SUPP2

424B3 1 supp2.htm SUPP2

FILED PURSUANT TO 424(b)(3)
REGISTRATION #333-121301

__________

SUPPLEMENT NO. 1, DATED OCTOBER 12 2005

TO THE PROSPECTUS DATED JANUARY 19, 2005
OF LEXINGTON RESOURCES, INC.

This Prospectus Supplement, dated October 12, 2005, is part of and should be read in conjunction with, our Prospectus, dated January 19, 2005. The shares that are the subject of the Prospectus have been registered to permit their resale to the public by the selling stockholders named in the Prospectus. We are not selling any shares of common stock in this offering and therefore will not receive any proceeds from this offering, other than the exercise price, if any, to be received upon exercise of the warrants referred to in the Prospectus. Capitalized terms used in this Prospectus Supplement but not defined have the same meanings as in our Prospectus. The purpose of this Prospectus Supplement is to update certain information in the Prospectus.

This Prospectus Supplement includes the following documents, as filed by us with the Securities and Exchange Commission:

the attached Form 10-KSB of Lexington Resources, Inc. for the year ended December 31, 2004, dated July 25, 2005; and

the attached Form 10-QSB of Lexington Resources, Inc. for the period ended June 30, 2005, dated August 13, 2005.

THIS PROSPECTUS SUPPLEMENT PROVIDES INFORMATION NOT CONTAINED IN OUR PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH OUR PROSPECTUS.

REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO "WE", "OUR" AND "US" REFER TO LEXINGTON RESOURCES, INC., INCLUDING AS THE CONTEXT REQUIRES, OUR WHOLLY-OWNED SUBSIDIARIES.

This Prospectus Supplement covers the resale by certain Selling Shareholders of their remaining 561,800 shares of our common stock which were acquired in connection with private placements completed in May of 2004.

__________

THE FOLLOWING DISCLOSURE UPDATES THE INFORMATION IN OUR PROSPECTUS IN THE SECTION ENTITLED "DESCRIPTION OF BUSINESS - OIL AND GAS PROPERTIES", CURRENTLY BEGINNING ON PAGE 35 OF OUR PROSPECTUS. THIS PROSPECTUS SUPPLEMENT PROVIDES INFORMATION NOT CONTAINED IN THAT SECTION OF OUR PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH OUR PROSPECTUS.

Oil and Gas Properties

Proposed Acquisition of Oak Hills

On September 23, 2005, we announced that we entered into an agreement in principal to acquire 100% of the issued and outstanding shares of our designated oil and gas operator, Oak Hills Drilling and Operating, LLC, an Oklahoma limited liability corporation ("Oak Hills"), for 3,000,000 restricted shares of our common stock, at a deemed issuance price of $1.50 per share, for $4,500,000 in aggregate consideration. The transaction is subject to, among other things: (i) the results of a valuation; (ii) the prior audit of Oak Hills; (iii) mutual due diligence; (iv) the execution of a formal agreement incorporating the terms and conditions of the agreement in principle by November 15, 2005; and (v) the closing of the transaction on or before December 31, 2005.

Our management believes that the planned acquisition of Oak Hills, if consummated, would further diversify our income base from exploration and drilling to include drilling and operating service income, and vertically integrate our planned gas drilling and exploration program at a time when drilling rigs are difficult to obtain for many operators.

Oak Hills is currently our designated oil and gas operator for our well interests in the Arkoma Basin and planned drilling for our Barnett Shale Project leases (see "Barnett Shale Project" below). Oak Hills was created to drill and operate according to its exploration and development program when we had difficulty obtaining drilling rigs during the latter half of 2004. Oak Hills is the wholly-owned subsidiary of Oak Hills Drilling and Operating International, Inc., a Nevada corporation. Oak Hills Drilling and Operating International, Inc. is owned by four share/stake holders in Lexington. Doug Humphries, a director of our company, is also a director, officer and shareholder of Oak Hills.

Oak Hills is a full service drilling, operating and well completion company and owns a 10,000 foot operating depth Wilson Giant triple mechanical drilling rig with both triplex and duplex mud pumps capable of drilling acreage owned by us in both the Barnett Shale areas of Texas and the Arkoma Basin in Oklahoma. In addition to its Wilson Giant drilling rig, Oak Hills has a well workover rig, trucks, dozer, backhoe, trailers and well and pipeline completion equipment. Oak Hills operates at least 75 wells for private clients in addition to us, on a contract basis. Oak Hills employs approximately 30 to 35 people and its Wilson Giant drilling rig operates on a 24 hour basis.

2005 is Oak Hill's first year of substantial operation having acquired its drilling rig in late 2004 and spent Q4 2004 and Q1 of 2005 rebuilding and updating its Wilson Giant drilling rig. The drilling rig has been operating since April of 2005 on independent contract drilling horizontal Barnett Shale wells in the Dallas Fort Worth Basin.

For further information related to our proposed acquisition of Oak Hills, see our Current Report on Form 8-K dated September 24, 2005.

Barnett Shale Project

In June 2005, we entered into an agreement with a Texas limited partnership, Pathway Investments, L.P., giving us the right acquire up to a maximum 75% working interest in approximately 3,000 net leasehold acres in the Barnett Shale Project, a gas well horizontal drilling venture in the Jack, Wise and Palo Pinto Counties in the State of Texas. This agreement was subsequently amended to provide us with the right to acquire a working interest of between 75% to 100% in the wells to be drilled in the Barnett Shale Project, with net revenue interests ranging from 75% to 70%, and to increase the initial acreage up to approximately 3,600 net leasehold acres.

Pursuant to the agreement and revised agreement: (i) we paid a non-refundable deposit of $100,000 to be credited against the total lease package purchase price; (ii) in the event we purchase the maximum 100% working interest, we will receive a 70% net revenue interest on the leases, with the remaining net revenue interest to be reserved as an overriding royalty interest for the Texas limited partnership; (iii) in the event we purchase a 75% working interest we will carry for the Texas limited partnership a 10% working interest in the drilling, completion and equipping of the pipeline on such wells drilled on the acreage purchased by us, however, we in this event will be delivered a 75% net revenue interest; (iv) we are responsible for our pro-rata share of acreage costs according to working interest purchased; (v) our contract operator, Oak Hill, will be the operator for the project and contribute a drilling rig to the project; and (vi) we shall use our best efforts to drill out all leases within 30 months from the date of lease acquisition.

On September 25, 2005, we acquired our first lease in the Barnett Shale Project. We acquired approximately 2,325 net leasehold acres for $1,107,000. Our management anticipates that this acquisition will provide us with up to 16 additional horizontal Barnett Shale gas drilling sites with access to existing pipeline networks.

The funds used to acquire the net leasehold acreage were derived from our private placement of secured and convertible notes issued on September 16, 2005. See "Recent Sales of Unregistered Securities".

For further information related to the Barnett Shale Project, see our Current Reports on Form 8-K dated September 23, 2005 and June 6, 2005.

Oklahoma Properties

We maintain an aggregate of approximately 2,814 gross developed acres and 6,634 gross undeveloped acres pursuant to leases and/or concessions in the Arkoma Basin in the State of Oklahoma as described below.

Wagnon Lease

We hold an 80% working interest and a 75% net revenue interest in approximately 590 gross acres of a gas lease located on the Wagnon Lease in Pittsburg County, Oklahoma (the "Wagnon Lease"). Our interest relating to the Wagnon Lease is subject to farm-out agreements equating to a total 20% working interest between Paluca Petroleum, Inc., an affiliate of one of our directors, Douglas Humphreys , Oak Hills Energy, Inc. ("Oak Hills Energy"), and the lessee of the Wagnon Lease. The gas lease was acquired from Oak Hills Energy, which acquired the lease pursuant to a farm-out agreement with Quinton Rental & Repair Services, Inc. As of September 30, 2005, we have drilled, completed, and put four wells into production on the Wagnon Lease.

The Kellster #1-5 coal bed methane gas well ("Kellster #1-5") was drilled to a depth of approximately 2,400 feet vertically and 2,200 feet horizontally and has been producing since the middle of February 2004 and continues through dewatering and production stages.

The Kyndal #2-2 coal bed methane gas well ("Kyndal #2-2") was completed in June 2004 to a depth of approximately 2,400 feet vertically and 2,200 feet horizontally and is located in close proximity to the Kellster #1-5 well. The Kyndal #2-2 well feeds directly into the existing pipeline infrastructure located on the Wagnon Lease.

The Bryce #3-2 coal bed methane gas well ("Bryce #3-2") was completed in August 2004 and is also located in close proximity to the Kellster #1-5 well. Completion of drilling of the Bryce #3-2 coal bed methane gas well resulted in vertical depths of approximately 2,400 feet with an approximate 2,000 foot horizontally drilled section utilizing drilling protocols similar to those previously utilized in the drilling of the Kellster #1-5 and Kyndal #2-2 coal bed methane gas wells. The Bryce #3-2 well has been completed and the well is in production.

The Caleigh #4-2 coal bed methane gas well was completed in the first quarter of 2005 and is in production. Completion of drilling of the Caleigh #4-2 coal bed methane gas well resulted in vertical depths of approximately 2,600 feet with an approximate 1,800 foot horizontally drilled section.

We have entered into Funding Agreements for the Kellster #1-5, Kyndal #2-2, Bryce #3-2 and the Caleigh #4-2 wells. Pursuant to the Funding Agreements, private investors were provided with an 80% working interest and a 60% net revenue interest in the wells until their respective invested capital in each well is repaid, after which time the private investors will revert to an aggregate 20.1% working interest and a 15.075% net revenue interest. Oak Hills Energy, the operator of the wells, will "back-in" to a reversionary 6.7% working interest after the working interest capital is repaid and Lexington Oil & Gas will "back-in" to a reversionary 53.2% working interest. Pursuant to the further terms and provisions of the Funding Agreements, all wells to be drilled on the Wagnon Lease will carry royalty interests totalling 25% to landowners and property interest holders, and a carried working interest of 5% to a landowner, and a 10% carried working interest to a company related to Douglas Humphreys, a director of our company who also owns a non-carried working interest of 5%. As of September 30, 2005, all Funding Agreement capital for the four wells on the Wagnon Lease wells have been repaid, and the Company's back-in working interest of 53.2% of each of the four wells has vested.

Coal Creek Prospect

On March 12, 2004 we entered into a lease for approximately 1,536 gross acres in the Coal Creek Gas Prospect, located in Hughes County, Oklahoma (the "Coal Creek Lease"). Under the terms and provisions of the Coal Creek Lease, we have an undivided 95% working interest in the subject lands and a 79% net revenue interest. On May 20, 2004, we acquired an additional 372 acres of the Coal Creek Prospect with a minimum 95% working interest in the subject lands and a 78% net revenue interest. On August 20, 2004, we acquired an additional approximate 23 acres of the Coal Creek Prospect with a minimum 95% working interest in the subject lands and a 79% net revenue interest. Pursuant to our previously disclosed Consultation Agreement, we have assigned an earned carried interest to Paluca Petroleum, Inc., an affiliate of one of our directors, Douglas Humphreys, 10% of Lexington's working interest in each well to be drilled on this property that has been completed and is in production.

On March 31, 2005, we began drilling the first well on the Coal Creek Prospect, the Lex #1-34, of which we have a 50% working interest. The Lex #1-34 well has been completed and is currently in production. On April 15, 2005, we began drilling a second well on the Coal Creek Project, the Brumbaugh #1-10 well, of which we have a 22% working interest. The Brumbaugh #1-10 well has been completed and began production in May 2005. It is estimated that interests in twelve to sixteen wells may be drilled on lease acreage owned by us that forms part of the Coal Creek Prospect.

The LEX #1 coal bed methane gas well ("Lex #1") was completed on approximately April 21, 2005 to a depth of approximately 3,200 feet vertically and approximately 2,000 feet horizontally. The Brumbaugh #1-10 coal bed methane gas well ("Brumbaugh #1-10") was drilled to a vertical depth of 3,350 feet and a horizontal lateral section of 2,350 feet. On May 31, 2005, we began drilling a third CBM well on our Coal Creek Prospect, the Ellis #1-15, of which we have an 88.5 % working interest. Drilling on this well has encountered a shallow "Bartlesville Sand" gas zone that produced a significant gas flair upon testing of the zone. The zone was logged, underwent economic and geological study to assess commercial potential of the new, non-CBM gas zone, and we attempted completion in the Barlesville Sand zone without success due to intrusion of water from a salt water disposal well. As a result, procedures are under evaluation for the completion of the well in the originally targeted, Hartshorne CBM gas zone that is unaffected by the intrusion of water.

Panther Creek Prospect

On March 12, 2004, we entered into a lease for approximately 292 gross acres located in five separate sections in the Panther Creek coal bed methane gas prospect, located in Hughes County, State of Oklahoma (the "Panther Creek Lease"). We have a 100% working interest and an approximate 81% net revenue interest in the subject property. On January 25, 2005, we entered into a joint operating agreement to participate in one of three proposed wells to be drilled in the vicinity of our leases in the Panther Creek Prospect (the "Joint Operating Agreement") with Newfield Exploration Mid-Continent Inc., a subsidiary of Newfield Exploration Company ("Newfield"). Pursuant to the terms and provisions of the Joint Operating Agreement: (i) Newfield shall drill and operate the first well and explore other zones up to 8,500 feet in depth; (ii) we will have an approximate 25% working interest in the first well; and (iii) Newfield has the right to drill the first well until December 31, 2005. As of the date of this prospectus supplement, Newfield has completed drilling the POE 1-29 woodford shale vertical gas well, and the well is producing. We have also elected to participate with Newfield in two further wells to be drilled on other sections in the Panther Creek Prospect and we will have an approximate 11% and 4% working interests, respectively, in the proposed two additional wells.

Drilling Activity

The following table sets forth the results of our coal bed methane gas drilling activity as of September 30, 2005:

Gross Wells			Net Wells
Total	Producing	Dry	Total	Producing	Dry
7	7	0	3.08	3.08	0

Production Information

During the prior three fiscal years we had no oil and gas production.

Net Production, Average Sales Price and Average Production Costs (Lifting)

We had no oil or gas production during the fiscal years ended December 31, 2002 or 2003. The table below sets forth the net quantities of gas production (net of all royalties, overriding royalties and production due to others) attributable to Lexington for the fiscal year ended December 31, 2004, and the average sales prices, average production costs and direct lifting costs per unit of production.

For the fiscal year ending December 31, 2004
Net production (Mcf)	160,412
Average Sales price (per Mcf)	$4.44
Average Production Cost (per Mcf)⁽¹⁾	$0.79

(1) Includes direct lifting costs (which are comprised of labor, repairs and maintenance, materials and supplies, workover costs, insurance and property, gathering, compression, marketing and severance taxes).

Gross and Net Productive Gas Wells, Developed Acreage and Overriding Royalty Interests
Productive Wells and Developed Acres

The tables below set forth our leasehold interest in productive and shut-in gas wells, and in developed acres, at September 30, 2005:

Prospect	Gross⁽¹⁾	Net⁽²⁾
Wagnon	4	2.13
Panther	1	.25
Coal Creek	2	.6981

(1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.

(2) A net well is deemed to exist when the sum of the fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.

Developed Acreage Table⁽¹⁾

Prospect	Gross ⁽²⁾	Net ⁽³⁾
Wagnon	590	472
Panther	292	262.8
Coal Creek	1,536	1,642.4

(1) Consists of acres spaced or assignable to productive wells.

(2) A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned.

(3) A net acre is deemed to exist when the sum of fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.

Undeveloped Acreage

The table below sets forth our leasehold interest in undeveloped acreage at September 30, 2005:

Prospect	Gross	Net⁽¹⁾
South Lamar	1,144	1029.6
Middlecreek	320	288
H-9	5,170	4,653

(1) Includes the assignment to Paluca Petroleum, Inc., an affiliate of one of our directors, Douglas Humphreys, of a 10% working interest in each well drilled on the properties held by us.

Gas Delivery Commitments

We have no gas delivery commitments. Lexington Oil & Gas contracts with Williams Arkoma Gathering Company, LLC, Unimark LLC and Hughes Gas System LLC to sell gas produced.

Drilling Commitments

None at the current date.

Reserve Information

We have obtained a reserve and economic evaluation report regarding the Wagnon Lease which was conducted by Fletcher Lewis Engineering, Inc. of Oklahoma dated September 9, 2004 (the "Reserve and Economic Evaluation Report"). The Reserve and Economic Evaluation Report estimates recoverable reserves from the Wagnon Lease, the present value and a discounted present value of 10% of future cash flow therefrom. The Reserve and Economic Evaluation Report indicates that as of September 1, 2004, there is approximately 1,531,026 MCF, with future net revenue of $5,274,000 in net gas reserve from proven producing wells and proven undeveloped sites on the Wagnon Lease when using a gas price of $4.57 MCF and a present value 10% discounted cash flow on net production of approximately $4,073,000. The Company has not updated its reserve reporting to include its other drilled interests since the date of the Reserve and Economic Evaluation Report.

	Net Gas MCF	Future Net Cashflow	Present Worth Discounted 10%
Proved Developed Producing	1,176,008	$4,353,737	$3,446,997
Summary Undeveloped	355,018	$920,224	$626,324
Total	1,531,026	$5,273,961	$4,073,322

We have not filed any estimates of total proved net oil or gas reserves with, or included such information in reports to, any federal authority or agency.

THE FOLLOWING DISCLOSURE UPDATES THE INFORMATION IN OUR PROSPECTUS IN THE SECTION ENTITLED "EXECUTIVE COMPENSATION", CURRENTLY BEGINNING ON PAGE 41 OF OUR PROSPECTUS. THIS PROSPECTUS SUPPLEMENT PROVIDES INFORMATION NOT CONTAINED IN THAT SECTION OF OUR PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH OUR PROSPECTUS.

