Cygnus Oil & Gas Corp – ‘10QSB’ for 9/30/05

On:  Monday, 11/14/05, at 5:47pm ET   ·   For:  9/30/05   ·   Accession #:  1144204-5-35588   ·   File #:  0-50228   ·   Correction:  This Filing’s “Filed as of” Date was Corrected and “Changed as of” 11/14/05 by the SEC on 11/16/05. ®

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Quarterly Report — Small Business   —   Form 10-QSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10QSB       Quarterly Report -- Small Business                    40    190K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)     2±     9K 
 3: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)     1      6K 

10QSB   —   Quarterly Report — Small Business
Document Table of Contents

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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB 

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934                                                             

For the quarterly period ended: September 30, 2005

[_]   TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934                                                             

 For the transition period from _______ to _______

 Commission file no. 000-50228

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

Delaware                               33-0967974 
---------------------------------------    ---------------------------------    
(State or Other Jurisdiction of                  (IRS Employer            
Incorporation or Organization)               Identification No.)        

 1600 Smith Street
Suite 5100
 Houston, TX 77002
 -------------------------------------
(Address of Principal Executive Offices)

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

      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 [_]

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

APPLICABLE ONLY TO CORPORATE ISSUERS

      State the number of shares  outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: There were 68,811,773 issued  
and outstanding  shares of the  registrant's  common stock,  par value $.001 per
share, as of November 10, 2005.                                                 

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

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TOUCHSTONE RESOURCES USA, INC.
 QUARTERLY REPORT ON FORM 10-QSB
 FOR FISCAL QUARTER ENDED SEPTEMBER 30, 2005

 TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I

Item 1. Financial Statements                                                    
         Condensed Consolidated Balance Sheets - (Unaudited)..............   2
         Condensed Consolidated Statements of Operations - (Unaudited)....   3
         Condensed Consolidated Statements of Cash Flows - (Unaudited)....   4
         Notes to Condensed Consolidated Financial Statements.............   5
Item 2. Management's Discussion and Analysis...............................  21 
Item 3. Controls and Procedures............................................  34 

 PART II

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........  36 
Item 5. Other Information..................................................  37 
Item 6. Exhibits...........................................................  37 

Signature..................................................................  38 

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PART I
 FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS                                                   

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

                                                        [Enlarge/Download Table]

                                     ASSETS                                                               
                                                                            September 30,    December 31, 
                                                                                2005            2004      
                                                                            --------------  ------------- 
                                                                             (Unaudited)      (Audited)   
                                                                                                          

Current assets                                                                                            
   Cash and cash equivalents                                                $   4,756,056   $     594,182 
   Restricted cash - joint interest                                               596,524       1,139,753 
   Accounts receivable - joint interest                                         1,978,847       2,945,421 
   Accounts receivable - joint interest related party                             984,592       3,354,468 
   Notes and interest receivable                                                   89,105          66,559 
   Due from related party                                                         959,898         188,588 
   Prepaid expenses and advances to operators                                     250,836       1,593,079 
                                                                            --------------  --------------

Total current assets                                                            9,615,858       9,882,050 
Undeveloped oil and gas interests, using successful efforts                     4,775,721       4,763,311 
Investment in limited partnerships and liability companies                      5,149,370       6,117,046 
Fixed assets, net                                                                  51,733          50,958 
Deposits                                                                           26,720          30,149 
                                                                            --------------  --------------
                                                                            $  19,619,402   $  20,843,514 
                                                                            ==============  ==============
                      LIABILITIES AND STOCKHOLDERS' EQUITY                                                
Current liabilities                                                                                       
   Accounts payable and accrued expenses                                    $   1,901,007   $     854,798 
   Accounts payable - joint interest                                            4,021,612       8,224,332 
   Notes payable                                                                  517,123         618,223 
   Notes payable - related party                                                   59,493         216,541 
   Limited partnership subscriptions payable                                      122,226         200,000 
   Convertible debentures, net                                                  3,050,000       1,080,287 
                                                                            --------------  --------------

Total current liabilities                                                       9,671,461      11,194,181 
                                                                            --------------  --------------

Note payable - noncurrent                                                       1,819,000       1,819,000 
Convertible debenture - noncurrent                                                      -       2,050,000 
                                                                            --------------  --------------

                                                                                1,819,000       3,869,000 
                                                                            --------------  --------------

Total liabilities                                                              11,490,461      15,063,181 
                                                                            --------------  --------------

Commitment and contingencies                                                                              

Minority interest                                                               2,954,774       3,078,820 

Stockholders' equity                                                                                      
   Preferred stock; $.001 par value; authorized - 5,000,000 shares; shares                                
        issued and outstanding - 710,063 at September 30, 2005 and 0 at                                   
        December 31, 2004; Liquidation preference:  $8,119,021                        710               - 
   Common stock; $.001 par value; authorized - 150,000,000 shares;                                        
        shares issued and outstanding - 62,204,551 and 3,918,332 issuable                                 
        at September 30, 2005 and 59,919,053 issued and outstanding                                       
        and 649,476 issuable at December 31, 2004                                  66,123          60,569 
   Additional paid-in capital                                                  32,608,815      18,338,476 
   Deferred compensation                                                                -         (16,600)
   Deficit accumulated during the development stage                           (27,501,481)    (15,680,932)
                                                                            --------------  --------------
Total stockholders' equity                                                      5,174,167       2,701,513 
                                                                            --------------  --------------
                                                                            $  19,619,402   $  20,843,514 
                                                                            ==============  ==============

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

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

                                                        [Enlarge/Download Table]


                                                For the Three Months               For the Nine Months          March 5, 2001  
                                                 Ended September 30,               Ended September 30,         (Inception) to  
                                          ------------------------------------------------------------------    September 30,  
                                               2005              2004             2005               2004            2005      
                                          ---------------    -------------   --------------   --------------   --------------- 
                                                                                                                               
Operator revenues                          $      46,361      $    60,316     $    240,211     $    144,253    $      441,020  
                                          ---------------    -------------   --------------   --------------   --------------- 
Expenses:                                                                                                                      
   Exploration expenses                            2,527                -           54,702          112,748         1,556,100  
   Impairment of oil and gas properties          446,233           20,221        1,185,684        1,333,466         1,361,504  
   Impairment of goodwill                              -                -                -                -           657,914  
   Bad debt expense                                    -                -                -           15,454            15,454  
   General and administrative                    800,448          837,507        2,603,770        1,806,005         4,996,893  
                                          ---------------    -------------   --------------   --------------   --------------- 

Total expenses                                 1,249,208          857,728        3,844,156        3,267,673         8,587,865  
                                          ---------------    -------------   --------------   --------------   --------------- 

Loss from operations                          (1,202,847)        (797,412)      (3,603,945)      (3,123,420)       (8,146,845) 
                                          ---------------    -------------   --------------   --------------   --------------- 

Other (income) expense                                                                                                         
   Loss from limited partnerships                                                                                              
      and limited liability companies          1,063,286          604,276        4,377,222          717,760         7,883,466  
   Impairment of equity investment                     -                -                -                -           139,502  
   Interest income                               (13,490)           (687)          (24,114)          (8,301)          (32,919) 
   Interest expense                              496,464          288,510        1,600,697        7,252,307         9,568,895  
                                          ---------------    -------------   --------------   --------------   --------------- 

Total other expense                            1,546,260          892,099        5,953,805         7,961,766        17,558,944 
                                          ---------------    -------------   --------------   --------------   --------------- 

Loss before minority interest and                                                                                              
   pre-acquisition losses                    (2,749,107)       (1,689,511)      (9,557,750)      (11,085,186)      (25,705,789)
                                          ---------------    -------------   --------------   --------------   --------------- 

Addback:                                                                                                                       
   Minority interest                               6,062          106,013          301,548           480,737           557,342 
   Pre-acquisition losses                              -                -                -           211,315           211,315 
                                          ---------------    -------------   --------------   --------------   --------------- 

Total minority interest and                                                                                                    
    pre-acquisition losses                         6,062          106,013          301,548          692,052           768,657  
                                          ---------------    -------------   --------------   --------------   --------------- 

Net loss                                      (2,743,045)      (1,583,498)      (9,256,202)     (10,393,134)      (24,937,132) 

Preferred dividend on Series A                  (320,988)               -       (2,564,349)               -        (2,564,349) 
                                          ---------------    -------------   --------------   --------------   --------------- 

Net loss to common shareholders             $ (3,064,033)     $(1,583,498)    $(11,820,551)    $(10,393,134)   $  (27,501,481) 
                                          ===============    =============   ==============   ==============   =============== 

Net loss per common share -                                                                                                    
   basic and diluted                       $       (0.05)     $     (0.03)    $      (0.19)    $      (0.12)   $        (0.22) 
                                          ===============    =============   ==============   ==============   ================

Weighted average number of common shares                                                                                       
   outstanding - basic and diluted            62,466,843       59,531,635      61,454,487      85,799,555        122,517,724   
                                          ===============    ==============  ==============   ==============   ================

