**U.S.
                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 period ended September 30, 2007





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 number: 0-25455**





**Lexington
                Resources, Inc.**
              **(Name
                of small business issuer in its charter)******
            ******Nevada**
            **88-0365453****(State
                or other jurisdiction of incorporation**
              **or
                organization)**
            **(I.R.S.
                Employer Identification No.)******
            ******7473
                West Lake Mead Road, Las Vegas, Nevada 89128**
              **(Address
                of principal executive offices)******
            ******(702)
                382-5139**
              **(Issuer’s
                telephone number)******
            ******Securities
                registered pursuant to Section**
              **12(b)
                of the Act:**
            **Name
                of each exchange on which**
              **registered:****None******
            ******Securities
                registered pursuant to Section 12(g) of the
                Act:****Common
                Stock, $0.000025 par value****(Title
                of Class)**




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




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




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




**Applicable
      Only to Issuer Involved in Bankruptcy Proceedings During the Preceding Five
      Years**.




N/A




Indicate
      by checkmark whether the issuer has filed all documents and reports required
      to
      be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934
      after the distribution of securities under a plan confirmed by a
      court. Yes
o  No
o




**Applicable
      Only to Corporate Registrants**




Indicate
                the number of shares outstanding of each of the issuer’s classes of common
                stock, as of the most practicable date:
              Class
            
            Outstanding
                as of November 16, 2007Common
                Stock, $0.00025 par value
            
            38,766,270




Transitional
      Small Business Disclosure Format (Check one): Yes o No
x




1





INDEX
            PAGEPART
              I.  FINANCIAL INFORMATION
            3ITEM
              1.  INTERIM CONSOLIDATED FINANCIAL STATEMENTS
            3CONSOLIDATED
                BALANCE SHEETS
            4INTERIM
                CONSOLIDATED STATEMENTS OF OPERATIONS
            5INTERIM
                CONSOLIDATED STATEMENTS OF CASH FLOWS
            6NOTES
                TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
            7ITEM
              2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
              OR PLAN OF OPERATION
            19ITEM
              3. CONTROLS AND PROCEDURES
            23PART
              II. OTHER INFORMATION
            24ITEM
              1.  LEGAL PROCEEDINGS
            24ITEM
              2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
              PROCEEDS
            24ITEM
              3.  DEFAULTS UPON SENIOR SECURITIES
            24ITEM
              4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
              HOLDERS
            24ITEM
              5.  OTHER INFORMATION
            24ITEM
              6.  EXHIBITS
            25SIGNATURES
            25










































2


**PART
      1. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**


**-----------------------------**





LEXINGTON
      RESOURCES, INC.





INTERIM
      CONSOLIDATED FINANCIAL STATEMENTS





September
      30, 2007


(Unaudited)

































































































3





**LEXINGTON
        RESOURCES, INC.**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 September
                  30,
                2007
              
              
              December
                  31,
                2006(Unaudited)
              
              
              (Audited)**ASSETS****CURRENT
                  ASSETS**Cash
                  and cash
                  equivalents
              
              $
              181,740
              
              
              $
              86,241Accounts
                  receivable, net of
                  allowance for doubtful accounts of $177,367 (2006 -
                  $177,367)
              
              
              75,128
              
              
              
              1,425,450Due
                  from related parties (Note
                  8)
              
              
              76,390
              
              
              
              73,916Prepaid
                  expenses and
                  other
              
              
              39,354
              
              
              
              2,917Current
                  portion of deferred
                  finance fees
              
              
              -
              
              
              
              39,803372,612
              
              
              
              1,628,327**ASSETS
                  HELD FOR SALE** (Note 5)
              
              
              -
              
              
              
              2,767,225**PROPERTY
                  AND EQUIPMENT** (Note 4)Oil
                  and gas properties - full
                  cost method of accountingProved,
                  net of accumulated depletion $1,464,704 (2006 -
                  $1,114,985)
              
              
              2,237,815
              
              
              
              8,408,510Unproved
              
              
              1,600,000
              
              
              
              5,049,8583,837,815
              
              
              
              13,458,368Other
                  equipment, net of
                  accumulated depreciation of $78,002 (2006 - $235,858)
              
              
              77,790
              
              
              
              578,7243,915,605
              
              
              
              14,037,092$
              4,288,217
              
              
              $
              18,432,644**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY (DEFICIT)****CURRENT
                  LIABILITIES**Accounts
                  payable and accrued
                  liabilities
              
              $
              6,296,302
              
              
              $
              8,404,178Due
                  to related parties (Note
                  8)
              
              
              154,599
              
              
              
              202,881Promissory
                  note and other short
                  term advances (Note 6)
              
              
              615,123
              
              
              
              640,274Current
                  portion of convertible
                  notes and accrued interest (Note 6)
              
              
              -
              
              
              
              615,824Current
                  portion of derivative liability (Note 7)
              
              
              672,338
              
              
              
              -7,738,362
              
              
              
              9,863,157**LONG
                  TERM DEBT**(Note 6)
              
              
              -
              
              
              
              1,295,961**DERIVATIVE
                  LIABILITY**(Note 7)
              
              
              -
              
              
              
              1,538,8297,738,362
              
              
              
              12,697,947**CONTINGENCIES
                  AND COMMITMENTS** (Notes 1, 4, 7 & 10)
              
              
              -
              
              
              
              -**STOCKHOLDERS’
                  EQUITY (DEFICIT)**(Note 7)Common
                  stock $.00025 par value:
                  200,000,000 shares authorizedPreferred
                  stock, $.001 par value:
                  75,000,000 shares authorizedIssued
                  and outstanding:38,766,270
                  common shares
                  (December 31, 2006 – 38,766,270)
              
              
              10,611
              
              
              
              10,611Additional
                  paid-in
                  capital
              
              
              30,510,613
              
              
              
              30,398,613Common
                  stock purchase
                  warrants
              
              
              6,181,340
              
              
              
              2,009,340Accumulated
                  deficit
              
              
              (40,152,709
              )
              
              
              (26,683,867
              )(3,450,145
              )
              
              
              5,734,697$
              4,288,217
              
              
              $
              18,432,644
 
 
 The
        accompanying notes are an integral part of these interim consolidated financial
        statements.
  4
  **LEXINGTON
        RESOURCES, INC.**
 
 **INTERIM
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 
 For
                  the three month period ended
              
              
              For
                  the nine month period endedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006**REVENUES**Oil
                  and gas
                  revenue
              
              $
              114,634
              
              
              $
              153,363
              
              
              $
              466,371
              
              
              $
              410,873Drilling
                  and service
                  revenue
              
              
              955
              
              
              
              838,309
              
              
              
              60,493
              
              
              
              1,527,419115,589
              
              
              
              991,672
              
              
              
              526,864
              
              
              
              1,938,292**OPERATING
                  EXPENSES**Operating
                  costs and
                  taxes
              
              
              159,439
              
              
              
              176,619
              
              
              
              320,219
              
              
              
              294,901Rig,
                  well and pulling unit
                  expense
              
              
              680
              
              
              
              92,647
              
              
              
              56,805
              
              
              
              555,537Salaries,
                  wages and
                  related
              
              
              -
              
              
              
              238,550
              
              
              
              77,947
              
              
              
              715,493Depreciation,
                  depletion and
                  amortization
              
              
              79,016
              
              
              
              238,543
              
              
              
              451,553
              
              
              
              623,693General
                  and
                  administrative
              
              
              187,955
              
              
              
              363,950
              
              
              
              559,290
              
              
              
              1,103,279Impairment
                  of oil and gas properties
              
              
              8,000,000
              
              
              
              -
              
              
              
              8,000,000
              
              
              
              -Impairment
                  of other fixed
                  assets
              
              
              -
              
              
              
              -
              
              
              
              99,100
              
              
              
              -Investor
                  relations and
                  promotion
              
              
              -
              
              
              
              223,600
              
              
              
              37,500
              
              
              
              2,154,5758,427,090
              
              
              
              1,333,909
              
              
              
              9,602,414
              
              
              
              5,447,478**NET
                  LOSS FROM OPERATIONS**
              
              
              (8,311,501
              )
              
              
              (342,237
              )
              
              
              (9,075,550
              )
              
              
              (3,509,186
              )**INTEREST
                  AND FINANCE FEES**
              
              
              (15,144
              )
              
              
              (147,517
              )
              
              
              (349,649
              )
              
              
              (3,137,653
              )**GAIN
                  ON DISPOSAL OF OTHER EQUIPMENT**
              
              
              -
              
              
              
              -
              
              
              
              342,195
              
              
              
              -**GAIN
                  ON DERIVATIVE LIABILITY** (Note 6)
              
              
              -
              
              
              
              461,900
              
              
              
              -
              
              
              
              2,771,400**LOSS
                  ON CONTINGENT LIABILITY**(Note 2)
              
              
              (334,331
              )
              
              
              -
              
              
              
              (782,556
              )
              
              
              -**NET
                  LOSS FOR THE PERIOD**
              
              $
              (8,660,976
              )
              
              $
              (27,854
              )
              
              $
              (9,865,560
              )
              
              $
              (3,875,439
              )
 
 
 
 **BASIC
                  AND FULLY DILUTED**
                **NET
                  LOSS PER SHARE**
              
              $
              (0.22
              )
              
              $
              (0.00
              )
              
              $
              (0.25
              )
              
              $
              (0.12
              )**WEIGHTED
                  AVERAGE COMMON SHARES**
                **OUTSTANDING**
              
              
              38,766,270
              
              
              
              38,766,270
              
              
              
              38,766,270
              
              
              
              32,285,314
 
 
 
 
  
 The
        accompanying notes are an integral part of these interim consolidated financial
        statements.
  5
  **LEXINGTON
        RESOURCES, INC.**
 
 **INTERIM
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 
 For
                  the nine month period
                ended
                  September 30,2007
              
              
              2006**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss for the
                  period
              
              $
              (9,865,560
              )
              
              $
              (3,875,439
              )Adjustments
                  to reconcile net
                  loss for the period to net cash used in operating
                  activities:Gain
                  on disposal of other
                  equipment
              
              
              (342,195
              )
              
              
              -Impairment
                  of other
                  equipment
              
              
              99,100
              
              
              
              -Impairment
                  of oil and gas properties
              
              
              8,000,000
              
              
              
              -Non–cash
                  expenses
              
              
              37,500
              
              
              
              187,500Oil
                  and gas
                  depletion
              
              
              349,719
              
              
              
              155,005Depreciation
              
              
              101,834
              
              
              
              468,688Non-cash
                  interest and finance
                  fees
              
              
              146,809
              
              
              
              2,880,638Gain
                  on derivative
                  liability
              
              
              -
              
              
              
              (2,771,400
              )Loss
                  on contingent
                  liability
              
              
              782,556
              
              
              
              -Changes
                  in working capital
                  assets and liabilities:Accounts
                  receivable
              
              
              308,131
              
              
              
              (538,403
              )Prepaid
                  expenses and
                  other
              
              
              -
              
              
              
              16,672Accounts
                  payable
              
              
              (1,183,833
              )
              
              
              (142,331
              )Accrued
                  liabilities
              
              
              (47,524
              )
              
              
              43,058**NET
                  CASH FLOWS USED IN OPERATING ACTIVITIES**
              
              
              (1,613,463
              )
              
              
              (3,576,012
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchases
                  of other
                  equipment
              