EXECUTIVE COMPENSATION

Summary Compensation Table

Other as described hereinbelow, none of our executive officers received an annual salary and bonus that exceeded $100,000 during the fiscal year ending December 31, 2004. The following table sets forth the compensation received by Grant Atkins, Vaughn Barbon, Doug Humphreys and Steve Jewett for the fiscal year ended December 31, 2004:

	Annual Compensation			Long Term Compensation
Name and Principal Position	Fiscal Year	Salary	Annual Compensation	Securities Underlying Options
Grant Atkins⁽¹⁾ President, Chief Executive Officer and Director	2004	-	$60,000⁽²⁾	100,000
Vaughn Barbon⁽³⁾ Chief Financial Officer	2004	-	$64,000⁽²⁾	-
Douglas Humphreys⁽⁴⁾ Drilling Operations Manager and Director	2004	-	$219,529.60⁽⁵⁾	200,000
Norman MacKinnon⁽⁴⁾Director	2004	-	-	2,500
Steve Jewett⁽⁴⁾ Director and Chair of Audit Committee	2004	-	$17,500	2,500

(1) Mr. Atkins was appointed the Chief Executive Officer of our company in July of 2003.
(2) Received pursuant to respective contractual arrangements between the Company and ICI.
(3) Mr. Barbon joined the Company in 2003.
(4) Messrs. Humphreys, MacKinnon and Jewett joined the Company in 2004.

(5) These amount represents the direct payment by the Company to Mr. Humphreys of aggregate management fees of $102,500 for the fiscal years ending December 31, 2004, together with the indirect payments to Mr. Humphreys through Paluca Petroleum, Inc., his affiliate, of 10% of the Company's working interest for each well drilled by our company on properties held by us pursuant to his Consultation Agreement with the Company.

Officers and directors of the Company may be reimbursed for any out-of-pocket expenses incurred by them on behalf of the Company. The Company presently has no pension, health, annuity, insurance, profit sharing or similar benefit plans. Mr. Atkins and Mr. Barbon previously derived remuneration from the Company directly and through Investor Communications International, Inc. ("ICI"), which provided a wide range of management, financial and administrative services to the Company. See "Summary Compensation Table" above.

Executive compensation is subject to change concurrent with the Company's requirements. None of the officers and directors of the Company are officers or directors of ICI, nor does the Company own any equity interest in ICI.

Currently, Mr. Atkins receives compensation in the amount of $10,000 per month and Mr. Barbon receives compensation in the amount of $5,000 per month. We do not have employment agreements with Mr. Atkins or Mr. Barbon.

Stock Option Grants

Option/SAR Grants In Last Fiscal Year
Name	Number of Securities Underlying Options	Percent of Total Options Granted	Exercise Price	Date of Expiration
Grant Atkins	100,000	8.33%	$3.00	12/31/2009
Vaughn Barbon	-	-	-	-
Douglas Humphreys	200,000	16.67%	$3.00	07/12/2009
Norman MacKinnon	2,500	0.21%	$1.00	12/31/2008
Stephen Jewett	2,500	0.21%	$1.00	12/31/2008

Exercise Of Stock Options And Year-End Option Values

Aggregated Option/SAR Exercises During The Last Financial Year End And Financial Year-End Option/SAR Values
Name	Common Shares Acquired on Exercise (#)	Value Realized ($)	Unexercised Options at Financial Year-End (#) exercisable/ unexercisable	Value of Unexercised In-The-Money Options/SARs at Financial Year-End ($) exercisable/ unexercisable
Grant Atkins	-	-	100,000	-
Vaughn Barbon	-	-	-	-
Douglas Humphreys	-	-	-	$39,500
Norman MacKinnon	-	-	2,500	$725
Stephen Jewett	-	-	2,500	$725

Compensation of Directors

Generally, our Directors do not receive salaries or fees for serving as directors, nor do they receive any compensation for attending meetings of the Board of Directors. Directors are entitled to reimbursement of expenses incurred in attending meetings. In addition, our directors are entitled to participate in our stock option plan. During the year ended December 31, 2004, we paid Steve Jewett $17,500 in connection with his service as the chairman of the audit committee.

THE FOLLOWING DISCLOSURE UPDATES THE INFORMATION IN OUR PROSPECTUS IN THE SECTION ENTITLED "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS", CURRENTLY BEGINNING ON PAGE 43 OF OUR PROSPECTUS. THIS PROSPECTUS SUPPLEMENT PROVIDES INFORMATION NOT CONTAINED IN THAT SECTION OF OUR PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH OUR PROSPECTUS.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On September 23, 2005 we announced that we entered into an agreement in principal to acquire 100% of the issued and outstanding shares of our designated oil and gas operator, Oak Hills Drilling and Operating, LLC, an Oklahoma limited liability corporation ("Oak Hills"), for 3,000,000 restricted shares of our common stock, at a deemed issuance price of $1.50 per share, for $4,500,000 in aggregate consideration.

Oak Hills is the wholly-owned subsidiary of Oak Hills Drilling and Operating International, Inc., a Nevada corporation. Oak Hills Drilling and Operating International, Inc. is owned by four share/stake holders in Lexington. Douglas Humphreys is an officer and director of and 25% shareholder in Oak Hills Drilling, and until January 21, 2004 Douglas Humphreys and Vaughn Barbon were prior minority shareholders of Oak Hills Energy, Inc., the Company's prior oil and gas operator. See "Description of Business - Oil and Gas Properties - Proposed Acquisition of Oak Hills".

On February 18, 2005, Orient Explorations Ltd. and Longfellow Industries (B.C.) Ltd. entered into a stock purchase agreement pursuant to which Orient Explorations Ltd. sold 3,000,000 shares of our restricted common stock to Longfellow Industries (B.C.) Ltd. at par value $0.00025 for an aggregate consideration of approximately $750.00 in cash.

On August 19, 2005, we granted Grant Atkins 250,000 options to acquire shares of our common. Grant Atkins is paid $10,000 per month as part of remuneration for his duties as President to the Company.

On August 19, 2005, we granted Vaughn Barbon 50,000 options to acquire shares of our common. Vaughn Barbon is paid up to $5,000 per month as part of remuneration for his duties as CFO to the Company.

Pursuant to an employment agreement with the Company, Douglas Humphreys or Paluca Petroleum, Inc. is paid $7,500 per month by the Company and receives 10% of Lexington's working interest in any well drilled and completed by the Company. On August 19, 2005, we granted Doug Humphreys 500,000 options to acquire shares of our common.

On August 19, 2005, we granted Norman MacKinnon 25,000 options to acquire shares of our common.

From January 1, 2005 up to September 30, 2005, we paid Steve Jewett $45,000 in connection with his service as the chairman of the audit committee. On August 19, 2005, we granted Steve Jewett 25,000 options to acquire shares of our common stock.

On February 1, 2005 we granted International Market Trend AG ("IMT") 600,000 options to acquire shares of our common stock and on August 19, 2005, we granted IMT 1,150,000 options to acquire shares of our common stock.

THE FOLLOWING DISCLOSURE UPDATES THE INFORMATION IN OUR PROSPECTUS IN THE SECTION ENTITLED "SELLING SHAREHOLDERS", CURRENTLY BEGINNING ON PAGE 49 OF OUR PROSPECTUS. THIS PROSPECTUS SUPPLEMENT PROVIDES INFORMATION NOT CONTAINED IN THAT SECTION OF OUR PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH OUR PROSPECTUS.

SELLING SHAREHOLDERS

The Selling Shareholders may offer and sell, from time to time, any or all of the common stock issued and the common stock issuable to them upon exercise of the common stock purchase warrants. We will not receive any proceeds from the resale of our common stock by the Selling Shareholders. Because the Selling Shareholders may offer all or only some portion of the 561,800 shares of common stock and underlying common stock purchase warrants to be registered pursuant to the Prospectus Supplement, no estimate can be given as to the amount or percentage of these shares of common stock that will be held by the selling stockholders upon termination of the offering.

The following table sets forth certain information regarding the beneficial ownership of shares of common stock by the Selling Shareholders, to the best of the Companies knowledge, as of September 30, 2005, and the number of shares of common stock covered by this Prospectus Supplement. The number of shares in the table represents an estimate of the number of shares of common stock to be offered by the selling stockholder. None of the Selling Shareholders is a broker-dealer, or an affiliate of a broker-dealer to our knowledge.

Name of Selling Shareholder	Shares Beneficially Owned Prior to Offering	Shares to be Offered	Number of Shares Owned After Offering and Percentage Total of the Issued and Outstanding
Name of Selling Shareholder	Shares Beneficially Owned Prior to Offering	Shares to be Offered	Shares Owned		Percentage of Issued and Outstanding
Crescent International, Ltd.⁽¹⁾	135,000	135,000	Nil	Nil
B&E Apartments, L.P.⁽⁴⁾	11,000	11,000	Nil	Nil
Everett L. Roley⁽³⁾	3,000	3,000	Nil	Nil
Phillipe Mast⁽⁴⁾	15,000	15,000	Nil	Nil
Arnold and Lynne Kellner⁽⁵⁾	12,000	12,000	Nil	Nil
Victor Meira⁽⁶⁾	45,000	45,000	Nil	Nil
Richard Ialungo⁽⁷⁾	15,000	15,000	Nil	Nil
Newport Capital Corp.⁽⁸⁾	247,600	247,600	Nil	Nil
Fairmont East Finance Ltd.⁽⁹⁾	8,400	8,400	Nil	Nil
John Cervi⁽¹⁰⁾	27,000	27,000	Nil	Nil
David Garnett⁽¹¹⁾	3,000	3,000	Nil	Nil
Eiger East Finance Ltd.⁽¹²⁾	39,800	39,800	Nil	Nil
Totals	561,800	561,800

Represents 135,000 shares of common stock. Mel Craw and Maxi Brezzi, as Managers of Cantara (Switzerland) SA, the investment advisor to Crescent International Ltd., exercise dispositive and voting power with respect to the shares of common stock owned by Crescent International Ltd. Messrs. Craw and Brezzi disclaim beneficial ownership of such shares.

Represents 11,000 shares of common stock. Howard Einberg exercises dispositive and voting power with respect to the shares of common stock owned by B&E Apartments, L.P.

Represents 2,000 shares of common stock and 1,000 warrants to purchase shares of our common stock.

Represents 10,000 shares of common stock and 5,000 warrants to purchase shares of our common stock.

Represents 12,000 warrants to purchase shares of our common stock.

Represents 30,000 shares of common stock and 15,000 warrants to purchase shares of our common stock.

Represents 10,000 shares of common stock and 5,000 warrants to purchase shares of our common stock.

Represents 104,000 shares of common stock and 143,600 warrants to purchase shares of our common stock. Brent Pierce is an officer of Newport Capital Corp. and exercises dispositve and voting power with respect to the shares of common stock owned by Newport Capital Corp.

Represents 8,400 warrants to purchase shares of our common stock. Phillipe Mast exercises dispositve and voting power with respect to the shares of common stock owned by Fairmont East Finance Ltd.

Represents 18,000 shares of common stock and 9,000 warrants to purchase shares of our common stock.

Represents 2,000 shares of common stock and 1,000 warrants to purchase shares of our common stock.

Represents 39,800 shares of common stock earned as a finder's fee for the April 2004 private placement. Phillipe Mast exercises dispositve and voting power with respect to the shares of common stock owned by Eiger East Finance Ltd.

We may require the Selling Shareholders to suspend the sales of the securities offered by this prospectus upon the occurrence of any event that makes any statement in this prospectus or the related registration statement untrue in any material respect or that requires the changing of statements in these documents in order to make statements in those documents not misleading.

THE FOLLOWING DISCLOSURE UPDATES THE INFORMATION IN OUR PROSPECTUS IN THE SECTION ENTITLED "RECENT SALES OF UNREGISTERED SECURITIES", CURRENTLY BEGINNING ON PAGE 102 OF OUR PROSPECTUS. THIS PROSPECTUS SUPPLEMENT PROVIDES INFORMATION NOT CONTAINED IN THAT SECTION OF OUR PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH OUR PROSPECTUS.

Recent Sales of Unregistered Securities

In September and October of 2005 we issued secured and convertible notes pursuant to a private placement with certain accredited investors, in reliance on Rule 506 promulgated under Section 4(2) of the Securities Act, for aggregate proceeds of $5,860,000. The Company issued: (i) an aggregate of $5,860,000 in secured, convertible two-year promissory notes bearing 8% interest; (ii) for every two shares of our common stock purchasable in accordance with the conversion provisions of the notes, one warrant, for an aggregate of 2,930,000 warrants, to purchase a share of our common stock at an exercise price of $1.25 per share for a one-year term (the "Class A Warrants"); and (iii) for every two shares of our common stock, a further warrant, for an aggregate of 2,930,000 additional warrants, to purchase an additional share of our common stock at an exercise price of $1.50 per share for a three-year term (the "Class B Warrants"). We have agreed to file a registration statement with the Securities and Exchange Commission within 30 days from the initial closing date covering the resale of shares of our common stock underlying the notes, the Class A Warrants and the Class B Warrants (collectively, the "Warrants") and the shares issuable upon exercise of the Warrants. The respective Warrant terms begin after the registration statement filed by the Company has been declared effective by the Securities and Exchange Commission. As well, and in conjunction with the completion of the private placement, we agreed to issue a finder's fee. See our Current Report on Form 8-K dated September 20, 2005 for further descriptions of the notes, Warrants and finder's fee.

On May 23, 2005, Brent Pierce exercised options that had been assigned him by International Market Trend AG to acquire 100,000 shares of common stock at a price of $0.167 per share for gross proceeds to the Company of approximately $16,667. The offer and sale of these securities was exempt from the registration provisions of the Securities Act pursuant to Regulation S and Section 4(2) of the Securities Act.

During the period from June 1, 2005 to August 22, 2005, we issued long-term promissory notes (the "Long-Term Notes") to Newport Capital Corp. and Vince Aballini in the aggregate principal amount of $1,165,000 in connection with secured long term loans. The Long-Term Notes bear interest at a rate of 10% per annum, compounded semi-annually. The principal amount and interest on the Long-Term Notes are payable by the Company on a blended monthly basis over a five year period during the term of the Long-Term Notes. As of September 30, 2005, outstanding principal and accrued interest relating to the Long-Term Notes had been repaid and such Long-Term Notes are no longer outstanding. In connection with the Long Term Notes, the holders of the Long-Term Notes received an aggregate of 210,000 warrants (the "Long-Term Warrants") to purchase shares of our common stock at a price of $3.00 per share. The Long-Term Warrants expire on May 31, 2010. The investors in the Long-Term Notes are each "accredited investors" and the issuance of the Long-Term Notes and the Long-Term Warrants were exempt from the registration provisions of the Securities Act under Rule 506 and Section 4(2) of the Securities Act.

__________

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB/A

Amendment #1

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _____ to _______

Commission file number 0-25455

LEXINGTON RESOURCES, INC.

_________________________________________________________________

(Exact name of small business issuer as specified in its charter)

NEVADA 88-0365453

_______________________________ ___________________

(State or other jurisdiction of (I.R.S. Employer

incorporation of organization) Identification No.)

7473 West Lake Mead Road

Las Vegas, Nevada 89128

________________________________________

(Address of Principal Executive Offices)

(702) 382-5139

___________________________

(Issuer's telephone number)

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

None

________________

(Title of class)

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

Common Stock, Par Value $0.00025

________________________________

(Title of class)

Indicate by check mark whether the issuer (1) has filed all reports

required to be filed by Section 13 or 15(d) of the Securities Exchange Act of

1934 during the preceding 12 months (or for such shorter period that the issuer

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 if disclosure of delinquent filers pursuant to Item

405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,

and will not be contained, to the best of issuer's knowledge, in definitive

prosy of information statements incorporated by reference in Part III of this

Form 10-KSB or any amendment to this Form 10-KSB.

[ X ]

State issuer's revenues for its most recent fiscal year (ending December

31, 2004): $472,140.

State the aggregate market value of the voting and non-voting common

equity held by non-affiliates computed by reference to the price at which the

common equity was last sold, or the average bid and asked price of such common

equity, as of the last business day of the registrant's most recently completed

fiscal quarter: December 31, 2004: $20,058,865.

Applicable Only to issuers Involved in Bankruptcy Proceedings

During the Preceding Five Years.

N/A

Indicate by check mark whether the issuer has filed all documents and

reports required to be filed by Section 12, 13 and 15(d) of the Securities

Exchange Act of 1934 subsequent to the distribution of securities under a plan

confirmed by a court.

Yes X No

___ ___

Applicable Only to Corporate Registrants

Indicate the number of shares outstanding of each of the issuer's

classes of common stock, as of the latest practicable date:

Class Outstanding as of March 27, 2005

Common Stock, $.00025 par value 17, 247,052

Documents Incorporated By Reference

List hereunder the following documents if incorporated by reference and

the Part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the

document in incorporated: (1) any annual report to security holders; (2) any

proxy or information statement; and (3) any prospectus filed pursuant to Rule

424(b) or (c) under the Securities Act of 1933. The listed documents should be

clearly described for identification purposes (e.g., annual report to security

holders for fiscal year ended December 24, 1980).

INDEX

ITEM 1. DESCRIPTION OF BUSINESS 5

ITEM 2. DESCRIPTION OF PROPERTIES 25

ITEM 3. LEGAL PROCEEDINGS 25

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 25

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION 30

ITEM 7. FINANCIAL STATEMENTS 37

CONSOLIDATED BALANCE SHEET F-3

CONSOLIDATED STATEMENT OF OPERATIONS F-4

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE 38

ITEM 8A. CONTROLS AND PROCEDURES 38

ITEM 8B. OTHER INFORMATION 39

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL

PERSONS; COMPLIANCE WITH SECIOTN 16(a) OF THE

EXCHANGE ACT 39

ITEM 10. EXECUTIVE COMPENSATION 42

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

AND MANAGEMENT 44

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45

ITEM 13. EXHIBITS 48

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 49

SIGNATURES 50

FORWARD LOOKING STATEMENTS

Statements made in this Form 10-KSB that are not historical or current

facts are "forward-looking statements" made pursuant to the safe harbor

provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section

21E of the Securities Exchange Act of 1934. These statements often can be

identified by the use of terms such as "may," "will," "expect," "believe,"

"anticipate," "estimate," "approximate" or "continue," or the negative thereof.

We intend that such forward-looking statements be subject to the safe harbors

for such statements. We wish to caution readers not to place undue reliance on

any such forward-looking statements, which speak only as of the date made. Any

forward-looking statements represent management's best judgment as to what may

occur in the future. However, forward-looking statements are subject to risks,

uncertainties and important factors beyond our control that could cause actual

results and events to differ materially from historical results of operations

and events and those presently anticipated or projected. We disclaim any

obligation subsequently to revise any forward-looking statements to reflect

events or circumstances after the date of such statement or to reflect the

occurrence of anticipated or unanticipated events.