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

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

                                                        [Enlarge/Download Table]

                                                                              Nine Months Ended                           
                                                                                September 30,              March 5, 2001  
                                                                     ---------------------------------    (Inception) to  
                                                                            2005              2004      September 30, 2005
                                                                     ---------------------------------  ------------------
                                                                                                                          
Cash flows from operating activities                                                                                      
Net cash used in operating activities                                $   (2,082,459)   $     (595,811)  $    (4,073,983)  
                                                                     ---------------   ---------------  ----------------  

Cash flows from investing activities                                                                                      
    Cash acquired from acquisition of wholly-owned subsidiaries                                                           
      and limited partnership interest                                            -           510,273             4,715   
    Repayment of note receivable - related party                              2,000             6,250            23,639   
    Notes receivable                                                        (23,050)          (30,000)         (204,419)  
    Notes receivable - related party                                       (752,000)         (184,549)         (806,975)  
    Purchase of oil and gas interests and drilling costs                   (460,120)       (2,548,420)       (2,788,573)  
    Refund of oil and gas prepayment                                        500,000                 -           500,000   
    Investment in limited partnership interests                          (3,559,820)       (7,319,654)      (11,646,695)  
    Distributions from limited partnerships                                  72,500                 -            98,885   
    Purchase of fixed assets                                                (12,731)            10,835          (39,672)  
                                                                     ---------------   ---------------  ------------------

Net cash used in investing activities                                    (4,233,221)       (9,555,265)      (14,859,095)  

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

Cash flows from financing activities                                                                                      
    Advances from stockholder                                                     -                 -            10,000   
    Repayments to stockholder                                                     -                 -           (10,000)  
    Proceeds from notes payable                                                   -           925,100           807,100   
    Proceeds from notes payable - related party                                   -           146,468           279,000   
    Repayment of notes payable                                             (101,100)       (5,253,600)       (5,446,100)  
    Repayment of notes payable - related party                             (157,048)          (76,000)         (248,548)  
    Proceeds from issuance of convertible debt                                    -         9,990,000        11,090,000   
    Repayment of convertible debt                                                 -          (150,000)                -   
    Loan costs                                                                    -          (121,500)         (104,000)  
    Capital contributed by officer                                                -            15,000            15,000   
    Minority contributions, net of issuance costs                           116,690         3,425,500         3,442,190   
    Proceeds from issuance of preferred stock, net of issuance costs      6,940,081         2,559,250         6,940,081   
    Proceeds from issuance of common stock, net of issuance costs         3,678,931                 -         6,914,411   
                                                                     ---------------   ---------------  ------------------

Net cash provided by financing activities                                10,477,554        11,460,218        23,689,134   

Net increase in cash and cash equivalents                                 4,161,874         1,309,142         4,756,056   

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

Cash and cash equivalents, end of period                             $    4,756,056       $ 1,400,720   $     4,756,056   
                                                                     ===============   ===============  ==================

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

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

NOTE 1 - BASIS OF PRESENTATION                                                  

The unaudited condensed consolidated financial statements included herein have  
been prepared by Touchstone Resources USA, Inc. (the "Company"), without audit, 
pursuant to the rules and regulations of the Securities and Exchange Commission.
The financial statements reflect all adjustments that are, in the opinion of    
management, necessary to fairly present such information. All such adjustments  
are of a normal recurring nature except impairment on certain oil and gas       
properties. Although the Company believes that the disclosures are adequate to  
make the information presented not misleading, certain information and footnote 
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting         
principles generally accepted in the United States of America ("US GAAP"), have 
been condensed or omitted pursuant to such rules and regulations.               

These financial statements should be read in conjunction with the financial     
statements and the notes thereto included in the Company's 2004 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of   
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2005.      

Touchstone follows the provisions of SFAS No. 123. As permitted under SFAS No.  
123, Touchstone continues to utilize Accounting Principles Board ("APB") No. 25 
in accounting for its stock-based compensation to employees. Had compensation   
expense for the three months and nine months ended September 30, 2005 and 2004  
been determined under the fair value provisions of SFAS No. 123, as amended by  
SFAS 148, Touchstone's net loss to common shareholders and net loss per share   
would have been as follows:                                                     

                                                        [Enlarge/Download Table]

                                               Three Months Ended                   Nine Months Ended          
                                                 September 30,                        September 30,            
                                      -----------------------------------  ------------------------------------
                                           2005                 2004            2005                 2004      
                                      --------------      ---------------  ----------------    ----------------
                                                                                                               
Net loss, to common stockholders                                                                               
  as reported                         $  (3,064,033)      $   (1,583,498)  $   (11,820,551)    $  (10,393,134) 
Add:  Stock-based employee                                                                                     
  compensation expense included                                                                                
  in reported net income determined                                                                            
  under APB No. 25, net of related                                                                             
  tax effects                                     -                    -                 -                  -  
Deduct:  Total stock-based employee                                                                            
  compensation expense determined                                                                              
  under fair-value-based method for                                                                            
  all awards, net of related tax           (346,088)                   -          (346,088)                 -  
  effects                                                                                                      
                                      --------------      ---------------  ----------------    --------------- 

Pro forma net income to common                                                                                 
  stockholders                        $  (3,410,121)      $   (1,583,498)  $   (12,166,639)    $  (10,393,134) 
                                      --------------      ---------------  ----------------    ----------------

Net loss per common share:                                                                                     
     Basic and diluted - as reported  $      (0.05)       $        (0.03)  $         (0.19)    $        (0.12) 

     Basic and diluted - pro forma    $      (0.05)       $        (0.03)  $         (0.20)    $        (0.12) 


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

NOTE 2 - 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 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                             

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 New Zealand, Inc. ("Touchstone New Zealand"), formerly known
    as Touchstone Awakino, Inc. ("Touchstone Awakino"), a wholly-owned
Delaware corporation incorporated in March 2004               
 o   Touchstone Louisiana, Inc. ("Touchstone Louisiana"), a wholly-owned
Delaware corporation incorporated in March 2004               
   o   Touchstone Texas Properties, Inc. ("Touchstone Properties"), formerly
 known as 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 Oklahoma, LLC ("Touchstone Oklahoma"), formerly known as
Touchstone Pierce Exploration, LLC ("Touchstone Pierce"), a   
     wholly-owned Delaware limited liability company formed in June 2004
 o   PF Louisiana, LLC ("PF Louisiana"), a wholly-owned Delaware limited
liability company formed in August 2004                       
 o   CE Operating, LLC ("CE Operating"), a wholly-owned Oklahoma limited
liability company formed in May 2005                          

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

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

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.         

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:                                                                        

Operating revenues for the nine months ended September 30, 2005 and 2004 by     
geographical area were as follows:                                              

                                           September 30,
                                          ------------------------------
                                           2005               2004
                                          -------------     ------------

       United States                      $    240,211      $    144,253
       New Zealand                                   -                 -
                                          -------------     ------------

                                          $    240,211      $    144,253
                                          =============     ============

Operating revenues for the three months ended September 30, 2005 and 2004 by    
geographical area were as follows:                                              

                                           September 30,
                                          ------------------------------
                                          2005              2004
                                          -------------     ------------

       United States                      $     46,361            60,316
       New Zealand                                   -                 -
                                          -------------     ------------

                                          $     46,361      $     60,316
                                          =============     ============

Long-lived assets as of September 30, 2005 and December 31, 2004 by geographical
area were as follows:                                                           

                                          September 30,     December 31,
                                           2005             2004
                                          -------------     ------------

       United States                      $  9,861,173      $ 10,669,066
       New Zealand                             115,651           262,249
                                          -------------     ------------

                                          $  9,976,824      $ 10,931,315
                                          =============     ============

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

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 related to the three
months ended March 31, 2004 have been updated to reflect the 25 for 1 stock     
split effected in March 2004.                                                   

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

                                                                [Download Table]

                                               Nine Months Ended        
                                                 September 30,          
                                      ----------------------------------
                                            2005               2004     
                                      ---------------- -----------------
                                                                        
Warrants                                 13,413,671         5,256,250   
Options                                   4,967,540                 -   
Convertible debt                          3,050,000         3,100,000   
Series A convertible preferred stock      7,100,630                 -   
                                      ---------------- -----------------

                                         28,531,841         8,356,250   
                                      ================ =================

NOTE 4 - 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 from private offerings of securities and 
its current and projected revenues from oil and gas operations will be          
sufficient to fund its operations through September 2006. The Company will need 
to raise additional funds in the event it locates additional prospects for      
acquisition, experiences cost overruns at its current prospects, or fails to    
generate projected revenues.                                                    

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

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

NOTE 5 - DUE FROM RELATED PARTY                                                 

As of September 30, 2005, 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 $750,000 to Awakino South Exploration, LLC ("Awakino"), 
a limited liability company in which the Company has an equity interest, and    
$35,000 to Touchstone Resources, Ltd. ("Touchstone Canada"). The president of   
Touchstone Canada served as the president of Touchstone Texas until his         
resignation on June 2, 2004. In addition, the Company was owed $101,607         
(approximately $752,000 less a reserve for collection of $650,393) from         
Touchstone Canada for payment of accounts payable, which Touchstone Canada had  
agreed to assume prior to the Company's acquisition of Touchstone Texas.        

