UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


FORM
10-Q/A


Amendment
No. 1





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended July 31, 2009


OR


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from _________ to ___________.





COMMISSION
FILE NUMBER:  001-32994





OILSANDS
QUEST INC.


(Exact
name of issuer as specified in its charter)





Colorado
            
            98-0461154(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)





800, 326 - 11th Avenue SW,
Calgary, Alberta, Canada T2R 0C5


(Address
of principal executive offices)





(403)
263-1623


(Issuer's
telephone number)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes x               No
o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes o                No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer: £
            Accelerated
      filer: T
            Non-accelerated
      filer: £
            Smaller
      reporting company: £(Do
      not check if smaller reporting
company)





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





As of
September 1, 2009 there were 277,359,511 shares of common stock issued and
outstanding.

















EXPLANATORY
NOTE





Oilsands
Quest Inc. (the “the Company”) is amending its Quarterly Report on Form 10-Q for
the quarter ended July 31, 2009, filed on September 9, 2009 (the “Original
Filing”) to amend and restate its consolidated financial statements for the
three months ended July 31 2009.Subsequent to the
issuance of the consolidated financial statements for the three months ended
July 31, 2009, our management determined that there were errors in the recording
of stock-based compensation expense for the three months ended July 31, 2009 and
for the years ended April 30 2007, 2008 and 2009. Management concluded that the
adjustment originating in the three months ended July 31, 2009 was material to
the financial statements and required restatement of our consolidated financial
statements. Management concluded that the adjustments originating in the years
ended April 2007, 2008 and 2009 and in the three months ended July 31, 2008, the
three and six months ended October 31, 2008 and the three and nine months ended
January 31, 2009 were not material to the financial statements for those periods
and which will be reflected as immaterial error corrections of prior period
comparative financial information in its interim financial statements for the
three months ended July 31, 2009 and future filings.




Refer to
Note 2 “Restatement of Consolidated Financial Statements” and Note 3 “Basis of
Presentation” of the Unaudited Notes to Consolidated Financial Statements for
further discussion of the restatement and the immaterial error
corrections





As a
result, the Company incorrectly presented the Company’s consolidated balance
sheets as of July 31, 2009, Consolidated Statements of Operations, Cash Flows
and Stockholders’ Equity and Comprehensive Income for the three months ended
July 31, 2009 and is correcting such presentation in this Form
10-Q/A.  Note 2 in the notes to the consolidated financial statements
included herein provides a reconciliation of amounts previously reported to
those shown herein.





For the
convenience of the reader, this Form 10-Q/A sets forth the Original Filing in
its entirety.  The Company has not modified or updated the disclosure
presented in this Form 10-Q/A, except as required to reflect the effects of the
restatement discussed above.  Accordingly, this Form 10-Q/A does not
reflect events occurring after the Original Filing or modify or update those
disclosures affected by subsequent events.





The
following items have been amended as a result of the restatement:





Item
1.  Financial Statements


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Item
4.  Controls and Procedures





Our Chief
Executive Officer and Chief Financial Officer have also reissued the
certifications required by Sections 302 and 906 of the Sarbanes Oxley
Act.








2


OILSANDS
QUEST INC.


FORM
10Q FOR THE QUARTER ENDED


JULY
31, 2009





Part I.  Financial
      InformationForward-Looking
      StatementsItem
      1.
            
            Financial
      StatementsUnaudited Consolidated Balance
      Sheets as of July 31, 2009 and April 30,
    2009
            5Unaudited Consolidated Statements
      of Operations for the Three Months Ended July 31, 2009 and 2008 and for
      the Period from Inception on April 3, 1998 to July 31,
      2009
            6Unaudited Consolidated Statements
      of Stockholders’ Equity for the Three Months Ended July 31, 2009 and
      2008
            7Unaudited Consolidated Statements
      of Comprehensive Income (Loss) for the Three Months Ended July 31, 2009
      and 2008 and for the Period from Inception on April 3, 1998 to July 31,
      2009
            8Unaudited Consolidated Statements
      of Cash Flows for the Three Months Ended July 31, 2009 and 2008 and for
      the Period from Inception on April 3, 1998 to July 31,
      2009
            9Unaudited Notes to Consolidated
      Financial Statements
            10Item
      2.
            
