**SECURITIES AND        EXCHANGE COMMISSION        Washington, D.C. 20549**

**FORM        10-QSB**

*(Mark        One)*

þ     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: **000-30377**

**PROVIDENCE        RESOURCES, INC.**        (Exact name of small business issuer as specified in its charter)

| **TEXAS**                        (State or other jurisdiction of incorporation or organization) | **06-1538201**                        (IRS Employer Identification Number) |
|-------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------|

**5300 Bee Caves        Rd, Bldg 1 Suite 240, Austin, Texas, 78746**        (Address of Principal Executive        Office)          

**(512)        970-2888**        (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.

Yesþ                     No ̈                    

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

Yes ̈                     Noþ                    

The number of outstanding shares of        the registrant’s common stock, $0.0001 par value (the only class of voting stock), as        of November 15, 2007 was 57,289,102.

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**TABLE OF CONTENTS**

**           **Page**    **PART I.**     **ITEM 1.                    FINANCIAL STATEMENTS**  3   Unaudited Consolidated Balance Sheet as of                            September 30, 2007  4   Unaudited Consolidated Statement of                            Operations for the three and nine month periods ended September                            30, 2007 and 2006 and the period from inception to September 30,                            2007  5   Unaudited Consolidated Statement of                            Cash Flows for the nine month periods ended September 30, 2007 and 2006                            and the period from inception to September 30, 2007  6   Notes to the Unaudited Consolidated                            Financial Statements  7   Supplemental Oil and Gas Information -                            FAS69  25                 **ITEM 2. MANAGEMENT'S PLAN OF                            OPERATION**  29  **ITEM 3.                    CONTROLS AND PROCEDURES**  40 **PART II.**     **ITEM 1.                    LEGAL PROCEEDINGS**  40  **ITEM 2.                    UNREGISTERED SALES OF EQUITY SECURITIES**  40  **ITEM 3.                    DEFAULTS UPON SENIOR SECURITIES**  40  **ITEM 4.                    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**  40  **ITEM 5.                    OTHER INFORMATION**  40  **ITEM 6.                    EXHIBITS**  40  **SIGNATURES**  41 **INDEX TO                    EXHIBITS**  42 **
**            2        **

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**PART I**

**ITEM 1.     FINANCIAL        STATEMENTS**

As used herein the terms“Company,        ”“we,        ”“our        ”, and“us        ”refer to Providence Resources, Inc.        (formerly“Healthbridge,        Inc.”), a        Texas corporation and our subsidiaries, unless otherwise indicated.In the opinion of management, the accompanying unaudited,        consolidated 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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PROVIDENCE RESOURCES, INC.

(A        Development Stage Company)

CONSOLIDATED BALANCE SHEETS

 

|                                                                                         |   |   | September 30, |   |   | December 31, |
|----------------------------------------------------------------------------------------------|--------|--------|---------------|--------|--------|--------------|
|                                                                                         |   |   | 2007          |   |   | 2006         |
|                                                                                         |   |   | (Unaudited)   |   |   |         |
| ASSETS                                                                                       |   |   |          |   |   |         |
|                                                                                         |   |   |          |   |   |         |
| CURRENT ASSETS:                                                                              |   |   |          |   |   |         |
| Cash                                                                                         |   | $      | 1,158,885     |   | $      | 1,540,145    |
| Note receivable                                                                              |   |   | 430,000       |   |   | -            |
| Drilling rig inventory                                                                       |   |   | -             |   |   | 724,515      |
| Prepaid expenses                                                                             |   |   | 86            |   |   | 98           |
| Total current assets                                                                         |   |   | 1,588,971     |   |   | 2,264,758    |
|                                                                                         |   |   |          |   |   |         |
| PROPERTY AND EQUIPMENT (Note 3) :                                                            |   |   |          |   |   |         |
| Oil and gas leases – undeveloped                                                       |   |   | 31,099,253    |   |   | 26,266,981   |
| Oil and gas pipeline (construction in progress)                                              |   |   | 1,509,734     |   |   | 1,170,173    |
| Equipment, net of amortization                                                               |   |   | 40,560        |   |   | 45,810       |
| Total property and equipment                                                                 |   |   | 32,649,547    |   |   | 27,482,964   |
|                                                                                         |   |   |          |   |   |         |
| OTHER ASSETS:                                                                                |   |   |          |   |   |         |
| Loan origination fees, net of amortization of                        $36,801                 |   |   | 26,749        |   |   | 45,799       |
| Deposits                                                                                     |   |   | 1,300         |   |   | 2,266        |
| Total other assets                                                                           |   |   | 28,049        |   |   | 48,065       |
|                                                                                         |   |   |          |   |   |         |
| Total assets                                                                                 |   | $      | 34,266,567    |   | $      | 29,795,787   |
|                                                                                         |   |   |          |   |   |         |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                         |   |   |          |   |   |         |
|                                                                                         |   |   |          |   |   |         |
| CURRENT LIABILITIES:                                                                         |   |   |          |   |   |         |
| Accounts payable                                                                             |   | $      | 150,376       |   | $      | 953,803      |
| Accrued expenses                                                                             |   |   | 492,210       |   |   | 153,909      |
| Related party payables                                                                       |   |   | 38,000        |   |   | 75,000       |
| Short-term note payable (Note 4)                                                             |   |   | 500,000       |   |   | -            |
| Short-term convertible promissory notes (Note 5)                                             |   |   | 501,483       |   |   | -            |
| Current portion of long-term notes payable (Note                        7)                   |   |   | 773,925       |   |   | 454,099      |
| Total current liabilities                                                                    |   |   | 2,455,994     |   |   | 1,636,811    |
|                                                                                         |   |   |          |   |   |         |
| CONVERTIBLE DEBENTURES (Note 8)                                                              |   |   | 3,320,000     |   |   | 3,570,000    |
| LONG-TERM CONVERTIBLE PROMISSORY NOTES (Note 6)                                              |   |   | 270,833       |   |   | -            |
| LONG-TERM NOTES PAYABLE (Note 7)                                                             |   |   | 200,000       |   |   | 319,826      |
| Total liabilities                                                                            |   |   | 6,246,827     |   |   | 5,526,637    |
|                                                                                         |   |   |          |   |   |         |
| MINORITY INTEREST IN NET ASSETS OF SUBSIDIARY                                                |   |   | 150,973       |   |   | 117,017      |
|                                                                                         |   |   |          |   |   |         |
| STOCKHOLDERS' EQUITY                                                                         |   |   |          |   |   |         |
| Preferred stock, $.0001 par value, 25,000,000                        shares                  |   |   |          |   |   |         |
| authorized, no shares issued and outstanding                                                 |   |   | -             |   |   | -            |
| Common stock, $.0001 par value, 250,000,000 shares                        authorized,        |   |   |          |   |   |
| 57,289,102 and 51,855,539 shares issued and outstanding,                        respectively |   | 5,729  |          |   | 5,185  |
| Additional paid-in capital                                                                   |   |   | 45,754,928    |   |   | 40,047,072   |
| Accumulated other comprehensive income                                                       |   |   | 14,514        |   |   | 14,560       |
| Deficit accumulated during the development stage                                             |   |   | (17,906,404)  |   |   | (15,914,684) |
|                                                                                         |   |   |          |   |   |         |
| Total stockholder's equity                                                                   |   |   | 27,868,767    |   |   | 24,152,133   |
|                                                                                         |   |   |          |   |   |         |
| Total liabilities and stockholders' equity                                                   |   | $      | 34,266,567    |   | $      | 29,795,787   |

 

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

 

4

 

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| PROVIDENCE RESOURCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE                        INCOME

Three and nine months ended September 30, 2007 and 2006 and                        Cumulative Amounts |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   | Inception on |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   | February 17, 1993 |
|                                                                                                                                                                                                                                                    |   | Three months ended September 30, |   |   | Nine months ended September 30, |   |   | through |
|                                                                                                                                                                                                                                                    |   | 2007 |   |   | 2006 |   |   | 2007 |   |   | 2006 |   |   | September 30, 2007 |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                                                                                                                                                                                                                   | $ | - |   | $ | - |   | $ | - |   | $ | - |   | $ | 350 |
| Cost of Sales                                                                                                                                                                                                                                           |   | - |   |   | - |   |   | - |   |   | - |   |   | 25,427 |
| Gross profit                                                                                                                                                                                                                                            |   | - |   |   | - |   |   | - |   |   | - |   |   | 25,777 |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| General and administrative expenses                                                                                                                                                                                                                     |   | (175,956) |   |   | (293,572) |   |   | (688,964) |   |   | (913,144) |   |   | (8,144,388) |
| Loss from operations                                                                                                                                                                                                                                    |   | (175,956) |   |   | (293,572) |   |   | (688,964) |   |   | (913,144) |   |   | (8,118,611) |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                                                                                                                                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority interest                                                                                                                                                                                                                                       |   | - |   |   | - |   |   | - |   |   | - |   |   | 19,898 |
| Interest expense                                                                                                                                                                                                                                        |   | (658,634) |   |   | (878,345) |   |   | (1,007,361) |   |   | (2,155,712) |   |   | (6,451,001) |
| Compensation expense                                                                                                                                                                                                                                    |   | - |   |   | - |   |   | (162,444) |   |   | - |   |   | (162,444) |
| Interest income                                                                                                                                                                                                                                         |   | 8,702 |   |   | 196,412 |   |   | 24,064 |   |   | 387,792 |   |   | 472,548 |
| Loss on disposal of assets                                                                                                                                                                                                                              |   | (157,015) |   |   | - |   |   | (157,015) |   |   | - |   |   | (157,015) |
| Loss before provision for income taxes                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and discontinued operations                                                                                                                                                                                                                             | (982,903) |   |   | (975,505) |   |   | (1,991,720) |   |   | (2,681,064) |   |   | (14,396,625) |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for income taxes                                                                                                                                                                                                                              |   | - |   |   | - |   |   | - |   |   | - |   |   | - |
| Loss before discontinued operations                                                                                                                                                                                                                     |   | (982,903) |   |   | (975,505) |   |   | (1,991,720) |   |   | (2,681,064) |   |   | (14,396,625) |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain (loss) from discontinued operations, net of                        tax                                                                                                                                                                             |   | - |   |   | - |   |   | - |   |   | - |   |   | (3,407,279) |
| Net loss before cumulative effect of accounting                        change                                                                                                                                                                           |   | (982,903) |   |   | (975,505) |   |   | (1,991,720) |   |   | (2,681,064) |   |   | (17,803,904) |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative effect of accounting change, net of                        tax                                                                                                                                                                               |   | - |   |   | - |   |   | - |   |   | - |   |   | (102,500) |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                                                                                                                                                |   | (982,903) |   |   | (975,505) |   |   | (1,991,720) |   |   | (2,681,064) |   |   | (17,906,404) |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss per share from continuing operations - basic and                        diluted                                                                                                                                                                    |   | $ (0.02) |   |   | $ (0.04) |   |   | $ (0.04) |   |   | $ (0.13) |   |   |   |
| Net Loss per common share - basic and diluted                                                                                                                                                                                                           |   | $ (0.02) |   |   | $ (0.04) |   |   | $ (0.04) |   |   | $ (0.13) |   |   |   |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common shares - basic and                        diluted                                                                                                                                                                               |   | 57,244,500 |   |   | 27,547,600 |   |   | 53,897,700 |   |   | 20,545,100 |   |   |   |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment                                                                                                                                                                                                                 |   | (33) |   |   | (655) |   |   | (46) |   |   | 99 |   |   | 14,514 |
|                                                                                                                                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

| Net comprehensive income (loss) | $ | (982,936) |   | $ | (976,160) |   | $ | (1,991,766) |   | $ | (2,680,965) |   | $ | (17,891,890) |
|---------------------------------|---|-----------|--------|---|-----------|--------|---|-------------|--------|---|-------------|--------|---|--------------|