AVAILABLE INFORMATION

Lexington Resources, Inc. files annual, quarterly, current reports,

proxy statements, and other information with the Securities and Exchange

Commission (the "Commission"). You may read and copy documents referred to in

this Annual Report on Form 20-F that have been filed with the Commission at the

Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You

may obtain information on the operation of the Public Reference Room by calling

the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission

filings by going to the Commission's website at http://www.sec.gov

PART I

ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT

Lexington Resources, Inc. was incorporated under the laws of the State

of Nevada in 1996 under the name "All Wrapped Up, Inc." During 1997, the Company

changed it name to Intergold Corporation and was engaged in the business of

exploration of gold and precious metals in the United States. On November 20,

2003, we filed an amendment to our articles of incorporation changing our name

to "Lexington Resources, Inc."

On November 19, 2003, Intergold Corporation (now known as Lexington

Resources, Inc.), Lexington Oil & Gas Ltd. Co. LLC, an Oklahoma limited

liability company ("Lexington Oil & Gas", or "Lexington"), and the shareholders

of Lexington (the "Lexington Oil & Gas Shareholders") entered into a share

exchange agreement (the "Share Exchange Agreement"). Pursuant to the terms of

the Share Exchange Agreement, we acquired from the Lexington Oil & Gas

Shareholders one hundred percent (100%) of the issued and outstanding shares of

common stock of Lexington Oil & Gas and issued 3,000,000 pre-forward split

shares of our common stock to the Lexington Oil & Gas Shareholders in proportion

to their respective holdings in Lexington Oil & Gas. In accordance with the

terms of the Agreement: (i) Lexington Oil & Gas became our wholly-owned

subsidiary; (ii) we changed our name to "Lexington Resources, Inc." and our

trading symbol to "LXRS"; and (iii) our sole business operations are as a

natural resource exploration company engaged in the acquisition and development

of oil and natural gas properties in the United States.

This acquisition has been accounted for as a reverse acquisition with

Lexington Oil & Gas being treated as the accounting parent and Lexington

Resources, Inc., the legal parent, being treated as the accounting subsidiary.

Accordingly, the consolidated results of operations of the Company include those

of Lexington Oil & Gas for the period from its inception on September 29, 2003

and those of Lexington Resources, Inc. since the date of the reverse

acquisition. Please note that throughout this report, and unless otherwise

noted, the words "we," "our," "us," or the "Company" refer to Lexington

Resources, Inc.

CURRENT BUSINESS OPERATIONS

GENERAL

We are a natural resource exploration and production company currently

engaged in the exploration, acquisition and development of oil and gas

properties in the United States. We hold an 80% working interest and a 60.56%

net revenue interest in approximately 590 gross acres of a gas lease located in

Pittsburg County, Oklahoma (the "Wagnon Lease"). Our wholly-owned subsidiary,

Lexington Oil & Gas, previously acquired the 590 gross acre section of farm-out

acreage for the development and production of coal bed methane gas. We have

drilled, completed, and are producing gas from the first three wells drilled on

the Wagnon Lease. We are currently drilling a fourth well of up to five wells on

this lease. We have utilized private funding for the capital required to drill

wells on the Wagnon Lease. After invested capital is repaid to the working

interest parties who provided funding, we will back into a 53.2% working

interest in net operating cash flows from wells drilled on this lease.

Further, during fiscal year 2004, we consummated the acquisition of

prospects in the Arkoma Basin in the State of Oklahoma, including 1,932 gross

leasehold acres in the Coal Creek Prospect, 292 gross acres in the Panther Creek

Prospect, 320 gross acres in the Middlecreek Prospect, 1,144 gross acres in the

South Lamar Prospect, and 5,170 gross acres in the H-9 Prospect. We currently

have an aggregate of approximately 590 gross developed and 8,858 gross

undeveloped acres pursuant to leases and/or concessions.

We have experienced delays in obtaining drilling rigs in the past due

to the high drilling demand in the Arkoma Basin where we have been concentrating

our coal bed methane and other gas targeted production and leasing programs. On

November 9, 2004, we announced that we had reached an agreement with Oak Hills

Drilling and Operating, LLC, ("Oak Hills Drilling") to drill a ten well program.

Oak Hills Drilling is an Oklahoma based private drilling and operating

contractor that will provide drill rig and drilling expertise for us to execute

our planned drilling initiatives. Douglas Humphreys, one of our directors, is an

officer, director and a 25% shareholder of Oak Hills Drilling. Management

believes that this agreement helps eliminate wait times for proceeding with

planned drilling initiatives due to limited rig availability and helps ensure

the continuous availability of a dedicated drilling rig and crew. Oak Hills

Drilling's triple drill rig has recently undergone final outfitting and is

currently drilling in the field. We anticipate using Oak Hills Drilling to drill

further gas wells for the Company. The terms and conditions obtained from Oak

Hills Drilling will be no less favorable than those we could obtain from an

independent third party.

Our transfer agent is Transfer OnLine, Inc., 317 S.W. Alder Street,

Portland, Oregon 97204.

OIL AND GAS PROPERTIES

We maintain an aggregate of approximately 590 gross developed acres and

8,858 gross undeveloped acres pursuant to leases and/or concessions in the

Arkoma Basin in the State of Oklahoma as described below.

WAGNON LEASE

We hold a 80% working interest and a 60.56% net revenue interest in

approximately 590 gross acres of a gas lease located on the Wagnon Lease in

Pittsburg County, Oklahoma (the "Wagnon Lease"). The gas lease was acquired from

Oak Hills Energy, Inc. ("Oak Hills Energy"), which acquired the lease pursuant

to a farm-out agreement with Quinton Rental & Repair Services, Inc. (the "Wagnon

Farm-Out Agreement"). Our interest relating to the Wagnon Property is subject to

farm-out agreements equating to a total 20% working interest between Paluca

Petroleum, Inc. ("Paluca"), an affiliate of one of our directors, Douglas

Humphreys , Oak Hills Energy, Inc., and the lessee of the Wagnon Property.

As of December 31, 2004, we have drilled, completed, and put three

wells into production. A fourth well is being drilled in the first quarter of

2005.

The Kellster #1-5 coal bed methane gas well ("Kellster #1-5") was

drilled to a depth of approximately 2,400 feet vertically and 2,200 feet

horizontally and has been producing since the middle of February 2004 and

continues through dewatering stages.

The Kyndal #2-2 coal bed methane gas well ("Kyndal #2-2") was completed

in June 2004 to a depth of approximately 2,400 feet vertically and 2,200 feet

horizontally and is located in close proximity to the Kellster #1-5 well. The

Kyndal #2-2 well feeds directly into the existing pipeline and compressor

station infrastructure located on the Wagnon Lease.

The Bryce #3-2 coal bed methane gas well ("Bryce #3-2") was completed

in August 2004 and is also located in close proximity to the Kellster #1-5 well.

Completion of drilling of the Bryce #3-2 coal bed methane gas well resulted in

vertical depths of approximately 2,400 feet with an approximate 2,000 foot

horizontally drilled section utilizing drilling protocols similar to those

previously utilized in the drilling of the Kellster #1-5 and Kyndal #2-2 coal

bed methane gas wells. The Bryce #3-2 well has been completed and the well is in

production.

We have commenced operations on our fourth well in the Wagnon Prospect,

the Caleigh #4-2 coal bed methane gas well. As of the date of this Annual

Report, the Caleigh #4-2 well has been drilled, and awaits completion and hook

up into the existing pipeline. Drilling and completion time is estimated at two

to three weeks based on depths and drilling protocols similar to those

previously experienced in the drilling of the Hartshorne Coal production target

of the Kyndal, Kellster and Bryce wells. The Calleigh #4-2 coal bed methane gas

well resulted in vertical depths of approximately 2,600 feet with an approximate

1,800 foot horizontally drilled section.

We have entered into funding agreements for the Kellster #1-5, Kyndal

#2-2, Bryce #3-2, and Caleigh #4-2 wells (collectively, the "Funding

Agreements"). Pursuant to the Funding Agreements, private investors were

provided with an 80% working interest and a 60.56% net revenue interest in the

wells until their respective invested capital in each well is repaid, after

which time the private investors will revert to an aggregate 20.1% working

interest and a 15.075% net revenue interest. Oak Hills Energy, Inc., the

original driller and operator of the wells, will "back-in" to a reversionary

6.7% working interest after the working interest capital is repaid and Lexington

Oil & Gas will "back-in" to a reversionary 53.2% working interest. Pursuant to

the further terms and provisions of the Funding Agreements, all wells to be

drilled on the Wagnon Lease will carry royalty interests totaling 25% to

landowners and property interest holders, and a carried working interest of 5%

to a landowner, as well as a 10% carried working interest to a company related

to Douglas Humphreys, one of our directors. In addition, we agreed to allow

Humphreys to participate in up to an additional 5% working interest in every

well drilled by us on the Wagnon Lease.

COAL CREEK PROSPECT

On March 12, 2004 we entered into a lease for approximately 1,536 gross

acres in the Coal Creek Gas Prospect, located in Hughes County, Oklahoma (the

"Coal Creek Lease"). Under the terms and provisions of the Coal Creek Lease, we

have an undivided 95% to 100% working interest in the subject lands and a

minimum 79% net revenue interest. On May 20, 2004, we acquired an additional 372

acres of the Coal Creek Prospect with a minimum 95% working interest in the

subject lands and a 78% net revenue interest. On August 20, 2004, we acquired an

additional approximate 23 acres of the Coal Creek Prospect with a minimum 95%

working interest in the subject lands and a 79% net revenue interest.

PANTHER CREEK PROSPECT

On March 12, 2004, we entered into a lease for approximately 292 gross

acres located in five separate sections in the Panther Creek coal bed methane

gas prospect, located in Hughes County, State of Oklahoma (the "Panther Creek

Lease"). We have a 100% working interest and an approximate 81% net revenue

interest in the subject property.

On January 25, 2005, we entered into a joint operating agreement to

participate in one of three proposed wells to be drilled in the vicinity of our

leases in the Panther Creek Prospect (the "Joint Operating Agreement") with

Newfield Exploration Mid-Continent Inc., a subsidiary of Newfield Exploration

Company ("Newfield"). Pursuant to the terms and provisions of the Joint

Operating Agreement: (i) Newfield shall drill and operate the first well and

explore other zones up to 8500 feet in depth; (ii) we have an approximate 25%

working interest in the first well; and (iii) Newfield has the right to drill

the first well until December 31, 2005. As of the date of this Annual Report,

Newfield has completed drilling the well, and the well is selling gas.

Management has also elected to participate with Newfield in two further wells to

be drilled on other sections in the Panther Creek Prospect with approximate 11%

and 4% working interests to Lexington, respectively, in the proposed two

additional wells.

SOUTH LAMAR PROSPECT

On April 22, 2004, we acquired 960 gross undeveloped acres in three

sections of farm-out acreage to develop coal bed methane gas wells in Hughes

County, State of Oklahoma (the "South Lamar Farm-Out"). Pursuant to the terms

and provisions of the South Lamar Farm-Out, we hold a 100% working interest and

a 78.5% net revenue interest in 960 gross undeveloped acres to develop gas

producing wells. The acreage was purchased originally by Paluca for

approximately $100,000, and the exchange of certain other equipment. On July 26,

2004, we acquired an additional 184 acres in the South Lamar Prospect with a

100% working interest and a 79% net revenue interest.

MIDDLECREEK PROSPECT

On May 24, 2004, we acquired a 320 gross acres in the Middlecreek Gas

Prospect located in Hughes County, State of Oklahoma (the "Middlecreek

Prospect"). The Middlecreek Prospect includes existing wells on the property

with minor production from the Gilchrease zone and represents an average 70% net

revenue interest and a 100% working interest. Rights to drill all geological

zones are included and primary gas targets include the Caney shale and

Hartshorne coal zones with further possibilities in the Booch, Stuart and

Savannah zones. The Middlecreek Prospect includes a 2,000 foot gas pipeline and

pipeline right of way.

H-9 PROSPECT

On June 29, 2004, we acquired approximately 4,850 gross leasehold acres

in approximately 38 sections of the H-9 Prospect located in Hughes and McIntosh

counties in the State of Oklahoma (the "H-9 Prospect"). We acquired a 100%

working interest and a 79.25% net revenue interest in the H-9 Prospect. We

subsequently acquired an additional 320 gross acres of leases in the H-9 area of

interest with a 100% working interest and a 78.25% net revenue interest.

DRILLING ACTIVITY

The following table sets forth the results of our coal bed methane gas

drilling activity as of December 31, 2004:

_____________________________________________________________________

Gross Wells Net Wells

_____________________________________________________________________

Total Producing Dry Total Producing Dry

_____________________________________________________________________

3 3 0 2.40 2.40 0

_____________________________________________________________________

PRODUCTION INFORMATION

During the prior three fiscal years, we had no oil and gas production.

PRODUCING WELLS AND ACREAGE

GROSS AND NET PRODUCTIVE GAS WELLS, DEVELOPED ACREAGE AND OVERRIDING

ROYALTY INTERESTS.

Productive wells and developed acres. The tables below set forth our

leasehold interest in productive and shut-in gas wells, and in developed acres,

at December 31, 2004:

__________________________________________________

Prospect Gross(1) Net (2)

__________________________________________________

Wagnon 3 2.40

__________________________________________________

(1) A gross well is a well in which a working interest is owned. The

number of gross wells is the total number of wells in which a working interest

is owned.

(2) A net well is deemed to exist when the sum of fractional ownership

working interest in gross wells equals one. The number of net wells is the sum

of the fractional working interests owned in gross wells expressed as whole

numbers and fractions thereof.

DEVELOPED ACREAGE TABLE(1)

__________________________________________________

Prospect Gross (2) Net (3)

__________________________________________________

Wagnon 590 443

__________________________________________________

(1) Consists of acres spaced or assignable to productive wells.

(2) A gross acre is an acre in which a working interest is owned. The

number of gross acres is the total number of acres in which a working interest

is owned.

(3) A net acre is deemed to exist when the sum of fractional ownership

working interests in gross acres equals one. The number of net acres is the sum

of the fractional working interests owned in gross acres expressed as whole

numbers and fractions thereof.

UNDEVELOPED ACREAGE

LEASEHOLD INTERESTS

The table below sets forth our leasehold interest in undeveloped

acreage at December 31, 2004:

_____________________________________________________

Prospect Gross Net

_____________________________________________________

Coal Creek 1,932 1,932

_____________________________________________________

Panther Creek 292 292

_____________________________________________________

South Lamar 1,144 1,144

_____________________________________________________

H-9 5,170 5,170

_____________________________________________________

GAS DELIVERY COMMITMENTS

We have no gas delivery commitments. Lexington Oil & Gas contracts with

Oak Hills Energy, Inc., which contracts for pipeline with Williams Arkoma

Gathering Company, LLC. Lexington Oil & Gas contracts with Unimark LLC to sell

gas produced.

DRILLING COMMITMENTS

At this time we are committed to drilling one additional well on Wagnon

Lease, the Caleigh #4-2 well, and the non-Company operated well on the Panther

Creek Project drilled and operated by Newfield. We have also committed to the

drilling of a new well on the Coal Creek Prospect, the Lex 1 well.

RESERVE INFORMATION

We have obtained a reserve and economic evaluation report regarding the

Wagnon Lease which was conducted by Fletcher Lewis Engineering, Inc. of Oklahoma

dated September 9, 2004 (the "Reserve and Economic Evaluation Report"). The

Reserve and Economic Evaluation Report estimates recoverable reserves from the

Wagnon Lease, the present value and a discounted present value of 10% of future

cash flow there from. The Reserve and Economic Evaluation Report indicates that

as of September 1, 2004, there is approximately 1,531,026 MCF, with future net

revenue of $5,274,000 in net gas reserve from proven producing wells and proven

undeveloped sites on the Wagnon Lease when using a gas price of $4.57 MCF and a

present value 10% discounted cash flow on net production of approximately

$4,073,000.

<TABLE>

___________________________________________________________________________

FUTURE NET PRESENT WORTH

NET GAS MCF CASHFLOW DISCOUNTED 10%

____________________________________________________________________________

PROVED DEVELOPED PRODUCING 1,176,008 4,353,737 3,446,997

____________________________________________________________________________

SUMMARY UNDEVELOPED 355,018 920,224 626,324

____________________________________________________________________________

TOTAL 1,531,026 5,273,961 4,073,322

PRODUCTION YEAR

ENDED 12/31/04 (180,123)

ESTIMATED RESERVES

AT 12/31/04 1,350,903

____________________________________________________________________________

</TABLE>

We have not filed any estimates of total proved net oil or gas reserves

with, or included such information in reports to, any federal authority or

agency.

COAL BED METHANE GAS

Natural gas consists primarily of methane, which is produced when

organic material is physically turned into coal under extreme geologic

conditions. When the coal and methane conversion process occurs such that the

resultant coal is saturated with water and methane is trapped within the coal,

the result is "coal bed methane." Water permeates coal beds and the water

pressure traps the gas within the coal. Because coal has a large and complex

internal surface area, it can store volumes of gas six or seven time as much as

a conventional nature gas reservoir of equal rock volume. Coal bed methane is

kept in place usually by the presence of water. Thus the production of coal bed

methane in many cases requires the dewatering of the coal gas to be extracted.

Therefore, in a coal bed gas well, water is produced in large volumes especially

in the early stages of production. As the amount of water in the coal decreases,

gas production increases.

The United States Geological Survey has estimated coal bed gas

resources of at least 700 trillion cubic feet. About 100 trillion cubic feet of

that appears to be economically recoverable with existing technology. Coal bed

gas currently accounts for about 7.5% of total natural gas production in the

United States.

COMPETITION

We operate in a highly competitive industry, competing with major oil

and gas companies, independent producers and institutional and individual

investors, which are actively seeking oil and gas properties throughout the

world together with the equipment, labor and materials required to operate

properties. Most of our competitors have financial resources, staffs and

facilities substantially greater than ours. The principal area of competition is

encountered in the financial ability to acquire good acreage positions and drill

wells to explore for oil and gas, then, if warranted, drill production wells and

install production equipment. Competition for the acquisition of oil and gas

wells is intense with many oil and gas properties and or leases or concessions

available in a competitive bidding process in which we may lack technological

information or expertise available to other bidders. Therefore, we may not be

successful in acquiring and developing profitable properties in the face of this

competition. No assurance can be given that a sufficient number of suitable oil

and gas wells will be available for acquisition and development.

