Glen Rose Petroleum (GLRP) 10QSB 2008 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

Mark One

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2007; or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ________ ___________.

Commission File No. 0-9997

 United Heritage Corporation

 (Exact name of registrant as specified in charter)

Utah	87-0372826
(State or other jurisdiction of  incorporation or organization)	(I.R.S. Employer Identification No.)

 1310 W. Wall Street, Suite A, Midland, Texas 79701

 (Address of principal executive offices)

 (432) 687-1131  

 (Registrant's telephone number, including area code)

 200 North Loraine, Suite 400, Midland, Texas 79701

 (Former name, former address and former fiscal year if changed since last report)

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The number of shares of common stock, $0.001 par value, outstanding at November 14, 2007, was 6,446,850 shares.

Transitional Small Business Format(Check one) Yes¨ Nox

UNITED HERITAGE CORPORATION—FORM 10-QSB

TABLE OF CONTENTS

		Page Number
Part I - Financial Information
	Item 1 - Financial Statements
	Consolidated Condensed Balance Sheets at September 30, 2007 (unaudited) and March 31, 2007 (audited)	1
	Consolidated Condensed Statements of Income (unaudited) for the three and six months ended September 30, 2007 and September 30, 2006	3
	Consolidated Condensed Statements of Cash Flows (unaudited) for the six months ended September 30, 2007 and September 30, 2006	4
	Consolidated Statements of Changes on Shareholders’ Equity for the six months ended September 30, 2007	5
	Notes to Consolidated Condensed Financial Statements	6
	Forward-Looking Statements	18
	Item 2 - Management’s Discussion and Analysis Or Plan of Operation	19
	Item 3 – Controls and Procedures	28
Part II -Other Information
	Item 1 - Legal Proceedings	29
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	29
	Item 3 - Defaults upon Senior Securities	29
	Item 4 - Submission of Matters to a Vote of Security Holders	29
	Item 5 - Other Information	29
	Item 6- Exhibits	29
Signatures		30
Certifications

Part I, Item 1. Financial Statements

UNITED HERITAGE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

	September 30, 2007			March 31, 2007
	(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash	$	5,463		$	1,671,672
Accounts receivable		37,862			470,670
Inventory		29,057			31,417
Prepaid expenses		17,226			34,909
Total current assets		89,608			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 September 30 and March 31, 2007
Proved		—			—
Unproved		5,864,587			5,864,587
		5,864,587			5,864,587
PROPERTY AND EQUIPMENT, at cost Equipment, furniture and fixtures		2,699			74,244
Vehicles		6,752			158,452
		9,451			232,696
Less accumulated depreciation		(4,803	)		(149,392	)
		4,648			83,304
TOTAL ASSETS	$	5,958,843		$	9,983,559

See notes to consolidated condensed financial statements.

1

Part I, Item 1. Financial Statements—Continued

UNITED HERITAGE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

	September 30, 2007			March 31, 2007
	(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	284,254		$	1,835,148
Accounts payable, related party		124,323			797,088
Accrued expenses		343,750			343,750
Accrued interest, related party		-			451,485
Accrued put option liability		2,866,642			—
Total current liabilities		3,618,969			3,427,471
LONG-TERM LIABILITIES
Asset retirement obligation		85,430			82,942
Note payable, related parties		-			2,941,983
Accrued put option liability		-			2,727,186
Deferred tax liability		-			—
Total liabilities		3,704,399			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; 6,446,850 shares issued and outstanding:		6,447			6,447
Additional paid-in capital		43,987,910			43,796,676
Accumulated deficit		(41,739,913	)		(42,999,146	)
Total Shareholders’ Equity		2,254,444			803,977
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	5,958,843		$	9,983,559

See notes to consolidated condensed financial statements.

2

Part I, Item 1. Financial Statements—Continued

UNITED HERITAGE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	THREE MONTHS ENDED September 30,						SIX MONTHS ENDED September 30,
	2007			2006			2007			2006
OPERATING REVENUES
Oil and gas sales	$	455		$	347,626		$	4,315		$	656,091
TOTAL OPERATING REVENUES		455			347,626			4,315			656,091
OPERATING COSTS AND EXPENSES
Production and operating		30,477			468,478			63,039			634,184
Depreciation and depletion		338			175,298			676			346,672
Accretion of asset retirement obligation		1,244			-			2,488			-
General and administrative		164,159			286,897			361,335			907,892
Bad debt expense		59,812			-			202,408			-
Put option expense		69,728			-			139,456			-
TOTAL OPERATING COSTS AND EXPENSES		325,758			930,673			769,402			1,888,748
LOSS FROM OPERATIONS		(325,303	)		(583,047	)		(765,087	)		(1,232,657	)
OTHER INCOME (EXPENSE)
Gain on forgiveness of debt		1,466,838			-			1,780,710			-
Gain on sale of investments		-			-			303,155			-
Gain on sale of property and equipment		8,351			-			8,351			-
Interest expense		(9,519	)		(99,518	)		(67,896	)		(150,607	)
Gain (Loss) before income tax		1,140,367			(682,565	)		1,259,233			(1,383,264	)
INCOME TAX BENEFIT		-			-			-			-
NET INCOME (LOSS)	$	1,140,367		$	(682,565	)	$	1,259,233		$	(1,383,264	)
Income (Loss) per share (basic)	$	0.18		$	(0.11	)	$	0.20		$	(0.22	)
Weighted average number of shares (basic)		6,446,850			6,446,850			6,446,850			6,446,850

