                                     Number of          Exercise Price          Number of           Exercise Price
Expiration Date                   Warrants issued          Per Share         Warrants issued          Per Share
----------------------------     -------------------    ----------------    -------------------    -----------------

<S>                                        <C>          <C>                 <C>                    <C>
April 2007                                 3,449,527    $           2.00                     --    $              --
July 2007                                  1,561,250    $           2.00                     --    $              --
November 2007                                500,000    $           2.00                     --    $              --
November and
    December 2007                            182,238    $           2.00
March 2014                                   250,000    $           1.00                     --    $              --
                                 -------------------                        -------------------
Common Stock                               5,943,015                                         --
                                 ===================                        ===================
</TABLE>


NOTE 15 - SETTLEMENT OF LAWSUIT WITH CLAYTON WILLIAMS

On or about May 3, 2003, Knox Miss LP filed a complaint in the District Court Of
Harris County, Texas, 234th Judicial District against Clayton Williams as a
result of Clayton Williams' breach of the Exploration and Development Agreement
(see Note 7). Under the Agreement, Knox Miss LP had the right to participate in
a 50% share of certain leases acquired by Clayton Williams during the term of
the Agreement. Knox Miss LP elected to participate in the acquisition of certain
additional leases and paid in excess of $1.7 million to Clayton Williams between
July and February 2003 in payment of its share of the acquisition costs. In
April 2003, Clayton Williams notified Knox Miss LP that it would not permit Knox
Miss LP to participate, alleging that the foregoing payments were not received
within the time frame set forth in the Agreement. Knox Miss LP sought a
declaratory judgment establishing its right under the Agreement to participate
in the acquisition of the leases at issue. Clayton Williams denied all
allegations.


                                      F-38
<PAGE>


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


NOTE 15 - SETTLEMENT OF LAWSUIT WITH CLAYTON WILLIAMS (Continued)

On October 31, 2003, Clayton Williams filed a counterclaim against Knox Miss LP
and a third party petition against PHT Gas, LLC alleging that Knox Miss LP
breached the Agreement by assigning an overriding royalty interest to PHT Gas,
LLC in the area of mutual interest ("AMI") subject to the Agreement to PHT Gas,
LLC. Clayton Williams sought a declaratory judgment establishing its rights
under the Agreement and an order of specific performance compelling Knox Miss LP
to convey the royalty interest to Clayton Williams together with attorney's
fees.

On May 26, 2004, Knox Miss LP and Clayton Williams entered into a Settlement
Agreement and Mutual Release ("Settlement"), pursuant to which:

      A.    Clayton Williams paid $75,000 to Knox Miss LP;

      B.    Knox Miss LP assigned all of its leasehold interests it acquired
            from May 23, 2002 through April 30, 2004 in the AMI to Clayton
            Williams except for the School Board Lease on the Mathiston
            prospect, in which Knox Miss LP retained its 50% interest (see Note
            7);

      C.    Knox Miss LP assigned all of its leasehold interests it acquired
            pursuant to an exploration agreement with SKH Exploration, Inc. (see
            Note 7) in the Savannah Lake prospect to Clayton Williams;

      D.    Knox Miss LP assigned half of the leasehold interests it acquired
            for $90,249 in the Noxubee County, Mississippi to Clayton Williams;

      E.    Knox Miss LP received a release of certain deed of trust between
            Knox Miss LP as the grantor and Trident Growth Fund as the
            beneficiary as to the interests assigned by Knox Miss LP to Clayton
            Williams;

      F.    Knox Miss LP was deemed to have paid all amounts owed to Clayton
            Williams as of April 30, 2004 and received a credit from Clayton
            Williams in the amount of $1,000,000. The credit was applied to Knox
            Miss LP's share of the drilling costs of the Gammill well, which was
            estimated to be $1,649,999, as well as the final monthly payment of
            Knox Miss LP's AMI management fee owed to Clayton Williams in the
            amount of $20,833 (See Note 7). As of December 31, 2004, the prepaid
            advance to the operator was $1,551,233.

