UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-KSB






x   Annual
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
fiscal period ended: September 30, 2008




o   Transition
Report under Section 13 or 15(d) of the Exchange Act of 1934




For the
transition period from ________ to _________




Commission
File Number: 0 - 52280




SCOUT EXPLORATION,
INC.


(Exact
name of registrant as specified in its charter)




Nevada
              
              98-0504670(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification
Number)





15707 Rockfield Boulevard, Suite 101, Irvine,
      California 92618(Address
      of principal executive
offices)





(949) 265-7717(Issuer’s
      telephone number)




Securities
registered pursuant to Section 12(b) of the Exchange Act: None




Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par
value $.001 per share




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




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: o




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




State
issuer’s revenues for its most recent fiscal year: $117,893




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $783,700 based on the last sale price of
our common stock of $0.10 on December 31, 2008. The Issuer had 8,947,000 shares
of Common Stock, par value $.001, outstanding as of December 31,
2008.




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






1




PART
I




Item 1. Description of
Business




Business
Development




We were
incorporated in the State of Nevada on February 1, 1999 as “Virtual Curricula
Corp.”  On April 10, 2006, we changed our name to “Scout Exploration,
Inc.”  We were originally engaged in the business of developing interactive
educational products for children, adults, business people and new language
learners.  On March 4, 2006, we abandoned that business to pursue the
business of mineral exploration.




On March
4, 2006, we entered into a mineral property purchase agreement with Iscis
Holdings Ltd., whereby they sold to us 100% right, title and interest in the
mineral title “AAV 1-9 Claims” (also known as the “Wheaton River Property”) in
the Whitehorse Mining District of the Yukon Territory.  For the
foreseeable future, we plan to defer any further exploration work programs on
Wheaton River Property.




Our
principal executive office is located at 15707 Rockfield Boulevard, Suite 101,
Irvine, California 92618. Our phone number is (949) 265-7717.  Our Internet
address is http://www.scoutexploration.com. Information on our website is not,
however, part of this report.




Purchase
of Kerrisdale Resources Ltd.




On
January 29, 2008, we entered into a letter of intent with Brian Mahood, the
owner of Kerrisdale Resources Ltd., an Alberta corporation
(“Kerrisdale”).  We filed a current report on Form 8-K regarding this
transaction with the SEC on February 11, 2008. Pursuant to the letter of intent
and, as later amended by terms of a Share Purchase Agreement dated June 18, 2008
(the “Agreement”), and further amended on January 7, 2009, we acquired the right
to purchase one hundred percent (100%) of the issued and outstanding shares of
Kerrisdale, with the:




a)
            Payment
      to Brian Mahood of $23,747 ($25,000 CDN)  upon signing the
      letter of intent for an exclusive ninety (90) day due diligence period
      (which has been paid), AND,




b)
            Payment
      of $ 392,696 ($400,000 CDN) upon the closing of the purchase transaction
      (which has been paid) AND,




c)
              Assumption
      by Kerrisdale Resources Ltd. of the unpaid amount of $343,610 ($360,000
      CDN) (the “Principal Amount”) pursuant to the provisions of a General
      Security Agreement, the effective date of which is January 1, 2008 (the
      “Security Agreement”).  Pursuant to the provisions of the
      Security Agreement, Kerrisdale, to secure the payment of the Principal
      Amount, granted to Mr. Mahood a continuing security interest in and to all
      (i) personal property of Kerrisdale, including goods, chattel paper,
      securities, documents of title, instruments, money, intangibles; (ii) real
      property of Kerrisdale, including all changes on land or interests in land
      and petroleum and natural gas leases described in the Security Agreement;
      and (iii) parts, accessories, attachments, equipment, additions,
      accretions thereto and property thereof, together with any equipment or
      accessories placed upon repairs made to the foregoing during the term of
      the Security Agreement.  Interest accrues on the Principal
      Amount at an annual rate of 6.75% during a period of three years. Interest
      is required to be paid quarterly, commencing on the effective date of
      January 1, 2008, until January 1, 2009 at which time interest is required
      to be paid monthly.  The first interest payment is due on July
      1, 2008, which payment shall consist of two payments (one on April 1,
      2008, and the other on July 1, 2008).   2
 Under
      the original terms of the agreement, effective on January 2, 2009, we were
      required to pay to Mr. Mahood (i) (A) $122,718 ($125,000 CDN) and (B) that
      amount of interest which has accrued for the quarter ending December 31,
      2008, or (ii) (A) $343,610 ($350,000 CDN); (B) the amount of that interest
      which has accrued during the quarter ending December 31, 2008; and (C) an
      amount equal to the interest which would have accrued pursuant to the
      Agreement for those two quarters ending December 31,
      2008.
                
                On
      January 7, 2009, we agreed with Mr. Mahood to modify the terms of the
      Agreement such that the payment required on January 2, 2009 in the amount
      $125,000 CDN is replaced by the following required
      payments:




Date
                      
                      Amount
                        ($
      CDN)January
      14, 2009
                      
                      $
                      35,000March
      31, 2009
                      
                      
                      50,000June
      30, 2009
                      
                      
                      50,000Total
                      
                      $
                      135,000








On
      January 2, 2010, we are required to pay Mr. Mahood either (i) (A) a
      payment of $122,718 ($125,000 CDN) and (B) interest which shall have
      accrued during the quarter ending December 31, 2009, or (ii) (A) the
      remaining unpaid portion of the Principal Balance; (B) that interest which
      shall have accrued during that quarter ending December 31, 2009; (C) that
      interest which shall have accrued on that amount of the unpaid portion of
      the Principal Amount, if any; and (D) the amount equal to that interest
      that shall accrue on the Principal Amount for the quarter ending December
      31, 2009.d)
              Effective
      January 1, 2008, the payment to Brian Mahood each month of approximately
      $985 ($1,000 CDN), depending on the exchange rate between the Canadian and
      United States Dollars, for a period of two years to consult with us in
      connection with the operations of Kerrisdale, including the consolidation
      of the remaining approximate 57% interest of certain operating gas
      fields.




e)
            Effective
      January 1, 2008, the payment to Kerrisdale Consulting Inc., a corporation
      owned by Mr. Mahood, each month of approximately $492 ($500 CDN) depending
      on the exchange rate between the Canadian and United States Dollars, as
      rent for office space for a period of two years, pursuant to a sublease
      with Kerrisdale Consulting Inc., which can be extended by us, at our sole
      discretion.




Kerrisdale
has mineral rights and gas production in the Hilda, Atlee Buffalo, Jenner and
Viking-Kinsella areas of Southeast Alberta and Gross Overriding Oil Royalties in
Southeast Saskatchewan.  Kerrisdale has interests in 4480 gross acres
and 1238 net acres with gross production of 280 mcfd, of which Kerrisdale owns
approximately 48%, and 0.7 bopd (47 boepd gross).  The lands include
13 undrilled gas spacing units.




Employees




We have
no employees, other than our executive officers, as of the time of this report.
We intend to retain geologists and consultants on a contract basis to conduct
the work programs on our properties to carry out our plan of
operations.




3




Research
and Development Expenditures




Since the
time of our incorporation we have not incurred any research or development
expenditures.




Business
Strategy




We are
focused on the identification and acquisition of producing, undervalued natural
gas assets, located primarily in the Western Canada Sedimentary
Basin.  Our management philosophy is to focus on relatively
inexpensive assets, such as when gas prices are at cyclical lows, and to
consolidate small to medium sized producers into one larger, growth oriented
corporation.




Competitive
Business Conditions




We are a
junior oil and gas exploration company. We compete with other companies for
financing and for the acquisition of new oil and gas properties. Many of the oil
and gas exploration companies with whom we compete have greater financial and
technical resources than those available to us. Accordingly, these competitors
may be able to spend greater amounts on acquisitions of oil and gas properties
of merit, on exploration of their properties and on development of their
properties. In addition, they may be able to afford more geological expertise in
the targeting and exploration of oil and gas properties. This competition could
result in competitors having properties of greater quality and interest to
prospective investors, who may finance additional exploration and development.
This competition could have an adverse impact on our ability to achieve the
financing necessary for us to conduct further exploration of our acquired
properties.




We will
also compete with other junior oil and gas exploration companies for financing
from a limited number of investors that are prepared to make investments in
junior oil and gas exploration companies. The presence of competing junior oil
and gas exploration companies may have an adverse impact on our ability to raise
additional capital in order to fund our exploration programs, if investors are
of the view that investments in competitors are more attractive, based on the
merit of the oil and gas properties under investigation and the price of the
investment offered to investors.




We also
compete with other junior and senior oil and gas companies for available
resources, including, but not limited to, professional geologists, camp staff,
helicopter or float planes, mineral exploration supplies and drill
rigs.




Patents
and Trademarks




We do not
own, either legally or beneficially, any patents or trademarks.




Governmental
Regulations




Our oil
and gas operations are subject to various federal, provincial and local
governmental regulations. Matters subject to regulation include discharge
permits for drilling operations, drilling and abandonment bonds, reports
concerning operations, the spacing of wells, pooling of properties and taxation.
The requirements imposed by such laws and regulations are frequently changed and
subject to interpretation, and we are unable to predict the ultimate cost of
compliance with these requirements or their effect on our operations.




4




Reports
to Security Holders




We file
our quarterly and audited annual reports with the Securities and Exchange
Commission (SEC), which the public may read and copy at the Public Reference
Room at 100 F Street, N.E., Washington D.C. 20549. SEC filings, including
supplemental schedules and exhibits, can also be accessed free of charge through
the SEC website at www.sec.gov.




Item 2. Description of
Property




Our
executive offices are located at 15707 Rockfield Boulevard, Suite 101, Irvine,
California 92618. We also have 9 mineral claims in the Yukon Territory, as well
as interests in oil and gas wells in Alberta and Saskatchewan, described above
under Description of Business.




Item 3. Legal
Proceedings




We are
not, and have not been during the period covered by this report, a party to any
legal proceedings.




Item 4. Submission of
Matters to a Vote of Security Holders




There
were no matters were submitted to a vote of the Company’s security holders in
the quarter ended September 30, 2008.