See notes to consolidated condensed financial statements.

3

Part I, Item 1. Financial Statements—Continued

UNITED HERITAGE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	SIX MONTHS ENDED September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,259,233		$	(1,383,264	)
Adjustments to reconcile net loss
To net cash provided by (used in) operating activities:
Depreciation and depletion		676			346,672
Accretion of asset retirement obligation		2,488			-
Gain on sale of investments		(303,155	)		-
Gain on forgiveness of debt		(1,780,710	)
Gain on sale of property and equipment		(8,351	)		-
Realization of stock options issued		191,234			276,474
Put option expense		139,456			-
Changes in assets and liabilities:
Accounts receivable		432,808			(54,534	)
Inventory		2,360			(4,533	)
Other current assets		17,683			29,175
Deferred tax		-			-
Accounts payable and accrued expenses		(1,438,461	)		1,702,523
Net cash (used in) provided by operating activities		(1,484,739	)		912,513
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties		-			(4,155,783	)
Additions to equipment		(2,699	)		(182,845	)
Net cash used in investing activities		(2,699	)		(4,338,628	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings, related party		153,218			3,371,113
Payments on note payable, related party		(331,989	)		-
Net cash provided by (used in) financing activities		(178,771	)		3,371,113
(Decrease) increase in cash and cash equivalents		(1,666,209	)		(55,002	)
Cash at beginning of period		1,671,672			76,366
Cash at end of period	$	5,463		$	21,364
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			—

See notes to consolidated condensed financial statements.

4

Part I, Item 1. Financial Statements—Continued

UNITED HERITAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

SIX MONTHS ENDED SEPTEMBER 30, 2007

	Common Stock				Additional Paid-in		Accumulated			Accumulated Other Comprehensive
	Shares		Amount		Capital		Deficit			Income			Total
Balance March 31, 2007		6,446,850	$	6,447	$	43,796,676	$	(42,999,146	)		—		$	803,977
Stock options for services		—		—		191,234		—			—			191,234
Comprehensive income:		—		—		—		—			—			—
Net income		—		—		—		1,259,233			—
Unrealized holding gain on available-for-sale security		—		—		—		—			303,155
Realized gain recognized		—		—		—		—			(303,155	)
Comprehensive income		—		—		—		—			—			1,259,233
Balance September 30, 2007		6,446,850	$	6,447	$	43,987,910	$	(41,739,913	)	$	—		$	2,254,444

See notes to consolidated condensed financial statements.

5

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements 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 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 six month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the 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.

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 operations and we have a working capital deficit which raises substantial doubt about our ability to continue as a going concern. We had net income of $1,259,233 for the six month period ended September 30, 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 $41,739,913 and $42,999,146, respectively. We are not certain that we will be able to obtain the financing we need to develop our properties and alleviate doubt about our ability to continue as a going concern.

NOTE 2 – NEW ACCOUNTING PRINCIPLES

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. The Company utilizes the full cost method to account for its oil and gas properties. As a result, the impact of FSP FAS 19-1 is expected to be minimal.

6

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – CHANGE IN ACCOUNTING PRINCIPLES (continued)

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.

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 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.

7

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – CHANGE IN ACCOUNTING PRINCIPLES (continued)

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 applied 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 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 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 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

8

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3 — 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

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 discussed in greater detail 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 $29,057 and $31,417 at September 30, 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:

	September 30, 2007		March 31, 2007
Capitalized costs of oil and gas properties:
Proved	$	0	$	0
Unproved		5,864,587		5,864,587
		5,864,587		5,864,587
Less accumulated depletion, depreciation, and amortization		0		0
	$	5,864,587	$	5,864,587

9

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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 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., previously its majority shareholder (the “Cato Unit Loan”). The Cato Unit Loan was subsequently increased to $8,000,000 during the 2007 fiscal year. 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 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.