GOVERNMENT REGULATION

GENERAL

The production and sale of oil and gas are subject to various federal,

state and local governmental regulations, which may be changed from time to time

in response to economic or political conditions and can have a significant

impact upon overall operations. Matters subject to regulation include discharge

permits for drilling operations, drilling bonds, reports concerning operations,

the spacing of wells, unitization and pooling of properties, taxation,

abandonment and restoration and environmental protection. These laws and

regulations are under constant review for amendment or expansion. From time to

time, regulatory agencies have imposed price controls and limitations on

production by restricting the rate of flow of oil and gas wells below actual

production capacity in order to conserve supplies of oil and gas. Changes in

these regulations could require us to expend significant resources to comply

with new laws or regulations or changes to current requirements and could have a

material adverse effect on us.

OIL AND GAS REGULATION

The governmental laws and regulations which could have a material

impact on the oil and gas exploration and production industry are as follows:

DRILLING AND PRODUCTION

Our operations are subject to various types of regulation at federal,

state, local and Native American tribal levels. These types of regulation

include requiring permits for the drilling of wells, drilling bonds and reports

concerning operations. Most states, and some counties, municipalities and Native

American tribes, in which we operate also regulate one or more of the following:

(i) the location of wells; (ii) the method of drilling and casing wells; (iii)

the rates of production or "allowables"; (iv) the surface use and restoration of

properties upon which wells are drilled and other third parties; (v) the

plugging and abandoning of wells; and (vi) notice to surface owners and other

third parties.

State laws regulate the size and shape of drilling and spacing units or

proration units governing the pooling of oil and natural gas properties. Some

states allow forced pooling or integration of tracts to facilitate exploration

while other states rely on voluntary pooling of lands and leases. In some

instances, forced pooling or unitization may be implemented by third parties and

may reduce our interest in the unitized properties. In addition, state

conservation laws establish maximum rates of production from oil and natural gas

wells, generally prohibit the venting or flaring of natural gas and impose

requirements regarding the ratability of production. These laws and regulations

may limit the amount of natural gas and oil we can produce from our wells or

limit the number of wells or the locations at which we can drill. Moreover, each

state generally imposes a production or severance tax with respect to the

production and sale of oil, natural gas and natural gas liquids within its

jurisdiction.

NATURAL GAS SALES TRANSPORTATION

Historically, federal legislation and regulatory controls have affected

the price of the natural gas we produce and the manner in which we market our

production. The Federal Energy Regulatory Commission ("FERC") has jurisdiction

over the transportation and sale for resale of natural gas in interstate

commerce by natural gas companies under the Natural Gas Act of 1938 and the

Natural Gas Policy Act of 1978.

FERC also regulates interstate natural gas transportation rates and

service conditions, which affects the marketing of natural gas that we produce,

as well as the revenues we receive for sales of our natural gas. Commencing in

1985, FERC promulgated a series of orders, regulations and rule makings that

significantly fostered competition in the business of transporting and marketing

gas. Today, interstate pipeline companies are required to provide

nondiscriminatory transportation services to producers, marketers and other

shippers, regardless of whether such shippers are affiliated with an interstate

pipeline company. Under FERC's current regulatory regime, transmission services

must be provided on an open-access, non-discriminatory basis at cost-based rates

or at market-based rates if the transportation market at issue is sufficiently

competitive.

MINERAL ACT

The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or

indirect ownership of any interest in federal onshore oil and gas leases by a

foreign citizen of a country that denies "similar or like privileges" to

citizens of the United States. Such restrictions on citizens of a

"non-reciprocal" country include ownership or holding or controlling stock in a

corporation that holds a federal onshore oil and gas lease. If this restriction

is violated, the corporation's lease can be canceled in a proceeding instituted

by the United States Attorney General. Although the regulations of the Bureau of

Land Management (which administers the Mineral Act) provide for agency

designations of non-reciprocal countries, there are presently no such

designations in effect.

ENVIRONMENTAL REGULATION

Our activities will be subject to existing federal, state and local

laws and regulations governing environmental quality and pollution control. Our

operations will be subject to stringent environmental regulation by state and

federal authorities including the Environmental Protection Agency ("EPA"). Such

regulation can increase the cost of such activities. In most instances, the

regulatory requirements relate to water and air pollution control measures.

WASTE DISPOSAL

The Resource Conservation and Recovery Act ("RCRA"), and comparable

state statutes, affect oil and gas exploration and production activities by

imposing regulations on the generation, transportation, treatment, storage,

disposal and cleanup of "hazardous wastes" and on the disposal of non-hazardous

wastes. Under the auspices of the EPA, the individual states administer some or

all of the provisions of RCRA, sometimes in conjunction with their own, more

stringent requirements. Drilling fluids, produced waters, and most of the other

wastes associated with the exploration, development, and production of crude

oil, natural gas, or geothermal energy constitute "solid wastes", which are

regulated under the less stringent non-hazardous waste provisions, but there is

no guarantee that the EPA or the individual states will not adopt more stringent

requirements for the handling of non-hazardous wastes or categorize some

non-hazardous wastes as hazardous for future regulation.

COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT

The federal Comprehensive Environmental Response, Compensation and

Liability Act ("CERCLA") imposes joint and several liability for costs of

investigation and remediation and for natural resource damages, without regard

to fault or the legality of the original conduct, on certain classes of persons

with respect to the release into the environment of substances designated under

CERCLA as hazardous substances ("Hazardous Substances"). These classes of

persons or potentially responsible parties include the current and certain past

owners and operators of a facility or property where there is or has been a

release or threat of release of a Hazardous Substance and persons who disposed

of or arranged for the disposal of the Hazardous Substances found at such a

facility. CERCLA also authorizes the EPA and, in some cases, third parties to

take actions in response to threats to the public health or the environment and

to seek to recover the costs of such action. Although CERCLA generally exempts

petroleum from the definition of Hazardous Substances in the course operations,

we may in the future generate wastes that fall within CERCLA's definition of

Hazardous Substances. We may also in the future become an owner of facilities on

which Hazardous Substances have been released by previous owners or operators.

We may in the future be responsible under CERCLA for all or part of the costs to

clean up facilities or property at which such substances have been released and

for natural resource damages.

AIR EMISSIONS

Our operations are subject to local, state and federal regulations for

the control of emissions of air pollution. Major sources of air pollutants are

subject to more stringent, federally imposed permitting requirements.

Administrative enforcement actions for failure to comply strictly with air

pollution regulations or permits are generally resolved by payment of monetary

fines and correction of any identified deficiencies. Alternatively, regulatory

agencies could require us to forego construction, modification or operation of

certain air emission sources.

CLEAN WATER ACT

The Clean Water Act ("CWA") imposes restrictions and strict controls

regarding the discharge of wastes, including produced waters and other oil and

natural gas wastes, into waters of the United States, a term broadly defined.

Permits must be obtained to discharge pollutants into federal waters. The CWA

provides for civil, criminal and administrative penalties for unauthorized

discharges of oil, hazardous substances and other pollutants. It imposes

substantial potential liability for the costs of removal or remediation

associated with discharges of oil or hazardous substances. State laws governing

discharges to water also provide varying civil, criminal and administrative

penalties and impose liabilities in the case of a discharge of petroleum or it

derivatives, or other hazardous substances, into state waters. In addition, the

EPA has promulgated regulations that may require us to obtain permits to

discharge storm water runoff. In the event of an unauthorized discharge of

wastes, we may be liable for penalties and costs.

Management believes that we are in substantial compliance with current

applicable environmental laws and regulations.

RESEARCH AND DEVELOPMENT ACTIVITIES

No research and development expenditures have been incurred, either on

our account or sponsored by customers, during the past three years.

EMPLOYEES

We do not employ any persons on a full-time or on a part-time basis.

Grant Atkins is our President and Chief Executive Officer, Vaughn Barbon is our

Chief Financial Officer, and Douglas Humphreys is the Drilling Operations

Manager of Lexington Oil & Gas. All of these individuals are primarily

responsible for all our day-to-day operations. Other services are provided by

outsourcing, consultant, and special purpose contracts. Our current designated

drilling contractor and well operator is Oak Hills Drilling and Operating, LLC.

RISK FACTORS

An investment in our common stock involves a number of very significant

risks. You should carefully consider the following risks and uncertainties in

addition to other information in evaluating our company and its business before

purchasing shares of our common stock. Our business, operating results and

financial condition could be seriously harmed due to any of the following risks.

The risks described below are all of the material risks that we are currently

aware of that are facing our company. Additional risks not presently known to us

may also impair our business operations. You could lose all or part of your

investment due to any of these risks.

RISKS RELATED TO OUR BUSINESS

OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED

OPERATING HISTORY. In considering whether to invest in our common stock, you

should consider that there is only limited historical financial and operating

information available on which to base your evaluation of our performance. Our

inception was September 29, 2003 and, as a result, we have a limited operating

history.

WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCES WE

WILL BE PROFITABLE IN THE FUTURE. We have a history of operating losses, expect

to continue to incur losses, and may never be profitable, and we must be

considered to be in the development stage. Further, we have been dependent on

sales of our equity securities and debt financing to meet our cash requirements.

We have incurred losses totaling approximately $6,092,689 for fiscal year ended

December 31, 2004. As of December 31, 2004, we had an accumulated deficit of

$7,568,155 and a working capital deficit of $382,953. Further, we do not expect

positive cash flow from operations in the near term. There is no assurance that

actual cash requirements will not exceed our estimates. In particular,

additional capital may be required in the event that: (i) the costs to acquire

additional leases are more than we currently anticipate; (ii) drilling and

completion costs for additional wells increase beyond our expectations; or (iii)

we encounter greater costs associated with general and administrative expenses

or offering costs.

Our development of and participation in an increasingly larger number

of oil and gas prospects has required and will continue to require substantial

capital expenditures. The uncertainty and factors described throughout this

section may impede our ability to economically find, develop, exploit, and

acquire natural gas and oil reserves. As a result, we may not be able to achieve

or sustain profitability or positive cash flows from operating activities in the

future.

WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS

REPORT ACCOMPANYING OUR DECEMBER 31, 2004 AND 2003 CONSOLIDATED FINANCIAL

STATEMENTS. The independent auditor's report accompanying our December 31, 2004

and 2003 consolidated financial statements contains an explanatory paragraph

expressing substantial doubt about our ability to continue as a going concern.

The consolidated financial statements have been prepared "assuming that the

Company will continue as a going concern," which contemplates that we will

realize our assets and satisfy our liabilities and commitments in the ordinary

course of business. Our ability to continue as a going concern is dependent on

raising additional capital to fund our operations and ultimately on generating

future profitable operations. There can be no assurance that we will be able to

raise sufficient additional capital or eventually have positive cash flow from

operations to address all of our cash flow needs. If we are not able to find

alternative sources of cash or generate positive cash flow from operations, our

business and shareholders will be materially and adversely affected.

WE WILL REQUIRE ADDITIONAL FUNDING IN THE FUTURE. Based upon our

historical losses from operations, we will require additional funding in the

future. If we cannot obtain capital through financings or otherwise, our ability

to execute our development plans and achieve production levels will be greatly

limited. Our current development plans require us to make capital expenditures

for the exploration and development of our oil and natural gas properties.

Historically, we have funded our operations through the issuance of equity and

short-term debt financing arrangements. We may not be able to obtain additional

financing on favorable terms, if at all. Our future cash flows and the

availability of financing will be subject to a number of variables, including

potential production and the market prices of oil and natural gas. Further, debt

financing could lead to a diversion of cash flow to satisfy debt-servicing

obligations and create restrictions on business operations. If we are unable to

raise additional funds, it would have a material adverse effect upon our

operations.

OUR ACQUISITIONS MAY NOT BE SUCCESSFUL. As part of our growth strategy,

we intend to acquire additional oil and gas production properties. Such

acquisitions may pose substantial risks to our business, financial condition,

and results of operations. In pursuing acquisitions, we will compete with other

companies, many of which have greater financial and other resources to acquire

attractive properties. Even if we are successful in acquiring additional

properties, some of the properties may not produce revenues at anticipated

levels or failure to conduct drilling on prospects within specified time periods

may cause the forfeiture of the lease in that prospect. There can be no

assurance that we will be able to successfully integrate acquired properties,

which could result in substantial costs and delays or other operational,

technical, or financial problems. Further, acquisitions could disrupt ongoing

business operations. If any of these events occur, it would have a material

adverse effect upon our operations and results from operations.

OUR EXPLORATORY AND DEVELOPMENT DRILLING AND PRODUCTION OPERATIONS MAY

NOT BE SUCCESSFUL. We intend to drill additional wells and continue production

operations on our current wells. There can be no assurance that our future

drilling activities will be successful, and we cannot be sure that our overall

drilling success rate or our production operations within a particular area will

not decline. We may not recover all or any portion of our capital investment in

the wells or the underlying leaseholds. Unsuccessful drilling activities would

have a material adverse effect upon our results of operations and financial

condition. The cost of drilling, completing, and operating wells is often

uncertain, and a number of factors can delay or prevent drilling operations

including: (i) unexpected drilling conditions; (ii) pressure or irregularities

in formation; (iii) equipment failures or accidents; (iv) adverse weather

conditions; and (iv) shortages or delays in availability of drilling rigs and

delivery of equipment.

Further, the coal beds in the Arkoma Basin in the State of Oklahoma

from which we produce methane gas frequently contain water, which may hamper our

ability to produce gas in commercial quantities. The amount of coal bed methane

that can be commercially produced depends upon the coal quality, the original

gas content of the coal seam, the thickness of the seam, the reservoir pressure,

the rate at which gas is released from the coal, and the existence of any

natural fractures through which the gas can flow to the well bore. However, coal

beds frequently contain water that must be removed in order for the gas to

detach from the coal and flow to the well bore. The average life of a coal bed

well is only five to six years. Our ability to remove and dispose of sufficient

quantities of water from the coal seam will determine whether or not we can

produce coal bed methane in commercial quantities.

There is no guarantee that the potential drilling locations that we

have or acquire in the future will ever produce natural gas or oil, which could

have a material adverse effect upon our results of operations.

A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO

RAISE FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS. A decline in

the price of our common stock could result in a reduction in the liquidity of

our common stock and a reduction in our ability to raise additional capital for

our operations. Because our operations to date have been principally financed

through the sale of equity securities, a decline in the price of our common

stock could have an adverse effect upon our liquidity and our continued

operations. A reduction in our ability to raise equity capital in the future

would have a material adverse effect upon our business plan and operations,

including our ability to continue our current operations. If our stock price

declines, we may not be able to raise additional capital or generate funds from

operations sufficient to meet our obligations.

WE ARE A NEW ENTRANT INTO THE OIL AND GAS INDUSTRY WITHOUT PROFITABLE

OPERATING HISTORY AND ONLY HAVE PROVED DEVELOPED PRODUCING FUTURE NET REVENUE OF

$3,446,997 AT A 10% DISCOUNTED PRESENT WORTH. Since September 29, 2003

(inception), our activities have been limited to organizational efforts,

obtaining working capital and acquiring and developing a very limited number of

properties. As a result, there is limited information regarding production or

revenue generation. Further, a Reserve and Economic Evaluation dated September

9, 2004 prepared by Fletcher Lewis Engineering, Inc. shows proved developed

producing future net revenue of $3,446,997 at a 10% discounted present worth. As

a result, our future revenues may be limited.

The Wagnon Lease is the oil and gas property where most of our drilling

capital resources have been employed. This prospect is still in the development

stage, and estimates made at this time by our contracted independent reservoir

engineer as to proved or probable oil and natural gas reserves cannot be

guaranteed that sufficient reserves will be maintained or new reserves

discovered for production. Although three wells have been drilled on the Wagnon

Lease to date, the absence of a sustained production history provides risk

regarding independent reserve estimates. Property lease positions in other

locations that have been purchased by us are unproven, having little to no

production, which prevents our engineers from assigning any proved or probable

reserves to these other properties.

NO ASSURANCE OF THE ACCURACY OF THE ESTIMATES OF OIL AND GAS RESERVES.

We have obtained a report on the estimated reserves on our leases on the Wagnon

Lease. Reserve estimates are based upon various assumptions, including

assumptions relating to oil and gas prices, drilling and operating expenses,

production levels, capital expenditures, taxes and availability of funds. No one

can measure underground accumulations of oil and natural gas in an exact way. As

a result, estimated quantities of proved reserves, projections of future

production rates, and the timing of development expenditures may be incorrect.

Any significant variance from these assumptions to actual figures could greatly

affect our estimates of reserves, the economically recoverable quantities of oil

and natural gas attributable to any particular group of properties, the

classifications of reserves based on risk of recovery, and estimates of the

future net cash flows.

Further, the present value of future net cash flows from our proved

reserves is not necessarily the same as the current market value of our

estimated oil and natural gas reserves. Actual future net cash flows from our

oil and natural gas properties also will be affected by factors such as: (i)

actual prices we receive for oil and natural gas; (ii) the amount and timing of

actual production; (iii) supply of and demand for oil and natural gas; and (iv)

changes in governmental regulations or taxation.

The timing of both our production and our incurrence of expenses in

connection with the development and production of oil and natural gas properties

will affect the timing of actual future net cash flows from proved reserves, and

thus their actual present value. In addition, the 10% discount factor used when

calculating discounted future net cash flows may not be the most appropriate

discount factor based on interest rates in effect from time to time and risks

associated with us or the oil and natural gas industry in general. Actual future

production, oil and gas prices, revenues, taxes, development expenditures,

operating expenses and quantities of recoverable oil and gas reserves will most

likely vary from those estimates and any significant variance could have a

material adverse effect on our future results from operations.

UNLESS WE REPLACE OUR OIL AND NATURAL GAS RESERVES, OUR RESERVES AND

PRODUCTION WILL DECLINE, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL

CONDITION AND RESULTS OF OPERATIONS. Producing oil and natural gas reservoirs

generally are characterized by declining production rates that vary depending

upon reservoir characteristics and other factors. Thus, our future oil and

natural gas reserves and production and, therefore, our cash flow and income are

highly dependent on our success in efficiently developing and exploiting our

current reserves and economically finding or acquiring additional recoverable

reserves. We may not be able to develop, find or acquire additional reserves to

replace our current and future production at acceptable costs.