PART
II




Item 5. Market for
Common Equity and related Stockholder Matters




Market
Information




We are a
reporting company with the SEC. We participate in the Over-the-Counter Bulletin
Board Quotation Service maintained by the Financial Industry Regulatory
Authority (“FINRA”) (“OTCBB”). The OTCBB is an electronic quotation medium for
securities traded outside of the Nasdaq Stock Market, and prices for our common
stock are published on the OTC Bulletin Board under the trading symbol
“SCXN.OB.” The OTCBB market is extremely limited and the prices quoted are not a
reliable indication of the value of our common stock.




The first
trade of our common stock on the Bulletin Board occurred on December 6,
2006.  The following table sets forth the quarterly high and low closing
sale prices for our common stock for the periods indicated below, based upon
quotations between dealers, without adjustments for stock splits, dividends,
retail mark-ups, mark-downs or commissions and, therefore, may not represent
actual transactions:






5




Date
                              
                              High
                              
                              
                              LowDecember
      6, 2006 to December 31, 2006
                              
                              $
                              0.25
                              
                              
                              $
                              0.02January
      1, 2007 to March 31, 2007
                              
                              $
                              0.91
                              
                              
                              $
                              0.11April
      1, 2007 to June 30, 2007
                              
                              $
                              0.72
                              
                              
                              $
                              0.35July
      1, 2007 to September 30, 2007
                              
                              $
                              0.58
                              
                              
                              $
                              0.23October
      1, 2007 to December 31, 2007
                              
                              $
                              0.51
                              
                              
                              $
                              0.31January
      1, 2008 to March 31, 2008
                              
                              $
                              0.60
                              
                              
                              $
                              0.32April
      1, 2008 to June 30, 2008
                              
                              $
                              0.59
                              
                              
                              $
                              0.40July
      1, 2008 to September 30, 2008
                              
                              $
                              0.58
                              
                              
                              $
                              0.20October
      1, 2008 to December 31, 2008
                              
                              $
                              0.20
                              
                              
                              $
                              0.10




Holders
of Our Common Stock




As of the
date of this report, we have approximately 66 registered
shareholders.




Dividends




There are
no restrictions in our Articles of Incorporation or bylaws that prevent us from
declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends when, after giving effect to the distribution of the
dividend:




·
            We
      would not be able to pay our debts as they become due in the usual course
      of business; or


·
            Our
      total assets would be less than the sum of our total liabilities plus the
      amount that would be needed to satisfy the rights of shareholders who have
      preferential rights superior to those receiving the
      distribution.




As of the
date of this report, we have not declared any dividends, and we do not plan to
declare any dividends in the foreseeable future.




Securities
Authorized for Issuance under Equity Compensation Plans




Our 2007
Stock Option and Incentive Plan was approved by the unanimous written consent of
our Board of Directors and by the written consent of a majority of our
shareholders on July 23, 2007.  One million (1,000,000) shares of our
common stock are reserved for issuance pursuant to that plan.  No options
have been issued under the plan as of the date of this report.




Recent
Sales of Unregistered Securities




On April
1, 2008, our Board of Directors approved a private placement of up to 2,000,000
units, with each unit consisting of one share of our common stock at a purchase
price of $0.40 per share and one warrant entitling the holder thereof the right
to purchase one additional share of our common stock at a purchase price of
$0.75 per share, at any time up to one year from the closing date of the private
placement. During May 2008, we completed the sale of 1,349,500 units and raised
net proceeds of $538,451.




We used
most of the proceeds from the private placement offering to fund the acquisition
of Kerrisdale with $392,696 ($400,000 CDN ) in cash, with an additional $343,610
($350,000 CDN) evidenced by and secured by the Security Agreement. Pursuant to
the provisions of the Security Agreement, the secured amount is due and payable
in installments during the period January 2, 2009, through January 3, 2011. The
amount secured by the Security Agreement




6




accrues
interest at 6.75% per annum, and interest is payable quarterly commencing June
30, 2008. All required interest payments are current. The balance of the
proceeds from the private placement was used to fund ongoing general and
administrative expenses and to supplement working capital.




Item 6. Management’s
Discussion and Analysis or Plan of Operation




Cautionary
Note Regarding Forward Looking Statements




This
report contains forward-looking statements that involve risks and uncertainties,
including statements regarding our capital needs, business plans and
expectations. Such forward-looking statements involve risks and uncertainties
regarding the market price of precious and base metals, oil and gas,
availability of funds, government regulations, operating costs, exploration
costs, outcomes of exploration programs and other factors. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. Forward-looking statements can be identified by
terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”,
“anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the
negative of such terms or other comparable terminology. Our actual results may
differ materially. In evaluating these statements, you should consider various
factors. These factors may cause actual results to differ materially from any
forward-looking statement. While these forward-looking statements are made in
good faith and reflect our current judgment regarding our business plans, actual
results from our operations will almost always vary, sometimes materially, from
any future performance suggested herein.




General




The
following discussion and analysis should be read in conjunction with our
financial statements (and notes related thereto) appearing elsewhere in this
report.




Plan
of Operations




Over the
next year our plan of operations is to complete the following objectives,
subject to our obtaining the necessary funding for the continued exploration and
possible further development of our resource properties, both mineral and oil
and gas:




·
            For
      the foreseeable future, we plan to defer any further exploration work
      programs on the Wheaton River
Property.


·
            We
      expect the acquisition of Kerrisdale to generate approximately $12,000 in
      monthly net income after taxes.


·
            We
      plan to evaluate the potential of completing in field drilling to
      hopefully expand our proven oil and gas reserves. Completion of any
      further drilling will be dependent on favorable engineering
      recommendations for the commencement of any in field drilling and our
      ability to raise additional funds. There is no assurance that we will be
      able to obtain such funds, nor is there any assurance that any in field
      drilling will, upon completion, result in any additional proven oil and
      gas reserves.


·
            We
      anticipate spending approximately $17,000 monthly in ongoing general and
      administrative expenses over the next year. These expenses will consist
      primarily of management remuneration, travel and promotion costs,
      professional fees for audit and legal work relating to our regulatory
      filings, transfer agent fees, annual mineral claim fees and general office
      expenses.




7




·
            We
      owe Iscis Holdings Ltd. an additional $20,000, which was due and payable
      on or before September 30, 2008, and has been deferred until September 30,
      2009.




As of
September 30, 2008, we had cash on hand of $131,100 and negative working capital
of $196,762, after including $122,000 principal payments which are due and
payable to Brian Mahood within one year (of which $28,000 has been paid
subsequent to September 30, 2008), pursuant to the Agreement, which is secured
by the Security Agreement, entered into by and among Kerrisdale and Mr. Mahood,
and which is discussed elsewhere in this report. Interest otherwise due on the
principal balance secured by the Security Agreement has been fully paid as at
December 31, 2008.




On April
1, 2008, our Board of Directors approved a private placement of up to 2,000,000
Units, with each Unit consisting of one share of our common stock at a purchase
price of $0.40 per share and one warrant entitling the holder thereof the right
to purchase one additional share of our common stock at a purchase price of
$0.75 per share, at any time up to one year from the closing date of the private
placement.. During May 2008, we completed the sale of 1,397,000 Units and raised
aggregate proceeds of $558,800, of which $23,000 was receivable from subscribers
as of September 30, 2008.  In addition, we received $4,000 in
subscriptions received in advance for 10,000 units which have not been issued as
of September 30, 2008.




We used
most of the proceeds from the private placement offering to fund the acquisition
of Kerrisdale with $392,696 ($400,000 CDN) in cash, with an additional $343,610
($350,000 CDN) evidenced by and secured by the General Security
Agreement.  Pursuant to the provisions of that General Security
Agreement, the secured amount is due and payable in installments during the
period January 2, 2009, through January 3, 2011. The amount secured by that
General Security Agreement accrues interest at 6.75% per annum, and interest is
payable quarterly commencing June 30, 2008. All required interest payments are
current. The balance of the proceeds from the private placement was used to fund
ongoing general and administrative expenses and to supplement working
capital.




We do not
anticipate present oil and gas revenues will be sufficient to pay ongoing
general and administrative expenses for the next year nor pay the $117,937
payable pursuant to the Agreement and Security Agreement. We will need to obtain
additional financing in order to continue our plan of operations.




We
believe that debt financing will not be a feasible alternative, as we do not
have sufficient unencumbered tangible assets to secure any debt financing. We
anticipate that additional financing will be from the sale of our common stock.
However, we do not have any financing arranged, nor can we provide investors
with any assurance that we will be able to raise sufficient funding from such
potential equity financings.  In the absence of such financing, we
will not be able to continue exploration or development of our mineral claims
and oil and gas property interests, and our business plan will then fail. Even
if we are successful in obtaining equity financing to fund possible in field
drilling of our oil and gas properties, as well as other operational costs and
short term debt obligations, there is no assurance of success from such drilling
activities.  There is a significant risk any future in field drilling
of our oil and gas properties may not be successful, and we may not be able to
meet our other obligations. In the event we do not continue to obtain additional
financing, we will be forced to abandon our mineral claims and may lose our oil
and gas properties, should we default on the payment of the deferred portion of
the purchase price for Kerrisdale.






8




Going
Concern




We have
not attained profitable operations and are dependant upon obtaining financing to
pursue any extensive exploration activities or acquisitions. For these reasons,
our auditors stated in their report that they are concerned that we will not be
able to continue as a going concern.




Future
Financing




We
anticipate continuing to rely on sales of our common stock to finance our
business operations. Issuances of additional shares of our common stock will
result in dilution to our existing shareholders. There is no assurance that we
will achieve any additional sales of our equity securities or arrange for debt
or other financing to fund our planned exploration activities.




Off-Balance Sheet
Arrangements.  We have no significant 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.




Item 7. Financial
Statements




See Index
to Financial Statements immediately following the signature page of this
report.




Item 8. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure




There
have been no disagreements with our accountants since our formation required to
be disclosed pursuant to Item 304(b) of Regulation S-B.