 

The        accompanying notes are an integral part of these financial statements

 

5

 

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| PROVIDENCE RESOURCES, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2007 and 2006 and Cumulative                        Amounts |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                          |   |   |   |   |   |   |   | Inception on |
|                                                                                                                                                                                          |   |   |   |   |   |   |   | February 17, 1993 |
|                                                                                                                                                                                          |   | Nine months ended September 30, |   |   | through |
|                                                                                                                                                                                          |   | 2007 |   |   | 2006 |   |   | September 30, 2007 |
| Cash flows from operating activities:                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                                                                                      | $ | (1,991,720) |   | $ | (2,681,064) |   | $ | (17,906,404) |
| Adjustments to reconcile net loss to net cash                                                                                                                                                 |   |   |   |   |   |   |   |   |
| used in operating activities:                                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Shares issued for services                                                                                                                                                                    |   | 262,500 |   |   | 2,516,458 |   |   | 622,500 |
| Shares issued with financing                                                                                                                                                                  |   | - |   |   | - |   |   | 3,532,073 |
| Shares issued for debt and accrued interest                        conversion                                                                                                                 |   | 12,356 |   |   | - |   |   | 238,903 |
| Additional value of shares issued for debt and services                        conversion                                                                                                     |   | 162,444 |   |   | - |   |   | 3,161,975 |
| Amortization of conversion rights on debt                                                                                                                                                     |   | 626,917 |   |   | - |   |   | 626,917 |
| Depreciation and amortization                                                                                                                                                                 |   | 24,300 |   |   | 1,019 |   |   | 189,320 |
| Minority interest                                                                                                                                                                             |   | - |   |   | - |   |   | (19,898) |
| Discontinued operations                                                                                                                                                                       |   | - |   |   | - |   |   | 2,542,150 |
| Gain on write-off of liabilities                                                                                                                                                              |   | - |   |   | - |   |   | (96,270) |
| (Increase) decrease in:                                                                                                                                                                       |   |   |   |   |   |   |   |   |
| Accounts receivable and prepaid expenses                                                                                                                                                      |   | (930,615) |   |   | (285,702) |   |   | (820,097) |
| Inventory                                                                                                                                                                                     |   | 294,515 |   |   | - |   |   | 294,515 |
| Accounts payable                                                                                                                                                                              |   | 128,165 |   |   | (95,288) |   |   | 1,678,992 |
| Accrued expenses                                                                                                                                                                              |   | 338,301 |   |   | 74,103 |   |   | 548,720 |
| Related party payables                                                                                                                                                                        |   | (37,000) |   |   | 43,500 |   |   | 138,312 |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Net cash used in operating activities                                                                                                                                                         |   | (1,109,837) |   |   | (426,974) |   |   | (5,268,292) |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Advances to Providence Exploration prior to                        acquisition                                                                                                                |   | - |   |   | (5,811,761) |   |   | (8,886,761) |
| Cash of Providence Exploration on acquisition                        date                                                                                                                     |   | - |   |   | 73,271 |   |   | 73,271 |
| Acquistion of intangible assets                                                                                                                                                               |   | - |   |   | - |   |   | (150,398) |
| Acquistion of property and equipment                                                                                                                                                          |   | (5,171,833) |   |   | - |   |   | (7,820,093) |
| Issuance of notes receivable                                                                                                                                                                  |   | - |   |   | - |   |   | (616) |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                                                                                                                                                         |   | (5,171,833) |   |   | (5,738,490) |   |   | (16,784,597) |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                                                                                                         |   |   |   |   |   |   |   |   |
| Proceeds from notes payable                                                                                                                                                                   |   | 700,000 |   |   | - |   |   | 1,392,999 |
| Proceeds from convertible promissory notes                        payable                                                                                                                     |   | 5,000,000 |   |   | - |   |   | 5,000,000 |
| Issuance of common stock                                                                                                                                                                      |   | 166,500 |   |   | 8,021,952 |   |   | 13,277,779 |
| Commissions paid to raise convertible debentures                                                                                                                                              |   | - |   |   | (75,000) |   |   | (41,673) |
| Minority investment in subsidiary                                                                                                                                                             |   | 33,956 |   |   | - |   |   | 170,871 |
| Proceeds from (payments for) convertible                        debentures                                                                                                                    |   | - |   |   | - |   |   | 3,654,173 |
| Payments on notes payable                                                                                                                                                                     |   | - |   |   | - |   |   | (256,889) |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Net cash provided by financing activities                                                                                                                                                     |   | 5,900,456 |   |   | 7,946,952 |   |   | 23,197,260 |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Change in accumulated other comprehensive income                                                                                                                                              |   | (46) |   |   | 99 |   |   | 14,514 |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash                                                                                                                                                               |   | (381,260) |   |   | 1,781,587 |   |   | 1,158,885 |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Cash, beginning of period                                                                                                                                                                     |   | 1,540,145 |   |   | 2,035,438 |   |   | - |
|                                                                                                                                                                                          |   |   |   |   |   |   |   |   |
| Cash, end of period                                                                                                                                                                           | $ | 1,158,885 |   | $ | 3,817,025 |   | $ | 1,158,885 |

 

 

The        accompanying notes are an integral part of these financial statements

 

6

 

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PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 1        — Organization and Summary of Significant Accounting Policies

Organization 

The        consolidated financial statements consist of Providence Resources, Inc. (“Providence        Resources”) (formerly Healthbridge, Inc.) and its wholly owned subsidiaries,        Healthbridge AG (“Healthbridge AG”), Providence Exploration LLC        (“Providence Exploration”), PDX Drilling, LLC and Providence Resources LLC and        a ninety percent interest in Comanche County Pipeline, LLC (collectively “the        Company”).

Providence        Resources, Inc. was organized on February 17, 1993 (date of inception) under the laws of        the State of Texas. The Company changed its name from Healthbridge, Inc. to Providence        Resources, Inc. on September 29, 2006. Healthbridge AG was formed as a German subsidiary        during 2002. Providence Exploration, LLC was formed on July 12, 2005, under the Laws of the        State of Texas as a Limited Liability Company and is headquartered in Dallas, Texas.        Providence Exploration formed a wholly owned subsidiary, PDX Drilling, LLC (PDX), on July        12, 2005. PDX was formed to acquire drilling and service rigs for the purpose of drilling        oil and gas wells in Texas. Providence Exploration also formed a wholly owned subsidiary,        Providence Resources LLC, on September 1, 2005, to acquire leases in Texas for oil and gas        exploration and development. In October of 2006, Providence Exploration entered into an        agreement to form Comanche County Pipeline, LLC with the purpose of constructing an oil and        gas pipeline in Comanche County, Texas.

On January        25, 2002, the Company acquired certain patents related to the infectious medical waste        sterilization and disposal technologies developed in Germany. During the fourth quarter of        2005, the Company decided to discontinue all operations connected to the Valides®        Modular Infectious Waste Disposal System and the Medides System due to the unsatisfactory        level of revenue generated to date.

On November        21, 2005, the Company executed a letter of intent to acquire Providence Exploration, LLC,        as a wholly owned subsidiary in a stock for ownership exchange. On September 29, 2006, the        Corporation acquired Providence Exploration as a wholly owned subsidiary, pursuant to the        closing of a Securities Exchange Agreement and a Note Exchange Agreement.

The        Securities Exchange Agreement, entered into on April 10, 2006 with Providence Exploration        and the unit holders of Providence Exploration, provided for the exchange of 4,286,330        shares of the Corporation’s common stock for 1,250,000 issued and outstanding        membership units of Providence Exploration. The Note Exchange Agreement, entered into on        April 10, 2006 with the holders of certain promissory notes issued by Providence        Exploration, provided for the exchange of 12,213,670 shares of the Company’s common        stock for the assignment of those promissory notes to the Company. The agreements were        closed pursuant to shareholder approval at a special meeting of the shareholders held on        September 29, 2006.

 

7

 

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PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 1        — Organization and Summary of Significant Accounting Policies        (continued)

Organization (continued) 

Providence        Exploration is involved in exploration activities for the recovery of oil and gas from the        Marble Falls and Barnett Shale formations in the Fort Worth basin and from the Ellenburger        carbonate, Strawn carbonate and Pennsylvanian-Wolfcamp sandstone reservoirs in Val Verde        County. The Fort Worth basin prospects include approximately 7,374 acres of oil and gas        leases and the Val Verde County prospects include approximately 12,832 acres of oil and gas        leases. Providence Exploration has a 90% working interest and its joint venture operating        partner, Harding Company, has a 10% working interest in the Fort Worth basin        projects.

The Company        is considered a development stage company as defined in SFAS No. 7.

Principles of Consolidation

The        consolidated financial statements include the accounts of Providence Resources, Inc. and        its wholly owned subsidiaries. All significant intercompany balances and transactions have        been eliminated.

Cash and        Cash Equivalents

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

Inventory

Inventory        consists of drilling rigs, parts and components. The Company records inventory at        cost.

Property        and Equipment

Property        and equipment are stated at cost less accumulated depreciation. Maintenance and repairs are        charged to expense as incurred. Costs of major renewals or betterments are capitalized over        the remaining useful lives of the related assets. Depreciation is computed by using the        straight-line method. The cost of property disposed of and related accumulated depreciation        is removed from the accounts at the time of disposal, and gain or loss is reflected in        operations.

Oil and        Gas Leases Not Subject to Amortization

Oil and gas        lease costs are recorded at cost and consist of 7,374.5 acres of land leases in North        Eastern Texas in the Barnett Shale Formation and 12,847.2 acres of land leases in Southwest        Texas in Val Verde County. These leases are undeveloped at September 30, 2007, and        accordingly no depletion is included in the accompanying consolidated financial        statements.

 

 

8

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 1        — Organization and Summary of Significant Accounting Policies        (continued)

Oil and        Gas Leases Not Subject to Amortization (continued)

The Company        follows the full cost method of accounting for exploration and development of oil and gas        properties whereby all costs in acquiring, exploring and developing properties are        capitalized, including estimate of abandonment costs, net of estimated equipment salvage        costs. Prior to acquisition on September 29, 2006, Providence Exploration capitalized        $3,278,647 in exploration costs. No costs related to production, general corporate        overhead, or similar activities have been capitalized. As of September 30, 2007, the        Company only has capitalized costs of unproved properties acquired and related exploration        costs. Leasehold costs are depleted based on the units-of-production method based on        estimated proved reserves. No proved reserves currently exist for the Company and therefore        no depletion has been taken as of September 30, 2007.

In        accordance with Statement of Financial Accounting Standards No. 144 “Accounting for        the Impairment or Disposal of Long-Lived Assets”, the Company reviews its long-lived        assets to be held and used, excluding proved oil and gas properties accounted for under the        full cost method of accounting, whenever events or circumstances indicate that the carrying        value of those assets may not be recoverable. An impairment loss is indicated if the sum of        the expected future net cash flows is less than the carrying amount of the assets. In this        circumstance, the Company recognizes an impairment loss for the amount by which the        carrying amount of the asset exceeds the estimated fair value of the asset. The        Company’s long-lived assets related to its proved oil and gas properties accounted        for under the full cost method of accounting are prescribed by the Securities and Exchange        Commission (Regulation S-X, Rule 4-10, “Financial Accounting and Reporting for Oil        and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy        and Conservation Act of 1975”).

