**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM        10-QSB**

 

*(Mark        One)*

|   | x | Quarterly report under Section 13 or 15(d) of the Securities                        Exchange Act of 1934 for the quarterly period ended**September 30, 2007**. |
|--------|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | [ ] | Transition report under Section 13 or 15(d) of the                        Securities Exchange Act of 1934 for the transition period from ________to                        ________. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Commission file number:**000-31390**

 

**ALLIED RESOURCES, INC.**

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

 

 

| **Nevada**

(State or other jurisdiction of

incorporation or organization) | **55-0608764**

(I.R.S. Employer

Identification No.) |
|-----------------------------------------------------------------------------|-------------------------------------------------------|

 

 

**1403 East 900 South, Salt Lake City, Utah 84105**

(Address        of principal executive office) (Zip Code)

 

**(801) 582-9609**

(Issuer’s telephone number)

 

Check        whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d)        of the Exchange Act during the past 12 months (or for such shorter period that the        registrant was required to file such reports), and (2) has been subject to such filing        requirements for the past 90 days.

 

|   | Yes | X | No ___ |
|--------|-----|---|--------|

 

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

|   | Yes | No | X |
|--------|-----|----|---|

 

The        number of outstanding shares of the registrant’s common stock, $0.001 par value (the        only class of voting stock) as of November 14, 2007 was 5,653,011.

 

1

         

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**TABLE OF CONTENTS**

**           **Page**    **PART I.**     **ITEM 1.                    FINANCIAL STATEMENTS**  3   Unaudited Balance Sheets as of September                            30, 2007   4   Unaudited  Statements of Income                            for the three and nine months ended September 30, 2007 and                            2006      5   Unaudited Statements of Cash Flows for the                            nine months ended September 30, 2007 and 2006    6   Notes to the Unaudited Financial                            Statements  7                 **ITEM 2. MANAGEMENT'S DISCUSSION                            AND ANALYSIS**  8  **ITEM 3.                    CONTROLS AND PROCEDURES**  18 **PART II.**     **ITEM 1.                    LEGAL PROCEEDINGS**  18  **ITEM 2.                    UNREGISTERED SALES OF EQUITY SECURITIES**  18  **ITEM 3.                    DEFAULTS UPON SENIOR SECURITIES**  18  **ITEM 4.                    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**  18  **ITEM 5.                    OTHER INFORMATION**  18  **ITEM 6.                    EXHIBITS**  18  **SIGNATURES**  19 **INDEX TO                    EXHIBITS**  20 **
**            2        **

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**PART        I**

 

| **ITEM 1.** | **FINANCIAL STATEMENTS** |
|-------------|--------------------------|

 

As used        herein, the term “Allied,” “we,” “our,” and        “us,” refers to Allied Resources, Inc., a Nevada corporation and its        predecessors, unless otherwise indicated. In the opinion of management, the accompanying        unaudited financial statements included in this Form 10-QSB reflect all adjustments        (consisting only of normal recurring accruals) necessary for a fair presentation of the        results of operations for the periods presented. The results of operations for the periods        presented are not necessarily indicative of the results to be expected for the full        year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

         

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| ALLIED RESOURCES, INC.                           |
|--------------------------------------------------|
| BALANCE SHEETS                                   |
| ASSETS                                           |   | September 30, |   | December 31, |
|                                             |   | 2007 |   | 2006 |
|                                             |   | (Unaudited) |   | (Audited) |
| Current assets:                                  |   |   |   |   |
| Cash                                             | $ | 718,594 |   | 1,107,191 |
| Accounts receivable                              |   | 91,575 |   | 82,142 |
|                                             |   |   |   |   |
| Total current assets                             |   | 810,169 |   | 1,189,333 |
|                                             |   |   |   |   |
| Oil and gas properties (proven), net (successful |   |   |   |   |
| efforts method)                                  |   | 1,043,380 |   | 563,605 |
| Deferred tax asset                               |   | 996,000 |   | 1,058,000 |
| Deposits                                         |   | 692,511 |   | 612,973 |
|                                             |   |   |   |   |
| Total assets                                     | $ | 3,542,060 |   | 3,423,911 |
|                                             |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY             |   |   |   |   |
|                                             |   |   |   |   |
| Current liabilities:                             |   |   |   |   |
| Accounts payable                                 | $ | 10,089 |   | - |
| Accrued liabilities                              |   | 16,800 |   | - |
|                                             |   |   |   |   |
| Total current liabilities                        |   | 26,889 |   | - |
|                                             |   |   |   |   |
| Asset retirement obligation                      |   | 155,063 |   | 149,458 |
| Accrued tax liabilities                          |   | 40,000 |   | - |
|                                             |   |   |   |   |
| Total liabilities                                |   | 195,063 |   | 149,458 |
|                                             |   |   |   |   |
| Commitments and contingencies                    |   |   |   |   |
|                                             |   |   |   |   |
| Stockholders' equity:                            |   |   |   |   |
| Common stock, $.001 par value; 50,000,000 shares |   |   |   |   |
| authorized, 5,653,011 issued and outstanding     |   | 5,653 |   | 5,653 |
| Additional paid-in-capital                       |   | 9,723,302 |   | 9,723,302 |
| Accumulated deficit                              |   | (6,408,847) |   | (6,454,502) |
| Total stockholders' equity                       |   | 3,320,108 |   | 3,274,453 |

 

| Total liabilities and stockholders' equity | $ | 3,542,060 |   | 3,423,911 |
|--------------------------------------------|---|-----------|--------|-----------|

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

 

4

         