NOTE 6 - OIL AND GAS PROSPECTS                                                  

PF Louisiana, LLC                                                               

On August 11, 2005, PF Louisiana elected not to make the delay rental payment on
State Lease #18219 located in Ibera Parish, Louisiana. This resulted in PF      
Louisiana impairing its total investment in the lease in the amount of $447,921.

Touchstone Oklahoma, LLC                                                        

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

CE Operating, LLC                                                               

In September 2005, the Company acquired one hundred percent (100%) of the       
membership interest of CE Operating, LLC, a qualified Oklahoma oil and gas      
operator, from Austex Production Company, LLC for $8,000. The Company           
subsequently contributed $150,000 to CE Operating. CE Operating purchased two   
certificates of deposit in the amount of twenty-five thousand dollars ($25,000) 
to back letters of credit required by governmental authorities of the State of  
Oklahoma. The Company serves as the sole and managing member.                   

NOTE 7 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES                             

Checotah Pipeline, LLC                                                          

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

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

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

                                                        [Enlarge/Download Table]

                                                    September 30, 2005                        December 31, 2004          
                                           --------------------------------------  --------------------------------------
                                                                   Temporary                                 Temporary   
                                                                   Excess of                                 Excess of   
                                                                Carrying Value                            Carrying Value 
                                           Carrying Value       Over Net Assets     Carrying Value        Over Net Assets
                                           --------------      ----------------    ----------------      ----------------
                                             (Unaudited)         (Unaudited)          (Unaudited)           (Unaudited)  
                                                                                                                         
PHT Vicksburg Partners, LP                   $   604,275         $      80,592        $    404,552          $     47,631 
Awakino South Exploration, LLC                   115,651                     -             252,154                     - 
PHT Stent Partners, LP                                 -                     -              10,094                47,616 
Louisiana Shelf Partners, LP                   2,558,866             1,224,874           2,484,428             1,219,497 
PHT Wharton Partners, LP                         112,818                     -             234,665                     - 
PHT Vela Partners, LP                            340,703                11,387             449,919                68,987 
PHT Good Friday Partners, LP                     351,750                31,832             812,737               190,347 
PHT Martinez Partners, LP                        835,645                28,252             833,981                36,151 
PHT La Paloma Partners, LP                       175,521               135,724             625,375                73,166 
Maverick Basin Exploration, LLC                        -                     -                   -               345,850 
Checotah Pipeline, LLC                            45,000                     -                   -                     - 
LS Gas, LLC                                        1,000                 1,000               1,000                 1,000 
2001 Hackberry Drilling Fund Partners, LP          8,141                     -               8,141                     - 
                                           --------------      ----------------    ----------------      ----------------

                                             $ 5,149,370         $   1,513,661        $  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 September 30, 2005 and December 31, 2004 and has been   
compiled from the financial statements of the respective entities:              

                                                                [Download Table]

                   September 30, 2005  December 31, 2004
                   ------------------  -----------------
                      (Unaudited)         (Unaudited)   
                                                        
Total Assets        $   25,121,794      $   30,760,273  
                   =================   =================

Total Liabilities   $    8,043,079      $    7,352,041  
                   =================   =================

                                                        [Enlarge/Download Table]

                            Nine Months Ended September 30,          Three Months Ended September 30,   
                        -----------------------------------------  -------------------------------------
                               2005                   2004              2005                 2004       
                        --------------------    -----------------  ----------------     ----------------
                            (Unaudited)            (Unaudited)        (Unaudited)         (Unaudited)   
                                                                                                        
Results of Operations:                                                                                  
Revenue                     $   1,433,388         $    482,014       $   528,205          $   431,097   
Loss from Operations        $ (29,994,664)        $ (4,700,409)      $(5,816,595)         $(3,169,824)  
Net Loss                    $ (29,994,664)        $ (4,700,409)      $(5,816,595)         $(3,169,824)  

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

NOTE 8 - NOTES PAYABLE                                                        

The following schedule summarizes the current and non-current portion of        
Company's debts as of September 30, 2005:                                       

                                                        [Enlarge/Download Table]

Payable to                                Current          Non-current            Total     
----------------------------------  -----------------  ------------------  -----------------
                                                                                            
2001 Hackberry Drilling Fund, LP              59,493                   -            59,493  
                                    -----------------  ------------------  -----------------
      Subtotal - related parties              59,493                   -            59,493  
                                    -----------------                                       

IL Resources                                 110,000                   -           110,000  
South Oil                                     87,500                   -            87,500  
John Paul Dejoria                            128,857                   -           128,857  
Other                                          9,766                   -             9,766  
Endeavour                                    181,000           1,819,000         2,000,000  
                                    -----------------  ------------------  -----------------
      Subtotal                               517,123           1,819,000         2,336,123  
                                    -----------------  ------------------  -----------------

                                        $    576,616     $     1,819,000    $    2,395,616  
                                    =================  ==================  =================

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

                                                        [Enlarge/Download Table]

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  
Endeavour International Corporation           181,000        1,819,000        2,000,000  
                                       ---------------  ---------------  ----------------
      Subtotal                                618,223        1,819,000        2,437,223  
                                       ---------------  ---------------  ----------------

                                        $     834,764    $   1,819,000    $    2,653,764 
                                       ===============  ===============  ================

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

NOTE 9 - CONVERTIBLE DEBENTURES                                                 

Convertible debentures consisted of the following at:                           

                                                                [Download Table]

                                            September 30,    December 31, 
                                                 2005            2004     
                                           --------------  ---------------
                                                                          
12% Secured convertible note                 $ 2,050,000     $ 2,050,000  
12% Convertible promissory note                1,000,000       1,000,000  
10% Convertible promissory note                        -       1,000,000  
                                           --------------  ---------------

                                               3,050,000       4,050,000  
    Less unamortized discount                          -         919,713  
                                           --------------  ---------------

                                               3,050,000       3,130,287  
    Less long-term portion                             -       2,050,000  
                                           --------------  ---------------

Current portion of convertible debentures    $ 3,050,000     $ 1,080,287  
                                           ==============  ===============

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 waiving all financial         
covenants on the convertible note. The warrants are exercisable immediately and 
expire on March 31, 2014.                                                       

On May 16, 2005, the Company entered into an agreement with DDH Resources II,   
Limited, to extend the maturity date of its outstanding convertible note from   
May 18, 2005 to May 18, 2006, in consideration for which the Company reduced the
conversion price of the note from $1.10 to $1.00 and issued an additional       
100,000 warrants which had an ascribed value of $14,000, to purchase common     
stock at $2.00 per share. The warrants are exercisable immediately and expire   
November 2007.                                                                  

On August 18, 2005, the Company entered into an agreement with Westwood AR, Inc.
("Westwood AR"), to amend the conversion rights of the convertible note dated   
May 27, 2004. The note was amended so that Westwood AR could convert, all or any
part, of the original principal amount of the note, plus accrued interest into  
units consisting of two (2) shares of common stock and one (1) three-year common
stock purchase warrant for $1.50 per common share; and 2 membership interests in
Knox Gas, LLC. The conversion price per unit was stated to be $1.80. On August  
19, 2005, Westwood AR converted the entire principal, plus accrued interest into
623,897 units and two membership interests in Knox Gas, LLC. The Company issued 
1,247,794 shares of its common stock and 623,897 three-year warrants with an    
exercise price of $1.50 per share.                                              

Under Financial Accounting Standard ("FAS") No. 84, "Induced Conversions of     
Convertible Debt an amendment of APB Opinion No. 26," the Company's amendment of
the convertible note was deemed as an inducement for Westwood AR to convert the 
note. Accordingly, the value of the inducement to convert the promissory note   
was recorded as interest expense in the amount of $280,324.                     

During August 2005, as defined in the 12% Secured convertible note agreement    
with Trident Growth Fund ("Trident"), the options granted to Roger Abel         
triggered a reset provision. The note has been reset to a conversion price of   
$0.86, the exercise price of Mr. Abel's options. Since the reset price was      
greater than of fair market value of the stock on the date when the original    
note was issued to Trident, no additional beneficial conversion expense was     
recorded.                                                                       

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

NOTE 10 - STOCKHOLDERS' EQUITY                                                  

Preferred Stock                                                                 

On March 29, 2005, the Company filed a Certificate of Designation with the      
Delaware Secretary of State to designate 2,000,000 of its authorized but        
unissued shares of preferred stock as Series A Convertible Preferred Stock. Each
share of the Series A convertible preferred stock ("Series A Shares") is        
initially convertible into ten (10) shares of the Company's common stock at an  
initial conversion price of $1.10 per share. The conversion price is subject to 
proportional adjustment for stock splits, combinations, recapitalizations and   
stock dividends.                                                                

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

Holders of the Series A Shares are entitled to receive dividends at the rate of 
eight percent (8%) per annum of the $11.00 stated value of such shares payable  
on an annual basis on December 31 of each year after issuance, or upon earlier  
conversion, out of funds legally available therefore; provided, however, that at
the option of the holder, such dividends shall be payable in kind at the rate of
12% per annum of the $11.00 stated value of such shares by issuance of shares of
the Company's common stock having a fair market value equal to the amount of the
dividend. For this purpose, fair market value is defined as the average of the  
high and low bid prices for the Company's shares of common stock as reported on 
the OTC Bulletin Board for the five (5) trading days immediately preceding the  
date the dividend is paid. As of September 30, 2005, the Company has recorded an
accrued preferred stock dividend of $308,328.                                   