Intangible Assets

Costs        associated with the acquisition of definite life intangibles are capitalized and amortized        over their useful life. These costs will are reviewed quarterly by management for        impairment and valuation. Such impairment is reviewed from available information at the        time such as projected cash flow analysis, sales orders and other information available to        help management determine future realization of this asset. Management will write this        intangible down to its net realizable value at the time of impairment appears to        exist.

Loan        origination fees are amortized on a straight line basis over the 36 month term of the        loans.

Long-Lived Assets 

The Company        evaluates its long-lived assets in accordance with SFAS No. 144, “Accounting for the        Impairment of Long-Lived Assets”. Long-lived assets held and used by the Company are        reviewed for impairment whenever events or changes in circumstances indicate that their net        book value may not be recoverable. When such factors and circumstances exist, the Company        compares the projected undiscounted future cash flows associated with the related asset or        group of assets over their estimated useful lives against their respective carrying        amounts. Impairment, if any, is based on the excess of the carrying amount over the fair        value of those assets and is recorded in the period in which the determination was        made.

 

9

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 1        — Organization and Summary of Significant Accounting Policies        (continued)

Income        Taxes

Deferred        income taxes are provided in amounts sufficient to give effect to temporary differences        between financial and tax reporting, principally related to deferred start-up cost. For        income tax purposes start-up costs are deferred until the Company begins generating        revenue, at which time the costs begin being amortized.

Concentration of Credit Risk

The Company        maintains its cash in bank deposit accounts, which, at times, may exceed federally insured        limits. At September 30, 2007, the Company had $1,158,885 in bank deposit accounts. The        Company has not experienced any losses in such accounts and believes it is not exposed to        any significant credit risk on cash and cash equivalents.

Translation of Foreign Currencies

Assets and        liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at        the applicable exchange rates at year-end. Net gains or losses resulting from the        translation of the Company’s assets and liabilities are reflected as a separate        component of stockholders’ equity. A negative translation impact on        stockholders’ equity reflects a current relative U.S. dollar value higher than at the        point in time that assets were actually acquired in a foreign currency. A positive        translation impact would result from a U.S. Dollar weaker in value than at the point in        time foreign assets were acquired.

Income and        expense items are translated at the weighted average rate of exchange (based on when        transactions actually occurred) during the year.

Revenue        Recognition

The Company        did not have revenues in the nine months ended September 30, 2007. Revenues are recorded        upon the completion of the services, with the existence of an agreement and where        collectability is reasonably assured. Oil and natural gas production revenue will be        recognized at the time and point of sale after the product has been extracted from the        ground.

Stock-Based Compensation

At        September 30, 2007, the Company has stock-based employee compensation plans, which are        described in greater detail in Note 11. The Company accounts for those plans under the        recognition and measurement principles of APB Opinion 25, “Accounting for Stock        Issued to Employees”, and related Interpretations, and has adopted the disclosure        provisions of SFAS 123 (R), “Share Based Payment.”

Had        compensation cost for the Company’s stock option plan been determined based on the        fair value at the grant date for awards consistent with the provisions of SFAS 123 (R), the        Company’s net loss and loss per share would have been reduced to the pro forma        amounts indicated below:

 

 

10

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 1        — Organization and Summary of Significant Accounting Policies        (continued)

Stock-Based Compensation (continued)

|   | Nine months ended September 30, |
|--------|---------------------------------|

|   | 2007 | 2006 |
|--------|------|------|

| Net loss as reported | $ (1,991,720) | $ (2,681,064) |
|----------------------|---------------|---------------|

 

Deduct:

Total stock-based employee compensation expense

determined under fair value based method for all

|   | awards, net of related tax effects | - | - |
|--------|------------------------------------|---|---|

 

| Net loss pro forma | $ (1,991,720)) | $ (2,681,064) |
|--------------------|----------------|---------------|

 

Loss per        share – basic and diluted:

|   | As reported | $ (.04) | $ (.13) |
|--------|-------------|---------|---------|

|   | Pro forma | $ (.04) | $ (.13) |
|--------|-----------|---------|---------|

 

Earnings        Per Share

The        numerator for the earnings per share calculation is the net loss for the period. The        denominator is the weighted average number of shares outstanding during the        period.

The        computation of diluted earnings per common share is based on the weighted average number of        shares outstanding during the period plus the common stock equivalents which would arise        from the exercise or conversion of warrants, options and convertible securities, if any,        using the treasury stock method. The Company had 7,303,650 stock equivalents of warrants at        September 30, 2007 that were excluded from the calculation of diluted earnings per share.        Common stock equivalents are not included in the diluted earnings per share calculation        when their effect is antidilutive.

Earnings        Per Share computation for Continuing operations:

|   | Nine months ended September                        30, |
|--------|--------------------------------------------------------|

|   | 2007 | 2006 |
|--------|------|------|

 

|   | Numerator – (loss from continuing                        operations) | $ | (1,991,720) | $ | (2,681,064) |
|--------|----------------------------------------------------------------------------|---|-------------|---|-------------|

|   | Denominator – weighted average |
|--------|--------------------------------------|

|   | number of shares outstanding | 53,897,700 | 20,545,100 |
|--------|------------------------------|------------|------------|

 

|   | Loss per share | $ | (0.04) | $ | (0.13) |
|--------|----------------|---|--------|---|--------|

 

 

 

11

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 1        — Organization and Summary of Significant Accounting Policies        (continued)

Earnings        Per Share (continued)

Earnings        Per Share computation from Discontinued Operations:

|   | Nine months ended September                        30, |
|--------|--------------------------------------------------------|

|   | 2007 | 2006 |
|--------|------|------|

 

|   | Numerator – (loss from discontinued operations)                        $ | Nil | $ | Nil |
|--------|--------------------------------------------------------------------------------|-----|---|-----|

|   | Denominator – weighted average |
|--------|--------------------------------------|

|   | number of shares outstanding | 53,897,700 | 20,545,100 |
|--------|------------------------------|------------|------------|

 

|   | Loss per share-discontinued operations | $ | (0.00) | $ | (0.00) |
|--------|----------------------------------------|---|--------|---|--------|

 

Earnings        Per Share computation for Net Income:

|   | Nine months ended September                        30, |
|--------|--------------------------------------------------------|

|   | 2007 | 2006 |
|--------|------|------|

 

|   | Numerator – (Net Loss) | $ | (1,991,720) | $ | (2,681,064) |
|--------|------------------------------|---|-------------|---|-------------|

|   | Denominator – weighted average |
|--------|--------------------------------------|

|   | number of shares outstanding | 53,897,700 | 20,545,100 |
|--------|------------------------------|------------|------------|

 

|   | Loss per share | $ | (0.04) | $ | (0.13) |
|--------|----------------|---|--------|---|--------|

 

Use of        Estimates in the Preparation of Financial Statements

The        preparation of financial statements in conformity with generally accepted accounting        principles requires management to make estimates and assumptions that affect the reported        amounts of assets and liabilities and disclosure of contingent assets and liabilities at        the date of the financial statements and the reported amounts of revenues and expenses        during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain        amounts in the 2006 financial statements may have been reclassified to conform to the 2007        presentation.

 

 

 

12

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 2        — Going Concern

As of        September 30, 2007, the Company’s revenue generating activities have not generated        sufficient funds for profitable operations, and the Company has incurred losses of        $17,906,404 since inception. These factors raise substantial doubt about the        Company’s ability to continue as a going concern.

We        anticipate that additional funding will be required in the next twelve months and that it        will be in the form of equity financing from the sale of our common stock. However, we do        not have any financing arranged and we cannot provide investors with firm assurance that we        will be able to raise sufficient funding from the sale of our common stock to fund our plan        of operations

Note 3        — Property and Equipment

Drilling        and service rigs and equipment are recorded at cost and are depreciated over their        estimated useful lives of ten years using the straight-line method. Office furniture and        equipment and automotive equipment are recorded at cost and depreciated over their        estimated useful lives of five to ten years using the straight-line method.

Upon sale        or retirement of property and equipment the cost and related accumulated depreciation of        the asset are removed from the Company's accounts and gain or loss is        recognized.

Expenditures for repair and maintenance are charged to expense as        incurred.

Depreciation expense for the nine months ended September 30, 2007 and 2006        was $24,300 and $1,019 respectively.

Note 4        – Short-term Note Payable 

|   | Note Payable - Global Convertible                        Megatrend LTD, unsecured, principal payable in full on February 23, 2008,                        interest at 10% payable at the end of each fiscal quarter, interest                        convertible to common shares at $0.35 per share. |  

                         

$500,000 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                  |                                             |

For the        nine months ended September 30, 2007, the Company recorded $30,000 as interest and        financing expense relating to a short-term note payable. Accrued interest as at September        30, 2007 for the outstanding short-term note payable totaled $30,000.

 

 

 

13

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 5        – Short-term Convertible Promissory Notes

In 2007,        the Company issued a secured convertible promissory note with a total face value of        $1,000,000 in exchange for a cash advance of the same amount. The principal and interest        are due in full on the maturity date of the note. The notes are secured by:

|   | 1. | All seismic data obtained in connection with the 3D Seismic                        Project Proposal and Agreement dated March 27, 2007 between the Company and                        TRNCO Petroleum Corporation which seismic data may not be shared with any                        third party without the express written consent of the holder of the                        note. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Any and all proceeds arising from or attributable to the                        assets. |
|--------|----|-----------------------------------------------------------------------------------------|

At the sole        discretion of the holder, the principal and accrued interest on the note may be converted        into shares of the Company’s common stock. The promissory notes bear interest at 10%        per annum. The principal and interest on the notes can be converted into shares of common        stock at a conversion price of $0.15. The terms of the note are outlined in the following        table.

|   | Convertible Promissory Note Payable – Miller Energy                        LLC, secured, payable in full on April 29, 2008, including interest at 10%,                        convertible at $0.15 per common share. |  

                         

$1,000,000 |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------|
|   |                                                                                                                                                                                                                       |                                               |

For the        nine months ended September 30, 2007, the Company recorded $41,918 as interest and        financing expense relating to short-term convertible promissory notes. Accrued interest as        at September 30, 2007 for the outstanding short-term convertible promissory notes totaled        $41,918.

The fair        value of the conversion option on the short-term promissory note of $854,600 as calculated        using the Black-Scholes model was recorded as a discount on the face value of the note.        This amount will be amortized using the straight-line method over the term of the note. For        the first nine months of 2007, the Company recorded $356,083 as interest expense due to        amortization of the discount.

The        following assumptions were used for the Black-Scholes valuation of the conversion        option:

|   | Risk-free interest rate | 4.88% |
|--------|-------------------------|-------|

|   | Expected life of option | 1.0 years |
|--------|-------------------------|-----------|

|   | Annualized volatility | 81% |
|--------|-----------------------|-----|

|   | Dividend rate | 0.00% |
|--------|---------------|-------|

 

 

14

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 6        – Long-term Convertible Promissory Notes

In 2007,        the Company issued secured convertible promissory notes with a total face value of        $4,000,000 in exchange for a cash advance of the same amount. The principal and interest        are due in full three years after the issue date of the note. The notes are secured        by:

1.         All seismic data        obtained in connection with the 3D Seismic Project Proposal and Agreement dated March 27,        2007 between the Company and TRNCO Petroleum Corporation which seismic data may not be        shared with any third party without the express written consent of the holder of the        note.

|   | 2. | Any and all proceeds arising from or attributable to the                        assets. |
|--------|----|-----------------------------------------------------------------------------------------|

At the sole        discretion of the holder, the principal and accrued interest on the note may be converted        into shares of the Company’s common stock. The promissory notes bear interest at 10%        per annum. The principal and interest on the notes can be converted into shares of common        stock at a conversion price of $0.15.