Item 8A. Controls and
Procedures




It is the
responsibility of John Roozendaal and Jason Walsh (who serve, respectively, as
our Chief Executive Officer and Chief Financial Officer) to ensure that we
maintain disclosure controls and procedures designed to provide reasonable
assurance that material information, both financial and non-financial, and other
information required under the securities laws to be disclosed is identified and
communicated to senior management on a timely basis. Our disclosure controls and
procedures include mandatory communication of material events, automated
accounting processing and reporting, management review of monthly results and an
established system of internal controls.




As of
September 30, 2008, management conducted an evaluation of our disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934. Based
upon that evaluation, management has concluded that our current disclosure
controls and procedures are effective as of September 30, 2008. The design of
any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.






9




There
have been no significant changes in our internal controls over financial
reporting during the fiscal quarter ended September 30, 2008, or subsequent to
that date that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.




Item 8B. Other
Information




None.




PART
III




Item 9. Directors, Executive
Officers, promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act




The
following table sets forth certain information regarding our executive officers
and directors as of December 31, 2008:




NAME
      OF DIRECTOR
                  AGE
                  TERM
      SERVED
                  POSITIONS
      WITH COMPANYJohn
      Roozendaal
                  42
                  Since
      December 13, 2007
                  President
      and DirectorJason
      Walsh
                  36
                  Since
      March 3, 2006
                  Secretary,
      Treasurer and DirectorShane
      Ivancoe
                  53
                  Since
      March 3, 2006
                  Director




On
December 13, 2007, our Board of Directors increased the number of its members to
three.  On that same date, Kathleen Scalzo resigned as our President and
Treasurer and as a director.  Our remaining director, Shane Ivancoe,
appointed Jason Walsh and John Roozendaal as directors to fill the vacancies on
the Board of Directors and, also, appointed John Roozendaal as our President and
Jason Walsh as our Treasurer.




All our
directors hold office until the next annual meeting of our stockholders or until
their successors are elected and qualified.  Executive officers hold
offices until their successors are elected and qualified, subject to earlier
removal by the Board of Directors.




Set forth
below is a biographical description of each director and executive officer based
upon information supplied by him:




Biographical
Information




John
Roozendaal has served as our President and as one of our directors since
December 13, 2007.  Mr. Roozendaal has been involved with the mineral
exploration industry for over 15 years, focusing on precious, base and specialty
metal exploration projects in North America. Mr. Roozendaal is the President and
a director of VMS Ventures Inc. and Harvest Gold Corp., and a director of Thelon
Ventures Ltd., which are all publicly traded companies on the TSX Venture
exchange.  Mr. Roozendaal helped found VMS Ventures in 1996, and Harvest
Gold was spun off from VMS Ventures in 2005.  He became a director of
Thelon Ventures Ltd. in October 2005.  Mr. Roozendaal holds a Bachelor of
Science degree in Geology received from Brandon University in 1996.




Jason
Walsh has served as our Secretary since March 3, 2006.  He has served
as our Treasurer and as one of our directors since December 13, 2007. 
Since April 15, 2003, he has also served as the President and a director of
Thelon Ventures Ltd. (TSX Venture: THV).  He has also served as an officer
of International Ranger Corp. (Pink Sheets: IRNG) since February 19, 2006. 
From October 1997 to April 2003, he served as a registered representative with
Global Securities in Vancouver, British Columbia.




10




Shane
Ivancoe has served as one of our directors since March 3, 2006.  For
over the past five years, he has also served as a self-employed corporate
consultant.  From 1976 to 1995, he served as the president of Galway
Holdings, a food importer and exporter based in Vancouver, British
Columbia.




Significant
Employees




We have
no significant employees, other than the officers and directors described
above.




Committees of the
Board of Directors  We presently do not have an audit committee,
compensation committee, nominating committee, an executive committee of our
Board of Directors, stock plan committee or any other
committees.




Audit Committee
Financial Expert  We have no financial expert on our Board of
Directors. We believe the cost related to retaining a financial expert at this
time is prohibitive.




Section 16(a)
Compliance.  Section 16(a) of the Securities Exchange Act of 1934,
as amended, requires our directors, executive officers and holders of more than
10% of our common stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of our common
stock.  It appears that Kathleen Scalzo, Shane Ivancoe, Jason Walsh, Kassel
Enterprises Inc. and Iscis Holdings Ltd. filed Form 3s during the year ended
September 30, 2007, that were properly filed during the year ended September 30,
2006.  It also appears that Shane Ivancoe, one of our directors, filed one
Form 4 regarding one transaction on February 13, 2007, which was not timely
filed.




The
Company has not yet adopted a written Code of Ethics, but management intends to
do so in the next year.




Item 10. Executive
Compensation




We paid
Jason Walsh, our Secretary and Treasurer and one of our directors, $12,000 in
the year ended September 30, 2008, as a director’s fee.  We also paid a
company controlled by Jason Walsh office and administration fees of $58,894 in
the in the year ended September 30, 2008.  We paid Shane Ivancoe, one of
our directors, $12,000 in the year ended September 30, 2008 as a director’s
fee.




Stock
Option Grants




We have
not granted any stock options to our executive officers since our
inception.




Consulting
Agreements




We are a
party to an agreement for services with Bua Group Holdings Ltd. dated October 1,
2006.  Pursuant to this agreement, we are obligated to pay Bua Group
Holdings Cdn$1,000 per month for services and Cdn$1,400 per month for
expenses.  The principals of Bua Group Holdings are Jason Walsh, our
Secretary and Treasurer and one of our directors, and Ralf
Hillebrand.




11




Item 11. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters




The
following table provides the names and addresses of each person known to us to
own more than 5% of our outstanding stock as of December 31, 2008, and by the
officers and directors, individually or as a group. Except as otherwise
indicated, all shares are owned directly.




Title
      of Class
                            Name
      and Address of
                              Beneficial
      Owner
                            Amount
      and Nature
                              of
      Beneficial Ownership
                            Percent
      of Class$0.001
      Par Value Common Stock
                            Shane
      Ivancoe
                              Director
                              c/o
      Scout Exploration, Inc.
                              15707
      Rockfield Boulevard, Suite 101
                              Irvine,
      California 92618
                            900,000
                            10.1%$0.001
      Par Value Common Stock
                            Jason
      Walsh
                              Secretary,
      Treasurer and Director
                              c/o
      Scout Exploration, Inc.
                              15707
      Rockfield Boulevard, Suite 101
                              Irvine,
      California 92618
                            235,000
                            2.6%$0.001
      Par Value Common Stock
                            John
      Roozendaal
                              President
      and Director
                              c/o
      Scout Exploration, Inc.
                              15707
      Rockfield Boulevard, Suite 101
                              Irvine,
      California 92618
                            320,000(1)
                            3.6%$0.001
      Par Value Common Stock
                            All
      officers and directors as a group
                            1,455,000
                            16.3%$0.001
      Par Value Common Stock
                            Iscis
      Holdings Ltd.
                              102-9323
      Gallant Ave.
                              North
      Vancouver, British Columbia
                              Canada
      V7G 2C1(2)
                            500,000
                            5.6%




1.
These shares are held by 667981 BC Ltd., a company controlled by Mr.
Roozendaal.




2.
Iscis Holdings Ltd. is owned by Ivan Walsh, the brother of Jason Walsh, our
Secretary and Treasurer and one of our directors.




The
percentage of class is based upon 8,947,000 shares of our common stock and no
shares of our preferred stock issued and outstanding as of the date of this
report.




Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. In accordance with Securities and Exchange Commission
rules, shares of our common stock which may be acquired




12




upon
exercise of stock options or warrants which are currently exercisable or which
become exercisable within 60 days of the date of the table are deemed
beneficially owned by the optionees. Subject to community property laws, where
applicable, the persons or entities named in the table above have sole voting
and investment power with respect to all shares of our common stock indicated as
beneficially owned by them.




Item 12. Certain
Relationships and Related Transactions




Except as
described below, none of the following parties has, in the last two years, had
any material interest, direct or indirect, in any transaction with us or in any
presently proposed transaction that has or will materially affect
us:




·
            Any
      of our directors or officers;


·
            Any
      person proposed as a nominee for election as a
  director;


·
            Any
      person who beneficially owns, directly or indirectly, shares carrying more
      than 10% of the voting rights attached to our outstanding shares of common
      stock; or


·
            Any
      member of the immediate family of any of the above
  person.




Office
Space Arrangement




We paid
Jason Walsh, our Secretary and Treasurer and one of our directors, office and
administration fees of $58,894 in the in the year ended September 30,
2008.




Agreement
with Iscis Holdings Ltd.




On March
4, 2006, we entered into a mineral property purchase agreement with Iscis
Holdings Ltd., whereby it sold to us 100% right, title and interest in the
mineral title “AAV 1-9 Claims” in the Whitehorse Mining District of the Yukon
Territory.Iscis
Holdings Ltd. is owned by Ivan Walsh, who is one of our shareholders and the
brother of Jason Walsh, our Secretary and Treasurer and one of our
directors.  Iscis Holdings Ltd. also beneficially owns over 10% of our
common stock.




As a part
of our purchase agreement with Iscis Holdings Ltd., we entered into a net
smelter return royalty agreement. The terms of this agreement specify that Iscis
Holdings Ltd. is entitled to a royalty payment equal to 3% of the net smelter
returns.




Agreement
with Bua Group Holdings Ltd.




We are a
party to an agreement for services with Bua Group Holdings Ltd. dated October 1,
2006.  Pursuant to this agreement, we are obligated to pay Bua Group
Holdings Cdn$1,000 per month for services and Cdn$1,400 per month for
expenses.  The principals of Bua Group Holdings are Jason Walsh, our
Secretary and Treasurer and one of our directors, and Ralf
Hillebrand.




Private
Placement Transaction




We
completed an offering for 1,700,000 units in March 2006, to 8 shareholders. Each
“unit” consisted of one share of our common stock and one warrant to purchase an
additional share of our common stock for $0.15 prior to March 31, 2007. The
units were issued at a price of $0.05per unit and the total amount received was
$85,000.




13




Shane
Ivancoe, one of our directors, purchased 400,000 units in this offering. 
During the year ended September 30, 2007, Mr. Ivancoe also exercised his
warrants and purchased 400,000 shares of our common stock for
$60,000.