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

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

During March and April of 2005, the Company completed private offerings (the    
"Offerings") of units comprised of shares of its Series A convertible preferred 
stock and warrants to purchase shares of its common stock at a purchase price of
$11.00 per unit. Each unit consisted of one share of Series A convertible       
preferred stock and one common stock purchase warrant. Each share of Series A   
convertible preferred stock is immediately convertible at the option of the     
holder into ten (10) shares of common stock at an initial conversion price of   
$1.10 per share. Each warrant is immediately exercisable into five (5) shares of
common stock at an exercise price of $1.50 per share for a term of three years. 

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

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

The Company has agreed to use its best efforts to prepare and file with the     
Securities and Exchange Commission within 60 days after the termination of the  
offering, but in no case later than 90 days after the termination of the        
offering, a registration statement under the Securities Act of 1933, as amended,
permitting the public resale of the shares of Common Stock issuable upon        
conversion or exercise, as applicable, of the Series A Convertible Preferred    
Stock and Warrants issued in the offering. The Company has agreed to pay certain
penalties to the subscribers in this offering if the registration statement is  
not filed within 90 days after the termination of the offering or if the        
registration statement is not declared effective within 180 days after the      
termination of the offering. As of September 30, 2005, the Company has not yet  
filed the registration statement. The Company therefore accrued $177,026 of     
penalties for the period through September 30, 2005.                            

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

During March and April 2005, the Company sold 402,336 units in the Regulation D 
Offering for aggregate gross proceeds of $4,425,696. The Company paid           
commissions and expenses of $575,333 to Legend Merchant Group, Inc. ("Legend"), 
a broker-dealer registered under the Securities Exchange Act of 1934, as        
amended, and member of the NASD and the SIPC. In addition, as compensation for  
the services provided by Legend in connection with the Regulation D Offering,   
the Company issued warrants to Legend to purchase 602,004 shares of common stock
at $1.50 that expire in three years.                                            

During March and April 2005, the Company sold 307,727 units in the Regulation S 
Offering for aggregate gross proceeds of $3,384,997. The Company paid investment
banking fees in the amount of $338,500 to independent third party consultants in
connection with this transaction. In addition, as compensation for services     
provided by such consultants in connection with the Regulation S Offering, the  
Company issued warrants to purchase 107,727 shares of common stock at $1.25 that
expire in three years.                                                          

As a result of the Regulation D and Regulation S Offerings during March and     
April 2005, the Company has issued a total of 710,063 shares of Series A        
preferred stock and warrants to purchase 3,550,315 shares of common stock to the
investors. Under Emerging Issues Task Force ("EITF") 00-27, "Application of     
Issue No. 98-5 to Certain Convertible Instruments," the Company has allocated   
the proceeds from issuance of the Series A convertible preferred stock and      
warrants based on a fair value basis of each item. Consequently, the convertible
Series A preferred stock was recorded with a discount of $1,109,335 based on the
ascribed value of the warrants as determined by using the Black-Scholes Model.  
Under EITF 00-27, the discount for the warrant was recorded as a preferred      
dividend. An additional beneficial conversion discount of $1,146,686 was        
recorded since the Series A preferred stock is convertible into shares of common
stock at an effective conversion price of $0.95 per share while the prevailing  
common stock share prices was $1.10, $1.11 and $1.16 at each closing date. This 
discount was also recorded as a preferred dividend.                             

Common Stock                                                                    

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 February 2005, the  
Company sold 236,614 units in which 473,228 shares of common stock and 236,614  
warrants were issued for an aggregate purchase price of $496,890. Offering costs
of $49,689 were paid. In March 2005, the Company issued warrants to the         
placement agent to purchase 83,770 shares of common stock in compensation for   
services provided by the placement agent.                                       

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

On May 26, 2005, the Company issued 200,000 shares of common stock to a         
consultant in exchange for consulting services for one year. The shares were    
valued at the Company's fair market value at the time of issuance in the amount 
of $166,000 and fully expensed as of September 30, 2005.                        

On July 11, 2005, The Company's Board of Directors approved and commenced an    
offering of up to 14,000,000 Units of its securities, each unit consisting of   
two shares of the Company's common stock and one three-year $1.50 common stock  
purchase warrant for a unit offering price of $1.80. The exercise price of the  
warrants will be adjusted for stock splits, combinations, recapitalization and  
stock dividends. In the event of a consolidation or merger in which we the      
Company is not the surviving corporation (other than a merger with a wholly     
owned subsidiary for the purpose of incorporating the Company in a different    
jurisdiction), all holders of the warrants shall be given at least fifteen (15) 
days notice of such transaction and shall be permitted to exercise the warrants 
during such fifteen (15) day period. Upon expiration of such fifteen (15) day   
period, the warrants shall terminate. The securities were issued in a private   
placement transaction to a limited number of accredited investors pursuant to   
the exemption from registration provided by Section 4(2) of the Securities Act  
of 1933, as amended (the "Securities Act"), and Rule 506 of Regulation D. The   
Company agreed to include the shares of common stock and shares of common stock 
issuable upon exercise of the warrants in any registration statement (excluding 
registration statements on SEC Forms S-4, S-8 or any similar or successor form) 
they file with the Securities and Exchange Commission under the Securities Act  
for the purpose of registering the public sale of any of our securities.        

During August and September 2005, the Company sold 1,816,667 units in which     
3,633,332 shares of common stock and 1,816,667 warrants were issued for an      
purchase price of $3,270,000. The Company accrued broker fees of $181,600       
related to this transaction.                                                    

Stock options                                                                   

On September 30, 2005, the Company's Board of Directors adopted the Touchstone  
Resources USA, Inc. 2005 Stock Incentive Plan (the "Plan"). The Plan reserves   
10,000,000 shares of common stock for issuance pursuant to stock options, stock 
appreciation rights, restricted stock awards, restricted stock units,           
unrestricted stock awards, and other equity based or equity related awards to   
employees, officers, directors, or advisors to the Company or any of the        
Company's subsidiaries as well as individuals who have entered into an agreement
with the Company under which they will be employed by the Company or any of its 
subsidiaries in the future. The Plan is administered by the Board of Directors  
(the "Board") of the Company which has full and final authority to interpret the
Plan, select the persons to whom awards may be granted, and determine the amount
and terms of any award. In order to comply with certain rules and regulations of
the Securities and Exchange Commission or the Internal Revenue Code, the Board  
can delegate authority to appropriate committees of the Board. Although the Plan
provides for the issuance of options that qualify as incentive stock options    
("ISOs") under the Internal Revenue Code of 1986, as amended, since the Plan was
not approved by the Company's stockholders, the Company cannot issue ISOs unless
and until it obtains the requisite shareholder approval.                        

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

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

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

On September 30, 2005, the Company issued a nonstatutory stock option under the 
Plan to Jerry Walrath, it's Vice President of Land and Project Development, to  
purchase 100,000 shares of common stock at an exercise price of $.96 per share, 
the last sales price of it's common stock reported on the OTCBB on the date of  
grant. The options vest in equal annual installments over a four-year period    
commencing September 1, 2005 and are otherwise subject to the terms of the Plan.

Stock Warrants                                                                  

On June 10, 2005, the Company issued warrants to purchase 250,000 shares of     
common stock to Legend with ascribed value of $30,000, in consideration for the 
consulting service Legend agreed to provide over a year. The warrants have an   
exercise of $1.10 per share and expire in two years.                            

The Company had the following outstanding common stock warrants to purchase its 
securities at September 30:                                                     

                                                        [Enlarge/Download Table]

                                           2005                                   2004             
                            -----------------------------------  ----------------------------------
                               Number of        Exercise Price     Number of        Exercise Price 
Expiration Date             Warrants issued        Per Share     Warrants issued       Per Share   
--------------------------  ----------------    ---------------  ---------------    -------------- 
                                                                                                   
April 2007                       3,445,000          $   2.00        3,445,000          $   2.00    
June 2007                          250,000          $   1.10                -          $      -    
July 2007                        1,561,250          $   2.00        1,561,250          $   2.00    
November 2007                      600,000          $   2.00                -          $      -    
November and                                                                                       
  December 2007                    418,852          $   2.00                -          $      -    
January 2008                        87,959          $   2.00                -          $      -    
March 2008                       4,152,319          $   1.50                -          $      -    
June 2008                          107,727          $   1.25                -          $      -    
August and                                                                                         
  September 2008                 2,440,564          $   1.50                -          $      -    
March 2014                         100,000          $   0.86                -          $      -    
March 2014                         250,000          $   0.86          250,000          $   1.00    
                            ----------------                     ---------------                   

Common Stock                    13,413,671                          5,256,250                      
                            ================                     ===============                   

NOTE 11 - 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.                         

