Unassociated Document

100 or more shareholders;

its principal office or place of business, or substantial assets, located in Utah; and

any of (i) more than 10% of its shareholders resident in Utah, (ii) more than 10% of its shares owned by Utah residents or (iii) 10,000 shareholders that are Utah residents.

We do not have our principal office, any place of business, or substantial assets in the State of Utah. Accordingly, the protections and restrictions of the Control Shares Acquisitions Act does not presently apply to us or to holders of our common stock.

Section 203 of the Delaware General Corporate Law prohibits a corporation from engaging in a “business combination” with an “interested shareholder” for three years following the date that the person becomes an interested shareholder. The three year moratorium imposed on business combinations by Section 203 does not apply if:

prior to the date on which the shareholder becomes an interested shareholder the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder;

the interested shareholder owns 85% of the corporation’s voting stock upon consummation of the transaction which made him an interested shareholder; or

the business combination is approved by the board of directors and approved at a shareholder meeting by the holders of two-thirds of the voting stock not owned by the interested shareholder.

Section 203 only applies to Delaware corporations that have a class of voting stock that is listed on a national securities exchange or held of record by more than 2,000 shareholders. However, a corporation may elect not to be governed by Section 203 by a provision in its certificate of incorporation or its bylaws. The certificate of incorporation of Glen Rose includes a provision electing not to be governed by Section 203. Accordingly, following consummation of the reincorporation merger, the board of directors will not have the power to reject certain business combinations with interested shareholders based on Section 203.

Indemnification and Limitation of Liability

Utah and Delaware have similar laws respecting indemnification by a corporation of its officers, directors, employees and other agents. The laws of both states also permit corporations to adopt a provision in the corporation’s charter eliminating the liability of a director to the corporation or its shareholders for monetary damages for breach of the director’s fiduciary duty of care. There are nonetheless differences between the laws of the two states respecting indemnification and limitation of liability. In general, Delaware law is somewhat broader in allowing corporations to indemnify and limit the liability of corporate agents.

Utah law does not permit the elimination of a director’s monetary liability where liability is based on:

a financial benefit received by a director to which the director is not entitled;

an intentional infliction of harm on the corporation or its shareholders;

an unlawful distribution; or

an intentional violation of criminal law.

Delaware law does not permit the elimination of a director’s monetary liability for:

breaches of the director’s duty of loyalty to the corporation or its shareholders;

acts or omissions not in good faith or involving intentional misconduct or knowing violations of law;

the payment of unlawful dividends or unlawful stock repurchases or redemptions; or

transactions in which the director received an improper personal benefit.

Utah law allows a corporation to indemnify a director or former director who is made a party to a proceeding against liability incurred in the proceeding if his conduct was in good faith, he reasonably believed that his conduct was in, or not opposed to, the corporation’s best interests and, in the case of a criminal proceeding, he had no reasonable cause to believe that his conduct was unlawful. A corporation may not indemnify a director in connection with a proceeding by or in the right of the corporation in which the director was judged liable to the corporation or in connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in his official capacity, in which proceeding he was judged liable on the basis that he derived an improper personal benefit. In Utah, unless limited by its articles of incorporation, a corporation must indemnify a director or an officer who was successful, on the merits or otherwise, in defense of any proceeding, to which he was a party because he is or was a director of the corporation, against reasonable expenses incurred by him in connection with the proceeding or claim with respect to which he has been successful. Utah law allows a corporation to advance reasonable expenses incurred by a director who is a party to a proceeding if the director furnishes the corporation with a written affirmation of his good faith belief that he has met the applicable standard of conduct described above, if he furnishes to the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct and there are no facts then known that would preclude indemnification. The determination as to whether or not the director is entitled to indemnity or to an advance must be made by a majority vote of the directors at which a quorum is present, so long as no member of the quorum is a party to the proceeding, or if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, which committee shall consist of two or more directors who are not parties to the proceeding, or by special legal counsel or by the shareholders by a majority of the votes entitled to be cast at a meeting. A director or officer who is or was a party to a proceeding may apply for indemnification to the court conducting the proceeding or to any other court of competent jurisdiction. A corporation may indemnify and advance expenses to an officer, employee, fiduciary or agent of the corporation to the same extent as a director.

Delaware law permits indemnification of any person who was or is a party or threatened to be made a party to any action, suit or proceeding so long as the person acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. No person may be indemnified in an action brought on behalf of the corporation by a third party if that person is judged to be liable to the corporation unless the Court of Chancery or the court in which the action or suit was brought determines that, despite the adjudication of liability and in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity. A corporation must indemnify a present or former director or officer of a corporation who has been successful on the merits or otherwise in a defense of any action, suit or proceeding. Whether or not a person has acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation will be determined by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or by a committee of such directors designated by a majority vote of the directors, even though less than a quorum, or by independent legal counsel in a written opinion or by the shareholders.

Utah law expressly states that provisions relating to the indemnification of, or advances for expenses to be made to, directors that are contained in a corporation’s articles of incorporation or bylaws, in a resolution of its shareholders or board, or in a contract other than an insurance policy, is valid only if and to the extent that the provisions are not inconsistent with Utah law.

In Delaware, indemnification and the advancement of expenses provided by or granted pursuant to Delaware law is not deemed to be exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise.

Both Utah law and Delaware law permit the purchase of insurance for the benefit of any person who is or was a director, officer, employee or agent of the corporation or is serving at the request of the corporation as a director, officer, employee or agent of another corporation.

Dividends and Repurchase of Shares

Utah law dispenses with the concepts of par value of shares as well as statutory definitions of capital and surplus. The concepts of par value, capital and surplus exist under Delaware law.

Under Utah law, a corporation may not make any distribution or repurchase its shares if, after giving effect to the distribution or repurchase:

the corporation would not be able to pay its debts as they become due in the normal course; or

its total assets would be less than the sum of its total liabilities plus the amount, if any, payable upon liquidation to holders of any preferred stock with distribution rights superior to the rights of holders of common stock.

Delaware law permits a corporation to declare and pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. In addition, Delaware law generally provides that a corporation may redeem or repurchase its shares only if the capital of the corporation is not impaired and the redemption or repurchase would not impair the capital of the corporation.

To date, we have not paid any cash dividends on our outstanding shares of common stock and we do not anticipate doing so in the foreseeable future.

Voting and Shareholder Approval Requirements

In Utah, each share of voting stock is entitled to one vote and each fractional share is entitled to a fractional vote. Directors are elected by a plurality of the votes cast. Cumulative voting for directors is not permitted unless the articles of incorporation provide for cumulative voting. With the exception of action to be taken on a plan of merger or share exchange or voting on an amendment to the corporation’s articles of incorporation, Utah law generally requires the holders of a majority of the shares of voting stock to approve the action. Action to be taken on a plan of merger or share exchange must be approved by each voting group entitled to vote separately on the plan by a majority of all the votes entitled to be cast on the plan by the voting group. In general, a class or series of stock is entitled to vote separately (or together with similarly affected shares of different series of the same class) if the proposed transaction would change the rights, preferences or limitations of the respective class or series. If shareholder voting is required to approve an amendment to the articles of incorporation, then the holders of the outstanding shares of a class are entitled to vote as a separate voting group. If a proposed amendment would affect a series of a class of shares, the shares of that series are entitled to vote as a separate voting group on the proposed amendment. However, if a proposed amendment entitles two or more series of a class of shares to vote as separate voting groups, and the amendment would affect the two or more series in the same or a substantially similar way, then the shares of all the series so affected must instead vote together as a single voting group on the amendment.

In Delaware, each share of voting stock is entitled to one vote, unless the certificate of incorporation provides for more or less than one vote per share. Like Utah, directors are elected by a plurality of the votes cast. Delaware law also allows cumulative voting for directors if the certificate of incorporation so provides. With the exception of voting on an amendment to the certificate of incorporation and voting on the election of directors, all shareholder actions, including the approval of a merger or consolidation, require the affirmative vote of the majority of shares present at the meeting and entitled to vote on the subject matter. In order to amend a certificate of incorporation, the holders of the outstanding shares of a class are entitled to vote as a class on a proposed amendment, whether or not they are entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences, or special rights of one or more series of any class so as to affect them adversely, but does not so affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for the purposes of voting.

Neither Utah law nor Delaware law requires a shareholder vote of the surviving corporation in a merger if:

the merger agreement does not amend the existing certificate of incorporation;

each share of the stock of the surviving corporation outstanding immediately before the merger is an identical outstanding share after the merger; and

either no shares of common stock of the surviving corporation and no securities convertible into common stock are to be delivered under the plan of merger, or the authorized unissued shares or the treasury shares of common stock of the surviving corporation to be delivered under the plan of merger plus those initially issuable upon conversion of any other securities to be delivered under the plan do not exceed 20% of the shares of common stock outstanding immediately prior to the merger.

Utah law and Delaware law are also substantially similar when the merger involves a parent owning at least 90% of a subsidiary. In that case, no vote of the shareholders of either corporation is required unless the subsidiary will be the surviving corporation, in which case the vote of the shareholders of the parent must be obtained.

Under Utah law, a sale of all or substantially all of the assets of a corporation must be approved by each voting group entitled to vote on the transaction.

Under Delaware law, a sale of all or substantially all of the assets of a corporation must be approved solely by the holders of a majority of the outstanding voting shares of the corporation.

Unless otherwise provided in the articles of incorporation or the Utah statutes, any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if one or more consents in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the written consents of all shareholders entitled to vote have been obtained, notice of any shareholder approval without a meeting shall be given at least ten days before the consummation of the transaction, action, or event authorized by the shareholder action to those shareholders entitled to vote who have not consented in writing; and to those shareholders not entitled to vote but to whom Utah law requires that notice of the proposed action be given. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the corporation. Under Utah law, a corporation in existence prior to July 1, 1992 may not take action by the written consent of fewer than all of the shareholders entitled to vote with respect to the subject matter of the action, until the date a resolution providing otherwise is approved either by a consent in writing, setting forth the proposed resolution, signed by all of the shareholders entitled to vote with respect to the subject matter of the resolution; or at a duly convened meeting of shareholders, by the vote of the same percentage of shareholders of each voting group as would be required to include the resolution in an amendment to the corporation's articles of incorporation. Delaware law does not have such a provision. We received shareholder approval to act by written consent at our annual meeting held on December 19, 2005.

Unless otherwise provided in the certificate of incorporation, shareholders in Delaware may take any action at any annual or special meeting of shareholders or any action which may be taken at any annual or special meeting of the shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. No written consent will be effective to take the corporate action unless, within 60 days of the earliest dated consent delivered to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation.

Dissenters’ or Appraisal Rights

Under Utah law, a shareholder has a right to dissent from and obtain payment of the fair value of shares held by him in the event of a consummation of a plan of merger to which the corporation is a party if shareholder approval is required for the merger (including if the corporation is a subsidiary that merged with its parent), consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, consummation of a sale, lease exchange or other disposition of all or substantially all of the property of the corporation for which a shareholder vote is required and consummation of a sale, lease, exchange or other disposition of all or substantially all of the property of an entity controlled by a corporation if the shareholders of the corporation were entitled to vote on the consent of the corporation to the disposition. A shareholder may also dissent and obtain payment of the fair value of his shares in the event of any other corporate action to the extent the articles of incorporation, bylaws or a resolution of the board of directors so provides. However, a shareholder may not dissent and obtain payment of the fair value of his shares if the shares are listed on a national securities exchange registered under the Securities Exchange Act of 1934 or on the National Market System of the National Association of Securities Dealers Automated Quotation System or were held of record by more than 2,000 shareholders. This limitation does not apply if the shareholders will receive for their shares anything other than shares of the corporation surviving the consummation of the plan of merger or share exchange, shares of a corporation which at the effective date of the merger or share exchange will be listed on a national securities exchange registered under the Securities Exchange Act of 1934 or on the National Market System of the National Association of Securities Dealers Automated Quotation System or if the shares will be held of record by more than 2,000 shareholders, cash in lieu of fractional shares or any combination of shares and cash. The shareholder who wishes to asset dissenters’ rights must cause the corporation to receive, before the vote is taken, written notice of his intent to demand payment for his shares if the proposed action is effectuated and may not vote any of his shares in favor of the proposed action. In order to be entitled to payment, the shareholder must have been a shareholder with respect to the shares for which payment is demanded as of the date the proposed corporate action creating dissenters’ rights is approved by the shareholders.

Under Delaware law, unless the certificate of incorporation provides for appraisal rights upon the sale of all or substantially all of its assets, a shareholder only has appraisal rights in the event of a merger or consolidation and only so long as the shares are not either listed on a national securities exchange or held of record by more than 2,000 shareholders. Like Utah, this limitation does not apply if the shareholder will receive for his shares anything other than shares of the corporation surviving the consummation of the merger or consolidation, shares of a corporation which at the effective date of the merger or consolidation will be listed on a national securities exchange or held of record by more than 2,000 shareholders, cash in lieu of fractional shares or any combination of shares and cash. The shareholder must hold his shares on the date that he makes a demand for appraisal, must continuously hold his shares through the effective date of the merger or consolidation and may not have voted in favor of, or consented to, the merger or consolidation. Any shareholder electing to demand appraisal must deliver to the corporation, before the vote is taken, a written demand for appraisal of his shares.

Delaware law and Utah law also provide an exemption to a corporation surviving a merger if no vote of the shareholders of the surviving corporation is required to approve the merger.

Directors

In Utah, before any shares are issued, a corporation's board of directors may consist of one or more individuals. After shares are issued and for as long as a corporation has fewer than three shareholders entitled to vote for the election of directors, its board of directors may consist of a number of individuals equal to or greater than the number of those shareholders. If a corporation has more than three shareholders, it must have at least three directors.

Delaware law requires a corporation to have at least one director who is a natural person.

Under Utah law, the articles of incorporation may provide for staggering the terms of directors by dividing the total number of directors into two or three groups, with each group containing 1/2 or 1/3 of the total, as near as may be. In that event, the terms of directors in the first group expire at the first annual shareholders' meeting after their election, the terms of directors in the second group expire at the second annual shareholders' meeting after their election, and the terms of directors in the third group, if any, expire at the third annual shareholders' meeting after their election. Upon the expiration of the initial staggered terms directors shall be elected for terms of two years or three years, as the case may be, to succeed those whose terms expire.

Like Utah, Delaware law allows the directors of a corporation, by the certificate of incorporation or by an initial bylaw, or by a bylaw adopted by a vote of the shareholders, to be divided into one, two or three classes; the term of office of those of the first class expires at the first annual meeting held after such classification becomes effective; of the second class one year thereafter; of the third class two years thereafter; and at each annual election held after such classification becomes effective, directors will be chosen for a full term to succeed those whose terms expire.

Inspection of Records

Under Utah law, directors or shareholders may inspect certain corporate records for any purpose as long as the directors or shareholders give the corporation written notice five business days in advance. Other records, including the shareholder list and minutes from meetings of the board of directors may be inspected only for a purpose reasonably related to the shareholder’s or director’s interest.

In contrast, Delaware law allows shareholders and directors to inspect the corporation’s records and shareholder list for purposes reasonably related to the person’s interests as a shareholder or director upon written demand.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of our financial condition, plan of operation and liquidity should be read in conjunction with our unaudited consolidated condensed financial statements and the notes thereto and our audited financial statements and the notes thereto.