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 September 30, 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 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 we entered into an agreement with our largest shareholder, Lothian Oil Inc. (“Lothian”). Pursuant to the terms of this agreement, Lothian forgave $1,800,000 that it asserted we owed to it, which amount included $753,296 in principal and $71,254 in accrued interest associated with the Wardlaw Loan. (See Note 15 - Transfer of Securities Owned by Lothian Oil Inc., below.) In exchange for the debt forgiveness, we agreed to deliver to Lothian any funds in excess of $100,000 that we receive from Cano Petroleum, Inc. in connection with the sale of the assets of UHC New Mexico Corporation. We do not anticipate that we will receive any funds in excess of $100,000 from Cano Petroleum, Inc. in connection with that sale.

10

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7 – NOTE PAYABLE TO RELATED PARTY (continued)

Reducing Revolving Line of Credit Agreement

The Company, as a co-borrower with Lothian, entered into an amended and restated reducing revolving line of credit agreement for 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 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 September 30, 2007 and September 30, 2006. Diluted earnings per share have not been presented since the inclusion of potential common shares would be antidilutive.

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 interim consolidated financial statements as of September 30, 2007 in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates.

NOTE 11 – STOCK OPTIONS

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 for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries.

11

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 11 – STOCK OPTIONS (continued)

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 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.

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. 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. On September 30, 2007, there were 19 awards outstanding under the 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 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 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 six months ended September 30, 2007.

12

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 11 – STOCK OPTIONS (continued)

The following table summarizes pertinent information with regard to the Plans for the six months ended September 30, 2007:

			Weighted
			Average
	Options and		Exercise
	Rights		Price
Outstanding at beginning of year, April 1, 2007		1,725,000	$	1.40
Granted		-		-
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at September 30, 2007		1,725,000	$	1.40
Exercisable at September 30, 2007		1,558,333	$	1.44

The weighted average contractual life of options outstanding at September 30, 2007 was 3.58 years. The weighted average contractual life of exercisable options was 3.09 at September 30, 2007.

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

Nonvested, at April 1, 2007	180,000
Granted	-
Vested	13,333
Forfeited	-
Nonvested, at September 30, 2007	166,667

As of September 30, 2007, there is approximately $123,000 of total unrecognized compensation cost related to non-vested share based compensation arrangements. This expense will be recognized in the third quarter as the remaining unvested options vested upon the option holder’s separation from service in October 2007. The weighted average grant date fair value of non-vested options outstanding at September 30, 2007 is $2.50, and of options that vested during the six months ended September 30, 2007 was $1.68. 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 $2,866,642 is recorded at September 30, 2007 and corresponding expense of $69,728 and $139,456 has been recorded for the three and six months ended September 30, 2007, respectively.

13

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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 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.

Half of the 1,766,667 warrants issued during fiscal year 2005 are exercisable at $2.25 and $3.00, respectively, and have a remaining contractual life of 2 years. The warrants issued in fiscal 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 Oil Inc. were transferred to Walter Mize on July 31, 2007 and, thereafter, from Walter Mize to Blackwood Ventures LLC on September 26, 2007, as more fully described in Note 15.

14

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 12 –  STOCK WARRANTS (continued)

The following schedule summarizes pertinent information with regard to the stock warrants for the six months ended September 30, 2007:

			Weighted
	Shares		Average
	Outstanding		Exercise Price
Outstanding at beginning of year, April 1, 2007		5,085,334	$	3.08 0.88
Granted		-		-
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at September 30, 2007		5,085,334	$	3.08
Exercisable		5,085,334	$	3.08 0.88

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”.

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 Utah on May 17, 2006, however, no preferred shares have been issued as of September 30, 2007.

NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION

	SIX MONTHS ENDED September 30,
	2007		2006
Cash paid during the three months for:
Interest	$	—	$	26,698
Taxes	$	—	$	—

15

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 15 – TRANSFER OF SECURITIES OWNED BY LOTHIAN OIL INC.

On July 31, 2007 the Company entered into an agreement with its largest shareholder, Lothian Oil Inc. (“Lothian”). The agreement is titled “Agreement to Settle Intercompany Debt and Other Claims” (the “Lothian Agreement”) and is dated July 26, 2007. Pursuant to the terms of the Lothian Agreement, Lothian forgave $1,800,000 that it asserted the Company owed to it. In exchange for the debt forgiveness, the Company agreed to deliver to Lothian any funds in excess of $100,000 that it receives from Cano Petroleum, Inc. in connection with the sale of the assets of UHC New Mexico Corporation. The buyer, Cano Petro of New Mexico, Inc., held back the amount of $800,000 from the cash portion of the purchase price (the “Holdback Amount”) to satisfy potential environmental and title claims and payables related to the purchased assets. The holdback period ended 120 days following the date of the sale, which was March 30, 2007. During the holdback period, Cano Petro of New Mexico, Inc. disbursed to the Company $258,000 which we used to satisfy payables related to the properties, and kept the balance of the Holdback Amount to satisfy title deficiencies and environmental remediation costs. The Company does not anticipate that it will receive any remaining portion of the Holdback Amount.

