**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

# **FORM 10-Q/A**

**Amendment No. 1**

**(Mark One)**

x              **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the quarterly period ended September 30, 2006**

o**    TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

**For the transition period from                  to                **

**Commission file number 001-32496**

**CANO PETROLEUM, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                                                     |   | **77-0635673**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |   | (IRS Employer  Identification No.) |

 

**The Burnett Plaza801 Cherry Street, Suite 3200Fort Worth, TX 76102**(Address of principal executive offices)

**(817) 698-0900**(Issuer’s telephone number)

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor 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 check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of accelerated filer and largeaccelerated filer in rule 12b-2 of the Exchange Act. (check one):

Large acceleratedfiler o      Accelerated filer x      Non-accelerated filer o

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  o     No x

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date: 32,308,894 shares of common stock, $.0001 par value per share, as of December 26, 2006.

 

----

**EXPLANATORY NOTE**

**               **ThisAmendment No. 1 on Form 10-Q/A is being filed with regard to the QuarterlyReport on Form 10-Q for thequarter ended September 30, 2006, filed with the Securities and ExchangeCommission on November 14, 2006 for the purposes of amending and restating PartI, Item 4. “Controls and Procedures” to reflect that due to strengthening ourinternal controls over recording of deferred income taxes, a change in ourinternal controls over financial reporting occurred during the fiscal quarter endedSeptember 30, 2006 that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

                ThisForm 10-Q/A does not reflect events occurring after the filing of the originalForm 10-Q, and does not modify or update the disclosure therein other than asrequired to reflect the amendments described above and set forth below.  Accordingly, this Amendment No. 1 on  Form 10-Q/A should be read in conjunctionwith our original Form 10-Q for the quarter ended September 30, 2006.  In addition, the filing of this Form 10-Q/Ashould not be deemed an admission that the original filing, when made, includedany untrue statement of a material fact or omitted to state a material factnecessary to make a statement made therein not misleading.  This Form 10-Q/A should be read inconjunction with our filings made with the Securities and Exchange Commissionsubsequent to the filing of the original Form 10-Q for the fiscal year endedSeptember 30, 2006, including any amendments to those filings.  In addition, pursuant to the rules of theSecurities and Exchange Commission, Exhibits 31.1, 31.2, 31.3, 32.1, 32.2 and32.3 of the original Form 10-Q have been amended and filed herewith to containcurrently dated certifications from our Chief Executive Officer, ChiefFinancial Officer and Principal Accounting Officer.

** **

 

2

----

 

**PART I****- FINANCIAL INFORMATION**

********Item 4. Controls and Procedures.**

As discussed in our Form 10-KSB dated June 30, 2006,we did not maintain effective controls over the preparation and review ofdeferred tax liabilities and the related deferred income tax benefit.Specifically, this pertained to apportioning taxes between states to correctlyaccount for the effect of changes to the state of Texas tax laws in May 2006.Internal controls have been strengthened through increased review andcommunication between Cano and the third-party tax preparer, which began duringthe preparation of the income tax accrual for the quarter ended September 30,2006.

During the courseof performing our quarter end closing procedures, as discussed in Note 11, ourinternal controls detected that a senior executive was involved in fraudulent salesto Cano of equipment and materials.  Inthe opinion of management, failure to set up adequate controls over payments tovendors represents a material weakness in the Company’s internal control overfinancial reporting as of September 30, 2006.  We have implemented additional procedures tostrengthen our internal controls over accounts payable processing subsequent toSeptember 30, 2006.  The additionalprocedures involve additional procedures to set-up new vendors in our accountspayable system and additional review of vendor invoices prior to payment.

As of the end of the period covered by this report, weconducted an evaluation, under the supervision and with the participation ofour chief executive officer, chief financial officer and principal accountingofficer of our disclosure controls and procedures as defined inRule 13a-15(e) and Rule 15d-15(e) of the SecuritiesExchange Act of 1934 (the “Exchange Act”). Based upon this evaluation, ourchief executive officer, chief financial officer and principal accountingofficer concluded that our disclosure controls and procedures were not effectiveto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is: (1) accumulated andcommunicated to our management, including our chief executive officer, chieffinancial officer and principal accounting officer, as appropriate to allowtimely decisions regarding required disclosure; and (2) recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  This specifically pertained to the accountspayable processing, as previously discussed.