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

NOTE 12 - 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.                                                                    

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

NOTE 13 - SUBSEQUENT EVENTS                                                     

In October 2005, the Company entered into an Exploration and Development        
Agreement with two industry partners to acquire acreage for development in      
Northern Arkansas. Under the agreement, the Company will own forty-five percent 
(45%) of the leasehold acquired and bear forty-five percent (45%) of the costs  
attributable thereto. Pursuant to this Agreement, the Company has expended six  
hundred fifty thousand dollars ($650,000) to date.                              

During November 2005, the Company received payment of $250,000 against the      
outstanding promissory note due from Awakino South Exploration.                 

In the fourth  quarter of 2005 the Company is making  demands  for payment  from
related parties.                                                                

In the fourth  quarter of 2005 the Company is reviewing  its existing  insurance
coverage and will make adjustments to coverage as it deems necessary.           

In continuation of the July offering, between October 1, 2005 and November 10,  
2005, the Company sold 2,688,890 shares of common stock and warrants to purchase
an additional 1,344,445 shares of common stock for aggregate gross cash proceeds
of $2,420,000. The securities were sold in units consisting of two shares of the
Company's common stock and one common stock purchase warrant at a purchase price
of $1.80 per unit. Each warrant is immediately exercisable into one (1) share of
common stock at an exercise price of $1.50 per share for a term of three years. 

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

This structure has the following effects:                                       

       -         As an equity interest holder in most of the limited liability
              companies and partnerships, the Company does not have sole
             management control over the working interest owned by the
limited liability company or partnership.   
      -         When a partnership or limited liability company in which the
          Company owns an equity interest receives a request for
                 expenditure, although the Company is only required to pay its
            proportionate share of such expense, if any of the other
                  partners or members fails to make payment of its proportionate
                  share, the partnership or limited liability company is at risk
            of losing its entire working interest as a result of the
               delinquency of a single member or partner. As a result, the
               Company is exposed to unnecessary risks associated with the
financial stability of its partners.        
     -         The transactions related to the limited liability companies
                 and partnerships are accounted for under the equity method of
                accounting. This results in all of the expenses and revenues
               applicable to each entity being combined into a single line
                 item on the Company's statement of operations captioned "Loss
            (Profit) from Limited Partnerships and Limited Liability
                Companies" and all assets being accounted for on its balance
               sheet as "Investments in Limited Partnerships and Liability
Companies."                                 

During September 2005, the Company began the process of reorganizing its        
corporate structure so that it directly owns its oil and gas assets. The process
involves its withdrawal as a member or partner in these limited liability       
companies and limited partnerships and the assignment to the Company of a record
title interest of its beneficial interest in the working interest held by such  
entities. Upon completion of these transactions, the Company will become direct 
owners of its oil and gas assets, receive joint interest billing statements     
directly from the operator of the various properties for all activities         
conducted on its leaseholds, and be directly responsive to elections and cash   
calls from such operators. These transactions have been designed to: (i) reduce 
the risks in these projects associated with the credit worthiness of its        
partners; (ii) increase the Company's control over its assets; and (iii)        
streamline the Company's accounting process. The Company expects the foregoing  
to be completed during the fourth quarter of 2005.                              

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

NOTE 14 - RECLASSIFICATION                                                      

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

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 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      This report includes  "forward-looking  statements"  within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities  Exchange  Act  of  1934,  as  amended.  All  statements  other  than
statements of historical  facts  included or  incorporated  by reference in this
report, including, without limitation, statements regarding the Company's future
financial position,  business strategy,  budgets, projected revenues,  projected
costs  and  plans  and  objective  of  management  for  future  operations,  are
forward-looking  statements. In addition,  forward-looking  statements generally
can be  identified  by the use of  forward-looking  terminology  such as  "may,"
"will," "expect," "intend," "project," "estimate," "anticipate," or "believe" or
the negative thereof or any variation thereon or similar  terminology.  Although
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.                                                              

      The following factors, among others, could cause actual results and future
events  to  differ  materially  from  those  set  forth or  contemplated  in the
forward-looking statements:                                                     

o     our ability to obtain sufficient  financing to satisfy capital calls, debt
      obligations  and  operating  expenses  with  respect  to our  oil  and gas
properties;                                                         

o     the accuracy of our reserve estimates and judgments when regarding oil and
gas resources and formations and reservoir performance;             

o     our  ability  to  identify  and  acquire   properties  with   commercially
productive reservoirs;                                              

o     our failure to identify  liabilities  associated  with the  properties  we
acquire or obtain protection from sellers against such liabilities; 

o     operational  and drilling risks inherent in the  exploration,  development
and production of oil and gas;                                      

o     market fluctuations in the prices of oil and gas;                         

o     our dependence  upon various  third-party  operators and others that we do
not control;                                                        

o     the  unavailability  or high cost of drilling rigs,  equipment,  supplies,
personnel and oil field services;                                   

o     title deficiencies in the properties underlying our leases;               

o     failure by us and our  operators  to maintain  adequate  insurance  on our
properties;                                                         

o     the impact of environmental and other laws and regulations; and           

o     international and domestic political and economic factors.                

A more in-depth  discussion of the factors that may cause our actual  results to
differ materially from those indicated in the forward-looking  statements is set
forth under the caption "Risk Factors" in our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission.                                    

      All subsequent written and oral forward-looking statements attributable to
us, or persons acting on our 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.                                                      

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Item 2. Management's Discussion and Analysis.                                   

      Unless  otherwise  indicated  or  the  context  otherwise  requires,   all
references to "Touchstone," the "Company," "we," "us" or "our" and similar terms
refer to Touchstone Resources USA, Inc. and its subsidiaries.                   

      The following Management's Discussion and Analysis is intended to help the
reader   understand   our  results  of  operations   and  financial   condition.
Management's  Discussion and Analysis is provided as a supplement to, and should
be read in conjunction with, our financial statements and the accompanying notes
thereto.  The revenue and operating  income (loss) amounts in this  Management's
Discussion and Analysis are presented in accordance with United States generally
accepted accounting principles.                                                 

Overview                                                                        

      We  are  an  independent   energy  company  engaged  in  the  acquisition,
development and production of oil and natural gas reserves.                     

We currently own working  interests in  approximately 16 oil and gas projects in
Texas, Louisiana, Mississippi,  Oklahoma, and New Zealand. These include several
producing properties in Starr, Hidalgo,  Wharton,  Maverick, and Zavala Counties
in Texas and working  interests in currently  completed wells and wells awaiting
completion  in  Zapata  County,  Texas.  We also own a  working  interest  in an
offshore well in Southern Louisiana which is capable of production but currently
awaiting   facilities  and  additional   interests  in  non-proved   acreage  in
Mississippi,  Oklahoma and Arkansas.  We are currently awaiting  assignment of a
record title interest in our Awakino and Stent projects in New Zealand.         

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

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

o     Participating in the development of  non-conventional,  resource based gas
projects                                                            

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

o     Utilizing the most cost effective  development  and completion  techniques
for development                                                     

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

o     Acquiring    undercapitalized    firms   with    attractive    development
opportunities.                                                      

      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.  By  initially  building  a base of
long-term  reserves in resource  based plays to generate  and sustain  operating
cash flow, such as our recently announced acquisition in the Caney Shale Play in
the Arkoma Basin of Oklahoma and our Fayetville Shale Play in Northern Arkansas,
we will be in a better  position  to  participate  in the higher risk and higher
growth rate exploration opportunities that still exist.                         

Outlook                                                                         

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

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

      To execute our plan, we need to retain additional  executive  officers and
directors  with  substantial  experience  in the  oil and  gas  exploration  and
development  business.  In that regard,  during the third quarter, we retained a
Chief Executive Officer,  a Vice President of Land and Business  Development and
we expect to retain additional  executive  management with substantial  industry
experience. Our future success will continue to be dependent upon our ability to
identify  projects  which are  capable of  producing  oil and gas in  commercial
quantities  which in turn, is dependent upon access to the capital  necessary to
exploit such  opportunities.  As of the date of this report,  we have  generated
minimal   revenues,   sustained   substantial   losses,   our  expected  capital
expenditures  exceed  our  available  cash  resources,  and  we  need  to  raise
substantial  additional  capital  to execute  our  business  plan.  Due to these
factors,  our  independent  auditors have included an  explanatory  paragraph in
their opinion for the fiscal year ended December 31, 2004 as to the  substantial
doubt about our ability to continue as a going  concern.  Our prospects  must be
considered  in light of the  forgoing and the risks,  expenses and  difficulties
encountered by companies at an early stage of development.                      