PROSPECTS THAT WE DECIDE TO DRILL MAY NOT YIELD NATURAL GAS OR OIL IN

COMMERCIALLY VIABLE QUANTITIES. We describe some of our current prospects in

this prospectus. Our prospects are in various stages of evaluation, ranging from

a prospect that is ready to drill to a prospect that will require substantial

additional seismic data processing and interpretation. However, the use of

seismic data and other technologies and the study of producing fields in the

same area will not enable us to know conclusively prior to drilling and testing

whether natural gas or oil will be present or, if present, whether natural gas

or oil will be present in sufficient quantities to recover drilling or

completion costs or to be economically viable. From inception through December

31, 2004, we participated in drilling a total of 3 gross wells. If we drill

additional wells that we identify as dry holes in our current and future

prospects, our drilling success rate may decline and materially harm our

business. In sum, the cost of drilling, completing and operating any wells is

often uncertain and new wells may not be productive.

WE ARE SUBSTANTIALLY DEPENDENT UPON ONLY ONE PROPERTY LOCATED IN THE

ARKOMA BASIN, WHICH CAUSES OUR RISK TO BE CONCENTRATED. Our three producing

wells are located on one property and all of our other leases are located in the

Arkoma Basin in the State of Oklahoma. As a result, we may be disproportionately

exposed to the impact of delays or interruptions of production from these wells

caused by significant governmental regulation, transportation capacity

constraints, curtailment of production or interruption of transportation of

natural gas produced from the wells in this basin.

PROPERTIES THAT WE BUY MAY NOT PRODUCE AS PROJECTED AND WE MAY BE

UNABLE TO DETERMINE RESERVE POTENTIAL, IDENTIFY LIABILITIES ASSOCIATED WITH THE

PROPERTIES OR OBTAIN PROTECTION FROM SELLERS AGAINST THEM. One of our growth

strategies is to capitalize on opportunistic acquisitions of oil and natural gas

reserves. However, our reviews of acquired properties are inherently incomplete

because it generally is not feasible to review in depth every individual

property involved in each acquisition. A detailed review of records and

properties may not necessarily reveal existing or potential problems, nor will

it permit a buyer to become sufficiently familiar with the properties to assess

fully their deficiencies and potential. Further, environmental problems, such as

ground water contamination, are not necessarily observable even when an

inspection is undertaken. Acquiring properties with liabilities would have a

material adverse effect upon our results of operations.

THE POTENTIAL PROFITABILITY OF OIL AND GAS VENTURES DEPENDS UPON

FACTORS BEYOND OUR CONTROL. The potential profitability of oil and gas

properties is dependent upon many factors beyond our control. For instance,

world prices and markets for oil and gas are unpredictable, highly volatile,

potentially subject to governmental fixing, pegging, controls, or any

combination of these and other factors, and respond to changes in domestic,

international, political, social, and economic environments. Additionally, due

to worldwide economic uncertainty, the availability and cost of funds for

production and other expenses have become increasingly difficult, if not

impossible, to project. These and other changes and events may materially affect

our financial performance.

Adverse weather conditions can also hinder drilling operations. A

productive well may become uneconomic in the event water or other deleterious

substances are encountered which impair or prevent the production of oil and/or

gas from the well. In addition, production from any well may be unmarketable if

it is impregnated with water or other deleterious substances. The marketability

of oil and gas, which may be acquired or discovered will be affected by numerous

factors beyond our control. These factors include, but are not limited to, the

proximity and capacity of oil and gas pipelines and processing equipment, market

fluctuations of prices, taxes, royalties, land tenure, allowable production and

environmental protection. These factors cannot be accurately predicted and the

combination of these factors may result in us not receiving an adequate return

on our invested capital.

WE ARE DEPENDENT UPON TRANSPORTATION AND STORAGE SERVICES PROVIDED BY

THIRD PARTIES. We will be dependent on the transportation and storage services

offered by various interstate and intrastate pipeline companies for the delivery

and sale of our gas supplies. Both the performance of transportation and storage

services by interstate pipelines and the rates charged for such services are

subject to the jurisdiction of the Federal Energy Regulatory Commission or state

regulatory agencies. An inability to obtain transportation and/or storage

services at competitive rates could hinder our processing and marketing

operations and/or affect our sales margins.

OUR RESULTS OF OPERATIONS ARE DEPENDENT UPON MARKET PRICES FOR OIL AND

NATURAL GAS, WHICH FLUCTUATE WIDELY AND ARE BEYOND OUR CONTROL. Our revenue,

profitability, and cash flow depend upon the prices and demand for oil and

natural gas. The markets for these commodities are very volatile and even

relatively modest drops in prices can significantly affect our financial results

and impede our growth. Prices received also will affect the amount of future

cash flow available for capital expenditures and may affect our ability to raise

additional capital. Lower prices may also affect the amount of natural gas and

oil that can be economically produced from reserves either discovered or

acquired.

Factors that can cause price fluctuations include: (i) the level of

consumer product demand; (ii) weather conditions; (iii) domestic and foreign

governmental regulations; (iv) the price and availability of alternative fuels;

(v) technical advances affecting energy consumption; (vi) proximity and capacity

of oil and gas pipelines and other transportation facilities; (vii) political

conditions in natural gas and oil producing regions; (viii) the domestic and

foreign supply of natural gas and oil; (ix) the ability of members of

Organization of Petroleum Exporting Countries to agree to and maintain oil price

and production controls; (x) the price of foreign imports; and (xi) overall

domestic and global economic conditions.

The availability of a ready market for our oil and gas depends upon

numerous factors beyond our control, including the extent of domestic production

and importation of oil and gas, the relative status of the domestic and

international economies, the proximity of our properties to gas gathering

systems, the capacity of those systems, the marketing of other competitive

fuels, fluctuations in seasonal demand and governmental regulation of

production, refining, transportation and pricing of oil, natural gas and other

fuels.

THE OIL AND GAS INDUSTRY IN WHICH WE OPERATE INVOLVES MANY OPERATING

RISKS THAT CAN CAUSE SUBSTANTIAL LOSSES. Our drilling activities are subject to

many risks, including the risk that we will not discover commercially productive

reservoirs. Drilling for oil and natural gas can be unprofitable, not only from

dry holes, but from productive wells that do not produce sufficient revenues to

return a profit. In addition, our drilling and producing operations may be

curtailed, delayed or canceled as a result of other factors, including: (i)

fires; (ii) explosions; (iii) blow-outs and surface cratering; (iv)

uncontrollable flows of underground natural gas, oil, or formation water; (v)

natural disasters; (vi) facility and equipment failures; (vii) title problems;

(viii) shortages or delivery delays of equipment and services; (ix) abnormal

pressure formations; and (x) environmental hazards such as natural gas leaks,

oil spills, pipeline ruptures and discharges of toxic gases.

If any of these events occur, we could incur substantial losses as a

result of (i) injury or loss of life; (ii) severe damage to and destruction of

property, natural resources or equipment; (iii) pollution and other

environmental damage; (iv) clean-up responsibilities; (v) regulatory

investigation and penalties; (vi) suspension of our operations; or (vii) repairs

necessary to resume operations. If we were to experience any of these problems,

it could affect well bores, gathering systems and processing facilities, any one

of which could adversely affect our ability to conduct operations. We may be

affected by any of these events more than larger companies, since we have

limited working capital. We currently maintain $2 million of liability insurance

on bodily injury per year, for up to 25 wells, which includes coverage for

pollution, environmental damage and chemical spills. However, for some risks, we

may elect not to obtain insurance if we believe the cost of available insurance

is excessive relative to the risks presented. In addition, pollution and

environmental risks generally are not fully insurable. If a significant accident

or other event occurs and is not fully covered by insurance, it could adversely

affect operations. Moreover, we cannot provide assurance that we will be able to

maintain adequate insurance in the future at rates considered reasonable.

THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE AND THERE IS NO

ASSURANCE THAT WE WILL BE SUCCESSFUL IN ACQUIRING THE LEASES. The oil and

natural gas industry is intensely competitive, and we compete with other

companies that have greater resources. Many of these companies not only explore

for and produce oil and natural gas, but also carry on refining operations and

market petroleum and other products on a regional, national or worldwide basis.

These companies may be able to pay more for productive oil and natural gas

properties and exploratory prospects or define, evaluate, bid for and purchase a

greater number of properties and prospects than our financial or human resources

permit. In addition, these companies may have a greater ability to continue

exploration activities during periods of low oil and natural gas market prices.

Our larger competitors may be able to absorb the burden of present and future

federal, state, local and other laws and regulations more easily than we can,

which would adversely affect our competitive position. Our ability to acquire

additional properties and to discover reserves in the future will be dependent

upon our ability to evaluate and select suitable properties and to consummate

transactions in a highly competitive environment. In addition, because we have

fewer financial and human resources than many companies in our industry, we may

be at a disadvantage in bidding for exploratory prospects and producing oil and

natural gas properties.

THERE CAN BE NO ASSURANCE WE WILL BE ABLE TO OBTAIN DRILLING EQUIPMENT

TO MEET OUR DRILLING REQUIREMENTS. There is currently a high demand for drilling

equipment in the Arkoma Basin in the State of Oklahoma. We have experienced

delays in the past in obtaining drilling rigs due to the high drilling demand in

the Arkoma Basin where we have been concentrating our coal bed methane and other

gas targeted production and leasing programs. While we have entered into a

drilling agreement with Oak Hills Drilling and Operating, LLC, to drill a ten

well program, there can be no assurance that we will be able to obtain the

requisite drilling equipment to meet our planned drilling initiatives according

to our timetable. In the event that we are unable to obtain drilling equipment

to conduct our exploration operations, it could have a material adverse effect

upon our business and our results of operations.

THE MARKETABILITY OF NATURAL RESOURCES WILL BE AFFECTED BY NUMEROUS

FACTORS BEYOND OUR CONTROL WHICH MAY RESULT IN US NOT RECEIVING AN ADEQUATE

RETURN ON INVESTED CAPITAL TO BE PROFITABLE OR VIABLE. The marketability of

natural resources which may be acquired or discovered by us will be affected by

numerous factors beyond our control. These factors include market fluctuations

in oil and gas pricing and demand, the proximity and capacity of natural

resource markets and processing equipment, governmental regulations, land

tenure, land use, regulation concerning the importing and exporting of oil and

gas and environmental protection regulations. The exact effect of these factors

cannot be accurately predicted, but the combination of these factors may result

in us not receiving an adequate return on invested capital to be profitable or

viable.

OIL AND GAS OPERATIONS ARE SUBJECT TO COMPREHENSIVE REGULATION WHICH

MAY CAUSE SUBSTANTIAL DELAYS OR REQUIRE CAPITAL OUTLAYS IN EXCESS OF THOSE

ANTICIPATED CAUSING AN ADVERSE EFFECT ON OUR COMPANY. Oil and gas operations are

subject to federal, state, and local laws relating to the protection of the

environment, including laws regulating removal of natural resources from the

ground and the discharge of materials into the environment. Oil and gas

operations are also subject to federal, state, and local laws and regulations

which seek to maintain health and safety standards by regulating the design and

use of drilling methods and equipment. Various permits from government bodies

are required for drilling operations to be conducted; no assurance can be given

that such permits will be received. Environmental standards imposed by federal,

provincial, or local authorities may be changed and any such changes may have

material adverse effects on our activities. Moreover, compliance with such laws

may cause substantial delays or require capital outlays in excess of those

anticipated, thus causing an adverse effect on us. Additionally, we may be

subject to liability for pollution or other environmental damages which we may

elect not to insure against due to prohibitive premium costs and other reasons.

To date we have not been required to spend material amounts on compliance with

environmental regulations. However, we may be required to do so in future and

this may affect our ability to expand or maintain our operations.

EXPLORATION AND PRODUCTION ACTIVITIES ARE SUBJECT TO CERTAIN

ENVIRONMENTAL REGULATIONS WHICH MAY PREVENT OR DELAY THE COMMENCEMENT OR

CONTINUANCE OF OUR OPERATIONS. In general, our exploration and production

activities are subject to certain federal, state and local laws and regulations

relating to environmental quality and pollution control. Such laws and

regulations increase the costs of these activities and may prevent or delay the

commencement or continuance of a given operation. Compliance with these laws and

regulations has not had a material effect on our operations or financial

condition to date. Specifically, we are subject to legislation regarding

emissions into the environment, water discharges and storage and disposition of

hazardous wastes. In addition, legislation has been enacted which requires well

and facility sites to be abandoned and reclaimed to the satisfaction of state

authorities. However, such laws and regulations are frequently changed and we

are unable to predict the ultimate cost of compliance. Generally, environmental

requirements do not appear to affect us any differently or to any greater or

lesser extent than other companies in the industry.

We believe that our operations comply, in all material respects, with

all applicable environmental regulations. However, we are not fully insured

against all possible environmental risks.

ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A

NEGATIVE IMPACT ON OUR ABILITY TO OPERATE AND OUR PROFITABILITY. The laws,

regulations, policies or current administrative practices of any government

body, organization or regulatory agency in the United States or any other

jurisdiction, may be changed, applied or interpreted in a manner which will

fundamentally alter our ability to carry on business. The actions, policies or

regulations, or changes thereto, of any government body or regulatory agency, or

other special interest groups, may have a detrimental effect on us. Any or all

of these situations may have a negative impact on our ability to operate and/or

our profitably.

WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR CONSULTANTS OR RECRUIT

ADDITIONAL QUALIFIED PERSONNEL. Our extremely limited personnel means that we

would be required to spend significant sums of money to locate and train new

employees in the event any of our employees resign or terminate their employment

with us for any reason. Due to our limited operating history and financial

resources, we are entirely dependent on the continued service of Grant Atkins,

Chief Executive Officer and Douglas Humphreys, Drilling Operations Manager of

Lexington Oil & Gas. Further, we do not have key man life insurance on either of

these individuals. We may not have the financial resources to hire a replacement

if one or both of our officers were to die. The loss of service of either of

these employees could therefore significantly and adversely affect our

operations.

OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO CONFLICTS OF INTEREST. Our

officers and directors serve only part time and are subject to conflicts of

interest. Each of our executive officers and directors serves only on a part

time basis. Each devotes part of his working time to other business endeavors,

much time to devote to our affairs, as well as what business opportunities

should be presented to the company. Such conflicts include deciding how much

time to devote to our affairs, as well as what business opportunities should be

presented to the company. Because of these relationships, our officers and

directors will be subject to conflicts of interest.

RISKS RELATED TO OUR COMMON STOCK

SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE

PUBLIC MARKET BY CERTAIN STOCKHOLDERS MAY RESULT IN SIGNIFICANT DOWNWARD

PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT YOUR ABILITY TO

REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK. Sales of a substantial

number of shares of our common stock in the public market by certain

stockholders could cause a reduction in the market price of our common stock. As

of the date of this Annual Report, we have 17,247,052 shares of common stock

issued and outstanding. Of the total number of issued and outstanding shares of

common stock, certain stockholders are able to resell up to 2,140,486 shares of

our common stock pursuant to a registration statement declared effective on

January 24, 2005. As a result of the registration statement, 2,140,486 shares of

our common stock were issued and are available for immediate resale and

1,947,039 common stock purchase warrants were issued with an exercise price of

$1.68 with a term ending July 24, 2005 with the shares underlying the warrants

also registered, which, if exercised, could have an adverse effect on the price

of our common stock. To the extent any of the certain stockholders exercise any

of the 1,947,039 common stock purchase warrants, and then resell the shares of

common stock issued to them upon such exercise (subject to applicable securities

law restrictions), the price of our common stock may decrease due to the

additional shares of common stock in the market. As of March 28, 2005, a total

of 248,014 warrants issued pursuant to the aforementioned registration statement

have been exercised.

As of December 31, 2004, there are 12,848,552 post-Forward Stock Split

shares outstanding of our common stock that are restricted securities as that

term is defined in Rule 144 under the Securities Act of 1933, as amended (the

"Securities Act"). Although the Securities Act and Rule 144 place certain

prohibitions on the sale of restricted securities, restricted securities may be

sold into the public market under certain conditions. Further, as of December

31, 2004, there are an aggregate of 535,000 Stock Options and 1,947,039 Warrants

outstanding.

Any significant downward pressure on the price of our common stock as

the selling stockholders sell their shares of our common stock could encourage

short sales by the selling stockholders or others. Any such short sales could

place further downward pressure on the price of our common stock.

THE TRADING PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN BOARD HAS

BEEN AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY AND STOCKHOLDERS MAY HAVE

DIFFICULTY RESELLING THEIR SHARES. Our common stock has traded as low as $0.17

and as high as $7.46 (adjusted for pre-Stock Split share prices on a 3 new

shares for 1 old share effected January 28, 2004). In addition to volatility

associated with Bulletin Board securities in general, the value of your

investment could decline due to the impact of any of the following factors upon

the market price of our common stock: (i) changes in the world wide price for

oil or natural gas; (ii) disappointing results from our discovery or development

efforts; (iii) failure to meet our revenue or profit goals or operating budget;

(iv) decline in demand for our common stock; (v) downward revisions in

securities analysts' estimates or changes in general market conditions; (vi)

technological innovations by competitors or in competing technologies; (vii)

lack of funding generated for operations; (viii) investor perception of our

industry or our prospects; and (ix) general economic trends.

In addition, stock markets have experienced price and volume

fluctuations and the market prices of securities have been highly volatile.

These fluctuations are often unrelated to operating performance and may

adversely affect the market price of our common stock. As a result, investors

may be unable to sell their shares at a fair price and you may lose all or part

of your investment.

ONE OF OUR SHAREHOLDERS MAY EXERCISE VOTING POWER OF MORE THAN 30% OF

OUR COMMON STOCK. As of the date of this Annual Report, Orient Exploration, Inc.

("Orient Exploration") owns 6,000,000 shares of our common stock, or 35.3% of

our outstanding common stock as of the date of this Annual Report, and is one of

our largest shareholders. Due to its stock ownership, Orient Exploration may be

in a viable position to affect the election of the Board of Directors and,

therefore, to affect the control our business and affairs including certain

significant corporate actions such as acquisitions, the sale or purchase of

assets, and the issuance and sale of our securities. Further, Orient Exploration

may be able to affect the prevention of or cause a change in control. We also

may be prevented from entering into transactions that could be beneficial to us

without Orient Exploration's consent. The interest of one of our largest

shareholders may differ from the interests of other shareholders.