              
              (120,000
              )
              
              
              (339,879
              )Proceeds
                  on disposal of other
                  equipment
              
              
              3,225,000
              
              
              
              -Oil
                  and gas property disposals
                  (additions)
              
              
              606,136
              
              
              
              (4,938,883
              )Cash
                  acquired on acquisition of
                  Oak Hills, net of transaction costs
              
              
              -
              
              
              
              119,544**NET
                  CASH FLOWS PROVIDED BY (USED IN) INVESTING
                  ACTIVITIES**
              
              
              3,711,136
              
              
              
              (5,159,218
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Advances
                  to related
                  parties
              
              
              (5,756
              )
              
              
              (130,005
              )Convertible
                  note
                  repayments
              
              
              (700,457
              )
              
              
              (745,516
              )Long
                  term debt
                  repayments
              
              
              (1,295,961
              )
              
              
              (222,423
              )Proceeds
                  on sale of common
                  stock
              
              
              -
              
              
              
              9,426,250**NET
                  CASH FLOWS PROVIDED BY (USED IN) FINANCING
                  ACTIVITIES**
              
              
              (2,002,174
              )
              
              
              8,328,306**INCREASE
                  (DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              95,499
              
              
              
              (406,924
              )**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              86,241
              
              
              
              520,332**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              181,740
              
              
              $
              113,408
 
 
 **SUPPLEMENTAL
        CASH FLOW INFORMATION**(Note 9).
 
 
 
 
 The
        accompanying notes are an integral part of these interim consolidated financial
        statements.
  6
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          1:                      NATURE
          OF CONTINUED OPERATIONS AND BASIS OF PRESENTATION**
 
 Lexington
        Resources, Inc., a Nevada corporation, and its wholly owned subsidiary Lexington
        Oil & Gas Ltd. Co., an Oklahoma Limited Liability Corporation (“Lexington”),
        were organized for the purposes of the acquisition and development of oil
        and
        natural gas properties in the United States, concentrating on unconventional
        gas
        production initiatives that include coal bed methane gas acquisitions and
        developments in the Arkoma Basin in the State of Oklahoma as well as Barnett
        Shale targeted acquisitions and developments in the Dallas Fort Worth Basin
        in
        the State of Texas.
 
 On
        January 23, 2006, the Company acquired 100% of the shares of Oak Hills Drilling
        and Operating International, Inc., and its wholly owned operating subsidiary,
        Oak Hills Drilling and Operating LLC (“Oak Hills”).  The purpose of
        the acquisition of Oak Hills was to enable the Company to improve scheduling
        of
        property development, to decrease costs associated with drilling and completing
        wells, and to increase the Company's control over its oil and gas leasehold
        developments by utilizing Oak Hills’ in house drilling and completion teams for
        its property exploration initiatives and gas well development
        programs.
 
 During
        the quarter ended June 30, 2007, Oasis Operating, LLC (“Oasis”), an Oklahoma
        limited liability company, became the new third party contract operator for
        the
        Company’s oil and gas assets and exploration properties as part of cost
        streamlining efforts effected to conserve cash resources.  To
        facilitate the operator transition, and to decrease liabilities, the Company
        approved the sale of the majority of its oil and gas related operating fixed
        assets to Oasis for $300,000.  This asset sale was completed during
        the quarter ended September 30, 2007.  A director of Oasis is related
        to a director of the Company.
 
 During
        the quarter ended September 30, 2007, the Company sold, in three transactions,
        virtually all its Oklahoma based assets except for the uncompleted Ellis
        well
        and three non-operated minority interests in wells drilled by non-related
        third
        parties as follows: (a) the Company sold all of its self operated and already
        developed Oklahoma based wells including Wagnon and Coal Creek leases including
        six wells developed by the Company and two further wells with minor production,
        (b) the Company sold all of its Oklahoma based Dylan Peyton LLC operated
        assets
        and (c) the Company sold its 25% working interest in Newfield Exploration
        Mid-Continent, Inc.’s (“Newfield”) POE well and undeveloped lands connected
        thereto.
 
 **Going
        Concern**
 The
        consolidated financial statements have been prepared on the basis of a going
        concern which contemplates the realization of assets and the satisfaction
        of
        liabilities in the normal course of business. The Company has a working capital
        deficiency of $7,365,750 at September 30, 2007, has incurred losses since
        inception of $40,152,709 and further losses are anticipated in the development
        of its oil and gas properties raising substantial doubt as to the Company’s
        ability to continue as a going concern. The ability of the Company to continue
        as a going concern is dependent on raising additional capital to fund ongoing
        losses and property development, obtaining debt settlements and ending
        litigation regarding debts outstanding, and ultimately on generating future
        profitable operations. The Company will attempt to fund operations with advances
        and debt instruments, the sale of assets, as well as further equity
        placements.
 
 Additional
        issuances of equity or convertible debt securities will result in dilution
        to
        our current shareholders. Further, such securities might have rights,
        preferences or privileges senior to our common stock. Additional financing
        may
        not be available upon acceptable terms, or at all. If adequate funds are
        not
        available or are not available on acceptable terms, we may not be able to
        take
        advantage of prospective new business endeavors or opportunities, which could
        significantly and materially restrict our business operations.
 
 **Unaudited
        Interim Financial Statements**
 The
        accompanying unaudited interim consolidated financial statements have been
        prepared in accordance with generally accepted accounting principles for
        interim
        financial information and with the instructions to Form 10-QSB of Regulation
        S-B.  They do not include all information and footnotes required by
        United States generally accepted accounting principles for complete financial
        statements.  However, except as disclosed herein, there have been no
        material changes in the information disclosed in the notes to the financial
        statements for the year ended December 31, 2006 included in the Company's
        Annual
        Report on Form 10-KSB filed with the Securities and Exchange
        Commission.  The interim unaudited consolidated financial statements
        should be read in conjunction with those financial statements included in
        the
        Form 10-KSB.  In the opinion of management, all adjustments considered
        necessary for a fair presentation, consisting solely of normal recurring
        adjustments, have been made.  Operating results for the nine months
        ended September 30, 2007, are not necessarily indicative of the results that
        may
        be expected for the year ending December 31, 2007.
  7
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          2:                      SIGNIFICANT
          ACCOUNTING POLICIES**
 
 **(a)
        Change in accounting principle**
 Effective
        January 1, 2007, the Company adopted the provisions of FASB Staff Position
        (“FSP”) No. EITF 00-19-2 *Accounting for Registration Payment
        Arrangements* (“EITF 00-19-2”), which provides more definitive guidance on
        accounting for registration arrangements including those described in more
        detail in Note 7 in connection with the Company’s 2006 private
        placement.
 
 The
        Company originally accounted for the various components of the private placement
        transaction using the provisions of SFAS No. 133 *Accounting for Derivative
        Instruments and Hedging Activities*; EITF Issue No. 00-19 *Accounting for
        Derivative Financial instruments Indexed to, and Potentially Settled in a
        Company’s Own Stock*; EITF Issue No. 05-4 *The Effect of Liquidated
        Damages Clause on Freestanding Financial Instruments Subject to Issue No.
        00-19* and related amendments and guidance.
 
 Under
        the
        original accounting treatment, the Company classified the shares of common
        stock
        issued and the common stock purchase warrants without registration damages
        as
        equity at their estimated fair values and classified the remainder of the
        proceeds, representing common stock registration damages and the common stock
        purchase warrants subject to registration damages, as a derivative
        liability.  This derivative liability was then subsequently adjusted
        to its estimated fair value with the corresponding gain or loss being charged
        to
        operations in the period.
 
 Under
        the
        provisions of EITF 00-19-2, the Company is required to classify the financing
        component parts as equity, assets or liabilities, notwithstanding the
        registration damages and related payment arrangements.  If at
        inception of the related instruments, the damages and related payments are
        deemed likely, then the proceeds of the instrument are apportioned on a relative
        fair value basis inclusive of the estimated fair value of the damages and
        related payments.  Otherwise, the proceeds are apportioned between
        their component parts with the damages and related payments being recorded
        when
        they are determined to be likely through a charge to operations in the
        period.  The damages and related payments are recorded as a contingent
        liability which continues to be adjusted to its estimated fair value, through
        charges to operations, until the contingency is resolved.  EITF
        00-19-2 was effective for the Company’s first interim period commencing after
        December 15, 2006, being the quarter ended March 31, 2007.
 
 The
        Company’s registration damages and related payment arrangements, which were
        entered into prior to the adoption of EITF 00-19-2 and were unresolved as
        of the
        date of adoption, are required to be accounted for as a change in accounting
        principle in accordance with the provisions of EITF 00-19-2, through a
        cumulative-effect adjustment to retained earnings (deficit) as may be
        required.  The applicable transition provisions and their impact are
        as follows:
 
 ·
              The
                  instrument is to be evaluated on issuance notwithstanding the existence
                  of
                  the registration damages and related payment
                  arrangements.
 ·
              Where
                  this evaluation results in a different classification of items
                  from the
                  previously recorded derivative liability to equity, this adjustment
                  is
                  made based on the issuance date relative fair
                  values.
 ·
              At
                  issuance, the damages and related payments were not considered
                  likely and
                  accordingly, were not included in the original allocation of the
                  proceeds.
 ·
              Upon
                  adoption of EITF 00-19-2 effective January 1, 2007, the damages
                  and
                  related payments were considered likely and accordingly, were recorded
                  through a charge to the opening
                  deficit.
 
 The
        results of adopting EITF 00-19-2 on certain components of stockholders’ equity
        are as follows:
 
 Additional
                  paid in capital
              
              
              Common
                  stock purchase warrants
              
              
              Accumulated
                  deficitAmounts
                  as previously reported, December 31, 2006
              
              $
              30,398,613
              
              
              $
              2,009,340
              
              
              $
              (26,683,867
              )Reclassification
                  of components on issuance
              
              
              74,500
              
              
              
              4,172,000
              
              
              
              -Reversal
                  of previous derivative liability gain
              
              
              -
              
              
              
              -
              
              
              
              (2,288,000
              )Record
                  EITF 00-19-2 contingent liability at adoption
              
              
              -
              
              
              
              -
              
              
              
              (1,315,282
              )Amounts
                  subsequent to adoption, January 1, 2007
              
              $
              30,473,113
              
              
              $
              6,181,340
              
              
              $
              (30,287,149
              )
  8
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          2:                      SIGNIFICANT
          ACCOUNTING POLICIES (continued)**
 
 **(a)
        Change in accounting principle (continued)**
 The
        contingent liability recorded under EITF 00-19-2 and the related changes
        during
        the period ended September 30, 2007 are as follows:
 
 Estimated
                contingent
                  liability
              
              
              Actual
                  damages accrued and unpaid to date
              
              
              Contingent
                  liability carrying valueBalance,
                  January 1, 2007 upon adoption
              
              $
              1,315,282
              
              
              $
              (419,671
              )
              
              $
              895,611Record
                  actual damages accrued during the period
              
              
              -
              
              
              
              (1,005,829
              )
              
              
              (1,005,829
              )Less:
                  amount of damages paid during the period
              
              
              (75,960
              )
              
              
              75,960
              
              
              
              -Record
                  loss on change in estimated fair value of
                contingent
                  liability during the period
              
              
              782,556
              
              
              
              -
              
              
              
              782,556Balance,
                  September 30, 2007
              
              $
              2,021,878
              
              
              $
              (1,349,540
              )
              
              $
              672,338
 
 **(b)
        Recent Accounting Pronouncements**
 In
        2006,
        the FASB issued Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty
        in Income Taxes — an Interpretation of FASB Statement No  109 Accounting
        for Income Taxes.*  FIN 48 clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with SFAS 109.  FIN 48 also prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax
        return.  FIN 48 provides guidance on de-recognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition.  The Company adopted FIN 48 as of January 1, 2007, as
        required.
 