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| ALLIED RESOURCES, INC                                                           |
|---------------------------------------------------------------------------------|
| UNAUDITED CONDENSED STATEMENTS OF INCOME                                        |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   | Three Months Ended |   | Nine Months Ended |
|                                                                            |   | September 30, |   | September 30, |
|                                                                            |   | 2007 |   | 2006 |   | 2007 |   | 2006 |
|                                                                            |   |   |   |   |   |   |   |   |
| Oil and gas revenues                                                            | $ | 221,037 |   | 197,015 |   | 611,329 |   | 686,546 |
|                                                                            |   |   |   |   |   |   |   |   |
| Operating expenses:                                                             |   |   |   |   |   |   |   |   |
| Production costs                                                                |   | 114,178 |   | 85,952 |   | 327,141 |   | 289,747 |
| Depletion                                                                       |   | 10,276 |   | 12,004 |   | 30,430 |   | 36,717 |
| General and administrative expenses                                             |   | 52,636 |   | 28,878 |   | 126,127 |   | 109,713 |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   | 177,090 |   | 126,834 |   | 483,698 |   | 436,177 |
|                                                                            |   |   |   |   |   |   |   |   |
| Income from operations                                                          |   | 43,947 |   | 70,181 |   | 127,631 |   | 250,369 |
|                                                                            |   |   |   |   |   |   |   |   |
| Interest income                                                                 |   | 11,598 |   | 9,154 |   | 40,024 |   | 23,924 |
|                                                                            |   |   |   |   |   |   |   |   |
| Income before provision                                                         |   |   |   |   |   |   |   |   |
| for income taxes                                                                |   | 55,545 |   | 79,335 |   | 167,655 |   | 274,293 |
|                                                                            |   |   |   |   |   |   |   |   |
| Provision for income taxes - deferred                                           |   |  

27,000 |   |  

28,000 |   |  

62,000 |   |  

94,000 |
|                                                                            |   |   |   |   |   |   |   |   |
| Net income                                                                      | $ | 28,545 |   | 51,335 |   | 105,655 |   | 180,293 |
|                                                                            |   |   |   |   |   |   |   |   |
|                                                                            |   |   |   |   |   |   |   |   |
| Income per common share -                                                       |   |   |   |   |   |   |   |   |
| basic and diluted                                                               | $ | 0.01 |   | 0.01 |   | 0.02 |   | 0.03 |
|                                                                            |   |   |   |   |   |   |   |   |
| Weighted average common shares – basis and                        diluted |   |  

5,653,000 |   |  

5,653,000 |   |  

5,653,000 |   |  

5,654,000 |

 

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

 

5

         

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| ALLIED RESOURCES, INC                                                |
|----------------------------------------------------------------------|
| UNAUDITED CONDENSED STATEMENTS OF CASH                        FLOWS  |
| Nine Months Ended September 30, 2007 and                        2006 |
|                                                                 |   |   |   |   |
|                                                                 |   | 2007 |   | 2006 |
| Cash flows from operating activities:                                |   |   |   |   |
| Net income                                                           | $ | 105,655 |   | 180,293 |
| Adjustments to reconcile net income to net cash                      |   |   |   |   |
| provided by operating activities:                                    |   |   |   |   |
| Depletion and amortization                                           |   | 30,430 |   | 36,717 |
| Accretion expense                                                    |   | 5,605 |   | 5,338 |
| Deferred tax asset                                                   |   | 62,000 |   | 94,000 |
| Stock compensation expense                                           |   | - |   | 6,000 |
| (Increase) decrease in:                                              |   |   |   |   |
| Accounts receivable                                                  |   | (9,433) |   | 62,658 |
| Deposits                                                             |   | (79,538) |   | (111,301) |
| Increase (decrease) in:                                              |   |   |   |   |
| Accounts payable                                                     |   | 10,089 |   | (6,507) |
| Accrued liabilities                                                  |   | 16,800 |   | - |
| Accrued tax liabilities                                              |   | (20,000) |   | - |
|                                                                 |   |   |   |   |
| Net cash provided by operating activities                            |   | 121,608 |   | 267,198 |
|                                                                 |   |   |   |   |
| Cash flows from investing activities:                                |   |   |   |   |
| Purchase of oil and gas properties                                   |   | (510,205) |   | - |
|                                                                 |   |   |   |   |
| Net cash used in investing activities                                |   | (510,205) |   | - |
|                                                                 |   |   |   |   |
| Cash flows from financing activities:                                |   | - |   | - |
|                                                                 |   |   |   |   |
|                                                                 |   |   |   |   |
| Change in accumulated other comprehensive income                     |   | - |   | 809 |
|                                                                 |   |   |   |   |
| Net increase (decrease) in cash                                      |   | (388,597) |   | 268,007 |
|                                                                 |   |   |   |   |
| Cash, beginning of period                                            |   | 1,107,191 |   | 763,435 |
|                                                                 |   |   |   |   |
| Cash, end of period                                                  | $ | 718,594 |   | 1,031,442 |

 

 

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

 

6

         

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ALLIED RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

September 30, 2007

 

Note        1 - Basis of Presentation

 

The        accompanying unaudited condensed financial statements have been prepared by management in        accordance with the instructions in Form 10-QSB and, therefore, do not include all        information and footnotes required by generally accepted accounting principles and should,        therefore, be read in conjunction with the Company’s Form 10-KSB for the year ended        December 31, 2006, filed with the Securities and Exchange Commission. These statements do        include all normal recurring adjustments which the Company believes necessary for a fair        presentation of the statements. The interim operations are not necessarily indicative of        the results to be expected for the full year ended December 31, 2007.