The Lothian Agreement was conditioned upon the execution of a Settlement Agreement between Lothian and Mr. Walter G. Mize, the Company’s former chief executive officer and former chairman of its board of directors (the “Mize Agreement”). The Mize Agreement was also dated July 26, 2007. Pursuant to the terms of the Mize Agreement, in exchange for a payment of $250,000 from Mr. Mize to Lothian and forgiveness by Mr. Mize of debt totaling $5,318,149, Lothian transferred to Mr. Mize all of its United Heritage Corporation common stock and warrants. Lothian owned 3,759,999 shares of the Company’s common stock and warrants to purchase a total of 2,906,666 shares of our common stock.

The Lothian Agreement and the Mize Agreement were subject to the approval of the bankruptcy court overseeing the bankruptcy of Lothian. The court approved the Lothian Agreement and the Mize Agreement on July 31, 2007.

On July 23, 2007 Lothian’s board of directors and the Company’s board of directors agreed to terminate the Merger Agreement and Plan of Reorganization that Lothian and the Company entered into on February 22, 2006. The parties determined that the merger was no longer in their best interests or in the best interests of their shareholders. According to its terms, the Merger Agreement and Plan of Reorganization could be terminated and the merger abandoned by the mutual agreement of the parties. There was no material termination penalty incurred by either party as a result of the termination.

16

UNITED HERITAGE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 15 – TRANSFER OF SECURITIES OWNED BY LOTHIAN OIL INC. (continued)

On September 26, 2007 Mr. Mize, entered into a Restated Stock Sale Agreement which is effective as of September 18, 2007 with Blackwood Ventures LLC (“Blackwood”), a Delaware limited liability company, pursuant to which Blackwood purchased from Mr. Mize (i) 3,759,999 shares of our common stock, (ii) a warrant for the purchase of 953,333 shares of our common

stock at an exercise price of $3.15 per share, (iii) a warrant for the purchase of 1,000,000 shares of our 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 purchase price for the securities was $5,017,000. Blackwood purchased the securities by transferring to Mr. 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.

NOTE 16 – SUBSEQUENT EVENTS

On October 17, 2007 the Company received a letter from The Nasdaq Stock Market indicating that, because the closing bid price of the Company’s common stock was at or above $1.00 per share for a period of at least 10 consecutive business days, the Company had regained compliance with Nasdaq Marketplace Rule 4310(c)(4). The Company was notified of its non-compliance with Nasdaq Marketplace Rule 4310(c)(4) on June 15, 2007.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-QSB filed by United Heritage Corporation (referred to as “the company”, “we”, “us” or “our”) contains forward-looking statements. These are statements regarding financial and operating performance and results and other statements that are not historical facts. The words “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “forecast,” and similar expressions are intended to identify forward-looking statements. These statements, and any other statements that are not historical facts, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Certain important risks could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of these risks include, among other things:

·   whether we will be able to find financing to continue our operations;

·   whether there are changes in regulatory requirements that adversely affect our business;

·   environmental risks;

·   volatility in commodity prices, supply of, and demand for, oil and natural gas;

·   whether the recovery methods that we use in our oil and gas operations are successful;

·   the ability of management to execute its plans to meet its goals;

·   general economic conditions, whether internationally, nationally, or in the regional and local markets in which we operate, which may be less favorable than expected;

·   the difficulty of estimating the presence or recoverability of oil and natural gas reserves and future production rates and associated costs;

·   the ability to retain key members of management and key employees;

·   drilling and operating risks and expense cost escalations; and

·   other uncertainties, all of which are difficult to predict and many of which are beyond our control.

We do not intend to update forward-looking statements. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Management’s discussion and analysis of results of operations and financial condition is based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require 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. On an on-going basis, we evaluate these estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

OVERVIEW

We are an independent producer of natural gas and crude oil based in Midland, Texas. We produce from properties we lease in Texas. 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 provide us with enough money to implement our development plan.