ADDITIONAL ISSUANCES OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR

EXISTING STOCKHOLDERS. Our Articles of Incorporation authorize the issuance of

200,000,000 shares of common stock and 75,000,000 shares of preferred stock. The

Board of Directors has the authority to issue additional shares of our capital

stock to provide additional financing in the future and the issuance of any such

shares may result in a reduction of the book value or market price of the

outstanding shares of our common stock. If we do issue any such additional

shares, such issuance also will cause a reduction in the proportionate ownership

and voting power of all other stockholders. As a result of such dilution, if you

acquire shares of our common stock, your proportionate ownership interest and

voting power could be decreased. Further, any such issuances could result in a

change of control.

POSSIBLE ISSUANCE OF PREFERRED STOCK. We are authorized to issue up to

75,000,000 shares of preferred stock. The preferred stock may be issued in one

or more series, the terms of which may be determined at the time of issuance by

the board of directors, without further action by shareholders, and may include

voting rights, preferences as to dividends and liquidation, conversion and

redemption rights and sinking fund provisions as determined by the board of

directors. Although we have no present plans to issue any shares of preferred

stock, the issuance of preferred stock in the future could adversely affect the

rights of the holders of common stock and reduce the value of the common stock.

OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH

LIMITS THE MARKET FOR OUR COMMON STOCK. Because our stock is not traded on a

stock exchange or on the NASDAQ National Market or the NASDAQ Small Cap Market,

and because the market price of the common stock is less than $5 per share, the

common stock is classified as a "penny stock." Our stock has not traded above $5

per share since June 28, 2004. SEC Rule 15g-9 under the Exchange Act imposes

additional sales practice requirements on broker-dealers that recommend the

purchase or sale of penny stocks to persons other than those who qualify as an

"established customer" or an "accredited investor." This includes the

requirement that a broker-dealer must make a determination that investments in

penny stocks are suitable for the customer and must make special disclosures to

the customers concerning the risk of penny stocks. Many broker-dealers decline

to participate in penny stock transactions because of the extra requirements

imposed on penny stock transactions. Application of the penny stock rules to our

common stock reduces the market liquidity of our shares, which in turn affects

the ability of holders of our common stock to resell the shares they purchase,

and they may not be able to resell at prices at or above the prices they paid.

ITEM 2. DESCRIPTION OF PROPERTIES

We lease our principal office space located at 7473 West Lake Mead

Road, Las Vegas, Nevada 89128. We currently utilize office space, warehouse, and

fenced yard, located at 225 Kingsberry Road, Holdenville, Oklahoma 74848. We

intend to lease this space in the future from Douglas Humphreys or an affiliated

entity on terms no less favorable than those that may be obtained from third

parties.

ITEM 3. LEGAL PROCEEDINGS

Management is not aware of any legal proceedings contemplated by any

governmental authority or any other party involving us or our properties. As of

the date of this Annual Report, no director, officer or affiliate is (i) a party

adverse to us in any legal proceeding, or (ii) has an adverse interest to us in

any legal proceedings. Management is not aware of any other legal proceedings

pending or that have been threatened against us or our properties.

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

During fiscal year ended December 31, 2004, no matters were submitted

to our stockholders for approval.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR COMMON EQUITY

Shares of our common stock are traded on the OTC Bulletin Board under

the symbol "LXRS" and on the Frankfurt and Berlin stock exchanges under the

symbol "LXR"; WKN: AOBKLP. The market for our common stock is limited, and can

be volatile. The following table sets forth the high and low sales prices

relating to our common stock on a quarterly basis for the last two fiscal years

as quoted by the NASDAQ. These quotations reflect inter-dealer prices without

retail mark-up, mark-down, or commissions, and may not reflect actual

transactions.

Quarter Ended High Bid Low Bid

December 31, 2004 $2.72 $1.07

September 30, 2004 $5.40 $1.40

June 30, 2004 $7.46 $2.30

March 31, 2004 $4.95 $2.95

December 31, 2003 $4.25 $0.17

September 30, 2003 $2.50 $0.17

June 30, 2003 $2.00 $1.00

March 31, 2003 $3.50 $0.70

December 31, 2002 $3.50 $0.50

As of March 15, 2005, we had 150 shareholders of record, which does not

include shareholders whose shares are held in street or nominee names. We

believe that there are approximately 2,485 beneficial owners of our common

stock.

DIVIDEND POLICY

No dividends have ever been declared by the Board of Directors on our

common stock. Our losses do not currently indicate the ability to pay any cash

dividends, and we do not indicate the intention of paying cash dividends either

on our common stock in the foreseeable future.

FORWARD STOCK SPLIT

On January 14, 2004, our Board of Directors pursuant to minutes of

written consent in lieu of a special meeting authorized and approved a forward

stock split of three-for-one of our total issued and outstanding shares of

common stock (the "Forward Stock Split").

The Forward Stock Split was effectuated based on market conditions and

upon a determination by our Board of Directors that the Forward Stock Split was

in our best interests and of the shareholders. In our judgment the Forward Stock

Split would result in an increase in our trading float of shares of common stock

available for sale resulting in facilitation of investor liquidity and trading

volume potential. The intent of the Forward Stock Split was to increase the

marketability of our common stock.

The Forward Stock Split was effectuated with a record date of January

26, 2004 upon filing the appropriate documentation with NASDAQ. The Forward

Stock Split increased our issued and outstanding shares of common stock from

4,281,184 to approximately 12,843,552 shares of common stock. The common stock

will continue to be $0.00025 par value.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS

We have one equity compensation plan, the Lexington Resources Inc.

Stock Option Plan. The table set forth below presents the securities authorized

for issuance with respect to the Stock Option Plan under which equity securities

are authorized for issuance as of December 31, 2004:

<TABLE>

Equity Compensation Plan Information

_____________________________________________________________________________________________________________

Number of Securities Weighted-Average Exercise Number of Securities

To be Issued Upon Price of Outstanding Remaining Available for

Plan Category Exercise of Outstanding Options, Warrants Future Issuance Under

Options, Warrants and Rights Equity Compensation Plans

and Rights (excluding column (a))

(a) (b) (c)

_____________________________________________________________________________________________________________

Equity Compensation n/a n/a n/a

Plans Approved by

Security Holders

Equity Compensation

Plans Not Approved by

Security Holders

Stock Options 50,000 $0.50 0

5,000 $1.00 0

380,000 $3.00 0

100,000 $0.167 0

Total 1,035,000 $1.63 800,000

Warrants 1,747,039 $1.68 0

200,000 $5.00 0

Total 1,947,039 0

_____________________________________________________________________________________________________________

</TABLE>

LEXINGTON RESOURCES, INC. STOCK OPTION PLAN

On August 7, 2003, our Board of Directors unanimously approved and

adopted a stock option plan (the "Stock Option Plan"). The purpose of the Stock

Option Plan is to advance our interests and the interests of the shareholders by

affording our key personnel an opportunity for investment in the Company and the

incentive advantages inherent in stock ownership in the Company. Pursuant to the

provisions of the Stock Option Plan, stock options (the "Stock Options") will be

granted only to our key personnel, generally defined as a person designated by

the board of directors upon whose judgment, initiative and efforts we may rely

including any director, officer, employee or consultant.

The Stock Option Plan is administered by our Board of Directors, which

shall determine: (i) the persons to be granted Stock Options under the Stock

Option Plan; (ii) the number of shares subject to each option, the exercise

price of each Stock Option; and (iii) whether the Stock Option shall be

exercisable at any time during the option period of ten (10) years or whether

the Stock Option shall be exercisable in installments or by vesting only.

The Stock Option Plan originally provided authorization to our Board of

Directors to grant Stock Options to purchase a total number of shares of our

common stock, not to exceed 1,000,000 shares as at the date of adoption by our

Board of Directors of the Stock Option Plan. Effective December 31, 2003, our

Board of Directors amended the Stock Option Plan to increase the total number of

shares of common stock to be purchased pursuant to exercise of Stock Options to

4,000,000. Effective July 2, 2004, our Board of Directors amended the Stock

Option Plan to increase the total number of shares of common stock to be

purchased pursuant to exercise of Stock Options to 5,000,000.

During April 2004, we registered 500,000 Stock Options pursuant to an

S-8 registration statement with the Securities and Exchange Commission.

At the time a Stock Option is granted under the Stock Option Plan, our

Board of Directors shall fix and determine the exercise price at which our

shares of common stock may be acquired; provided, however, that any such

exercise price shall not be less than that permitted under the rules and

policies of any stock exchange or over-the-counter market which is applicable to

us.

In the event an optionee who is our director or officer ceases to serve

in that position, any Stock Option held by such optionee generally may be

exercisable within up to ninety (90) calendar days after the effective date that

his position ceases, and after such 90-day period any unexercised Stock Option

shall expire. In the event an optionee who is our employee or consultant ceases

to be employed by us, any Stock Option held by such optionee generally may be

exercisable within up to sixty (60) calendar days (or up to thirty (30) calendar

days where the optionee provided only investor relations services to us) after

the effective date that his employment ceases, and after such 60- or 30-day

period any unexercised Stock Option shall expire.

The Board of Directors shall determine the acceptable form of

consideration for exercising a Stock Option, including the method of payment.

Such consideration may consist entirely of: (i) cash; (ii) check; (iii)

promissory note; (iv) other shares which (A) in the case of shares acquired upon

exercise of a Stock Option, have been owned by the optionee for more than six

months on the date of surrender, and (B) have a fair market value on the date of

surrender equal to the aggregate exercise price of the shares as to which said

Stock Option shall be exercised; (v) consideration received by us under a

cashless exercise program implemented by us in connection with the Stock Option

Plan; (vi) a reduction in the amount of any of our liability to the optionee;

(vii) such other consideration and method of payment for the issuance of shares

to the extent permitted by applicable laws; or (viii) any combination of the

foregoing methods of payment. Notwithstanding the foregoing, any method of

payment other than in case may be used only with the consent of our board of

directors or if and to the extent so provided in an agreement.

As of the date of this Annual Report, an aggregate of 4,700,000 Stock

Options have been granted and an aggregate of 1,035,000 Stock Options remain

exercisable.

COMMON STOCK PURCHASE WARRANTS

Pursuant to the terms of a registration statement filed on Form SB-2,

SEC File No. 333-121301 (the "Registration Statement"), which was filed under

the Securities Act of 1933, as amended, and became effective on January 21, 2005

at 2:00 p.m., registering an aggregate of 1,947,039 common stock purchase

warrants. (collectively, the "Warrants").

The Warrants to purchase shares of common stock, and the shares of

common stock underlying the Warrants, were issued in private placements by us in

April and November 2004. Of the 1,947,039 Warrants, 1,747,039 Warrants may be

exercised by certain stockholders and their transferees, donees or successors to

purchase an aggregate of 1,747,039 shares of common stock at an exercise price

of $1.68 per share (the "November Warrants"). As of March 27, 2005, a total of

348,014 of the November Warrants have been exercised for proceeds of $416,463.

The November Warrants contain provisions for specified anti-dilution adjustments

and are exercisable for a term of 180 days after the Registration Statement has

been declared effective by the Securities and Exchange Commission (Registration

Statement declared effective on January 24, 2005 creating an expiry term of July

23, 2005). The remaining 200,000 Warrants may be exercised by certain

stockholders and their transferees, donees or successors to purchase an

aggregate of 200,000 shares of common stock at an exercise price of $5.00 per

share (the "April Warrants"). The April Warrants contain provisions for

specified anti-dilution adjustments and expire on December 31, 2005.

RECENT SALES OF UNREGISTERED SECURITIES

As of the date of this Annual Report and during fiscal year ended

December 31, 2004, to provide capital, we sold stock in private placement

offerings, issued stock in exchange for our debts or pursuant to contractual

agreements as set forth below.

PRIVATE PLACEMENT OFFERING OF 1,351,953 UNITS AND EXCHANGE OF CONVERTIBLE

PROMISSORY NOTE

On November 1, 2004, we completed the sale of an aggregate of 1,351,953

units (the "Units") at a purchase price of $1.47 per Unit for gross proceeds of

approximately $1,987,370. Further, the holder of two outstanding convertible

promissory notes from us in the aggregate principal amount of $500,000 plus

accrued interest of $12,637 exchanged the promissory notes and accrued interest

for Units, resulting in the issuance of an additional 348,733 Units. Each Unit

consists of one share of our restricted common stock and one warrant to purchase

a share of our common stock at an exercise price of $1.68 (the "November

Warrants"). The resale of the 1,351,953 shares of common stock issued and the

shares of common stock issuable upon exercise of the November Warrants were

covered under the Registration Statement filed with the Securities and Exchange

Commission, which was declared effective January 24, 2005, as described above.

C.K. Cooper & Company of Irvine, California served as the placement

agent for the offering of Units. The total commission paid or payable to C.K.

Cooper & Company in connection with the offering of the Units was: (i) a cash

payment of approximately $155,746 (which equal 8% of the total amount of capital

received by us from the sale of the brokered Units); (ii) a cash payment equal

to 5% of the capital to be received by us upon the exercise of the November

Warrants (provided such exercise is within an applicable exercise period; (iii)

warrants to purchase 46,353 shares of our common stock equal to 4% of the

aggregated gross proceeds received or to be received by us in the offering from

brokered sales of the Units on terms and conditions equal to the November

Warrants issued; and (iv) $25,000 to cover legal and other administrative costs

incurred.

PRIVATE PLACEMENT OFFERING OF 1,000,000 UNITS

During fiscal year ended December 31, 2004, we engaged in a private

placement offering under Regulation S and Rule 506 of Regulation D of the 1933

Securities Act. Pursuant to the terms of the private placement, we offered

1,000,000 units in our capital (the "Unit"), at a subscription price of $2.50

per Unit, with each such Unit being comprised of one share of our restricted

common stock and one-half of one non-transferable share purchase warrant (the

"April Warrant"). Each such whole April Warrant entitles the holder thereof to

purchase one additional share of common stock at an exercise price of $5.00 per

April Warrant for a period commencing on the date of the issuance of the Unit by

us and ending on December 31, 2005. We sold 400,000 Units at $2.50 per Unit,

consisting of 400,000 shares of restricted common stock and 200,000 April

Warrants, for aggregate gross proceeds of $1,000,000. The resale of the 400,000

shares of common stock issued and the 200,000 shares of common stock issuable

upon exercise of the April Warrants were covered under the Registration

Statement filed with the Securities and Exchange Commission, which was declared

effective January 24, 2005, as described above.

FORWARD STOCK SPLIT

On January 14, 2004, our board of directors pursuant to minutes of

written consent in lieu of a special meeting authorized and approved a forward

stock split of three-for-one of our total issued and outstanding shares of

common stock (the "Forward Stock Split").

The Forward Stock Split was effectuated based on market conditions and

upon a determination by our board of directors that the Forward Stock Split was

in our best interests and those of the shareholders. In our board's judgment the

Forward Stock Split would result in an increase in our trading float of shares

of common stock available for sale resulting in facilitation of investor

liquidity and trading volume potential. The intent of the Forward Stock Split

was to increase the marketability of our common stock.

The Forward Stock Split was effectuated with a record date of January

26, 2004 upon filing the appropriate documentation with NASDAQ. The Forward

Stock Split increased our total issued and outstanding shares of common stock

from 4,681,184 to approximately 14,043,552 shares of common stock. The common

stock will continue to carry a $0.00025 par value.

INVESTOR COMMUNICATIONS INTERNATIONAL, INC. DEBT ("ICI")

During fiscal year ended December 31, 2004, we incurred an aggregate of

$30,000 to ICI for services rendered. We had entered into a two-year consulting

services and management agreement dated January 1, 1999 with ICI (the

"Consulting Services Agreement"), whereby ICI performed a wide range of

management, administrative, financial, marketing and public company services. On

January 1, 2001, we renewed the Consulting Services Agreement for an additional

two-year period. Subsequent to January 1, 2003, the Consulting Services

Agreement had been extended on a month-to-month basis.

During fiscal year ended December 31, 2004, we entered into a

settlement agreement (the "Settlement Agreement") with ICI, in which we settled

the $495,000 of debt due and owing to ICI. ICI subsequently assigned its right,

title and interest into such debt to certain designated holders of Stock

Options, and we agreed to accept such assignment of debt as payment for the

exercise price of $1.00 per share. We issued 495,000 shares of our trading

common stock as registered under the S-8 Registration Statement to certain

designees pursuant to the exercise of Stock Options at $1.00 per share.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The summarized consolidated financial data set forth in the table below

is derived from and should be read in conjunction with our audited consolidated

financial statements for the period from inception (September 29, 2003) to

December 31, 2003 and the year ended December 31, 2004, including the notes to

those financial statements which are included in this Annual Report. The

discussion herein of fiscal year ended December 31, 2004 does not include a

comparison to fiscal year ended December 31, 2003 since fiscal year ended

December 31, 2003 is a three-month fiscal year period.

The acquisition of Lexington by Lexington Resources, Inc. on November

19, 2003, has been accounted for as a reverse acquisition with Lexington being

treated as the accounting parent and Lexington Resources, Inc., the legal

parent, being treated as the accounting subsidiary. Accordingly, our

consolidated results of operations include those of Lexington for the period

from its inception on September 29, 2003 and those of Lexington Resources, Inc.

since the date of the reverse acquisition. The acquisition of Lexington has been

accounted for using the purchase method of accounting. All significant

intercompany transactions and account balances have been eliminated.

_____________________________________________________________________

FOR THE PERIOD FROM

INCEPTION (SEPTEMBER 29,

2003) TO DECEMBER 31,

2003

_____________________________________________________________________

Revenues $ 0

_____________________________________________________________________

Net Loss $ 42,149

_____________________________________________________________________

FOR THE YEAR ENDED

DECEMBER 31, 2004

_____________________________________________________________________

Oil and Gas Revenue $ 472,140

_____________________________________________________________________

Depletion 161,328

_____________________________________________________________________

Operating costs and taxes 83,893

_____________________________________________________________________

Operating Income 226,919

_____________________________________________________________________

Consulting Expenses- Stock Based 2,989,221

_____________________________________________________________________

General and Administrative 3,268,455

Interest expense 61,932

_____________________________________________________________________

Net Loss for the Year $(6,092,689)

_____________________________________________________________________

As of December 31, 2004

_____________________________________________________________________

Working Capital $ (382,953)

_____________________________________________________________________

Total Assets 3,095,248

_____________________________________________________________________

Total Number of Shares of Common Stock

Outstanding 16,999,038

_____________________________________________________________________

Deficit (7,568,155)

_____________________________________________________________________

Total Stockholders Equity $ 1,685,514

_____________________________________________________________________

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATION

FOR FISCAL YEAR ENDED DECEMBER 31, 2004

Our net losses during fiscal year ended December 31, 2004 were

approximately ($6,092,689). During fiscal year ended December 31, 2004, we

generated $472,140 in gross revenue from the sale of gas produced from coal bed

methane gas wells on the Wagnon Lease. The $472,140 in gross revenue was reduced

by operating expenses in the amount of $245,221 consisting of $161,328 in

depletion and $83,893 in operating costs and taxes, resulting in operating

income of $226,919.