 

Note 2        – Additional Footnotes Included By Reference

 

Except as        indicated in Notes above, there have been no other material changes in the information        disclosed in the notes to the financial statements included in the Company’s Form        10-KSB for the year ended December 31, 2006, filed with the Securities and Exchange        Commission. Therefore, those footnotes are included herein by reference.

 

Note 3        – Income Tax Liabilities

 

In July        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,        “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the        accounting for uncertainty in income taxes recognized in an enterprise’s financial        statements in accordance with Statement of Financial Accounting Standards No. 109,        “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and        the measurement attributes for the financial statement recognition and measurement of a tax        position taken or expected to be taken in a tax return. FIN 48 also provides guidance on        classification and interest and penalties related to income taxes. The Company adopted FIN        48 effective January 1, 2007. As a result of the adoption of FIN 48, the Company recorded        $60,000 of accrued tax liabilities in the balance sheet for unrecognized tax benefits,        which was accounted for as a cumulative effect adjustment to the January 1, 2007, balance        of accumulated deficit.

 

The Company        recognizes accrued interest related to unrecognized tax benefits in interest expense and        penalties as an other expense. The Company had $10,000 for the payment of interest and        penalties accrued at September 30, 2007.

 

During the        three months ended September 30, 2007, the Company settled a portion of its accrued tax        liability for $20,000.

 

Note 4        – Supplemental Cash Flow Information

 

During the        nine months ended September 30, 2007, the Company increased the accumulated deficit and        recorded an income tax liability of $60,000 as a result of the adoption of FIN 48 (see Note        3).

 

 

 

7

         

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**ITEM 2. MANAGEMENT'S DISCUSSION AND        ANALYSIS**

 

This        Management's Discussion and Analysis of our financial condition and results of operations        and other parts of this report contain forward-looking statements that involve risks and        uncertainties. Forward-looking statements can also be identified by words such as        "anticipates," "expects," "believes," "plans," "predicts," and similar terms.        Forward-looking statements are not guarantees of future performance and our actual results        may differ significantly from the results discussed in the forward-looking statements.        Factors that might cause such differences include, but are not limited to, those discussed        in the subsections entitled*"Forward-Looking Statements and        Factors That May Affect Future Results and Financial Condition"*below. The following discussion should be read in conjunction with our        financial statements and notes thereto included in this report. All information presented        herein is based on our period ended September 30, 2007. Our fiscal year end is December        31.

 

**General**

 

Allied is        an independent oil and natural gas producer involved in the exploration, development,        production and sale of oil and gas derived from properties located in Calhoun and Ritchie        counties, West Virginia and Goliad, Edwards and Jackson Counties, Texas. Allied owns        working interests varying from 3.73% to 75% and net revenue interests varying from 2.68% to        65.63%, after deduction of royalties, in a total of 158 wells on several leases.

**Discussion and Analysis**

Allied’s intends to utilize net cash flow from operations to continue        to acquire additional oil and gas producing properties and to implement improved production        practices on existing wells to increase production and expand reserves where practicable.        Allied believes that it can achieve production growth while expanding reserves through        improved exploitation of its existing inventory of wells by disposing of non-productive        wells and enhancing producing wells. An evaluation for this objective of our existing        portfolio of oil and gas properties is now under consideration. Allied also intends to        continue to expand non-operated acquisitions of additional oil or gas producing        properties.

 

*Recent        Acquisitions*

 

|   | § | Effective May 1, 2007 we acquired a non-operated 5.4221%                        working interest and net royalty interest of 3.9388%, in the Harper #2 well                        located within the Ramon Musquiz Survey, A-29, in Goliad, Texas. The Harper                        #2 well is operated by Hankey Oil Company of Houston, Texas and currently                        produces 1076 STBO and 30,402 MCFG per month from the Wilcox                        formation. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | § | Effective August 1, 2007 we acquired a non-operated 5.4375%                        working interest and various net revenue interests ranging from 4.2275% to                        4.2325% in ten properties located in Sections 24, 41, 42 and 46 of the CCSD                        & RGNG RR Co. Survey, Edwards County Texas. The properties are operated                        by Marshall & Winston, Inc. of Midland, Texas and currently produce 16                        STBO and 37,320 MCFG per month in the Frances Hill (Penn Lower) field from                        the Canyon Sands formation. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | § | Effective October 1, 2007 we acquired a non-operated 3.73%                        working interest and a 2.68% net revenue interest in the Williams #1 well                        located within the John Alley Survey, A-3, Jackson County, Texas. The                        Williams #1 well is operated by Magnum Producing, LP of Corpus Christi,                        Texas and currently produces 1290 STBO and 8,580 MCFG per month from the                        Wilcox formation. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

8

         

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|   | § | Effective October 1, 2007 we acquired a a non-operated 21%                        working interest and a 12.75% net revenue interest in the Brinkoeter #4                        well located within the V. Ramos Survey, A-241, Goliad County, Texas. The                        Brinkoeter #4 well is operated by Marquee Corporation of Houston, Texas and                        currently produces 1,800 STBO and 600 MCFG per month from the Massive                        formation. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Allied’s business development strategy is prone to significant risks        and uncertainties certain of which can have an immediate impact on our efforts to realize        positive net cash flow and deter future prospects of production growth. Historically,        Allied has not generated sufficient cash flow from operations to sustain operations so        there can be no assurance that the wells currently producing will provide sufficient cash        flows to sustain operations. Should Allied be unable to generate sufficient cash flow from        existing properties, it may have to sell certain properties or interests in such properties        or seek financing through alternative sources such as the sale of our common stock. Allied        can provide no assurance that such efforts, if necessary, would be successful.