      G.    Knox Miss LP withdrew its leasehold interests and participation
            rights on the Natchez Trace prospect. As a result, the advance
            payment Knox Miss LP made to Clayton Williams in the amount of
            $549,600 in April 2004 was also applied as a credit towards Knox
            Miss LP's share of the drilling of the Gammill well; and

      H.    Knox Miss LP paid the remaining balance of $257,875 for its share of
            the drilling costs of the Gammill well to Clayton Williams.


NOTE 16 - CONCENTRATIONS

A majority of the Company's equity investments in oil and gas entities have a
common general partner/managing member of PHT Gas, LLC.


                                      F-39
<PAGE>


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


NOTE 17 - COMMITMENTS AND CONTINGENCIES

General

Federal, state and local authorities regulate the oil and gas industry. In
particular, gas and oil production operations and economics are affected by
environmental protection statutes, tax statutes and other laws and regulations
relating to the petroleum industry, as well as changes in such laws, changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. The Company believes it is in compliance with all
federal, state and local laws, regulations, and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.

Operating Hazards and Insurance

The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.

In those projects for which the Company is an operator, the Company maintains
certain insurance of various types to cover its operations with policy limits
and retention liability customary in the industry. In those projects in which
the Company is not the operator, but in which it owns a non-operating interest
directly or owns an equity interest in a limited partnership or limited
liability company that owns a non-operating interest, the operator for the
prospect maintains insurance to cover its operations.

There can be no assurance that insurance, if any, will be adequate to cover any
losses or exposure to liability. Although the Company believes that the policies
obtained by operators provide coverage in scope and in amounts customary in the
industry, they do not provide complete coverage against all operating risks. An
uninsured or partially insured claim, if successful and of significant
magnitude, could have a material adverse effect on the Company and its financial
condition via its contractual liability to the prospect.

Potential Loss of Oil and Gas Interests/ Cash Calls

The Company is subject to cash calls related to its various investments in oil
and gas prospects. If the Company does not pay its share of future Authorization
For Expenditures ("AFE") invoices, it may have to forfeit all of its rights in
certain of its interests in the applicable prospects and any related profits. If
one or more of the other members of the prospects fail to pay their share of the
prospect costs, the Company may need to pay additional funds to protect its
investments.


NOTE 18 - OPERATING LEASES

During 2004, the Company subleased office space from its officer and director
for a total of $556 per month. The lease is renewable on a month to month basis.
During the year ended December 31, 2004, the Company paid $4,190 of rent expense
for the office lease.

On October 4, 2004, the Company's wholly-owned subsidiary, Touchstone Texas,
entered into a lease agreement for new office space in Houston of Texas. The
lease is for seven and half years with annual rent increasing, on a sliding
scale, from $68,000 to $130,000 during the lease period. The Company paid
$106,851 under the lease for old office space that expired in November 2004 and
$9,367 for the new lease for the year ended December 31, 2004.


                                      F-40
<PAGE>


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


NOTE 19 - SUBSEQUENT EVENTS

On January 6, 2005, the Company was subject to a capital call of $100,000 from
PHT Wharton.

On January 6, 2005, the Company was subject to a capital call of $100,000 from
LSP.

On February 24, 2005, the Company was subject to a capital call of $100,000 from
PHT Wharton.

On February 24, 2005, the Company was subject to a capital call of $100,000 from
Maverick Basin Exploration, LLC.

On March 3, 2005, the Company was subject to a capital call of $500,000 from PHT
Wharton.

On March 8, 2005, the Company was subject to a capital call of $100,000 from PHT
Vicksburg.

On March 8, 2005, The Company was subject to a capital call of $275,000 from PHT
Wharton.

On March 11, 2005, the Company was subject to a capital call of $300,000 from
Maverick Basin Exploration, LLC.