Director
Independence




We
participate in the Over-the-Counter Bulletin Board Quotation Service maintained
by FINRA.  As such, we are not currently subject to corporate governance
standards of listed companies, which require, among other things, that the
majority of our Board of Directors be independent.




Since we
are not currently subject to corporate governance standards relating to the
independence of our directors, we choose to define an “independent” director in
accord with the NASDAQ Global Market’s requirements for independent directors
(NASDAQ Marketplace Rule 4200). The NASDAQ independence definition includes a
series of objective tests, such as that the director is not our and has not
engaged in various types of business dealings with us.




Shane
Ivancoe is considered an independent director under the above definition. 
We do not list that definition on our Internet website.




We
presently do not have an audit committee, compensation committee, nominating
committee, an executive committee of our Board of Directors, stock plan
committee or any other committees.




Item 13.
Exhibits




The
following documents have been filed as a part of this annual
report:




Exhibit
No.


3.1
                      *
      Articles of Incorporation (Charter Document)3.2
                      *
      Certificate of Amendment3.3
                      *
      Bylaws10.1
                      *
      Iscis Holdings Ltd. Mineral Property Purchase Agreement10.2
                      **
      Contract for services with Bua Group Holdings Ltd. dated October 1,
      2006.10.3
                      ***
      Share Purchase Agreement with Brian Mahood and Kerrisdale Resources
      Ltd.10.4
                      ***
      Management Agreement with Kerrisdale Consulting Inc.10.5
                      ***
      General Security Agreement by and among Kerrisdale Resources Ltd. and
      Brian Mahood.31.1
                      Rule 13A-14(A)
Certification31.2
                      Rule 13A-14(A)
      Certification32.1
                      Certification Pursuant to 18 U.S.C. SECTION 1350,
      as adopted pursuant to SECTION 906 of the Sarbanes-Oxley Act of
      200232.2
                      Certification Pursuant to 18 U.S.C. SECTION 1350,
      as adopted pursuant to SECTION 906 of the Sarbanes-Oxley Act of
      2002




*
Previously filed with the Securities and Exchange Commission on August 10, 2006
as exhibits to our Registration Statement on Form SB-2.




**
Previously filed with the Securities and Exchange Commission on February 13,
2007 as an exhibit to our Quarterly Report on Form 10-QSB.




***
Previously filed with the Securities and Exchange Commission on August 21, 2008
as an exhibit to our Quarterly Report on Form 10-Q.




14




Item 14. Principal
Accountant Fees and Services




The
following is a summary of the aggregate fees billed to us by our principal
accountant, MacKay LLP, for professional services rendered for the fiscal years
ended September 30, 2008 and 2007.




1.    Audit
Fees. Consists of fees billed for professional services rendered for the
audits of our financial statements for the fiscal years ended September 30, 2008
and 2007, and for review of the financial statements included in our Quarterly
Reports on Form 10-QSB for those fiscal years. Fees billed in 2007 were $5,521.
Fees billed in 2008 are $24,039.




2.    Audit-Related
Fees. Consists of fees billed for services rendered to us for
audit-related services, which generally include fees for audit and review
services in connection with a proposed spin-off transaction, separate audits of
employee benefit and pension plans, and ad hoc fees for consultation on
financial accounting and reporting standards.  Fees billed:
None.




3.    Tax Fees.
Consists of fees billed for services rendered to us for tax services, which
generally include fees for corporate tax planning, consultation and
compliance.  Fees billed in 2007 were $5,005. Fees billed in 2008 are
$1,487.




4.    All Other
Fees. Consists of fees billed for all other services rendered to us,
which generally include fees for consultation regarding computer system controls
and human capital consultations. Fees Billed: None.




Pre-Approval
of Services of Principal Accounting Firm




We do not
have an audit committee, and the tasks generally undertaken by an audit
committee are undertaken by our Board of Directors.  Our board’s policy is
to pre-approve all audit and permissible non-audit services provided by our
principal accounting firm.  These services may include audit services,
audit-related services, tax services and other permissible non-audit services.
Any service incorporated within the independent auditor's engagement letter,
which is approved by our Board of Directors, is deemed pre-approved. Any service
identified as to type and estimated fee in the independent auditor's written
annual service plan, which is approved by our Board of Directors, is deemed
pre-approved up to the dollar amount provided in such annual service
plan.




During
the year, the principal accounting firm may also provide additional accounting
research and consultation services required by, and incident to, the audit of
our financial statements and related reporting compliance. These additional
audit-related services are pre-approved up to the amount approved in the annual
service plan approved by our Board of Directors. Our Board of Directors may,
also, pre-approve services on a case-by-case basis during the year.




The
approval by our Board of Directors of proposed services and fees are noted in
the meeting minutes of our Board of Directors and/or by signature of the
appropriate members of our Board of Directors on the engagement letter. Our
principal accounting firm and management are periodically requested to summarize
the principal accounting firm services and fees paid to date, and management is
required to report whether the principal accounting firm's services and fees
have been pre-approved in accordance with the required pre-approval process of
our Board of Directors.






15




SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




SCOUT
EXPLORATION, INC.


Dated:
January 28, 2009




By: /s/ John
Roozendaal


Name: 
John Roozendaal


Title:
President and Chief Executive Officer






By: /s/ Jason
Walsh


Name: 
Jason Walsh


Treasurer
and Principal Accounting Officer






In
accordance with the Exchange Act, this report has been signed below by the
following person on behalf of the registrant and in the capacity and on the date
indicated.




Dated:
January 28, 2009






By: /s/ John
Roozendaal


Name: 
John Roozendaal


Title:
President and Chief Executive Officer


Director






By: /s/ Jason
Walsh


Name: 
Jason Walsh


Title:
Secretary, Treasurer and Principal Accounting Officer


Director






By: /s/ Shane
Ivancoe


Name: 
Shane Ivancoe


Title:
Director







16




Scout
Exploration, Inc.
 Consolidated
Financial Statements
 (presented
in US dollars)
 
 September
30, 2008 and 2007
 
 
 
 
      
 
 
 F -
1
  INDEX
 
  Report of Independent Registered Public Accounting
      Firm
                      F-3Consolidated Balance Sheets
                      F-4Consolidated Statements of Stockholders’
    Equity
                      F-5Consolidated Statements of Operations
                      F-6Consolidated Schedules of Administrative
      Expenses
                      F-7Consolidated Statements of Cash Flows
                      F-8Notes to the Consolidated Financial
      Statements
                      F-9


F -
2




CHARTERED

                      ACCOUNTANTS
                      MacKay LLP
                    1100
      – 1177 West Hastings Street

                      Vancouver,
      BC  V6E 4T5
                        Tel:  (604)
      687-4511
                        Fax:
      (604) 687-5805
                        Toll
      Free: 1-800-351-0426
                        www.MacKayLLP.ca
    Report of Independent Registered Public Accounting
Firm
 
 To
the Shareholders of
 Scout
Exploration, Inc.
   We have
audited the balance sheets of Scout Exploration, Inc. as at September 30, 2008
and 2007, and the statement of operations, stockholders’ equity (deficit), and
cash flows for the years then ended, and for the period from incorporation on
February 1, 1999 to September 30, 2008.  These financial statements
are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatements.  The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting.  Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, these financial statements present fairly, in all material respects,
the financial position of the Company as at September 30, 2008 and 2007, and the
results of its operations and its cash flows for the years then ended, and for
the period from incorporation on February 1, 1999 to September 30, 2008 in
conformity with U.S. generally accepted accounting principles.
 
 The
accompanying financial statements referred to above have been prepared assuming
that the Company will continue as a going concern.  As discussed in
Note 1 to financial statements, the Company is in the exploration stage, and has
no permanently established source of revenue and is dependent on its ability to
raise capital from shareholders or other sources to sustain
operations.  These factors, along with other matters as set forth in
Note 1, raise substantial doubt that the Company will be able to continue as a
going concern.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
    “MacKay LLP”Vancouver,
    Canada.January 09,
      2009
              Chartered
      Accountants








F -
3








Scout
      Exploration, Inc.Consolidated Balance Sheets(Presented
      in US Dollars)As
      at September 30
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              2007AssetsCurrentCash
                                                                              
                                                                              $
                                                                              131,100
                                                                              
                                                                              
                                                                              $
                                                                              45,649Receivables
                                                                              
                                                                              
                                                                              57,015
                                                                              
                                                                              
                                                                              
                                                                              -Prepaid
      expenses
                                                                              
                                                                              
                                                                              7,468
                                                                              
                                                                              
                                                                              
                                                                              4,280195,583
                                                                              
                                                                              
                                                                              
                                                                              49,929Resource
      properties (Note 4)
                                                                              
                                                                              
                                                                              932,900
                                                                              
                                                                              
                                                                              
                                                                              -Equipment
      (Note 5)
                                                                              
                                                                              
                                                                              15,959
                                                                              
                                                                              
                                                                              
                                                                              -$
                                                                              1,144,442
                                                                              
                                                                              
                                                                              $
                                                                              49,929LiabilitiesCurrentAccounts
      payable and accrued liabilities
                                                                              
                                                                              $
                                                                              264,563
                                                                              
                                                                              
                                                                              $
                                                                              44,723Debenture
      payable - current portion (Note 3)
                                                                              
                                                                              
                                                                              122,000
                                                                              
                                                                              
                                                                              
                                                                              -Income
      taxes payable
                                                                              
                                                                              
                                                                              5,782
                                                                              
                                                                              
                                                                              
                                                                              -392,345
                                                                              
                                                                              
                                                                              
                                                                              44,723Debenture
      payable (Note 3)
                                                                              
                                                                              
                                                                              208,225
                                                                              
                                                                              
                                                                              
                                                                              -Deferred
      income taxes (Note 13)
                                                                              
                                                                              
                                                                              211,797
                                                                              
                                                                              
                                                                              
                                                                              -Asset
      retirement obligations (Note 6)
                                                                              
                                                                              
                                                                              28,355
                                                                              
                                                                              
                                                                              
                                                                              -840,722
                                                                              
                                                                              
                                                                              
                                                                              44,723Stockholders'
      EquityPreferred
      stockAuthorized:
      1,000,000 shares with par value of $0.01Issued:
      Nil (2007 - Nil)
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -Common
      stock (Note 8)Authorized:
      50,000,000 shares with par value of $0.001Issued:
      8,847,000 (2007 - 7,300,000)
                                                                              
                                                                              
                                                                              8,847
                                                                              
                                                                              
                                                                              
                                                                              7,300Subscriptions
      received in advance
                                                                              
                                                                              
                                                                              4,100
                                                                              
                                                                              
                                                                              
                                                                              100Subscriptions
      receivable
                                                                              
                                                                              
                                                                              (23,000
                                                                              )
                                                                              
                                                                              
                                                                              (75,000
                                                                              )Additional
      paid in capital
                                                                              
                                                                              
                                                                              981,953
                                                                              
                                                                              
                                                                              
                                                                              349,700Accumulated
      deficit
                                                                              
                                                                              
                                                                              (645,722
                                                                              )
                                                                              
                                                                              
                                                                              (276,894
                                                                              )Accumulated
      other comprehensive loss
                                                                              
                                                                              
                                                                              (22,458
                                                                              )
                                                                              
                                                                              
                                                                              -303,720
                                                                              
                                                                              
                                                                              
                                                                              5,206$
                                                                              1,144,442
                                                                              
                                                                              
                                                                              $
                                                                              49,929




Going
      Concern (Note 1)Commitments
      (Note 14)Approved
      by the Directors:____________________________
      Director____________________________
      DirectorThe
      accompanying notes are an integral part of the consolidated financial
      statements.