 There
        were no interest or general and administrative expenses accrued or recognized
        related to income taxes for the nine months ended September 30,
        2007.  The Company has not taken a tax position that would have a
        material effect on the financial statements or the effective tax rate for
        the
        nine months ended September 30, 2007 or during the prior three years applicable
        under FIN 48.  It is determined not to be reasonably possible for the
        amounts of unrecognized tax benefits to significantly increase or decrease
        within 12 months of the adoption of FIN 48.  The Company is currently
        subject to a three year statute of limitations by major tax
        jurisdictions.
 
 **NOTE
        3:                      ACQUISITION
        OF OAK HILLS DRILLING AND OPERATING INTERNATIONAL, INC.**
 
 
 On
        January 23, 2006, the Company acquired 100% of the shares of Oak Hills Drilling
        and Operating International, Inc., and its wholly owned operating subsidiary,
        Oak Hills.  The companies were acquired from the existing shareholders
        for an aggregate of 6,000,000 restricted shares of the Company’s common
        stock.  The assets of Oak Hills were independently valued at
        approximately $5.85 million and management of the Company determined a net
        tangible fair value of approximately $3.82 million as the basis for the total
        number of common shares issued at a price per share of $0.637.  As of
        the acquisition date, Oak Hills had secured promissory notes totaling $1.28
        million owed to certain of the Oak Hills vendors.  The $1.28 million
        in promissory notes accrue interest at 9% per annum, and require no payments
        of
        interest or principal until the end of a two year term ending January 22,
        2008.
 
 The
        purpose of the acquisition of Oak Hills was to enable the Company to improve
        scheduling of property development, to decrease costs associated with drilling
        and completing wells, and to increase the Company's control over its oil
        and gas
        leasehold developments by utilizing Oak Hills’ in house drilling and completion
        teams for its property exploration initiatives and gas well development
        programs.
 
 Prior
        to
        the acquisition of Oak Hills, there were 18,627,523 shares of common stock
        of
        the Company outstanding.  Accordingly, the pre-acquisition
        shareholders of the Company owned approximately 76% of the post-acquisition
        issued and outstanding shares of the Company’s common stock.  As a
        result, this business combination has been accounted for using the purchase
        method with the Company being the acquirer.
  9
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          3:                      ACQUISITION
          OF OAK HILLS (continued)**
 
 The
        fair
        value of the assets acquired and liabilities assumed effective January 23,
        2006
        were as follows:
  Current
                  assets
              
              $
              1,024,458Property,
                  plant and equipment
              
              
              5,228,736Current
                  liabilities
              
              
              (842,836
              )Due
                  to related parties
              
              
              (1,280,789
              )Long
                  term debt
              
              
              (222,423
              )$
              3,907,146
 
 Consideration
                  paid-
                  6,000,000 common shares at $0.6374 per share
              
              $
              3,824,190-
                  transaction costs
              
              
              82,956$
              3,907,146
 
 The
        results of operations and cash flows presented include those of the Company
        for
        all periods presented and those of Oak Hills for all periods subsequent to
        January 23, 2006.
 
 The
        following unaudited pro forma information for the three month and nine month
        periods ended September 30, 2006 presents the pro forma results of operations
        as
        if the acquisition had occurred as of January 1, 2006.  The pro forma
        information presented is not necessarily indicative of what would have occurred
        had the acquisition been made as of January 1, 2006, nor is it necessarily
        indicative of future results of operations.  The following pro forma
        amounts give effect to appropriate adjustments for an increase in depreciation,
        additional intercompany profit elimination and an increase in weighted average
        shares outstanding.
 
 For
                  the three Months Ended September 30,
              
              
              For
                  the Nine Months Ended September 30,2006
              
              
              2006Revenues
              
              $
              991,672
              
              
              $
              2,284,925Net
                  loss
              
              $
              (27,854
              )
              
              $
              (3,851,367
              )Net
                  loss per share – basic and diluted
              
              $
              (0.00
              )
              
              $
              (0.12
              )Weighted
                  average shares outstanding
              
              
              38,766,270
              
              
              
              32,768,830
  10
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          4:                      PROPERTY
          AND EQUIPMENT**
 
 Property
        and equipment includes the following:
 September
                  30,
              
              
              December
                  31,2007
              
              
              2006**Oil
                  and gas properties:**Proved,
                  subject to depletion
              
              $
              13,852,519
              
              
              $
              11,673,495Unproved,
                  not subject to depletion
              
              
              1,600,000
              
              
              
              5,049,858Accumulated
                  depletion
              
              
              (1,464,704
              )
              
              
              (1,114,985
              )Impairment
                  provision
              
              
              (10,150,000
              )
              
              
              (2,150,000
              )Net
                  oil and gas properties
              
              
              3,837,815
              
              
              
              13,458,368Other
                  equipment
              
              
              163,525
              
              
              
              841,859Accumulated
                  depreciation
              
              
              (78,002
              )
              
              
              (235,858
              )Impairment
                  provision
              
              
              (7,733
              )
              
              
              (27,277
              )Net
                  other property and equipment
              
              
              77,790
              
              
              
              578,724Property
                  and equipment, net of accumulated depreciation  and
                  depletion
              
              $
              3,915,605
              
              
              $
              14,037,092
 
 For
        the
        period ended September 30, 2007, estimated future development costs totaling
        $2,498,000 were included in costs subject to amortization for the purposes
        of
        determining depletion for the period.
 
 Total
        depletion expense per unit of production for the period ended September 30,
        2007
        was $3.80 per mcf (2006 - $1.23).
 
 The
        Company's oil and gas activities are currently conducted in the United
        States.  The Company has completed the following significant
        transactions related to its oil and gas activities:
 
 **Acquisition
        of Oak Hills Drilling and Operating International, Inc.**
 On
        January 23, 2006, the Company completed the acquisition of Oak Hills as
        described in Note 3.
 
 **Joint
        Exploration Agreement – Arkoma Basin, Oklahoma**
 On
        March
        3, 2006, effective January 31, 2006, the Company entered into an exploration
        agreement with Dylan Peyton, LLC (“Dylan”) of Dallas, Texas to jointly develop
        Lexington’s Arkoma Basin leases located in Hughes and MacIntosh Counties in the
        State of Oklahoma (the “Arkoma Basin Exploration Agreement”).  The
        properties were to be developed on a 50/50 equal working interest basis. 
An affiliate to Dylan, named Avatar Energy, LLC, became the operator for
        the
        project.  During 2006, the Company has assigned 50% of its undeveloped
        leasehold interests in Oklahoma in exchange for cash proceeds of $575,000
        which
        equates to approximately 50% of the Company’s originally incurred leasing
        costs.  Assignments to 50% of the Company’s undeveloped leasehold interests
        in Coal Creek, South Lamar, Middle Creek, and H-9 Prospects have been effected
        to Dylan.  Well bores and acreage relating to previously drilled and
        completed wells by the Company do not form part of any assignments under
        the
        Arkoma Basin Exploration Agreement.  Proceeds from this disposal were
        recorded as a reduction of the capitalized costs without recognition of a
        gain
        or loss as the disposal did not result in a change of 20 percent or more
        in the
        Company’s depletion rate.
 
 **Joint
        Exploration Agreement – Comanche County, Texas**
 On
        March
        3, 2006, effective January 31, 2006, the Company entered into an exploration
        agreement with Dylan to jointly develop approximately 5,000 acres of Barnett
        Shale and shallow gas targets in Comanche County, Texas (the “Comanche County
        Exploration Agreement”). The property would be developed on a 50/50 equal
        working interest basis.  The Company’s subsidiary, Oak Hills became the
        operator of the project.  The Company will pay approximately $1,225,500 for
        its 50% working interest in the new acreage through a combination of $575,000
        in
        cash (paid during 2006) and approximately $650,500 of carried drilling costs
        in
        the first Comanche Barnett Shale test well required to be drilled on or before
        September 2006.  The test well commenced drilling on September 1, 2006. It
        is estimated that the total amount owing for the acreage will be approximately
        $1,225,500, resulting in no additional amount to be paid after deducting
        the
        original payment of $575,000 and the carried drilling costs estimated to
        be
        $650,500. The Company is currently in negotiations and reconciliation of
        expenditures relating to the Joint Exploration Agreement in Comanche County,
        Texas.
  11
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          4:                      PROPERTY
          AND EQUIPMENT (continued)**
 
 On
        October 2, 2006, the Company entered into a convertible debt set-off agreement
        with Dylan (the “Convertible Debt Agreement”), relating to amounts due and owing
        to Dylan from fractures and completion of certain coal bed methane gas wells.
        Pursuant to the terms and provisions of the Convertible Debt Agreement: (i)
        Oak
        Hills sold to Ada Energy Services LLC (“AES”) certain of its assets, including
        two Wilson 600 duplex pumps for an aggregate consideration of $120,000 as
        a
        set-off for the debt due and owing to Dylan; (ii) Oak Hills had 120 days
        to pay
        the amount of $120,000 due and owing to Dylan to re-purchase the two Wilson
        pumps from AES for $120,000 plus the cost of any work done on them other
        than
        repairs made for damages caused by AES’ usage of the pumps; (iii) Oak Hills made
        a payment of $20,000 to Avatar Energy relating to the completion and fracture
        job on the Gray Well #1H-22 and the fracture job on the Dylan Well #1-23;
        and
        (iv) in the event Oak Hills does not re-purchase the Wilson pumps for $120,000
        within the 120 days, the sale of the pumps will constitute full and complete
        settlement of the $120,000 due and owing Dylan. On January 27, 2007, the
        Company
        extinguished its obligations under the convertible debt set-off agreement
        with
        Dylan by repaying $120,000 to Ada Energy Services and reclaiming its pledged
        collateral (two Wilson 600 duplex pumps).  Accordingly, as at December
        31, 2006, the Company off-set the amount owing to Dylan against the carrying
        value of the pumps with the residual carrying value being included in the
        Rig
        and related equipment impairment provision as described in Note 5. On January
        27, 2007, the Company sold its two Wilson 600 duplex pumps to Innovative
        Energy
        Services for $125,000.
 
 During
        the period ended September 30, 2007, Oasis became the new third party contract
        operator for the Company’s oil and gas assets and exploration properties as part
        of cost streamlining efforts effected to conserve cash
        resources.   A director of Oasis is related to a director of Oak
        Hills.
 
 During
        the quarter ended September 30, 2007, we sold all of the Company’s self operated
        and already developed Oklahoma based wells including Wagnon and Coal Creek
        leases including six wells developed by the Company and two further wells
        with
        minor production for an aggregate of $457,392.
 
 During
        the quarter ended September 30, 2007, the Company sold all of its Oklahoma
        based
        Dylan Peyton LLC operated assets to Dylan Peyton LLC in exchange for the
        write-off of $1,042,191 in amounts due to the Company from Dylan Peyton LLC,
        the
        settlement of $965,999 due by the Company to Dylan Peyton, LLC, and the
        settlement of various related issues, other unrecorded items under dispute
        and
        disagreements between the parties.
 