On March 17, 2005, the Company was subject to a capital call of $158,000 from
PHT La Paloma.

On March 18, 2005, Knox Miss LP received $500,000 from Clayton Williams as
reimbursements for prepaid drilling costs that Clayton Williams had on account.

On March 29, 2005, the Company filed a Certificate of Designation with the
Delaware Secretary of State to designate 2,000,000 of its authorized but
unissued shares of preferred stock as Series A Convertible Preferred Stock. Each
share of the Series A convertible preferred stock ("Series A Shares") is
initially convertible into ten (10) shares of the Company's common stock at an
initial conversion price of $1.10 per share. The conversion price is subject to
proportional adjustment for stock splits, combinations, recapitalizations and
stock dividends. In addition, if, prior to June 30, 2005, the Company issues
additional shares of common stock or securities convertible or exercisable into
shares of common stock in a capital raising transaction in which the Company
realizes net proceeds equal to at least fifty percent (50%) of the net proceeds
realized in the Regulation D Offering (as defined below), the conversion price
in effect immediately prior to such issuance will automatically be adjusted to a
price equal to the aggregate consideration per share received by the Company in
such transaction.

The Series A Shares are convertible at any time at the option of the holder, and
are subject to mandatory conversion in the event that: (i) there is an effective
registration statement covering the public sale of the shares of the Company's
common stock underlying the Series A Shares; and (ii) the volume weighted
average closing price per share of the Company's common stock for 20 consecutive
trading days is equal to or greater than 150% of the conversion price. In the
event of a merger or other transaction in which the Company is not the surviving
corporation, the Series A Shares and all accrued and unpaid dividends due
thereon, will automatically convert into common stock and participate in such
merger or other transaction.

Holders of our Series A Shares are entitled to receive dividends at the rate of
eight percent (8%) per annum of the $11.00 stated value of such shares payable
on an annual basis on December 31 of each year after issuance, or upon earlier
conversion, out of funds legally available therefore; provided, however, that at
the option of the holder, such dividends shall be payable in kind at the rate of
12% per annum of the $11.00 stated value of such shares by issuance of shares of
the Company's common stock having a fair market value equal to the amount of the
dividend. For this purpose, fair market value is defined as the average of the
high and low bid prices for the Company's shares of common stock as reported on
the OTC Bulletin Board for the five (5) trading days immediately preceding the
date the dividend is paid.


                                      F-41
<PAGE>


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


NOTE 19 - SUBSEQUENT EVENTS (Continued)

In the event of liquidation, dissolution or winding up of the Company, the
holders of the Series A Shares shall be entitled to a liquidation preference of
$11.00 per share plus all accrued and unpaid dividends prior to any payment or
distribution to holders of shares of the common stock.

Except as otherwise provided in the Delaware General Corporation Law, the shares
of Series A convertible preferred stock have no voting rights.

In the first quarter of 2005 the Company commenced in concurrent private
offerings (the "Offerings") of units comprised of shares of its series A
convertible preferred stock and warrants to purchase shares of its common stock
at a purchase price of $11.00 per unit. Each unit is comprised of one share of
its series A convertible preferred stock and one common stock purchase warrant.
Each share of series A convertible preferred stock is immediately convertible at
the option of the holder into ten (10) shares of common stock at an initial
conversion price of $1.10 per share. Each warrant is immediately exercisable
into five (5) shares of common stock at an exercise price of $1.50 per share for
a term of three years.

The warrants have a call provision if the volume weighted average closing price
per share of the Company's common stock for twenty consecutive trading days
following the effectiveness of the registration of the shares underlying the
warrants is equal to or greater than 150% of the exercise price, the Company
will have unlimited discretion to call the warrants for surrender fifteen (15)
business days after it provides written notice to the holders of the warrants.
If the warrants are not exercised during such fifteen (15) business day period,
they will terminate.