F -
4




Scout
      Exploration, Inc.Consolidated Statements of Stockholders'
Equity(Presented
      in US Dollars)For
      the Years Ended September 30, 2008 and 2007AccumulatedShares
      of
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  Additional
                                                                                  
                                                                                  Subscriptions
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  other
                                                                                  
                                                                                  Totalcommon
                                                                                  
                                                                                  Capital
                                                                                  
                                                                                  paid-in
                                                                                  
                                                                                  received
                                                                                  
                                                                                  Subscriptions
                                                                                  
                                                                                  Accumulated
                                                                                  
                                                                                  comprehensive
                                                                                  
                                                                                  Stockholders'stock
                                                                                  
                                                                                  stock
                                                                                  
                                                                                  capital
                                                                                  
                                                                                  in
      advance
                                                                                  
                                                                                  receivable
                                                                                  
                                                                                  Deficit
                                                                                  
                                                                                  loss
                                                                                  
                                                                                  EquityBalance
      September 30, 2006
                                                                                  
                                                                                  
                                                                                  5,900,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  5,900
                                                                                  
                                                                                  
                                                                                  $
                                                                                  141,100
                                                                                  
                                                                                  
                                                                                  $
                                                                                  100
                                                                                  
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (145,025
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  -
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,075Issuance
      of common stock for cashand
      subscription receivable
                                                                                  
                                                                                  
                                                                                  1,400,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,400
                                                                                  
                                                                                  
                                                                                  
                                                                                  208,600
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (75,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  135,000Net
      loss
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (131,869
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (131,869
                                                                                  )Balance
      September 30, 2007
                                                                                  
                                                                                  
                                                                                  7,300,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  7,300
                                                                                  
                                                                                  
                                                                                  
                                                                                  349,700
                                                                                  
                                                                                  
                                                                                  
                                                                                  100
                                                                                  
                                                                                  
                                                                                  
                                                                                  (75,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (276,894
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  5,206Cash
      received for subscriptionsreceivable
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  75,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  75,000Issuance
      of common stock forfor
      consulting services
                                                                                  
                                                                                  
                                                                                  150,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  150
                                                                                  
                                                                                  
                                                                                  
                                                                                  74,850
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  75,000Issuance
      of common stock for cash
                                                                                  
                                                                                  
                                                                                  1,397,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,397
                                                                                  
                                                                                  
                                                                                  
                                                                                  557,403
                                                                                  
                                                                                  
                                                                                  
                                                                                  4,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  (23,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  539,800Net
      loss
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (368,828
                                                                                  )
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (368,828
                                                                                  )Foreign
      currency translation
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  (22,458
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (22,458
                                                                                  )Balance
      September 30, 2008
                                                                                  
                                                                                  
                                                                                  8,847,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  8,847
                                                                                  
                                                                                  
                                                                                  $
                                                                                  981,953
                                                                                  
                                                                                  
                                                                                  $
                                                                                  4,100
                                                                                  
                                                                                  
                                                                                  $
                                                                                  (23,000
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (645,722
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (22,458
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  303,720




The
accompanying notes are an integral part of the consolidated financial
statements.
   F -
5




Scout
      Exploration, Inc.Consolidated Statements of Operations(Presented
      in US Dollars)For
      the Year Ended September 30
                                                                
                                                                2008
                                                                
                                                                
                                                                2007Revenues
      - petroleum and natural gas
                                                                
                                                                $
                                                                117,893
                                                                
                                                                
                                                                $
                                                                -Operating
      expensesLease
      and royalties
                                                                
                                                                
                                                                23,854
                                                                
                                                                
                                                                
                                                                -Depletion
      and accretion
                                                                
                                                                
                                                                26,405
                                                                
                                                                
                                                                
                                                                -Depreciation
                                                                
                                                                
                                                                1,969
                                                                
                                                                
                                                                
                                                                -52,228
                                                                
                                                                
                                                                
                                                                -Operating
      margin
                                                                
                                                                
                                                                65,665
                                                                
                                                                
                                                                
                                                                -Administrative
      expenses - schedule
                                                                
                                                                
                                                                427,043
                                                                
                                                                
                                                                
                                                                131,869Loss
      before income taxes
                                                                
                                                                
                                                                (361,378
                                                                )
                                                                
                                                                
                                                                (131,869
                                                                )Income
      taxes expense (benefit)Current
                                                                
                                                                
                                                                14,670
                                                                
                                                                
                                                                
                                                                -Deferred
                                                                
                                                                
                                                                (7,220
                                                                )
                                                                
                                                                
                                                                -7,450
                                                                
                                                                
                                                                
                                                                -Net
      loss
                                                                
                                                                $
                                                                (368,828
                                                                )
                                                                
                                                                $
                                                                (131,869
                                                                )Basic
      and diluted loss per share
                                                                
                                                                $
                                                                (0.05
                                                                )
                                                                
                                                                $
                                                                (0.02
                                                                )Basic
      and diluted weighted average shares outstanding
                                                                
                                                                
                                                                7,882,243
                                                                
                                                                
                                                                
                                                                6,570,833




The
accompanying notes are an integral part of the consolidated financial
statements.
  F -
6




Scout
      Exploration, Inc.Consolidated Schedules of Administrative
    Expenses(Presented
      in US Dollars)For
      the Year Ended September 30
                                      
                                      2008
                                      
                                      
                                      2007Accounting
      and audit
                                      
                                      $
                                      112,656
                                      
                                      
                                      $
                                      25,671Bank
      charges and interest
                                      
                                      
                                      6,584
                                      
                                      
                                      
                                      1,097Consulting
      fees
                                      
                                      
                                      104,418
                                      
                                      
                                      
                                      -Directors’
      fees
                                      
                                      
                                      24,000
                                      
                                      
                                      
                                      20,000Filing
      fees, dues and subscriptions
                                      
                                      
                                      4,151
                                      
                                      
                                      
                                      3,001Foreign
      exchange loss
                                      
                                      
                                      4,518
                                      
                                      
                                      
                                      -Legal
                                      
                                      
                                      50,857
                                      
                                      
                                      
                                      26,961Office
      and administration
                                      
                                      
                                      69,281
                                      
                                      
                                      
                                      40,019Promotion
      and travel
                                      
                                      
                                      45,443
                                      
                                      
                                      
                                      12,345Transfer
      agent
                                      
                                      
                                      5,135
                                      
                                      
                                      
                                      2,775$
                                      427,043
                                      
                                      
                                      $
                                      131,869


































The
accompanying notes are an integral part of the consolidated financial
statements.
  F -
7




Scout
      Exploration, Inc.Consolidated Statements of Cash Flows(Presented
      in US Dollars)For
      the Year Ended September 30
                                                        
                                                        2008
                                                        
                                                        
                                                        2007Cash
      flows from operating activitiesNet
      loss
                                                        
                                                        $
                                                        (368,828
                                                        )
                                                        
                                                        $
                                                        (131,869
                                                        )Adjustments
      to reconcile net loss to net cash
      used in operating activitiesConsulting
      services settled by issuance of common stock
                                                        
                                                        
                                                        75,000Depletion
      and accretion
                                                        
                                                        
                                                        26,405
                                                        
                                                        
                                                        
                                                        -Depreciation
                                                        
                                                        
                                                        1,969
                                                        
                                                        
                                                        
                                                        -Deferred
      income taxes
                                                        
                                                        
                                                        (7,220
                                                        )
                                                        
                                                        
                                                        -Changes
      in operating assets and liabilitiesAccounts
      receivable
                                                        
                                                        
                                                        79,114
                                                        
                                                        
                                                        
                                                        -Prepaid
      expenses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (4,280
                                                        )Accounts
      payable and accrued liabilities
                                                        
                                                        
                                                        78,258
                                                        
                                                        
                                                        
                                                        15,317Income
      taxes payable
                                                        
                                                        
                                                        8,625
                                                        
                                                        
                                                        
                                                        -(106,677
                                                        )
                                                        
                                                        
                                                        (120,832
                                                        )Cash
      flows from investing activitiesAcquisition
      of subsidiary, net of cash acquired (Note 3)
                                                        
                                                        
                                                        (415,948
                                                        )
                                                        
                                                        
                                                        -Cash
      flows from financing activitiesProceeds
      from Issuance of common stock
                                                        
                                                        
                                                        614,800
                                                        
                                                        
                                                        
                                                        135,000Effect
      of exchange rate changes on cash
                                                        
                                                        
                                                        (6,724
                                                        )
                                                        
                                                        
                                                        -Net
      increase in cash
                                                        
                                                        
                                                        85,451
                                                        
                                                        
                                                        
                                                        14,168Cash
      at beginning of the year
                                                        
                                                        
                                                        45,649
                                                        
                                                        
                                                        
                                                        31,481Cash
      at end of the year
                                                        
                                                        $
                                                        131,100
                                                        
                                                        
                                                        $
                                                        45,649Supplemental
      disclosure with respect to cash flows (Note 10)




The
accompanying notes are an integral part of the consolidated financial
statements.