 As
        a
        result of the disposals of certain property interests during the period as
        described in more detail herein, and the Company’s ongoing assessment of
        impairment to carrying values, during the period $3,183,048 was transferred
        from
        unproven properties to properties subject to depletion.  Further, as a
        result of the application of the ceiling test and other valuation estimates,
        the
        Company recorded an impairment of the carrying value of its properties subject
        to depletion totaling $8,000,000.
 
 **Sale
        of Other Undeveloped Acreage**
 During
        the first and second quarters of 2007, the Company sold approximately 719
        acres
        of Barnett Shale targeted exploration leases located in Hood County, Texas
        for
        net proceeds of approximately $380,000.  Also during this period, the
        Company received $8,125 as compensation for forfeiting the right to participate
        in a new well on the Panther Creek prospect.
 
 During
        the quarter ended September 30, 2007, the Company sold its 25% working interest
        in its POE well and undeveloped lands connected thereto to Newfield Exploration
        Mid-Continent, Inc. (“Newfield”) for $626,704 by offsetting $590,267 in amounts
        owed to Newfield and the receipt of $36,437 in cash.
 
 **Unproven
        Properties**
 The
        following is a summary of the transactions involving the Company’s unproven
        properties not subject to depletion:
  Acquisition
                  Costs
              
              
              Development
                  Costs
              
              
              TotalBalance,
                  December 31, 2006
              
              $
              2,067,267
              
              
              $
              2,982,591
              
              
              $
              5,049,858Incurred
                  during the period
              
              
              -
              
              
              
              121,426
              
              
              
              121,426Proceeds
                  from disposals during the period
              
              
              -
              
              
              
              (388,236
              )
              
              
              (388,236
              )Allocated
                  to properties subject to amortization
              
              
              (467,267
              )
              
              
              (2,715,781
              )
              
              
              (3,183,048
              )Balance,
                  September 30, 2007
              
              $
              1,600,000
              
              
              $
              -
              
              
              $
              1,600,000
  12
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          5:                      ASSETS
          HELD FOR SALE AND DISPOSAL OF OTHER EQUIPMENT**
 
 On
        January 2, 2007, the Company authorized and approved the execution by Oak
        Hills
        of an agreement dated December 29, 2006 with Innovative Energy Services
        pertaining to the sale of the Company’s drilling rig and related equipment. In
        accordance with the Agreement, Innovative Energy Services paid to Oak Hills
        a
        gross aggregate amount of $3,100,000 for the drilling dig and related
        equipment.  As at December 31, 2006, these assets were reclassified to
        assets held for sale at their estimated net recoverable amount of $2,767,225
        resulting in an impairment of the carrying value of these assets totaling
        $1,572,723 being recorded during 2006.  During the period, this
        Agreement was completed, and the net proceeds received effective January
        5, 2007
        with the net recoverable amount exceeding the original resulting in a gain
        on
        disposal of $342,195 being recorded during the period.
 
 On
        June
        24, 2007, the Company approved the sale of certain oil and gas related operating
        fixed assets to Oasis for $300,000.  As at June 30, 2007, these assets
        were reclassified to assets held for sale at their estimated net recoverable
        amount of $300,000 resulting in an impairment of the carrying value of these
        assets totaling $99,100 being recorded during the period.  During the
        period ended September 30, 2007, this transaction was completed with the
        Company
        receiving the $300,000 consideration by way of amounts owing by the Company
        to
        Oasis and other parties related to Oasis and / or the Company.
 
 
 **NOTE
          6:                      LONG
          TERM DEBT, SHORT TERM DEBT AND OTHER ADVANCES**
 
 During
        the period ended September 30, 2007, the Company had the following activity
        in
        connection with long term debt, short term debt and other advances:
 
 **Promissory
        note**
 On
        December 20, 2005, the Company obtained an unsecured loan by way of promissory
        note from a shareholder of the Company totaling $600,000. The term of the
        loan
        is for two years with interest calculated at 10% per annum.  Interest
        is to be paid on a quarterly basis with the principal to be repaid on or
        before
        the two year loan period.  As of September 30, 2007, $15,123 (December
        31, 2006 - $40,274) of accrued interest remains unpaid on this
        loan.
 
 **Long
        term debt**
 As
        at the
        date of the Oak Hills acquisition, Oak Hills had outstanding promissory notes
        totaling $1,295,961 which accrue interest at 9% per annum, and require no
        payments of interest or principal until the end of a two year term ending
        January 22, 2008.  These promissory notes are owed to certain former
        shareholders of Oak Hills, being vendors in the Oak Hills acquisition described
        in Note 3 and are secured against the assets of Oak Hills.
 
 On
        January 26, 2007, the $1,295,961 in promissory notes and accrued interest
        of
        $227,775 was repaid in full pursuant to the sale of equipment securing these
        notes.
 
 **Secured
        convertible notes**
 As
        at
        December 31, 2006, the Company had secured convertible debt principal
        outstanding of $700,457 less an unamortized discount of $107,006 resulting
        in a
        net carrying value of $593,451 which, including accrued interest of $22,373,
        was
        recorded as a current liability.  The convertible notes were due
        September 15, 2007 and bear interest at a rate of 8% per annum.  The
        repayment of the notes has been guaranteed by Lexington supported by a
        collateral security agreement covering all the assets of
        Lexington.  On January 26, 2007, the Company repaid all outstanding
        convertible promissory notes principal of $700,457, accrued interest of $32,105,
        and a 20% penalty repayment amount of $146,512 for an aggregate amount of
        $879,074 to the remaining convertible note holders who had a secured interest
        on
        the assets of Lexington.
  13
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          7:                      STOCKHOLDERS'
          EQUITY**
 
 The
        authorized capital of the Company consists of 200,000,000 voting common shares
        with $0.00025 par value, and 75,000,000 non-voting preferred shares with
        $0.001
        par value.
 
 **Common
        Stock Issuances –period ended September 30, 2007**
 The
        Company did not issue any shares of common stock during the period ended
        September 30, 2007.
 
 **Liquidated
        damages related to common stock and warrants issued to investors in the 2006
        private placement**
 During
        2006, the Company completed a private placement pursuant to which the Company
        issued an aggregate of 7,650,000 units ("Unit") of the Company’s securities at a
        subscription price of U.S. $1.00 per Unit for total gross proceeds of
        $7,650,000; with each Unit being comprised of one common share and one
        non-transferable common stock purchase warrant ("Warrant").  Each
        resulting Warrant entitles the subscriber to purchase an additional common
        share
        (“Warrant Share”) of the Company at a price of $1.25 per share for the period
        commencing upon the date of issuance of the Units by the Company and ending
        on
        the day which is the earlier of (i) 18 months from the date of issuance of
        the
        Units and (ii) 12 months from the effective date of the Company’s proposed
        registration statement.  Both the Warrant Shares and the common shares
        issued pursuant to the private placement offering are to be proposed for
        registration under the United States Securities Act of 1933, as
        amended.  The Company paid finders fees of 5% of the gross cash
        proceeds received under the private placement offering and 10% restricted
        common
        shares on the gross units issued, with such restricted shares carrying piggy
        back registration rights.  Of the total Units sold, 7,450,000 are
        subject to potential damages relating to the registration
        requirement.  Effective July 3, 2006, the Company filed a Form SB-2
        Registration Statement under the United States Securities Act of 1933, as
        amended, to register the 8,415,000 common shares issued and 7,650,000 common
        shares underlying the common stock purchase warrants.  This
        registration statement was not declared effective before financial penalties
        were due pursuant to registration timing.  During the period the
        Company paid $75,960 in penalties leaving $1,349,5405 accrued and unpaid
        as at
        September 30, 2007 (December 31, 2006 - $419,671) which have been included
        in
        accounts payable and accrued liabilities.  The Company continues to
        incur 1.5% of $7,450,000 raised per month of delay until the Registration
        Statement is declared effective.
 
 The
        Company originally accounted for the various components of the private placement
        transaction using the provisions of SFAS No. 133 *Accounting for Derivative
        Instruments and Hedging Activities*; EITF Issue No. 00-19 *Accounting for
        Derivative Financial instruments Indexed to, and Potentially Settled in a
        Company’s Own Stock*; EITF Issue No. 05-4 *The Effect of Liquidated
        Damages Clause on Freestanding Financial Instruments Subject to Issue
        No. 00-19* and related amendments and guidance.
 
 Effective
        January 1, 2007, the Company adopted the provisions of FASB Staff Position
        (“FSP”) No. EITF 00-19-2 *Accounting for Registration Payment
        Arrangements* (“EITF 00-19-2”), which provides more definitive guidance on
        accounting for registration arrangements including those described above
        in
        connection with the Company’s 2006 private placement.  The impact of
        adopting EITF 00-19-2 is described in more detail in Note 2.
 
 The
        following table summarizes the initial allocation of the proceeds from the
        private placement:
 
 Gross
                  proceeds
              
              $
              7,650,000Fair
                  value of warrants subject to registration damages
              
              
              (4,172,000
              )Estimated
                  fair value of liquidated damages on common shares and
                  warrants
              
              
              (74,500
              )Share
                  issuance costs
              
              
              (411,250
              )Proceeds
                  allocated to equity components
              
              $
              2,992,250Allocated
                  as follows:Common
                  shares
              
              $
              2,880,250Warrants
                  not subject to registration damages
              
              
              112,000$
              2,992,250
 
  14
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          7:                      STOCKHOLDERS'
          EQUITY (continued)**
 
 **Private
        placement warrants**
 The
        fair
        value of the Warrants at inception was estimated to be $4,284,000 and has
        been
        allocated between warrants subject to damages (derivative liability) and
        warrants not subject to damages (equity) as outlined above.  The fair
        value of the warrants at inception was estimated using the Black-Scholes
        option-pricing model with the following assumptions: expected warrant life
        of
        1.33 years, risk-free interest rate of 4.81%, dividend yield of 0% and expected
        volatility of 77%.
 
 At
        inception, the Company determined that the warrants and related liquidated
        damages provisions associated with the common stock issuable upon exercise
        of
        the warrants did not meet the criteria for equity accounting under EITF
        00-19.  Further, the Company determined that the liquidated damages
        provision related to the common stock issued is an embedded derivative under
        SFAS No. 133.
 
 As
        at
        issuance of the shares and warrants, the fair value of the warrants subject
        to
        damages was estimated to be $4,172,000 using the Black-Scholes option-pricing
        model as described above.  The fair value of the liquidated damages on
        the common stock and warrants at issuance was estimated to be
        $74,500.  This estimate was based on the probability of
        non-registration over time and the damages related thereto.  The total
        fair value of the combined warrants and liquidated damages was $4,246,500
        at
        issuance of the shares and warrants and was recorded as a derivative liability
        which will be revalued each quarter until the liquidated damages provisions
        expire.  Changes in the fair value estimate for the period from
        inception to December 31, 2006 were recorded in the consolidated statement
        of
        operations.
 