For the        nine months ended September 30, 2007, the Company recorded $76,027 as interest and        financing expense relating to long-term convertible promissory notes. Accrued interest as        at September 30, 2007 for the outstanding long-term convertible promissory notes totaled        $76,027.

The fair        value of the conversion option on the long-term promissory notes of $4,000,000 as        calculated using the Black-Scholes model was recorded as a discount on the face value of        the note. This amount will be amortized using the straight-line method over the term of the        note. For the first nine months of 2007, the Company recorded $270,833 as interest expense        due to amortization of the discount.

The        following assumptions were used for the Black-Scholes valuation of the conversion        option:

|   | Risk-free interest rate | 4.96% |
|--------|-------------------------|-------|

|   | Expected life of option | 3.0 years |
|--------|-------------------------|-----------|

|   | Annualized volatility | 93% |
|--------|-----------------------|-----|

|   | Dividend rate | 0.00% |
|--------|---------------|-------|

 

 

 

15

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 7        – Long-term Notes Payable

 

|   | Note Payable - FAGEB AG, secured by drilling equipment,                        payable in quarterly installments of $25,119 through July 31, 2008,                        including interest at 12%.                                                 |  

                         

$156,515                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                 |                                                                            |
|   | Note Payable - Global                        Convertible Megatrend LTD., secured by drilling equipment, payable in                        quarterly installments of $50,238 through July 31, 2008, including interest                        at 12%. |  

                         

                         

352,608 |
|   |                                                                                                                                                                                                                                                 |                                                                            |
|   | Note Payable - FAGEB AG, secured by drilling equipment,                        payable in quarterly installments of $37,722 through September 25, 2008,                        including interest at 12%.                                            |  

                         

264,802                                 |
|   | Note Payable – Bluemont Investment Ltd, payable in                        full by August 8, 2010, including interest at 10%.                                                                                                                   |  

                         

200,000                                 |
|   | Total                                                                                                                                                                                                                                                | 973,925                                                                         |
|   | Less current portion                                                                                                                                                                                                                                 | 773,925                                                                         |
|   |                                                                                                                                                                                                                                                 |                                                                            |
|   | Long-term notes payable                                                                                                                                                                                                                              | $ 200,000                                                                       |

 

For the        nine months ended September 30, 2007, the Company recorded $71,322 as interest and        financing expense relating to long-term notes payable. Accrued interest as at September 30,        2007 for the outstanding long-term notes payable totaled $71,322.

Note 8        – Convertible Debentures

Two        convertible debentures were issued during 2002 (May 3, 2002-$75,000 and May 6,        2002-$250,000), bearing interest at 7.5% per annum, which mature in three years. The        convertible debentures become immediately due and payable upon certain events of default        unless waived by the lender. Interest on the principal amount was due annually on the        anniversary date of the issue date. The conversion feature allowed the holder at any time        to convert any unpaid amount of principal or interest at $5.00 per share for a period of        three years from the date of issuance. Pursuant to the terms of the convertible debenture,        the Company agrees to file a Registration Statement within 60 days of conversion with the        U.S. Securities and Exchange Commission.

The        convertible debentures are secured by substantially all of the Company’s assets        consisting of all tangible and intangible property, but not limited to procedures,        instruments, devices, equipment, research, designs, registrations, licenses, trademarks,        software, patents, patents pending, “know-how” expertise, all additions and        replacements to such property and any other documentation related to the Valides® and        Medides systems for sterilizing and disinfecting infectious waste.

On January        14, 2004, the conversion price of the two debentures was adjusted to $0.10 per        share.

 

16

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 8        – Convertible Debentures (continued)

The terms        for these two convertible debentures were extended to May 3, 2008 and May 6, 2010,        respectively pursuant to the terms of extension agreements dated March 31, 2005. The        extension agreements require certain additional conditions related to the Company’s        obligations as follows:

1. The interest payable on the convertible debentures, as of May 4, 2005,        accrues at a rate of ten percent (10%) per annum payable on a quarterly basis with the        initial quarterly interest payments due on September 30, 2005 and at the end of each        quarter thereafter until repayment or conversion.

2. The right to convert the whole part or any part of the principal amounts        and accrued interest into shares of the Company extends until May 3, 2008 and May 6, 2010        respectively.

3. Upon conversion or repayment of the principal amounts and accrued        interest, the holders of the convertible debentures are entitled to a ten percent (10%)        bonus on the amount due as of such date. The market value of this bonus on the date of the        extension was recorded as financing expense of $32,500.

On October        3, 2005 the Company reached an agreement with the beneficiaries of these two outstanding        debentures for payment of interest accrued to September 30, 2005. The Company issued        136,298 shares of common stock to Global Convertible Megatrend Ltd. for $13,629 owed, and        56,250 shares of common stock to Max Fugman for $5,625 owed.

On April        11, 2006, the principal amount of the $75,000 debenture to Max Fugman and $3,863 of accrued        interest were converted into shares of common stock at $0.10 per share. After applying the        10% bonus, the Company issued 867,493 shares of common stock to extinguish $86,749 of debt        consisting of $75,000 of principal repayment and $11,749 in accrued interest. The Company        recorded interest expense of $954,243 to reflect the value of the shares issued upon        conversion in excess of the book amounts.

On June 15,        2006, the interest accrued on the $250,000 debenture to Global Convertible Megatrend Ltd.        was converted into shares of common stock at $0.10 per share. The Company issued 167,810        shares for $16,781 of interest owed. The Company recorded interest expense of $192,982 to        reflect the value of the shares issued upon conversion of the book amount.

On December        31, 2006, the interest accrued on the $250,000 debenture to Global Convertible Megatrend        Ltd. was converted into shares of common stock at $0.10 per share. The Company issued        145,200 shares for $14,520 of interest owed. The Company recorded interest expense of        $65,340 to reflect the value of the shares issued upon conversion of the book        amount.

On June 13,        2007, the principal amount of the $250,000 debenture to Global Convertible Megatrend Ltd.        and $12,357 of accrued interest were converted into shares of common stock at $0.10 per        share. After applying the 10% bonus, the Company issued 2,873,563 shares of common stock to        extinguish $287,356 of debt consisting of $250,000 of principal repayment and $37,356 in        accrued interest and bonus. The Company recorded compensation expense of $139,944 to        reflect the value of the shares issued upon conversion in excess of the debt and interest        amounts.

 

17

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 8        – Convertible Debentures (continued)

On November        28, 2005, the Company issued seven convertible debenture certificates for the total        principal sum of $3,320,000 due in full with accrued and unpaid interest on November 30,        2010. The interest at a rate of 7.0% per annum is payable on a semi-annual basis with the        initial payment due on June 1, 2006. The holders of the debentures has the right to convert        all or part of the principal and accrued interest into common shares of the Company at        $0.35 per share at any time prior to maturity.

On August        24, 2006, the interest accrued on the seven debentures was partially converted into shares        of common stock at $0.35 per share. The Company issued 263,563 shares for $92,247 of        interest owed. The Company recorded interest expense of $144,960 to reflect the value of        the shares issued upon conversion of the book amount.

On December        1, 2006, the interest accrued on the seven debentures was partially converted into shares        of common stock at $0.35 per share. The Company issued 260,712 shares for $91,249 of        interest owed. The Company recorded interest expense of $52,142 to reflect the value of the        shares issued upon conversion of the book amount.

For the        nine months ended September 30, 2007, the Company recorded $186,179 as interest and        financing expense relating to convertible debentures. Accrued interest as at September 30,        2007 for all outstanding debentures totaled $243,738.

The total        value of the principal of the seven convertible debentures outstanding as of September 30,        2007 was $3,320,000. Repayment of this principle is due according to the following        schedule:

|   | Year | Principal Repayment |
|--------|------|---------------------|

|   | 2007 | - |
|--------|------|---|

2008  -2009-2010$        3,320,000

Note 9        — Related Party Transactions

The Company        has entered into an agreement with Markus Mueller, a director of the Company for consulting        services. The agreement has an automatic renewal provision unless terminated by either        party. During the nine months ended September 30, 2007 and 2006, the Company recognized        consulting expense of $67,500 and $46,500 respectively. In 2007, the Company also        recognized compensation expense of $22,500 which relates to shares issued to convert an        outstanding balance due to Mr. Mueller. In 2007, the Company issued 750,000 shares for        $112,500 of consulting fees owed to Mr. Mueller. The Company recorded compensation expense        of $22,500 to reflect the value of the shares issued upon conversion of the book amount.        The balance of $30,000 was due to Mr. Mueller at September 30, 2007.

 

 

18

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 9        — Related Party Transactions (continued)

The Company        has entered into an agreement with Nora Coccaro, a director of the Company for consulting        services. The agreement has an automatic renewal provision unless terminated by either        party. During the nine months ended September 30, 2007 and 2006, the Company recognized        consulting expense of $85,500 and $406,500 respectively. Of the 2007 charge, $16,000        relates to the deemed value of 100,000 shares of common stock issued to Ms. Coccaro. Of the        2006 charge, $360,000 relates to the deemed value of 300,000 shares of common        stock.

Note 10        — Stockholders’ Equity Transactions

During the        nine months ended September 30, 2007, the Company issued 1,450,000 shares of common stock        valued at $285,000 for consulting and legal services.

During the        nine months ended September 30, 2007, the principal amount of a $250,000 convertible        debenture to Global Convertible Megatrend Ltd. and $12,357 of accrued interest were        converted into shares of common stock at $0.10 per share. After applying a 10% bonus, the        Company issued 2,873,563 shares of common stock to extinguish $287,356 of debt consisting        of $250,000 of principal repayment and $37,356 in accrued interest and bonus. The Company        recorded compensation expense of $139,944 to reflect the value of the shares issued upon        conversion in excess of the debt and interest amounts.

During the        nine months ended September 30, 2007, the Company issued 1,110,000 shares of common stock        at $0.15 per share for a total of $166,500.

During the        nine months ended September 30, 2007, the Company recorded $4,854,600 of discount on        promissory notes to value their conversion option as calculated using the Black-Scholes        model.

On July 25,        2006, the Company issued 1,336,992 units in an equity financing for a total of $8,021,952.        Each $6.00 unit comprised of 10 shares of common stock and 5 share purchase warrants, which        warrants are exercisable at $1.00 for a period of three years from the date of grant. A        total of 13,369,920 shares of common stock were issued and 6,684,960 warrants were issued.        The Company recorded $3,409,330 as a financing cost related to the issuance of the        warrants. As finder’s fees, the Company paid $225,096 in cash and issued 234,690        warrants exercisable at $0.72 for a period of three years from the date of grant. The        Company recorded $122,743 as a finder’s fee expense related to the issuance of these        warrants.

On        September 29, 2006, the Company issued 16,500,000 shares of common stock valued at        $13,200,000 pursuant to the acquisition of Providence Exploration. In connection with the        acquisition, the Company issued a further 3,500,000 shares of common stock valued at        $2,800,000 as payment of the outstanding balance for oil and gas leases in Val Verde        County.