Lothian Oil Inc., formerly our largest shareholder, provided us with the funds to operate from November 2005 until it declared bankruptcy on June 13, 2007. Lothian acquired its stock in October 2005. A portion of Lothian’s stock was purchased with a promissory note from Mr. Walter G. Mize and persons associated or affiliated with him. On July 31, 2007, Mr. Mize entered into a Settlement Agreement with Lothian, pursuant to which, in exchange for a payment of $250,000 from Mr. Mize to Lothian and forgiveness by Mr. Mize of debt totaling $5,318,149.18, Lothian transferred to Mr. Mize all of its United Heritage Corporation common stock and warrants. On the date of the Settlement Agreement, Lothian owned 3,759,999 shares of our common stock and warrants to purchase a total of 2,906,666 shares of our common stock.

As part of the settlement with Mr. Mize, the company and Lothian signed an agreement titled “Agreement to Settle Intercompany Debt and other Claims”. Pursuant to this agreement, Lothian forgave $1,800,000 that it asserted we owed to it. Included in this 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 Texas property. In exchange for the debt forgiveness, we agreed to deliver to Lothian any funds in excess of $100,000 that we receive from Cano Petroleum, Inc. in connection with the sale of the assets of UHC New Mexico Corporation. As we previously reported, the buyer, Cano Petro of New Mexico, Inc., held back the amount of $800,000 from the cash portion of the purchase price (the “Holdback Amount”) to satisfy potential environmental and title claims and payables related to the purchased assets. The holdback period ended 120 days following the date of the sale, which was March 30, 2007. During the holdback period, Cano Petro of New Mexico, Inc. disbursed to us $258,000 which we used to satisfy the payables, and kept the balance of the Holdback Amount to satisfy title deficiencies and environmental remediation costs. We do not anticipate that we will receive any remaining portion of the Holdback Amount.

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In conjunction with the reacquisition of his common stock from Lothian, Mr. Mize was permitted to appoint five persons to our board of directors.

On September 26, 2007 Mr. Mize, entered into a Restated Stock Sale Agreement which was effective as of September 18, 2007 with Blackwood Ventures LLC (“Blackwood”), a Delaware limited liability company, pursuant to which Blackwood purchased from Mr. Mize all of the common stock and warrants that Mr. Mize had acquired from Lothian. The purchase price for these securities was $5,017,000. As a result of this transaction, Blackwood now owns approximately 58% of our voting securities. Blackwood purchased the securities by transferring to Mr. 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.

Prior to the settlement between Mr. Mize and Lothian, on July 23, 2007, Lothian’s board of directors and our board of directors agreed to terminate the Merger Agreement and Plan of Reorganization that Lothian and we entered into on February 22, 2006. The parties determined that the merger was no longer in their best interests or in the best interests of their shareholders. According to its terms, the Merger Agreement and Plan of Reorganization could be terminated and the merger abandoned by the mutual agreement of the parties. There was no material termination penalty incurred by either party as a result of the termination.

On March 30, 2007 our wholly-owned subsidiary, UHC New Mexico Corporation (“New Mexico”) entered into an Asset Purchase and Sale Agreement (the “Agreement”) with Cano Petro of New Mexico, Inc. (the “Buyer”) and Cano Petroleum, Inc.

Pursuant to the Agreement, New Mexico sold all of its assets to the Buyer in exchange for $7 million in cash and 404,204 shares of restricted common stock of Cano Petroleum, Inc. (the “Restricted Securities”). The purchase price was adjusted for items such as tax prorations, prepaid costs and expenses, hydrocarbons existing in storage facilities and proceeds received by New Mexico from the sale of hydrocarbons during the period from the Effective Time (defined as February 1, 2007) and the closing date. In accordance with the terms of the Agreement, the Buyer held back the amount of $800,000 from the cash portion of the purchase price to satisfy potential environmental and title claims and payables related to the purchased assets (the “Holdback Amount”). From the Holdback Amount, the Buyer disbursed to us $258,000 which we used to satisfy payables. The Buyer kept the balance of the Holdback Amount to satisfy title deficiencies and environmental remediation costs. The Restricted Securities could not be traded for a period of one year from the date of closing and subsequent to that date, no more than 25% of the Restricted Securities may be sold during any quarter. The sale of New Mexico’s assets is referred to in this Quarterly Report as the “Asset Sale”.

The assets that were transferred to the Buyer included all interests, including the working interests and net revenue interests, in and to the leases held by New Mexico, all of New Mexico’s interests in the hydrocarbons produced from the leases, all of New Mexico’s interests in the land covered by the leases (such as easements and rights of way), all of the equipment, fixtures and improvements located on the land covered by the leases, any contract rights and any other rights belonging to New Mexico relating to the assets it transferred.