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            21Item
      3.
            
            Quantitative and Qualitative
      Disclosures About Market Risk
            25Item
      4.
            
            Controls and
      Procedures
            25Part II  Other
      InformationItem
      1.
            
            Legal
      Proceedings
            26Item
      1A.
            
            Risk
      Factors
            26Item
      2.
            
            Unregistered Sales of Equity
      Securities and Use of Proceeds
            26Item
      3.
            
            Defaults Upon Senior
      Securities
            26Item
      4.
            
            Submission of Matters to a Vote of
      Security Holders
            26Item
      5.
            
            Other
      Information
            26Item
      6.
            
            Exhibits
            26Signatures
            27








3





Cautionary Statement about
Forward-Looking Statements





This
Quarterly Report on Form 10-Q includes certain statements that may be deemed to
be “forward-looking statements.” All statements, other than statements of
historical facts, included in this Form 10-Q that address activities, events or
developments that our management expects, believes or anticipates will or may
occur in the future are forward-looking statements. Such forward-looking
statements include discussion of such matters as:





—
            the
      amount and nature of future capital, development and exploration
      expenditures;





—
            the
      timing of exploration activities;





—
            business
      strategies and development of our business plan and drilling programs;
      and





—
            potential
      reservoir recovery optimization
processes.





Forward-looking
statements are statements other than relating to historical fact and are
frequently characterized by words such as “plan”, “expect”, “project”, “intend”,
“believe”, “anticipate”, “estimate”, “potential”, “prospective” and other
similar words or statements that certain events or conditions “may” “will” or
“could” occur. Forward-looking statements such as references to Oilsands Quest’s
drilling program, geophysical programs, reservoir field testing and analysis
program, preliminary engineering and economic assessment program for a first
commercial project, and the timing of such programs are based on the opinions
and estimates of management and the company’s independent evaluators at the date
the statements are made, and are subject to a variety of risks and uncertainties
and other factors that could cause actual events or results to differ materially
from those anticipated in the forward-looking statements, which include but are
not limited to risks inherent in the oil sands industry, regulatory and economic
risks, lack of infrastructure in the region in which the company’s resources are
located and risks associated with the company’s ability to implement its
business plan. Oilsands Quest undertakes no obligation to update forward-looking
information if circumstances or management’s estimates or opinions should
change, except as required by law. The reader is cautioned not to place undue
reliance on forward-looking statements.








4





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Balance Sheets


(Unaudited)





July
      31, 2009
            
            April 30, 2009(as
      restated)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            44,000,040
            
            
            $
            6,986,099Accounts
      receivable
            
            
            302,859
            
            
            
            3,616,793Short-term
      investments
            
            
            12,140,871
            
            
            
            25,208,748Prepaid
      expenses
            
            
            707,332
            
            
            
            337,099Available
      for sale equity securities
            
            
            50,053
            
            
            
            60,307Total
      Current Assets
            
            
            57,201,155
            
            
            
            36,209,046Property and Equipment
      (note 4)
            
            
            440,973,219
            
            
            
            398,975,468Total
      Assets
            
            $
            498,174,374
            
            
            $
            435,184,514LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable (note 12)
            
            $
            908,721
            
            
            $
            3,463,642Accrued
      liabilities
            
            
            5,296,268
            
            
            
            5,603,779Flow-through
      share premium liability
            
            
            721,004
            
            
            
            749,287Total
      Current Liabilities
            
            
            6,925,993
            
            
            
            9,816,708Deferred
      Taxes
            
            
            70,644,375
            
            
            
            65,651,035Asset Retirement Obligation(note 5)
            
            
            2,951,596
            
            
            