F -
8
  Scout
Exploration, Inc.
 Notes to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
 1.            
Nature of operations
  Scout
Exploration, Inc. (the “Company”) was incorporated in the State of Nevada on
February 1, 1999.  The Company was initially engaged in the business
of designing, developing and marketing educational products for children,
adults, business people, as well as new language learners.  On April
10, 2006 the Company changed its name from Virtual Curricula Corp. to Scout
Exploration, Inc.  The Company is now in the business of the
exploration, development and exploitation of mineral and oil and gas resources
properties.
  The
Company’s continuing operations, as intended, are dependent on management’s
ability to raise required funding through future equity issuances, asset sales
or a combination thereof, which is not assured. These consolidated financial
statements have been prepared on a going concern basis, which assumes the
realization of assets and liquidation of liabilities in the normal course of
business. These financial statements do not include any adjustments to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary, should the Company be unable to continue
as a going concern.
  2.            
Significant
accounting policies
  (a)
              Principles
      of consolidation
  These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary (see Note 3). Significant inter-company transactions
were eliminated upon consolidation.
  (b)
              Management
      estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America (“U.S. GAAP”) 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. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial statements;
accordingly, actual results may differ from estimated amounts. Significant items
subject to such estimates and assumptions include estimates of proved reserves,
related present value estimates of future net revenue, the carrying value of oil
and gas properties, asset retirement obligations, income taxes, and legal and
environmental risks and exposure.
  (c)
              Cash
      and cash equivalents
  Cash is
comprised of cash on hand and demand deposits. The Company considers highly
liquid investments that are readily convertible to known amounts of cash on
demand to be cash equivalents.
  F -
9
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  2.           
 Significant accounting
policies(continued)
  (d)
              Equipment
  Equipment
is carried at cost less accumulated amortization. Amortization is provided using
the declining balance method at an annual rate of 30%.
  (e)
              Mineral
      properties - exploration
  The
Company expenses all costs related to investments in mineral property interests.
Such costs include mineral property acquisition costs and exploration,
development and related administrative expenditures, net of any
recoveries.
  From time
to time, the Company may acquire or dispose of a mineral property interest
pursuant to the terms of an option agreement. Where the options are exercisable
entirely at the discretion of the Company or the optionee, the amounts payable
or receivable are not recorded. Option payments are recorded as property
expenses or recoveries when the payments are made or received.
  Although
the Company has taken steps to verify the title to mineral properties in which
it has an interest, in accordance with industry norms for the current stage of
exploration of such properties, these procedures do not guarantee the Company’s
title. Property title may be subject to unregistered prior agreements or
transfers and title may be affected by undetected defects.
  (f)
              Joint
      venture operations
  Substantially
all of the Company’s petroleum and natural gas exploration and production
activities are conducted jointly with others; accordingly, these financial
statements reflect only the Company’s proportionate interest in such
activities.
  (g)
              Concentration
      of Credit Risk
  Substantially
all of the Company’s accounts receivable result from natural gas and crude oil
sales or joint interest billings to third parties in the oil and gas industry,
operating in Canada. This concentration of customers and joint interest owners
may impact the Company’s overall credit risk as these entities could be affected
by similar changes in economic conditions as well as other related factors.
Accounts receivable are generally not collateralized.  Historically,
the Company has not experienced credit losses on its accounts receivable. There
is only one buyer for the purchase of oil or gas production.
  (h)
              Petroleum
      and natural gas properties
  The
Company uses the successful-efforts method of accounting for oil and gas
property as defined under Statement of Financial Accounting Standards (SFAS) No.
19, Financial Accounting and Reporting by Oil and Gas Producing Companies (“FAS
19”). Under this method of accounting, costs to acquire mineral interests in oil
and natural gas properties, to drill and equip exploratory wells that find
proved reserves, and to drill and equip development wells, are capitalized.
Costs to drill exploratory wells that do not find proved reserves, geological
and geophysical costs and costs of carrying and retaining unproved properties
are expensed.
  F -
10
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  2.Significant accounting policies(continued)
  (h)
                Petroleum and natural gas
      properties (continued)
  The net
book value of petroleum and natural gas properties, less related deferred income
taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the
estimated after-tax future net revenues, discounted at 10% per annum, from
proved petroleum and natural gas reserves plus the lower of cost or net
realizable value of unproven properties not subject to depletion. Estimated
future net revenues exclude future cash outflows associated with settling asset
retirement obligations included in the net book value of oil and gas properties.
Such limitations are imposed and are tested quarterly. In calculating future net
revenues, prices and costs used are those as of the end of the appropriate
period. These prices are not changed except where different prices are fixed and
determinable from applicable contracts for the remaining term of those
contracts, including designated cash flow hedges in place. The Company had no
such hedges outstanding at September 30, 2008.
  Any
excess of the net book value, less related deferred taxes, over the ceiling is
included in depletion expense. An expense recorded in one period may not be
reversed in a subsequent period even though higher oil and gas prices may have
increased the ceiling applicable to the subsequent period.
  Capitalized
costs are depleted by an equivalent unit-of-production method, converting gas to
oil at the ratio of six thousand cubic feet of natural gas to one barrel of oil.
Depletion is calculated using the capitalized costs, including estimated asset
retirement costs, plus the estimated future expenditures (based on current
costs) to be incurred in developing proved reserves, net of estimated salvage
values.
  Unproved
properties are excluded from amortized capitalized costs until it is determined
whether or not proved reserves can be assigned to such properties. The Company
assesses its unproved properties for impairment quarterly. Significant unproved
properties are assessed individually. Costs of insignificant unproved properties
are transferred to amortizable costs over average holding periods ranging from
three years for onshore properties to seven years for offshore
properties.
  No gain
or loss is recognized upon disposal of oil and gas properties unless such
disposal significantly alters the relationship between capitalized costs and
proved reserves.
  (i)
              Asset
      retirement obligations
  The
Company recognizes a liability for asset retirement obligations in the period in
which they are incurred and in which a reasonable estimate of such costs can be
made. Asset retirement obligations include those legal obligations where the
Company will be required to retire tangible long-lived assets such as producing
well sites. The asset retirement obligation is measured at fair value and
recorded as a liability and capitalized as part of the cost of the related
long-lived asset as an asset retirement cost. The asset retirement obligation
accretes until the time the asset retirement obligation is expected to settle
while the asset retirement costs included in oil and gas properties are
amortized using the unit-of-production method.
  Amortization
of asset retirement costs and accretion of the asset retirement obligation are
included in depletion, depreciation, and accretion. Actual asset retirement
costs are recorded against the obligation when incurred. Any difference between
the recorded asset retirement obligations and the actual retirement costs
incurred is recorded in depletion, depreciation, and accretion.
  F -
11
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  2.            
Significant accounting policies(continued)
  (j)
              Environmental
  Oil and
gas activities are subject to extensive federal and provincial environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites.
  Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when an environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. To date, the Company’s recognized environmental obligations are not
material as production has been insignificant.
  (k)
              Revenue
      recognition
  Revenue
is recognized from oil sales when the oil is delivered to the buyer and from gas
sales when the gas passes through the pipeline at the delivery point. Revenue
from the sale of oil and gas is recognized based on volumes delivered to
customers at contractual delivery points and rates.
  (l)
              Income
      taxes
  Income
taxes are determined using the liability method in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes that date of enactment. In addition, a valuation allowance
is established to reduce any deferred tax asset for which it is determined that
it is more likely than not that some portion of the deferred tax asset will not
be realized.
  The
Company accounts for uncertain income tax positions in accordance with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”,
which requires that that the Company recognize in the financial statements, the
impact of a tax position, if that position is more likely than not of being
sustained on examination by taxation authorities, based on the technical merits
of the position.  During the years ended September 30, 2008 and 2007
the Company did not incur interest and/ or penalties related to uncertain tax
positions.
  (m)
              Valuation
      of equity units issued in private
placements
  The
Company has adopted a residual value method with respect to the measurement of
shares and warrants issued as private placement units. The residual value method
first allocates value to the more easily measurable component based on fair
value and then the residual value, if any, to the less easily measurable
component.
 