As discussed above with respect to strengtheningour internal controls over recording of deferred income taxes, a change of ourinternal conrol over financial reporting occurred during the fiscal quarterended September 30, 2006 that materially affected, or is reasonably likelyto materially affect, our internal control overfinancial reporting.  Aspreviously stated, we implemented additional procedures to strengthen ourinternal controls over accounts payable subsequent to September 30, 2006.

**PART II —OTHER INFORMATION**

**Item 6. Exhibits.**
| Exhibit  Number | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 3.1        |            |   | Certificate of  Designation for Series D Convertible Preferred Stock incorporated by  reference from Exhibit 3.1 to Current Report on Form 8-K, filed on September  7, 2006. |
|            | 4.1        |            |   | Registration Rights  Agreement dated August 25, 2006 by and among Cano Petroleum, Inc. and the  Buyers listed therein, incorporated by reference from Exhibit 4.1 to  Amendment to Current Report on Form 8-K/A filed on August 31, 2006. |
| +               | 10.1       |            |   | Employment Agreement of  Michael J. Ricketts effective July 1, 2006, incorporated by reference from  Exhibit 10.1 to Current Report on Form 8-K filed on August 17, 2006. |
| +               | 10.2       |            |   | Employee Restricted Stock  Award Agreement of Morris B. Smith dated August 11, 2006, incorporated by  reference from Exhibit 10.2 to Current Report on Form 8-K filed on August 17,  2006. |
| +               | 10.3       |            |   | Stock Option Agreement of  Dennis McCuistion dated August 11, 2006, incorporated by reference from  Exhibit 10.4 to Current Report on Form 8-K filed on August 17, 2006. |
| +               | 10.4       |            |   | Stock Option Agreement of  Patrick W. Tolbert dated August 11, 2006, incorporated by reference from  Exhibit 10.4 to Current Report on Form 8-K filed on August 17, 2006. |
|            | 10.5       |            |   | Securities Purchase  Agreement dated August 25, 2006 by and among Cano Petroleum, Inc. and the  Buyers listed therein, incorporated by reference from Exhibit 10.1 to  Amendment to Current Report on Form 8-K/A filed on August 31, 2006. |
|            | 10.6       |            |   | Form of Warrant to  Purchase Common Stock dated September 6, 2006 by Cano Petroleum, Inc.,  incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K  filed on September 11, 2006. |
|            | 31.1*      |            |   | Certification by Chief  Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of |
|            |       |            |   | the Exchange Act,  promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|            | 31.2*      |            |   | Certification by Chief  Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the  Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|            | 31.3*      |            |   | Certification by  Principal Accounting Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of  the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|            | 32.1*      |            |   | Certification by Chief  Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the  Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States  Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|            | 32.2*      |            |   | Certification by Chief  Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the  Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States  Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|            | 32.3*      |            |   | Certification by  Principal Accounting Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of  the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United  States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

----

*       Filed herewith

+       Management contract or compensatory plan,contract or arrangement

3

----

**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this Form 10-Q/A to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| **CANO PETROLEUM, INC.**     |   |                                                |
|------------------------------|--------|-----------------------------------------------------|
| ** **                   |   |                                                |
| Date: December 26, 2006 | By:    | /s/ S. Jeffrey Johnson                              |   |
|                         |   | S. Jeffrey Johnson                                  |
|                         |   | Chief  Executive Officer                            |
|                         |   |                                                |
| Date: December 26, 2006 | By:    | /s/ Morris B. Smith                                 |   |
|                         |   | Morris B. Smith                                     |
|                         |   | Senior  Vice-President and  Chief Financial Officer |
|                         |   |                                                |
| Date: December 26, 2006 | By:    | /s/ Michael J. Ricketts                             |   |
|                         |   | Michael J. Ricketts                                 |
|                         |   | Vice-President  and  Principal Accounting Officer   |

 

4

----