Cygnus Oil & Gas (CYNS) 10-Q/A 2006 Q2 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q/A

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

For the quarterly period ended: June 30, 2006

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

For the transition period from                    to                    

Commission file no.000-50228

CYGNUS OIL AND GAS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

1600 Smith Street
Suite 5100
Houston, TX 77002

(Address of Principal Executive Offices)

(713) 784-1113

(Registrant’s Telephone Number, including Area Code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

Large Accelerated Filero Accelerated Filero Non-Accelerated Filerþ

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date: There were 83,680,535 issued and outstanding shares of the registrant’s common stock, par value $.001 per share, as of August 10, 2006.

CYGNUS OIL AND GAS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR FISCAL QUARTER ENDED JUNE 30, 2006

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Consolidated Balance Sheets (Unaudited)	2
	Consolidated Statements of Operations (Unaudited)	3
	Consolidated Statements of Cash Flows (Unaudited)	4
	Notes to Consolidated Financial Statements (Unaudited)	5
PART II. OTHER INFORMATION		18
Item 6.	Exhibits	18
SIGNATURES		19
EXHIBIT INDEX
CEO Certification Pursuant to Section 302
CFO Certification Pursuant to Section 302
CEO Certification Pursuant to Section 906
CFO Certification Pursuant to Section 906

1

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CYGNUS OIL AND GAS CORPORATION
(A Development Stage Entity)

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2006			2005
	(Unaudited)			(Audited)
ASSETS
Current assets
Cash and cash equivalents	$	3,439,924		$	4,632,988
Restricted cash — joint interest		465,303			382,525
Accounts receivable		156,546			159,559
Accounts receivable — joint interest		2,247,165			1,075,746
Accounts receivable — joint interest related party		—			492,988
Notes and interest receivable		29,153			30,371
Due from related party		271,754			359,559
Prepaid loan costs		749,340			19,997
Prepaid drilling costs and advances to operator		1,845,310			1,209,583
Prepaid expenses		557,414			318,091
Total current assets		9,761,909			8,681,407
Oil and gas properties using successful efforts:
Developed oil and gas interests, net		5,399,962			3,507,316
Undeveloped		19,894,072			4,125,578
Property, plant and equipment, net		272,047			—
Due from related party		171,452			—
Prepaid loan costs — non-current		1,311,340			—
Investment in limited liability companies		54,141			54,141
Fixed assets, net		108,925			66,360
Deposits		—			30,149
	$	36,973,848		$	16,464,951
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	2,660,879		$	2,695,935
Accounts payable — joint interest		1,448,751			2,412,060
Notes payable		271,934			369,105
Notes payable — related parties		64,296			115,005
Convertible debentures, net		—			3,050,000
Registration rights penalty payable		2,416,769			—
Fair value of derivatives — registration rights penalty		—			1,696,647
Total current liabilities		6,862,629			10,338,752
Non-current liabilities
Notes payable — non-current		1,476,951			1,534,660
Convertible debentures, net — non-current		15,745,277			—
Total non-current liabilities		17,222,228			1,534,660
Commitment and contingencies
Stockholders’ equity
Preferred stock; $.001 par value; authorized — 5,000,000 shares; shares issued and outstanding — 579,563 and 710,063 at June 30, 2006 and December 31, 2005, respectively. Liquidation preference: $7,136,651		579			710
Common stock; $.001 par value; authorized — 300,000,000 shares; shares issued and outstanding — 83,458,535 at June 30, 2006 and 63,982,329 issued and outstanding and 6,763,333 issuable at December 31, 2005		83,458			70,746
Additional paid-in capital		54,029,158			36,607,833
Deficit accumulated during the development stage		(41,224,204	)		(32,087,750	)
Total stockholders’ equity		12,888,991			4,591,539
	$	36,973,848		$	16,464,951

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

2

CYGNUS OIL AND GAS CORPORATION
(A Development Stage Entity)

Condensed Consolidated Statements of Operations

(Unaudited)