The exercise price of the warrants will be adjusted for stock splits,
combinations, recapitalization and stock dividends. In addition, if the Company
issues additional warrants or options which have an exercise price less than the
exercise price of the warrants in effect immediately prior to such issuance, in
a capital raising transaction that closes prior to June 30, 2005 in which the
Company realizes net proceeds equal to at least fifty percent (50%) of the net
proceeds realized in the Regulation D Offering, the exercise price of the
warrants will automatically be adjusted to a price equal to the exercise price
per share of such other warrants or options.

The Company has agreed to use its best efforts to prepare and file with the
Securities and Exchange Commission within 60 days after the termination of the
offering, but in no case late than 90 days after the termination of the
offering, a registration statement under the Securities Act of 1933, as amended,
permitting the public resale of the shares of Common Stock issuable upon
conversion or exercise, as applicable, of the Series A Convertible Preferred
Stock and Warrants issued in the offering. The Company has agreed to pay certain
penalties to the subscribers in this offering if the registration statement is
not filed within 90 days after the termination of the offering or if the
registration statement is not declared effective within 180 days after the
termination of the offering.

The first offering is being carried out on a "best efforts" basis solely to a
limited number of accredited investors in the United States (the "Regulation D
Offering"). The second offering is being carried out on a "best efforts" basis
solely to a limited number of accredited investors who are not "U.S. persons"
(the "Regulation S Offering").

On March 30, 2005, the Company conducted an initial closing of the Regulation D
Offering in which it sold 204,100 units for aggregate gross proceeds of
$2,245,100. The Company paid commissions and expenses of $291,857 to Legend
Merchant Group, Inc. ("Legend"), a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and member of the NASD and the SIPC.


                                      F-42
<PAGE>


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

NOTE 19 - SUBSEQUENT EVENTS (Continued)

As of April 5, 2005, the Company sold 247,727 units in the Regulation S Offering
for aggregate gross proceeds of $2,724,997. The Company paid investment banking
fees in the amount of $220,000 to an independent third party consultant in
connection with this transaction.

On March 23, 2005, the Company issued a warrant to Trident Growth Fund to
purchase 100,000 shares of common stock at an initial exercise price of $1.20
per share in consideration of Trident extending the due date of its $2,050,000
convertible promissory note to March 24, 2006 and waivering all financial
covenants on the convertible note. The warrants are exercisable immediately and
expire on March 31, 2014.

During January and February 2005, the Company sold a total of 236,614 units in
which 473,228 shares of common stock and 236,614 warrants were issued for a
total purchase price of $496,800 related to the private placement offering
commenced in November 2004 (see Note 14). In March 2005, the Company paid
$87,579 and issued warrants to the placement agent to purchase 83,770 shares of
common stock in compensation for services provided by the placement agent.

In compensation for the services provided by Legend in connection with the
Regulation D and Regulation S Offerings, the Company issued warrants to Legend
to purchase 677,741 shares of common stock in April 2005.

NOTE 20 - NOTES PAYABLE SUMMARY

The following schedule summarizes the current and non-current portion of
Company's debts included in Note 11 through Note 13:

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

IL Resources                            210,000              --        210,000
South Oil                                87,500              --         87,500
John Paul Dejoria                       128,857              --        128,857
Other                                    10,866              --         10,866
Trident                                      --       2,050,000      2,050,000
Westwood                              1,000,000              --      1,000,000
DDH II                                1,000,000              --      1,000,000
Endeavour                               181,000       1,819,000      2,000,000
                                    -----------     -----------    -----------
                                      2,834,764       3,869,000      6,703,764
Less:  unamortization discounts        (919,713)              0       (919,713)
                                    -----------     -----------    -----------
                                    $ 1,915,051     $ 3,869,000    $ 5,784,051
                                    ===========     ===========    ===========

Maturities on debts are as follows:

Year Ending December 31:
               2005                 $ 1,915,051
               2006                   2,741,000
               2007                     592,000
               2008                     465,000
               2009                      71,000
                                    -----------
                                     $5,784,051
                                    ===========