Overview

We are an independent producer of natural gas and crude oil based in Midland, Texas. We produce from property we lease in the Wardlaw field in Edwards County, Texas (the “Wardlaw Field”). We acquired our Texas property, which includes 130 potentially productive wellbores (of which approximately 44 wells are capable of producing), in February 1997. Our plan has been to develop this property by reworking many of the existing wells and drilling additional wells, however, the revenues we earn do not presently provide us with sufficient capital to implement our development plan.

From November 2005 until it declared bankruptcy on June 13, 2007 (the “Lothian Bankruptcy”), Lothian Oil Inc. (“Lothian”), formerly our largest shareholder, provided us with the funds to operate. Lothian acquired its shares of our common stock on October 7, 2005, a portion of which were purchased from Walter G. Mize (“Mize”), our former chief executive officer and chairman of the board of directors, and persons associated or affiliated with Mize, in consideration of an aggregate principal amount of $10,651,000 evidenced by a promissory note (the “Lothian Note”).

Following a default under the terms of the Lothian Note, on July 31, 2007, Mize entered into a settlement agreement with Lothian, dated July 26, 2007 (the “Mize Agreement”), and pursuant to which, in exchange for a payment of $250,000 from Mize to Lothian and forgiveness by Mize of debt totaling $5,318,149.18, Lothian transferred to Mize 3,759,999 shares of common stock and warrants to purchase up to an additional 2,906,666 shares of common stock (collectively, the “Mize Securities”), constituting all of the shares of our common stock and warrants to purchase shares of our common stock then held by Lothian.

On July 31, 2007, we entered into an agreement, dated July 26, 2007, entitled “Agreement to Settle Intercompany Debt and other Claims” with Lothian (the “Lothian Agreement”), to which the execution of the Mize Agreement was a condition precedent, and pursuant to the terms of which Lothian agreed, among other things, to forgive a $1,800,000 claim asserted against us (the “Claim”). Included in the Claim amount was $753,296 in principal and approximately $71,254 in accrued interest related to a loan we received from Lothian for development of our Wardlaw Field.

In consideration of Lothian’s forgiveness of the Claim, we agreed to deliver to Lothian any funds in excess of $100,000 that we received from Cano Petroleum, Inc. (“Cano”) in connection with an asset purchase and sale agreement (the “Cano Agreement”), pursuant to which we agreed to sell all of the assets of UHC New Mexico Corporation, our wholly owned subsidiary (“UHC New Mexico”), to Cano Petro of New Mexico, Inc.(“Cano New Mexico”), in consideration of $7 million dollars in cash and 404,204 restricted shares of Cano common stock (the “Cano Securities”), and in accordance with the terms of which Cano New Mexico held back $800,000 from the cash proceeds of the purchase price (the “Holdback Amount”) to satisfy potential environmental and title claims and payables related to the purchased assets (the preceding transaction is hereinafter referred to as the “Asset Sale”). The holdback period ended 120 days following the date of the Asset Sale, which was March 30, 2007. During the holdback period, Cano New Mexico disbursed $258,000 to us, which we used to satisfy the payables related to the purchased assets. Cano New Mexico kept the remaining balance of the Holdback Amount to satisfy title deficiencies and environmental remediation costs. We do not anticipate the receipt of any of the remaining balance of the Holdback Amount.

Immediately following the Asset Sale, UHC New Mexico used $4,398,000 of the cash proceeds to repay a portion of the principal of a $6,554,000 loan outstanding and owed to Lothian (the “Lothian Loan”), and pledged the Cano Securities to secure the remaining balance thereof. On June 6, 2007 we entered into an agreement with UHC New Mexico and Lothian pursuant to which we transferred the Cano Securities to Lothian in full satisfaction of the remaining balance on the Lothian Loan.

On September 26, 2007 Mize, entered into a restated stock sale agreement (the “Blackwood Agreement”), effective as of September 18, 2007, with Blackwood, pursuant to which Blackwood purchased all of the Mize Securities for an aggregate purchase price of $5,017,000, consisting of $375,000 in cash and two promissory notes in the principal amount of $3,767,000 and $875,000, respectively. As a result of this transaction, Blackwood now owns approximately 66.9% of our voting securities on a fully diluted basis (the “Change in Control”).

Following the Change in Control, on October 8, 2007, Messrs. C. Scott Wilson, Thomas Kelly, Raoul Baxter and Kenneth Levy resigned from our board of directors and Messrs. Joseph F. Langston, Jr. (“Langston”), Theodore D. Williams and Paul K. Hickey were appointed in their place. Messrs. Williams and Hickey were also appointed as members of our Audit Committee in place of Messrs. Kelly and Baxter.

On October 8, 2007, Messrs. Wilson and Levy were also terminated from their positions as our chief executive officer and chief financial officer, respectively, and Langston was appointed as our interim chief executive officer, interim president and interim chairman of the board of directors and as our chief financial officer and treasurer.

On November 26, 2007, Messrs. Mize, C. Dean Boyd, Joe Martin, Charles Garrett and Bill Wilkins resigned from our board of directors.

On November 28, 2007 we entered into a 12 month consulting agreement (the “Consulting Agreement”) with DK True Energy Development Ltd., a member of Blackwood, our largest shareholder, and RTP Secure Energy Corp. (together, the “Consultants”). A discussion of the material terms of the Consulting Agreement is included in the discussion of item 1 at page 7.

On November 28, 2007, we entered into a consulting agreement with Applewood Energy, Inc., (“Applewood”), effective as of November 1, 2007 (the “Applewood Agreement”). A discussion of the material terms of the Applewood Agreement is included in the discussion of item 2 at page 8.

On November 28, 2007 we entered into a consulting agreement with GWB Petroleum Consultants Ltd. (“GWB”), effective as of November 1, 2007 (the “GWB Agreement”). A discussion of the material terms of the GWB Agreement is included in the discussion of item 2 at page 8.

On November 28, 2007 we completed the sale and issuance of units having a total gross value of $600,000 in a private placement to accredited investors. A discussion of the material terms of this offering is included in the discussion of item 7 at page 16.

On December 19, 2007, we entered into an agreement to convert debt with our legal counsel, Richardson & Patel, LLP. A discussion of the material terms of this agreement is included in the discussion of item 3 at page 10.

On December 19, 2007, we entered into an agreement to convert debt with Blackwood. A discussion of the material terms of this agreement is included in the discussion of item 5 at page 11.

Going Concern Status

Our financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. We have incurred substantial losses from our operations and we have a working capital deficit which raises substantial doubt as to our ability to continue as a going concern. We had net loss of $ 484,843 for the nine months ended December 31, 2007 and a net loss of $11,435,134 for the fiscal year ended March 31, 2007, and, as of the same periods, we had an accumulated deficit of $43,483,989 and $42,999,146, respectively. Unless we are able to obtain the financing we need to develop our properties, there can be no assurance that we will be able to continue as a going concern.

Critical Accounting Policies and Estimates

Our critical accounting policies, including the assumptions and judgments underlying those policies, are more fully described in the notes to our audited financial statements contained in our annual report on Form 10-KSB for the fiscal years ended March 31, 2007 and 2006. We have consistently applied these policies in all material respects. These policies are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from the assumptions or estimates we use when applying these policies. Set forth below are the accounting policies that we believe most critical to an understanding of our financial condition and liquidity.

Oil and Gas Properties

Proved Reserves

Proved reserves are defined by the SEC as those volumes of crude oil, condensate, natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty are recoverable from known reservoirs under existing economic and operating conditions. Proved developed reserves are volumes expected to be recovered through existing wells with existing equipment and operating methods. Although our engineers are knowledgeable of and follow the guidelines for reserves established by the SEC, the estimation of reserves requires our engineers to make a significant number of assumptions based on professional judgment. Reserves estimates are updated at least annually and consider recent production levels and other technical information about each well. Estimated reserves are often subject to future revision, which could be substantial, based on the availability of additional information including reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes and other economic factors. Changes in oil and gas prices can lead to a decision to start-up or shut-in production, which can lead to revisions to reserve quantities. Reserve revisions in turn cause adjustments in the depletion rates utilized by us. We cannot predict what reserve revisions may be required in future periods.

Depletion rates are determined based on reserve quantity estimates and the capitalized costs of producing properties. As the estimated reserves are adjusted, the depletion expense for a property will change, assuming no change in production volumes or the costs capitalized. Estimated reserves are used as the basis for calculating the expected future cash flows from a property, which are used to determine whether that property may be impaired. Reserves are also used to estimate the supplemental disclosure of the standardized measure of discounted future net cash flows relating to oil and gas producing activities and reserve quantities disclosure in Note 20 to our audited consolidated financial statements for the fiscal year ended March 31, 2007, which are included in our annual report on Form 10-KSB for that fiscal year. Changes in the estimated reserves are considered changes in estimates for accounting purposes and are reflected on a prospective basis.

We employ the full cost method of accounting for our oil and gas production assets, which are located in the southwestern United States. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in cost centers on a country-by-country basis. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production basis using proved oil and gas reserves as determined by independent petroleum engineers.

Net capitalized costs are limited to the lower of unamortized cost net of related deferred tax or the cost center ceiling. The cost center ceiling is defined as the sum of: (i) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on un-escalated year-end prices and costs; (ii) the cost of properties not being amortized; (iii) the lower of cost or market value of unproved properties included in the costs being amortized; and (iv) income tax effects related to differences between the book and tax basis of the oil and gas properties.

The ceiling test is affected by a decrease in net cash flow from reserves due to higher operating or finding costs or reduction in market prices for natural gas and crude oil. These changes can reduce the amount of economically producible reserves. If the cost center ceiling falls below the capitalized cost for the cost center, we would be required to report an impairment of the cost center’s oil and gas assets at the reporting date.

Impairment of Properties

We will continue to monitor our long-lived assets recorded in oil and gas properties in the consolidated balance sheet to ensure they are fairly presented. We must evaluate our properties for potential impairment when circumstances indicate that the carrying value of an asset could exceed its fair value. A significant amount of judgment is involved in performing these evaluations since the results are based on estimated future events. Such events include a projection of future oil and natural gas sales prices, an estimate of the ultimate amount of recoverable oil and gas reserves that will be produced from a field, the timing of future production, future production costs, and future inflation. The need to test a property for impairment can be based on several factors, including a significant reduction in sales prices for oil and/or gas, unfavorable adjustment to reserves, or other changes to contracts, environmental regulations or tax laws. All of these factors must be considered when testing a property’s carrying value for impairment. We cannot predict whether impairment charges may be required in the future.

Revenue Recognition

Oil and gas production revenues are recognized at the point of sale. Production not sold at the end of the fiscal year is included as inventory.

Income Taxes

Included in our net deferred tax assets are approximately $15.3 million of future tax benefits from prior unused tax losses. Realization of these tax assets depends on our achieving sufficient future taxable income prior to the expiration of the future tax benefits, of which there can be no assurance. In addition, as a result of our Change in Control, our annual use of net operating losses will be limited, therefore, we have provided an allowance for the full amount of our net deferred tax asset.

Accounting Estimates

Our financial statements have been prepared in accordance with United States generally accepted accounting principles. These principles require our management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In particular, there is significant judgment required to estimate oil and gas reserves, asset retirement obligations and impairment of the unproved properties. These estimates are based on our historical experience and various other assumptions that we believe to be reasonable under the circumstances, and are evaluated on an on going basis. Actual results may differ materially from these estimates under different assumptions or conditions.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, special purpose entities or financing partnerships that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Results of Operations

Three and Nine Months Ended December 31, 2007 as Compared to the Three and Nine Months Ended December 31, 2006

The following selected financial data for the three and nine months ended December 31, 2007 as compared to the three and nine months ended December 31, 2006 are derived from our unaudited consolidated condensed financial statements and is qualified in its entirety by and should be read in conjunction with such financial statements and related notes contained therein.

	Three Months Ended December 31						Nine Months Ended December 31
	2007			2006			2007			2006
Income Data
Revenues	$	24,311		$	253,904		$	26,266		$	909,995
Depreciation and depletion		338			156,621			1,014			503,293
Total operating costs and expenses		1,771,166			735,914			2,538,208			2,624,662
Loss from operations		(1,746,855	)		(482,010	)		(2,511,942	)		(1,714,667	)
Income tax		—			—			—			—
Net income (loss)	$	(1,744,076	)	$	(627,150	)	$	(484,843	)	$	(2,010,414	)
Basic and diluted loss per share	$	(0.26	)	$	(0.10	)	$	(0.07	)	$	(0.32	)
Weighted average number of shares		6,778,886			6,446,850			6,557,931			6,446,850

Oil and Gas Results

Our revenues decreased $229,593, or approximately 91%, from $253,904 for the three months ended December 31, 2006, to $24,311 for the three months ended December 31, 2007. Our revenues decreased $883,729, or approximately 97%, from $909,995 for the nine months ended December 31, 2006, to $26,266 for the nine months ended December 31, 2007. This decrease in revenues was primarily attributable to our sale of the assets of UHC New Mexico (the “UHC Sale”), which had previously accounted for a significant portion of our production and sale of oil and all of our production and sale of natural gas. Currently, the only remaining field owned by Company, the Wardlaw Field in Edwards County, Texas, is producing less than 10 barrels of oil per day.

Our total operating costs and expenses increased $1,035,252, or approximately 141%, from $735,914 for the three months ended December 31, 2006, to $1,771,166 for the three months ended December 31, 2007. Our total operating costs and expenses decreased $86,454, or approximately 3%, from $2,624,662 for the nine months ended December 31, 2006, to $2,538,208 for the nine months ended December 31, 2007. This decrease in our operating expenses was primarily attributable to decreases in production and operating costs, and depreciation and depletion expense as a result of the UHC Sale. Our remaining general and administrative expenses were primarily attributable to continued expenses from the Lothian Bankruptcy, as well as additional expenses incurred in relation to our Change in Control and our associated change in members of management and of our board of directors, offset by the approximate $1.2 million expense from the warrants issued during the three months ended December 31, 2007.

Our loss from operations increased $1,264,845, or approximately 260%, from $482,010 for the three months ended December 31, 2006, to $1,746,855 for the three months ended December 31, 2007. Our loss from operations increased $797,275, or approximately 47%, from $1,714,667 for the nine months ended December 31, 2006, to $2,511,942 for the nine months ended December 31, 2007. This change in our loss from operations is primarily attributable to an increase in legal and consulting expenses incurred in relation to our Change in Control, and more importantly the charge related to compensatory options awarded management and consultants.

Our net loss decreased $1,116,926 or approximately 178%, from $627,150 for the three months ended December 31, 2006, to $1,744,076 for the three months ended December 31, 2007. Our net loss decreased $1,525,571, or approximately 76%, from $2,010,414 for the nine months ended December 31, 2006, to a net loss of $484,843 for the nine months ended December 31, 2007. This decrease in our net loss is primarily attributable to Lothian’s forgiveness of the Claim pursuant to the terms of the Lothian Agreement, offset by an expense of approximately $1.2 million related to compensatory warrants issued.

Liquidity and Capital Resources

Liquidity

Our revenues have not been adequate to support our operations and we do not expect that this will change in the near future. In the past, we have relied primarily on loans from Lothian to finance our operations.