													March 5, 2001
	Three Months						Six Months						(Inception) to
	Ended June 30,						Ended June 30,						June 30,
	2006			2005			2006			2005			2006
Revenues	$	252,351		$	78,554		$	741,741		$	193,850		$	1,431,082
Expenses:
Exploration expenses		3,363,842			43,355			3,538,073			52,175			5,145,830
Operating expenses		181,123			—			320,062			—			632,980
Impairment of oil and gas properties		—			(50,726	)		292,375			739,451			2,220,467
Impairment of goodwill — related party		—			—			—			—			657,914
Bad debt expense — related party		—			—			—			—			136,607
Bad debt expense		—			—			—			—			40,454
Share-based compensation		270,296			—			567,823			—			567,823
Depreciation and depletion		239,635			—			584,209			—			765,184
General and administrative		1,903,338			944,653			3,397,087			1,803,322			9,296,226
Total expenses		5,958,234			937,282			8,699,629			2,594,948			19,463,485
Loss from operations		(5,705,883	)		(858,728	)		(7,957,888	)		(2,401,098	)		(18,032,403	)
Other (income) expense
Loss from limited partnerships and limited liability companies		—			2,758,917			—			3,313,936			8,626,796
Impairment of equity investment		—			—			—			—			139,502
Registration rights penalty		(14,859	)		—			(8,326	)		—			1,690,587
Other income		—			—			—			—			(273,987	)
Interest income		(43,758	)		(10,131	)		(44,628	)		(10,624	)		(83,063	)
Interest expense		818,496			508,013			935,888			1,104,233			10,843,676
Total other expense		759,879			3,256,799			882,934			4,407,545			20,943,511
Loss before minority interest and pre-acquisition losses		(6,465,762	)		(4,115,527	)		(8,840,822	)		(6,808,643	)		(38,975,914	)
Add back:
Minority interest		—			37,134			—			295,486			557,874
Pre-acquisition losses		—			—			—			—			211,315
Total minority interest and pre-acquisition losses		—			37,134			—			295,486			769,189
Net loss		(6,465,762	)		(4,078,393	)		(8,840,822	)		(6,513,157	)		(38,206,725	)
Preferred dividend on Series A Preferred Stock		(143,252	)		(721,961	)		(295,632	)		(2,243,361	)		(3,017,479	)
Net loss to common stockholders	$	(6,609,014	)	$	(4,800,354	)	$	(9,136,454	)	$	(8,756,518	)	$	(41,224,204	)
Net loss per common share — basic and diluted	$	(0.08	)	$	(0.08	)	$	(0.12	)	$	(0.14	)	$	(0.36	)
Weighted average number of common shares outstanding — basic and diluted		82,317,721			61,118,680			79,421,317			60,946,688			115,880,209

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

3

CYGNUS OIL AND GAS CORPORATION
(A Development Stage Entity)

Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Six Months Ended						March 5, 2001
	June 30,						(Inception) to
	2006			2005			June 30, 2006
Cash flows from operating activities
Net cash used in operating activities	$	(6,398,824	)	$	(1,489,596	)	$	(12,976,760	)
Cash flows from investing activities
Cash acquired from acquisition of wholly-owned subsidiaries and limited partnership interest		—			—			4,715
Repayment of note receivable — related party		(49,700	)		2,000			721,939
Notes receivable		(148,369	)		(10,184	)		(315,840	)
Notes receivable — related party		—			(752,000	)		(804,975	)
Purchase of oil and gas interests and drilling costs		(17,541,398	)		(90,194	)		(22,820,763	)
Purchase of oil and gas pipeline		(272,047	)		—			(272,047	)
Refund of payments for oil and gas interests and drilling costs		—			500,000			—
Investment in limited partnership interests		—			(2,818,587	)		(11,512,785	)
Distributions from limited partnerships		62,928			10,000			512,067
Purchase of fixed assets		(52,989	)		(7,726	)		(112,183	)
Net cash used in investing activities		(18,001,575	)		(3,166,691	)		(34,599,872	)
Cash flows from financing activities
Advances from stockholder		—			—			10,000
Repayments to stockholder		—			—			(10,000	)
Proceeds from notes payable		—			—			807,100
Proceeds from notes payable — related party		—			—			279,000
Repayment of notes payable		(2,747,170	)		(101,100	)		(8,197,814	)
Repayment of notes payable — related party		—			(82,048	)		(248,548	)
Proceeds from issuance of convertible debt		22,000,000			—			33,090,000
Loan costs		(1,899,515	)		—			(2,003,515	)
Capital contributed by officer		—			—			15,000
Minority contributions, net of issuance costs		—			116,690			3,325,500
Proceeds from issuance of preferred stock, net of issuance costs		—			6,940,081			6,940,081
Proceeds from issuance of common stock, net of issuance costs		5,854,020			408,931			17,009,752
Net cash provided by financing activities		23,207,335			7,282,554			51,016,556
Net (decrease) increase in cash and cash equivalents		(1,193,064	)		2,626,267			3,439,924
Cash and cash equivalents at beginning of period		4,632,988			594,182			—
Cash and cash equivalents, end of period	$	3,439,924		$	3,220,449		$	3,439,924

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

4

CYGNUS OIL AND GAS CORPORATION
(A Development Stage Entity)

Notes to Condensed Consolidated Financial Statements

NOTE 1 — BASIS OF PRESENTATION

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

These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s 2005 Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2006.

For comparability, certain reclassifications have been made to prior years’ financial statements to conform with the presentation used in the current period. These reclassifications had no effect on reported net loss.

NOTE 2 — DESCRIPTION OF BUSINESS

Effective June 9, 2006, the Company changed its name from “Touchstone Resources USA, Inc.” to “Cygnus Oil and Gas Corporation.”

Cygnus Oil and Gas Corporation was incorporated under the laws of Delaware on March 5, 2001.

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

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidated Financial Statements

The accompanying consolidated financial statements include all of the accounts of Cygnus Oil and Gas Corporation and its nine subsidiaries consisting of:

• Cygnus Operator, Inc. (“Cygnus Operator”), formerly known as Touchstone Resources USA, Inc. (“Touchstone Texas”), a wholly-owned Texas corporation incorporated in May 2000.

• Cygnus New Zealand, Inc. (“Cygnus New Zealand”), formerly known as Touchstone New Zealand, Inc. (“Touchstone New Zealand”), a wholly-owned Delaware corporation incorporated in March 2004.

• Cygnus Louisiana, Inc. (“Cygnus Louisiana”), formerly known as Touchstone Louisiana, Inc. (“Touchstone Louisiana”), a wholly-owned Delaware corporation incorporated in March 2004.