                                      F-43
<PAGE>


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


NOTE 21 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for interest expense and income taxes for 2004 and 2003 were as
follows:

                                             2004                     2003
                                        ---------------         ----------------
Interest                                $       172,200         $             --
                                        ===============         ================
Income taxes, net                       $            --         $             --
                                        ===============         ================


Non-Cash Investing and Financing Transactions:

On March 23, 2004, the Company issued 7,000,000 shares of common stock to
Touchstone Canada valued at $70,000 for the acquisition of 100% ownership
interest in Touchstone Texas. In connection with this acquisition, the Company
issued 280,000 shares of common stock to an investment banker valued at $2,800.

On March 23, 2004, the Company issued 100,000 shares of common stock to
Touchstone Canada valued at $1,000 for Touchstone Louisiana's acquisition of 10%
membership interest in LS Gas, LLC.

The Company recorded a discount of $540,000 related to the beneficial conversion
feature on the Westwood AR Note.

The Company recorded discounts of $3,678,600 and $3,211,400 related to the
beneficial conversion feature and value of attached warrants, respectively, on
the converted notes of $6,890,000 (see Note 14).

The Company recorded discounts of $409,309 and $318,400 related to the
beneficial conversion feature and value of attached warrants, respectively, on
the DDH II Note.

In September 2004, the Company issued 20,000 shares of common stock for
financial advisory fee and recorded $24,800 as deferred compensation.

In August 2004, PF Louisiana issued a promissory note of $192,000 to IL
Resources, Inc. for the payment IL Resources, Inc. made to South Oil on behalf
of PF Louisiana to acquire oil and gas leasehold interests.

In April 2004, Touchstone Louisiana issued a promissory note of $2,000,000 to
Endeavour as part of the consideration for its acquisition of the 24.9975% class
A limited partnership interest in LSP.

In February 2004, Knox Gas issued a promissory note of $4,500,000 to Endeavour
as part of the consideration for its acquisition of the 99% limited partnership
interest in Knox Miss LP and 1% membership interest in Knox Miss LLC.


                                      F-44
<PAGE>


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


NOTE 22 - SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED

Oil and Gas Reserves

The determination of oil and gas reserves is highly complex and interpretive.
The estimates are subject to continuing changes as additional information
becomes available.

Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids, which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved development
oil and gas reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods. The reserve data
is based on studies prepared by an outside petroleum engineer. All proved
developed reserves of oil and gas are located in Texas.

The following table presents estimates of the Company's net proved developed oil
and gas reserves:

                                                                 December 31,
                                                              ------------------
                                                                2004        2003
                                                              ---------     ----
Proved developed reserves (mcf), beginning of year                   --       --

Purchase of proved developed reserves (mcf), in place                         --
                                                                     --       --
Production                                                           --       --
Extension of reservoir                                               --       --
Revisions of previous estimates                                      --       --
                                                              ---------     ----

Proved developed reserves (mcf), end of year                         --       --
                                                              =========     ====
Equity in reserves (mcf) in equity method investees           1,331,000       --
                                                              =========     ====


Capitalized Costs Relating to Oil and Gas Producing Activities

<TABLE>
<CAPTION>
                                                    December 31, 2004                            December 31, 2003
                                         ----------------------------------------    ---------------------------------------
                                            United         New                         United          New
                                            States        Zealand        Total         States        Zealand         Total
                                         ------------    ----------    ----------    ----------    -----------    ----------
<S>                                      <C>             <C>           <C>           <C>           <C>            <C>
Unproved oil and gas properties          $  4,763,310    $       --    $4,763,310    $       --    $        --    $       --
Proved oil and gas properties                      --            --            --            --             --            --
                                         ------------    ----------    ----------    ----------    -----------    ----------
Total capitalized costs                     4,763,310            --     4,763,310            --             --            --
                                         ============    ==========    ==========    ==========    ===========    ==========
Accumulated depreciation,
   depletion and amortization                      --            --            --            --             --            --
                                         ------------    ----------    ----------    ----------    -----------    ----------
Net capitalized costs                    $  4,763,310    $       --    $4,763,310    $       --    $        --    $       --
                                         ============    ==========    ==========    ==========    ===========    ==========
Company's share of equity
   method investees' net
   capitalized costs                     $  4,634,629    $  237,900    $4,872,529    $       --    $        --    $       --
                                         ============    ==========    ==========    ==========    ===========    ==========
</TABLE>