         

Allied’s financial condition, results of operations and the carrying        value of our oil and natural gas properties depends primarily upon the prices we receive        for oil and natural gas production and the quantity of that production. Oil and natural gas        prices historically have been volatile and are likely to continue to be volatile in the        future. This price volatility can immediately affect Allied’s available cash flow        which can in turn impact the availability of net cash flow for capital expenditures. A drop        in oil and natural gas prices could also incur a write down of the carrying value of our        properties as can future decreases in production. Allied’s continued success will        depend on the level of oil and natural gas prices and the quantity of our production. Since        production leads to the depletion of oil and gas reserves, Allied’s ability to        develop or acquire additional economically recoverable oil and gas reserves is vital to        continued operations. Unless Allied obtains additional reserves, the current decline in        production will lead to a significant reduction in revenue.

 

**Results of Operations**

 

During the        period from January 1, 2007 through September 30, 2007, Allied was engaged in overseeing        the operation of our oil and gas assets by independent operators.

 

| Number of days in period | 272 |
|--------------------------|-----|

| Oil Production (bbls) | 518.64 |
|-----------------------|--------|

| Gas Production (mcf) | 83,911.88 |
|----------------------|-----------|

 

 

 

 

 

 

 

 

 

 

9

         

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| **Nine Months Ended September 30**          |   | **2007** |   | **2006** | **Change #** | **Change %** |
|---------------------------------------------|--------|----------|--------|----------|--------------|--------------|
|                                        |   |     |   |     |         |         |
| **Average Daily Production**                |   |     |   |     |         |         |
|                                        |   |     |   |     |         |         |
| Oil (bbls/day)                              |   | 2        |   | 1        | 1            | 100%         |
| Natural gas (mcf/day)                       |   | 308      |   | 353      | (45)         | -13%         |
| Barrels of oil equivalent (boe/day)         |   | 53       |   | 60       | (7)          | -11%         |
|                                        |   |     |   |     |         |         |
| **Profitability**                           |   |     |   |     |         |         |
|                                        |   |     |   |     |         |         |
| Petroleum and natural gas revenue           | $      | 611,329  | $      | 686,546  | (75,217)     | -11%         |
| Net Revenue                                 |   | 611,329  |   | 686,546  | (75,217)     | -11%         |
| Production and operating costs              |   | 327,141  |   | 289,747  | (37,394)     | 13%          |
| Field netback                               |   | 284,188  |   | 396,799  | 16,414       | 15%          |
| G&A                                     |   | 126,127  |   | 109,713  | (7,344)      | -9%          |
| Net cash flow from operations               |   | 158,061  |   | 287,086  | (129,025)    | -45%         |
| Depletion, depreciation and other charges   |   | 30,430   |   | 36,717   | (6,287)      | -17%         |
| Future income taxes                         |   | -        |   | -        | -            | 0%           |
| Net earnings from operations                | $      | 127,631  | $      | 250,369  | (122,738)    | -49%         |
|                                        |   |     |   |     |         |         |
| **Profitability per BOE**                   |   |     |   |     |         |         |
|                                        |   |     |   |     |         |         |
| Oil and gas revenue (average selling price) |   | 42.14    |   | 42.18    | (0.04)       | 0%           |
| Production and operating costs              |   | 22.55    |   | 17.80    | 4.75         | 27%          |
| Field netback ($/boe)                       |   | 19.59    |   | 24.38    | (112,611)    | -28%         |
| Net earnings ($/boe)                        |   | 8.80     |   | 15.38    | (16,414)     | 15%          |
| Cash flow from operations ($/boe)           |   | 10.90    |   | 17.64    | (6.74)       | -38%         |

 

**Revenue**

 

Revenue for        the three months ended September 30, 2007 increased to $221,037 from $197,015 for the three        month period ended September 30, 2006, an increase of 12%. Revenue for the nine month ended        September 30, 2007 decreased to $611,329 from $686,546 for the nine month period ended        September 30, 2006 a decrease of 11%. The increase in revenues over the three month        comparative periods is attributed to the realization of new revenues from properties        acquired in May and August. However, the overall decrease in revenues during the nine month        comparative periods is attributed to a decline in production from aging wells. Allied        expects revenue to increase as production from newly acquired properties offsets recent        declines assuming the market price for oil and gas products remains within the current        range.

 

 

 

 

10

         

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**Income**

 

Net income        for the three months ended September 30, 2007 decreased to $28,545 from $51,335 for the        three month period ended September 30, 2006, a decrease of 44%. Net income for the nine        months ended September 30, 2007 decreased to $105,655 from $180,293, a decrease of 41%. The        decrease in net income over the three and nine month comparative periods was due to a        number of factors including the overall decrease in revenue, the increase in production        costs and the increase in general and administrative costs precipitated by the payment of        certain state taxes. Allied anticipates that net income will increase over future periods        as revenue increases, production costs remain relatively constant and general and        administrative expenses decrease.

 

**Expenses**

 

General and        administrative expenses for the three months ended September 30, 2007, increased to $52,636        from $28,878 for the three month period ended September 30, 2006, an increase of 82%.        General and administrative expenses for the nine months ended September 30, 2006 increased        to $126,127 from $109,713 for the nine month period ended September 30, 2006, an increase        of 15%. The increase in general and administrative expenses over the three and nine month        comparative periods can be attributed to the payment of certain state taxes in the current        three month period. Allied anticipates that general and administrative expenses in future        periods will decrease.