• Cygnus Texas Properties, Inc. (“Cygnus Texas Properties”), formerly known as Touchstone Texas Properties, Inc. (“Touchstone Texas Properties”), a wholly-owned Delaware corporation incorporated in March 2004.

• Cygnus Oklahoma, LLC (“Cygnus Oklahoma”), formerly known as Touchstone Oklahoma, LLC (“Touchstone Oklahoma”), a wholly-owned Delaware limited liability company formed in June 2004.

5

• PF Louisiana, LLC (“PF Louisiana”), a wholly-owned Delaware limited liability company formed in August 2004.

• Cygnus Mississippi, LLC (“Cygnus Mississippi”), formerly known as Touchstone Mississippi, LLC (“Touchstone Mississippi”), a wholly-owned Delaware limited liability company formed in October 2005.

• Cygnus Oklahoma Operating, LLC (“Cygnus Oklahoma Operating”), formerly known as CE Operating, LLC (“CE Operating”), a wholly-owned Oklahoma limited liability company formed in May 2005.

• PHT West Pleito Gas, LLC (“PHT West”), an 86% owned Delaware limited liability company formed in April 2004.

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

Development Stage Enterprise

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

Segment Information

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

Operating revenues for the six months and three months ended June 30, 2006 and 2005 by geographical area were as follows:

	Six Months Ended				Three Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
United States	$	741,741	$	193,850	$	252,351	$	78,554
New Zealand		—		—		—		—
	$	741,741	$	193,850	$	252,351	$	78,554

Long-lived assets as of June 30, 2006 and December 31, 2005 by geographical area were as follows:

	June 30,		December 31,
	2006		2005
United States	$	25,564,208	$	7,588,456
New Zealand		164,939		164,939
	$	25,729,147	$	7,753,395

Loss Per Share

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

6

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

	Six Months Ended
	June 30,
	2006		2005
Warrants		35,126,823		10,973,107
Options		5,426,540		—
Convertible debt		20,754,717		4,050,000
Series A convertible preferred stock		5,795,630		7,100,630
		67,103,710		22,123,737

NOTE 4 — STOCK-BASED COMPENSATION

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized under fair value accounting and recorded in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. We also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. Cygnus adopted SFAS No. 123R using the modified prospective method and, accordingly, financial statement amounts for prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of recognizing compensation cost relating to non-qualified stock options.

There was $567,823 and $270,296 of compensation costs related to non-qualified stock options recognized in operating results for the six months and three months ended June 30, 2006, respectively. Since the Company has generated losses from its inception, no associated future income tax benefit was recognized for the three or six months ended June 30, 2006.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Historical volatilities based on the historical stock trading prices of Cygnus are used to calculate the expected volatility. We used the simplified method as defined under the SEC Staff Accounting Bulletin No. 107, Topic 14: “Share-based Payment,” to derive an expected term. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The following table sets forth the assumptions used to determine the fair value of stock options issued:

	June 30, 2006
Expected volatility		49.27	%
Expected annual dividend yield		0.00	%
Risk free rate of return		4.00	%
Expected life (years)		4.2

No stock options were awarded in the six months ended June 30, 2005 and therefore no fair value disclosure is provided for this period.

At June 30, 2006, there was $1,245,187 of total unrecognized compensation cost related to non-vested non-qualified stock option awards which is expected to be recognized over a weighted-average period of 6.47 years. The total fair value of options vested during the six months ended June 30, 2006 was approximately $37,552.

7

NOTE 5 — GOING CONCERN

The Company is in the development stage and has incurred losses since its inception. There are no assurances the Company will receive funding necessary to implement its business plan. This raises substantial doubt about the ability of the Company to continue as a going concern.

The Company believes that cash on hand and the proceeds that it plans to raise from private offerings of securities and its current and projected revenues from oil and gas operations will be sufficient to fund its operations through June 2007. The Company will need to raise additional funds in the event it locates additional prospects for acquisition, experiences cost overruns at its current prospects, or fails to generate projected revenues.

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

NOTE 6 — DUE FROM RELATED PARTY

As of June 30, 2006, Cygnus Mississippi, and Cygnus New Zealand had receivables of $93,374 and $30,011 due from Knox Miss Partners, LP and Awakino South Exploration, LLC, respectively, as a result of the corporate structure reorganization of the Company during 2005. Cygnus Louisiana had receivables due from Louisiana Shelf Partners in the amount of $171,452 as of June 30, 2006. In addition, the Company had advanced a total of $148,369 to Checotah Pipeline, LLC to help fund startup operations.