During fiscal year ended December 31, 2004, we incurred other expenses

of approximately $6,319,608. These operating expenses consisted of:

(i)$2,989,221 in stock-based compensation relating to the fair valuation of

stock options granted to consultants; (ii) $3,268,455 as general and

administrative expenses; and (iii) $61,932 as interest expense. General and

administrative expenses generally include corporate overhead, financial and

administrative contracted services, marketing, and consulting costs.

Operating expenses incurred during fiscal year ended December 31, 2004

increased primarily due to an increase in operating costs and taxes and

depletion associated with the acquisition and development of oil and gas

properties. Other expenses incurred during fiscal year ended December 31, 2004

increased primarily due to an increase in general and administrative expenses

relating to corporate marketing and the recording of the non-cash expense of

$2,989,221 in connection with the grant of 2,200,000 Stock Options.

Of the $6,319,608 incurred as other expenses during fiscal year ended

December 31, 2004, an aggregate of $30,000 was incurred payable to ICI for

amounts due and owing for operational management, administrative and financial

services rendered for the quarter ended March 31, 2004 pursuant to a month to

month contractual arrangement which ended March 31, 2004 (thus no fees were

incurred to ICI during the remaining quarters of fiscal year 2004). We also owed

ICI an aggregate amount of $74,228 in loans inclusive of interest of $3,033

accrued at ten percent (10%) per annum on outstanding loans. During fiscal year

ended December 31, 2004, we paid $72,761 to ICI in loans and accrued interest

leaving a total of $3,033 in accrued interest due and owing to ICI. During the

first quarter, we settled $200,000 of the amounts due and owing ICI pursuant to

which ICI assigned its right, title and interest into such debt to certain

designated holders of Stock Options, and we agreed to accept such assignment of

debt as payment for the exercise price of $0.50 per share of 400,000

(pre-forward stock split) Stock Options held by such designated holders. During

the second quarter, we settled $495,000 of amounts due and owing to ICI in

exchange for issuance of 495,000 shares of our restricted common stock pursuant

to the exercise of options by ICI at $1.00 per share.

Of the $6,319,608 incurred as other expenses during fiscal year ended

December 31, 2004, an aggregate of $60,000 was incurred payable to International

Market Trends AG ("IMT") for amounts due and owing for operational,

administrative, and financial services rendered. On November 10, 2003, we

entered into a consulting agreement with IMT (the "Consulting Agreement"),

whereby IMT performs a wide range of management, administrative, financial, and

business development services to us.

Our net loss during fiscal year ended December 31, 2004 was

($6,092,689) or ($0.39) per share compared to a net loss of ($42,149) or ($0.00)

per share for fiscal year ended December 31, 2003. The weighted average number

of shares outstanding was 15,817,033 at December 31, 2004 compared to 10,303,797

at December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

As at fiscal year ended December 31, 2004, our current assets were

$462,866 and our current liabilities were $845,819, resulting in a working

capital deficit of $382,953. As at fiscal year ended December 31, 2004, current

assets were comprised of: (i) $326,293 in cash; and (ii) $136,573 in accounts

receivable. As at fiscal year ended December 31, 2004, current liabilities were

comprised of: (i) $617,000 in current portion of drilling advances; and (ii)

$228,819 in accounts payable and accrued liabilities.

As at fiscal year ended December 31, 2004, our total assets were

$3,112,231 comprised of: (i) $462,866 in current assets; (ii) $1,209,938 in

carrying value of proved oil and gas properties (net of accumulated depreciation

of $161,328); (iii) $1,419,447 in carrying value of unproved oil and gas

properties; and (iv) $2,997 in other property and equipment (net of accumulated

depreciation. The increase in total assets during fiscal year ended December 31,

2004 was primarily due to the increase in carrying value of proved and unproved

oil and gas properties and an increase in accounts receivable.

As at fiscal year ended December 31, 2004, our total liabilities were

$1,409,734 comprised of: (i) $845,819 in current liabilities; and (ii) $563,915

in long-term drilling advances. The increase in total liabilities during fiscal

year ended December 31, 2004 from fiscal year ended December 31, 2003 was

primarily due to the increase in drilling advances and accounts payable and

accrued liabilities.

Stockholders' equity increased from $697,818 for December 31, 2003 to $1,685,514

for December 31, 2004.

We have not generated positive cash flows from operating activities.

For fiscal year ended December 31, 2004, net cash flow used in operating

activities was $2,346,996, consisting primarily of a net loss of $6,092,689. Net

cash flows used in operating activities was adjusted by $2,989,221 to reconcile

the non-cash expense of the grant of 2,200,000 Stock Options.

During fiscal year ended December 31, 2004, net cash flows used in

investing activities was $2,674,204, which was primarily the result of the

acquisition of our oil and gas properties.

During fiscal year ended December 31, 2004, net cash flow from

financing activities was $4,996,073 pertaining primarily to $3,766,625 received

from proceeds on the sale of our common stock, $500,000 received pursuant to the

issue of convertible promissory notes, and $830,915 in proceeds for drilling

from private third parties.

As at December 31, 2004, our current assets were $462,866, current

liabilities were $845,819, resulting in a working capital deficit of $382,953.

We expect that working capital requirements will continue to be funded through a

combination of our existing funds, cash flow from operations and further

issuances of securities. Our working capital requirements are expected to

increase in line with the growth of our business.

PLAN OF OPERATION AND FUNDING

On November 1, 2004, we completed the sale of an aggregate of 1,351,953

Units at a purchase price of $1.47 per Unit for gross proceeds of approximately

$1,987,371. Further, the holder of two of our outstanding promissory notes in

the aggregate principal amount of $500,000 plus accrued interest of $12,637

exchanged the promissory notes and accrued interest for Units, resulting in the

issuance of an additional 348,733 Units. Each Unit consists of one share of our

common stock and one Warrant to purchase a share of our common stock at an

exercise price of $1.68. The November Warrants are exercisable for a term of 180

days after the Registration Statement filed by us for the resale of the common

stock and the shares of common stock underlying the November Warrants

(Registration Statement declared effective on January 24, 2005 creating an

expiry term of July 23, 2005). The April Warrants expire on December 31, 2005.

Existing working capital, further advances and possible debt

instruments, warrant exercises, further private placements, and anticipated cash

flow are expected to be adequate to fund our operations over the next six

months. We have no lines of credit or other bank financing arrangements.

Generally, we have financed operations to date through the proceeds of the

private placement of equity and debt securities. In connection with our business

plan, management anticipates additional increases in operating expenses and

capital expenditures relating to: (i) oil and gas operating properties; (ii)

drilling initiatives; and (iii) property acquisitions. We intend to finance

these expenses with further issuances of securities, debt and or advances, and

revenues from operations. Thereafter, we expect we will need to raise additional

capital and increase its revenues to meet long-term operating requirements.

Additional issuances of equity or convertible debt securities will

result in dilution to our current shareholders. Further, such securities might

have rights, preferences or privileges senior to our common stock. Additional

financing may not be available upon acceptable terms, or at all. If adequate

funds are not available or are not available on acceptable terms, we may not be

able to take advantage of prospective new business endeavors or opportunities,

which could significantly and materially restrict our business operations.

The independent auditors' report accompanying our December 31, 2004 and

December 31, 2003 consolidated financial statements contains an explanatory

paragraph expressing substantial doubt about our ability to continue as a going

concern. The consolidated financial statements have been prepared "assuming that

we will continue as a going concern," which contemplates that we will realize

our assets and satisfy our liabilities and commitments in the ordinary course of

business.

MATERIAL COMMITMENTS

DRILLING ADVANCES

As of the date of this Annual Report, we are committed to drilling one

additional well on the Wagnon Lease, the Caleigh #4-2 well, and have elected to

participate in the drilling of a well on the Panther Creek Prospect with

Newfield. Subsequent to December 31, 2004, we received an additional $270,000,

which provides all the capital required for drilling and completion of the

Caleigh #4-2 well. The estimated cost to drill and complete the Caleigh #4-2

well is $405,000.

THE WYNN AGREEMENT

On June 24, 2004, we entered into an agreement with Jack Wynn & Co. to

place feature news stories about Lexington Resources, Inc. in national, regional

and local business investment and trade media outlets and provide other public

relations services (the "Wynn Agreement"). Pursuant to the Wynn Agreement, we

were obligated to pay Jack Wynn & Co. $7,000 per month to place feature news

stories about Lexington Resources, Inc. in national, regional and local business

investment and trade media outlets and provide other investor relation services.

The Wynn Agreement expires on June 30, 2005 but was suspended in December 2004.

PROMISSORY NOTES

During April and June 2004, we borrowed $400,000 and $100,000,

respectively, from a third-party pursuant to two promissory notes (the "Notes").

Pursuant to the terms and provisions of the Notes: (i) interest accrues monthly

at the U.S. prime lending rate plus 1% simple interest per annum; (ii) the

holder has the right to convert the $400,000 principal amount plus accrued

interest thereon into shares of common stock at the rate of $5.00 per share; and

(iii) the holder has the right to convert the $100,000 principal amount plus

accrued interest thereon into shares of common stock at the rate of $2.50 per

share.

The holder of two outstanding convertible promissory notes in the

aggregate principal amount of $500,000 plus accrued interest of $12,637

exchanged the promissory notes and accrued interest for Units, resulting in the

issuance of an additional 348,733 Units. Each Unit costing $1.47 consists of one

share of restricted common stock and one warrant to purchase a share of our

common stock at an exercise price of $1.68. The common stock and shares

underlying the warrants were subsequently registered. (See "Recent Sales of

Unregistered Securities").

PURCHASE OF SIGNIFICANT EQUIPMENT

We do not intend to purchase any significant equipment during the next

twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the FASB issued EITF No. 03-1, THE MEANING OF

OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS

("EITF 03-1"). The objective of EITF 03-1 is to provide guidance for identifying

impaired investments. EITD 03-1 also provides new disclosure requirements for

investments that are deemed to be temporarily impaired. In October 2004, the

FASB delayed the recognition and measurement provisions of EITF 03-1 until

implementation guidance is issued. The disclosure requirements are effective for

annual periods ending after June 15, 2004, and remain in effect. Management

believes that the adoption of EITF 03-1 will not have a material impact on the

Company's financial condition or results of operations.

In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS ("SFAS

151"). SFAS 151 requires issuers to treat idle facility expense, freight,

handling costs, and wasted material (spoilage) as current-period charges

regardless of whether such charges are considered abnormal. In addition, SFAS

151 requires the allocation of fixed production overheads to the costs of

conversion be based on the normal capacity of the production facilities. SFAS

151 will be effective for all inventory costs incurred in fiscal years beginning

after June 15, 2005. Management believes the adoption of this standard will not

have a material impact on the Company's financial position or results of

operations.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004),

SHARE-BASED PAYMENT ("SFAS 123(R)"), which requires the compensation cost

related to share-based payments, such as stock options and employee stock

purchase plans, be recognized in the financial statements based on the

grant-date fair value of the award. SFAS 123(R) is effective for all interim

periods beginning after December 15, 2005. Management is currently evaluating

the impact of this standard on the Company's financial condition and results of

operations. The Company has provided information herein related to the pro forma

effects on the Company's reported net loss and net loss per share of applying

the fair value recognition provisions of the previous SFAS No. 123, Accounting

for Stock-Based Compensation, to stock-based employee compensation.

In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF

NON-MONETARY ASSETS, AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR

NON-MONETARY TRANSACTIONS ("SFAS 153") SFAS 153 requires that exchanges of

non-monetary assets are to be measured based on fair value and eliminates the

exception for exchanges of non-monetary, similar productive assets, and adds an

exemption for non-monetary exchanges that do not have commercial substance. SFAS

153 will be effective for fiscal periods beginning after June 15, 2005.

Management does not believe that the adoption of this standard will have a

material impact on the Company's financial condition or results of operations.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies affect our more

significant judgments and estimates used in the preparation of our financial

statements.

ACCOUNTING FOR NATURAL GAS AND OIL PRODUCING ACTIVITIES

We use the full cost method to account for our natural gas and oil

producing activities. Under this accounting method, we capitalize substantially

all of the costs incurred in connection with the acquisition, development, and

exploration of natural gas and oil reserves in full cost pools maintained by

geographic areas, regardless of whether reserves are actually discovered and

apply a quarterly full cost ceiling test. Adverse changes in conditions

(primarily gas price declines) could result in permanent write-downs in the

carrying value of oil and gas properties as well as non-cash charges to

operations.

RESERVE ESTIMATES

Our estimates of oil and natural gas reserves, by necessity, are

projections based on geological and engineering data, and there are

uncertainties inherent in the interpretation of such data as well as the

projection of future rates of production and the timing of development

expenditures. Reserve engineering is a subjective process of estimating

underground accumulations of oil and natural gas that are difficult to measure.

The accuracy of any reserve estimate is a function of the quality of available

data, engineering and geological interpretation and judgment. Estimates of

economically recoverable oil and natural gas reserves and future net cash flows

necessarily depend upon a number of variable factors and assumptions which are

not limited to historical production from the area compared with production from

other producing areas, the assumed effects of regulations by governmental

agencies and assumptions governing future oil and natural gas prices, future

operating costs, severance and excise taxes, development costs and work-over and

remedial costs, and assumed commodity prices, all of which may in fact vary

considerably from actual results. For these reasons, estimates of the

economically recoverable quantities of oil and natural gas attributable to any

particular group of properties, classifications of such reserves based on risk

of recovery, and estimates of the future net cash flows expected there from may

vary substantially. Any significant variance in the assumptions could materially

affect the estimated quantity and value of the reserves, which could affect the

carrying value of our oil and gas properties and/or the rate of depletion of the

oil and gas properties. Actual production, revenues and expenditures with

respect to our reserves will likely vary from estimates, and such variances may

be material.

Many factors will affect actual net cash flows, including:

- the amount and timing of actual production;

- supply and demand for natural gas;

- curtailments or increases in consumptions by natural gas

purchasers;

- changes in governmental regulation or taxation; and

- oil and gas commodity price changes.

PROPERTY, EQUIPMENT AND DEPRECIATION

We follow the full cost method of accounting for oil and gas

properties. Under this method all production costs incurred in connection with

the exploration for and development of oil and gas reserves are capitalized.

These capitalized costs include lease acquisition, geological and geophysical

work, delay rentals, drilling, completing and equipping oil and gas wells,

including salaries, benefits and other internal salary related costs directly

attributable to these activities.

Costs associated with production and general corporate activities are

expensed in the period incurred. Interest costs related to unproved properties

and properties under development also are capitalized to oil and gas properties.

If the net investment in oil and gas properties exceeds an amount equal to the

sum of (1) the standardized measure of discounted future net cash flows from

proved reserves, and (2) the lower of cost or fair market value of properties in

process of development and unexplored acreage, the excess is charged to expense

as additional depletion. Normal dispositions of oil and gas properties are

accounted for as adjustments of capitalized costs, with no gain or loss

recognized. As a result, we are required to estimate our proved reserves at the

end of each quarter, which is subject to the uncertainties described in the

previous section.

ITEM 7. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM DATED

MARCH 24, 2005 F-2

CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2004 AND

DECEMBER 31, 2003 F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR FISCAL YEAR ENDED

DECEMBER 31, 2004 AND FOR THE PERIOD FROM SEPTEMBER 29, 2003

(INCEPTION) TO DECEMBER 31, 2003 F-4

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD

FROM SETPEMBER 29, 2003 (INCEPTION) TO DECEMBER 31, 2004 F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED

DECEMBER 31, 2004 AND FOR THE PERIOD FROM SEPTEMBER 29, 2003

(INCEPTION) TO DECEMBER 31, 2004 F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

LEXINGTON RESOURCES, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

DALE MATHESON

CARR-HILTON LABONTE

CHARTERED ACCOUNTANTS

LETTERHEAD APPEARS HERE

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

________________________________________________________________________________

To the Stockholders and Board of Directors of Lexington Resources, Inc.

We have audited the consolidated balance sheets of Lexington Resources Inc. as

at December 31, 2004 and 2003 and the consolidated statement of operations,

stockholders' equity and cash flows for the year ended December 31, 2004 and the

period from September 29, 2003 (inception) to December 31, 2003. These financial

statements are the responsibility of the Company's management. Our

responsibility is to express an opinion on these financial statements based on

our audits.

We conducted our audits in accordance with the standards of the Public Company

Accounting Oversight Board (United States). Those standards require that we plan

and perform an audit to obtain reasonable assurance whether the financial

statements are free of material misstatement. An audit includes examining, on a

test basis, evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a

reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all

material respects, the financial position of the Company as at December 31, 2004

and 2003 and the results of its operations and its cash flows and the changes in

stockholders' equity for the periods then ended, in conformity with accounting

principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming

that the Company will continue as a going concern. As discussed in Note 1 to the

financial statements, to date the Company has reported significant losses since

inception from operations and requires additional funds to meet its obligations

and fund the costs of its operations. These factors raise substantial doubt

about the Company's ability to continue as a going concern. Management's plans

in this regard are described in Note 1. The financial statements do not include

any adjustments that might result from the outcome of this uncertainty.

"DALE MATHESON CARR-HILTON LABONTE"

CHARTERED ACCOUNTANTS

Vancouver, B.C.