            2,621,439Stockholders’
      EquityCapital
      StockPreferred
      Stock, par value of $0.001 each, 10,000,000 shares authorized, 1 Series B
      Preferred share outstanding (note 7)
            
            
            1
            
            
            
            1Common
      Stock, par value of $0.001 each, 750,000,000 shares authorized,
      276,654,511 and 241,559,549 shares outstanding at July 31, 2009 and April
      30, 2009 respectively (notes 8, 9 and 10)
            
            
            276,654
            
            
            
            241,559Additional
      Paid-in Capital
            
            
            743,099,134
            
            
            
            713,573,848Deficit
      Accumulated During Development Stage
            
            
            (335,496,393)
            
            
            
            (330,699,364)Accumulated
      Other Comprehensive Income (Loss)
            
            
            9,773,014
            
            
            
            (26,020,712)Total
      Stockholders’ Equity
            
            
            417,652,410
            
            
            
            357,095,332Total
      Liabilities and Stockholders’ Equity
            
            $
            498,174,374
            
            
            $
            435,184,514





Subsequent events(note
13)





See Notes
to Unaudited Consolidated Financial Statements








5





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Operations


(Unaudited)


Three
      Months Ended
              July
      31,
            
            
            From
      Inception on April 3, 1998 through to2009
            
            
            2008
            
            
            July
      31, 2009(as
      restated)
            
            
            
            
            
            (as
      restated)ExpensesExploration
      costs
            
            $
            3,614,359
            
            
            $
            10,472,742
            
            
            $
            209,871,368General
      and administrativeCorporate
            
            
            3,798,450
            
            
            
            2,855,016
            
            
            
            44,830,625Stock-based
      compensation (note 9)
            
            
            1,735,797
            
            
            
            3,763,772
            
            
            
            142,961,873Foreign
      exchange (gain) loss
            
            
            (3,243,691)
            
            
            
            782,690
            
            
            
            1,296,231Depreciation
      and accretion
            
            
            448,416
            
            
            
            317,726
            
            
            
            3,452,7356,353,331
            
            
            
            18,191,946
            
            
            
            402,412,832Other
      ItemsInterest
      and other income
            
            
            (58,764)
            
            
            
            (429,278)
            
            
            
            (6,357,434)Loss
      before deferred  income tax benefit
            
            
            6,294,567
            
            
            
            17,762,668
            
            
            
            396,055,398Deferred
      income tax benefit
            
            
            (1,497,538)
            
            
            
            (3,444,370)
            
            
            
            (52,864,751)Net
      loss
            
            
            4,797,029
            
            
            
            14,318,298
            
            
            
            343,190,647Net loss attributable to
      noncontrolling  interest
            
            
            -
            
            
            
            -
            
            
            
            (7,694,254)Net
      loss attributable to common stockholders
            
            $
            4,797,029
            
            
            $
            14,318,298
            
            
            $
            335,496,393Net
      loss attributable to common stockholders per share
            
            $
            (0.02)
            
            
            $
            (0.06)Weighted
      average number of common stock outstanding
            
            
            297,811,710
            
            
            
            252,061,213





See Notes
to Unaudited Consolidated Financial Statements








6





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Stockholders' Equity


(Unaudited)


Common
      Stock
            
            
            Preferred
      Stock
            
            
            Additional
      Paid in
            
            
            Accumulated
      Other Comprehensive Income
            
            
            Deficit
      Accumulated During the
              Development
            
            
            Total
      Stockholders’Shares
            
            
            Par
      Value
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            (Loss)
            
            
            Stage
            
            
            EquityBalance,
      April 30, 2009
            
            
            241,559,549
            
            
            $
            241,559
            
            
            
            1
            
            
            $
            1
            
            
            $
            713,573,848
            
            
            $
            (26,020,712)
            
            
            
            (330,699,364)
            
            
            $
            357,095,332Common
      stock and warrants issued for:Cash
            
            
            35,075,000
            
            
            
            35,075
            
            
            
            -
            
            
            
            
            
            
            
            29,778,675
            
            
            