On November 28, 2007 we completed the sale and issuance of units having a total gross value of $600,000 in a private placement to accredited investors (the “November Offering”). Each unit was comprised of (i) 32,000 shares of our common stock, par value $0.001 per share, and (ii) a 5 year callable warrant to purchase up to 52,253 shares of our common stock, subject to certain vesting requirements, at an exercise price of $1.40 per share. The warrants may not be exercised until we obtain shareholder approval of their issuance. We sold and issued a total of 21 units at a price of $24,000 per unit, for net cash proceeds of approximately $504,000. We also converted debt in the amount of $96,000 owed to Blackwood, our largest shareholder, into 4 units. The per share price of the common stock included in the units was less than the per share book or market value of our common stock on the date of sale. No underwriting discounts or commissions were paid in connection with the November Offering. We are obligated to register the shares underlying the warrants, subject to compliance with rule 415 promulgated under the Securities Act.

In addition, on December 19, 2007, we issued 345,606 shares of common stock and 259,205 stock purchase warrants, exercisable at $1.05 per share, for the conversion of accounts payable totaling $276,139.

Our current assets decreased by $ 1,910,435 or approximately 86%, from $2,208,668 for March 31, 2007, to $298,233 at December 31, 2007. The decrease in our current assets was due primarily to a reduction of cash in the amount of $1,442,412, from $1,671,672 at March 31, 2007 to $229,260 at December 31, 2007, which occurred as a result of the repayment of a loan made to us by Lothian and the reduction of accounts receivable in the amount of $451,614, from $470,670 at March 31, 2007 to $19,056 at December 31, 2007, which occurred as a result of the sale of New Mexico’s assets. We also experienced an increase of $5,784 in inventory, from $31,417 at March 31, 2007 to $37,201 at December 31, 2007 and a reduction in the amount of $22,193 of prepaid expenses, from $34,909 at March 31, 2007 to $12,716 at December 31, 2007. The reduction in prepaid expenses resulted from amortization of our prepaid Nasdaq listing fee.

Current liabilities also increased from $3,427,471 at March 31, 2007 to $3,432,158 at December 31, 2007, an increase of $4,687 or approximately less than 1%. The increase in current liabilities was due primarily to the liability associated with certain options that included a put right. This liability was offset by a decrease in interest accrued on the debt owed to Lothian, which at March 31, 2007 was $451,485 and at December 31, 2007 was $0, a decrease of $797,088 in accounts payable to Lothian, which at March 31, 2007 were $797,088 and at December 31, 2007 were $0 and a decrease in payables of $1,693,110, from $1,835,148 at March 31, 2007 to $142,038 at December 31, 2007, that resulted from the sale of New Mexico’s assets and use of the sales proceeds to satisfy related payables. Working capital was a deficit of $3,133,925 at December 31, 2007 as compared to a working capital deficit of $1,218,803 at March 31, 2007, an increase of $1,915,122 or approximately 157%. The increase in our working capital deficit resulted primarily from the accrued put liability of $2,936,370 becoming current during the nine month period ended December 31, 2007.

Shareholders’ equity increased $1,900,569, from $803,977 at March 31, 2007, to $2,704,546 at December 31, 2007, as a result of the forgiveness of debt by Lothian Oil, as well as the $600,000 in gross proceeds we received from the November Offering and an accounts payable conversion concluded during the quarter.

There was a decline of $3,760,181 or approximately 37.6% in our total assets, from $9,983,559 at March 31, 2007 to $6,223,378 at December 31, 2007. Aside from the decrease in current assets, the decrease in total assets resulted from the transfer of our common stock in Cano Petroleum Inc., which had a fair value of $1,827,000 at March 31, 2007, to Lothian as a partial repayment of the Cato Unit Loan and we sold most of our property and equipment, which had a value of $83,304 at March 31, 2007 when we sold our New Mexico property. At December 31, 2007 our property and equipment had a value of $10,362.

Cash Flow

Our operations used $1,352,432 of cash in the nine months ended December 31, 2007. Cash was used primarily for accounts payable and accrued expenses, which totaled $875,568 offset, in part, by accounts receivable of $355,614.

Cash of $8,751 was used in investing activities during the nine months ended December 31, 2007. In comparison, during the nine months ended December 31, 2006 we used $5,873,242 in cash to improve our oil and gas properties and equipment.

During the three months ended December 31, 2007, we obtained loan proceeds from Lothian totaling $153,218, and we used cash in the amount of $331,989 to repay advances made to us by Lothian. For the three months ended December 31, 2006, we obtained loan proceeds from Lothian totaling $5,389,502. We also received cash proceeds of $504,360 from the November offering during the three months ended December 31, 2007.

At December 31, 2007 we had cash on hand in the amount of $229,260 as compared to $171,388 at December 31, 2006.

The sale price of oil produced by our Wardlaw Field increased by $1.53 a barrel, or approximately 4%, from $36.80 a barrel for the nine months ended December 31, 2006, to $38.33 a barrel for the nine months ended December 31, 2007. Production costs for the nine months ended December 31, 2007 increased $114.68, or approximately 381%, from $30.11 a barrel for the nine months ended December 31, 2006, to $144.79 a barrel for the year ended March 31, 2007.

Without activity in the Wardlaw Field, we believe that our expenses will decrease significantly, however, we have a funded plan to begin reworking the existing well bores, drill three test wells, and to commence a pilot flooding program consisting of four injection wells and nine producing well during the next twelve months. There can be no assurance of success, and unless production and sales of oil and gas significantly increase, we may not be able to attain profitability, or even be able to continue as a going concern.

Except as otherwise discussed above, we know of no trends, events or uncertainties that have, or are reasonably likely to have, a material impact on our short-term or long-term liquidity or on our net sales or revenues from continuing operations. We do not currently have any commitments for capital expenditures for the next twelve months.

Fiscal Year Ended March 31, 2007 as Compared to the Fiscal Year Ended March 31, 2006

The following selected financial data for the two years ended March 31, 2007 and March 31, 2006 is derived from our consolidated financial statements. The data is qualified in its entirety and should be read in conjunction with the consolidated financial statements and related notes contained elsewhere herein.

	Year Ended March 31, 2007			Year Ended March 31, 2006
Income Data:
Revenues	$	1,014,734		$	601,685
Income Profit (Loss)	$	(11,435,134	)		(17,371,395	)
Income Profit (Loss)
Per Share	$	(1.77	)	$	(2.98	)
Weighted Average
Number of Shares		6,446,758			5,830,188
Balance Sheet Data:
Working Capital (deficit)	$	(1,218,803	)	$	(1,765,656	)
Total Assets	$	9,983,559		$	15,461,605
Current Liabilities	$	3,427,471		$	1,998,447
Long-Term Debt	$	2,941,983		$	1,413,003
Shareholders’ Equity	$	803,977		$	11,783,643

Combined Results

Our revenues for the 2007 fiscal year were $1,014,734, an increase of $413,049 or approximately 69%, as compared to revenues of $601,685 for the 2006 fiscal year. The increase in sales revenue for the 2007 fiscal year was due primarily to increased volume of oil sold.

Total operating expenses of $5,867,952 reflects a decrease of $19,990,051, or approximately 77%, for the 2007 fiscal year as compared to operating expenses of $25,858,003 for the 2006 fiscal year. The significant operating expenses reported for the 2006 fiscal year resulted from the inclusion of $23,199,110 in impairment of our oil and gas properties, which was not taken in 2007. The impairment was taken in conjunction with the re-evaluation of our reserves. General and administrative expenses decreased slightly by $22,464, or approximately 2%, from $1,339,920 in the 2006 fiscal year to $1,317,456 in the 2007 fiscal year. We also incurred a put option expense of $2,727,186 during the fiscal year ended March 31, 2007. We had no similar expense during the fiscal year ended March 31, 2006. Interest expense was $456,683 in the 2007 fiscal year, as compared to $221,445 in the 2006 fiscal year. The increase during the 2007 fiscal year was due primarily to the increase in the amount of money loaned to us by Lothian for development of our properties.

Our net loss for the 2007 fiscal year was $11,435,134, a decrease of $5,936,261 or approximately 34%, as compared to a net loss of $17,371,395 for the 2006 fiscal year. We reported a significant decrease in net loss because we had no impairment charge in the 2007 fiscal year, as compared to the impairment charge of $23,199,110 we included in the 2006 fiscal year.

Food Products Activity

Our subsidiary, National Heritage Sales Corporation, had $0 product sales during the 2007 fiscal year, as compared to sales for the 2006 fiscal year of $8,694. National is no longer selling meat and poultry products and has sold its assets. We do not intend to re-enter this market and we will no longer have results related to this activity to report.

Oil and Gas Activity

Oil and gas sales during the 2007 fiscal year were $1,014,734, an increase of $421,743 or approximately 71%, as compared to sales of $592,991 during the 2006 fiscal year. The volume of production sold during the 2007 fiscal year was greater than the volume of production sold during the 2006 fiscal year, however, significantly higher production costs offset the increased volumes and slightly higher product prices. The increased costs from the 2006 fiscal year were primarily the result of higher field labor, salt water disposal and high service company costs related to increased activity on the Texas and New Mexico properties. Production is expected to remain limited on our Texas property, the only property we currently own, due to a lack of operating and investment capital that, prior to its bankruptcy, had been provided to us by Lothian. Receivables due to the Asset Sale comprised 99% of our total receivable balance at March 31, 2007. Receivables from a single oil and gas customer comprised 55% of our trade receivable balance at March 31, 2006. No allowance for doubtful accounts has been included in our financial statements since recorded amounts are determined to be fully collectible, based on management’s review of customer accounts, historical experience and other pertinent factors. During the fiscal year ended March 31, 2007, we recorded oil and gas sales to only two customers. Buyers of crude oil are plentiful and can be easily replaced.

Production and operating expenses were $1,320,401 during the 2007 fiscal year as compared to $259,290 in production and operating expenses during the 2006 fiscal year, an increase of $1,061,111 or approximately 401%. This significant increase in production and operating expenses was the result of higher salt water disposal charges and charges for field labor. Depreciation and depletion expense for the 2007 fiscal year was $490,507 as compared to depreciation and depletion expense of $1,027,155 for the 2006 fiscal year, a decrease of $536,648 or approximately 52%. The decreased depreciation and depletion expense resulted primarily from the reduction of proved properties due to the impairment of assets in the 2006 fiscal year.

Liquidity and Capital Resources

Liquidity

Our sales revenues have not been adequate to support our operations and we do not expect that this will change in the near future. In the past, we relied primarily on loans from Lothian to finance our operations. Lothian declared bankruptcy on June 13, 2007 and we do not believe that it is capable of providing additional funding to us. We currently have no other sources of capital. We are operating on a day-to-day basis and we will continue operating in this manner for as long as Lothian provides us with the funds to do so.

Our current assets increased by $1,975,877 or approximately 849%, from $232,791 at March 31, 2006 to $2,208,668 at March 31, 2007. The increase in our current assets was due primarily to cash and receivables related to the Asset Sale. Current liabilities increased from $1,998,447 at March 31, 2006, to $3,427,471 at March 31, 2007, an increase of $1,429,024 or approximately 72%. The increase in current liabilities was due to increased accounts payable and accrued interest on the related party notes payable. Working capital was a deficit of $1,218,803 at March 31, 2007 as compared to the March 31, 2006 deficit of $1,765,656, a decrease of $546,853 or approximately 31%. The decreased deficit was due primarily to the Asset Sale.

Due to the loss incurred on the sale of our New Mexico properties and the expense related to the put provision included in certain stock option agreements, equity capital decreased by $10,979,666, or approximately 93%, during the 2007 fiscal year. Shareholders’ equity was $11,783,643 at March 31, 2006, as compared to $803,977 at March 31, 2007.

Total assets were $9,983,559 at March 31, 2007, a decrease of $5,478,046 as compared to $15,461,605 for the 2006 fiscal year. The decrease in total assets resulted primarily from the sale of our New Mexico property.

Cash Flow

Our operations used $575,885 of cash in the 2007 fiscal year as compared to $67,729 used in the 2006 fiscal year. The cash flow deficits are due to the operating losses incurred.

Cash of $642,211 was provided by investing activities during the 2007 fiscal year and cash of $1,908,815 was used in investing activities for the 2006 fiscal year. Net cash provided from investing activities for the 2007 fiscal year consisted of the proceeds from the sale of our New Mexico properties, which totaled $6,613,947. Cash of $5,971,736 was used for capital expenditures for our oil and gas properties and for the purchase of equipment. During the 2006 fiscal year, cash flows used in investing activities related primarily to capital expenditures for our oil and gas properties.

In the 2007 fiscal year, cash of $6,338,904 was provided by borrowings from Lothian. Payments totaling $4,809,924 were made to Lothian from the proceeds we received when we sold New Mexico’s assets. During the 2006 fiscal year, cash in the amount of $5,249,753 from financing activities came from the exercise of warrants, the sale of our common stock to Lothian and loans from Lothian. Of this amount, $3,203,994 was used for the repayment of a loan from Almac Financial Corporation.

At March 31, 2007 we had cash of $1,671,672.

INDEX TO FINANCIAL STATEMENTS

Consolidated Condensed Balance Sheets at December 31, 2007 (Unaudited) and March 31, 2007 (Audited)	F-2
Consolidated Condensed Statements of Income (Unaudited) for the Three and Nine Months Ended December 31, 2007 and December 31, 2006	F-4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended December 31, 2007 and December 31, 2006	F-5
Notes to Consolidated Condensed Financial Statements	F-7
Report of Independent Registered Public Accounting Firm	F-19
Consolidated Balance Sheets at March 31, 2007 and 2006	F-20
Consolidated Statements of Operations for the Years Ended March 31, 2007 and 2006	F-22
Consolidated Statements of Changes in Shareholders’ Equity or the Years Ended March 31, 2007 and 2006	F-23
Consolidated Statements of Cash Flows for the Years Ended March 31, 2007 and 2006	F-24
Notes to Consolidated Financial Statements	F-25

F-1

CONSOLIDATED CONDENSED BALANCE SHEETS

	December 31, 2007			March 31, 2007
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	229,260		$	1,671,672
Accounts receivable		19,056			470,670
Inventory		37,201			31,417
Prepaid expenses		12,716			34,909
Total current assets		298,233			2,208,668
INVESTMENT in Cano Petroleum common stock, at fair value (restricted)		—			1,827,000
OIL AND GAS PROPERTIES, accounted for using the full cost method, net of accumulated depletion and depreciation of $0 at December 31 and March 31, 2007
Proved		—			—
Unproved		5,914,783			5,864,587
		5,914,783			5,864,587
PROPERTY AND EQUIPMENT, at cost equipment, furniture and fixtures		8,751			74,244
Vehicles		6,752			158,452
		15,503			232,696
Less accumulated depreciation		(5,141	)		(149,392	)
		10,362			83,304
TOTAL ASSETS	$	6,223,378		$	9,983,559

See notes to the consolidated condensed financial statements.

F-2

CONSOLIDATED CONDENSED BALANCE SHEETS

(Continued)

	December 31, 2007			March 31, 2007
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	142,038		$	1,835,148
Accounts payable, related party		10,000			797,088
Accrued expenses		343,750			343,750
Accrued interest, related party		—			451,485
Accrued put option liability		2,936,370			—
Total current liabilities		3,432,158			3,427,471
LONG-TERM LIABILITIES
Asset retirement obligation		86,674			82,942
Note payable, related parties		—			2,941,983
Accrued put option liability		—			2,727,186
Total liabilities		3,518,832			9,179,582
SHAREHOLDERS’ EQUITY
Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued		—			—
Common stock, $.001 par value, 125,000,000 shares authorized; 7,592,456 and 6,446,850 shares issued and outstanding, respectively:		7,593			6,447
Additional paid-in capital		46,180,942			43,796,676
Accumulated deficit		(43,483,989	)		(42,999,146	)
Total shareholders’ equity		2,704,546			803,977
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	6,223,378		$	9,983,559

See notes to the consolidated condensed financial statements.