 

Direct        production costs for the three months ended September 30, 2007 increased to $114,178 from        $85,952 for the three month period ended September 30, 2006, an increase of 33%. Direct        production costs for the nine months ended September 30, 2007 increased to $327,141 from        $289,747 for the nine month period ended September 30, 2006, an increase of 13%. Direct        production costs include the cost of maintaining the wells, access roads, miscellaneous        expenses for soap, solvent, gasoline or electricity and expenses such as those incurred in        swabbing, dozer work or rig time. The increase in direct production costs over the        comparative three and nine month periods can be attributed in part to the increase in the        number of wells in production and operating expenses associated with two new operators in        the field. Allied expects that direct production costs will continue to increase over        future periods as additional production is acquired with new wells and costs associated        with maintaining existing wells increases over time.

 

Depletion        expenses for the three months ended September 30, 2007 and September 30, 2006 were $10,276        and $12,004 respectively. Depletion expenses for the nine months ended September 30, 2007        and September 30, 2006 were $30,430 and $36,717 respectively. Allied expects that oil and        gas resources will continue to deplete over future periods as wells age.

 

**Income Tax Expense (Benefit)**

 

Allied has        an income tax benefit resulting from prior net operating losses which may be used to offset        current operating profits.As of December 31, 2006 Allied had net        operating loss (NOL) carry-forwards of approximately $3,087,000. Should substantial changes        in Allied’s ownership occur there would be an annual limitation on the amount of NOL        carry-forward, which could be utilized. Further, the ultimate realization of these        carry-forwards will be due, in part, on the tax law in effect at the time of the        anticipated benefit which cannot be definitively determined based on future        events.

 

 

 

11

         

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**Impact of Inflation**

 

Allied        believes that inflation has had an effect on operations over the past three years most        significantly in relation to increased production and maintenance costs. Allied expects to        offset inflationary increases in production and maintenance costs by improving operating        efficiencies.

 

**Capital Expenditures**

 

Allied        made significant capital expenditures on property or equipment for the nine month        period ended September 30, 2007 on acquiring various working and revenue interests in 11        oil and gas wells for $510,205.

 

**Liquidity and Capital Resources**

 

Cash flow        provided by operations was $121,608 for the nine months ended September 30, 2007, as        compared to cash flow provided by operations of $267,198 for the nine months ended        September 30, 2006. The decrease in cash flow provided by operations over the comparative        periods can be primarily attributed to the decrease in net income, a decrease in our        deferred tax asset and a decrease in amounts receivable. Allied expects to continue to        realize cash flow provided by operations in future periods.

 

Cash flow        used in investing activities was $510,205 for the nine months ended September 30, 2007 and        $0 for the nine months ended September 30, 2006. Cash flow used in investing activities in        the current nine month period can be attributed to the acquisition of various working and        revenue interests in the 13 wells located on different leases in the State of Texas.        Further, we are currently reevaluating our existing wells which may lead to a decision to        invest cash into upgrading existing production facilities or to drill new wells. Should        Allied expend capital on existing wells or drilling or acquire additional producing        properties, we would then expect to continue to use cash flow in investing        activities.

 

Cash flow        provided by financing activities was $0 for the nine months ended September 30, 2007 and $0        for the nine months ended September 30, 2006.

 

Allied had        a working capital surplus of $783,280 as of September 30, 2007 and has funded its cash        needs since inception with revenues generated from operations, debt instruments and private        placements. Existing working capital and anticipated cash flow are expected to be        sufficient to fund operations for the next twelve months.

 

Allied has        no current commitments for the purchase or sale of any plant or equipment and has no        current intention to make any changes in the number of employees.

 

**Off        Balance Sheet Arrangements** 

 

As of        September 30, 2007, Allied has no off-balance sheet arrangements that have or are        reasonably likely to have a current or future effect on our financial condition, changes in        financial condition, revenues or expenses, results of operations, liquidity, capital        expenditures, or capital resources that is material to stockholders.

 

 

 

 

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**Forward Looking Statements and Factors That May Affect Future Results        and Financial Condition**

 

The        statements contained in the section titled*“Management’s Discussion and        Analysis”*, with the exception of historical facts, are        forward looking statements within the meaning of Section 27A of the Securities Act. A        safe-harbor provision may not be applicable to the forward looking statements made in this        Form 10-QSB due to certain exclusions under Section 27A (b). Forward looking statements        reflect our current expectations and beliefs regarding our future results of operations,        performance, and achievements. These statements are subject to risks and uncertainties and        are based upon assumptions and beliefs that may or may not materialize. These statements        include, but are not limited to, statements concerning:

 

|   | **•** | our anticipated financial performance and business                        plan; |
|--------|------------|---------------------------------------------------------------------------------|

|   | **•** | uncertainties related to production volumes of oil and                        gas; |
|--------|------------|------------------------------------------------------------------------------------|

|   | **•** | the sufficiency of existing capital resources; |
|--------|------------|------------------------------------------------|

|   | **•** | uncertainties related to future oil and gas                        prices; |
|--------|------------|----------------------------------------------------------------------------|

|   | **•** | our ability to raise additional capital to fund cash                        requirements for future operations; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

|   | **•** | uncertainties related the quantity of our reserves of oil                        and gas |
|--------|------------|------------------------------------------------------------------------------------------|

|   | **•** | the volatility of the stock market and; |
|--------|------------|-----------------------------------------|

|   | **•** | general economic conditions. |
|--------|------------|------------------------------|

 

We wish to        caution readers that our operating results are subject to various risks and uncertainties        that could cause our actual results to differ materially from those discussed or        anticipated, including the factors set forth in the section entitled*“Risk Factors”*included elsewhere        in this report. We also wish to advise readers not to place any undue reliance on the        forward looking statements contained in this report, which reflect our beliefs and        expectations only as of the date of this report. We assume no obligation to update or        revise these forward looking statements to reflect new events or circumstances or any        changes in our beliefs or expectations, other than is required by law.