NOTE 7 — INVESTMENT IN LIMITED LIABILITY COMPANIES

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

	June 30, 2006				December 31, 2005
			Temporary				Temporary
			Excess of				Excess of
			Carrying Value				Carrying Value
	Carrying Value		Over Net Assets		Carrying Value		Over Net Assets
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
LS Gas, LLC		1,000		1,000		1,000		1,000
Checotah Pipeline, LLC		45,000		—		45,000		—
2001 Hackberry Drilling Fund Partners, LP		8,141		—		8,141		—
	$	54,141	$	1,000	$	54,141	$	1,000

NOTE 8 — OIL AND GAS PROSPECTS

Fayetteville Shale

In October 2005, the Company entered into an Exploration and Development Agreement with two industry partners to acquire acreage for development in Northern Arkansas. Upon entering the agreement, the Company owned forty-five percent (45%) of the leasehold acquired and bears forty-five percent (45%) of the costs attributable thereto. Pursuant to this agreement, as of June 30, 2006, the Company has acquired leases in the total amount of $15,363,651. As of June 30, 2006, the Company also recorded prepaid drilling costs in the amount of $1,798,172. The Company bears forty-five percent (45%) of the costs of drilling, completing, testing and equipping the well. In the Fayetteville prospect, three wells, operated by others, have been drilled and tested. The first two wells, Williamson Bros. #1-36H and the Byers #1-3H, are not presently on production and are awaiting additional testing procedures. The third well, the Morris #1-3H in Woodruff County, Arkansas, was spud on July 1, 2006. The well was drilled vertically to a total depth of 6,883 feet and logged. After evaluation of the logs, mud logs and drilling data, the operator recommended plugging and abandoning the well. Cygnus concurred with the operator’s recommendation, and elected to plug and abandon the well. A fourth well is expected to spud during the middle of August 2006.

Chitterling Prospect

In February 2006, the Company entered into an exploration agreement with Trinity USA Partnership, L.P. (“Trinity”) and others and participated in a leasehold totaling approximately 800 acres in southern Alabama. Under the participation agreement, the Company reimbursed Trinity for its proportionate share of certain costs totaling $39,375. Under the agreement, the Company owns approximately twenty percent (20%) of the leasehold acquired and bears twenty-five percent (25%) of the costs attributable thereto.

8

NOTE 9 — NOTES PAYABLE

The following schedule summarizes the current and non-current portion of Company’s debt as of June 30, 2006:

Payable to	Current		Non-current		Total
2001 Hackberry Drilling Fund, LP	$	59,493	$	—	$	59,493
Louisiana Shelf Partners, LP (“LSP”)		4,037		—		4,037
Mark Bush		766		—		766
Subtotal — related parties		64,296		—		64,296
IL Resources — 3%		110,000		—		110,000
John Paul Dejoria — 10%		138,857		—		138,857
Insurance policies financing — 6%		20,077		—		20,077
Other — non-interest bearing		3,000		—		3,000
Endeavour — 3%		—		2,000,000		2,000,000
		271,934		2,000,000		2,271,934
Less unamortized discount		—		523,049		523,049
Subtotal		271,934		1,476,951		1,748,885
	$	336,230	$	1,476,951	$	1,813,181

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

Payable to	Current		Non-current		Total
2001 Hackberry Drilling Fund, LP	$	59,494	$	—	$	59,494
LSP		54,745		—		54,745
Mark Bush		766		—		766
Subtotal — related parties		115,005		—		115,005
IL Resources — 3%		110,000		—		110,000
John Paul Dejoria — 10%		138,857		—		138,857
Insurance policies financing — 6%		117,248		—		117,248
Other — non-interest bearing		3,000		—		3,000
Endeavour — 3%		—		2,000,000		2,000,000
		369,105		2,000,000		2,369,105
Less unamortized discount		—		465,340		465,340
Subtotal		369,105		1,534,660		1,903,765
	$	484,110	$	1,534,660	$	2,018,770

NOTE 10 — CONVERTIBLE DEBENTURES

Convertible debentures consisted of the following at:

	June 30,		December 31,
	2006		2005
7.5% Senior convertible note — Kings Road Holdings II, LLC	$	11,000,000	$	—
7.5% Senior convertible note — Capital Ventures International		4,000,000		—
7.5% Senior convertible note — SF Capital Partners, LTD		4,000,000		—
7.5% Senior convertible note — RHP Master Fund, LTD		3,000,000		—
12% Secured convertible note — Trident Growth Fund, LP (“Trident”)		—		2,050,000
12% Convertible promissory note — DDH Resources II Limited (“DDH”)		—		1,000,000
		22,000,000		3,050,000
Less unamortized discount		6,254,723		—
		15,745,277		3,050,000
Less long-term portion		15,745,277		—
Current portion of convertible debentures	$	—	$	3,050,000

9

On March 23, 2005, Trident waived compliance with all financial covenants contained in the Trident Note as well as the registration requirements and extended the note to March 24, 2006, in consideration for which the Company issued a warrant to Trident to purchase 100,000 shares of common stock at an initial exercise price of $1.20 per share, which was reset to $0.90 per share later in 2005. On February 6, 2006, Trident exercised the warrant through the cashless exercise provision, as a result of which the Company issued 29,688 shares of common stock to Trident.

On March 23, 2006, Trident waived compliance with all financial covenants contained in the Trident Note and extended the note to May 7, 2006, in consideration for which the Company issued a warrant to Trident to purchase 50,000 shares of common stock at an exercise price of $0.90 per share. In addition, the Company and Trident agreed that in the event that the Company raises funds sufficient to repay the Trident Note through private placement of equity or debt during the term of the note, the Company is obligated to repay the principal plus any accrued interest of the note within ten days of the closing of such placement. In April 2006, the Company repaid a portion of the Trident Note together with unpaid interest in the amount of $1,653,375. Trident converted the remaining portion of the $400,000 note into 444,444 shares of the Company’s common stock at a conversion price of $0.90 per share.