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Direct Ownership of Oil and Gas Assets                                          

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

This structure has the following effects:                           

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

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

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

      During  September 2005, we began the process of reorganizing our corporate
structure so that we directly own our oil and gas assets.  The process  involves
our withdrawal as a member or partner in these limited  liability  companies and
limited  partnerships and the assignment to us of a record title interest of our
beneficial  interest  in the  working  interest  held  by  such  entities.  Upon
completion  of these  transactions,  we will become direct owners of our oil and
gas assets, receive joint interest billing statements directly from the operator
of the various properties for all activities conducted on our leaseholds, and be
directly  responsive  to  elections  and cash calls from such  operators.  These
transactions  have been  designed  to: (i)  reduce  the risks in these  projects
associated with the credit worthiness of our partners; (ii) increase our control
over our assets;  and (iii)  streamline  our accounting  process.  We expect the
foregoing to be completed during the current quarter.                           

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Critical Accounting Policies                                                    

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

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

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

Revenue Recognition                                                             

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

Proved Oil and Natural Gas Reserves                                             

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

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

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

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      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.                                                                       

Impairment of Properties                                                        

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

Property Retirement Obligations                                                 

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

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Recent Accounting Pronouncements                                                

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

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

            In  November  2004,  the FASB issued  SFAS No. 151  "Accounting  for
Inventory Costs" that amends Accounting  Research Bulletin (ARB) No. 43, Chapter
4,  "Inventory  Pricing" to clarify the accounting for abnormal  amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).  SFAS
151 requires that those items be recognized as current-period charges regardless
of whether they meet the criterion of "so abnormal" and requires that allocation
of fixed production  overheads to the costs of conversion be based on the normal
capacity of the production facilities.  We are required to adopt SFAS No. 151 in
the  beginning of 2006 and its  adoption is not  expected to have a  significant
effect on our results of operations or financial condition.                     

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

      In May 2005,  the FASB issued SFAS No. 154  "Accounting  Changes and Error
Corrections"  to  replace  ABP No.  20  "Accounting  Changes"  and  SFAS  No.  3
"Reporting  Accounting  Changes in  Interim  Financial  Statements."  Opinion 20
previously  required  that most  voluntary  changes in  accounting  principle be
recognized by including in net income of the period of the change the cumulative
effect  of  changing  to  the  new  accounting  principle.   SFAS  154  requires
retrospective  application to prior periods' financial  statements of changes in
accounting  principle,  unless  it is  impracticable  to  determine  either  the
period-specific  effects  or the  cumulative  effect of the  change.  When it is
impracticable to determine the  period-specific  effects of an accounting change
on one or more individual  prior periods  presented,  SFAS 154 requires that the
new accounting principle be applied to the balances of assets and liabilities as
of the beginning of the earliest period for which  retrospective  application is
practicable and that a  corresponding  adjustment be made to the opening balance
of retained earnings (or other appropriate components of equity or net assets in
the statement of financial  position) for that period rather than being reported
in an income  statement.  When it is  impracticable  to determine the cumulative
effect of applying a change in accounting  principle to all prior periods,  SFAS
154 requires that the new accounting  principle be applied as if it were adopted
prospectively  from the earliest  date  practicable.  SFAS 154 is effective  for
accounting  changes and  corrections  of errors made in fiscal  years  beginning
after December 15, 2005. The implementation of FAS 154 is not expected to have a
significant effect on our results of operations or financial condition.         

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      In December 2004, FASB issued Statement of Financial  Accounting Standards
No. 123R,  "Share-Based  Payment" ("SFAS No. 123R"),  which revised Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation."  SFAS No.  123R  establishes  standards  for the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services.  This Statement  focuses  primarily on accounting for  transactions in
which an entity obtains employee services in share-based  payment  transactions.
SFAS No.  123R  requires  that the fair  value  of such  equity  instruments  be
recognized  as expense in the  historical  financial  statements as services are
performed.  Prior to SFAS No. 123R,  only certain pro forma  disclosures of fair
value were required.  SFAS No. 123R will be effective for small business issuers
as of the beginning of the first interim or annual  reporting period that begins
after December 15, 2005. We cannot estimate the impact of adopting SFAS No. 123R
because it will depend on levels of share-based payments granted in the future. 

Comparison  of Three and Nine Months Ended  September 30, 2005 and September 30,
2004                                                                            

      We entered the oil and gas exploration  and development  business in March
2004. Prior to that time, we were  unsuccessful in the execution of our business
plan and thus, did not generate any revenues or incur any significant  operating
expenses.  As a result  of the  foregoing,  we  believe  that  our  consolidated
revenues and operating expenses for the nine months ended September 30, 2005 are
not comparable to our consolidated  revenues and operating expenses for the nine
months ended  September 30, 2004 and,  therefore,  any  differences  between our
consolidated  revenues and operating  expenses for such nine month period 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
or from sales of oil and gas projects in which we have a majority interest.     

      We  generated  $46,361 of  revenue  during the  three-month  period  ended
September 30, 2005 as compared to $60,316  during the  three-month  period ended
September 30, 2004. We generated $240,211 of revenue the nine-month period ended
September 30, 2005 as compared to $144,253  during the  nine-month  period ended
September 30, 2004.  The $95,958  increase in revenues was due to an increase in
the number of projects for which we serve as the operator. We expect revenues to
increase in the future as we continue to serve as the  operator for existing and
new wells and  produce  oil and gas from our various  working  interests.  As we
complete  the transfer of our working  interests  from  beneficial  interests in
partnerships  to direct  ownership,  sales of oil and gas  allocated  to us from
these interest will be accounted for as revenue.                                

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Exploration Expenses                                                            

      Exploration   expenses  consist  of  geological  and  geophysical   costs,
exploratory  dry hole  expenses,  and other  exploration  expenses.  Exploration
expenses were $2,527 during the three-month  period ended September 30, 2005. We
did not incur any  exploration  expenses  during the  three-month  period  ended
September 30, 2004.                                                             

      Exploration  expenses  were  $54,702  during the  nine-month  period ended
September 30, 2005 as compared to $112,748 in  exploration  expenses  during the
nine-month period ended September 30, 2004. The decrease in exploration expenses
resulted  primarily from our focus on development  and production in the various
properties and less  exploration  activity.  We expect  exploration  expenses to
increase in future periods due to the need to drill several obligation wells    

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 for impairment or  circumstances  indicate
that the  carrying  value of those  assets may not be  recoverable.  We incurred
$446,233 of non-cash  charges  associated  with the  impairment  of the carrying
value of certain of our oil and gas properties and equity investments during the
three-month  period ended  September 30, 2005 as compared to $20,221 of non-cash
charges  during the  three-month  period ended  September  30, 2004.  The charge
resulted from our subsidiary PF Louisiana  electing not to make the delay rental
payment on State Lease #18219 located in Ibera Parish, Louisiana.               

      We incurred  $1,185,684 in impairment of the carrying  value of certain of
our oil and gas properties and equity  investments  during the nine-month period
ended  September 30, 2005 as compared to  $1,333,466 of such charges  during the
nine-month period ended September 30, 2004. The impairment of the carrying value
of unproved properties acquisition and drilling costs related to our Mississippi
properties  as a result of dry holes and PF  Louisiana  electing not to make the
delay rental payment on State Lease #18219  located in Ibera Parish,  Louisiana,
which were partially offset by credits  received for over-billed  drilling costs
on our PHT West Pleito Project.  We may incur additional charges associated with
the impairment of our oil and gas properties in the event we abandon or withdraw
from additional oil and gas projects in the future.                             

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 were $800,448 for the three-month period ended September 30, 2005
as compared to $837,507 for the three-month period ended September 30, 2004.    

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      General and  administrative  expenses increased $797,765 to $2,603,770 for
the  nine-month  period  ended  September  30,  2005  from  $1,806,005  for  the
nine-month period ended September 30, 2004. The increase resulted primarily from
our  commencement  of operations in the oil and gas  exploration and development
business in March 2004, and consisted primarily of $363,987 of professional fees
incurred in connection  with our increased  interests in oil and gas  prospects,
financing  transactions  and  compliance  with our reporting  obligations  under
federal securities laws, $127,288 of consulting and engineering fees incurred in
connection with our oil and gas operations,  and $177,026 of penalties  incurred
as a result  of our  delinquency  in  filing a  registration  statement  for the
preferred  stock  offering  during March and April 2005.  We expect  general and
administrative  expenses to increase in future  periods as a result of increased
compensation  expense for executive  management  personnel,  including our chief
executive  officer  and  additional  executive  officers  we expect  to  retain,
increased consulting and engineering fees related to our oil and gas operations,
and continued expenditures for professional fees associated with acquisitions of
additional oil and gas properties and compliance  with SEC public  reporting and
corporate governance requirements.                                              

Loss (Profit) From Limited Partnerships and Limited Liability Companies         

      Loss from limited  partnerships and limited liability  companies  includes
the income or losses that we recognize from the financial performance of the oil
and gas limited  partnerships and limited liability companies in which we own an
equity  interest of greater than 5% but less than 50% of the applicable  entity.
Loss  from  limited  partnerships  and  limited  liability  companies  increased
$459,010 to $1,063,286 for the three-month  period ended September 30, 2005 from
$604,276 for the  three-month  period ended  September  30, 2004.  The loss from
limited  partnerships and limited liability companies consisted primarily of the
$88,248 loss that we recognized  from our leasehold  interest in Zapata  County,
Texas (the "Good Friday Project"), the $812,536 loss that we recognized from our
leasehold interest in Wharton County, Texas (the "Wharton Project"), the $97,118
loss that we  recognized  from our leasehold  interest in the Maverick  Basin in
South Texas (the "Maverick Basin Project"),  the $39,862 loss that we recognized
from our leasehold  interest in the Taranaki  Basin in New Zealand (the "Awakino
South  Project"),  and the $102,057 loss that we  recognized  from our leasehold
interest in Zapata County, Texas (the "Vela Project").                          