 F -
12
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  2.            
Significant accounting policies(continued)
  (n)
              Stock
      based compensation
  The
Company records compensation expense in the financial statements for share based
payments using the fair value method pursuant to the Financial Accounting
Standards Board Statement SFAS No. 123R. The fair value of share-based
compensation to employees will be determined using the Black-Scholes option
valuation model at the time of grant. Fair value for common shares issued for
goods or services rendered by non-employees are measured based on the fair value
of the goods and services received. Share-based compensation is expensed with a
corresponding increase to share capital. Upon the exercise of the stock options,
the consideration paid is recorded as an increase in share capital.
  There
were no options granted during the year ended September 30, 2008, nor since
inception.
  (o)
              General
      and administrative expenses
  General
and administrative expenses are reported net of amounts reimbursed by working
interest partners of the petroleum and natural gas properties operated by the
Company and net of amounts capitalized pursuant to the successful efforts method
of accounting.
  (p)
              Foreign
      currency transactions
  The
Company’s functional and reporting currency is the U.S. Dollar. All transaction
initiated in foreign currencies are translated into U.S. dollars in accordance
with SFAS No. 52, “Foreign Currency Translation” as follows:
  i)
              monetary
      assets and liabilities at the rate of exchange in effect at the balance
      sheet date;
  ii)
              non-monetary
      assets and liabilities at historical rates;
and
  iii)
              revenue
      and expense items at the average rate of exchange prevailing during the
      period.
  The
subsidiary’s functional and reporting currency is the Canadian dollar. The
subsidiary is a self-sustaining operation in Canada and is therefore translated
to the Company’s functional currency using the current rate
method.  Gains and losses on translation are included in other
comprehensive income.
  (q)
              Loss
      per share
  Basic
loss per share is computed by dividing the net loss by the weighted average
number of shares outstanding during the period. The weighted average number of
shares was calculated by taking the number of shares outstanding and weighting
them by the amount of time that they were outstanding.
  Diluted
loss per share is computed after giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon the exercise of stock options and
warrants, contingent stock, and conversion of debentures. The dilutive effect of
potential common shares is not considered in the loss per share calculation as
the impact is anti-dilutive.
  F -
13
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  2.            
Significant accounting policies(continued)
  (r)
              Recently
      issued accounting standards
  In
September 2006 the Financial Account Standards Board (the “FASB”) issued its
SFAS No. 157, “Fair Value Measurements”. This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that
require or permit fair value measurements, the Board having previously concluded
in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement will
change current practice. SFAS No. 157 effective date is for fiscal years
beginning after November 15, 2007. The Company does not expect adoption of this
standard will have a material impact on its financial position, results of
operations, or cash flows.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
to measure many financial instruments, and certain other items, at fair value.
SFAS 159 applies to reporting periods beginning after November 15, 2007. The
adoption of SFAS 159 is not expected to have a material impact on the Company’s
financial position, results of operations, or cash flows.
  3.            
Share
purchase agreement
  On June
18, 2008, the Company entered into a Share Purchase Agreement with Brian Mahood,
defined therein as the “Vendor”, whereby the Vendor agreed to sell 100% of the
issued and outstanding Class A Voting Shares of Kerrisdale Resources Ltd.
(“KRL”), an Alberta corporation, to the Company (the “Agreement”). The effective
date of the Agreement is January 1, 2008 and it had a Closing Date of June 18,
2008.
  Operations
of KRL are included from the closing date of June 18, 2008. Had the acquisition
occurred October 1, 2006, pro forma operating revenues, net income (loss) and
diluted net income (loss) per share would be $373,127, $(342,456), and $(0.04),
respectively, for the year ended September 30, 2008 and $423,316, $22,850, and
$0.00, respectively, for the year ended September 30, 2007.  These pro
forma results are intended for information purposes only and do not purport to
represent what the combined companies’ results of operations or financial
position would actually have been had the transaction in fact occurred at an
earlier date or project the results for any future date or period.
  The
Purchase Price for the Shares was $760,849 ($775,000 CDN) (the “Purchase Price”)
comprised of $24,543 ($25,000 CDN) paid in cash to the Vendor at the time of
signing the January 28, 2008 Letter of Intent, $392,696 ($400,000 CDN) paid to
the Vendor on Closing Date of June 18, 2008, and the issuance of a $343,610
($350,000 CDN) debenture (“Debenture”) to the Vendor with a maturity date of
December 31, 2010. The Debenture is secured by a first charge on all of KRL’s
assets.
  F -
14
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  3.            
Share purchase agreement(continued)
  The
Purchase Price of $760,849 ($775,000 CDN) represents the fair value of the
acquired oil and gas assets. The fair value of the net assets acquired
is:
  Current
      assets
                            
                            $
                            144,816Proved
      petroleum and natural gas properties
                            
                            
                            997,964Tangible
      production equipment
                            
                            
                            18,618Liabilities
      assumed
                            
                            
                            (400,549
                            )Net
      Assets Acquired
                            
                            $
                            760,849
  The
Debenture bears interest at 6.75% per annum, effective from January 1,
2008.  Under the original terms of the Agreement, interest was payable
on July 1, 2008 (paid) for the period January 1, 2008 to June 30, 2008, on
October 1, 2008 (paid) and January 1, 2009 (paid), and thereafter quarterly
until the Debenture is fully paid; subsequently modified (see below) such that
effective January 1, 2009 and thereafter accrued interest is payable monthly
commencing on February 1, 2009 until the Debenture is fully paid.
  The
original terms of the Debenture required a principal payment on January 2, 2009,
of either $125,000 CDN plus the quarterly interest otherwise due for the quarter
ended December 31, 2008, or the prepayment of $350,000 CDN Debenture total plus
the quarterly interest otherwise due for the quarter ended December 31, 2008
together with an additional interest payment calculated as the amount that
accrued on the Debenture balance for the two (2) quarters ending December 31,
2008.
  Subsequent
to September 30, 2008 the Vendor and the Company agreed to modify the terms of
the Debenture such that effective January 1, 2009, accrued interest is payable
monthly as detailed above, and to replace the principal payment due on January
2, 2009 for $125,000 CDN with the following payments:
  Date
                              
                              Amount
                                ($
      CDN)
                              
                              
                              Amount
                                ($US)January
      14, 2009 (paid subsequent)
                              
                              $
                              35,000
                              
                              
                              $
                              28,000March
      31, 2009
                              
                              
                              50,000
                              
                              
                              
                              47,000June
      30, 2009
                              
                              
                              50,000
                              
                              
                              
                              47,000Current
      portion
                              
                              
                              135,000
                              
                              
                              
                              122,000Remaining
      original paymentsJanuary
      2, 2010
                              
                              
                              125,000
                              
                              
                              
                              117,500January
      2, 2011
                              
                              
                              100,000
                              
                              
                              
                              94,000Total
      debenture payable
                              
                              $
                              360,000
                              
                              
                              $
                              333,500
  In
addition, terms of the Debenture require a principal payment on January 2, 2010,
at the Company’s sole and exclusive option, of either $125,000 CDN plus the
monthly interest otherwise due for the month of December 2009, or the prepayment
of the then remaining principal balance plus the monthly interest otherwise due
for the month of December 2009 together with an additional interest payment
calculated as the amount that accrued on the Debenture balance for the six (6)
months ending December 31, 2009.
  F -
15
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  3.            
Share purchase agreement(continued)
  As
security for the Principal Amount of the Debenture, KRL and the Vendor entered
into a General Security Agreement, the effective date of which is January 1,
2008 (the “Security Agreement”). Pursuant to the provisions of the Security
Agreement, KRL granted to the Vendor a continuing security interest in and to
all (i) personal property of KRL including goods, chattel paper, securities,
documents of title, instruments, money, intangibles; (ii) real property of KRL
including all charges on KRL land or interests in land and petroleum and natural
gas leases; and (iii) parts, accessories, attachments, equipment, additions,
accretions thereto and property thereof, together with any equipment or
accessories placed upon repairs made to the foregoing during the term of the
Security Agreement.
  4.            
Resource
properties
  Petroleum and Natural Gas
Properties
  Pursuant
to the terms of the purchase agreement as more fully described in Note 3, the
company has varying working interests, from 6% to 100%, in thirteen (13) oil and
gas wells located in Alberta. The cost of these producing wells is recorded at
the apportioned purchase price paid by the Company as more fully described in
Note 3.
 
 Mineral Property: AAV 1-9
Claims
  On March
4, 2006 the Company signed a letter of agreement with a non-arms length private
Canadian Corporation for a 100% interest in and to the Wheaton River AAV 1-9
Claims situated in the Whitehorse Mining District of the Yukon Territory,
Canada. Terms of the purchase require a cash payment of $5,000 by March 31, 2006
(paid) and $20,000 on or before September 30, 2006 (subsequently deferred to
September 30, 2009), and the issuance of 500,000 common shares of the Company
(issued at fair value of $0.05 per common share). The Vendor will retain 3% net
smelter royalty, up to 2% of which can be re-purchased for $2,000,000. All costs
associated with Exploration Mineral projects are expensed when
incurred.
  5.             Equipment
  As
      at September 30, 2008Cost
                          
                          
                          Accumulated
      Amortization
                          
                          
                          Net
      Book ValueTangible
      production equipment
                          
                          $
                          17,893
                          
                          
                          $
                          1,934
                          
                          
                          $
                          15,959
  6.            
Asset
retirement obligations
  The total
future asset retirement obligation was estimated based on the Company’s net
ownership interest in all oil and gas properties, the estimated cost to abandon
and reclaim the properties, and the estimated timing of the cost to be incurred
in future periods. The total undiscounted amount of the estimated future cash
flows required to settle the retirement obligation is approximately $56,799
which will be incurred during the years 2012 through 2034. A credit adjusted
risk free rate of 6.5 percent was used to calculate the fair value of the asset
retirement obligation.
  F -
16
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  7.            Related
party transactions
  a)
              During
      the year ended September 30, 2008, directors’ fees of $24,000 (2007 -
      $20,000) were paid or accrued to two Directors of the
    Company.
  b)
              During
      the year ended September 30, 2008, office and administration fees and
      management fees of $96,687 (2007 - $25,986) were paid to corporations
      controlled by a Director of the
Company.
  c)
              At
      September 30, 2008, $36,771 (September 30, 2007 - $21,260) owed to a
      Director and corporations controlled by the Director of the Company was
      included in accounts payable. The balance is due on demand, has no
      specific terms of repayments, is non-interest bearing and is unsecured,
      and accordingly fair value cannot be reliably
  determined.
  The above
transactions occurred in the normal course of operations and were measured at
the exchange value which represented the consideration established and agreed to
by the related parties.
  8.
              Capital
      stock
  a)
              During
      the year ended September 30, 2007, the Company issued 1,400,000 common
      shares for exercise of warrants at a price of $0.15 per share for gross
      proceeds of $210,000, of which $75,000 was collected during the year ended
      September 30, 2008.
  b)
              The
      Company entered into a consulting agreement on March 10, 2008, expiring on
      March 10, 2009. Pursuant to the agreement, the Company issued 150,000
      shares on signing the agreement (issued during March 2008 at a fair value
      of $0.50 per share), and the additional 150,000 shares would be issued if
      the agreement was extended for an additional six months, and would also
      grant options to purchase 100,000 common shares at $0.40 per share
      expiring March 10, 2009, such options to be valued at the date of
      grant.  In July 2008, the Company cancelled the March 2008
      consulting agreement and resolved to rescind the 150,000 common shares
      issued at $0.50 for consulting services due to the non performance of such
      services by the contractors. The Company will not be issuing any
      additional common shares nor will any options be granted to the
      contractor.  As of September 30, 2008 the 150,000 shares remain
      outstanding and the shares are expected to be returned to treasury and
      cancelled in January 2009.
  c)
              On
      May 20, 2008, the Company issued 1,397,000 units of a private placement
      offering at $0.40 per unit, with each unit comprising one common share at
      a par value of $0.001 per common share and additional paid in capital of
      $0.399 per common share and one share purchase warrant, entitling the
      holder thereof to purchase, at any time prior to May 20, 2009, for each
      one warrant held, one common share of the Company at a price of $0.75 per
      common share. Aggregate proceeds of $558,800 were raised from the Unit
      Offering, of which $23,000 was receivable from subscribers as of September
      30, 2008.  In addition, the Company received $4,000 in
      subscriptions received in advance for 10,000 units which have not been issued as of
      September 30, 2008.
                