 

**Risks        Related to Our Business**

 

Our future        operating results are highly uncertain. Before deciding to invest in us or to maintain or        increase your investment, you should carefully consider the risks described below, in        addition to the other information contained in this annual report. If any of these risks        actually occur, our business, financial condition or results of operations could be        seriously harmed. In that event, the market price for our common stock could decline and        you may lose all or part of your investment.

 

*We have        a history of significant operating losses, which losses may reoccur in the        future.*

 

Since our        inception in 1979, our expenses have often exceeded our income, resulting in losses and an        accumulated deficit of $6,408,847 at September 30, 2007. Although we have recorded a net        income of $28,545 for the three month period ended September 30, 2007, we may incur        operating losses in the future as revenues may continue to decline from depleted oil and        gas resources, in addition expenses are likely to increase with aging wells. Our        expectation of continued profitability is dependent upon our ability to acquire additional        production revenue through exploration, development or acquisition. Allied’s success        in this endeavor can in no way be assured.

 

 

 

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*Oil and        natural gas prices are volatile. Any substantial decrease in prices would adversely affect        our financial results.*

 

Allied’s future financial condition, results of operations and the        carrying value of our oil and natural gas properties depend primarily upon the prices we        receive for oil and natural gas production. Oil and natural gas prices historically have        been volatile and are likely to continue to be volatile in the future. Allied’s cash        flow from operations is highly dependent on the prices we receive for oil and natural gas.        This price volatility also affects the amount of Allied’s cash flow available for        capital expenditures and our ability to borrow money or raise additional capital. The        prices for oil and natural gas are subject to a variety of additional factors that are        beyond our control.These factors include:

|   | **•** | the level of consumer demand for oil and natural                        gas; |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | the domestic and foreign supply of oil and natural                        gas; |
|--------|------------|--------------------------------------------------------------------------------|

|   | **•** | the ability of the members of the Organization of Petroleum                        Exporting Countries to agree to and maintain oil price and production                        controls; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the price of foreign oil and natural gas; |
|--------|------------|-------------------------------------------|

|   | **•** | domestic governmental regulations and taxes; |
|--------|------------|----------------------------------------------|

|   | **•** | the price and availability of alternative fuel                        sources; |
|--------|------------|--------------------------------------------------------------------------------|

|   | **•** | weather conditions; |
|--------|------------|---------------------|

|   | **•** | market uncertainty; |
|--------|------------|---------------------|

|   | **•** | political conditions or hostilities in energy producing                        regions, including the Middle East; and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

|   | **•** | worldwide economic conditions. |
|--------|------------|--------------------------------|

         

These        factors and the volatility of the energy markets generally make it extremely difficult to        predict future oil and natural gas price movements with any certainty. Declines in oil and        natural gas prices would not only reduce revenue, but could reduce the amount of oil and        natural gas that Allied can produce economically and, as a result, could have a material        adverse effect on our financial condition, results of operations and reserves. Should the        oil and natural gas industry experience significant price

declines,        Allied may, among other things, be unable to meet our financial obligations or make planned        expenditures.

 

*Allied’s future performance depends on our ability to find or        acquire additional oil or natural gas reserves.*

 

Unless        Allied successfully replaces the reserves that we produce, the defined reserves will        decline, resulting in a decrease in natural gas production and lower revenues and cash        flows from operations. Allied has historically obtained the majority of our reserves        through acquisitions. The business of exploring for, developing or acquiring reserves is        capital intensive. Allied may not be able to obtain the necessary capital to acquire        additional oil or natural gas reserves as cash flows from operations are reduced, and        access to external sources of capital is unavailable. Should Allied not make significant        capital expenditures we will not be able to maintain our current production rates and        expenses will overtake revenue which may lead to a cessation of operations.

 

*The        results of our operations are wholly dependent on the production and maintenance efforts of        independent operators.*

 

The        operation and maintenance of our oil and natural gas operations is wholly dependent on        independent local operators. While the services provided by operators of our properties in        the past have proven adequate for the successful operation of our oil and natural gas        wells, the fact that we are dependent on operations of a third party to produce revenue        from our assets could restrict our ability to continue generating a net profit on        operations.

 

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*The        market for our stock is limited and our stock price may be volatile.*

 

The market        for our common stock has been limited due to low trading volume and the small number of        brokerage firms acting as market makers. Because of the limitations of our market and        volatility of the market price of our stock, investors may face difficulties in selling        shares at attractive prices when they want to. The average daily trading volume for our        stock has varied significantly from week to week and from month to month, and the trading        volume often varies widely from day to day.

 

*We may        incur significant expenses as a result of being quoted on the Over the Counter Bulletin        Board, which may negatively impact our financial performance.*

 

We may        incur significant legal, accounting and other expenses as a result of being listed on the        Over the Counter Bulletin Board. The Sarbanes-Oxley Act of 2002, as well as related rules        implemented by the Commission has required changes in corporate governance practices of        public companies. We expect that compliance with these laws, rules and regulations,        including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as discussed in the        following risk factor, may substantially increase our expenses, including our legal and        accounting costs, and make some activities more time-consuming and costly. As a result,        there may be a substantial increase in legal, accounting and certain other expenses in the        future, which would negatively impact our financial performance and could have a material        adverse effect on our results of operations and financial condition.