F-3

TABLE OF CONTENTS

UNITED HERITAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

See notes to the consolidated condensed financial statements.

	Three Months Ended December 31,						Nine Months Ended December 31,
	2007			2006			2007			2006
OPERATING REVENUES
Oil and gas sales	$	24,311			253,904		$	26,266		$	909,995
TOTAL OPERATING REVENUES		24,311			253,904			26,266			909,995
OPERATING COSTS AND EXPENSES
Production and operating		21,672			406,736			82,351			1,040,920
Depreciation and depletion		338			156,621			1,014			503,293
Accretion of asset retirement obligation		1,244			—			3,732			—
General and administrative		1,636,778			172,557			1,998,113			1,080,449
Bad debt expense		41,406			—			243,814			—
Put option expense		69,728			—			209,184			—
TOTAL OPERATING COSTS AND EXPENSES		1,771,166			735,914			2,538,208			2,624,662
LOSS FROM OPERATIONS		(1,746,855	)		(482,010	)		(2,511,942	)		(1,714,667	)
OTHER INCOME (EXPENSE)
Gain on forgiveness of debt		—			—			1,780,710			—
Gain on sale of investments		—			—			303,155			—
Gain on sale of property and equipment		5,000			—			13,351			—
Interest expense		(2,221	)		(145,140	)		(70,117	)		(295,747	)
Income (loss) before income tax		(1,744,076	)		(627,150	)		(484,843	)		(2,010,414	)
INCOME TAX BENEFIT		—			—			—			—
NET INCOME (LOSS)	$	(1,744,076	)		(627,150	)	$	(484,843	)	$	(2,010,414	)
Income (loss) per share (basic)	$	(0.26	)		(0.10	)	$	(0.07	)	$	(0.32	)
Weighted average number of shares (basic)		6,778,886			6,446,850			6,557,931			6,446,850

F-4

TABLE OF CONTENTS

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

See notes to the consolidated condensed financial statements.

	Nine Months Ended December 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(484,843	)	$	(2,010,414	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and depletion		1,014			503,293
Accretion of asset retirement obligation		3,732			—
Gain on sale of investments		(303,155	)		—
Gain on forgiveness of debt		(1,780,710	)		—
Gain on sale of property and equipment		(13,351	)		—
Realization of stock options and warrants issued		1,519,242			341,601
Put option expense		209,184			—
Changes in assets and liabilities:
Accounts receivable		355,614			(49,659	)
Inventory		(5,784	)		(14,659	)
Other current assets		22,193			39,467
Deferred tax		—			—
Accounts payable and accrued expenses		(875,568	)		1,768,769
Net cash (used in) provided by operating activities		(1,352,432	)		578,762
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties		—			(5,732,183	)
Additions to equipment		(8,751	)		(141,059	)
Net cash used in investing activities		(8,751	)		(5,873,242	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings, related party		153,218			5,389,502
Issuance of common stock		504,360			—
Payments on note payable, related party		(331,989	)		—
Net cash provided by financing activities		325,589			5,389,502
(Decrease) increase in cash and cash equivalents		(1,035,594	)		95,002
Cash at beginning of period		1,671,672			76,366
Cash at end of period	$	229,260		$	171,388
NON-CASH INVESTING AND FINANCING ACTIVITIES
Investment applied to note payable and accrued interest-related party		2,130,155			—
Proceeds from sale of equipment applied to accounts payable-related party		94,030			—
Conversion of accounts payable to equity		361,464			—

F-5

TABLE OF CONTENTS

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended December 31, 2007

See notes to the consolidated condensed financial statements.

	Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance March 31, 2007	$	6,446,850	$	6,447	$	43,796,676	$	(42,999,146	)	$	803,977
Stock options for services		—		—		314,367		—			314,367
Issuance of common stock for conversion of debt		473,606		474		361,464		—			361,938
Issuance of common stock for cash		672,000		672		503,560		—			504,232
Warrants issued for service		—		—		1,204,875		—			1,204,875
Net loss		—		—		—		(484,843	)
Balance December 31, 2007	$	7,592,456	$	7,593	$	46,180,942	$	(43,483,989	)	$	2,704,546

F-6

TABLE OF CONTENTS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of United Heritage Corporation, a Utah corporation (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated condensed financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2007.

The Company’s financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and has a working capital deficit which raises substantial doubt as to its ability to continue as a going concern. The Company had a net loss of $484,843 for the nine months ended December 31, 2007 and a net loss of $11,435,134 for the fiscal year ended March 31, 2007 and, as of the same periods, the Company had an accumulated deficit of $43,483,989 and $42,999,146, respectively. During the quarter ended December 31, 2007, the Company raised gross proceeds of approximately $504,000 in cash in additional equity financings, and approximately $362,000 in debt conversion of debt to equity, however, there can be no assurance that the Company will be able to continue to obtain the financing it needs to develop its properties and alleviate doubt as to the Company’s ability to continue as a going concern.

Note 2 — New Accounting Standards

Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 19-1, Accounting for Suspended Well Costs, amends Statement of Financial Accounting Standards (“SFAS”) Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, to provide revised guidance concerning the criteria for continued capitalization of exploratory costs when wells have found reserves that cannot yet be classified as proved. FSP FAS No. 19-1 provides circumstances that would permit the continued capitalization of exploratory well costs beyond one year, other than when additional exploration wells are necessary to justify major capital expenditures and those wells are under way or firmly planned for the near future. Generally, the statement allows exploratory well costs to continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. The Company utilizes the full cost method to account for its oil and gas properties. As a result, the impact of FSP FAS No. 19-1 is expected to be minimal.

Effective April 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective transition method. SFAS No. 123(R) requires equity-classified share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on or after April 1, 2006 are recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that are not fully vested as of April 1, 2006 are recognized as compensation expense over the remaining vesting period. No retroactive or cumulative effect adjustments were required upon the Company’s adoption of SFAS No. 123(R).

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(Unaudited)

Note 2 — New Accounting Standards – (continued)

Prior to adopting SFAS No. 123(R), the Company accounted for its employee stock options using the intrinsic-value based method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. This method required compensation expense to be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. This interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding derecognition, classification and disclosure of these uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN No. 48 on April 1, 2007 did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows due to the significant net operating loss carryforwards of the Company.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which establishes an approach requiring the quantification of financial statement errors based on the effect of the error on each of the Company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the “iron curtain” and “roll-over” methods. The roll-over method focuses primarily on the impact of a misstatement on the income statement, including the reversing effect of prior year misstatements; however, its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method focuses primarily on the effect of correcting the period end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. The Company applied the provisions of SAB No. 108 in connection with the preparation of the Company’s annual financial statements for the year ending March 31, 2007. The use of the dual approach did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which addresses how companies should measure fair value when companies are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). As a result of SFAS No. 157, there is now a common definition of fair value to be used throughout GAAP. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Although the disclosure requirements may be expanded where certain assets or liabilities are fair valued such as those related to stock compensation expense and hedging activities, the Company does not expect the adoption of SFAS No. 157 to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides entities with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

At March 31, 2007, securities consisted of the following:

Note 3 — Securities

	Amortized Cost		Gross Unrealized Gain	Gross Unrealized (Loss)	Estimated Fair Value
Restricted Common Stock	$	1,827,000			$	1,827,000
Total	$	1,827,000			$	1,827,000

These securities were restricted shares of Cano Petroleum, Inc. common stock with an estimated fair value that approximated cost. On June 6, 2007 these securities were exchanged for forgiveness of the balance of principal and interest due to Lothian Oil Inc. for the Cato Unit Loan, as more fully described in Note 7. A gain of $303,155 was recognized upon the transfer to Lothian Oil Inc.

Note 4 — Inventory

Inventory consists of oil in tanks of $37,201 and $31,417 at December 31, 2007 and March 31, 2007, respectively.

Note 5 — Oil and Gas Properties

Capitalized costs related to oil and gas producing activities and related accumulated depletion, depreciation and amortization are as follows:

	December 31, 2007		March 31, 2007
Capitalized costs of oil and gas properties:
Proved	$	—	$	—
Unproved		5,914,783		5,864,587
		5,914,783		5,864,587
Less accumulated depletion, depreciation, and amortization		—		—
	$	5,914,783	$	5,864,587

Note 6 — Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. Concentrations of credit risk with respect to accounts receivable consist principally of oil and gas purchasers. The majority of the accounts receivable balance relates to the post-closing adjustments from the sale of the Company’s New Mexico properties. No allowance for doubtful accounts has been provided because management has determined the recorded amounts were fully collectible.

Note 7 — Note Payable to Related Party

Loans from Lothian Oil Inc.

The Company had a $4,000,000 loan agreement with Lothian Oil Inc. (“Lothian”), previously its majority shareholder (the “Cato Unit Loan”). The Cato Unit Loan was subsequently increased to $8,000,000 during the year ended March 31, 2007. Advances to the Company under this agreement were $2,182,843 as of March 31, 2007. The agreement, dated October 7, 2005, provided for draws as needed for the development of the Cato San Andres Unit in New Mexico. The note bore interest at 1% over the Citibank prime rate (8.25% at March 31, 2007) and was secured by a deed of trust and assignment of production, among other provisions. Loan advances were repayable monthly from 70% of the oil and gas proceeds produced by the Cato San Andres Unit. The note was due and payable on October 7, 2015 and was subordinated to the Sterling Bank agreement discussed below. The loan was reduced by $4,397,760 from the proceeds of the sale of the Cato San Andres Unit and the Tom Tom and Tomahawk Field on March 30, 2007. After the sale of these properties, the Cato Unit Loan was then secured by 404,204 shares of restricted Cano Petroleum, Inc. (“Cano Petroleum”) common stock. Effective June 6, 2007, Lothian accepted the restricted Cano Petroleum common stock as full payment of the loan and accrued interest which resulted in a gain of $303,155 on the extinguishment of the debt.

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(Unaudited)

Note 7 — Note Payable to Related Party – (continued)

The Company also had an additional $2,500,000 loan agreement with Lothian (the “Wardlaw Loan”). Advances to the Company under this agreement were $0 and $759,140 as of December 31, 2007 and March 31, 2007, respectively. The agreement, dated as of March 31, 2006, provided for draws as needed for the development of the Wardlaw field in Texas (the “Wardlaw Field”). The note bore interest at 1% over the Citibank prime rate (8.25% at March 31, 2007) and was secured by a deed of trust and assignment of production, among other provisions. Loan advances are repayable monthly from 70% of the oil and gas proceeds produced by the Wardlaw Field. The note was due and payable on March 31, 2016. On July 31, 2007 the Company entered into an agreement with its largest shareholder, Lothian. Pursuant to the terms of this agreement, Lothian forgave $1,800,000 that it asserted the Company owed to it, which amount included $753,296 in principal and $71,254 in accrued interest associated with the Wardlaw Loan. In exchange for the debt forgiveness, the Company agreed to deliver to Lothian any funds in excess of $100,000 that it received from Cano Petroleum in connection with the sale of the assets of UHC New Mexico Corporation. The Company does not anticipate that it will receive any funds in excess of $100,000 from Cano Petroleum in connection with that sale.

Note 8 — Net Loss Per Common Share

Basic earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during the periods ended December 31, 2007 and December 31, 2006. Diluted earnings per share have not been presented since the inclusion of potential common shares would be antidilutive. All outstanding options and warrants are priced above the closing price of the Company’s common stock at December 31, 2007, and likewise are not included in potential common shares outstanding.

Note 9 — Income Taxes

As of March 31, 2007, the Company had net operating loss carryovers of approximately $15,300,000 available to offset future income for income tax reporting purposes, which will ultimately expire in 2026, if not previously utilized.

Note 10 — Estimates

The preparation of condensed consolidated financial statements as of the period ended December 31, 2007 in conformity with United States GAAP require management to make estimates and assumptions that effect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. For example, estimates of oil and gas reserves, asset retirement obligations and impairment on unproved properties held by the Company are particularly sensitive, and actual results could differ materially from any estimates contained in the Company’s condensed consolidated financial statements.

Note 11 — Stock Options

Directors of the Company adopted the 1998 Stock Option Plan effective July 1, 1998 (the “1998 Plan”). The 1998 Plan and its subsequent amendment set aside 66,667 shares of authorized but unissued common stock for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan are exercisable over a period to be determined when granted, but may be affected by the termination of employment. As a result of a grant in January 2006 to the Company’s then chief executive officer, discussed in more detail below, options to purchase 66,667 shares are outstanding under this plan.

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(Unaudited)

Note 11 — Stock Options – (continued)

The 2000 Stock Option Plan of United Heritage Corporation was effective on June 5, 2000 and included 1,666,667 shares of authorized but unissued common stock (the “2000 Plan”). Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. Options granted under the 2000 Plan are exercisable over a period to be determined when granted, but may be affected by the termination of employment. On December 31, 2007, there were 19 awards outstanding under the 2000 Plan for the right to purchase a total of 1,658,333 shares.

On May 30, 2003 the Company granted 1,051,667 options under the 2000 Plan. The options were granted to directors, employees and others. The options vest over a two-year period with terms of three to five years. The exercise price is $1.50 per share. During the fiscal year ended March 31, 2006, the Company granted an option for 40,000 shares to a member of the Board of Directors for and in consideration of services provided to the Company. The option was issued at $2.91 per share for a term of five years with vesting over a three-year period.

On May 24, 2005, the Company granted options to certain members of the Board of Directors for and in consideration of services provided to the Company, as shown in the table below. The options were issued at $1.50 for a term of three years.

On January 3, 2006, the Company granted options to purchase 500,000 shares to the Company’s then chief executive officer for and in consideration of services provided to the Company. The options were issued at $1.05 per share for a term of three years with one-third of the options being exercisable immediately and one-third exercisable in each of the following two years. The fair value of each option was determined to be $2.50. All of the options vested on the date that the chief executive officer separated from service.

There were no options granted during the three or nine months ended December 31, 2007.

The following table summarizes pertinent information with regard to the 1998 Plan and 2000 Plan for the nine months ended December 31, 2007:

	Option and Rights		Weighted Average Exercise Price
Outstanding at beginning of year, April 1, 2007		1,725,000	$	3.40
Granted
Exercised		—		—
Forfeited		—		—
Expired		—		—
Outstanding at December 31, 2007		1,725,000	$	1.40
Exercisable at December 31, 2007		1,725,000	$	1.40

The weighted average contractual life of options outstanding at December 31, 2007 was 3.33 years. The weighted average contractual life of exercisable options was $3.33 at December 31, 2007.

The following is a summary of the Company’s nonvested options for 2007:

Nonvested, at April 1, 2007			180,000
Granted			—
Vested			180,000
Forfeited			—
Nonvested, at December 31, 2007			—

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(Unaudited)

Note 11 — Stock Options – (continued)

During the third quarter the remaining unvested options vested upon the option holder’s separation from service in October 2007. The weighted average grant date fair value of options that vested during the nine months ended December 31, 2007 was $1.19. The weighted average grant date fair value of unvested options outstanding at April 1, 2006 was $2.44.