      Loss from limited  partnerships and limited liability  companies increased
$3,659,462 to $4,377,222 for the nine-month period ended September 30, 2005 from
$717,760 for the  nine-month  period  ended  September  30, 2004.  The loss from
limited  partnerships and limited liability companies consisted primarily of the
460,987 loss that we recognized  from the Good Friday  Project,  the  $1,651,847
loss that we  recognized  from the Wharton  Project,  the $607,854  loss that we
recognized  from the loss that we  recognized  from our  leasehold  interest  in
Zapata County,  Texas,  the $1,080,125 loss that we recognized from the Maverick
Basin Project,  and the $374,403 loss that we recognized  from the Awakino South
Project.                                                                        

      During  the  periods  covered  by  this  report,  most  of our oil and gas
interests  were owned by limited  liability  companies in which we owned greater
than 5% but less than 50% of the  applicable  entity's  equity  interests.  As a
result, loss (profit) from limited  partnerships and limited liability companies
constituted a material  component of our overall  financial  performance for the
foreseeable  future. As we expect to own most of our working interests  directly
in future  periods,  cash  generated  by these  interests  will be  recorded  as
revenue,  and related  expenditures will be recorded in the appropriate  expense
account.                                                                        

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Interest Expense                                                                

      Interest  expense  consists  of  certain  cash and  non-cash  charges  and
interest  accrued on our  various  debt  obligations.  We  incurred  $496,464 of
interest  expense  during the  three-month  period ended  September  30, 2005 as
compared to $288,510 during the three-month period ended September 30, 2004. The
interest  expense  consisted  of interest  accrued  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 $62,351
under the  convertible  promissory  note due to Trident Growth Fund, LP, $14,582
under the  convertible  promissory  note due to Westwood AR, Inc. (the "Westwood
Note") and $30,247 under the  convertible  promissory  note due to DDH Resources
II, Ltd. ("DDH Note").  The $207,954  increase in interest expense was primarily
the result of non-cash charges of $372,072 incurred from the amortization of the
Westwood note discount and inducement  fee in connection  with the conversion of
the Westwood Note.                                                              

      We incurred  $1,600,697 of interest  expense during the nine-month  period
ended  September 30, 2005 as compared to $7,252,307  for the  nine-month  period
ended September 30, 2004. The interest expense  consisted  primarily of $337,771
of interest  accrued  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 $183,847 under the  convertible
promissory  note due to Trident Growth Fund, LP, $64,171 under the Westwood Note
and $89,753 under the DDH Note. The balance of the interest expense consisted of
$1,262,926  of non cash charges.  The  $5,651,610  decrease in interest  expense
resulted  primarily  from a decrease in  non-cash  charges  associated  with the
beneficial  conversion  feature and the ascribed  value of the  warrants  issued
together  with  convertible  promissory  notes that were issued during the nine-
month period ended  September 2004 as compared to those nine- month period ended
September 2005. We may incur similar  non-cash  charges in the future and expect
interest  expense under our various debt  obligations to remain constant for the
foreseeable future.                                                             

Minority Interest and (Profits) Losses                                          

      Minority  interest  consists 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 our minority
interest holders. Minority interest decreased $99,951 to $6,062 during the three
month period ended  September  30, 2005 from $106,013 for the three month period
ended  September 30, 2004.  The $99,951  decrease  resulted  primarily  from the
decrease in net losses incurred by our  consolidated  subsidiaries.  We recorded
minority interest of $301,548 for the nine-month period ended September 30, 2005
as compared to $480,737 for the nine-month  period ended September 30, 2004. The
decrease of $179,189 resulted primarily from the decrease in net losses incurred
by our consolidated subsidiaries.                                               

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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 September 30, 2005, we had a cash balance of $4,756,056.                  

      Net cash used in operating  activities  was  $2,082,459 for the nine-month
period  ended  September  30,  2005 as  compared  to net cash used in  operating
activities  of $595,811 for  nine-month  period ended  September  30, 2004.  The
$1,486,648 increase in cash used in operating activities was primarily due to an
increase in losses to fund  operations  960,081,  net of non cash charges and an
increase in the changes in accounts  payable of  $4,172,244.  These amounts were
partially  offset by a decrease in accounts  receivable and  restricted  cash of
$3,061,154 and $625,423, respectively                                           

      Net cash used in investing  activities  was  $4,233,221 for the nine-month
period ended September 30, 2005 compared to $9,555,265 for the nine-month period
ended  September  30,  2004.  The  $5,322,044  decrease was  primarily  due to a
$3,759,834  decrease  in  investments  in limited  partnership  interests  and a
$2,088,300  decrease in purchase of oil and gas  interests  and drilling  costs.
These  amounts  were   partially   offset  by  a  $567,451   increase  in  notes
receivable-related  party,  a  $500,000  refund of oil and gas  prepayment,  and
$72,500 of distributions from limited partnerships.                             

      Net  cash  provided  by  financing  activities  was  $10,477,554  for  the
nine-month  period ended  September  30, 2005  compared to  $11,460,218  for the
nine-month  period  ended  September  30,  2004.  The  amounts  in both  periods
represent net proceeds from sales of our equity securities.                     

      At  September  30,  2005,  we had a working  capital  deficit of  $55,603,
compared to a working  capital  deficit of $1,312,131 at December 31, 2004.  The
$1,256,528  increase  in working  capital  was due  primarily  to a decrease  in
accounts  payable-joint  interest of $4,202,720  which was partially offset by a
$1,046,209  increase in accounts  payable and accrued  expenses and a $1,969,713
increase in convertible debentures payable.                                     

      On or about March 23,  2004,  we  obtained  gross  proceeds of  $2,100,000
through the  issuance  of a  $2,100,000  principal  amount  secured  convertible
promissory  note (the  "Trident  Note") and warrants to Trident  Growth Fund, LP
("Trident").  The  Trident  Note was  originally  due  March 23,  2005,  accrues
interest  at  12%  per  annum  payable   monthly  in  arrears,   is  secured  by
substantially  all of our assets,  is  convertible at the option of Trident into
shares of our  common  stock at an initial  conversion  price of $1.00 per share
(subject to adjustment  pursuant to anti-dilution and reset provisions),  and is
redeemable  at our option at 100% of par prior to maturity.  Interest is payable
in cash unless  Trident  elects to have it paid in shares of common  stock.  The
Trident Note contains various financial  covenants with which we are required to
comply and various  negative  covenants  that  prohibit  us from taking  certain
action  without  obtaining the prior written  consent of Trident.  These include
incurring additional liens on our property,  incurring indebtedness in excess of
$100,000,  selling  any of our  assets  other  than in the  ordinary  course  of
business,  and  making  capital  expenditures  in  excess  of  $50,000.  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  and  pursuant  to
anti-dilution adjustment, the conversion price is currently $.86.               

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      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  on March 31,  2014 and  pursuant  to  anti-dilution  adjustment,  the
exercise price is currently $.86.                                               

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

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

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

      Each  share  of our  Series A  Convertible  Preferred  Stock is  initially
convertible  into ten shares of our common stock at an initial  conversion price
of $1.10 per  share.  Holders of our Series A  Convertible  Preferred  Stock are
entitled  to  receive  dividends  at the rate of 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.                                                                          

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

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      Between  August and October,  2005, we have  generated  gross  proceeds of
$5,690,001  through the  issuance of shares of common  stock and  warrants.  The
securities  were sold in units  consisting of two shares of our common stock and
one common stock purchase  warrant at a purchase  price of $1.80 per unit.  Each
warrant  is  immediately  exercisable  into one (1) share of common  stock at an
exercise price of $1.50 per share for a term of three years.                    