            -
            
            
            
            -
            
            
            
            29,813,750Stock
      option exercises
            
            
            19,962
            
            
            
            20
            
            
            
            -
            
            
            
            
            
            
            
            16,149
            
            
            
            -
            
            
            
            -
            
            
            
            16,169Stock-based
      compensation, as restated
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            1,735,797
            
            
            
            -
            
            
            
            -
            
            
            
            1,735,797Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            (2,005,335)
            
            
            
            -
            
            
            
            -
            
            
            
            (2,005,335)Other
      comprehensive incomeForeign
      exchange gain on translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            35,793,726
            
            
            
            -
            
            
            
            35,793,726Net
      loss, as restated
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            (4,797,029)
            
            
            
            (4,797,029)Balance,
      July 31, 2009, as restated
            
            
            276,654,511
            
            
            $
            276,654
            
            
            
            1
            
            
            $
            1
            
            
            $
            743,099,134
            
            
            $
            9,773,014
            
            
            $
            (335,496,393)
            
            
            $
            417,652,410Balance,
      April 30, 2008
            
            
            213,861,958
            
            
            $
            213,862
            
            
            
            1
            
            
            $
            1
            
            
            $
            604,322,495
            
            
            $
            36,732,367
            
            
            $
            (241,502,206
            )
            
            $
            399,766,519Common
      stock issued for:Cash
            
            
            12,976,761
            
            
            
            12,977
            
            
            
            -
            
            
            
            -
            
            
            
            54,489,420
            
            
            
            -
            
            
            
            -
            
            
            
            54,502,397Property
            
            
            640,000
            
            
            
            640
            
            
            
            -
            
            
            
            -
            
            
            
            3,717,760
            
            
            
            -
            
            
            
            -
            
            
            
            3,718,400Stock
      option exercises
            
            
            35,000
            
            
            
            35
            
            
            
            -
            
            
            
            -
            
            
            
            165,115
            
            
            
            -
            
            
            
            -
            
            
            
            165,150Exchange
      of OQI Sask Exchangeable Shares
            
            
            1,190,250
            
            
            
            1,190
            
            
            
            -
            
            
            
            -
            
            
            
            (1,190)
            
            
            
            -
            
            
            
            -
            
            
            
            -Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,763,772
            
            
            
            -
            
            
            
            -
            
            
            
            3,763,772Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,270,248)
            
            
            
            -
            
            
            
            -
            
            
            
            (1,270,248)OQI
      Sask options exercises
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,250,495
            
            
            
            -
            
            
            
            -
            
            
            
            1,250,495Other
      comprehensive incomeTransfer
      of unrealized loss on available for sale securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            141,970
            
            
            
            -
            
            
            
            141,970Foreign
      exchange loss on translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,864,955)
            
            
            
            -
            
            
            
            (5,864,955)Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,318,298)
            
            
            
            (14,318,298)Balance,
      July 31, 2008
            
            
            228,703,969
            
            
            $
            228,704
            
            
            
            1
            
            
            $
            1
            
            
            $
            666,437,619
            
            
            $
            31,009,382
            
            
            $
            (255,820,504)
            
            
            $
            441,855,202





See Notes
to Unaudited Consolidated Financial Statements.


7





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Comprehensive Income (Loss)





Three
      Months Ended
              July
      31,
            
            
            From
      Inception on April 3, 1998 through to2009
            
            
            2008
            
            
            July
      31, 2009(as
      restated)
            
            
            
            
            
            (as
      restated)Net
      loss
            
            $
            (4,797,029)
            
            
            $
            (14,318,298)
            
            
            $
            (343,190,647)Unrealized
      loss on available for sale securities
            
            
            -
            
            
            
            -
            
            
            
            (167,631)Transfer
      of unrealized loss on available for sale securities
            
            
            -
            
            
            
            141,970
            
            
            
            167,631Foreign
      exchange gain (loss) on translation
            
            
            35,793,726
            
            
            
            (5,864,955)
            
            
            
            9,773,014Comprehensive
      income (loss)
            
            $
            30,996,697
            
            
            $
            (20,041,283)
            
            
            $
            (333,417,633)Comprehensive
      loss attributable to noncontrolling interest
            
            
            -
            
            
            
            -
            
            
            
            7,694,254Comprehensive
      income (loss) attributable to common stockholders
            
            $
            30,996,697
            
            
            $
            (20,041,283)
            
            
            $
            (325,723,379)





See Notes
to Unaudited Consolidated Financial Statements














8





OILSANDS QUEST
INC.