20

Immediately following the Asset Sale, New Mexico used $4,398,000 from the sale proceeds to repay a portion of the principal of a loan owed to Lothian for the development of the Cato San Andres Unit (the “Cato Unit Loan”). The unpaid balance of the Cato Unit Loan on the date of the Asset Sale was $6,554,000. The Cato Unit Loan was secured by the assets that were transferred in the Asset Sale, therefore, the Restricted Securities were pledged to secure payment of the remaining balance. On June 6, 2007 we and New Mexico entered into an agreement with Lothian whereby we agreed to transfer the Restricted Securities to Lothian as full and final payment for the Cato Unit Loan. On the date of the agreement, the outstanding balance of the loan was $2,009,917 in principal and $434,111 of accrued interest and the closing price of the Restricted Securities was $5.27 per share.

The remaining proceeds from the Asset Sale were applied to payables.

On April 20, 2005, our wholly-owned subsidiary, UHC Petroleum Corporation, owner of the leases to the properties in Texas, assigned 7,840 specific net acres of its 10,360 acre oil and gas leasehold situated in the Val Verde Basin to Dominion Oklahoma Texas Exploration & Production, Inc., which is a petroleum exploration and production company owned by Dominion Resources, Inc. (referred to in this discussion as “Dominion”). UHC Petroleum Corporation and Dominion also agreed to an area of mutual interest (“AMI”) that surrounds the 7,840 specific net acres. This AMI encompasses approximately 12,800 acres. The assignment to Dominion was for development of wells in depths below 2000 feet. Petroleum reserved all right to develop wells above 2000 feet. The term of the assignment was for two years, but would continue so long as oil, gas or associated hydrocarbons was produced in paying quantities. Dominion drilled, completed and tested a well and was studying the results of the first well, but did not drill another well within the term defined in the agreement. Petroleum notified Dominion of the violation and cancelled the assignment.

On August 2, 2005 we elected to participate with Dominion in an additional 1,555 acre oil and gas lease acquisition. We paid $14,556 for our proportionate share of the cost of the lease.

In December 2005 we again elected to participate with Dominion in an additional 640 acre oil and gas lease acquisition in Edwards County, Texas. We paid $12,000 for our proportionate share of the cost.

With the exception of the money that was paid to us by Dominion for the assignment, which totaled $625,000, we have not realized any revenues from the assignment or our participation in the oil and gas leases.

During the 2007 fiscal year, the sale price of oil produced by our properties in Texas increased by $1.53 a barrel, to $38.33 a barrel, from $36.80 a barrel during the 2006 fiscal year. Production costs during the 2007 fiscal year increased from $30.11 a barrel during the 2006 fiscal year to $144.79 a barrel.

Since we do not believe that our expenses will decrease significantly during the 2008 fiscal year, unless production and sales of oil and gas significantly increase, we may not attain profitability, or even be able to continue our business, during the 2008 fiscal year.

21

Except as otherwise discussed in this Quarterly Report, 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 2008 fiscal year.

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 about our ability to continue as a going concern. For the six month periods ended September 30, 2007 and September 30, 2006, we had operating revenues of $4,315 and $656,091 and operating costs and expenses of $769,402 and $1,888,748, respectively. We have a working capital deficit of $3,529,361 at September 30, 2007. Unless we are able to obtain the financing we need to develop our properties, we will not be able to continue as a going concern.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The reported financial results and disclosures were determined using the significant accounting policies, practices and estimates described below.

Oil and Gas Properties

Proved Reserves - Proved reserves are defined by the Securities and Exchange Commission 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 Securities and Exchange Commission, the estimation of reserves requires 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.

22

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 consolidated financial statements for the fiscal year ended March 31, 2007. 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; less (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.

23

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 sufficient future taxable income before the benefits expire. We are unsure if we will have sufficient future taxable income to utilize the loss carry-forward benefits before they expire. In addition, due to the change in control of the Company, the annual use of the net operating losses will be limited. Therefore, we have provided an allowance for the full amount of the net deferred tax asset.

Accounting Estimates - Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. In particular, there is significant judgment required to estimate oil and gas reserves, asset retirement obligations and impairment of the unproved properties. Actual results could vary significantly from the results that are obtained by using management’s estimates.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, special purpose entities or financing partnerships.

RESULTS OF OPERATIONS

The following selected financial data for the three and six months ended September 30, 2007 as compared to the three and six months ended September 30, 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.