 

*Our        internal controls over financial reporting may not be considered effective, which could        result in a loss of investor confidence in our financial reports and in turn have an        adverse effect on our stock price.*

 

Pursuant to        Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual report for the        year ending December 31, 2007, we may be required to furnish a report by our management on        our internal controls over financial reporting. Such report will contain, among other        matters, an assessment of the effectiveness of our internal controls over financial        reporting as of the end of the year, including a statement as to whether or not our        internal controls over financial reporting are effective. This assessment must include        disclosure of any material weaknesses in our internal controls over financial reporting        identified by management. If we are unable to assert that our internal controls are        effective as of December 31, 2007, investors could lose confidence in the accuracy and        completeness of our financial reports, which in turn could cause our stock price to        decline.

 

**Critical Accounting Policies and Estimates**

 

Accounting        for Oil and Gas Property Costs. As more fully discussed in Note 1 to our financial        statements for the year ended December 31, 2006, Allied (i) follows the successful efforts        method of accounting for the costs of our oil and gas properties, (ii) amortizes such costs        using the units of production method and, (iii) evaluates our proven properties for        impairment whenever events or changes in circumstances indicate that their net book value        may not be recoverable. Adverse changes in conditions (primarily gas price declines) could        result in permanent write-downs in the carrying value of oil and gas properties as well as        non-cash charges to operations that would not affect cash flows.

 

Estimates        of Proved Oil and Gas Reserves. An independent petroleum engineer annually estimates        Allied’s proven reserves. Reserve engineering is a subjective process that is        dependent upon the quality of available data and the interpretation thereof. In addition,        subsequent physical and economic factors such as the results of drilling, testing,        production and product prices may justify revision of such estimates. Therefore, actual        quantities, production timing, and the value of reserves may differ substantially from        estimates. A reduction in proved reserves would result in an increase in depreciation,        depletion and amortization expense.

 

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Estimates        of Asset Retirement Obligations. In accordance with SFAS No 143, Allied makes estimates of        future costs and the timing thereof in connection with recording our future obligations to        plug and abandon wells. Estimated abandonment dates will be revised in the future based on        changes to related economic lives, which vary with product prices and production costs.        Estimated plugging costs may also be adjusted to reflect changing industry experience.        Increases in operating costs and decreases in product prices would increase the estimated        amount of the obligation and increase depreciation, depletion and amortization expense.        Cash flows would not be affected until costs to plug and abandon were actually        incurred.

 

**Recent        Accounting Pronouncements**

 

In February        2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial        Instruments-an amendment of FASB Statements No. 133 and 140”, to simplify and make        more consistent the accounting for certain financial instruments. SFAS No. 155 amends SFAS        No. 133, “Accounting for Derivative Instruments and Hedging Activities” to        permit fair value remeasurement for any hybrid financial instrument with an embedded        derivative that otherwise would require bifurcation, provided that the whole instrument is        accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting        for the Impairment or Disposal of Long-Lived Assets”, to allow a qualifying        special-purpose entity to hold a derivative financial instrument that pertains to a        beneficial interest other than another derivative financial instrument. SFAS No. 155        applies to all financial instruments acquired or issued after the beginning of an entity's        first fiscal year that begins after September 15, 2006, with earlier application allowed.        This standard is not expected to have a significant effect on Allied’s future        reported financial position or results of operations.

 

In March        2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets, an        amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial        Assets and Extinguishments of Liabilities". This statement requires all separately        recognized servicing assets and servicing liabilities be initially measured at fair value,        if practicable, and permits for subsequent measurement using either fair value measurement        with changes in fair value reflected in earnings or the amortization and impairment        requirements of Statement No. 140. The subsequent measurement of separately recognized        servicing assets and servicing liabilities at fair value eliminates the necessity for        entities that manage the risks inherent in servicing assets and servicing liabilities with        derivatives to qualify for hedge accounting treatment and eliminates the characterization        of declines in fair value as impairments or direct write-downs. SFAS No. 156 is effective        for an entity's first fiscal year beginning after September 15, 2006. This adoption of this        statement is not expected to have a significant effect on Allied’s future reported        financial position or results of operations.

 

In June        2006, the Financial Accounting Standards Board (FSAB) issued FASB Interpretation No. 48,        “Accounting for Uncertainty in Income Taxes – an interpretation of FASB        Statement No. 109.” This statement clarifies the accounting for uncertainty in income        tax positions. Allied has filed income tax returns in the U.S. federal jurisdiction and in        certain states. Allied is no longer subject to U.S. federal, state and local income tax        examinations by tax authorities for years before 2002. Allied adopted the

provisions        of FIN 48 on January 1, 2007.

 

 

 

 

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In        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The        objective of SFAS 157 is to increase consistency and comparability in fair value        measurements and to expand disclosures about fair value measurements. SFAS 157 defines fair        value, establishes a framework for measuring fair value in generally accepted accounting        principles, and expands disclosures about fair value measurements. SFAS 157 applies under        other accounting pronouncements that require or permit fair value measurements and does not        require any new fair value measurements. The provisions of SFAS No. 157 are effective for        fair value measurements made in fiscal years beginning after November 15, 2007. The        adoption of this statement is not expected to have a material effect on Allied's future        reported financial position or results of operations.

 

In        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for        Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB        Statements No. 87, 88, 106, and 132(R)”. This statement requires employers to        recognize the overfunded or underfunded status of a defined benefit postretirement plan        (other than a multiemployer plan) as an asset or liability in its statement of financial        position and to recognize changes in that funded status in the year in which the changes        occur through comprehensive income of a business entity or changes in unrestricted net        assets of a not-for-profit organization. This statement also requires an employer to        measure the funded status of a plan as of the date of its year-end statement of financial        position, with limited exceptions. The provisions of SFAS No. 158 are effective for        employers with publicly traded equity securities as of the end of the fiscal year ending        after December 15, 2006. The adoption of this statement is not expected to have a material        effect on Allied's future reported financial position or results of operations.