The option agreements related to the options with $1.50 and $2.91 exercise prices were modified to extend the expiration date to March 31, 2009, add a put feature where the option holder can put the option back to the Company for the difference between $4.00 per share and the purchase price between April 1, 2008 and April 10, 2008 and add a call feature whereby the Company can call the option for the difference between $7.50 and the purchase price. Since the put feature does not subject the holder to the normal risks of share ownership, the options are classified as liability awards and recorded at fair value. A liability of $2,936,370 is recorded at December 31, 2007 and corresponding expense of $69,728 and $209,184 has been recorded for the three and nine months ended December 31, 2007, respectively.

Note 12 — Stock Warrants

The Company entered into a stock warrant agreement effective January 12, 2004. Pursuant to the agreement, the Company issued warrants to purchase 500,000 shares of common stock in connection with a private placement. Warrants issued under the agreement have a term of 10 years.

The Company entered into stock warrant agreements effective April 2004 in connection with the issuance of convertible promissory notes. Pursuant to the agreement, the Company issued warrants to purchase 1,766,667 shares of common stock. Warrants issued under the agreement have a term of 10 years.

On December 19, 2005, the Company’s shareholders approved the issuance of warrants to purchase 2,906,666 shares of common stock to Lothian. The warrants are exercisable upon issuance and have a term of five years and were issued as follows:

(1)

Warrant for the purchase of 953,333 shares with an exercise price of $3.15 per share;

(2)

Warrant for the purchase of 1,000,000 shares with an exercise price of $3.36 per share;

(3)

Warrant for the purchase of 953,333 shares with an exercise price of $3.75 per share.

Half of the 1,766,667 warrants issued during the fiscal year ended March 31, 2005 are exercisable at $2.25 and $3.00, respectively, and have a remaining contractual life of 2 years. The warrants issued in the fiscal year ended March 31, 2006 include those issued to Lothian Oil Inc. and warrants for the purchase of 50,234 shares of common stock with an exercise price of $1.50 per share issued for legal services rendered to the Company.

The common stock and warrants owned by Lothian were transferred to Walter G. Mize (“Mize”) on July 31, 2007 and, thereafter, from Mize to Blackwood Ventures LLC (“Blackwood”) on September 26, 2007, as more fully described in Note 17.

During the quarter ended December 31, 2007, there were 10,306,325 warrants issued, as more fully described in Notes 15 and 16.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 12 — Stock Warrants – (continued)

United Heritage Corporation Warrants Issuance Quarter Ended 12/31/07

IssuanceDate	Warrant Holder		Warrants		Exercise Price
11/28/2007		DK True Energy Development Ltd. &RTP Secure Energy Corp.		9,000,000	$	1.05
11/28/2007		Private Placement		1,306,325	$	1.40
		Total		10,306,325

The following schedule summarizes pertinent information with regard to the stock warrants for the nine months ended December 31, 2007:

	Shares Outstanding		Weighted Average Exercise Price
Outstanding at beginning of year, April 1, 2007		5,085,334	$	3.08
Granted		10,306,325		1.09
Exercised		—		—
Forfeited		—		—
Expired		—		—
Outstanding at December 31, 2007		15,391,659	$	1.75
Exercisable		5,085,334	$	3.08

An expense of $1,204,875, related to the compensatory warrants issued to DK True Energy Development Ltd. and RTP Secure Energy Corp., was recorded in the three and nine months ended December 31, 2007. An additional compensation expense of approximately $8.2 million will be recorded over the vesting term of such warrants.

In addition, the Company, as part of an independent consulting services agreement, has agreed to issue a warrant to purchase up to 1,600,000 shares of common stock to Applewood Energy Inc., and a warrant to purchase up to 1,000,000 shares of common stock to GWB Petroleum Consultants, Ltd., as more fully described in Note 16 — Consulting Agreements. The Company has also agreed to issue a warrant to purchase up to 1,500,000 shares of common stock to Joseph Langston, and a warrant to purchase up to 1,500,000 shares of common stock to Blackwood Capital Limited, as more fully described in Note 18 — Subsequent Events — Consultants. Each of the above-referenced warrants will be issued upon receipt of shareholder approval in accordance with applicable federal securities laws and in compliance with Nasdaq Marketplace Rule 4350 (“Rule 4350”).

Note 13 — Preferred Stock

The Company’s Articles of Incorporation authorize the issuance of 5,000,000 shares of preferred stock, $0.0001 par value per share and allow the Board of Directors, without shareholder approval and by resolution, to designate the preferences and rights of the preferred stock. On February 22, 2006, the Company’s Board of Directors unanimously adopted and approved a “Certificate of Designation, Preferences and Rights of Series A Preferred Stock of United Heritage Corporation” and a “Certificate of Designation, Preferences and Rights of Series B Preferred Stock of United Heritage Corporation”.

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(Unaudited)

Note 13 — Preferred Stock – (continued)

The Certificates of Designation created 133,334 shares of Series A Preferred Stock, 30,303 shares of Series B-1 Preferred Stock and 45,455 shares of Series B-2 Preferred Stock. The Certificates of Designation were filed with the Secretary of State of the State of Utah on May 17, 2006, however, no preferred shares have been issued as of December 31, 2007.

Note 14 — Supplemental Disclosures of Cash Flows Information

	Nine Months Ended December 31,
	2007		2006
Cash paid during the three months for:
Interest	$	—	$	26,698
Taxes	$	—	$	—

Note 15 — Issuance of Common Stock

On November 28, 2007 the Company completed the sale and issuance of units having a total gross value of $600,000 in a private placement to accredited investors (the “November Offering”). Each unit was comprised of (i) 32,000 shares of the Company’s common stock, par value $0.001 per share, and (ii) a 5 year callable warrant to purchase up to 52,253 shares of the Company’s common stock, subject to certain vesting requirements, at an exercise price of $1.40 per share. The warrants may not be exercised until the Company obtains shareholder approval of their issuance. The Company sold and issued a total of 21 units at a price of $24,000 per unit, for net cash proceeds of approximately $504,000. The Company also converted debt in the amount of $96,000 owed to Blackwood, its largest shareholder, into 4 units. The per share price of the common stock included in the units was less than the per share book or market value of the Company’s common stock on the date of sale. No underwriting discounts or commissions were paid in connection with the November Offering. The Company is obligated to register the shares underlying the warrants, subject to compliance with Rule 415 promulgated under the Securities Act of 1933, as amended.

Note 16 — Consulting Agreements

On November 28, 2007 the Company entered into a 12 month consulting agreement (the “Consulting Agreement”) with DK True Energy Development Ltd., a member of Blackwood, the Company’s largest shareholder, and RTP Secure Energy Corp. (together, the “Consultants”). In accordance with the terms of the Consulting Agreement, the Consultants are to provide the Company with, among other things, reservoir analysis, and geological and engineering expertise, as required and reasonably requested by the Company from time to time, as well as to assist the Company with respect to: (i) reviewing technical data and providing advice regarding the development of the Wardlaw Field; (ii) identifying and introducing the Company to management candidates, including prospective members of the board of directors and officers; (iii) interacting with the Company’s potential investors; and (iv) assisting and advising the Company with respect to developing a pilot program and a full development plan for the full production of the Wardlaw Field.

In lieu of cash compensation, the Consultants will receive 5-year warrants to purchase up to a total of 9,000,000 shares of common stock, at an exercise price of $1.05 per share, exercisable after December 31, 2007 and only on a cashless basis (such that fewer than 9,000,000 shares will be issued). The Consultants’ warrants are subject to shareholder approval in accordance with applicable federal securities laws and in compliance Rule 4350. The Company’s majority shareholder, Blackwood, has executed a voting agreement to approve the Consultants’ warrants. The Consultants’ warrants will vest, in the aggregate, as follows: (i) 1,147,500 warrant shares will vest upon effective shareholder approval; (ii) 2,452,500 warrant shares will vest upon the Company’s announcement that it is moving forward with a development program based on the results of the pilot program of the Wardlaw Field; and (iii) 5,400,000 warrant shares will vest at the rate of 675,000 shares for each increase of an average of 250 barrels of oil per day produced by the Company in any calendar month following the warrant issue date. Notwithstanding the foregoing, the Consultants’ warrants will vest entirely upon a change of control transaction, including an agreement for the sale or disposition of more than 50% of the Company’s interest in the Wardlaw Field. The Company is obligated to use its best efforts to file a registration statement with the Securities and Exchange Commission (the “SEC”) within 180 days providing for the resale of an aggregate of 6,500,000 of the Consultants’ warrant shares, subject to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”).

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(Unaudited)

Note 16 — Consulting Agreements – (continued)

Officers and Directors

On November 28, 2007, the Company entered into a consulting agreement with Applewood Energy, Inc., (“Applewood”), effective as of November 1, 2007 (the “Applewood Agreement”), pursuant to which Applewood agreed to provide the Company, for a period of two years from the effective date, the services of Mr. Paul D. Watson (“Watson”), as Chief Operating Officer and a member of board of directors.

As compensation for the services to be rendered under the terms of the Applewood Agreement, the Company agreed to issue Applewood shares of common stock having a value of $60,000 and pay cash compensation of $5,000 per month. Upon completion of the first and second years of the Applewood Agreement, the Company will pay Applewood a bonus, in shares of common stock, equal to the amount of Applewood’s annual compensation. Upon the achievement of certain milestones, Applewood will be entitled receive warrants to purchase shares of the Company’s common stock as follows: (i) the right to purchase 400,000 shares of common stock at an exercise price of $2.00 per share vesting upon completion of a successful pilot; (ii) the right to purchase 400,000 shares of common stock at an exercise price of $2.00 per share when the Company’s 30 day average production reaches 1,000 barrels of oil equivalent per day (“BOE/D”); (iii) the right to purchase 400,000 shares of common stock at an exercise price of $2.50 per share vesting when the Company’s 30 day average production reaches 2,000 BOE/D; and (iv) the right to purchase 400,000 shares of common stock having an exercise price of $3.00 per shares when the Company’s 30 day average production reaches 3,000 BOE/D. Before the Company can issue the shares of common stock for the bonus and the warrants, it must seek approval from its shareholders pursuant to Rule 4350.

In the event of a business combination or change of control, as they are defined in the Applewood Agreement, all unvested warrants issued to Applewood will immediately vest and Applewood will have the right to receive, upon exercise of its warrants and payment of the exercise price, subject in all cases to completion of a successful pilot, the kind and amount of shares of capital stock or other securities or property which it would have been entitled to receive upon or as a result of such combination or change of control had the warrants been exercised immediately prior to such event. In the event of a business combination or change of control which results in the termination of the Applewood Agreement, Applewood will receive a 12 month severance package payable upon the effective date of the transaction and only as to the cash portion of Applewood’s annual compensation.

On November 28, 2007, the Company entered into a consulting agreement with GWB Petroleum Consultants Ltd. (“GWB”), effective as of November 1, 2007 (the “GWB Agreement”), pursuant to which GWB agreed to provide the Company, for a period of two years from the effective date, the services of Mr. Geoffrey W. Beatson (“Beatson”) as Vice President of Engineering and Production.

As compensation for the services to be rendered under the terms of the GWB Agreement, the Company agreed to pay GWB $550 per day until January 1, 2008, and thereafter $12,000 per month. Upon completion of the first and second years of the GWB Agreement, the Company will pay GWB a bonus, in shares of its common stock, equal to the amount of GWB’s annual cash compensation. Upon the achievement of certain milestones, GWB will also receive warrants to purchase shares of the Company’s common stock as follows: (i) the right to purchase 250,000 shares of common stock at an exercise price of $2.00 per share vesting upon completion of a successful pilot; (ii) the right to purchase 250,000 shares of common stock at an exercise price of $2.00 per share when the Company’s 30 day average production reaches 1,000 BOE/D; (iii) the right to purchase 250,000 shares of common stock at an exercise price of $2.50 per share vesting when the Company’s 30 day average production reaches 2,000 BOE/D; and (iv) the right to purchase 250,000 shares of common stock having an exercise price of $3.00 per shares when the Company’s 30 day average production reaches 3,000 BOE/D.

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(Unaudited)

Note 16 — Consulting Agreements – (continued)

In the event of a business combination or change of control, as they are defined in the GWB Agreement, all unvested warrants issued to GWB will immediately vest and GWB will have the right to receive, upon exercise of its warrants and payment of the exercise price, subject in all cases to completion of a successful pilot, the kind and amount of shares of capital stock or other securities or property which it would have been entitled to receive upon or as a result of such combination or change of control had the warrants been exercised immediately prior to such event. In the event of a business combination or change of control which results in the termination of the GWB Agreement, GWB shall receive a 12 month severance package payable upon the effective date of the transaction and only as to the cash portion of GWB’s annual compensation.

Note 17 — Control Corporation

On September 26, 2007, Walter G. Mize, formerly the Company’s largest shareholder, entered into a Restated Stock Sale Agreement, which was effective as of September 18, 2007, with Blackwood, pursuant to which Blackwood purchased from Mize (i) 3,759,999 shares of common stock, (ii) a warrant for the purchase of 953,333 shares of common stock at an exercise price of $3.15 per share, (iii) a warrant for the purchase of 1,000,000 shares of common stock at an exercise price of $3.36 per share, and (iv) a warrant for the purchase of 953,333 shares of our common stock at an exercise price of $3.75 per share. The aggregate purchase price for the securities was $5,017,000. As a result of this transaction, Blackwood now owns approximately 58.3% of the Company’s voting securities. Blackwood purchased the securities by transferring to Mize $375,000 in cash and two promissory notes, one in the face amount of $3,767,000 and the second in the face amount of $875,000. The funds transferred to Mize from Blackwood to purchase the securities were Blackwood’s personal funds.

On November 27, 2007, as part of the November Offering, the Company converted $96,000 of debt owed to Blackwood into 4 units of its securities, comprised of an aggregate of 128,000 shares of common stock and five year warrants to purchase up to an additional 209,012 shares of common stock, subject to certain vesting requirements, at an exercise price of $1.40 per share, as more fully described in Note 15.

On December 19, 2007, the Company entered into an agreement to convert debt with Blackwood (the “Agreement to Convert Debt”), pursuant to which Blackwood agreed to accept (i) 48,750 shares of common stock, representing a price of $0.80 per share, and (ii) a seven year warrant to purchase 36,563 shares of common stock at an exercise price of $1.40 per share, in consideration of the cancellation of $39,000 of debt incurred by the Company in connection with Blackwood’s prior discharge of certain of its accounts payable.

As a result of these transactions Blackwood beneficially owns 6,794,665 shares of the Company’s common stock, or approximately 66.9%, exclusive of the shares issuable as part of the November Offering and the Agreement to Convert Debt which are subject to shareholder approval at the Company’s annual meeting (the “Annual Meeting”).

Note 18 — Subsequent Events

Officers and Directors

On January 14, 2008, Mr. Watson relinquished his appointment as the Company’s Chief Operating Officer and was appointed Chief Executive Officer and chairman of the board of directors. As such the Company intends to amend the Applewood Agreement to reflect this change. The Applewood Agreement will remain otherwise unmodified.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 18 — Subsequent Events – (continued)

On January 15, 2008, Joseph Langston resigned as the Company’s interim Chairman of the board of directors and interim Chief Executive Officer and Paul D. Watson as appointed Chairman of the board of directors and Chief Executive Officer in his place. On the same date, Mr. Langston was appointed as the Company’s President, Chief Financial Officer and Secretary.