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	Three months ended September 30						Six months ended September 30
	2007			2006			2007			2006
Income Data
Revenues	$	455		$	347,626		$	4,315		$	656,091
Depreciation and depletion		338			175,298			676			346,672
Total operating costs and expenses		325,758			930,673			769,402			1,888,748
Loss from operations		(325,303	)		(583,047	)		(765,087	)		(1,232,657	)
Income tax		—			—			—			—
Net gain (loss)	$	1,140,367		$	(682,565	)	$	1,259,233		$	(1,383,264	)
Basic and diluted gain (loss)
Per share	$	0.18		$	(0.11	)	$	0.20		$	(0.22	)
Weighted average
Number of shares		6,446,850			6,446,850			6,446,850			6,446,850

Oil and Gas Results

Our revenues for the three and six months ended September 30, 2007 were $455 and $4,315 respectively, a decrease of $347,171 and $651,776 or approximately 99.9% and 99.3%, respectively, from $347,626 and $656,091 in revenues we earned during the three months and six months ended September 30, 2006. The decrease in sales revenue for the three and six months ended September 30, 2007 was due primarily to the sale of our New Mexico property which, prior to the sale, accounted for a significant portion of our production and sale of oil and all of our production and sale of natural gas. We are able to extract very little oil and no gas from our Texas property.

Total operating costs and expenses of $325,758 reflect a decrease of $604,915, or approximately 65%, for the three months ended September 30, 2007 as compared to operating expenses of $930,673 for the three months ended September 30, 2006. Total operating costs and expenses of $769,402 reflect a decrease of $1,119,346, or approximately 59.3%, for the six months ended September 30, 2007 as compared to operating expenses of $1,888,748 for the six months ended September 30, 2006. The significant decrease in operating expenses for the three and six months ended September 30, 2007 resulted primarily from a decrease in production and operating costs which resulted from the sale of our New Mexico property, a decrease in depreciation and depletion expense which also resulted from the sale of our New Mexico property, and a reduction in general and administrative expenses. Production and operating expenses decreased by $438,001, or approximately 93.5% from $468,478 to $30,477 for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 and by $571,145, or approximately 90.1%, from $634,184 to $63,039 for the six months ended September 30, 2007 as compared to the six months ended September 30, 2006. Depreciation and depletion decreased by $174,960, or approximately 99.8% from $175,298 in the three months ended September 30, 2006 as compared to $338 for the three months ended September 30, 2007. Depreciation and depletion decreased by $345,996, or approximately 99.8% from $346,672 in the six months ended September 30, 2006 as compared to $676 for the six months ended September 30, 2007. General and administrative expenses decreased by $122,738, or approximately 42.8%, from $286,897 in the three months ended September 30, 2006 to $164,159 in the three months ended September 30, 2007. General and administrative expenses decreased by $546,557, or approximately 60.2%, from $907,892 in the six months ended September 30, 2006 to $361,335 in the six months ended September 30, 2007 due primarily to decreases in professional fees, insurance and stock compensation expense. We had no bad debt expense for the three and six months ended September 30, 2006 as compared to a bad debt expense of $59,812 and $202,408 for the three and six months ended September 30, 2007. This expense resulted from the amounts due from the sale of the New Mexico properties that were ultimately not collected. For the three and six months ended September 30, 2007, we also incurred a put option expense of $69,728 and $139,456, respectively, related to certain option agreements issued to certain of our former employees and consultants. We had no comparable expense for the three and six months ended September 30, 2006.

25

Our loss from operations for the three months and six months ended September 30, 2007 was $325,303 and $765,087, respectively, as compared to a loss from operations of $583,047 and $1,232,657 for the three and six months ended September 30, 2006.

Other income (expense) included gain on forgiveness of debt of $1,466,838 and $1,780,710 during the three months and six months ended September 30, 2007 which related to the forgiveness of debt owed to Lothian. We also experienced a gain on the sale of investments in the amount of $303,155 that related to the transfer of our common stock in Cano Petroleum, Inc. to Lothian as full payment for the Cato Unit Loan. We also experienced a gain on the sale of property and equipment which occurred during the three months ended September 30, 2007. Offsetting our other income was interest expense of $9,519 and $67,896 incurred in the three and six months ended September 30, 2007. As a result of the payment of the loans owed to Lothian, interest expense decreased by $89,999 or approximately 90.4% during the three months ended September 30, 2007, from $99,518 for the three months ended September 30, 2006 to $9,519 for the three months ended September 30, 2007, and by $82,711 or approximately 55% during the six months ended September 30, 2007, from $150,607 for the six months ended September 30, 2006 to $67,896 for the six months ended September 30, 2007.

As a result of the forgiveness of the debt we owed to Lothian, we had net income for the three months and six months ended September 30, 2007 of $1,140,367 and $1,259,233, respectively, as compared to a net loss of $682,565 and $1,383,264 for the three months and six months ended September 30, 2006.

26

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.