The Company        acquired the following fixed assets upon acquisition:

|  

Drilling rig inventory   | $ 724,515    |
|----------------------------------|--------------|
| Property and equipment           | 47,979       |
| Oil and gas leases - undeveloped | 23,807,018   |
|                             | $ 24,579,512 |

 

 

19

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 10        — Stockholders’ Equity Transactions (continued)

During the        year ended December 31, 2006, the Company issued 2,004,778 shares of common stock valued at        $2,071,214 for debt.

Note 11        — Minority Interest

Minority        interest relates to the 10% interest in County Pipeline, LLC that is not held by the        Company. This subsidiary was formed in October of 2006 with the purpose of constructing an        oil and gas pipeline in Comanche County, Texas.

Note 12        — Preferred Stock

The        Company’s preferred stock may have such rights, preferences and designations and may        be issued in such series as determined by the Board of Directors. No shares were issued and        outstanding at September 30, 2007.

Note 13        — Warrants 

During        2005, in connection with the offering of 6,270,000 shares common stock and $3,320,000 of        convertible debentures during the year, a sales commission was partially paid in warrants.        The warrants are exercisable in whole or in part allowing the holders to purchase 348,000        shares at an exercise price of $0.30 before the expiry date of December 1, 2010. On the        date granted, the fair market value of these warrants, totaling $191,400, consisted of        $68,970 for warrants issued in connection with the common stock offering, and $122,430 for        warrants issued in connection with the debenture offering. The value of the warrants issued        in connection with the debenture offering was recorded as a financing expense.

As part of        the equity financing completed in July 2006, the Company issued 6,684,960 warrants        exercisable until July 25, 2009 at $1.00 per share. The Company recorded $3,409,330 as a        financing expense related to the issuance of these warrants based on their value as        calculated using the Black-Scholes model.

The        following assumptions were used for the Black-Scholes valuation of the warrants granted in        2006:

|   | Risk-free interest rate | 4.50% |
|--------|-------------------------|-------|

|   | Expected life of options | 3.0 years |
|--------|--------------------------|-----------|

|   | Annualized volatility | 177% |
|--------|-----------------------|------|

|   | Dividend rate | 0.00% |
|--------|---------------|-------|

 

 

 

20

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 13        — Warrants (Continued)

Transactions involving the Company’s warrant issuance are summarized        as follows:

 

|        |                           | Warrants Outstanding |                           |                    |                           |                                  | Warrants Exercisable           |
|-------------|--------------------------------|----------------------|--------------------------------|-------------------------|--------------------------------|---------------------------------------|--------------------------------|
| Year Issued |       | ExercisePrice        |       | NumberSharesOutstanding |       | WeighedAverageContractualLife (Years) |       | NumberExercisable |       | WeightedAverageExercisePrice |   |
| 2005        |                           | $                    | 0.30                           |                    |                           | 348,000                               |                           |   | 4.00 |   |   | 348,000 |   | $ | .30 |   |
| 2006        |                           | $                    | 1.00                           |                    |                           | 6,684,960                             |                           |   | 2.50 |   |   | 6,684,960 |   | $ | 1.00 |   |
| 2006        |                           | $                    | 0.70                           |                    |                           | 234,690                               |                           |   | 2.50 |   |   | 234,690 |   | $ | .70 |   |

         

|                                                                           |   | Number ofShares |      | WeightedAverageExercise Price |   |
|--------------------------------------------------------------------------------|--------|-----------------|-----------|-------------------------------|--------|
|                                                                           |   |            |      |                          |   |   |   |
| Outstanding at December 31, 2004                                               |   |            | 0         |                          | $      | 0 |   |
|                                                                           |   |            |      |                          |   |   |   |
| Granted                                                                        |   |            | 348,000   |                          | $      | .30 |   |
| Exercised                                                                      |   |            | —   |                          | $      | — |   |
| Cancelled                                                                      |   |            | (—  | )                             | $      | (— | ) |
| Outstanding at December 31, 2005                                               |   |            | 348,000   |                          | $      | .30 |   |
|                                                                           |   |            |      |                          |   |   |   |
| Granted                                                                        |   |            | 6,919,650 |                          | $      | .99 |   |
| Exercised                                                                      |   |            | —   |                          | $      | — |   |
| Cancelled                                                                      |   |            |      |                          | $      |   |   |
| Outstanding at December 31, 2006 and September 30,                        2007 |   |            | 7,267,650 |                          | $      | .96 |   |

 

Note 14        — Acquisition of Providence Exploration

 

On        September 29, 2006, the Company entered into a share purchase agreement pursuant to which        the Company acquired 100% control over Providence Exploration through the acquisition of        all of its outstanding member shares.

 

The        purchase price of the transaction required the Company to issue 20,000,000 common shares        with a deemed value of $16,000,000. The shares were used to eliminate $3,571,311 of debt        held by Providence Exploration. Prior to the transaction, Providence Exploration had a net        assets deficit of $1,961,149 which included $73,721 in cash. The excess of the deemed value        of the shares and fair value of the assets acquired amounted to $14,389,838 which was        allocated to the value of undeveloped oil and gas leases held by Providence Exploration at        the time of the acquisition. At the time of the acquisition, there was an intercompany        account balance of $9,189,364 for principal and interest of cash advances made by the        Company to Providence Exploration prior to the acquisition.

 

21

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 15        - Agreements

In October        2005, the Company signed a joint exploration agreement with Harding Company. Under the        terms of the agreement, the Company and Harding Company intend to explore, develop and        produce oil and gas from Marble Falls and Barnett Shale formations in targeted areas of the        Ft. Worth basin. Harding Company is appointed as operator.

The Company        is required pursuant to the agreement to fund 100% of all costs of the management and        operation for a minimum of 3 wells. The Company will carry Harding for its 10% working        interest in all wells drilled and completed through the pipeline connection phase, in the        project.

Effective        February 22, 2006, the Company entered into an agreement to purchase oil and gas leases in        Val Verde County, Texas. The purchase price was $3,849,600, payable $1,924,800 cash and        $1,924,800 note payable. In March 2006, Harding Company paid the Company 192,480 related to        the purchase. In connection with the acquisition of Providence Exploration, the Company        issued 3,500,000 shares of common stock valued at $2,800,000 as payment of the outstanding        balance for the oil and gas leases in Val Verde County.

In early        2007, the Company engaged TRNCO Petroleum Corporation of Midland, Texas to implement an I/O        System Two recording system in combination with the latest generation of state-of-the-art        acquisition and processing parameters to obtain high quality 3D seismic data for those        leases located in Val Verde County. The data is intended to illuminate deep gas targets at        depths ranging from 14,000 to 16,000 feet within the identified carbonates. TRNCO will        supervise the acquisition, processing, licensing and interpretation of all seismic data and        has engaged Dawson Geophysical Company to be responsible for obtaining the actual 3D        seismic data. Founded in 1952, Dawson is a leading provider of onshore seismic data        acquisition and processing services that operates two state-of-the-industry data processing        centers in Houston and Midland, Texas, staffed by experienced geophysicists. The processing        professionals use the latest kits of powerful processing tools and back their analytical        excellence with practical geophysical field experience in correlating complex producing        horizons. Dawson’s prior experience in the Val Verde Basin is expected to be of        considerable benefit to Providence in acquiring reliable 3D seismic data.

Note 16        – Commitments and Contingencies

The Company        leases office and warehouse space under an operating lease with monthly payments of 1,200        per month, expiring October 1, 2007. The Company also leases a vehicle under an operating        lease with monthly payments of 455.74, expiring in October 2007.

The        contract commitment cost for the agreement with TRNCO Petroleum Corporation (see Note 14)        is $4,553,787, payable in installments on or before August 1, 2007. The Company had paid        $5,000,000 to TRNCO by September 30, 2007 to cover project overruns.

Note 17        — Fair Value of Financial Instruments

The        Company’s financial instruments consist of cash, accounts receivable, accounts        payable and notes payable. The carrying amount of these items approximates fair value        because of their short-term nature and the notes payable bear interest at the market        interest rate.

 

22

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 18        — Stock Based Compensation

The Company        has adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS)        No. 123 (R), “Share Based Payment” as described in Note 1. No stock options        were granted in 2006 and 2005. No stock options were outstanding at September 30,        2007.

Note 19        — Reverse Common Stock Split 

Effective        August 25, 2003, the Company approved a 1-for-20 reverse common stock split. All common        share amounts, common stock option amounts and per share information have been        retroactively adjusted to reflect this common stock split in the accompanying financial        statements.

Note 20        — Recent Accounting Pronouncements 

In February        2006 the Financial Accounting Standards Board (FASB) issued Statement of Financial        Standards No. 155 Accounting for Certain Hybrid Financial Instruments — an        amendment of FASB Statements No. 133 and 140 (SFAS 155). This standard permits        fair value remeasurement for any hybrid financial instrument that contains an embedded        derivative that otherwise would require bifurcation. SFAS 155 allows an entity to make        an irrevocable election to measure such a hybrid financial instrument at fair value on an        instrument-by-instrument basis. The standard eliminates the prohibition on a QSPE from        holding a derivative financial instrument that pertains to a beneficial interest other than        another derivative financial instrument. SFAS 155 also clarifies which interest-only        and principal-only strips are not subject to the requirements of SFAS 133, as well as        determines that concentrations of credit risk in the form of subordination are not embedded        derivatives. SFAS 155 is effective for all financial instruments acquired or issued        after the beginning of the fiscal year that begins after September 15, 2006. Adoption        of SFAS 155 is not expected to have a material impact on our consolidated financial        position or results of operations.

In        July 2006, the Financial Accounting Standards Board (“FASB”) issued        Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in        Income Taxes,” which clarifies the accounting for uncertainty in income taxes        recognized in the financial statements in accordance with FASB Statement No. 109,        “Accounting for Income Taxes.” FIN 48 provides guidance on 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 derecognition, classification, interest and        penalties, accounting in interim periods, disclosures, and transition. FIN 48 becomes        effective beginning with our first quarter 2007 fiscal period. We are currently evaluating        the impact of this standard on our Consolidated Financial Statements.

In        September 2006, the FASB issued FASB Statement of Financial Accounting Standards        (“SFAS”) No. 157, Fair Value Measurements, which establishes a framework        for reporting fair value and expands disclosures about fair value measurements. SFAS        No. 157 becomes effective beginning with our first quarter 2008 fiscal period. We are        currently evaluating the impact of this standard on our Consolidated Financial        Statements.

In        September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for        Defined Benefit Pension and Other Postretirement Plans. Effective for our fiscal year        ending 2006, we will be required to fully recognize the assets and obligations associated        with our defined benefit plans. Effective for fiscal year ending 2008, we will be required        to measure a plan’s assets and liabilities as of the end of the fiscal year instead        of our current measurement date of September 30. We are currently evaluating the impact of        this standard on our Consolidated Financial Statements.

 

23

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

Note 21        — Subsequent Events

Subsequent        to the end of the quarter, the Company received $59,200 for subscriptions of common stock        priced at $0.08 per share. The Company anticipates closing this financing in the immediate        future.

End of        Notes to Financial Statements

 

24

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

**Supplemental Oil and Gas Information – FAS69**

 

The        following unaudited disclosures on standardized measures of discounted cash flows and        changes therein relating to proved oil and gas reserves are determined in accordance with        United States Statements of Financial Accounting Standards No. 69 “Disclosures About        Oil and Gas Producing Activities”.