In connection with the Company’s appointment of Mr. Langston as President, Chief Financial Officer and Secretary the Company agreed to enter into a definitive employment agreement with Mr. Langston, the material terms of which will include: (i) an annual salary in the amount of $60,000 (the “Annual Salary”), payable, at the option of the Company, in cash or shares of the Company’s common stock, (ii) a signing bonus of 80,000 shares of the Company’s common stock (the “Signing Bonus Shares”), (iii) reimbursement for any out-of-pocket expenses incurred in connection with the execution of Mr. Langston’s duties as an executive officer, (iv) an annual renewal bonus equal to 100% of the Annual Salary payable in common stock at the prevailing market price, and (v) a warrant to purchase: (a) 300,000 shares of common stock at a purchase price per share of $1.50 vesting upon completion of a successful financing in which the Company raises in excess of $1 million, (b) 300,000 shares of common stock at a purchase price per share of $2.00 vesting upon completion of a successful pilot for development of the Company’s Wardlaw Field, (c) 300,000 shares of common stock at a purchase price per share of $2.00 vesting when the Company’s 30-day average production reaches 1,000 barrels of oil equivalent per day (“BOE/D”), (d) 300,000 shares of common stock at a purchase price per share of $2.50 vesting when the Company’s 30-day average production reaches 2,000 BOE/D, and (e) 300,000 shares of common stock at a purchase price per share of $3.00 vesting when the Company’s 30 day average production reaches 3,000 BOE/D. The Signing Bonus Shares will not be accrued and issued until approved by the shareholders at the Annual Meeting.

Consultants

On January 15, 2008, the Company entered into a one-year consulting agreement with Blackwood Capital Limited (“BCL”), an entity which controls Blackwood, the Company’s majority shareholder (the “BCL Agreement”), pursuant to which the Company agreed to issue to BCL, for financial advisory services which have been rendered since September 1, 2007 and as an inducement to provide further services, a four-year warrant to purchase 1,500,000 shares of the Company’s common stock at a price of $1.05 per share (the “BCL Warrant”). In addition to the BCL Warrant, the Company agreed to pay BCL a monthly consulting fee of $15,000, to be calculated and paid from September 1, 2007 through the end of the term of the BCL Agreement. The BCL Warrant is subject to approval by the Company’s shareholders, as required by Rule 4350. As of December 31, 2007, there was no money owed to BCL under to the terms of the BCL Agreement.

Private Placements

On January 16, 2008, the Company entered into a six-month exclusive agreement with Chadbourn Securities (“Chadbourn”), pursuant to which Chadbourn agreed to act as the Company’s placement agent in connection with a private placement of the Company’s securities (the “Chadbourn Agreement”). According to the Chadbourn Agreement, the Company will pay Chadbourn a monthly fee of $15,000, which Chadbourn may elect to receive in the Company’s common stock valued at the average volume weighted average price for the five trading days preceding the end of the applicable month of service. In addition, if the Company places any equity or equity-linked securities during the term of the Chadbourn Agreement, other than the securities issued pursuant to the 500K Private Placement (as hereinafter defined), the Company will pay Chadbourn 8% of the gross proceeds up to $5,000,000 and 4% of the gross proceeds in excess of $5,000,000, along with warrants to purchase 8% of the number of shares of common stock actually issued in the private placement (or 8% of the number of shares of common stock into which any preferred stock or convertible debentures so issued are initially convertible). If the Company places non-convertible subordinated debt during the term of the Chadbourn Agreement, the Company will pay Chadbourn 8% of the amount funded to the Company, and if the Company issues equity interests along with such subordinated debt, Chadbourn will also receive 8% of the equity securities issued to the lenders. If the Company places non-convertible senior debt during the term of the Chadbourn Agreement, the Company will pay Chadbourn 2% of the amount funded to the Company, and if the Company issues equity interests along with such senior debt, Chadbourn will also receive 8% of the securities issued to the lenders. Subject to approval by the Company’s shareholders, as required by Rule 4350, at the Annual Meeting.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 18 — Subsequent Events – (continued)

On or about January 17, 2008, the Company accepted binding subscriptions for the purchase and sale to accredited investors of $500,000 of the Company’s common stock at a price of $0.75 per share (the “$500K Private Placement”), including subscriptions for $50,000 each from the Langston Family Limited Partnership and Applewood Energy, Inc., entities controlled by the Company’s Chief Executive Officer and Chairman of its board of directors, Paul D. Watson, and the Company’s President, Chief Financial Officer and Secretary, Joseph F. Langston, Jr., respectively. The $500K Private Placement is subject to approval by the Company’s shareholders, as required by Rule 4350, inasmuch as the $500K Private Placement may be aggregated with certain private placement consummated by the Company in November 2007.

Listing Requirements

On July 19, 2007 the Company received a letter from the Nasdaq Stock Market (“Nasdaq”) indicating that it did not comply with Marketplace Rule 4310(c)(3) requiring it to have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years (“Rule 4310(c)(3)”). The Company had until August 3, 2007 to provide Nasdaq with a specific plan to achieve and sustain compliance with Rule 4310(c)(3). The Company submitted a plan on August 2, 2007 and Nasdaq extended its time for compliance until the filing of its next periodic report. On November 14, 2007 the Company filed a quarterly report on Form 10-QSB for the quarter ended September 30, 2007, indicating that it was not in compliance with Rule 4310(c)(3).

On November 30, 2007 the Company received a letter from Nasdaq noting its failure to regain compliance and indicating that trading of its common stock would be suspended at the opening of business on December 11, 2007 unless it appeal the determination. The Company appealed the determination to the Nasdaq Listing Qualifications Panel (the “Panel”) and a hearing was held on January 17, 2008, the outcome of which is currently pending.

On January 31, 2008 the Company received a letter from Nasdaq indicating that, for a period of 30 consecutive business days, the bid price of its common stock closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4), and that the Company has until July 29, 2008 to regain compliance.

Debt Conversions

On January 15, 2008, the Company entered into an agreement to convert an $833,335 option put right held by Mize into 1,111,113 shares of the Company’s common stock and a three-year warrant to purchase 555,556 shares of the Company’s common stock at an exercise price of $1.50 per share. Mize’s obligation to convert his put right into securities of the Company is conditioned on the Company obtaining a favorable decision by the Panel as to the continued listing of the Company’s common stock on the Nasdaq Capital Market. If the Company receives an unfavorable decision as to its continued listing on the Nasdaq Capital Market, Mize will have the right, but not the obligation, to convert his put right on the same terms described above for a period of 90 days from receiving notice of such unfavorable decision. The option put right conversion agreement with Mize is subject to approval by the Company’s shareholders, as required by Rule 4350.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

United Heritage Corporation

We have audited the accompanying consolidated balance sheets of United Heritage Corporation and subsidiaries as of March 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Heritage Corporation and subsidiaries as of March 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company sold all of its proved reserves in 2006 and currently does not have significant revenue producing assets. In addition, the Company has limited capital resources and it’s majority shareholder who was financing the Company’s development filed for bankruptcy subsequent to March 31, 2007, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, in 2007 the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share Based Payment.”

/s/ Weaver and Tidwell, L.L.P.

Fort Worth, Texas

July 16, 2007

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The Notes to Consolidated Financial Statements are an integral part of these statements.

CONSOLIDATED BALANCE SHEETS

March 31, 2007 and 2006

	2007		2006
ASSETS
CURRENT ASSETS
Cash	$	1,671,672	$	76,366
Accounts receivable		5,602		60,269
Accounts receivable – other		465,068		—
Inventory		31,417		48,626
Prepaid expenses		34,909		47,530
Total current assets		2,208,668		232,791
INVESTMENT in Cano Petroleum common stock, at fair value (restricted)		1,827,000		—
OIL AND GAS PROPERTIES, accounted for using the full cost method, net of accumulated depletion and depreciation of $0 for 2007 and $2,048,818 for 2006
Proved		—		9,353,037
Unproved		5,864,587		5,864,587
		5,864,587		15,217,624
PROPERTY AND EQUIPMENT, at cost
Equipment, furniture and fixtures		74,244		74,244
Vehicles		158,452		57,603
		232,696		131,847
Less accumulated depreciation		149,392		120,657
		83,304		11,190
Total Assets	$	9,983,559	$	15,461,605

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The Notes to Consolidated Financial Statements are an integral part of these statements.

CONSOLIDATED BALANCE SHEETS

March 31, 2007 and 2006

	2007			2006
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,835,148		$	1,248,763
Accounts payable, related party		797,088			405,000
Accrued expenses		343,750			344,684
Accrued interest, related party		451,485			—
Total current liabilities		3,427,471			1,998,447
LONG-TERM LIABILITIES
Asset retirement obligation		82,942			266,512
Note payable, related parties		2,941,983			1,413,003
Accrued put option liability		2,727,186			—
Deferred tax liability		—			—
Total liabilities		9,179,582			3,677,962
SHAREHOLDERS' EQUITY
Preferred stock, $.0001 par value, 5,000,000 shares authorized, none issued		—			—
Common stock, $.001 par value, 125,000,000 shares authorized, 6,446,758 issued and outstanding		6,447			6,447
Additional paid-in capital		43,796,676			43,341,208
Accumulated deficit		(42,999,146	)		(31,564,012	)
Total shareholders' equity		803,977			11,783,643
Total Liabilities and Shareholders' Equity	$	9,983,559		$	15,461,605

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CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended March 31, 2007 and 2006

	2007			2006
OPERATING REVENUES
Processed meat products	$	—		$	8,694
Oil and gas sales		1,014,734			592,991
Total operating revenues		1,014,734			601,685
OPERATING COSTS AND EXPENSES
Processed meat products		—			15,996
Production and operating		1,320,401			259,290
Depreciation and depletion		490,507			1,027,155
Accretion of asset retirement obligation		12,402			16,532
General and administrative		1,317,456			1,339,920
Put option expense		2,727,186			—
Ceiling test impairment of oil & gas properties		—			23,199,110
Total operating costs and expenses		5,867,952			25,858,003
Loss from operations		(4,853,218	)		(25,256,318	)
OTHER INCOME (EXPENSE)
Gain on forgiveness of debt		—			116,457
Loss on notes receivable		—			(87,500	)
Loss on sale of oil and gas assets		(6,125,233	)		—
Interest expense		(456,683	)		(221,445	)
Miscellaneous income		—			27,486
Income (loss) before income tax		(11,435,134	)		(25,421,320	)
INCOME TAX (EXPENSE) BENEFIT		—			8,049,925
Net income (loss)	$	(11,435,134	)	$	(17,371,395	)
Income (loss) per share:
Basic and diluted	$	(1.77	)	$	(2.98	)
Weighted average number of shares outstanding Basic and diluted		6,446,758			5,830,188

The Notes to Consolidated Financial Statements are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years Ended March 31, 2007 and 2006

	Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Other
Balance, March 31, 2005 (Restated)		5,182,781	$	5,183	$	39,476,803	$	(14,192,617	)	$	(5,250	)
Stock issued for services		33,333		33		105,324		—			—
Issuance of stock to Lothian Oil Inc.		1,093,333		1,093		3,442,907		—			—
Issuance of stock upon exercise of warrants		138,233		138		311,712		—			—
Stock options for services non-employees		—		—		4,462		—			—
Realization of deferred consulting fees		—		—		—		—			5,250
Net loss		—		—		—		(17,371,395	)		—
Balance, March 31, 2006		6,446,758		6,447		43,341,208		(31,564,012	)		—
Stock options for services of non-employees		—		—		455,468		—			—
Net loss		—		—		—		(11,435,134	)		—
Balance, March 31, 2007		6,446,758	$	6,447	$	43,796,676	$	(42,999,146	)	$	—

The Notes to Consolidated Financial Statements are an integral part of these statements.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended March 31, 2007 and 2006

	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,435,134	)	$	(17,371,395	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization		490,507			1,027,155
Loss on sale of oil and gas assets		6,125,233			—
Ceiling test impairment of oil and gas properties		—			23,199,110
Realization of stock options issued to non-employees		455,468			4,462
Put option expense		2,727,186			—
Recognition of services performed for stock		—			105,357
Deferred compensation and consulting recognized in current year		—			5,250
Forgiveness of debt		—			(116,457	)
Accretion of asset retirement obligation		12,402			16,532
Write off of note receivable		—			87,500
Changes in assets and liabilities:
Accounts receivable		(410,401	)		29,998
Inventory		17,209			(22,419	)
Prepaid expenses		12,621			77,665
Deferred tax		—			(8,049,925	)
Accounts payable and accrued expenses		1,429,024			939,438
Net cash used in operating activities		(575,885	)		(67,729	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas interests		6,613,947			625,000
Additions to oil and gas properties		(5,830,677	)		(2,533,815	)
Additions to equipment		(141,059	)		—
Net cash provided by (used in) investing activities		642,211			(1,908,815	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock warrants		—			311,850
Proceeds from issuance of common stock to Lothian		—			3,444,000
Proceeds from borrowings, related parties		6,338,904			1,493,903
Payments on note payable, related party		(4,809,924	)		(3,203,994	)
Net cash provided by financing activities		1,528,980			2,045,759
Net increase in cash		1,595,306			69,215
Cash, beginning of year		76,366			7,151
Cash, end of year	$	1,671,672		$	76,366
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest	$	—		$	712,030
Taxes	$	—		$	—
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in exchange for services	$	—		$	105,357
Acquisition of common stock in sale of oil and gas properties	$	1,827,000		$	—
Forgiveness of debt	$	—		$	116,457

The Notes to Consolidated Financial Statements are an integral part of these statements.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Restatement of Historical Financial Statements

In April 2006, the Company retained independent petroleum engineers to evaluate its properties. Based on this review and internal assessments, the Company concluded that a downward revision of its stated proved reserves, from 36,492,693 Boe to 1,056,317 Boe, should have been reflected in the March 31, 2005 fiscal year and prior periods. The Company concluded that a revision of the historical proved reserve estimates included in the historical supplemental oil and gas producing disclosures was required. Quantities of estimated proved reserves are used in determining depletion and impairment based on the ceiling limitation. The revisions of historical reserve estimates required the restatement of the Company’s financial statements for the fiscal years ending March 31, 2000 to March 31, 2005 and the first three quarters of March 31, 2006.

In addition to the restatements required as a result of the reserve revisions, the Company determined that approximately $76,822 of merger costs and $34,131 of vehicle costs net of accumulated depreciation were inappropriately included in the Company’s proven properties in the March 31, 2005 financial statements and prior years. The Company determined that a revision of the historical financial statements for these reclassifications was required to determine the appropriate depletion and impairment based on the ceiling limitation.

Reserve Restatement

The reserve restatement resulted in the following revisions to our estimated proved reserves as of March 31, 2005:

	March 31, 2005
	As Reported		As Restated
Estimated Proved Reserves (Unaudited)
Oil (Bbls)		35,225,600		567,189
Gas (Mcf)		7,602,559		2,934,765
Oil and Gas (Boe)		36,492,693		1,056,317
Estimated Proved Developed Reserves (Unaudited)
Oil (Bbls)		5,629,000		567,189
Gas (Mcf)		2,538,000		2,934,765
Oil and Gas (Boe)		6,052,000		1,056,317

The cumulative impact of the restatement on the Company’s shareholders’ equity as of March 31, 2005 was a reduction of approximately $1,800,873.