Due to Lothian’s bankruptcy and the subsequent sale of its securities to Mr. Mize, Lothian will no longer provide funds to us for our operations. During the period from July 31, 2007, the date on which Lothian’s securities in United Heritage Corporation were transferred to Mr. Mize, until September 26, 2007, the date on which Mr. Mize transferred the securities to Blackwood Ventures LLC, Mr. Mize advanced us a total of $124,323. Mr. Mize is under no obligation to continue advancing money to us and it is not likely that he will. If Mr. Mize does not continue to provide operating funds to us and we are unsuccessful in obtaining funds from other sources, we may be required to cease our operations.

Our current assets decreased by $2,119,060 or approximately 96%, from $2,208,668 at March 31, 2007 to $89,608 at September 30, 2007. The decrease in our current assets was due primarily to a reduction of cash in the amount of $1,666,209, from $1,671,672 at March 31, 2007 to $5,463 at September 30, 2007, which was used to pay accounts payable. and the reduction of accounts receivable in the amount of $432,808, from $470,670 at March 31, 2007 to $37,862 at September 30, 2007, which occurred as a result of the forgiveness of the debt we owed to Lothian. We also experienced a slight reduction of $2,360 in inventory, from $31,417 at March 31, 2007 to $29,057 at September 30, 2007 and a reduction in the amount of $17,683 of prepaid expenses, from $34,909 at March 31, 2007 to $17,226 at September 30, 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 $3,618,969 at September 30, 2007, an increase of $191,498 or approximately 5.6%. 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 September 30, 2007 was $0, a decrease of $672,765 in accounts payable, which at March 31, 2007 were $797,088 and at September 30, 2007 were $124,323, and a decrease in payables to related parties in the amount of $1,550,894, from $1,835,148 at March 31, 2007 to $284,254 at September 30, 2007, that resulted from the sale of New Mexico’s assets. Working capital was a deficit of $3,529,361 at September 30, 2007 as compared to a working capital deficit of $1,251,518 at March 31, 2007, an increase of $2,277,843 or approximately 182%. The increase in our working capital deficit resulted primarily from the accrued put liability of $2,866,642 becoming current during the six month period ended September 30, 2007.

Shareholders’ equity was $803,977 at March 31, 2007, as compared to $2,254,444 at September 30, 2007, an increase of $1,450,467 due primarily to the debt that was forgiven by Lothian Oil.

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There was a decline of $4,024,716 or approximately 40.3% in our total assets, from $9,983,559 at March 31, 2007 to $5,958,843 at September 30, 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 September 30, 2007 our property and equipment had a value of $4,648.

Cash Flow

Our operations used $1,484,739 of cash in the six months ended September 30, 2007. Cash was used primarily for accounts payable and accrued expenses, which totaled $1,433,461 offset, in part, by accounts receivable of $432,808.

Cash of $2,699 was used in investing activities during the six months ended September 30, 2007. In comparison, during the six months ended September 30, 2006 we used $4,338,628 in cash to improve our oil and gas properties and equipment.

During the three months ended September 30, 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 period ended September 30, 2006, we received advances of $3,371,113 from Lothian.

At September 30, 2007 we had cash in the amount of $5,463 as compared to cash in the amount of $21,364 at September 30, 2006.

ITEM 3. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, due to the loss of a number of employees, we no longer have the capacity to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Furthermore, management determined that a material weakness existed in the processes, procedures and controls related to the preparation of our quarterly and annual financial statements. In connection with the preparation of this report, we discovered that, due to certain actions that were taken at the beginning of the year, the complexity of some of the new accounting standards and the difficulty experienced by management in applying the new accounting standards, our control environment is dependent upon the review function and the ability to recognize and obtain assistance for complex transactions. The ineffectiveness of these controls resulted in adjustments related to the recording of stock options. This material weakness could result in the reporting of financial information and disclosures in future consolidated annual and interim financial statements that are not in accordance with generally accepted accounting principles.

Other than as described above, there were no changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1	Articles of Incorporation, as amended (1)
3.2	Bylaws (1)
4.1	Certificate of Designation, Preferences and Rights of Series A Preferred Stock of United Heritage Corporation (2)
4.2	Certificate of Designation, Preferences and Rights of Series B Preferred Stock of United Heritage Corporation (2)
31.1	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
31.2	Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4)*
32	Certification Pursuant to Section 1350 of Title 18 of the United States Code*

(1) Incorporated by reference from Form S-18 File No. 2-73370, filed with the Securities and Exchange Commission on July 24, 1981.

(2) Incorporated by reference from the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2006.

*Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UNITED HERITAGE CORPORATION
	By:	/s/ Joseph F. Langston Jr.
Date: November 14, 2007		Joseph F. Langston Jr, Interim President, Interim Chief Executive Officer and Chief Financial Officer

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