 

*Standardized Measure of Discounted Future Net Cash Flows and Changes        Therein*

 

In        calculating the standardized measure of discounted future net cash flows, year-end constant        prices and cost assumptions were applied to the Company’s annual future production        from proved reserves to determine cash inflows. Future production and development costs are        based on constant price assumptions and assume the continuation of existing economic,        operating and regulatory conditions. Future income taxes are calculated by applying        statutory income tax rates to future pre-tax cash flows after provision for the tax cost of        oil and natural gas properties based upon existing laws and regulations. The discount was        computed by application of a 10 percent discount factor to the future net cash flows. The        calculation of the standardized measure of discounted future net cash flows is based upon        discounted future net cash flows prepared by the Company’s independent qualified        reserve evaluators in relation to the reserves they respectively evaluated, and adjusted by        the Company to account for management’s estimate obligations and future income taxes.        The Company cautions that the discounted future net cash flows relating to proved oil and        gas reserves are an indication of neither the fair market value of the Company’s oil        and gas properties, nor of the future net cash flows expected to be generated from such        properties. The discounted future net cash flows do not include the fair market value of        exploratory properties and probable or possible oil and gas reserves, nor is consideration        given to the effect of anticipated future changes in crude oil and natural gas prices,        development, asset retirement and production costs, and possible changes to tax and royalty        regulations. The prescribed discount rate of 10 percent may not appropriately reflect        future interest rates. The Company’s projections should not be interpreted as being        equivalent to fair market value.

 

25

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

**Supplemental Oil and Gas Information – FAS69        (continued)**

 

| **Net Proved Reserves***(1,                        2)* |
|--------------------------------------------------------|

 

|                                      | **Natural Gas**

**(*****millions of cubic                        feet)*** |   | **Crude Oil and Natural Gas Liquids**

**(*****thousands of                        barrels)*** |
|-------------------------------------------|----------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
| December 31, 2005                         | -                                                                          |   | -                                                                                              |
| Purchase of reserves in place             | -                                                                          |   | -                                                                                              |
| Production                                | -                                                                          |   | -                                                                                              |
| Adjustment for uneconomic wells           | -                                                                          |   | -                                                                                              |
| December 31, 2006 and

September 30, 2007 | -                                                                          |   | -                                                                                              |
|                                      |                                                                       |   |                                                                                           |
| Developed                                 | -                                                                          |   | -                                                                                              |
| Undeveloped                               | -                                                                          |   | -                                                                                              |
| Total                                     | -                                                                          |   | -                                                                                              |

 

 

|   | *(1)* | *Definitions:* |
|--------|-------|----------------|

|   | *a.* | *“Net*” reserves are                        the remaining reserves of the Company, after deduction of estimated                        royalties and including royalty interests. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | *b.* | *“Proved oil and gas reserves.”*Proved oil and gas reserves are the estimated quantities of                        crude oil, natural gas, and natural gas liquids which geological and                        engineering data demonstrate with reasonable certainty to be recoverable in                        future years from known reservoirs under existing economic |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

and operating conditions, i.e. prices and costs as of the date the estimate        is made. Prices include consideration of changes in existing prices provided only by        contractual arrangements, but not on escalations based upon future conditions.

 

Reservoirs are considered proved if economic product ability is supported by        either actual production or conclusive formation test. The area of a reservoir considered        proved includes that portion delineated by drilling and defined by gas-oil and /or        oil-water contacts, if any; and the immediately adjoining portions not yet drilled, but        which can be reasonably judged as economically productive on the basis of available        geological and engineering data. In the absence of information on fluid contacts, the        lowest known structural occurrence of hydrocarbons controls the lower proved limit of the        reservoir.

         

|   | i. | Reserves which can be produced economically through                        application of improved recovery techniques (such as fluid injection) are                        included in the “proved” classification when successful testing                        by a pilot project, or the operation of an |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

26

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

**Supplemental Oil and Gas Information – FAS69        (continued)**

         

|   | ii. | installed program in the reservoir, provides support for the                        engineering analysis on which the project or program was based. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | iii. | Estimates of proved reserves do not include the                        following: |
|--------|------|-----------------------------------------------------------------------------------|

         

Oil that may become available from known reservoirs but is classified        separately as “indicated additional reserves”;

         

Crude oil, natural gas, and natural gas liquids, the recovery of which is        subject to reasonable doubt because of uncertainty as to geology, reservoir        characteristics, or economic factors;

 

Crude oil, natural gas, and natural gas liquids, that may occur in undrilled        prospects; and

         

Crude oil, natural gas, and natural gas liquids, that may be recovered from        oil shales, coal, gilsonite and other such sources.

 

|   | *c.* | *“Proved developed oil and gas                        reserves.”*Proved developed oil and gas                        reserves are reserves that can be expected to be recovered through existing                        wells with existing equipment and operating methods. Additional oil and gas                        expected to be obtained through the application of fluid injection or other                        improved recovery techniques for supplementing the natural forces and                        mechanisms of primary recovery should be included as “proved                        developed reserves” only after testing by a pilot project or after                        the operation of an installed |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

program has confirmed through production response that increased recovery        will be achieved.

         

|   | *d.* | *“Proved undeveloped reserves.”*Proved undeveloped oil and gas reserves are reserves that                        are expected to be recovered from new wells on undrilled acreage, or from                        existing wells where a relatively major expenditure is required for                        recompletion. Reserves on undrilled acreage shall be limited to those                        drilling units offsetting productive unites that are reasonably certain of                        production when drilled. Proved reserves for other undrilled unites can be                        claimed |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

only where it can be demonstrated with certainty that there is continuity of        production from the existing productive formation. Under no circumstances should estimates,        for proved undeveloped reserves be attributable to any acreage for which an application of        fluid injection or other improved recovery technique is contemplated, unless such        techniques have been proved effective by actual tests in the area and in the same        reservoir.

 

*(2) The Company does not file any estimates of total net proved crude oil        or natural gas reserves with any U.S. federal authority or agency other than the        SEC.*

         

 

27

 

----

 

PROVIDENCE RESOURCES INC.

(A        Development Stage Company)

NOTES TO        CONSOLIDATED FINANCIAL STATEMENTS

September        30, 2007 and 2006

 

**Supplemental Oil and Gas Information – FAS69        (continued)**

 

**Standardized Measure of Discounted Future Net Cash Flows Related to        Proved Oil and Gas Reserves**

 

The Company        has no proved reserves and no oil and gas production and therefore has not presented the        Standardized Measure of Discounted Future Net Cash Flows or operating results.

 

**Capitalized Costs**

 

| **September 30, 2007**          | **United States** |
|---------------------------------|-------------------|
| Proved oil and gas properties   | $ -               |
| Unproved oil and gas properties | 31,099,253        |
| Total capital costs             | 31,099,253        |
| Accumulated depletion           | (-)               |
| Net capitalized costs           | $ 31,099,253      |

 

**Costs        Incurred**

|                                                            | **United States** |
|-----------------------------------------------------------------|-------------------|
| **Nine months ended September 30,                        2007** |              |
| Acquisitions:                                                   |              |
| Proved reserves                                                 | $ -               |
| Unproved reserves                                               | -                 |
| Total acquisitions                                              | -                 |
| Exploration costs                                               | 4,832,272         |
| Development costs                                               | -                 |
| Asset retirement obligations                                    | -                 |
| Total costs incurred                                            | $ 4,832,272       |

 

 

28

 

----

 

 

 

**ITEM 2.        MANAGEMENT'S PLAN OF OPERATION**

 

This        Management's Plan of Operation that discusses our financial condition and results of        operations and other parts of this report contains 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** 

 

The Company        was incorporated under the laws of the State of Texas on February 17, 1993, as “GFB        Alliance Services, Inc.” We have since undergone several name changes and on        September 29, 2006, adopted the name “Providence Resources, Inc.” The Company        is involved in the exploration and development of oil and gas in Hamilton, Comanche and Val        Verde Counties, Texas.

 

**Plan        of Operation**

 

Over the        next twelve months the Company intends to:

         

|   | **•** | seismically explore for gas prospects within the Val Verde                        leases; |
|--------|------------|-------------------------------------------------------------------------------------------|

|   | **•** | initiate drilling on the Val Verde leases to include                        multiple deep drilling targets for natural gas production; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | evaluate the prospect of further development of acreage that                        remains under lease in Comanche and Hamilton County. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------|

 

Seismic        Exploration – Val Verde County Leases

 

On March        27, 2007 the Company engaged TRNCO Petroleum Corporation to implement an I/O System Two        recording system in combination with the latest generation of state-of-the-art acquisition        and processing parameters to obtain high quality 3D seismic data from the Val Verde County        leases. The data is intended to illuminate deep gas targets at depths ranging from 14,000        to 16,000 feet in the Ellenberger carbonate, Strawn carbonate and Pennsylvanian-Wolfcamp        sandstone reservoirs which underlie our 12,832 acres of leasehold interests over 57 square        miles in Val Verde County, Texas. TRNCO is supervising the acquisition, processing,        licensing and interpretation of all seismic data while Dawson Geophysical Company is        responsible for obtaining the actual 3D seismic data of which approximately 60% has been        obtained as of the date of this report. The anticipated final processing of seismic data is        expected by the middle of January 2008. Interpretative work to identify and prioritize        initial drilling locations will be completed in the first quarter of 2008.

 

Drilling        – Val Verde Leases

 

On June 29,        2007, the Company entered into an exploration and development agreement with Miller Energy,        LLC and certain of its affiliates (“Miller”) providing for the further        exploration and development of the Company’s oil and gas leasehold interests in Val        Verde County, Texas (“Agreement”).

 

The        Agreement includes the following provisions:

 

29

 

----

 

 

 

|   | § | Miller will undertake all activities necessary to test and                        develop the Company’s oil and gas leasehold interests in Val Verde                        County; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | Miller will fund up to $10,000,000 of drilling costs in Val                        Verde County through a series of convertible debentures; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | Miller will acquire a 10% working interest in the                        Company’s Val Verde County oil and gas leasehold interests;                        and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | The Company will appoint a new chief executive officer                        affiliated with Miller; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------|

|   | § | The Company will appoint two additional members to the board                        of directors both of whom are affiliated with Miller. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

 

The Company        is now actively working with Miller in anticipation of obtaining that seismic data from        TRNCO Corporation that is expected to indicate prospective drill targets. Initial drilling        on the leases is anticipated within the first six months of 2008.

 

Comanche        and Hamilton County Leases

 

On October        1, 2005, Providence Exploration purchased interests in approximately 6,272 acres of oil and        gas leases located in Comanche and Hamilton Counties, Texas. Seismic work was completed on        the leases and initial drill targets identified. An oil and gas pipeline infrastructure was        also completed in Southeast Comanche County by Comanche County Pipeline, LLC, a partnership        owned 90% by the Company and 10% by Harding Company and others. Harding Company drilled        four wells, Marrs #1, Steward #1H, Nowell #1 and Patton #2H on the Comanche County leases.        None of the wells indicated commercial quantities of gas that could be produced on an        economic basis. We now retain approximately 3,000 acres in Comanche and Hamilton County as        leases have started to expire. No additional wells are anticipated for these leases until        such time as further evaluation of existing work is completed. 

 

**Results of Operations**

 

During the        nine month period ended September 30, 2007, the Company was involved in (i) seismic        exploration activities on the Val Verde County leases with TRNCO, (ii) raising additional        capital by way of loans to fund the exploration, and development of those properties under        lease (iii) evaluating the performance and results of drilling activities on the Comanche        and Hamilton County leases and (iv) engaging Miller Energy, LLC. as a partner in the        development of the Val Verde County leases.

 

The        Company’s business development strategy is prone to significant risks and        uncertainties that can have an immediate impact on efforts to realize net cash flow. In the        near term, we will not be able to generate sufficient cash flow from operations to sustain        our business as we continue to incur lease development expenses without any corresponding        revenue. Further, we can offer no assurance that our efforts to identify commercial        quantities or oil or gas that can be produced economically will be successful or that the        Company will ever produce revenue from oil and gas exploration activities.