      The foregoing  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  costs and  drilling and
production  costs in our  various  oil and gas  projects  to  explore,  develop,
produce and eventually  sell the underlying oil and gas reserves.  Specifically,
we expect to incur  capital  calls and  production  costs of  approximately  $19
million with respect to our jointly owned  properties  during the next 12 months
as follows (each amount an approximation):                                      

o     $250,000 for exploration costs in the Awakino South Project;              

o     $150,000 for exploration in the Knox Miss Project;                        

o     $1,100,000  for  facilities  and operating  costs in the  Louisiana  Shelf
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     $200,000  for  exploration  and  operating  costs  in the  Martinez  Ranch
Project;                                                            

o     $200,000  for  exploration  and  operating  costs  in the  Maverick  Basin
Project;                                                            

o     $775,000 for exploration and operating costs in the Vicksburg Project;    

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

o     Up to  $2,500,000  for  exploration  and  operating  costs in the McIntosh
Project;; and                                                       

o     Up to  $11,700,000  for  exploration  and operating  costs in the Arkansas
Project                                                             

      We do not  expect to incur any  capital  calls or  production  costs  with
respect to the Stent Project, during the next 12 months.                        

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

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

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

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

      In addition,  Touchstone  Louisiana,  Inc., our  wholly-owned  subsidiary,
issued  a  $2,000,000  promissory  note  (the  "Endeavour  Note")  to  Endeavour
International  Corporation  as partial  consideration  for the  purchase  of our
interest in the Louisiana Shelf Project.  The Endeavour Note accrues interest at
the rate of 3% per annum.  The  repayment  of  principal  and payment of accrued
interest  under the Endeavour Note is based on 25% of the monthly cash flows (as
defined in the note) of the project.  The Endeavour  Note  contains  accelerated
payment provisions in the event certain production levels for any of the oil and
gas wells are met or exceeded. We expect payments to commence during 2006.      

      As of the date of this  report,  we had cash  resources  of  approximately
$5,300,000.  We will need a total of  approximately  $25  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  $19 million  for  capital  calls and
production  costs  with  respect  to  our  various  jointly  owned   properties,
approximately  $3.1  million to repay our  outstanding  term  indebtedness,  and
approximately  $2.0  million for  general  corporate  expenses.  In the event we
locate  additional  prospects for  acquisition,  experience cost overruns at our
current prospects or fail to generate projected revenues,  we will need funds in
excess  of the  foregoing  amounts  during  the  next 12  months.  Based  on our
available cash resources,  cash flows that we are currently  generating from our
various  oil and gas  properties,  and  projected  cash  flows that we expect to
generate  from our various oil and gas projects in the future,  we will not have
sufficient  funds to continue to meet such  capital  calls,  make such term debt
payments and operate at current levels for the next 12 months.  Accordingly,  we
will be required to raise  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  September  30,  2005,  we  did  not  have  any  relationships  with
unconsolidated  entities or financial partners,  such as entities often referred
to as structured finance or special purpose entities, which had been established
for  the  purpose  of  facilitating  off-balance  sheet  arrangements  or  other
contractually narrow or limited purposes. As such, we are not materially exposed
to any  financing,  liquidity,  market or credit risk that could arise if we had
engaged in such relationships.                                                  

Item 3. 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,  who serves as our principal  financial
officer  ("Treasurer").  Based  upon  that  evaluation,  our CEO  and  Treasurer
concluded  that, as of the end of the period covered by this  quarterly  report,
our disclosure  controls and procedures were not effective to provide reasonable
assurance  that  information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods  specified  in the  Securities  and Exchange  Commission
rules and forms.                                                                

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

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

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

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

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      Concurrent with the establishment of the forgoing, we will be initiating a
project to ensure compliance with Section 404 of the  Sarbanes-Oxley Act of 2002
(SOX),  which will apply to us as of December 31, 2007. This project will entail
a detailed review and documentation of the processes that impact the preparation
of our financial  statements,  an  assessment of the risks that could  adversely
affect the accurate and timely  preparation of those financial  statements,  and
the identification of the controls in place to mitigate the risks of untimely or
inaccurate preparation of those financial statements.                           

      As we continue the forgoing compliance  efforts,  including the testing of
the  effectiveness  of  our  internal  controls,   we  may  identify  additional
deficiencies  in our system of internal  controls over financial  reporting that
either  individually  or in the  aggregate  may  represent  a material  weakness
requiring  additional  remediation  efforts.  We are  committed  to  effectively
remediating  known  deficiencies as expeditiously as possible and continuing our
efforts to comply with Section 404 of SOX by December 31, 2007.                 

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

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.            

      1. On June 10,  2005,  we issued  warrants to purchase  250,000  shares of
common stock to Legend Merchant Group,  Inc. and its affiliates in consideration
of financial  advisory  services.  The warrants are  immediately  exercisable as
$1.10 per share and  terminate  two years from the date of grant.  The  warrants
were  issued to two  accredited  investors  in a private  placement  transaction
exempt from the  registration  requirements  of the  Securities  Act of 1933, as
amended,  pursuant  to section  4(2)  thereof  without  payment of  underwriting
discounts or commissions to any person.                                         

      2. On August 19,  2005,  we issued  1,247,794  shares of common  stock and
warrants  to purchase  623,897  shares of common  stock to Westwood  AR, Inc. in
consideration  of the conversion of $1,000,000  principal amount and $123,014 of
accrued  interest  due under a  promissory  note.  Each  warrant is  immediately
exercisable  into one share of common  stock at an  exercise  price of $1.50 per
share for a term of three years.  The  securities  were issued to one accredited
investor  in a  private  placement  transaction  exempt  from  the  registration
requirement of the Securities Act of 1933, as amended,  pursuant to section 4(2)
thereof without payment of underwriting discounts or commissions to any person. 

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      3.  Between  October 13 and October 28, 2005 we sold  2,688,890  shares of
common stock and warrants to purchase an additional  1,344,445  shares of common
stock for aggregate gross cash proceeds of $2,420,001.  The securities were sold
in units  consisting  of two  shares of our common  stock and one  common  stock
purchase  warrant  at a  purchase  price of $1.80  per  unit.  Each  warrant  is
immediately  exercisable into one (1) share of common stock at an exercise price
of $1.50 per share for a term of three years.  The  securities  were issued in a
private  placement  transaction  to a  limited  number of  accredited  investors
pursuant to the  exemption  from  registration  provided by Section  4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.  We
paid  cash   commissions  of  $132,400  to  Legend  Merchant   Group,   Inc.,  a
broker-dealer  registered under the Securities Exchange Act of 1934, as amended,
and member of the NASD and the SIPC, and $43,200 to Mid-South  Capital,  Inc., a
broker-dealer  registered under the Securities Exchange Act of 1934, as amended,
and  member of the NASD and the SIPC.  We  agreed  to issue  warrants  to Legend
Merchant Group                                                                  

Item 5. Other Information                                                       

      On  November  5, 2005,  Wesley  Franklin  tendered  his  resignation  as a
Director  of  the  Company.  We are  currently  in the  process  of  identifying
additional  individuals with a substantial  financial and industry experience to
serve on our Board of Directors.                                                

      We have received a subpoena from the Securities  and Exchange  Commission.
We  understand  that the  subpoena  relates to an SEC  investigation  concerning
trading in the stocks of a number of  publicly-traded  companies,  including the
Company.  We have  cooperated,  and will  continue to  cooperate,  in  producing
documents and providing information to the SEC.                                 

Item 6. Exhibits.                                                               

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

      31.1    Certification  of Chief  Executive  Officer and  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                             

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SIGNATURES

      In accordance  with the  requirements  of the  Securities  Exchange Act of
1934, as amended,  the registrant  caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.                                  

                              TOUCHSTONE RESOURCES USA, INC.

Date:  November 14, 2005                /s/ Roger L. Abel                       
                                      --------------------------------------
             Roger L. Abel
                                      Chief Executive Officer, President and
         Treasurer

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 EXHIBIT INDEX

Exhibit Number         Description                                              
--------------         -----------                                              

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

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

39

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10QSB’ Filing		Date		First		Last			Other Filings
		3/31/14		13		33
		12/31/07		37
		8/15/07		16
		8/15/06		16					8-K
		5/18/06		13		35
		3/24/06		13		35			4
		12/31/05		6					10KSB
		12/15/05		27		28
Corrected on:		11/16/05
Filed on / Changed as of:		11/14/05		39
		11/10/05		1		19
		11/5/05		38
		10/28/05		38
		10/1/05		19
For Period End:		9/30/05		1		35			10QSB/A,  3,  4,  8-K
		9/1/05		17
		8/31/05		10
		8/19/05		13		37
		8/18/05		13					3,  4,  8-K
		8/11/05		10					8-K
		7/11/05		16		36
		6/10/05		17		37
		5/26/05		16
		5/18/05		13
		5/16/05		13					10QSB
		4/19/05		33					8-K
		4/4/05		27
		3/29/05		14
		3/23/05		13		32
		2/21/05		33
		12/31/04		3		36			10KSB,  NT 10-K
		11/18/04		33					10QSB
		11/1/04		15
		9/30/04		6		32			10QSB,  NT 10-Q
		6/2/04		10
		5/27/04		13
		3/31/04		9					10QSB,  10QSB/A,  NT 10-K,  NT 10-Q
		3/23/04		32					3,  4,  8-K,  8-K/A
		3/18/04		7
		3/15/04		7					8-K
		3/5/01		4		7
									List all Filings