 As
        at
        December 31, 2006, the fair value of the warrants was estimated to be $36,500
        using the Black-Scholes option-pricing model with the following assumptions:
        expected warrant life of 0.83 years, risk-free interest rate of 5.0%, dividend
        yield of 0% and expected volatility of 89%.  As at December 31, 2006,
        the fair value of the liquidated damages on the common stock and warrants
        was
        estimated to be $1,922,000 and accordingly, the combined derivative liability
        had a carrying value of $1,958,500.  During 2006, the company recorded
        a gain of $2,288,000 on the change in the carrying value of the derivative
        liability resulting primarily from a decline in the price of the Company’s
        common stock of approximately 82%.
 
 The
        carrying value of the derivative liability as at December 31, 2006 is summarized
        as follows:
 
 Derivative
                  liability:Fair
                  value of warrants subject to registration damages
              
              $
              4,172,000Estimated
                  fair value of liquidated damages on common shares and
                  warrants
              
              
              74,500Balance
                  as at issuance of the shares and warrants
              
              
              4,246,500Change
                  in fair value for the year ended December 31, 2006
              
              
              (2,288,000
              )Less:
                  actual damages accrued to December 31, 2006
              
              
              (419,671
              )Derivative
                  liability, December 31, 2006
              
              $
              1,538,829
 
 Allocated
                  as follows:Fair
                  value of warrants subject to registration damages
              
              $
              36,500Estimated
                  fair value of liquidated damages on common shares and
                  warrants
              
              
              1,922,000Less:
                  actual damages accrued to December 31, 2006
              
              
              (419,671
              )$
              1,538,829
  15
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          7:                      STOCKHOLDERS'
          EQUITY (continued)**
 
 **Share
        Purchase Warrants**
 A
        summary
        of the Company’s stock purchase warrants and related activity is presented
        below:
 
 Number
                  of Warrants
              
              
              Weighted
                  average exercise price
                per
                  share
              
              
              Weighted
                  average remaining contractual life (in years)Balance
                  at December 31, 2006
              
              
              11,399,000
              
              
              $
              1.21
              
              
              
              1.11Issued
                  during the period
              
              
              -
              
              
              
              -Exercised
                  during the period
              
              
              -
              
              
              
              -Expired
                  during the period
              
              
              -
              
              
              
              -Balance
                  at September 30, 2007
              
              
              11,399,000
              
              
              $
              1.21
              
              
              
              0.47
 
 The
        Series A and Series B warrants were originally issued as part of the secured
        convertible note unit offering at exercise prices of $1.50 per share and
        $1.25
        per share, respectively were subject to exercise price changes under certain
        conditions relating to a subsequent financing.  As a result of the
        private placement completed during 2006, the Series A and Series B warrants
        were
        all repriced to $1.00 per share.  During 2006, the Company recorded a
        non-cash finance cost of $615,300 being the estimated fair value increase
        in the
        warrants resulting from the price reduction described above.
 
 During
        2006 the Company reclassified from common stock purchase warrants to additional
        paid in capital, $130,358 on the exercise of warrants and $1,397,438 on the
        expiration of warrants.
 
 **Stock
        Options**
 The
        Company has stock options outstanding to certain employees, officers, directors
        and consultants of the Company and its subsidiaries.  The Company’s
        Stock Option Plan (the “Plan”), most recently amended and approved by the board
        of directors on August 19, 2005, was effective August 7, 2003 for the purpose
        of
        advancing the interests of the Company and its stockholders.  The Plan
        allows for the granting of options to key employees, officers, directors
        and
        consultants of the Company for terms not to exceed 10 years and at prices
        and
        vesting conditions to be determined by the board of directors.  The
        Plan also allows for the granting of Incentive Stock Options that must be
        granted at no less than grant date market price of the Company’s common
        stock.
 
 The
        Plan
        allows for a total of 7,500,000 options outstanding of which 1,285,000 were
        outstanding as at September 30, 2007 and December 31, 2006 resulting in
        options available for grant of 6,215,000.  To date, all options
        granted under the Plan have been immediately vested and exercisable, and
        accordingly, there is no unrecognized stock based compensation expense as
        at
        September 30, 2007 or December 31, 2006.
 
 As
        at
        September 30, 2007 and December 31, 2006, the Company had no stock options
        outstanding for which the exercise price was lower than the market value
        of the
        Company’s common stock.
 
 The
        total
        estimated intrinsic value of options exercised during the period ended September
        30, 2007 was $NIL (year ended December 31, 2006 - $19,100).  No stock
        options were granted during the period ended September 30, 2007 or the year
        ended December 31, 2006.
 
 A
        summary
        of the Company’s stock options and related activity is presented
        below:
 
 Number
                  of options
              
              
              Weighted
                  average exercise price
                per
                  share
              
              
              Weighted
                  average remaining contractual life (in years)Outstanding
                  at December 31, 2006
              
              
              1,285,000
              
              
              $
              1.72
              
              
              
              3.16Granted
                  during the period
              
              
              -
              
              
              
              -Cancelled
                  during the period
              
              
              -
              
              
              
              -Exercised
                  during the period
              
              
              -
              
              
              
              -Outstanding
                  at September 30, 2007
              
              
              1,285,000
              
              
              $
              1.72
              
              
              
              2.41
 
  16
 
 **LEXINGTON
          RESOURCES, INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
  **NOTE
          7:                      STOCKHOLDERS'
          EQUITY (continued)**
 
 A
        summary
        of information about stock options as at September 30, 2007 is as
        follows:
 
 Exercise
                    Price
                Number
                    of options outstanding and exercisable
                Weighted
                    average remaining contractual life (in years)$0.167
                50,000
                1.14$1.00
                5,000
                1.35$1.25
                850,000
                2.89$3.00
                380,000
                1.531,285,000
 **NOTE
        8:                      RELATED
        PARTY TRANSACTIONS**
 
 Related
        party transactions not otherwise disclosed elsewhere are listed as
        follows:
 
 The
        Company previously entered into a one year contract with IMT on November
        10,
        2003, a private company that performs a wide range of management,
        administrative, financial, and business development services to the Company.
        The
        contract has been renewed annually. During the period ended September 30,
        2007,
        the Company incurred $30,000 (2006 - $90,000) in fees to IMT.
 
 During
        the period ended September 30, 2007, the Company incurred (a) $45,000 to
        its
        officers for management fees (2006 - $135,000), (b) $NIL to an officer and
        director for legal and other expense reimbursements (2006 - $15,000) and
        (c)
        $5,000 in fees to a director (2006 - $40,000).  As at September 30,
        2007, the Company owes $154,599 (December 31, 2006 - $202,881) to these related
        parties.
 
 During
        the period ended September 30, 2007, the Company incurred $67,500 (2006 -
        $65,769) in fees to the sole officer and director of Oak Hills who is also
        a
        director of the Company.  In addition, Oak Hills incurred $22,750
        (2006 - $31,500) to this director and a relative of this director for rent
        on
        the Company’s field offices in Oklahoma.  This director has previously
        been assigned a 10% carried working interest in each well successfully drilled
        on the Wagnon lease, as partial compensation for his involvement in obtaining
        and facilitating the execution of the Farm-Out Agreement and to compensate
        for
        his services relating to operation and completion of wells to be located
        on the
        Wagnon lease, and has also been provided the right to purchase up to an
        additional 5% working interest of the Company’s total interest in all wells
        drilled by the Company on its properties provided that funds for this
        participation are paid prior to the commencement of drilling of said
        wells.  During the periods ended September 30, 2007 and 2006, no
        compensation was recorded in connection with the costs of this carried working
        interest.  As at September 30, 2007, a total of $76,390 (December 31,
        2006 - $73,916) is owed to the Company from this director and / or affiliates
        of
        this director for costs incurred in connection with certain well
        interests.
 
 During
        the quarter ended September 30, 2007, Oasis became the new third party contract
        operator for the Company’s oil and gas assets and exploration properties as part
        of cost streamlining efforts effected to conserve cash resources.  To
        facilitate the operator transition, and to decrease liabilities, the Company
        approved the sale of the majority of its oil and gas related operating fixed
        assets to Oasis for $300,000.  A director of Oasis is related to a
        director of the Company.
 
 On
        June
        24, 2007, the Company approved the sale of certain oil and gas related operating
        fixed assets to Oasis for $300,000.  As at September 30, 2007, these
        assets were reclassified to assets held for sale at their estimated net
        recoverable amount of $300,000 resulting in an impairment of the carrying
        value
        of these assets totaling $99,100 being recorded during the
        period.  Amounts owing pursuant to this agreement will be offset
        against amounts subsequently owed by the Company to Oasis in connection with
        their ongoing operator activities.
 
 Refer
        to
        Notes 3, 4 and 5.
 
 17
 **LEXINGTON
              RESOURCES, INC.**
 
 **NOTES
              TO FINANCIAL STATEMENTS**
   **NOTE
          9:                      SUPPLEMENTAL
          DISCLOSURE WITH RESPECT TO CASH FLOWS**
 
 In
        connection with the oil and gas property disposals as described in more detail
        in Note 4, the Company received non-cash proceeds consisting of the settlement
        of accounts payable totaling $1,556,266 and the assumption of additional
        payables by the purchaser of $114,186 which were further offset by the Company’s
        agreement to write off accounts receivable owing to certain purchasers totaling
        $1,042,191.
 
 For
                  the Nine Months Ended September 30,2007
              
              
              2006Cash
                  paid during the period for:Interest
                  and debt payout
                  penalties
              
              $
              552,379
              
              
              $
              208,829Income
                  taxes
              
              $
              -
              
              
              $
              -
 
 
 **NOTE
          10:                      LITIGATION**
 
 To
        date
        the Company has received twenty-two lawsuits from creditors of the Company
        for
        the payment of services and goods totaling approximately $2,208,426 with
        $418,072 of the amount forming summary judgments or partial summary judgments
        against the Company.  The Company also currently has one well lien for
        the payment of services and goods totaling approximately $2,454, and nineteen
        demand letters for the payment of services and goods totaling approximately
        $392,781 pursuant to expenditures incurred in the development of oil and
        gas
        assets on the Company’s leasehold interests.  All amounts owing in
        connection with these law suits, well liens and demand letters have been
        accrued, as applicable, as of September 30, 2007 and December 31,
        2006.  During the period and subsequently, the Company settled certain
        of these debts totaling $270,482 utilizing $102,917 in cash, $64,209 in amounts
        assigned to and assumed by Dylan Peyton LLC, and the write down of amounts
        owing
        in the amount of $103,356.
 
 On
        July
        3, 2007, we received a Wells Notice from the United States Securities and
        Exchange Commission (“SEC”).  The Wells Notice advised us that the SEC
        Staff intended to recommend that the SEC bring a civil action against us
        alleging that we violated Sections 5(a) and 5(c) of the Securities Act of
        1933,
        as amended (the “Act”). The SEC Staff advised that the alleged violations of
        Sections 5(a) and 5(c) of the Act relate to the issuance of shares of the
        Company's common stock that were registered under Forms S-8 to certain
        individuals who allegedly were not eligible to receive shares registered
        on Form
        S-8.  The Wells Notice advised that the SEC Staff may seek a permanent
        injunction against future violations, disgorgement plus prejudgment interest,
        and civil monetary penalties.
 