In April 2006, the Company repaid the principal and accrued interest on the DDH Note in the amount of $1,165,370.

On April 4, 2006, the Company closed a private placement offering (“the Offering”) pursuant to a Securities Purchase Agreement (“Securities Purchase Agreement”) with certain accredited investors, resulting in net proceeds of approximately $20,100,486. Pursuant to the Offering, the Company issued: (i) senior convertible notes in the aggregate amount of $22,000,000 maturing April 4, 2009, and bearing interest at 7.5% per annum. The holders of the notes have the right at any time to convert all or a portion of the principal amount of the notes into shares of the company’s common stock at a conversion price of $1.06 per share, (ii) Series A warrants to purchase up to 12,971,700 shares of common stock at an exercise price of $1.06 per share subject to adjustment, and (iii) Series B warrants to purchase up to 8,301,888 shares of common stock with a per share exercise price of $1.38 subject to adjustment (together with the Series A warrants, the “Warrants”). The Series A warrants are immediately exercisable. The Series B Warrants are not initially exercisable and only become exercisable upon a mandatory conversion of the convertible notes conducted by the Company. The Warrants expire on the fifth anniversary of the closing date of the Offering and contain anti-dilution provisions. The holders of the Warrants cannot exercise the warrants if such exercise results in the Warrant holders beneficially owning in excess of 4.99% of the Company’s outstanding shares of common stock. The Company has allocated the proceeds from issuance of the convertible notes and warrants based on a fair value basis for each item. The convertible promissory notes were recorded with discounts of $6,621,400 based on the ascribed value of the warrants as determined by using the Black-Scholes Method. This discount is being amortized over the term of the loan. As of June 30, 2006, the Company amortized $366,677 of the discount.

In connection with the Offering, the Company paid $1,559,403 and $180,000 to First Albany Capital, Inc. (“First Albany”) and Casimir Capital, LP (“Casimir”), the placement agents of the Offering and also issued warrants to purchase 682,642 shares of the Company’s common stock at an exercise of $1.06 per share exercisable immediately and expiring in five years. The warrants were recorded as loan costs in the amount of $348,500, based on the ascribed value of the warrants as determined by the Black-Scholes Method. Total loans costs of $2,087,903 are being amortized over the term of the loans. In addition, the Company incurred legal costs of $160,111 that are being amortized over the term of the loans. As of June 30, 2006, the Company amortized $187,335 of loan costs.

In connection with the Offering, on April 4, 2006 the Company entered into a Registration Rights Agreement (“Registration Rights Agreement”) pursuant to which it is obligated to prepare and file on or before the date that is 45 days following the effectiveness of the Registration Rights Agreement, a registration statement covering the resale of the shares underlying the convertible notes and the Warrants. The Registration Rights Agreement further provides that the Company is obligated to use commercially reasonable best efforts to obtain effectiveness of such registration statement as soon as reasonably practicable, but no later than the date that is 120 days following the effectiveness of the Registration Rights Agreement. In the event that the Company fails to meet either the filing or the effectiveness deadlines, the Company shall become subject to certain liquidated damages as described in the Registration Rights Agreement. The Company filed the required registration statement on May 19, 2006, and it became effective July 7, 2006. As a result, the Company was not subject to the liquidated damages as described in the Registration Rights Agreement.

Also in connection with the Offering, certain officers of the Company and one of the Company’s significant stockholders (the “Affiliates”), who together directly own 9,020,778 shares of common stock representing 11.4% of the Company’s currently outstanding common stock, entered into a lock-up agreement (“Lock-up Agreement”) and a voting agreement (“Voting Agreement”) with the Company on April 4, 2006. Pursuant to the Lock-up Agreement, the Affiliates are not permitted to sell any securities of the Company that they beneficially own for a period of six months following the closing of the Securities Purchase Agreement. Pursuant

10

to the Voting Agreement, the Affiliates are required to vote in favor of a proposal that will be included in the Company’s proxy statement for the 2006 annual meeting of stockholders to amend the Company’s certificate of incorporation to increase the number of authorized shares of Common Stock.

NOTE 11 — STOCKHOLDERS’ EQUITY

On June 5, 2006, the Company filed an amendment to its certificate of incorporation pursuant to which, among other things, the Company increased the authorized number of shares of its common stock from 150,000,000 to 300,000,000.

Preferred Stock

As of June 30, 2006, the Company has recorded an accrued preferred stock dividend of $295,632.

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

The Company was required to use its best efforts to prepare and file with the Securities and Exchange Commission within 60 days after the termination of the offering, but in no case later than 90 days after the termination of the offering, a registration statement under the Securities Act of 1933, as amended, permitting the public resale of the shares of Common Stock issuable upon conversion or exercise, as applicable, of the Series A Convertible Preferred Stock and Warrants issued in the offering. The Company is required to pay certain penalties to the subscribers in this offering since a registration statement was not filed within 90 days after the termination of the offering and the registration statement was not declared effective within 180 days after the termination of the offering. The Company filed the required registration statement on May 19, 2006, and it became effective July 7, 2006. Prior to the filing, the Company had been subject to a penalty of 2% per month of the amount of the offering ($7,810,693) until it filed the registration statement. The penalty decreased to 1% per month until the registration statement became effective. The Company recorded a registration rights penalty payable of $1,718,344 as of June 30, 2006.