 

***Net        Losses***

 

For the        period from inception until September 30, 2007, the Company incurred a net loss of        $17,906,404. Net losses for the three month period ended September 30, 2007 were $982,903        as compared to $975,505 for the three months ended September 30, 2006. Net losses for the        nine month period ended September 30, 2007 were $1,991,720 as compared to $2,681,064 for        the nine months ended September 30, 2006. The increase in net losses over the comparative        three month periods can be primarily attributed to a loss associated with the disposal of        equipment. The decrease in net losses over the comparative nine month periods can be        primarily attributed to a decrease in general and administrative expenses and a decrease in        interest expenses. We did not generate any revenues during this period.

 

30

 

----

 

 

 

We will        continue to operate at a loss through fiscal 2007 due to the nature of the Company’s        oil and gas exploration and development operations and cannot determine whether we will        ever generate revenues from operations.

 

***Expenses***

 

General and        administrative expenses for the three month period ended September 30, 2007 were $175,956        as compared to $293,572 for the three months ended September 30, 2006. General and        administrative expenses for the nine month period ended September 30, 2007 were $688,964 as        compared to $913,144 for the nine months ended September 30, 2006. The decrease in general        and administrative expenses over the comparative three and nine month periods can be        primarily attributed to decreases in legal, consulting, and accounting costs. We expect        that general and administrative expenses will continue to decrease in future        periods.

 

Interest        expenses for the three month period ended September 30, 2007 were $658,634 as compared to        $878,345 for the three months ended September 30, 2006. Interest expenses for the nine        month period ended September 30, 2007 were $1,007,361 as compared to $2,155,712 for the        nine months ended September 30, 2006. Interest expenses over the comparative three and nine        month periods can be attributed to the debt financing involving notes payable and        convertible debentures.

 

Depreciation expense for the nine months ended September 30, 2007 and 2006        was $24,300 and $1,019 respectively.

 

***Capital Expenditures***

 

The Company        spent no amounts on capital expenditures for the period from February 17, 1993 (inception)        to September 30, 2007, except those costs of unproved properties acquired with Providence        Exploration, pipeline construction, and related exploration costs.

 

**Income Tax Expense (Benefit)**

 

The Company        has an income tax benefit resulting from net operating losses that may offset any future        operating profit.

 

**Impact of Inflation**

 

The Company        believes that inflation has had an effect on Providence Exploration’s operations due        to the increased interest in oil and gas exploration over the last three years which has        increased prices for labor, maintenance services and equipment. We believe that we can        offset inflationary increases by improving operating efficiencies.

 

**Liquidity and Capital Resources**

 

The Company        had current assets of $1,588,971 and total assets of $34,266,567 as of September 30, 2007.        These assets include cash on hand of $1,158,885 and undeveloped oil and gas leases of        $31,099,253. Stockholders equity in the Company was $27,868,767 at September 30,        2007.

 

Cash flows        used in operating activities were $1,109,837 for the nine month period ended September 30,        2007, compared to cash flows used in operating activities of $426,974 for the nine month        period ended September 30, 2006. The cash flows used in operating activities during the        current period is due primarily to net losses and increases in accounts receivable and        prepaid expenses.

 

31

 

----

 

 

 

Cash flows        used in investing activities were $5,171,833 for the nine month period ended September 30,        2007, compared to $5,738,490 for the nine month period ended September 30, 2006. Cash flows        used in investing activities during the current period was due to the acquisition of        property and equipment in connection with the Val Verde County leases.

 

Cash flows        from financing activities were $5,900,456 for the nine month period ended September 30,        2007, compared to $7,946,952 for the nine month period ended September 30, 2006. Cash flows        from financing activities during the current period consisted of proceeds from convertible        promissory notes of $5,000,000, proceeds from notes payable, the sale of common stock and        our minority interest in a subsidiary.

 

We had a        working capital deficit of $867,023 as of September 30, 2007, and have funded our cash        needs from inception through revenues and a series of debt and equity transactions,        including several private placements. We do not believe that our current assets are        sufficient to conduct our exploration and development activities over the next twelve (12)        months though we do intend to rely on the terms and conditions of our funding agreement        with Miller Energy LLC to finance a prospective drilling program on the Val Verde leases        next year. However, no assurances can be given that additional funding, as needed to        explore and develop our lease interests will be available to us on acceptable terms or at        all. Our inability to obtain funding, as necessary, would have a material adverse affect on        our business.

 

The Company        has no current plans for the purchase or sale of any plant or equipment. We have no current        plans to make any changes in the number of employees.

 

**Off        Balance Sheet Arrangements** 

 

As of        September 30, 2007, the Company 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.

 

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

 

The        statements contained in the section titled*Management’s Plan        of Operation*and*Results of        Operations,*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        because of 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; |
|--------|------------|----------------------------------------|

|   | **•** | uncertainties related to oil and gas exploration and                        development; |
|--------|------------|------------------------------------------------------------------------------------------|

|   | **•** | our ability to generate revenues through oil and gas                        production to fund future operations; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------|

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

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

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

 

 

32

 

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We wish to        caution readers that the Company’s operating results are subject to various risks and        uncertainties that could cause our actual results to differ materially from those discussed        or anticipated 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 that is required by law.

 

**Critical Accounting Policies**

 

In the        notes to the audited consolidated financial statements for the Company for the year ended        December 31, 2006, the Company’s auditors discussed those accounting policies that        are considered to be significant in determining the results of operations and financial        position. The Company’s auditors believe that their accounting principles conform to        accounting principles generally accepted in the United States of America.

 

The        preparation of financial statements requires management to make significant estimates and        judgments that affect the reported amounts of assets, liabilities, revenues and expenses.        By their nature, these judgments are subject to an inherent degree of uncertainty. On an        on-going basis, we evaluate our estimates, including those related to bad debts,        inventories, intangible assets, warranty obligations, product liability, revenue, and        income taxes. We base our estimates on historical experience and other facts and        circumstances that are believed to be reasonable, and the results form the basis for making        judgments about the carrying value of assets and liabilities. The actual results may differ        from these estimates under different assumptions or conditions.

 

***Revenue Recognition***

 

Revenues        are recorded upon the completion of the services, with the existence of an agreement and        where collectability is reasonably assured. Oil and natural gas production revenue, if any,        will be recognized at the time and point of sale after the product has been extracted from        the ground.

 

***Stock-Based Compensation***

 

On January        1, 2006, we adopted SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment, which        addresses the accounting for stock-based payment transactions in which an enterprise        receives employee services in exchange for (a) equity instruments of the enterprise or (b)        liabilities that are based on the fair value of the enterprise’s equity instruments        or that may be settled by the issuance of such equity instruments. In January 2005, the        Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107,        which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R        eliminates the ability to account for stock-based compensation transactions using the        intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting        for Stock Issued to Employees, and instead generally requires that such transactions be        accounted for using a fair-value-based method. We use the Black-Scholes-Merton        (“BSM”) option-pricing model to determine the fair-value of stock-based awards        under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No.        123, Accounting for Stock-Based Compensation. We have elected the modified prospective        transition method as permitted by SFAS No. 123R and accordingly prior periods have not been        restated to reflect the impact of SFAS No. 123R. The modified prospective transition method        requires that stock-based compensation expense be recorded for all new and unvested stock        options, restricted stock, restricted stock units, and employee stock purchase plan shares        that are ultimately expected to vest as the requisite service is rendered beginning on        January 1, 2006, the first day of our fiscal year 2006. Stock-based compensation expense        for awards granted prior to January 1, 2006 is based on the grant date fair-value as        determined under the pro forma provisions of SFAS No. 123.

 

33

 

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Prior to        the adoption of SFAS No. 123R, we measured compensation expense for our employee        stock-based compensation plans using the intrinsic value method prescribed by APB Opinion        No. 25. We applied the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148,        Accounting for Stock-Based Compensation – Transition and Disclosure, as if the        fair-value-based method had been applied in measuring compensation expense. Under APB        Opinion No. 25, when the exercise price of the Company’s employee stock options was        equal to the market price of the underlying stock on the date of the grant, no compensation        expense was recognized. We account for equity instruments issued in exchange for the        receipt of goods or services from other than employees in accordance with SFAS No. 123 and        the conclusions reached by the Emerging Issues Task Force (“EITF”) in Issue No.        96-18. Costs are measured at the estimated fair market value of the consideration received        or the estimated fair value of the equity instruments issued, whichever is more reliably        measurable. The value of equity instruments issued for consideration other than employee        services is determined on the earliest of a performance commitment or completion of        performance by the provider of goods or services as defined by EITF 96-18.

 

***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 re-measurement 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. The adoption of this statement is not expected to have a material        effect on the Company‘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. The adoption of        this statement is not expected to have a material effect on the Company’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. The Company has filed income tax returns in the U.S. federal jurisdiction        and in certain states. The Company is no longer subject to U.S. federal, state and local        income tax examinations by tax authorities for years before 2002. The Company adopted the        provisions of FIN 48 on January 1, 2007.

 

 

34

 

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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 the Company’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 the        Company’s future reported financial position or results of operations.

 

In        September 2006, the Commission 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. The Company is currently        evaluating the impact of adopting SAB No. 108 but does not expect that it will have a        material effect on our 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. The Company is        currently assessing the impact of SFAS No. 159 on our financial position and results of        operations.

 

**RISKS        FACTORS**

 

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.

 

 

 

35

 

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***Risks        Related To The Company’s Business***

 

The        Company has a history of operating losses and such losses may continue in the        future.

 

Since the        Company’s inception in 1993, our operations have resulted in a continuation of losses        and an accumulated deficit of $15,914,684 at December 31, 2006 that increased to        $17,906,404 as of September 30, 2007. We will continue to incur operating losses until such        time as we begin producing oil and gas revenue, which may or may not eventuate. Should the        Company fail to produce oil and gas revenue we may continue to operate at a loss and may        never be profitable.

 

The        Company has a limited operating history.

 

The Company        acquired Providence Exploration on September 29, 2006, which company first began oil and        gas exploration operations during the fourth quarter of 2005. As such, our limited        operating history provides an inadequate track record from which to base future projections        of successful operation.

 

The        Company has a history of uncertainty about continuing as a going concern.

 

The        Company’s audits for the periods ended December 31, 2006 and December 31, 2005        expressed substantial doubt as to our ability to continue as a going concern as a result of        recurring losses, an accumulated deficit of $15,914,684 as of December 31, 2006, and        revenue generating activities that were insufficient to sustain operations. Unless we are        able to cure this pattern of reoccurring losses and insufficient revenue, our ability to        continue as a going concern will be in jeopardy.

 

The        Company cannot represent that it will be successful in continuing        operations.

 

The Company        has not, to date, generated sufficient revenue from operations to cover expenses and may        not generate sufficient revenue over the next twelve months to ensure continued oil and gas        development operations. Should the Company be unable to realize sufficient revenue over        that time period, it will be forced to raise additional capital to remain in operation. We        have no commitments for the provision of additional capital and can offer no assurance that        such capital will be available if necessary to continue operations.

 

***Risks        Related to the Oil and Gas Industry***

 

Oil and        natural gas drilling and producing operations involve various risks which could result in        net losses.