 The
        SEC's
        Staff, in accordance with Rule 5(c) of the Commission's Rules of Informal
        and
        Other Procedures, 17 C.F.R.  § 202.5(c), afforded the Company the
        opportunity to make a “Wells Submission” regarding the SEC Staff's intended
        recommendations. On August 8, 2007, we submitted a Wells Submission to the
        Commission setting forth the reasons why no enforcement proceeding should
        be
        authorized by the SEC. Although there can be no assurance as to the ultimate
        outcome, we believe we have meritorious legal and factual defenses in this
        matter. We cannot predict the outcome of this matter, and an adverse resolution
        of this matter could have a material adverse effect on our business, financial
        condition and/or results of operations.
 
 On
        July
        3, 2007, Grant Atkins, the Chief Executive Officer of the Company also received
        a Wells Notice. The Wells Notice advised Mr. Atkins that the SEC Staff intends
        to recommend that the SEC bring a civil action against him alleging that
        he also
        violated Sections 5(a) and 5(c) of the Act in connection with the issuance
        of
        the Company's shares of common stock that were registered under Forms S-8
        certain to individuals allegedly who were not eligible to receive shares
        registered on Form S-8. The SEC Staff indicated that it may recommend that
        the
        SEC seek disgorgement plus prejudgment interest, an order prohibiting Mr.
        Atkins
        from participating in any offering of penny stock, civil monetary penalties,
        and
        a permanent injunction.  On August 6, 2007, Mr. Atkins submitted a
        Wells Submission to the Commission setting forth the reasons why he
        should not be charged with violations of the federal securities laws in
        connection with this investigation. We cannot predict the outcome of the
        potential claims against Mr. Atkins, and an adverse resolution could have
        a
        material adverse effect on the Company's business and
        operations.




18





Statements
      made in this Form 10-QSB that are not historical or current facts are
      "forward-looking statements" made pursuant to the safe harbor provisions of
      Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
      Securities Exchange Act of 1934. These statements often can be identified by
      the
      use of terms such as "may," "will," "expect," "believe," "anticipate,"
      "estimate," "approximate" or "continue," or the negative thereof. We intend
      that
      such forward-looking statements be subject to the safe harbors for such
      statements. We wish to caution readers not to place undue reliance on any such
      forward-looking statements, which speak only as of the date made. Any
      forward-looking statements represent management's best judgment as to what
      may
      occur in the future. However, forward-looking statements are subject to risks,
      uncertainties and important factors beyond our control that could cause actual
      results and events to differ materially from historical results of operations
      and events and those presently anticipated or projected. We disclaim any
      obligation subsequently to revise any forward-looking statements to reflect
      events or circumstances after the date of such statement or to reflect the
      occurrence of anticipated or unanticipated events. Please note that throughout
      this Quarterly Report, and unless otherwise noted, the words “we”, “our” or the
“Company” refer to Lexington Resources, Inc.





**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
      OPERATION**





**GENERAL**





Lexington
      Resources, Inc. is a corporation organized under the laws of the State of
      Nevada. We currently trade on the OTC Bulletin Board under the symbol "LXRS"
      and
      on the Frankfurt and Berlin Stock Exchanges under the symbol “LXR”; WKN: AØBKLP.
      Our oil and gas operations are conducted through our wholly owned subsidiary,
      Lexington Oil and Gas Ltd. Co., an Oklahoma limited liability company via a
      third party contract operator.





Two
      additional wholly-owned subsidiaries, Oak Hills Drilling and Operating
      International, Inc., a Nevada company, and Oak Hills Drilling and Operating
      LLC,
      an Oklahoma limited liability company (“Oak Hills”), were acquired in the first
      quarter of 2006. Oak Hills Drilling and Operating International Inc. is the
      private parent company to Oak Hills.





**Oil
      and Gas Properties**





As
      of the
      date of this Quarterly Report, we have an aggregate of approximately 2,944
      gross developed acres, 2,200 net undeveloped acres and 3,257 gross
      undeveloped acres, 1,771 net developed acres pursuant to leases and/or
      concessions in Texas and Oklahoma. During the nine-month period ended September
      30, 2007, we have engaged in three separate transactions pursuant to which
      we
      sold substantially all of our Oklahoma based working interests in certain
      properties as disclosed below. During the nine-month period ended September
      30,
      2007, we have been attempting to settle over $4,500,000 in trade payables,
      and
      are currently not in an active stage of development of any of our wells
      or
      prospects. Our interests in the properties developed in both Oklahoma and Texas
      did not achieve results as anticipated. Most undeveloped acreage in Texas has
      been either sold, or has had their lease terms expire. Therefore, we consider
      ourselves in a retrenchment phase of operation. As of the date of this Quarterly
      Report, our remaining Oklahoma based interests in material mineral properties
      are briefly summarized below.





**Oklahoma**




·
            **Coal
                Creek Prospect in Hughes and Pittsburg Counties, Oklahoma**. The
                Ellis 1-15 well, in which we have a 44% working interest, is not
                completed. Paluca Petroleum, Inc. receives a 10% carried interest
                of our
                working interest pursuant to a farm-out agreement.  The well is not
                completed or producing.




·
            **H-9
                Prospect in Hughes County, Oklahoma.**We have a 5.67% working
                interest in the Gates 1-19 and 2-19 wells, which were drilled by
                Orion
                Exploration, Inc. and are completed and in
                production.




**Newfield
      Exploration Mid-Continent, Inc. Agreement**




On
      August
      14, 2007, we entered into an agreement (the “Newfield Agreement”) with Newfield
      Exploration Mid-Continent, Inc. (“Newfield”). In accordance with the terms and
      provisions of the Newfield Agreement, we sold to Newfield all of our rights,
      title and interest in and to our leasehold interests in certain properties
      located in Hughes County, Oklahoma, which primarily included the Panther Creek
      Prospect in Hughes County, Oklahoma, and the Poe 1-29 well and associated
      undeveloped lands connected thereto (collectively, the “Property”). In
      accordance with further terms and provisions of the Newfield Agreement, Newfield
      acquired all of our rights, title and interest in the Property and paid to
      us an
      aggregate purchase price of $626,704, of which $590,267 was used to offset
      amounts owed by us to Newfield and $36,437 was cash.




**Dylan
      Peyton LLC Agreement**




On
      September 1, 2007, we entered into a Buy Out Agreement (the “Dylan Peyton
      Agreement”) with Dylan Peyton LLC (“Dylan Peyton”). We had previously entered
      into a joint exploration agreement with Dylan Peyton, which involved our land
      and leases primarily in Hughes and McIntosh Counties in Oklahoma, pursuant
      to
      which we shared together with Paluca Energy, LLC (“Paluca”) working interests in
      certain properties with Dylan Peyton. As a result, together with Paluca and
      in
      accordance with the terms and provisions of the Dylan Peyton Agreement, we
      sold
      our interest in and to all Oklahoma based properties jointly developed with
      Dylan Peyton which included wells drilled:  (i) the Peyton 1-25,
      Nicole 2-23H, and the Dylan 1-24H (collectively, the “Dylan Peyton Properties”).
      In accordance with further terms and provisions of the Dylan Peyton Agreement,
      we sold our right, title and interests in the Dylan Peyton Properties to Dylan
      Peyton in exchange for the write-off of $1,042,191 due to the Company from
      Dylan
      Peyton, a settlement of $965,999 due from us to Dylan Peyton, and a settlement
      of various related issues, other unrecorded items under dispute and disagreement
      with Dylan Peyton.




19




**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION OR PLAN OF OPERATION (continued)**


**GENERAL
        (continued)**
  **Wagnon
        and Coal Creek Properties**
  On
        August
        29, 2007, we entered into an agreement with Avatar Energy LLC, John Swadley,
        and
        Dylan Peyton LLC (the “Agreement”) to sell all of our rights, title and interest
        in and to the land and leases relating to wells previously drilled and
        developed: Bryce 3-2, Caleigh 4-2, Kyndall 2-2, Kellster #1, Lex 1-34, and
        Brumbaugh 1-10, as well as Betsey and Fix wells for $457,392 in gross proceeds
        of which $114,186 was provided to a third party vendor that was owed this
        amount
        by the Company. The payment of the third party vendor was a term and condition
        of the Agreement.




**New
      Oil and Gas Operator Appointed/Sale of Assets**




During
      the nine-month period ended September 30, 2007, Oasis Operating, LLC (“Oasis”)
      became our new third-party contractor for our oil and gas assets and exploration
      properties as part of cost streamlining efforts effected to conserve cash
      resources. On June 24, 2007, we approved the sale of certain oil and gas related
      operating fixed assets to Oasis for $300,000. During September 2007, this
      transaction was consummated resulting in amounts owing offset against amounts
      subsequently owed by us to Oasis in connection with Oasis’ ongoing operator
      activities. A director of Oasis is related to a director of Oak
      Hills.





**RESULTS
      OF OPERATIONS**





**Nine-Month
      Period Ended September 30, 2007 Compared to Nine-Month Period Ended September
      30, 2006.**





Our
      net
      loss for the nine-month period ended September 30, 2007 was approximately
      ($9,865,560) compared to ($3,875,439) for the nine-month period ended September
      30, 2006 (an increase of $5,990,121).





During
      the nine-month period ended September 30, 2007, we generated $526,864 in gross
      revenue compared to $1,938,292 in gross revenue generated during the nine-month
      period ended September 30, 2006 (a decrease of $1,411,428). Gross revenue
      resulted primarily from oil and gas revenue of $466,371 (2006: $410,873) and
      $60,493 (2006: $1,527,419) in well drilling and services revenue generated
      by
      our subsidiary, Oak Hills. Drilling and service revenue of $60,493 declined
      from
      $1,527,419 during the same period in 2006 resulting from the sale of our
      drilling rig. Oil and gas revenue of $466,371 increased from $410,873 during
      the
      same period in 2006 resulting from increased price of gas sold. Prices from
      natural gas averaged $5.07 per mcf (net of marketing and transportation costs)
      during the nine-month period ended September 30, 2007 compared to $4.06 per
      mcf
      for the nine-month period ended September 30, 2006. Volume of gas sold for
      the
      nine-month period ended September 30, 2007 was approximately 92,047
      mcf down from approximately 101,225 mcf from the nine-month period
      ended September 30, 2006. The decline in the amount of gas sold was due to
      a moderate decline in production and the sale of producing gas wells at the
      end
      of the period.




During
      the nine-month period ended September 30, 2007, we incurred operating expenses
      in the aggregate amount of $9,602,414 compared to $5,447,478 incurred during
      the
      nine-month period ended September 30, 2006 (an increase of $4,154,936). The
      operating expenses incurred during the nine-month period ended September 30,
      2007 consisted of: (i) operating costs and taxes of $320,219 (2006: $294,901);
      (ii) depreciation, depletion and amortization of $451,553 (2006: $623,693);
      (iii) general and administrative of $559,290 (2006: $1,103,279); (iv) impairment
      of oil and gas properties of $8,000,000 (2006: $-0-); (v) impairment of other
      fixed assets of $99,100 (2006: $-0-); (vi) investor relations and promotion
      of
      $37,500 (2006: $2,154,575); (vii) drilling rig, well and pulling unit expense
      of
      $56,805 (2006: $555,537); and (viii) salaries, wages and related of $77,947
      (2006: $715,493). The increase in operating expenses incurred during the
      nine-month period ended September 30, 2007 compared to the nine-month period
      September 30, 2006 resulted primarily from recording of impairment of oil and
      gas properties of $8,000,000 relating to the disposition of our interests in
      the
      properties described above. However, there was a decrease in other operating
      expenditures including: (i) rig, well and pulling unit expense relating to
      our
      subsidiary, Oak Hills, and the sale of the drilling rig previously owned by
      Oak
      Hills; (ii) overall general administration expenses resulting from the decrease
      in scale and scope of well drilling operations; and (iii) investor relations
      and
      promotion relating to investor awareness programs.