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

The Company evaluated its Series A Preferred Stock and related warrants for possible application of derivative accounting under Statement of Financial Accounting Standard (“SFAS”) No 133: Accounting for Derivative Instruments and Hedging Activities SFAS No. 150: Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”), Emerging Issues Task Force (“EITF”) 00-19: Accounting for Derivative Financial Instrument Indexed to, and Potentially Settled in, a Company’s Own Stock, EITF 01-6: The Meaning of “Indexed to a Company’s Own Stock”. It has determined that registration rights related to the Series A Preferred Stock and related warrants were not subject to derivative accounting. In evaluating these registration rights and their related financial instruments the Company applied the methodology of View C in EITF 05-4 Issue Summary No. 1 and accounted for them each as a freestanding instrument. The related Series A Preferred stock and warrants were not subject to derivative accounting but were subject to beneficial conversion accounting as described in the paragraph above. The Company has determined the registration rights were subject to SFAS 150 and required to be recorded at fair value. The fair value of these registration rights agreements was immaterial when they were initially granted in 2005 and at June 30, 2005. However, the fair value was determined to be $1,696,647 at December 31, 2005 and the Company recognized this amount as an expense and correspondingly as a liability. The Company filed a registration statement covering these securities on May 19, 2006, which became effective July 7, 2006. Having fulfilled their registration filing and effectiveness obligation, the Company has computed the amount of the penalty due to the shareholders at June 30, 2006 to be $1,718,344 and accordingly recorded the incremental increase in expenses and liabilities. As of June 30, 2006, the liability is no longer considered a derivative and the penalty amount has been reclassified as a registration rights penalty payable.

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During March 2006, an investor elected to convert 28,000 shares of the Series A Preferred Stock into 280,000 shares of the Company’s common stock which was issuable as of March 31, 2006.

During the second quarter certain investors holding the Company’s Series A Preferred Stock elected to convert 102,500 Series A Preferred shares into 1,025,000 shares of the Company’s common stock.

Common Stock

On July 11, 2005, the Company’s Board of Directors approved and commenced an offering of up to 14,000,000 units of its securities, each unit consisting of two shares of the Company’s common stock and one three-year $1.50 common stock purchase warrant for a unit offering price of $1.80 (“July 2005 through January 2006 Offering”). The exercise price of the warrants will be adjusted for stock splits, combinations, recapitalization and stock dividends. In the event of a consolidation or merger in which the Company is not the surviving corporation (other than a merger with a wholly owned subsidiary for the purpose of incorporating the Company in a different jurisdiction), all holders of the warrants shall be given at least fifteen (15) days notice of such transaction and shall be permitted to exercise the warrants during such fifteen (15) day period. Upon expiration of such fifteen (15) day period, the warrants shall terminate. The securities were issued in a private placement transaction to a limited number of accredited investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D. The Company agreed to include the shares of common stock and shares of common stock issuable upon exercise of the warrants in any registration statement (excluding registration statements on SEC Forms S-4, S-8 or any similar or successor form) they file with the Securities and Exchange Commission under the Securities Act for the purpose of registering the public sale of any of the Company’s securities.

The Company has agreed to use its best efforts to prepare and file with the Securities and Exchange Commission within 60 days after the termination of the offering, a registration statement under the Securities Act of 1933, as amended, permitting the public resale of the shares of common stock issuable upon conversion or exercise, as applicable, of the common stock and warrants issued in the offering. The Company has agreed to pay certain penalties to the subscribers in this offering if the registration statement is not filed within 60 days after the termination of the offering or if the registration statement is not declared effective within 150 days after the termination of the offering. The Company filed the required registration statement on May 19, 2006, and it became effective July 7, 2006. Prior to the filing, the Company had been subject to a penalty of 2% per month of the amount of the offering ($13,968,501) until it filed the registration statement. The penalty decreased to 1% per month until the registration statement became effective. The Company recorded a registration rights penalty payable of $698,425 as of June 30, 2006.

Between August and December 2005, the Company sold 4,131,667 units in which 8,263,333 shares of common stock and 4,131,667 warrants were issued for a purchase price of $7,437,001. Each warrant is immediately exercisable into one (1) share of common stock at an exercisable price of $1.50 per share for a term of three years. The Company paid a total of $175,680 for offering costs during 2005 and as of December 31, 2005, has accrued a total of $419,280 for offering costs related to this transaction, which was subsequently paid in February 2006.

On November 29, 2005, in connection with the July 2005 offering, the Company entered into a securities purchase agreement with The Abel Family Trust (the “Trust”) pursuant to which the Company issued 138,889 units to the Trust for a purchase price of $250,000. Roger Abel, the Company’s Chairman and Chief Executive Officer, serves as the trustee and is a beneficiary of the Trust. Each unit consisted of two shares of the Company common stock and one common stock purchase warrant. The purchase price per unit was $1.80. Each warrant is immediately exercisable into one share of common stock at an exercise price of $1.50 per share for a term of three years.