The Company’s historical consolidated statements of operations for the year ended March 31, 2005 and for each of the quarters in that year and the first three quarters of the fiscal year ended March 31, 2006 reflect the effects of the restatement on the calculation of historical depletion. The Company did not amend the Annual Report filed on Form10-KSB for the year ended March 31, 2005 or the Quarterly Reports filed on Form 10-QSB for any periods prior to March 31, 2006. The financial statements and related information contained in those reports should no longer be relied upon. A summary of the effects of the restatement on reported amounts for the year ended March 31, 2005 and the quarters ended June 30, 2005, September 30, 2005 and December 31, 2005 is presented below. The information presented represents only those statements of operations, balance sheet and cash flow statement line items affected by the restatement.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Restatement of Historical Financial Statements – (continued)

	March 31, 2005
	As Reported			As Restated
Balance Sheet:
Prepaid expenses	$	48,374		$	125,195
Proved oil and gas properties		38,565,819			2,301,263
Accumulated depletion		204,706			1,026,934
Unproved oil and gas properties		834,579			35,215,630
Vehicles		22,045			57,603
Accumulated depreciation		85,637			115,384
Total assets		39,683,457			37,882,584
Accumulated deficit		(12,391,744	)		(14,192,617	)

Total liabilities and shareholders’ equity		39,683,457			37,882,584

	Quarters Ended (Unaudited)
	June 30, 2005						September 30, 2005						December 31, 2005
	As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
Statement of Operations:
Depreciation and depletion	$	11,734		$	64,005		$	14,187		$	389,435		$	21,269		$	234,880
Ceiling test impairment		—			—			—			23,199,110			—			—
Total operating costs and expenses		271,475			323,746			418,970			23,993,328			354,531			568,142
Loss from operations		(144,392	)		(196,663	)		(234,528	)		(23,808,886	)		(173,095	)		(386,706	)
Income tax		—			—			—			8,049,925			—			—
Net loss		(219,013	)		(271,284	)		(304,821	)		(15,865,481	)		(209,792	)		(423,403	)
Basic and diluted loss per share		(0.04	)		(0.05	)		(0.06	)		(2.98	)		(0.03	)		(0.07	)

	Quarters Ended (Unaudited)
	June 30, 2005						September 30, 2005						December 31, 2005
	As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
Statement of Cash Flows:
Net loss	$	(219,013	)	$	(271,284	)	$	(304,821	)	$	(15,865,481	)	$	(209,792	)	$	(423,403	)
Depreciation, depletion and amortization		11,734			64,005			14,187			389,435			21,269			234,880
Ceiling test impairment		—			—			—			23,199,110			—			—
Deferred tax		—			—			—			(8,049,925	)		—			—

Note 2 — Summary of Significant Accounting Policies

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of United Heritage Corporation (the Company) and its wholly owned subsidiaries, UHC Petroleum Corporation, UHC Petroleum Services Corporation, UHC New Mexico Corporation and National Heritage Sales Corporation.

All intercompany transactions and balances have been eliminated upon consolidation.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Summary of Significant Accounting Policies – (continued)

Nature of Operations

United Heritage Corporation owns various oil and gas properties located in south Texas. The Company began production of the Texas properties during the year ended March 31, 2000. The Company continues to operate its oil and gas properties.

Revenue

Oil and gas production revenues are recognized at the point of sale. Production not sold at the end of the fiscal year is included as inventory in the accompanying financial statements. Revenue from the sale of meat products was recognized when products were delivered to customers.

Inventory

Inventory consists of oil in tanks, which is valued at the lower of the cost to produce the oil or the current available sales price.

Oil and Gas Properties

The Company follows the full cost method of accounting for oil and gas properties, which are located in the southwestern United States. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized.

All capitalized costs, including the estimated future costs to develop proved reserves are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects will not be amortized until proved reserves associated with the projects can be determined or until impairment occurs. Oil and gas reserves and production are converted into equivalent units based upon estimated relative energy content.

The Company is currently participating in oil and gas exploitation and development activities. As of March 31, 2007 the following associated property costs have been excluded in computing amortization of the full cost pool, by the year in which such costs were incurred:

	Total			2007		2006			Prior
Acquisition costs	$	31,752,741		$	0	$	26,566		$	31,726,175
Exploration costs		0			0		0			0
Development costs		3,918,199			0		428,744			3,489,455
Sale of deep rights		(625,000	)		0		(625,000	)		0
Unproved impairment		(29,181,353	)		0		(29,181,353	)		0
	$	5,864,587		$	0	$	(29,351,043	)	$	35,215,630

The Company will begin to amortize the remaining acquisition costs when the project evaluation is complete. This will be dependent upon the Company finding the necessary financing.

Potential impairment of producing properties and significant unproved properties and other plant and equipment are assessed periodically. If the assessment indicates that the properties are impaired, the amount of the impairment will be added to the capitalized costs to be amortized.

In addition, the capitalized costs are subject to a “ceiling test”, which limits such costs to the aggregate of the estimated present value using a 10% discount rate (based on prices and costs at the balance sheet date) of future net revenues from proved reserves based on current economic and operating conditions, plus the lower of cost (net of impairments) or fair market value of unproved properties.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Summary of Significant Accounting Policies – (continued)

As discussed in Note 1, the Company retained outside independent petroleum engineers to evaluate the properties of the Company as of March 31, 2006. Based on this review and internal assessments, the Company concluded that a downward revision for its unproved properties was required. As of March 31, 2006, the Company impaired $29,181,353 of unproved properties and included these costs in the full cost pool subjecting these costs to the ceiling limitation and depletion for the fiscal year ended March 31, 2006. The ceiling test resulted in a write-down during 2006 of $23,199,110. Depreciation and depletion increased approximately $763,414 primarily due to the addition of these unproved properties to the full cost pool. As of March 31, 2007 the Company determined that no impairment of its unproved properties was required.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized. During the year ended March 31, 2007 the Company sold 100% of its proved reserves for net proceeds of $8,440,947. The sale resulted in a loss of $6,125,233 which is reflected in the Statements of Operations.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets primarily by the straight-line method as follows:

Equipment, furniture and fixtures			3 – 7 years
Vehicles			3 – 5 years

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share are computed based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share are computed assuming all dilutive potential common shares were issued. Dilutive potential common shares consist of stock options and warrants. Diluted earnings per share have not been presented since the inclusion of potential common shares would be antidilutive.

Cash Flows Presentation

For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents.

Advertising

The Company expenses all advertising costs as incurred. No advertising cost was incurred for the years ended March 31, 2007 or 2006.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates of oil and gas reserves, the asset retirement obligation and impairment on unproved properties are inherently imprecise and may change materially in the near term.

Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and notes payable. Recorded values of cash, receivables and payables approximate fair values due to short maturities of the instruments. Notes payable are to Lothian Oil Inc., the Company’s majority shareholder, and the difference between fair value and recorded amount is not material, based on the stated interest rates available to the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Summary of Significant Accounting Policies – (continued)

Investment Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses reported as a component of other comprehensive income, net of tax. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase.

Interest income includes amortization of purchase premiums and discounts. Realized gains and losses are derived from the amortized cost of the security sold. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2007, the Company owned 404,204 shares of restricted common stock in Cano Petroleum, Inc. which was classified as available for sale.

Stock-based Employee Compensation

Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), Share-Based Payment , (“SFAS No. 123(R)”), using the modified prospective transition method. SFAS No. 123(R) requires equity-classified share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on or after April 1, 2006 are recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that are not fully vested as of April 1, 2006 are recognized as compensation expense over the remaining vesting period. No retroactive or cumulative effect adjustments were required upon the Company’s adoption of SFAS No. 123(R).

Prior to adopting SFAS No. 123(R), the Company accounted for its employee stock options using the intrinsic-value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , (“APB No. 25”) and related interpretations. This method required compensation expense to be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

Had the Company elected the fair value provisions of SFAS No. 123(R), fiscal year 2006 net loss and net loss per share would have differed from the amounts actually reported as shown in the following table.

The fair value of the options granted in the year ended March 31, 2006 was estimated on the date of grant using a Black-Scholes option pricing model and the following assumptions: a risk-free rate of return of 3.00% to 4.37%; an expected life of three to ten years; expected volatility of 88% to 96%; and no expected dividends.

Using the above assumptions, the fair value of the options granted to employees and directors on a pro forma basis would result in additional compensation expense of $359,571 for the year ended March 31, 2006. As such, pro forma net loss per share would be as follows for the years ended March 31, 2006:

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Summary of Significant Accounting Policies – (continued)

	Fiscal Year Ended March 31, 2006
Net loss, as reported	$	(17,371,395	)
Expense recognized		343,750
Additional compensation		(703,321	)
Pro forma net loss	$	(17,730,966	)
Loss per share as reported	$	(2.98	)
Pro forma net loss per share	$	(3.04	)

Long-lived Assets

Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets, and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB Statement No. 109, Accounting for Income Taxes . As changes in tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Recently Issued Accounting Standards Not Yet Adopted

FASB Staff Position (FSP) FAS 19-1 amends SFAS statement No. 19 to provide revised guidance concerning the criteria for continued capitalization of exploratory costs when wells have found reserves that cannot yet be classified as proved. FAS 19-1 provides circumstances that would permit the continued capitalization of exploratory well costs beyond one year, other than when additional exploration wells are necessary to justify major capital expenditures and those wells are under way or firmly planned for the near future. Generally, the statement allows exploratory well costs to continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project.

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and also resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 was issued to eliminate the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for in a similar fashion, regardless of the instrument’s form. The Company does not believe that its financial position, results of operations or cash flows will be impacted by SFAS No. 155 as it does not currently hold any hybrid financial instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Summary of Significant Accounting Policies – (continued)

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding derecognition, classification and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which establishes an approach requiring the quantification of financial statement errors based on the effect of the error on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the “iron curtain” and “roll-over” methods. The roll-over method focuses primarily on the impact of a misstatement on the income statement, including the reversing effect of prior year misstatements; however, its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method focuses primarily on the effect of correcting the period end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. The Company will initially apply the provisions of SAB 108 in connection with the preparation of the Company’s annual financial statements for the year ending March 31, 2007. The use of the dual approach is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In September 2006, the FASB issued SFAS No. 157 ,”Fair Value Measurements”, which addresses how companies should measure fair value when companies are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). As a result of SFAS 157, there is now a common definition of fair value to be used throughout GAAP. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Although the disclosure requirements may be expanded where certain assets or liabilities are fair valued such as those related to stock compensation expense and hedging activities, the Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In December 2006, the FASB issued FASB Staff Position FSP EITF 00-19-2, Accounting for Registration Payment Arrangements . This FASB Staff Position, or FSP, specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies . This FSP also requires certain disclosures regarding registration payment arrangements and liabilities recorded for such purposes. This FSP is immediately effective for registration payment arrangements entered into or modified after December 21, 2006. The guidance of this FSP is effective for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years for registration payment arrangements entered into prior to December 21, 2006. This FSP requires adoption by reporting a change in accounting principle through a cumulative-effect adjustment to the opening balance of our partners’ capital accounts as of the first interim period of the year in which this FSP is initially applied. The adoption of this FSP is not expected to materially affect the Company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” which provides entities with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Summary of Significant Accounting Policies – (continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the reported prior year net loss.

Note 3 — Going Concern

The Company’s financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and it has a working capital deficit which raises substantial doubt about its ability to continue as a going concern. The Company sustained a net loss of $11,435,134 for the fiscal year ended March 31, 2007 and it had an accumulated deficit of $42,999,146 at March 31, 2007. The Company is currently looking for financing to provide the needed funds for operations. However, the Company is not certain that it will be able to obtain the financing it needs to develop its properties and alleviate doubt about its ability to continue as a going concern.

Note 4 — Securities

At March 31, 2007, securities consisted of the following:

	Amortized Cost		Gross Unrealized Gain	Gross Unrealized (Loss)	Estimated Fair Value
Restricted Common Stock	$	1,827,000			$	1,827,000
Total	$	1,827,000			$	1,827,000

At March 31, 2007 securities consisted of $1,827,000 of restricted common stock in Cano Petroleum, Inc. with an estimated fair value that approximated cost.

Note 5 — Reverse Stock Split

On December 19, 2005, the Company’s shareholders approved a one-for-three reverse stock split. The reverse stock split was effective December 22, 2005. The Company retained the current par value of $.001 per share for all common shares. All references in the financial statements and notes to the number of shares outstanding, per share amounts, and stock option and warrant data have been restated to reflect the reverse stock split for all periods presented.

Note 6 — Asset Retirement Obligations

The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. This statement, adopted by the Company as of April 1, 2003, establishes accounting and reporting standards for the legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development and the normal operation of long-lived assets. It requires that the fair value of the liability for asset retirement obligations be recognized in the period in which it is incurred. Upon initial recognition of the asset retirement liability, an asset retirement cost is capitalized by increasing the carrying amount of the long-lived asset by the same amount as the liability. In periods subsequent to initial measurement, the asset retirement cost is allocated to expense using a systematic method over the asset’s useful life. Changes in the liability for the asset retirement obligation are recognized for (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

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Inventory consists of the following:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Asset Retirement Obligations – (continued)

A reconciliation of the changes in the estimated asset retirement obligation follows:

	2007			2006
Beginning asset retirement obligation	$	266,512		$	249,980
Additional liability incurred		—			—
Liabilities assumed by others		(125,455	)		—
Accretion expense		12,402			16,532
Asset retirement cost incurred		(70,517	)		—
Ending asset retirement obligation	$	82,942		$	266,512

During the years ended March 31, 2007 and 2006, accretion expense of $12,402 and $16,532, respectively, was recognized and is reported in the consolidated statements of operations. Asset retirement obligations at March 31, 2007 were $82,942 related to the wells on the Texas properties.

Note 7 — Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash equivalents and trade receivables. During the years ended March 31, 2007 and 2006, the Company maintained money market accounts with a bank, which at times exceeded federally insured limits.

Concentrations of credit risk with respect to trade receivables consist principally of oil and gas companies operating within the United States.

Receivables due to the sale of the Cato San Andres properties comprised 99% of the receivable balance at March 31, 2007. Receivables from an oil and gas customer at March 31, 2006 comprised 55% of the trade receivable balance. No allowance for doubtful accounts has been provided since recorded amounts are determined to be fully collectible based upon management’s review of customer accounts, historical experience and other pertinent factors.