20




**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF
        FINANCIAL CONDITION OR PLAN OF OPERATION (continued)**
 **RESULTS
          OF OPERATIONS
          (continued)**
  Of
          the
          $9,602,414 incurred as operating expenses during the nine-month period
          ended
          September 30, 2007, an aggregate of $90,000 was incurred in fees payable
          to
          International Market Trend (“IMT”) for amounts due and owing for operational,
          administrative and consulting services rendered during the nine-month period
          ended September 30, 2007. On November 10, 2003, we entered into a consulting
          agreement with IMT (the “Consulting Agreement”), whereby IMT performs a wide
          range of management, administrative, financial, and business development
          services for us. The contract with IMT has been renewed
          annually.





Of
      the
      $9,602,414 incurred as operating expenses during the nine-month period ended
      September 30, 2007: (i) an aggregate of $45,000 was incurred to our
      officers/directors for management fees; and (ii) an aggregate of $5,000 was
      incurred to one of our directors for fees. As of September 30, 2007, an
      aggregate of $154,599 was due and owing to these officers/directors.
      Furthermore, an additional $67,500 was incurred to Mr. Humphreys, who is also
      the sole officer and director of Oak Hills, as compensation during the
      nine-month period ended September 30, 2007. In addition, Oak Hills incurred
      $22,750 to Mr. Humphreys and a relative of this director for rent on our field
      offices in Oklahoma. As at September 30, 2007, $76,390 is owed to us from Mr.
      Humphreys and/or affiliates of Mr. Humphreys for costs incurred in connection
      with certain well interests. Subsequent to September 30, 2007, we have received
      $-0- of this amount due and owing. This director had previously been assigned
      a
      10% carried working interest in each well successfully drilled on the Wagnon
      lease, as partial compensation for his involvement in obtaining and facilitating
      the execution of a farm-out agreement and for his services relating to operation
      and completion of wells to be located on the Wagnon lease, and had also been
      provided the right to purchase up to an additional 5% working interest of our
      total interest in all wells drilled by us on our properties provided that funds
      for this participation are paid prior to the commencement of drilling of said
      wells. During the nine-month period ended September 30, 2007, no compensation
      was recorded in connection with the costs of this carried working
      interest.





During
      the nine-month period ended September 30, 2007, interest and finance fees of
      $349,649 (2006: $3,137,653) were incurred. Moreover, a loss of $782,556 (2006:
      $-0-) was recorded as a contingent liability and related changes. During the
      nine-month period ended September 30, 2007, we recorded a gain on disposal
      of
      other equipment of $342,195 (2006: $-0-), which offset our net loss from
      operations.





Our
      net
      loss during the nine-month period ended September 30, 2007 was ($9,865,560)
      or
      ($0.25) per share compared to a net loss of ($3,875,439) or ($0.12) per share
      for the nine-month period ended September 30, 2006. The weighted average number
      of shares outstanding was 38,766,270 at the nine-month period ended September
      30, 2007 compared to 32,285,314 at the nine-month period ended September 30,
      2006.





**Three-Month
      Period Ended September 30, 2007 Compared to Three-Month Period Ended September
      30, 2006.**





Our
      net
      loss for the three-month period ended September 30, 2007 was approximately
      ($8,660,976) compared to ($27,854) for the three-month period ended September
      30, 2006 (an increase of $8,633,122).





During
      the three-month period ended September 30, 2007, we generated $115,589 in gross
      revenue compared to $991,672 in gross revenue generated during the three-month
      period ended September 30, 2006 (a decrease of $876,083). Gross revenues
      resulted primarily from oil and gas revenue of $114,634 (2006: $153,363) and
      $955 (2006: $838,309) in well drilling and services revenue generated by our
      subsidiary, Oak Hills. Drilling and service revenue of $955 declined from
      $838,309 during the same period in 2006 resulting from the sale of our drilling
      rig. Oil and gas revenue of $114,634 decreased from $153,363 during the same
      period in 2006 resulting from a decrease in volume of gas sold.





During
      the three-month period ended September 30, 2007, we incurred operating expenses
      in the aggregate amount of $8,427,090 compared to $1,333,909 incurred during
      the
      three-month period ended September 30, 2006 (an increase of $7,093,181). The
      operating expenses incurred during the three-month period ended September 30,
      2007 consisted of: (i) operating costs and taxes of $159,439 (2006: $176,619);
      (ii) depreciation, depletion and amortization of $79,016 (2006: $238,543);
      (iii)
      general and administrative of $187,955 (2006: $363,950); (iv) impairment of
      oil
      and gas properties of $8,000,000 (2006: $-0-) (v) investor relations and
      promotion of $-0- (2006: $223,600); (vi) drilling rig, well and pulling unit
      expense of $680 (2006: $92,647); and (vi) salaries, wages and related of $-0-
      (2006: $238,550). The increase in operating expenses incurred during the
      three-month period ended September 30, 2007 compared to the three-month period
      September 30, 2006 resulted primarily from the recording of $8,000,000 in
      impairment of oil and gas properties. However, there was a decrease in other
      operating expenditures including: (i) rig, well and pulling unit expense
      relating to our subsidiary, Oak Hills, and the sale of the drilling rig
      previously owned by Oak Hills; (ii) overall general administration expenses
      resulting from the decrease in scale and scope of well drilling operations;
      and
      (iii) investor relations and promotion relating to investor awareness
      programs.


21


**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
        OF
        FINANCIAL CONDITION OR PLAN OF OPERATION (continued)**
 **RESULTS
          OF OPERATIONS
          (continued)**
  Our
          net
          loss from operations during the three-month period ended September 30,
          2007 also
          included: (i) $15,144 (2006: $147,517) related to interest and finance
          fees;
          (ii) a loss of $334,331 (2006: $-0-) related to a contingent liability;
          and
          (iii) a gain of $-0- (2006: $461,900) related to a derivative liability.
          Together with operating expenses, this resulted in a net loss of ($8,660,976).
          The increase in net loss during the three-month period ended September
          30, 2007
          compared to the three-month period ended September 30, 2006 is attributable
          primarily to the recognition of the impairment of oil and gas properties
          of
          $8,000,000 during the three-month period ended September 30,
          2007.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      financial statements have been prepared assuming that we will continue as a
      going concern and, accordingly, do not include adjustments relating to the
      recoverability and realization of assets and classification of liabilities
      that
      might be necessary should we be unable to continue in operation.





As
      of
      September 30, 2007, our current assets were $372,612 and our current liabilities
      were $7,738,362, resulting in a working capital deficit of $7,365,750. As at
      the
      nine-month period ended September 30, 2007, current assets were comprised of:
      (i) $181,740 in cash and cash equivalents; (ii) $75,128 in accounts receivable,
      net of allowance for doubtful accounts of $177,367; (iii) $76,390 in amounts
      due
      from related parties; and (iv) $39,354 in prepaid expenses and other. As at
      the
      nine-month period ended September 30, 2007, our current liabilities were
      comprised of: (i) $6,296,302 in accounts payable and accrued liabilities; (ii)
      $615,123 in promissory note and other short term advances; (iii) $154,599 in
      amounts due to related parties; and (iv) $672,338 in current portion of
      derivative liability. See “ - Material Commitments.”





As
      of
      September 30, 2007, our total assets were $4,288,217 comprised of: (i) $372,612
      in current assets; (ii) $2,237,815 in carrying value of proved oil and gas
      properties (net of accumulated depletion of $1,464,704); (iii) $1,600,000 in
      carrying value of unproved oil and gas properties; and (iv) $77,790 in other
      equipment (net of accumulated depreciation of $78,002). The decrease in total
      assets during the nine-month period ended September 30, 2007 from fiscal year
      ended December 31, 2006 was primarily due to a decrease in carrying value of
      proved and unproved oil and gas properties relating to the disposition of such
      properties as described above and from well drilling and leasehold related
      capital expenditures.





As
      of
      September 30, 2007, our total liabilities were $7,738,362 comprised of
      $7,738,362 in current liabilities. The decrease in total liabilities during
      the
      nine-month period ended September 30, 2007 from fiscal year ended December
      31,
      2006 was primarily due to a decrease in derivative liability of $1,538,829,
      a
      decrease in long term debt of $1,295,961, and a decrease in accounts payable
      and
      accrued liabilities of $2,107,876.





Stockholders’
      equity decreased from $5,734,697 as of December 31, 2006 to
      ($3,450,145) as of September 30, 2007.


We
      have
      not generated positive cash flows from operating activities. For the nine-month
      period ended September 30, 2007, net cash flow used in operating activities
      was
      ($1,613,463) compared to net cash flow used in operating activities of
      ($3,576,012) for the nine-month period ended September 30, 2006. Net cash flow
      used in operating activities during the nine-month period ended September 30,
      2007 consisted primarily of a net loss of ($9,865,560) adjusted by $8,000,000
      relating to impairment of oil and gas properties, $99,100 relating to impairment
      of other equipment, $146,809 relating to non-cash interest and finance fee
      expenses, ($342,195) relating to gain on disposal of other equipment, $349,719
      relating to oil and gas depletion, $101,834 in depreciation,  $37,500
      in non-cash expenses, and $782,556 in loss on contingent liability. Net cash
      flow used in operating activities during the nine-month period ended September
      30, 2007 also reflected changes in working capital assets and liabilities of
      ($1,183,833) in accounts payable, ($47,524) in accrued liabilities, and $308,131
      in accounts receivable.





During
      the nine-month period ended September 30, 2007, net cash flow provided by
      investing activities was $3,711,136 compared to net cash flow used in investing
      activities of ($5,159,218) for the nine-month period ended September 30, 2006.
      Net cash flow provided by investing activities during the nine-month period
      ended September 30, 2007 was primarily the result of $3,225,000 in proceeds
      on
      disposal of the drilling rig and other equipment and $606,136 in disposal of
      oil
      and gas properties adjusted by ($120,000) in purchases of other
      equipment.





During
      the nine-month period ended September 30, 2007, net cash flow used in financing
      activities was ($2,002,174) compared to net cash flow from financing activities
      of $8,328,306 for the nine-month period ended September 30, 2006. Net cash
      flow
      used in financing activities during the nine-month period ended September 30,
      2007 pertained primarily to ($1,295,961) in long-term debt repayments,
      ($700,457) in convertible note repayments, and ($5,756) in advances to related
      parties.





**PLAN
      OF OPERATION**




During
      fiscal year ended December 31, 2006, we completed a private placement pursuant
      to which we issued an aggregate of 7,650,000 Units at a subscription price
      of
      U.S. $1.00 per Unit for total gross proceeds of $7,650,000; with each Unit
      being
      comprised of one common share and one non-transferable common stock purchase
      Warrant. Each resulting Warrant entitles the subscriber to purchase an
      additional share of our common stock ("Warrant Share") at a price of $1.25
      per
      share for the period commencing upon the date of issuance of the Units and
      ending on the day which is the earlier of (i) 18 months from the date of
      issuance of the Units and (ii) 12 months from the effective date of our proposed
      registration statement. Both the Warrant Shares and the common shares issued
      pursuant to the private placement offering are to be proposed for registration
      under the 1933 Securities Act. We paid finders fees of 5% of the gross cash
      proceeds received under the private placement offering and 10% restricted common
      shares on the gross units issued, with such restricted shares carrying piggy
      back registration rights.