                                      F-45
<PAGE>


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


NOTE 22 - SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED (Continued)

Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities for the Years Ended December 31:

<TABLE>
<CAPTION>
                                                            2004                                      2003
                                         ----------------------------------------    ---------------------------------------
                                            United          New                        United          New
                                            States        Zealand         Total        States        Zealand        Total
                                         ------------    ----------    ----------    ----------    -----------    ----------
<S>                                      <C>             <C>           <C>           <C>           <C>            <C>
Acquisition of properties
  Proved                                 $         --    $       --    $       --    $       --    $        --    $       --
  Unproved                                    730,596            --       730,596            --             --            --
Exploration costs                           1,501,398            --     1,501,398            --             --            --
Development costs                                  --            --            --            --             --            --
                                         ------------    ----------    ----------    ----------    -----------    ----------
  Total                                  $  2,231,994    $       --    $2,231,994    $       --    $        --    $       --
                                         ============    ==========    ==========    ==========    ===========    ==========
Company's share of equity
  method investees' costs of
  property acquisition,
  exploration, and development           $  6,949,203    $  977,899    $7,927,102    $       --    $        --    $       --
                                         ============    ==========    ==========    ==========    ===========    ==========
</TABLE>

Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

SFAS No. 69, "Disclosure about Oil and Gas Producing Activities", prescribes
guidelines for computing a standardized measure of future net cash flows and
changes therein relating to estimated proved reserves. The Company has followed
these guidelines, which are briefly discussed below.

Future cash inflows and future production and development costs are determined
by applying year-end prices and costs to the estimated quantities of oil and gas
to be produced. Estimated future income taxes are computed using current
statutory income tax rates for where production occurs. The resulting future net
cash flows are reduced to present value amounts by applying a 10% annual
discount factor.

The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect the Company's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these estimates are the basis for
the valuation process.

The following summary sets forth the Company's future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in
Statement of Financial Accounting Standards No. 69.

<TABLE>
<CAPTION>
                                                                     December 31,
                                                              ------------------------
                                                                   2004        2003
                                                              ------------    --------
<S>                                                           <C>             <C>
Future cash inflows                                           $         --    $     --
Future production costs                                                 --          --
Future development costs                                                --          --
Future income tax expense                                               --          --
                                                              ------------    --------
Future net cash flows (undiscounted)                                    --          --

 Annual discount of 10% for estimated timing                            --          --
                                                              ------------    --------
 Standardized measure of future net                           $         --    $     --
                                                              ============    ========
 Equity in standardized measure of equity method investees    $  4,805,186    $     --
                                                              ============    ========
</TABLE>


                                      F-46
<PAGE>


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


NOTE 22 - SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED (Continued)

Changes in Standardized Measure (Unaudited)

The following are the principal sources of change in the standardized measure of
discounted future net cash flows at December 31:

<TABLE>
<CAPTION>
                                                                        2004            2003
                                                                    -------------    -----------
<S>                                                                 <C>              <C>
       Standardized measure, beginning of period                    $          --    $        --
       Net changes in prices and production costs                              --             --
       Future development costs                                                --             --
       Revisions of previous quantity estimates                                --             --
       Extension of reservoir                                                  --             --
       Sale of reserves in place                                               --             --
       Accretion of discount                                                   --             --
       Changes in income taxes, net                                            --             --
       Purchased reserves                                                      --             --
                                                                    -------------    -----------
       Standardized measure, end of period                          $          --    $        --
                                                                    =============    ===========
       Equity in standardized measure of equity method investees    $   4,805,186    $        --
                                                                    =============    ===========
       </TABLE>