Note 8 — Inventory

	2007		2006
Oil in tanks	$	31,417	$	48,626
	$	31,417	$	48,626

Note 9 — Oil and Gas Properties and Operations

Capitalized costs related to oil and gas producing activities and related accumulated depletion, depreciation and amortization at March 31 are as follows:

	2007		2006
Capitalized costs of oil and gas properties:
Proved	$	—	$	11,401,855
Unproved		5,864,587		5,864,587
		5,864,587		17,266,442
Less accumulated depletion, depreciation and amortization		—		2,048,818
	$	5,864,587	$	15,217,624

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Oil and Gas Properties and Operations – (continued)

Costs incurred in oil and gas producing activities were as follows:

	2007		2006
Property acquisitions
Proved	$	—	$	—
Unproved		—		26,566
Exploration		—		—
Development		5,830,677		2,507,249
	$	5,830,677	$	2,533,815

Results of operations of oil and gas producing activities for the years ended March 31 are as follows:

	2007			2006
Revenues from oil and gas producing activities:
Sales to unaffiliated parties Expenses	$	1,014,734		$	592,991
Production and operating		1,320,401			259,290
Depreciation, depletion and accretion		502,909			1,040,250
General and administrative		300,952			191,150
Loss on sale of oil and gas assets		6,125,233			—
Ceiling test impairment of oil and gas properties		—			23,199,110
Total expenses		8,249,495			24,689,800
Pretax income (loss) from producing activities		(7,234,761	)		(24,096,809	)
Income tax expense		—			—
Results of oil and gas producing activities (excluding corporate overhead and interest costs)	$	(7,234,761	)	$	(24,096,809	)

Note 10 — Notes Payable, Related Parties

The Company has a $4,000,000 loan agreement with Lothian, its majority shareholder. The loan was subsequently increased to $8,000,000 during 2007. Advances to the Company under this agreement were $2,182,843 as of March 31, 2007 and $1,217,264 as of March 31, 2006. The agreement, dated October 7, 2005, provides for draws as needed for the development of the Cato San Andres Unit in New Mexico. The note bears interest at 1% over the Citibank prime rate (8.75% at March 31, 2007) and is secured by a deed of trust and assignment of production, among other provisions. Loan advances are repayable monthly from 70% of the oil and gas proceeds produced by the Cato San Andres Unit. The note is due and payable on October 7, 2015 and is subordinated to the Sterling Bank agreement discussed below. The loan was reduced by $4,397,760 from the proceeds of the sale of the Cato San Andres Unit and the Tom Tom and Tomahawk Field on March 30, 2007. After the sale of these properties, the loan was then secured by 404,204 shares of restricted Cano Petroleum common stock. Effective June 2007, Lothian accepted the Cano Petroleum common stock as full payment of the loan and accrued interest.

The Company has an additional $2,500,000 loan agreement with Lothian, its majority shareholder. Advances to the Company under this agreement were $759,140 and $195,739 as of March 31, 2007 and 2006, respectively. The agreement, dated as of March 31, 2006, provides for draws as needed for the development of the Wardlaw Field in Texas. The note bears interest at 1% over the Citibank prime rate (8.75% at March 31, 2006) and is secured by a deed of trust and assignment of production, among other provisions. Loan advances are repayable monthly from 70% of the oil and gas proceeds produced by the Wardlaw Field. The note is due and payable on March 31, 2016. There were no payments made during the 2006 or 2007 fiscal years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Notes Payable, Related Parties - (continued)

Reducing Revolving Line of Credit Agreement

The Company, as a co-Borrower with its largest shareholder, entered into an Amended and Restated reducing revolving line of credit agreement of up to $20 million (“Credit Agreement”) with Sterling Bank as of March 31, 2006. The line was substantially repaid on March 30, 2007. The Company was thereafter released by Sterling Bank as a co-borrower under the Credit Agreement.

Note 11 — Major Customers

During March 31, 2007 and 2006, the Company only operated in oil and gas producing activities.

The Company recorded oil and gas sales to the following major customers for the years ended March 31:

	2007					2006
	Amount		Percent			Amount		Percent
Customer A	$	799,332		78.8	%	$	230,144		38.8	%
Customer B		215,402		21.2	%		362,847		61.2	%
	$	1,014,734		100.0	%	$	592,991		100.0	%

Note 12 — Unregistered Sale of Equity Securities to Lothian Oil Inc.

On December 19, 2005, the Company’s shareholders approved the sale of 1,093,333 shares of the Company’s common stock, $0.001 par value, and warrants to purchase an additional 2,906,666 shares of common stock to Lothian Oil Inc. Proceeds from the sale of these securities were used to repay a line of credit made to the Company by ALMAC Financial Corporation, a corporation wholly-owned by Walter G. Mize, formerly the largest shareholder of the Company. Any funds remaining after payment of the line of credit were used by the Company for working capital purposes.

As part of the agreement, Lothian and the Company entered into a development and operating agreement relative to certain properties belonging to the Company’s wholly-owned subsidiaries, UHC Petroleum Corporation and UHC New Mexico Corporation.

In addition, Lothian purchased 2,666,667 restricted shares of Company common stock from Walter G. Mize, Chairman of the Board of Directors and formerly the Company’s largest shareholder, President and Chief Executive Officer, and six other shareholders for an aggregate purchase price of $10,651,000 or $3.99 per share. Lothian paid the purchase price with a promissory note.

Note 13 — Stock Option Plans

Directors of the Company adopted the 1995 Stock Option Plan effective September 11, 1995. This Plan set aside 66,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries.

Options granted under the Plan must be exercised within five years after the date of grant, but may be affected by the termination of employment. No options have been granted since 1998 and none are outstanding.

Directors of the Company adopted the 1998 Stock Option Plan effective July 1, 1998. This Plan and its subsequent amendment set aside 66,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan are exercisable over a period to be determined when granted, but may be affected by the termination of employment. As a result of a grant in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 — Stock Option Plans – (continued)

January 2006 to the Company’s chief executive officer, discussed in more detail below, options to purchase 66,667 shares are outstanding under this plan.

Directors of the Company adopted the 2000 Stock Option Plan effective June 5, 2000. This Plan set aside 1,666,667 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, advisors, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan must be exercised within the number of years determined by the Stock Option Committee and allowed in the Stock Option Agreement. The Stock Option Agreement may provide that a period of time must elapse after the date of grant before the options are exercisable. The options may not be exercised as to less than 100 shares at any one time.

On May 30, 2003 the Company granted 1,051,667 options under the 2000 Stock Option Plan. The options were granted to directors, employees and others. The options vest over a two-year period with terms of three to five years. The exercise price is $1.50 per share. During fiscal year 2006, the Company granted an option for 40,000 shares to a member of the Board of Directors for and in consideration of services provided to the Company. The option was issued at $2.91 per share for a term of five years with vesting over a three-year period.

On January 3, 2006, the Company granted options to purchase 500,000 shares to the Company’s chief executive officer for and in consideration of services provided to the Company. The options were issued at $1.05 per share for a term of three years with one-third of the options being exercisable immediately and one-third exercisable in each of the following two years. The fair value of each option was determined to be $2.50.

The following schedule summarizes pertinent information with regard to the Plans for the years ended March 31:

	2007				2006
	Shares Outstanding		Weighted Average Exercise Price		Shares Outstanding		Weighted Average Exercise Price
Beginning of year		1,725,000	$	1.40		1,051,667	$	1.50
Granted		0				673,333		1.25
Exercised		0				0		0
Forfeited		0				0		0
Expired		0				0		0
End of year		1,725,000	$	1.40		1,725,000	$	1.40

Options granted to non-employees under the above three plans resulted in compensation expense of $4,462 for the year ended March 31, 2006. The intrinsic value of options issued in 2006 resulted in expense of $343,750 being accrued in the accompanying financial statements. At March 31, 2007 there is no intrinsic value associated with the outstanding or exercisable options as the Company’s stock price is lower than the exercise price of the options.

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Note 13 — Stock Option Plans – (continued)

The following table summarizes information for options outstanding as of March 31, 2007:

	Options Outstanding						Options Exercisable
Exercise Price	Number		Weighted Average Remaining Life-Years		Weighted Average Exercise Price		Number		Weighted Average Exercise Price		Weighted Average Remaining Life Years
$1.50		1,185,000		2.17	$	1.50		1,185,000	$	1.50		2.17
2.91		40,000		2.17		2.91		26,667		2.91		2.17
1.05		500,000		8.76		1.05		333,333		1.05		8.76
$1.05 – $2.91		1,725,000		4.08	$	1.36		1,545,000	$	1.43		3.59

At March 31, 2007 and 2006, nonvested options were comprised of the following:

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested March 31, 2005		—		—
Granted		673,333		2.15
Vested		313,334		1,81
Expired/forfeited		—		—
Nonvested, March 31, 2006		359,999		2.44
Granted		—		—
Vested		179,999		2.44
Expired/forfeited		—		—
Nonvested, March 31, 2007		180,000		2.44

As of March 31, 2007, approximately $439,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements is to be recognized over the next year.

The option agreements related to the options with $1.50 and $2.91 exercise prices were modified to extend the expiration date to March 31, 2009, add a put feature where the option holder can put the option back to the Company for the difference between $4.00 per share and the purchase price between April 1, 2008 and April 10, 2008 and add a call feature whereby the Company can call the option for the difference between $7.50 and the purchase price. Since the put feature does not subject the holder to the normal risks of share ownership, the options are classified as liability awards and recorded at fair value. A liability and corresponding expense of $2,727,186 has been recorded in the accompanying financial statements.

Note 14 — Stock Warrants

The Company entered into a stock warrant agreements effective January 12, 2004. Pursuant to the agreements, the Company issued 500,000 warrants to purchase common stock in connection with a private placement. Warrants issued under the agreements must be exercised by March 15, 2014.

The Company entered into a stock warrant agreements effective April 2004 in connection with the offering of convertible promissory notes. Pursuant to the agreements, the Company issued 1,766,667 warrants to purchase common stock. Warrants issued under the agreements must be exercised by March 15, 2014.

On December 19, 2005, the Company’s shareholders approved the issuance of warrants to purchase an additional 2,906,666 shares of Common Stock to Lothian Oil Inc. The warrants are exercisable upon issuance and have a term of five years and were issued as follows:

(1)

Warrant for the purchase of 953,333 shares with an exercise price of $3.15 per share;

(2)

Warrant for the purchase of 1,000,000 shares with an exercise price of $3.36 per share;

(3)

Warrant for the purchase of 953,333 shares with an exercise price of $3.75 per share.

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Note 14 — Stock Warrants – (continued)

The following schedule summarizes pertinent information with regard to the stock warrants for the years ended March 31:

	2007				2006
	Shares Outstanding		Weighted Average Exercise Price		Shares Outstanding			Weighted Average Exercise Price
Beginning of year		5,085,334	$	3.08		2,266,667		$	2.64
Granted		—				2,956,900			3.39
Exercised		—				(138,233	)		2.25
Forfeited		—				—			—
Expired		—				—			—
End of year		5,085,334	$	3.08		5,085,334		$	3.08
Exercisable		5,085,334	$	3.08		5,085,334		$	3.08

The warrants issued in fiscal 2006 include those issued to Lothian Oil Inc. and 50,234 warrants issued for legal services exercisable at $1.50 per share to satisfy liabilities. No warrants were issued in 2007. No warrants were issued in 2007.

The following table summarizes information for warrants outstanding as of March 31, 2007:

	Warrants Outstanding				Warrants Exercisable
Exercise Price Range	Number		Weighted Average Remaining Life-Years		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
$2.25 – $3.00		2,178,668		7.00	$	2.62		2,178,668	$	2.62
$3.15 – $3.75		2,906,666		3.72		3.42		2,906,666		3.42
$2.25 – $3.75		5,085,334		5.13	$	3.08		5,085,334	$	3.08

During the years ended March 31, 2007 and 2006, the Company did not record any expenses for services rendered related to warrants issued under the agreements.

Note 15 — Income Taxes

Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

The Company’s federal tax provision consists of the following:

	2007			2006
Current	$	—		$	—
Adjustments of beginning of year valuation allowance		—			(3,099,000	)
Deferred		3,729,296			(4,950,925	)
Valuation allowance		(3,729,296	)		—
Federal	$	—		$	(8,049,925	)

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Note 15 — Income Taxes – (continued)

The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:

	2007			2006
U.S. statutory rate		34	%		34	%
Valuation allowance		(34	)%		—
Other		—			(2	)%
Effective tax rate		—			32	%

At March 31, the deferred tax asset and liability balances are as follows:

	2007			2006
Deferred tax asset
Net operating loss	$	5,207,899		$	3,089,263
Accrued put option		927,243			—
Accrued expenses		145,075			207,489
		6,280,217			3,296,752
Deferred tax liability – oil and gas properties		(680,865	)		(1,426,696	)
Net deferred tax asset		5,599,352			1,870,056
Valuation allowance		(5,599,352	)		(1,870,056	)
Deferred tax asset (liability)	$	—		$	—

The net change in the valuation allowance for 2007 was an increase of $3,729,296 and 2006 had a decrease of $1,228,944. The deferred tax asset is due primarily to the net operating loss carryover and the accrued put option expense. The deferred tax liability results from difference in the basis of oil and gas properties for tax and financial reporting purposes.

The Company has a net operating loss carryover of approximately $15.3 million available to offset future income for income tax reporting purposes, which will ultimately expire in 2027, if not previously utilized. Due to the change in control in 2006, the use of the net operating loss each year will be limited based on applicable Internal Revenue Code provisions.

Note 16 — Stock Bonus Plan

The Company has a stock bonus plan, which provides incentive compensation for its directors, officers, and key employees. The Company has reserved 30,000 shares of common stock for issuance under the plan. As of March 31, 2007, 27,800 shares had been issued in accordance with the plan. No shares were issued under the plan in 2007.

Note 17 — Contingencies

The Company is involved in various claims incidental to the conduct of our business. Based on consultation with legal counsel, we do not believe that any claims, either individually or in the aggregate, to which the Company is a party will have a material adverse effect on our financial condition or results of operations.

Note 18 — 2002 Consultant Equity Plan

In August 2002, the Company adopted “The 2002 Consultant Equity Plan,” whereby 333,333 shares of unissued common stock were reserved for issuance to consultants, independent contractors and advisors in exchange for bona fide services rendered not in connection with a capital raising transaction. All shares reserved under the plan have been issued as of March 31, 2006.

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UNITED HERITAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Subsequent Event

On June 13, 2007 Lothian Oil Inc., the Company’s largest shareholder, filed a petition under Chapter 11 of the U.S. Bankruptcy Code. In the past, the Company relied on Lothian Oil Inc. to provide funds for its operations. The Company does not know what effect this action will have on its ability to continue its operations.

Note 20 — Supplementary Financial Information For Oil and Gas Producing Activities (Unaudited)

Proved Reserves

Independent petroleum engineers have estimated the Company’s proved oil and gas reserves, all of which are located in the United States. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available.

The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors.

	Oil (Bbls)			Gas (Mcf)
March 31, 2005 (Restated)		567,189			2,934,765
Extensions, additions and discoveries		—			—
Revisions of previous estimates		(67	)		(222,358	)
Production		(7,380	)		(110,336	)
March 31, 2006		559,742			2,602,071
Extensions, additions and discoveries		—			—
Revisions of previous estimates		—			—
Oil and gas asset sales		(543,661	)		(2,534,085	)
Production		(16,081	)		(67,986	)
March 31, 2007		—			—

Proved Developed Reserves

March 31, 2006			559,742			2,602,071
March 31, 2007			0			0

Standardized Measure

The standardized measure of discounted future net cash flows (“standardized measure”) and changes in such cash flows are prepared using assumptions required by the Financial Accounting Board. Such assumptions include the use of year-end prices for oil and gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% rate. Estimated future income taxes are calculated by applying year-end statutory rates to future pre-tax net cash flows, less the tax basis of related assets and applicable tax credits.

The standardized measure does not represent management’s estimate of the Company’s future cash flows or the value of proved oil and gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows, are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data.

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