March 24 , 2005

F-2

<TABLE>

LEXINGTON RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, December 31,

2004 2003

______________________________________________________________________________________________________

ASSETS

CURRENT ASSETS

Cash $ 326,293 $ 351,420

Accounts receivable 136,573 -

Prepaid expenses - 450

______________________________________________________________________________________________________

462,866 351,870

______________________________________________________________________________________________________

PROPERTY AND EQUIPMENT, at cost (Note 4)

Oil and gas properties, full cost method of accounting

Proved, net of accumulated depletion of $161,328 1,209,938 -

Unproved 1,419,447 120,000

______________________________________________________________________________________________________

2,629,385 120,000

Other property and equipment, net of accumulated depreciation 2,997 -

______________________________________________________________________________________________________

2,632,382 120,000

______________________________________________________________________________________________________

$ 3,095,248 $ 471,870

======================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES

Accounts payable and accrued liabilities $ 228,819 $ 23,221

Current portion of drilling advances (Note 5) 617,000 350,000

Due to related parties (Note 9) - 796,467

______________________________________________________________________________________________________

845,819 1,169,688

DRILLING ADVANCES (Note 5) 563,915 -

______________________________________________________________________________________________________

1,409,734 1,169,688

______________________________________________________________________________________________________

CONTINGENCIES AND COMMITMENTS (Notes 1, 5 & 12)

STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 7)

Common stock $0.00025 par value: 200,000,000 shares authorized

Preferred stock, $0.001 par value: 75,000,000 shares authorized

Issued and outstanding:

16,999,038 common shares (2003 - 12,843,552) 4,250 3,211

Additional paid-in capital 8,947,604 761,937

Common stock purchase warrants 301,815 12,500

Deficit (7,568,155) (1,475,466)

______________________________________________________________________________________________________

1,685,514 (697,818)

______________________________________________________________________________________________________

$ 3,095,248 $ 471,870

======================================================================================================

The accompanying notes are an integral part of these consolidated financial

statements.

</TABLE>

F-3

<TABLE>

LEXINGTON RESOURCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the period from

September 29, 2003

(inception)

For the year to

ended December 31, December 31,

2004 2003

______________________________________________________________________________________

(Note 1)

OIL AND GAS REVENUE $ 472,140 $ -

______________________________________________________________________________________

EXPENSES

Depletion 161,328 -

Operating costs and taxes 83,893 -

______________________________________________________________________________________

245,221 -

______________________________________________________________________________________

OPERATING INCOME 226,919 -

______________________________________________________________________________________

OTHER EXPENSES

Consulting - stock based (Note 8) 2,989,221 -

General and administrative 3,268,455 32,739

Interest expense 61,932 9,410

______________________________________________________________________________________

6,319,608 42,149

______________________________________________________________________________________

NET LOSS FOR THE YEAR $(6,092,689) $ (42,149)

======================================================================================

BASIC NET LOSS PER SHARE $ (0.39) $ (0.00)

======================================================================================

WEIGHTED AVERAGE COMMON

SHARES OUTSTANDING 15,817,033 10,303,797

======================================================================================

The accompanying notes are an integral part of these consolidated financial

statements.

</TABLE>

F-4

<TABLE>

LEXINGTON RESOURCES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Deficit

Accumulated

Additional Common Stock During

Common stock Paid-In Purchase Exploration

Shares Amount Capital Warrants Stage Total

___________________________________________________________________________________________________________________________________

Issued for cash at $.0001 per share 3,000,000 $ 300 $ - $ - $ - $ 300

___________________________________________________________________________________________________________________________________

Lexington balance, November 19, 2003 3,000,000 300 - - - 300

LRI balance, November 19, 2003 (Note 7) 10,593,552 39,833 15,981,933 - (17,452,735) (1,430,969)

Reverse acquisition recapitalization

adjustment (3,000,000) (37,485) (15,981,933) - 16,019,418 -

___________________________________________________________________________________________________________________________________

Balance post-reverse acquisition 10,593,552 2,648 - - (1,433,317) (1,430,669)

Private placement at $0.83 per unit 300,000 75 237,425 12,500 - 250,000

Issuance of common stock on exercise of

options 1,650,000 413 274,587 - - 275,000

Issuance of common stock on settlement of

debt at $0.83 per share 300,000 75 249,925 - - 250,000

Net loss, period ended December 31, 2003 - - - - (42,149) (42,149)

___________________________________________________________________________________________________________________________________

Balance, December 31, 2003 12,843,552 3,211 761,937 12,500 (1,475,466) (697,818)

Common stock purchase warrants expired - - 12,500 (12,500) - -

Feb 2, 2004 - stock based compensation (Note

8) - - 2,989,221 - - 2,989,221

Private placement 2.50 per unit 439,800 110 954,890 45,000 - 1,000,000

Discount on Convertible Debenture (Note 6) - - 50,000 - - 50,000

Private placement 1.47 per unit for cash and

settlement of Convertible Debentures (Note

7) 1,700,686 425 2,035,355 256,815 - 2,292,595

Fair market value of additional

consideration on conversion of Convertible

Debentures (Note 6) 489,205 - - 489,005

Issuance of common stock on exercise of

options @ $0.167 per share 1,200,000 300 199,700 - - 200,000

Issuance of common stock on exercise of

options @ $1.00 per share 495,000 124 494,876 495,000

Issuance of common stock on exercise of

options @ $3.00 per share 320,000 80 959,920 - - 960,000

Net loss, year ended December 31, 2004 - - - - (6,092,689) (6,092,689)

___________________________________________________________________________________________________________________________________

Balance, December 31, 2004 16,999,038 $ 4,250 $ 8,947,604 $301,815 $(7,568,155) $ 1,685,514

===================================================================================================================================

All share amounts have been restated to reflect the 300:1 reverse split in

November 2003 and the 3:1 forward split in January 2004. (Refer to Note 7.)

The accompanying notes are an integral part of these consolidated financial

statements.

</TABLE>

F-5

<TABLE>

LEXINGTON RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the period

from

September 29, 2003

For the Year (inception) to

Ended December 31, 2003

December 31,

2004

___________________________________________________________________________________________________________________

(Note 1)

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss for the year $ (6,092,689) $ (42,149)

Adjustments to reconcile net loss to net cash from operating activities:

Stock-based consulting fees 2,989,221 -

Finance fees 512,538 -

Oil and gas depletion 161,328 -

Accrued interest 12,637 -

Depreciation 494 -

Changes in working capital assets and liabilities

Prepaid expenses 450 (450)

Accounts receivable (136,573) -

Accounts payable 205,598 (15,724)

___________________________________________________________________________________________________________________

NET CASH FLOWS USED IN OPERATING ACTIVITIES (2,346,996) (58,323)

___________________________________________________________________________________________________________________

CASH FLOWS FROM INVESTING ACTIVITIES

Cash acquired on acquisition of Lexington Oil & Gas Co. LLC - 900

Fixed assets (3,491) -

Oil and gas properties (2,670,713) (120,000)

___________________________________________________________________________________________________________________

NET CASH FLOWS USED IN INVESTING ACTIVITIES (2,674,204) (119,100)

___________________________________________________________________________________________________________________

CASH FLOWS FROM FINANCING ACTIVITIES

Drilling advances 830,915 -

Advances payable (101,467) 278,543

Convertible Promissory Notes 500,000 -

Net proceeds on sale of common stock 3,766,625 250,300

___________________________________________________________________________________________________________________

NET CASH FLOWS FROM FINANCING ACTIVITIES 4,996,073 528,843

___________________________________________________________________________________________________________________

INCREASE (DECREASE) IN CASH (25,127) 351,420

CASH, BEGINNING OF YEAR 351,420 -

___________________________________________________________________________________________________________________

CASH, END OF YEAR $ 326,293 $ 351,420

===================================================================================================================

SUPPLEMENTAL CASH FLOW INFORMATION (Refer to Note 11)

The accompanying notes are an integral part of these consolidated financial

statements.

</TABLE>

F-6

LEXINGTON RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004

________________________________________________________________________________

NOTE 1: NATURE OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION

________________________________________________________________________________

By Share Exchange Agreement dated November 19, 2003, Lexington Resources, Inc.

(formerly Intergold Corporation) ("LRI" or "the Company"), a Nevada corporation,

acquired 100% of the issued and outstanding shares of Lexington Oil & Gas Ltd.

Co. LLC, (an exploration stage company) ("Lexington"), in exchange for 9,000,000

(3,000,000 pre January 26, 2004 3:1 forward split) restricted shares of common

stock of the Company representing 85% of the total issued and outstanding shares

of the Company at the time. In connection with this transaction, Intergold

Corporation changed its name to Lexington Resources, Inc. (Refer to Note 3.)

This acquisition has been accounted for as a reverse acquisition with Lexington

being treated as the accounting parent and LRI, the legal parent, being treated

as the accounting subsidiary. Accordingly, the consolidated results of

operations of the Company include those of Lexington for the period from its

inception on September 29, 2003 and those of LRI since the date of the reverse

acquisition.

Lexington is an Oklahoma Limited Liability Corporation incorporated on September

29, 2003 formed for the purposes of the acquisition and development of oil and

natural gas properties in the United States, concentrating on coal bed methane

gas acquisition and production initiatives. As planned principal operations

commenced in 2004 the Company is no longer considered to be an exploration stage

company.

GOING CONCERN

The consolidated financial statements have been prepared on the basis of a going

concern which contemplates the realization of assets and the satisfaction of

liabilities in the normal course of business. The Company has a working capital

deficit of $382,953, has incurred losses since inception of $7,568,155, and

further losses are anticipated in the development of its oil and gas properties

raising substantial doubt as to the Company's ability to continue as a going

concern. The ability of the Company to continue as a going concern is dependent

on raising additional capital to fund ongoing research and development and

ultimately on generating future profitable operations. The Company will continue

to fund operations with advances, other debt sources, further equity placements

and the expected exercise of outstanding warrants.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

________________________________________________________________________________

(a) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and

its wholly-owned subsidiary, Lexington. Lexington was acquired by reverse

acquisition on November 19, 2003. All significant intercompany transactions and

account balances have been eliminated.

(b) OIL AND GAS PROPERTIES

The Company follows the full cost method of accounting for its oil and gas

operations whereby all costs related to the acquisition of methane, petroleum,

and natural gas interests are capitalized. Under this method, all productive and

nonproductive costs incurred in connection with the exploration for and

development of oil and gas reserves are capitalized. Such costs include land and

lease acquisition costs, annual carrying charges of non-producing properties,

geological and geophysical costs, costs of drilling and equipping productive and

non-productive wells, and direct exploration salaries and related benefits.

Proceeds from the disposal of oil and gas properties are recorded as a reduction

of the related capitalized costs without recognition of a gain or loss unless

the disposal would result in a change of 20 percent or more in the depletion

rate. The Company currently operates solely in the U.S.A.

Depreciation and depletion of proved oil and gas properties is computed on the

units-of-production method based upon estimates of proved reserves, as

determined by independent consultants, with oil and gas being converted to a

common unit of measure based on their relative energy content.

The costs of acquisition and exploration of unproved oil and gas properties,

including any related capitalized interest expense, are not subject to

depletion, but are assessed for impairment either individually or on an

aggregated basis. The costs of certain unevaluated leasehold acreage are also

not subject to depletion. Costs not subject to depletion are periodically

assessed for possible impairment or reductions in value. If a reduction in value

has occurred, costs subject to depletion are increased or a charge is made

against earnings for those operations where a reserve base is not yet

established.

F-7

LEXINGTON RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004

________________________________________________________________________________

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

________________________________________________________________________________

Estimated future removal and site restoration costs are provided over the life

of proven reserves on a units-of-production basis. Costs, which include

production equipment removal and environmental remediation, are estimated each

period by management based on current regulations, actual expenses incurred, and

technology and industry standards. The charge is included in the provision for

depletion and depreciation and the actual restoration expenditures are charged

to the accumulated provision amounts as incurred.

The Company applies a ceiling test to capitalized costs which limits such costs

to the aggregate of the estimated present value, using a ten percent discount

rate of the estimated future net revenues from production of proven reserves at

year end at market prices less future production, administrative, financing,

site restoration, and income tax costs plus the lower of cost or estimated

market value of unproved properties. If capitalized costs are determined to

exceed estimated future net revenues, a write-down of carrying value is charged

to depletion in the period.

The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset

Retirement Obligations." SFAS No. 143 requires the fair value of a liability for

an asset retirement obligation to be recognized in the period in which it is

incurred if a reasonable estimate of fair value can be made. The associated

asset retirement costs are capitalized as part of the carrying amount of the

related oil and gas properties. As of December 31, 2004 management has

determined that there are no material asset retirement obligations.

(d) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing earnings (loss) for the

period by the weighted average number of common shares outstanding for the

period. Diluted earnings (loss) per share reflects the potential dilution of

securities by including other potential common stock, including convertible

preferred shares, in the weighted average number of common shares outstanding

for a period and is not presented where the effect is anti-dilutive. The

presentation is only of basic earnings (loss) per share as the effect of

potential dilution of securities has no impact on the current period's basic

earnings (loss) per share. Loss per share, as presented, has been restated to

reflect the forward stock split described in Note 7. The weighted average number

of shares outstanding prior to the reverse acquisition is deemed to be the

number of shares issued in connection with the reverse acquisition being

9,000,000 shares (3,000,000 pre January 26, 2004 3:1 forward split).

(e) REVENUE RECOGNITION

Oil and natural gas revenues are recorded using the sales method, whereby the

Company recognizes oil and natural gas revenue based on the amount of oil and

gas sold to purchasers, when title passes, the amount is determinable and

collection is reasonably assured.

(f) FINANCIAL INSTRUMENTS

The fair values of cash, accounts receivable, accounts payable, accrued

liabilities, drilling advances and advances due to related parties were

estimated to approximate their carrying values due to the immediate or

short-term maturity of these financial instruments. The Company's operations are

currently in the State of Oklahoma, in the United States, and as a result the

Company is not subject to significant exposure to market risks from changes in

foreign currency rates.

The Company's financial instruments that are exposed to concentrations of credit

risk consist primarily of cash and accounts receivable. The Company's cash is

held at a major financial institution. The Company manages and controls market

and credit risk through established formal internal control procedures, which

are reviewed on an ongoing basis.

The Company sells its gas to only one customer as there is currently

insufficient production for multiple purchasers. The Company manages and

controls this situation by ensuring it only deals with gas purchasers that are

reputable and are well established.

(g) CONCENTRATION OF CREDIT RISK

Substantially all of the Company's sales are to one party. Consequently the

Company is exposed to a concentration of credit risk.

F-8

LEXINGTON RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004

________________________________________________________________________________

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

________________________________________________________________________________

(h) USE OF ESTIMATES

The preparation of these consolidated financial statements requires the use of

certain estimates by management in determining the Company's assets,

liabilities, revenues and expenses. Actual results could differ from such

estimates. Depreciation, depletion and amortization of oil and gas properties

and the impairment of oil and gas properties are determined using estimates of

oil and gas reserves. There are numerous uncertainties in estimating the

quantity of reserves and in projecting the future rates of production and timing

of development expenditures, including future costs to dismantle, dispose, plug,

and restore the Company's properties. 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. Proved reserves of oil and

natural gas are estimated quantities that geological and engineering data

demonstrate with reasonable certainty to be recoverable in the future from known

reservoirs under existing conditions.

(i) STOCK-BASED COMPENSATION

In December 2002, the Financial Accounting Standards Board ("FASB") issued

Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation

- - Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial

Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.

123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of

transition for an entity that voluntarily changes to the fair value based method

of accounting for stock-based employee compensation, (2) amend the disclosure

provisions to require prominent disclosure about the effects on reported net

income of an entity's accounting policy decisions with respect to stock-based

employee compensation, and (3) to require disclosure of those effects in interim

financial information. The disclosure provisions of SFAS No. 148 were effective

for the Company for the period ended December 31, 2003.

The Company has elected to continue to account for stock-based employee

compensation arrangements in accordance with the provisions of Accounting

Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES",

("APB No. 25") and comply with the disclosure provisions of SFAS No. 123 as

amended by SFAS No. 148 as described above. In addition, in accordance with SFAS

No. 123 the Company applies the fair value method using the Black-Scholes

option-pricing model in accounting for options granted to consultants. Under APB

No. 25, compensation expense is recognized based on the difference, if any, on

the date of grant between the estimated fair value of the Company's stock and

the amount an employee must pay to acquire the stock. Compensation expense is

recognized immediately for past services and pro-rata for future services over

the option-vesting period.

The following table illustrates the pro forma effect on net income (loss) and

net income (loss) per share as if the Company had accounted for its stock-based

employee compensation using the fair value provisions of SFAS No. 123 using the

assumptions as described in Note 8:

<TABLE>

For the period from

September 29, 2003

Year ended (inception) to

December 31, 2004 December 31, 2003

__________________________________________

Net loss for the year As reported $ (6,092,689) $ (42,149)

SFAS 123 compensation expense Pro-forma (692,051) -

__________________________________________

Net loss for the year Pro-forma $ (6,784,740) $ (42,149)

==========================================

Pro-forma basic net loss per share Pro-forma $ (0.43) $ (0.00)

==========================================

</TABLE>

The Company accounts for equity instruments issued in exchange for the receipt

of goods or services from other than employees in accordance with SFAS No. 123

and the conclusions reached by the Emerging Issues Task Force in Issue No.

96-18. Costs are measured at the estimated fair market value of the

consideration received or the estimated fair value of the equity instruments

issued, whichever is more reliably measurable. The value of equity instruments

issued for consideration other than employee services is determined on the

earliest of a performance commitment or completion of performance by the

provider of goods or services as defined by EITF 96-18.

The Company has also adopted the provisions of the FASB Interpretation No.44,

ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN

INTERPRETATION OF APB OPINION NO. 25 ("FIN 44"), which provides guidance as to

certain applications of APB 25.

F-9

LEXINGTON RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004

________________________________________________________________________________

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

________________________________________________________________________________

(j) INCOME TAXES

The Company follows the liability method of accounting for income taxes. Under

this method, deferred tax assets and liabilities are recognized for the future

tax consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax

balances. Deferred tax assets and liabilities are measured using enacted or

substantially enacted tax rates expected to apply to the taxable income in the

years in which those differences are expected to be recovered or settled. The

effect on deferred tax assets and liabilities of a change in tax rates is

recognized in income in the period that includes the date of enactment or

substantial enactment. A valuation allowance is provided for deferred tax assets

if it is more likely than not that the Company will not realize the future

benefit, or if future deductibility is uncertain.

(k) CASH AND CASH EQUIVALENTS

The company considers all highly liquid instruments with an original maturity of

three months or less at the time of issuance to be cash equivalents.

RECENT ACCOUNTING PRONOUNCEMENTS

(l) In March 2004, the FASB issued EITF No. 03-1, THE MEANING OF