 

Drilling        activities are subject to many risks, including the risk that no commercially productive        reservoirs will be discovered. Wells which we drill may not be productive, and, thus, we        may not be able to recover all or any portion of our investment in such wells. Drilling for        oil and natural gas may involve unprofitable efforts, not only from dry wells, but also        from wells that are productive but do not produce sufficient net reserves to return a        profit after deducting drilling, operating and other costs. The seismic data and other        technologies which we use do not allow us to know conclusively prior to drilling a well        that oil or natural gas is present or may be produced economically. The cost of drilling,        completing and operating a well is often uncertain, and cost factors can reduce the        feasibility of a project to produce a profit. Further, our drilling operations may be        curtailed, delayed or canceled as a result of numerous factors, including:

 

 

36

 

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|   | § | unexpected drilling conditions; |
|--------|--------|---------------------------------|

|   | § | title problems; |
|--------|--------|-----------------|

|   | § | pressure or irregularities in formations; |
|--------|--------|-------------------------------------------|

|   | § | equipment failures or accidents; |
|--------|--------|----------------------------------|

|   | § | adverse weather conditions; |
|--------|--------|-----------------------------|

|   | § | compliance with environmental and other governmental                        requirements; and |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | § | cost of, or shortages or delays in the availability of,                        drilling rigs, equipment and services. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|

 

Our        operations are subject to all the risks normally incident to the operation and development        of oil and natural gas properties and the drilling of oil and natural gas wells,        including:

 

|   | § | encountering well blowouts; |
|--------|--------|-----------------------------|

|   | § | cratering and explosions; |
|--------|--------|---------------------------|

|   | § | pipe failure; |
|--------|--------|---------------|

|   | § | fires; |
|--------|--------|--------|

|   | § | formations with abnormal pressures resulting in                        uncontrollable flows of oil and natural gas; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | § | brine or well fluids; and |
|--------|--------|---------------------------|

|   | § | release of contaminants into the environment and other                        environmental hazards and risks. |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

 

The nature        of these risks is such that some liabilities including environmental fines and penalties        could exceed our ability to pay for the damages. We could incur significant costs due to        these risks that could result in net losses.

 

The        Company is subject to federal, state and local laws and regulations which could create        liability for personal injuries, property damage, and environmental damages. 

 

Exploration        and development, exploitation, production and sale of oil and natural gas in the United        States is subject to extensive federal, state and local laws and regulations, including        complex tax laws and environmental laws and regulations. Existing laws or regulations, as        currently interpreted or reinterpreted in the future, or future laws or regulations could        harm the Company’s business, results of operations and financial condition. We may be        required to make large expenditures to comply with environmental and other governmental        regulations. Matters subject to regulation include oil and gas production and saltwater        disposal operations and our processing, handling and disposal of hazardous materials, such        as hydrocarbons and naturally occurring radioactive materials, discharge permits for        drilling operations, spacing of wells, environmental protection, reports concerning        operations, and taxation. Under these laws and regulations, we could be liable for personal        injuries, property damage, oil spills, discharge of hazardous materials, reclamation costs,        remediation, clean-up costs and other environmental damages.

 

Shortages of oil field equipment, services and qualified personnel could        reduce the Company’s profit margin, cash flow and operating results. 

 

The demand        for qualified and experienced field personnel to drill wells and conduct field operations,        geologists, geophysicists, engineers and other professionals in the oil and natural gas        industry can fluctuate significantly, often in correlation with oil and natural gas prices,        causing periodic shortages. There have also been shortages of drilling rigs and other        equipment, as demand for rigs and equipment has increased along with the number of wells        being drilled. These factors also cause significant increases in costs for equipment,        services and personnel. Higher oil and natural gas prices generally stimulate increased        demand and result in increased prices for drilling rigs, crews and associated supplies,        equipment and services. We cannot be certain when or if we will experience these issues and        these types of shortages or price increases which could significantly decrease any profit        margin, cash flow and operating results on any particular well or restrict our ability to        drill additional wells.

 

37

 

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The        results of the Company’s operations depend on the exploration efforts of Miller        Energy, LLC, Harding Company and TRNCO Petroleum Corporation, all of whom are third        parties. 

 

The        management of exploration for the Company in Comanche and Hamilton Counties is provided by        Harding Company, the management of exploration for the Company in Val Verde County, Texas        will be provided by Miller Energy, LLC and certain of its affiliates, while 3D seismic        exploration of oil and natural gas prospects in Val Verde is dependent on an independent        local company, TRNCO Petroleum Corporation. The fact that the Company is dependent on the        operations of third parties for the results of exploration efforts and the prospective        production of oil and natural gas assets could impede our ability to realize a net profit        from operations.

 

Oil and        natural gas prices are volatile, and any substantial decrease in prices could cause the        Company to continue to operate at a loss. 

 

Our future        financial condition, results of operations and the carrying value of our oil and natural        gas properties will depend primarily upon the prices we receive for production. Oil and        natural gas prices historically have been volatile and are likely to continue to be        volatile in the future. Our cash flow from operations will be highly dependent on the        prices that we receive for oil and natural gas. This price volatility also affects the        amount of 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; |
|--------|--------|-------------------------------|

|   | § | the domestic supply; |
|--------|--------|----------------------|

|   | § | domestic governmental regulations and taxes; |
|--------|--------|----------------------------------------------|

|   | § | the price and availability of alternative fuel                        sources; |
|--------|--------|--------------------------------------------------------------------------------|

|   | § | weather conditions; and |
|--------|--------|-------------------------|

|   | § | market uncertainty. |
|--------|--------|---------------------|

 

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 future revenue, but could reduce the amount of oil        and natural gas that we can produce economically and, as a result, could cause us to        continue to operate at a loss. Should the oil and natural gas industry experience        significant price declines, we may continue to operate at a loss.

 

***Risks        Related to the Company’s Shares***

 

The        Company will require additional capital funding.

 

The Company        will require additional funds, either through equity offerings or debt placements to        develop our operations. Such additional capital may result in dilution to our current        shareholders. Our ability to meet short-term and long-term financial commitments depends on        future cash. There can be no assurance that future income will generate sufficient funds to        enable us to meet our financial commitments.

 

 

 

 

38

 

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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.

 

**Going        Concern** 

 

The        Company’s audit expressed substantial doubt as to the Company’s ability to        continue as a going concern as a result of reoccurring losses, lack of revenue generating        activities, and an accumulated deficit of $15,914,684 as of December 31, 2006, which        increased to $17,906,404 at September 30, 2007. These conditions raise substantial doubt        about the Company’s ability to continue as a going concern.

 

Management’s plan to address the Company’s ability to continue        as a going concern, include the development and prospective production of oil and natural        gas operations, and the conversion of outstanding debt to equity. The successful outcome of        these activities cannot be determined at this time, and there is no assurance that, if        achieved, we would then have sufficient funds to execute our intended business plan or        generate positive operating results.

 

 

 

 

 

 

 

39

 

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**ITEM 3.        CONTROLS AND PROCEDURES**

 

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

 

***(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 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        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.** | **CHANGES IN SECURITIES** |
|-------------|---------------------------|

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

Exhibits        required to be attached by Item 601 of Regulation S-B are listed in the Index to Exhibits        on page 42 of this Form 10-QSB, and are incorporated herein by this reference.

 

40

 

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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 15th        day of November 2007.

 

***Providence Resources, Inc.***

 

/s/        Gilbert Burciaga

Gilbert        Burciaga

Chief        Executive Officer, Chief Financial Officer, Principal Accounting Officer, and        Director

 

 

 

 

 

 

 

41

 

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**INDEX TO EXHIBITS**

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

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

         

| 3(i)(a) | *  Articles of Incorporation (incorporated by                        reference from the Form 10-SB filed with the Commission on April 17,                        2000). |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(i)(b)(c) | *  Amendment to Articles of Incorporation                        (incorporated by reference from the Form 10-SB filed with the Commission on                        April 17, 2000). |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(i)(d) | *  Amended and Restated Articles of Incorporation                        (incorporated by reference from the Form 10-SB filed with the Commission on                        April 17, 2000). |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(i)(e) | *  Articles of Amendment to the Amended and                        Restated Articles of Incorporation (incorporated by reference from the Form                        10-QSB filed with the Commission on November 17, 2003). |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(i)(f) | *  Amendment to the Amended and Restated Articles                        of Incorporation (incorporated by reference from the Form 8-K filed with                        the Commission on October 2, 2006). |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(i)(g) | * | Amendment to the Amended and Restated Articles of                        Incorporation. |
|---------|---|-----------------------------------------------------------------------------------------|

| 3(ii)(a) | *  Bylaws of Providence (incorporated by reference                        from the Form 10-SB filed with the Commission on April 17,                        2000). |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(ii)(b) | *  Amended and Restated Bylaws of Providence                        (incorporated by reference from the Form 8-K filed with the Commission on                        October 26, 2006). |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(i) | *  Joint Venture Agreement between Providence                        Exploration and Harding Company, dated October 1, 2005 (incorporated by                        reference from the Form 8-K filed with the Commission on October 2,                        2006). |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(ii) | *  Extension of the Term of Series “A”                        Convertible Debenture Certificate with Max Fugman (incorporated by                        reference from the Form 10-KSB/A filed with the Commission on October 11,                        2005). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(iii) | *  Extension of the Term of Series “A”                        Convertible Debenture Certificate with Global Convertible Megatrend Ltd.                        (incorporated by reference from the Form 10-KSB/A filed with the Commission                        on October 11, 2005). |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(iv) | *  Agreement for Purchase and Sale between                        Providence Exploration and Global Mineral Solutions, L.P., dated February                        22, 2006 (incorporated by reference from the Form 8-K filed with the                        Commission on October 2, 2006). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(v) | *  Letter Agreement between Providence Exploration                        and Harding Company, dated March 30, 2006 (incorporated by reference from                        the Form SB2/A-2 filed with the Commission on February 28,                        2007). |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(vi) | *  Consulting Agreement with Eastgate Associates                        Ltd., dated April 1, 2006 (incorporated by reference from the Form 10-QSB                        filed with the Commission on November 13, 2006). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(vii) | *  Securities Exchange Agreement dated April 10,                        2006, between Providence, Providence Exploration, and the membership unit                        holders of Providence Exploration (filed on Form 8-K with the Commission on                        April 14, 2006). |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(viii) | *  Note Exchange Agreement dated April 10, 2006,                        between Providence and the holders of certain promissory notes issued by                        Providence Exploration (filed on Form 8-K with the Commission on April 14,                        2006). |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(ix) | *  Amendment to the Terms of the Securities                        Exchange Agreement dated effective as of May 26, 2006, between Providence,                        Providence Exploration, and the membership unit holders of Providence                        Exploration (filed on Form 8-K with the Commission on July 3,                        2006). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(x) | *  Amendment to the Terms of the Note Exchange                        Agreement dated effective as of May 26, 2006, between Providence and the                        holders of certain promissory notes issued by Providence Exploration (filed                        on Form 8-K with the Commission on July 3, 2006). |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(xi) | *  Exploration and development agreement with                        Miller Energy, LLC and certain of its affiliates dated June 29, 2007 (filed                        on Form 8-K with the Commission on July 11, 2007). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10(xii) | *  Secured Revolving Convertible Promissory Note                        with Miller Energy, LLC dated June 29, 2007 (filed on Form 8-K with the                        Commission on July 11, 2007). |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14 | *  Code of Ethics, adopted as of March 1, 2004                        (incorporated by reference from the form 10QSB filed with the Commission on                        November 17, 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 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.                |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| * | Incorporated by reference to prior filings with the                        Securities and Exchange Commission. |
|---|----------------------------------------------------------------------------------------------------------------|

 

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