(A
Development Stage Company)


Consolidated
Statements of Cash Flows


(Unaudited)





Three
      Months Ended
              July
      31,
            
            
            From Inception on
      April 3, 1998through to
              July 31, 20092009
            
            
            2008(as
      restated)
            
            
            
            
            
            (as
      restated)Operating
      ActivitiesNet
      loss
            
            $
            (4,797,029)
            
            
            $
            (14,318,298)
            
            
            $
            (343,190,647)Non-cash
      adjustments to net lossStock-based
      compensation
            
            
            1,735,797
            
            
            
            3,763,772
            
            
            
            142,961,873Deferred
      income tax benefit
            
            
            (1,497,538)
            
            
            
            (3,444,370)
            
            
            
            (52,864,751)Depreciation
      and accretion
            
            
            448,416
            
            
            
            317,726
            
            
            
            3,452,735Asset
      retirement cost expense
            
            
            -
            
            
            
            -
            
            
            
            1,067,715Other
      non-cash items
            
            
            10,255
            
            
            
            234,773
            
            
            
            1,249,538Changes
      in Non-Cash Working CapitalAccounts
      receivable and prepaid expenses
            
            
            3,157,979
            
            
            
            1,843,316
            
            
            
            (186,361)Accounts
      payable and accrued liabilities
            
            
            (3,453,587)
            
            
            
            (5,180,826)
            
            
            
            9,953,632Cash
      Used in Operating Activities
            
            
            (4,395,707)
            
            
            
            (16,783,907)
            
            
            
            (237,556,266)Investing
      ActivitiesProperty
      and equipment expenditures
            
            
            (440,425)
            
            
            
            (4,582,176)
            
            
            
            (79,854,030)Short-term
      investment
            
            
            13,067,877
            
            
            
            (13,580,041)
            
            
            
            (12,140,871)Other
      investments
            
            
            -
            
            
            
            -
            
            
            
            (548,048)Cash
      Used in Investing Activities
            
            
            12,627,452
            
            
            
            (18,162,217)
            
            
            
            (92,542,949)Financing
      ActivitiesIssuance
      of shares for cash
            
            
            27,824,584
            
            
            
            53,397,299
            
            
            
            355,385,992Shares
      issued on exercise of OQI Sask options and warrants
            
            
            -
            
            
            
            1,250,495
            
            
            
            4,176,336Shares
      issued by OQI Sask to non-controlling interests
            
            
            -
            
            
            
            -
            
            
            
            7,663,666Convertible
      debentures
            
            
            -
            
            
            
            -
            
            
            
            8,384,496Cash
      Provided by Financing Activities
            
            
            27,824,584
            
            
            
            54,647,794
            
            
            
            375,610,490Inflow
      of Cash and Cash Equivalents
            
            
            36,056,329
            
            
            
            19,701,670
            
            
            
            45,511,275Effects
      of exchange rate changes on cash and cash
equivalents
            
            
            957,612
            
            
            
            (74,249)
            
            
            
            (1,511,235)Cash
      and Cash Equivalents, Beginning of Period
            
            
            6,986,099
            
            
            
            26,498,038
            
            
            
            -Cash
      and Cash Equivalents, End of Period
            
            $
            44,000,040
            
            
            $
            46,125,459
            
            
            $
            44,000,040Non-Cash
      Financing ActivitiesCommon
      stock issued for properties
            
            $
            -
            
            
            $
            3,718,400
            
            
            $
            10,848,342Warrants
      granted on purchase of properties
            
            $
            -
            
            
            $
            -
            
            
            $
            1,763,929Common
      stock issued for services
            
            $
            -
            
            
            $
            -
            
            
            $
            10,504,594Common
      stock issued for debt settlement
            
            $
            -
            
            
            $
            -
            
            
            $
            28,401,029








See Notes
to Unaudited Consolidated Financial Statements











9





OILSANDS
QUEST INC.