In January 2006, in continuation of the July 2005 private offering, the Company sold 3,489,722 units in which 6,979,444 shares of common stock and 3,489,722 warrants were issued for a purchase price of $6,281,500. Each warrant is immediately exercisable into one (1) share of common stock at an exercise price of $1.50 per share for a term of three years. During January and February 2006, the Company paid a total of $830,632 for offering costs related to the July 2005 offering. The Company also issued a total of 220,755 warrants as offering costs in connection with the offering.

Included in the 3,489,722 units issued in January 2006 in connection with the July 2005 Offering as referred to above, were 140,000 units issued by the Company to G & S Bennett Ltd. (“GS”) for a purchase price of $252,000. R. Gerald Bennett, a member of the Company’s board of directors, is a principal equity owner and managing partner of GS. Each unit consisted of two shares of the Company’s common stock and one common stock purchase warrant. The purchase price per unit was $1.80. Each warrant is immediately exercisable into one share of common stock at an exercise price of $1.50 per share for a term of three years.

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The Company evaluated stock and related warrants from its July 2005 through January 2006 Offering for possible application of derivative accounting under Statement of Financial Accounting Standard (“SFAS”) No. 133: Accounting for Derivative Instruments and Hedging Activities, SFAS No. 150: Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, Emerging Issues Task Force (“EITF”) 00-19: Accounting for Derivative Financial Instrument Indexed to, and Potentially Settled in, a Company’s Own Stock, EITF 01-6: The Meaning of “Indexed to a Company’s Own Stock.” It has determined that registration rights related to the stock and related warrants from July 2005 through January 2006 Offering were not subject to derivative accounting. In evaluating these registration rights and their related financial instruments the Company applied the methodology of View C in EITF 05-4 Issue Summary No. 1 and accounted for them each as a freestanding instrument. The stock and related warrants from July 2005 through January 2006 Offering were not subject to derivative accounting. The Company has determined the fair value of the registration rights in accordance with paragraph 17 of SFAS No. 133 to be $728,447 at January 27, 2006 (the effective closing date of the private offering) and the Company recognized this amount as a liability with a corresponding entry as a reduction in additional paid in capital. It was management’s opinion this cost was directly associated with the July 2005 through January 2006 Offering. Management concluded at that time it would not be able to file the registration statement on a timely basis to enable it to raise additional capital required to fund operations. The Company filed a registration statement covering these securities on May 19, 2006, which became effective July 7, 2006. Having fulfilled their registration filing and effectiveness obligation, the Company has computed the amount of the penalty due to the shareholders at June 30, 2006 to be $698,425 and accordingly recorded the incremental decrease in expenses and liabilities. As of June 30, 2006, the liability is no longer considered a derivative and the penalty amount has been reclassified as a registration rights penalty payable.

On October 10, 2005, Maverick Woodruff County, LLC, a Delaware limited liability company (“MWC”), borrowed $1,000,000 from Michael P. Marcus pursuant to a secured promissory note. The promissory note was secured by all ownership interest in MWC, had a maturity date of October 10, 2006, accrued interest at the rate of 10% per annum payable at maturity, and the principal amount together with all accrued and unpaid interest due thereon was convertible at anytime at the option of Mr. Marcus into shares of the Company’s common stock at a conversion price of $.90 per share. The monies were used to fund the Company’s proportionate share of certain acquisition expenses in its Fayetteville project. The note would automatically convert into shares of the Company’s common stock upon MWC acquiring a leasehold interest in certain acreage and MWC assigning its right to certain leasehold interests to the Company. In connection with the issuance of the note, the Company issued a warrant which was immediately exercisable to Mr. Marcus to purchase 555,556 shares of its common stock at an exercise price of $1.50 per share for a term of three years. On February 13, 2006, the note and $41,527 of accrued interest due thereunder were converted into 1,148,519 shares of the Company’s common stock.

Assignment and Transfer Agreement

In April 2006, the Company entered into an Assignment and Transfer Agreement (the “Agreement”) with Paradigm Asset Holdings, Inc. and Paradigm Strategic Exploration (collectively “Paradigm”).

Under the Agreement, Paradigm has transferred to the Company its rights under an associated Volume Data Licensing Agreement with Seismic Exchange, Inc. (“SEI”), to obtain certain two- and three-dimensional seismic data from SEI. The Company will have two years from the date of the Agreement to select the seismic data and will be responsible for any reproduction costs as outlined in the Volume Data Licensing Agreement. Paradigm will provide consulting related to the Company’s three-dimensional seismic data selections under the Agreement. The Company will pay a consulting fee of $12,500 per month for these consulting services for a period of 18 months commencing on July 1, 2006. Paradigm is also entitled under the Agreement to participate in any prospect developed in connection with the Agreement for up to 25% of the working interest on a non-promoted basis. Paradigm is entitled to include others in such participation. Paradigm has also assigned its rights and obligations in certain agreements it previously entered into with Trinity and Black Stone Minerals Company, LP relating to certain oil and gas prospects in Alabama.

In consideration for the transfer and assignment described above, Cygnus has agreed to issue a warrant to purchase up to 1,388,889 shares, of the Company’s common stock exercisable at any time during the three year period following the date of the Agreement at an exercise price of $1.50 per share. Cygnus has also agreed to issue 1,777,778 shares of its common stock to Paradigm and 1,000,000 shares of the Company’s common stock to Georgia Stone Partnership, the designee of SEI. The Company recorded $3,319,445 as exploration costs based on the prevailing common stock share price and the ascribed value of the warrants issued as determined by using the Black Scholes Method.