 

In        September 2006, the SEC issued Staff Accounting Bulletin        (“SAB”) No. 108, “Considering the Effects of Prior Year        Misstatements when Quantifying Misstatements in Current Year Financial Statements.”        SAB No. 108 addresses how the effects of prior year uncorrected misstatements should        be considered when quantifying misstatements in current year financial statements. SAB        No. 108 requires companies to quantify misstatements using a balance sheet and income        statement approach and to evaluate whether either approach results in quantifying an error        that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is        effective for periods ending after November 15, 2006. Allied is currently evaluating        the impact of adopting SAB No. 108 but does not expect that it will have a material        effect on its financial position and results of operations.

 

In February        2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and        Financial Liabilities”. This Statement permits entities to choose to measure many        financial assets and financial liabilities at fair value. Unrealized gains and losses on        items for which the fair value option has been elected are reported in earnings. SFAS No.        159 is effective for fiscal years beginning after November 15, 2007. Allied is        currently assessing the impact of SFAS No. 159 on its financial position and results of        operations.

 

 

 

 

 

 

 

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**ITEM 3. CONTROLS AND PROCEDURES**

 

Allied’s president acts both as our chief executive officer and chief        financial officer and is responsible for establishing and maintaining disclosure controls        and procedures for Allied.

 

(a)        Evaluation of Disclosure Controls and Procedures

 

Under the        supervision and with the participation of our management, including our principal executive        officer and principal financial officer, we evaluated the effectiveness of the design and        operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and        15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), as of        September 30, 2007. Based on this evaluation, our principal executive officer and our        principal financial officer concluded that, as of the end of the period covered by this        report, our disclosure controls and procedures were effective and adequately designed to        ensure that the information required to be disclosed by us in the reports we submit under        the Exchange Act is recorded, processed, summarized and reported within the time periods        specified in the applicable rules and forms and that such information was accumulated and        communicated to our chief executive officer and chief financial officer, in a manner that        allowed for timely decisions regarding required disclosure.

 

(b) Changes        in Internal Controls

 

During the        period ended September 30, 2007, there has been no change in internal control over        financial reporting that has materially affected, or is reasonably likely to materially        affect our internal control over financial reporting.

 

**PART        II**

 

| **ITEM 1.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

None.

 

| **ITEM 2.** | **UNREGISTERED SALES OF EQUITY SECURITIES** |
|-------------|---------------------------------------------|

 

None.

 

| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES** |
|-------------|-------------------------------------|

 

None.

 

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

 

None.

 

| **ITEM 5.** | **OTHER INFORMATION** |
|-------------|-----------------------|

 

None.

 

| **ITEM 6.** | **EXHIBITS** |
|-------------|--------------|

         

Exhibits        required to be attached by Item 601 of Regulation SB are listed in the Index to Exhibits on        page 20 of this Form 10-QSB and are incorporated herein by this reference.

 

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**SIGNATURES**

 

In        accordance with the requirements of the Exchange Act, the registrant caused this report to        be signed on its behalf by the undersigned, hereunto duly authorized, this 14th        day of November 2007.

 

 

**ALLIED        RESOURCES, INC**.

 

         

| /s/ Ruairidh Campbell |
|-----------------------|

| Ruairidh Campbell |
|-------------------|

Chief        Executive Officer, Chief Financial Officer and Principal Accounting Officer

 

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**INDEX TO EXHIBITS**

 

| ***Exhibit*** | ***Page*** |
|---------------|------------|

| ***No.*** | ***Description*** |
|-----------|-------------------|

 

| 3(i) | * | Articles of Incorporation dated February 12, 2002                        (incorporated by reference |
|------|---|-----------------------------------------------------------------------------------------------------|

|   | to the Form 10-SB/A filed on April 21, 2003. |
|--------|----------------------------------------------|

| 3(ii) | * | Bylaws (incorporated by reference to the Form 10-SB/A filed                        on April 21, |
|-------|---|-------------------------------------------------------------------------------------------------|

|   | 2003). |
|--------|--------|

| 10(i) * | Oil and Gas Well Operating Agreement between Allied and                        Allstate Energy Corporation dated May 1, 1996 (incorporated by reference to                        the Form 10SB/A filed on April 21, 2003). |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(ii) * | Amendments to Operating Agreements between Allied and                        Allstate Energy Corporation dated May 10, 1996 (incorporated by reference                        to the Form 10SB/A filed on April 21, 2003). |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(iii) * | Form Gas Purchase Agreement (incorporated by reference to                        the Form 10SB/A filed on April 21, 2003). |
|-----------|----------------------------------------------------------------------------------------------------------------------------|

| 10(iv) * | Gas Contract between Allstate Energy Corporation and                        Dominion dated January 1, 2002 (incorporated by reference to the Form                        10SB/A filed on April 21, 2003). |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14 * | Code of Ethics adopted May 3, 2004 (incorporated by                        reference to the Form 10KSB filed on May 26, 2004). |
|------|--------------------------------------------------------------------------------------------------------------------------------|

| 31 Attached | Certification of the Chief Executive                        Officer and Chief Financial Officer pursuant to Section 302 of the                        Sarbanes-Oxley Act of 2002. |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32 Attached | Certification of the Chief Executive                        Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as                        adopted pursuant to Section 906 of the Sarbanes-Oxley Act of                        2002. |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

         

         

         

         

         

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