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





1.
            DESCRIPTION
      OF BUSINESS AND NATURE OF
OPERATIONS





Oilsands
Quest Inc. (“OQI”) together with its subsidiaries, (collectively the “Company”)
is in the exploration stage and follows the guidance for a development stage
company as defined in Statement No. 7 of the Financial Accounting Standards
Board. The principal business activity is the exploration and development of
natural resource properties in Canada.





To date,
the Company has not earned revenue from any of its natural resource properties,
and none of its estimated resources have been classified as proved reserves. The
Company expects that significant additional exploration and development
activities will be necessary to establish proved reserves, and to develop the
infrastructure necessary to facilitate production, if any, from the estimated
resources.





As at
July 31, 2009, the Company had working capital of $51.0 million. The Company
believes that it has sufficient funds to maintain its interests in the existing
properties, to complete the announced testing activities at its Axe Lake
Property, and to maintain other core activities through July 31, 2010. The
Company monitors its expenditure budgets and adjusts its expenditure plans to
conform to available funding. However, additional funding will be required to
complete the exploration or development activities, or for changes in the nature
or cost of the activities currently planned.





The
Company plans to fund future exploration and development activities by way of
financings such as  public offerings or private placements of debt or
equity securities. Current conditions in the global and financial markets have
currently limited the availability of these resources. The Company’s development
strategy also includes entering into partnerships with third parties on a joint
venture basis. However, the Company cannot provide any assurance that debt or
equity financing or joint venture partner arrangements will be available on
acceptable terms, if at all, to meet future requirements.





These
financial statements have been prepared on a going concern basis in accordance
with generally accepted accounting principles. The going concern basis assumes
that the Company will continue its operations for the foreseeable future and
realize its assets and discharge its liabilities in the normal course of
business. The Company has no revenues and no near term prospects for revenue,
and its operating results, profitability and any future growth are dependent on
management’s ability to successfully implement the business plans, including
accessing future funding.  If the Company is not able to develop its
natural resource properties to a commercial stage, or if the going concern is
otherwise not appropriate in future periods, adjustments to the amounts recorded
for, and classification of, assets and liabilities may be
necessary.





2.
            RESTATEMENT
      OF CONSOLIDATED FINANCIAL
STATEMENTS





Subsequent
to the issuance of the consolidated financial statements for the three months
ended July 31, 2009, the Company identified errors in the accounting for the
stock-based compensation expense for the years ended April 30, 2007, 2008, 2009
and for the three months ended July 31, 2009. The Company incorrectly calculated
stock-based compensation expense by reversing the expense associated with the
portion of forfeited stock option awards that had already vested, resulting in
an understatement of stock-based compensation expense for the respective
periods. As stock based compensation is a non-cash item, there is no impact to
cash used in operating activities in the quarter.





The
Company determined that the aggregate stock-based compensation expense error
related to the three months ended July 31, 2009 of $2.9 million was material to
the period. To correct this error, the Company has recorded additional non-cash
stock-based compensation expense of $2.9 million for the three months ended
July 31, 2009.




As
discussed in note 3, the Company determined that the impact of the errors
originating in the years ended April 30, 2007, 2008 and 2009 were not material
to the financial statements for the respective years and, accordingly, the
adjustments have been reflected as an immaterial error correction of prior
period comparative financial information in its interim financial statements for
the three months ended July 31, 2009.


The
Company has restated its consolidated balance sheets of July 31 2009 and
consolidated statements of operations and consolidated statements of cash flows
for the three months ended July 31, 2009.  Other impacted amounts related
to stock-based compensation are reflected in note 9.