                The
      fair value of the common shares issued in the private placement was
      determined to be the more easily measurable component and therefore were
      valued at their fair value, as determined by the closing quoted bid price
      on the announcement date.  Since the fair value of the common
      shares was in excess of the price per unit, no value has been assigned to
      the warrants.
  F -
17
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  9. Share
purchase warrants
  As of
September 30, 2008, 1,397,000 (2007 – Nil) share purchase warrants are
outstanding, with an exercise price of $0.75 per share and which expire on May
20, 2009.
  10.         
Supplemental
disclosure with respect to cash flows
  Non-cash
financing and investing activities for the year ended September 30, 2008
comprised the issuance of a debenture in the amount of $343,610 ($350,000 CDN)
pursuant to the acquisition of KRL (Note 3).
  Other
supplemental cash flow information for the year ended September 30 is as
follows:
  2008
                          
                          
                          2007Income
      taxes paid
                          
                          $
                          6,086
                          
                          
                          $
                          -Interest
      paid
                          
                          $
                          17,141
                          
                          
                          $
                          -
  11.         
Segmented
disclosure
  The
Company has two operating segments, both located in Canada: an inactive mineral
exploration project in the Yukon Territory and recently acquired oil and gas
production and development in Alberta. All plant and equipment assets of the
Company are located in Canada.
  12.         
Financial
instruments and risk management
  a)
              Fair
      value
  The
Company’s financial instruments include cash, receivables, accounts payable,
accrued liabilities and debenture payable. Unless otherwise noted, it is
management’s opinion that the Company is not exposed to significant interest,
currency or credit risks arising from these financial instruments. The fair
value of these financial instruments approximates their carrying values, unless
otherwise noted.
  b)
              Foreign
      exchange risk
  The
Company expects to raise equity predominantly in United States dollars. The
Company is conducting business in Canada where financial transactions are based
on the Canadian dollar. As such, the Company is subject to risks due to
fluctuations in the exchange rates for the U.S. and Canadian dollar. The Company
does not enter into derivative financial instruments to mitigate its exposure to
foreign currency risk.
  At
September 30, 2008 the Company had the following financial assets and
liabilities:
 CDN
      DollarsCash
                        
                        $
                        105,500Receivables
                        
                        $
                        60,430Accounts
      payable and accrued liabilities
                        
                        $
                        137,562Debenture
      payable
                        
                        $
                        360,000
 At
September 30, 2008 CDN dollar amounts were converted at a rate of $0.9435
Canadian dollars to $1.00 US dollar.
  F -
18
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  13. Income
taxes
  A
reconciliation of income taxes at statutory rates with the reported taxes is as
follows:
 
 Year
      Ended September 30
                                    
                                    2008
                                    
                                    
                                    2007Income
      taxes at US federal statutory rate
                                    
                                    $
                                    (126,482
                                    )
                                    
                                    $
                                    (46,154
                                    )Effect
      of rate change on deferred taxes
                                    
                                    
                                    (1,262
                                    )
                                    
                                    
                                    -Effect
      of foreign income taxed at other than 35%
                                    
                                    
                                    (1,624
                                    )
                                    
                                    
                                    -Change
      in valuation allowance
                                    
                                    
                                    136,818
                                    
                                    
                                    
                                    46,154Total
      income tax expense
                                    
                                    $
                                    7,450
                                    
                                    
                                    $
                                    -
 
 The
significant components of the Company’s deferred income tax liabilities and
assets are as follows:
 
 As
      at September 30
                                  
                                  2008
                                  
                                  
                                  2007Deferred
      income tax liabilitiesPetroleum
      and natural gas properties
                                  
                                  $
                                  215,453
                                  
                                  
                                  $
                                  -Deferred
      income tax assetsLosses
      and tax credits available for future periods
                                  
                                  
                                  233,731
                                  
                                  
                                  
                                  96,913Plant
      and equipment
                                  
                                  
                                  3,656
                                  
                                  
                                  
                                  -Valuation
      allowance
                                  
                                  
                                  (233,731
                                  )
                                  
                                  
                                  (96,913
                                  )Total
      deferred income tax assets
                                  
                                  
                                  3,656
                                  
                                  
                                  
                                  -Net
      deferred income tax liability
                                  
                                  $
                                  211,797
                                  
                                  
                                  $
                                  -
 
 The
Company has available unclaimed start up costs of approximately $667,000 for US
income tax purposes, which may be carried forward to reduce taxable income in
future years.
 
 Future
tax benefits related to the start up costs have not been recorded due to
uncertainty regarding their utilization.
  14.         
Commitments
  On June
18, 2008, and as amended subsequent to September 30, 2008, the Company entered
into a Management Agreement with Kerrisdale Consulting Inc. (“KCI”) with an
effective date of January 1, 2008 whereby KCI would provide ongoing senior and
geological and management operations services to the Company for a monthly fee
of $1,000 CDN per month, terminating on December 31, 2009.
  In
addition, pursuant to the provisions of the Agreement (see Note 3), the Company
agreed to pay KCI $500 CDN per month for a period of two years commencing
January 1, 2008, as rent pursuant to a sublease by the Company of office space
located in Calgary, Alberta, Canada.
  F -
19
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  15. Supplemental Petroleum and Natural
Gas Disclosures(Unaudited)
  The
accompanying table presents information concerning the Company’s crude petroleum
and natural gas producing activities as required by Statement of Financial
Accounting Standards No. 69, “Disclosures about Oil and Gas Producing
Activities.” Capitalized costs relating to petroleum and natural gas producing
activities from continuing operations are as follows:
  As
      at September 30
                                
                                2008
                                
                                
                                2007Proved
      petroleum and natural gas properties
                                
                                $
                                959,091
                                
                                
                                $
                                -Unproved
      properties
                                
                                
                                -
                                
                                
                                
                                -959,091
                                
                                
                                
                                -Less:
      Accumulated depletion
                                
                                
                                (26,191
                                )
                                
                                
                                -Net
      capitalized costs
                                
                                $
                                932,900
                                
                                
                                $
                                -
 
  Costs
incurred in petroleum and natural gas property acquisitions and development
activities related to continuing operations are as follows:
  For
      the Year Ended September 30
                            
                            2008
                            
                            
                            2007Acquisition
      costs - proved properties
                            
                            $
                            997,963
                            
                            
                            $
                            -
  The
results of operations for petroleum and natural gas producing activities from
continuing operations are as follows:
  For
      the Year Ended September 30
                                    
                                    2008
                                    
                                    
                                    2007Sales
      of petroleum and natural gas
                                    
                                    $
                                    117,893
                                    
                                    
                                    $
                                    -Lease
      and royalties
                                    
                                    
                                    23,854
                                    
                                    
                                    
                                    -Depletion
      and accretion
                                    
                                    
                                    26,405
                                    
                                    
                                    
                                    -Depreciation
                                    
                                    
                                    1,969
                                    
                                    
                                    
                                    -Total
      petroleum and natural gas expenses
                                    
                                    
                                    52,228
                                    
                                    
                                    
                                    -Results
      of petroleum and natural gas operations (excluding corporate overhead and
      interest costs)
                                    
                                    $
                                    65,665
                                    
                                    
                                    $
                                    -
 
    F -
20
  Scout
Exploration, Inc.
 Notes
to the Consolidated Financial Statements
 (Presented
in US dollars)
 
 September
30, 2008 and 2007
  15.           Supplemental Petroleum and Natural
Gas Disclosures(Unaudited) (continued)
  The
following table presents the Company’s estimate of its net proved crude
petroleum and natural gas reserves related to continuing operations. The
Company’s management emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and gas properties. Accordingly, the estimates are expected to change as
future information becomes available. The estimates have been prepared by
independent petroleum reserve engineers. Proved oil and gas reserves are the
estimated quantities of crude oil and natural gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed oil and gas reserves are those expected to be
recovered through existing wells with existing equipment and operating methods.
All of the Company’s proved reserves are located in Canada.
  Petroleum
                                
                                
                                Natural
      Gas(MBbls)
                                
                                
                                (MMCF)Proved
      developed reserves:Balance,
      October 1, 2007
                                
                                
                                -
                                
                                
                                
                                -Purchase
      of minerals in place
                                
                                
                                113.5
                                
                                
                                
                                895.6Production
                                
                                
                                (0.1
                                )
                                
                                
                                (11.8
                                )Balance,
      September 30, 2008
                                
                                
                                113.4
                                
                                
                                
                                883.8
  The
standardized measure of discounted future net cash flows is computed by applying
year-end prices of oil and gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future production
of proved oil and gas reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing the proved reserves,
less estimated future income tax expenses (based on year-end statutory tax
rates, with consideration of future tax rates already legislated) to be incurred
on pretax net cash flows less tax basis of the properties and available credits,
and assuming continuation of existing economic conditions. The estimated future
net cash flows are then discounted using a rate of 10 percent a year to reflect
the estimated timing of the future cash flows.
  2008
                              
                              
                              2007(thousands)Future
      cash inflows
                              
                              $
                              1,830
                              
                              
                              $
                              -Future
      operating costs
                              
                              
                              (989
                              )
                              
                              
                              -Future
      income tax expense
                              
                              
                              (231
                              )
                              
                              
                              -Future
      net cash flows
                              
                              
                              610
                              
                              
                              
                              -Discount
      10%
                              
                              
                              (208
                              )
                              
                              
                              -Standardized
      measure of discounted future net cash flows relating to proved
      reserves
                              
                              $
                              402
                              
                              
                              $
                              -
  No change
in the standardized measure of discounted future net cash flows is presented for
2008 as the Company did not have any reserves in 2007.
   F -
21