The following schedule lists the total assets, liabilities and results of
operations of the limited partnerships which the Company is invested in at
December 31, 2004:

<TABLE>
<CAPTION>
                                       PHT Vicksburg       Awakino South          PHT Stent
                                       Partner's, L.P.     Exploration, LLC     Partners, L.P.
                                       ---------------     ---------------     ---------------
<S>                                    <C>                 <C>                 <C>
Total Assets                           $     1,721,458     $     3,814,696     $        96,815
                                       ===============     ===============     ===============
Total Liabilities                      $       423,562     $       104,974     $       248,115
                                       ===============     ===============     ===============
Results of Operations
   Sales                               $       791,041     $            --     $            --
   Gross profit                        $       401,262     $            --     $            --
   Net loss                            $      (224,576)    $    (1,028,445)    $    (2,713,799)

Company's share of equity method
   investees' results of operations
   for producing activities            $       (57,951)    $       (94,000)    $      (537,903)
</TABLE>


                                      F-47
<PAGE>


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


NOTE 22 - SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED (Continued)

<TABLE>
<CAPTION>
                                                          Louisiana Shelf       PHT Wharton
                                         LS Gas, LLC       Partners, L.P.      Partners, L.P.
                                       ---------------    ---------------     ---------------
<S>                                    <C>                <C>                 <C>
Total Assets                           $            --    $     5,555,342     $     3,579,006
                                       ===============    ===============     ===============
Total Liabilities                      $            --    $       491,569     $     2,107,617
                                       ===============    ===============     ===============
Results of Operations
   Sales                               $            --    $            --     $        31,262
   Gross profit                        $            --    $            --     $        21,169
   Net loss                            $            --    $    (3,877,828)    $    (4,940,611)

Company's share of equity method
   investees' results of operations
   for producing activities            $            --    $      (876,573)    $      (935,335)


                                          PHT Vela         PHT Good Friday      PHT Martinez
                                        Partners, L.P.     Partners, L.P.      Partners, L.P.
                                       ---------------     ---------------     ---------------
Total Assets                           $     1,322,680     $     4,052,019     $     3,019,341
                                       ===============     ===============     ===============
Total Liabilities                      $            --     $            --     $            --
                                       ===============     ===============     ===============
Results of Operations
   Sales                               $            --     $            --     $            --
   Gross profit                        $            --     $            --     $            --
   Net loss                            $    (2,602,320)    $      (565,981)    $      (330,659)

Company's share of equity method
   investees' results of operations
   for producing activities            $      (750,081)    $       (87,263)    $       (66,019)
</TABLE>


                                      F-48
<PAGE>


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


NOTE 22 - SUPPLEMENTAL OIL AND GAS DISCLOSURES - UNAUDITED (Continued)

                                            Maverick Basin       PHT La Paloma
                                            Exploration, LLC    Partners, L.P.
                                            ---------------     ---------------
Total Assets                                $     2,578,831     $     5,020,085
                                            ===============     ===============
Total Liabilities                           $     3,976,204     $            --
                                            ===============     ===============
Results of Operations
   Sales                                    $            --     $            --
   Gross profit                             $            --     $            --
   Net loss                                 $    (2,529,497)    $       (72,344)

Company's share of equity method
   investees' results of operations
   for producing activities                 $      (100,000)    $        (7,958)


                                      F-49





<PAGE>

                                  EXHIBIT INDEX

Exhibit
-------

3.3         Certificate of Amendment to Certificate of Incorporation

10.22       Amendment and Waiver to 12% Secured Convertible Promissory Note,
            dated March 23, 2004, by and between the Company and Trident Growth
            Fund, L.P.

21.1        Subsidiaries of the Company

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

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

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