The Company agreed to grant to Paradigm and SEI rights to the registration for resale of the securities contained in the agreement. The Company is obligated to use its reasonable best efforts to prepare and file with the Securities Exchange Commission (“SEC”), within 60 days of the date the shares are issued, a registration statement under the Securities Act of 1933 to permit the public sale of the securities. The Company is further obligated to cause the registration statement to be declared effective within 150 days of the date

13

the shares are issued, except that if the Company has a registration statement pending with the SEC during this period, the Company may without penalty suspend filing of the registration statement until such time the pending registration statement is approved.

Stock Warrants

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

	2006				2005
	Number of		Exercise Price		Number of		Exercise Price
Expiration Date	Warrants issued		Per Share		Warrants issued		Per Share
April - July 2007		3,445,000	$	2.00		3,445,000	$	2.00
June 2007		250,000	$	1.10		250,000	$	1.10
July 2007		1,561,250	$	2.00		1,561,250	$	2.00
November 2007		600,000	$	2.00		600,000	$	2.00
Nov. and Dec. 2007		418,852	$	2.00		418,852	$	2.00
January 2008		87,959	$	2.00		87,959	$	2.00
March 2008		4,152,319	$	1.50		4,152,319	$	1.50
June 2008		107,727	$	1.25		107,727	$	1.25
Aug. 2008 - Jan. 2009		8,604,930	$	1.50		—		—
October 2008		555,555	$	1.50		—		—
March 2009		1,388,889	$	1.50		100,000	$	1.20
March 2011		13,654,342	$	1.06		—		—
March 2014		300,000	$	0.90		100,000	$	1.00
Common Stock		35,126,823				10,823,107

Stock Options

The Company had the following outstanding common stock options at June 30:

	2006				2005
	Number of		Exercise Price		Number of		Exercise Price
Expiration Date	Options issued		Per Share		Options issued		Per Share
July 2012		4,876,540	$	0.86		—	$	—
September 2015		100,000	$	0.96		—	$	—
November 2015		200,000	$	0.83		—	$	—
January 2016		100,000	$	1.05		—	$	—
February 2016		150,000	$	1.25		—	$	—
Common Stock		5,426,540				—

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NOTE 12 — COMMITMENTS AND CONTINGENCIES

General

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

New Lease Agreement

On May 19, 2006, the Company, entered into a lease agreement (the “Agreement”) with a third party (the “Lessor”), for approximately 15,000 rentable square feet of office space in Houston, Texas. The Agreement term is ten years and six months commencing on August 1, 2006. The Company will pay approximately $15,000 per month in base rent for the first 63 months and approximately $18,500 per month in base rent for the remaining lease term, subject to adjustment under certain conditions. In addition to the base rent, the Company is responsible under the Agreement for certain operating expenses and taxes with respect to the leased premises for the duration of the lease term. The Company has one option to renew the lease for an additional five years at the then-prevailing market rate. The Agreement also provides that the Company will indemnify and hold harmless the Lessor from and against certain liabilities, damages, claims, costs, penalties and expenses arising from the Company’s conduct related to the property.

Operating Hazards and Insurance

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

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

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

Potential Loss of Oil and Gas Interests/ Cash Calls

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

NOTE 13 — SUBSEQUENT EVENTS

Relating to the Fayetteville prospect, the third well, the Morris #1-3H in Woodruff County, Arkansas, was spud on July 1, 2006. The well was drilled vertically to a total depth of 6,883 ft and logged. After evaluation of the logs, mud logs, and drilling data, the operator recommended plugging and abandoning the well. Cygnus concurred with the operator’s recommendation, and elected to plug and abandon the well. Since the well spud on July 1,2006, no provision for dry hole expense has been made in the financial statements as of June 30, 2006. A fourth well is expected to spud during the middle of August 2006.

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:

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

• activity levels in the energy markets,

• production levels,

• reserve levels,

• availability of gathering systems and pipeline transportation,

• availability of equipment and supplies,

• geologic conditions,

• operational risks,

• competitive conditions,

• technology,

• the availability of capital resources,

• capital expenditure obligations,

• the price, supply and demand for oil, natural gas and other products or services,

• our limited operating history,

• the weather,

• inflation,

• the availability of goods and services,

• successful exploration and drilling,

• drilling risks,

• future processing volumes and pipeline throughput,

16

• general economic conditions, either nationally or internationally or in the jurisdictions in which we or any of our subsidiaries are doing business,

• legislative or regulatory changes, including changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations,

• the securities or capital markets,

and other factors disclosed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. Except as required by law, we assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

17

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit No.
10.1	Lease with Trizec CS Limited Partnership dated May 19, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 19, 2006).
31.1	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

18

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CYGNUS OIL AND GAS CORPORATION
	(Registrant)
Date: August 25, 2006	/s/ Roger L. Abel
	Roger L. Abel
	President and Chief Executive Officer
	(Principal Executive Officer)
	CYGNUS OIL AND GAS CORPORATION
Date: August 25, 2006	/s/ Stephen C. Haynes
	Stephen C. Haynes
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.
10.1	Lease with Trizec CS Limited Partnership dated May 19, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 19, 2006).
31.1	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002