22


**ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
      (continued)** **PLAN
            OF OPERATION (continued)**




Effective
      July 3, 2006, we filed the 2006
      Registration Statement under the Securities Act of 1933, as amended (the
“Securities Act”) to register the 8,415,000 common shares issued and 7,650,000
      common shares underlying the Warrants. The 2006 Registration Statement was
      not
      declared effective before financial penalties were due pursuant to registration
      timing. During the nine-month period
      ended September 30, 2007, we have paid $75,960 in penalties leaving $1,349,540
      accrued and unpaid as at September 30, 2007. As of the date of this Quarterly
      Report, we continue to incur 1.5% of $7,450,000 raised per month of delay until
      the 2006 Registration Statement is declared effective by the Securities and
      Exchange Commission.




Existing
      working capital, further advances and possible debt instruments, warrant
      exercises, further private placements, monetization of existing assets, and
      anticipated cash flow are expected to be adequate to fund our operations over
      the next two months. We have no lines of credit or other bank financing
      arrangements. Generally, we have financed operations to date through the
      proceeds of the private placement of equity and debt securities. In connection
      with our business plan, management will delay additional increases in operating
      expenses and capital expenditures relating to: (i) oil and gas operating
      properties; (ii) drilling initiatives; and (iii) property acquisitions. We
      intend to utilize our best efforts to settle current finance accounts payables
      and liabilities with further issuances of securities, debt and or advances,
      monetization of existing assets, and revenues from operations. We will need
      to
      raise additional capital and increase revenues to meet both short term and
      long-term operating requirements.




**Modified
      Going Concern Note**




The
      reports of the independent registered public accounting firms that accompany
      our
      December 31, 2006 and December 31, 2005 consolidated financial statements
      contained an explanatory paragraph expressing substantial doubt about our
      ability to continue as a going concern. The consolidated financial statements
      have been prepared "assuming that we will continue as a going concern," which
      contemplates that we will realize our assets and satisfy our liabilities and
      commitments in the ordinary course of business. The “going concern” note has
      been modified to states that “the consolidated financial statements have been
      prepared on the basis of a going concern which contemplates the realization
      of
      assets and the satisfaction of liabilities in the normal course of business.
      The
      Company has a working capital deficiency of $7,365,750 at September 30, 2007,
      has incurred losses since inception of $40,152,709 and further losses are
      anticipated in the development of its oil and gas properties raising substantial
      doubt as to the Company’s ability to continue as a going concern. The ability of
      the Company to continue as a going concern is dependent on raising additional
      capital to fund ongoing losses and property development, obtaining debt
      settlements and ending litigation regarding debts outstanding, and ultimately
      on
      generating future profitable operations. The Company will attempt to fund
      operations with advances and debt instruments, the sale of assets, as well
      as
      further equity placements.




**MATERIAL
      COMMITMENTS**




**Promissory
      Note**




During
      2007, a material commitment for us relates to an unsecured promissory note
      from
      one of our shareholders aggregating $600,000 (the "Promissory Note"). The
      provisions of the Promissory Note are:(i) two-year term with interest at the
      rate of 10% per annum; and (ii) interest to be paid on a quarterly basis with
      the principal to be repaid on or before the due date of the Promissory Note.
      As
      at September 30, 2007, there is $15,123 of accrued and unpaid interest on this
      loan.


**2006
      Registration Statement Penalties**




On
      July
      3, 2006, we filed the 2006 Registration Statement to register the 8,415,000
      common shares issued and 7,650,000 common shares underlying the Warrants. The
      2006 Registration Statement was not declared effective before financial
      penalties were due pursuant to registration timing. Penalties accrued and unpaid
      to September 30, 2007 aggregate $1,349,540. As of the date of this Quarterly
      Report, we continue to incur 1.5% of $7,450,000 raised per month of delay until
      the registration statement is declared effective by the Securities and Exchange
      Commission.




**Accounts
      Payable Related Legal Proceedings**




**See
      PART II. OTHER INFORMATION, ITEM 1. LEGAL PROCEEDINGS**





**ITEM
      3. CONTROLS AND PROCEDURES**





Our
      management is responsible for establishing and maintaining a system of
      disclosure controls andprocedures (as defined
      in
      Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure
      that information required to be disclosed by us in the reports that we file
      or
      submit under the Exchange Act is recorded, processed, summarized and reported,
      within the time periods specified in the Commission’s rules and forms.
      Disclosurecontrols andprocedures include,
      without limitation,controls andprocedures
      designed to ensure that information required to be disclosed by an issuer in
      the
      reports that it files or submits under the Exchange Act is accumulated and
      communicated to the issuer’s management, including its principal executive
      officer or officers and principal financial officer or officers, or persons
      performing similar functions, as appropriate to allow timely decisions regarding
      required disclosure.





In
      accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was
      completed under the supervision and with the participation of our management,
      including Mr. Grant Atkins, our Chief Executive Officer and interim Chief
      Financial Officer, of the effectiveness of the design and operation, our Chief
      Financial Officer of our disclosure controls andprocedures as of
      the end of the period covered by this Quarterly
      Report. Based on that evaluation, our management concluded that our disclosurecontrols andprocedures
      are effective, to
      provide reasonable assurance that information required to be disclosed in our
      reports filed or submitted under the Exchange Act is recorded, processed,
      summarized, and reported within the time periods specified in the Commission’s
      rules and forms. There have been no changes to our internalcontrols over financial reporting (as defined
      in Rule 13a-15(f) and
      15d-15(f) under the Securities Exchange Act of 1934) that occurred during our
      nine-month quarterly period ended September 30, 2007, that materially affected,
      or were reasonably likely to materially affect, our internalcontrols over financial reporting.


23
  **PART
        II. OTHER INFORMATION**
 
 **ITEM
        1. LEGAL PROCEEDINGS**




During
      the fourth quarter of 2006 and to the date of this Quarterly Report, we have
      received twenty-two law suits from our creditors for the payment of services
      and
      goods totaling approximately $2,208,426 with $418,072 of the amount forming
      summary judgments or partial summary judgments against us. We also currently
      have one well lien for the payment of services and goods totaling approximately
      $2,454 (which has been reduced from the previous reported amount of $116,622)
      and nineteen demand letters for the payment of services and goods totaling
      approximately $392,781 pursuant to expenditures incurred in the development
      of
      oil and gas assets on our leasehold interests. All amounts owing in connection
      with these law suits, mediation requests, well liens and demand letters have
      been accrued, as applicable, as of September 30, 2007. During the nine-month
      period ended September 30, 2007, we settled certain of these debts totaling
      $270,482 utilizing $102,917 in cash, $64,209 in amounts assigned to and assumed
      by Dylan Peyton, and the write down of amounts owing in the amount of
      $103,356.





On
      July
      3, 2007, we received a Wells Notice from the United States Securities and
      Exchange Commission (“SEC”).  The Wells Notice advised us that the SEC
      Staff intended to recommend that the SEC bring a civil action against us
      alleging that we violated Sections 5(a) and 5(c) of the Securities Act of 1933,
      as amended (the “Act”). The SEC Staff advised that the alleged violations of
      Sections 5(a) and 5(c) of the Act relate to the issuance of our shares of common
      stock that were registered under Forms S-8 to certain individuals who allegedly
      were not eligible to receive shares registered on Form S-8.  The Wells
      Notice advised that the SEC Staff may seek a permanent injunction against future
      violations, disgorgement plus prejudgment interest, and civil monetary
      penalties.





The
      SEC's
      Staff, in accordance with Rule 5(c) of the Commission's Rules of Informal and
      Other Procedures, 17 C.F.R. § 202.5(c), afforded us the opportunity to make
      a “Wells Submission” regarding the SEC Staff's intended recommendations. On
      August 8, 2007, we submitted a Wells Submission to the Commission setting forth
      the reasons why no enforcement proceeding should be authorized by the SEC.
      Although there can be no assurance as to the ultimate outcome, we believe we
      have meritorious legal and factual defenses in this matter. We cannot predict
      the outcome of this matter, and an adverse resolution of this matter could
      have
      a material adverse effect on our business, financial condition and/or results
      of
      operations.





On
      July
      3, 2007, Grant Atkins, our Chief Executive Officer, also received a Wells
      Notice. The Wells Notice advised Mr. Atkins that the SEC Staff intends to
      recommend that the SEC bring a civil action against him alleging that he also
      violated Sections 5(a) and 5(c) of the Act in connection with the issuance
      of
      our shares of common stock that were registered under Forms S-8 certain to
      individuals allegedly who were not eligible to receive shares registered on
      Form
      S-8. The SEC Staff indicated that it may recommend that the SEC seek
      disgorgement plus prejudgment interest, an order prohibiting Mr. Atkins from
      participating in any offering of penny stock, civil monetary penalties, and
      a
      permanent injunction.  On August 6, 2007, Mr. Atkins submitted a Wells
      Submission to the Commission setting forth the reasons why he should
      not be charged with violations of the federal securities laws in connection
      with
      this investigation. We cannot predict the outcome of the potential claims
      against Mr. Atkins, and an adverse resolution could have a material adverse
      effect on our business and operations.




Management
      is not aware of any legal proceedings contemplated by any governmental authority
      or any other party involving us or our properties other than that described
      below. As of the date of this Quarterly Report, no director, officer or
      affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has
      an
      adverse interest to us in any legal proceedings. Management is not aware of
      any
      other legal proceedings pending or that have been threatened against us or
      our
      properties.





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





No
      report
      required.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





No
      report
      required.





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





No
      report
      required.





**ITEM
      5. OTHER INFORMATION**





**Resignation
      of Director**





Effective
      on July 23, 2007, our Board of Directors accepted the resignation of Norman
      J R
      MacKinnon as a director, our Chief Financial Officer and a member of our audit
      committee.





Effective
      on May 2, 2007, our Board of Directors accepted the resignation of Mr. Gino
      Cicci as a director.







24




**ITEM
      6. EXHIBITS**





10.1
            Agreement
                dated August 14, 2007 between Lexington Resources, Inc. and Newfield
                Exploration Mid-Continent, Inc.





10.2
            Buy
                Out Agreement dated September 1, 2007 between Lexington Resources,
                Inc.,
                Paluca Petroleum, LLC and Dylan Peyton
                LLC.





31.1
            Certification
                of Chief Executive Officer pursuant to SecuritiesExchange
                Act of 1934 Rule 13a-14(a) or
                15d-14(a).





31.2
            Certification
                of Chief Financial Officer pursuant to SecuritiesExchange
                Act of 1934 Rule 13a-14(a) or
                15d-14(a).





32.1
            Certifications
                pursuant to Securities Exchange Act of 1934 Rule 13a-14(b)
                or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant toSection
                906 of the Sarbanes-Oxley Act of
                2002.





**SIGNATURES**





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






LEXINGTON
              RESOURCES,
              INC.Dated:
                November
                19, 2007
            By:
            /s/ Grant
              AtkinsGrant
              Atkins, President
              andChief
              Executive Officer Dated:
                November 19, 2007
            By:
            /s/ Grant
              AtkinsGrant
              Atkins, Chief FinancialOfficer














25