10


The
following table outlines the impact of the adjustment by financial statement
line item in the Company's consolidated balance sheet of July 31,
2009:





As
      of July 31, 2009
            
            As
      previously reported
            
            
            Restatement
      adjustment
            
            
            As
      restatedASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            44,000,040
            
            
            $
            -
            
            
            $
            44,000,040Accounts
      receivable
            
            
            302,859
            
            
            
            -
            
            
            
            302,859Short-term
      investments
            
            
            12,140,871
            
            
            
            -
            
            
            
            12,140,871Prepaid
      expenses
            
            
            707,332
            
            
            
            -
            
            
            
            707,332Available
      for sale equity securities
            
            
            50,053
            
            
            
            -
            
            
            
            50,053Total
      Current Assets
            
            
            57,201,155
            
            
            
            -
            
            
            
            57,201,155Property
      and Equipment
            
            
            440,973,219
            
            
            
            -
            
            
            
            440,973,219Total
      Assets
            
            $
            498,174,374
            
            
            $
            -
            
            
            $
            498,174,37LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            908,721
            
            
            $
            -
            
            
            $
            908,721Accrued
      liabilities
            
            
            5,296,268
            
            
            
            
            
            
            
            5,296,268Flow-through
      share premium liability
            
            
            721,004
            
            
            
            -
            
            
            
            721,004Total
      Current Liabilities
            
            
            6,925,993
            
            
            
            -
            
            
            
            6,925,993Deferred
      Taxes
            
            
            70,644,375
            
            
            
            
            
            
            
            70,644,375Asset
      Retirement Obligation
            
            
            2,951,596
            
            
            
            -
            
            
            
            2,951,596STOCKHOLDERS’
      EQUITYCapital
      StockPreferred
      stock, par value of $0.001 each, 10,000,000 shares authorized, 1 Series B
      Preferred share outstanding
            
            
            1
            
            
            
            -
            
            
            
            1Common
      stock, par value of $0.001 each, 750,000,000 shares authorized,
      276,654,511 and 241,559,549shares
      outstanding at July 31, 2009 andApril
      30, 2009 respectively
            
            
            276,654
            
            
            
            -
            
            
            
            276,654Additional
      Paid-in Capital
            
            
            740,210,4061
            
            
            
            2,888,728
            
            
            
            743,099,134Deficit
      Accumulated During Development Stage
            
            
            (332,607,665)1
            
            
            
            (2,888,728)
            
            
            
            (335,496,393)Accumulated
      Other Comprehensive Income
            
            
            9,773,014
            
            
            
            -
            
            
            
            9,773,014Total
      Stockholders’ Equity
            
            
            417,652,410
            
            
            
            -
            
            
            
            417,652,410Total
      Liabilities and Stockholders’ Equity
            
            $
            498,174,374
            
            
            $
            -
            
            
            $
            498,174,374




1


11


The
following table outlines the impact of the adjustment by financial statement
line item in the Company's consolidated statement of operations for the three
months ended July 31, 2009:





Three
      Months Ended July 31, 2009
            
            As
      previously reported
            
            
            Restatement
      adjustment
            
            
            As
      restatedExpensesExploration
      costs
            
            $
            3,614,359
            
            
            $
            -
            
            
            $
            3,614,359General
      and administrativeCorporate
            
            
            3,798,450
            
            
            
            -
            
            
            
            3,798,450Stock-based
      compensation
            
            
            (1,152,931)
            
            
            
            2,888,728
            
            
            
            1,735,797Foreign
      exchange gain
            
            
            (3,243,691)
            
            
            
            -
            
            
            
            (3,243,691)Depreciation
      and accretion
            
            
            448,416
            
            
            
            
            
            
            
            448,4163,464,603
            
            
            
            2,888,728
            
            
            
            6,353,331Other
      ItemsInterest
      and other income
            
            
            (58,764)
            
            
            
            -
            
            
            
            (58,764)Loss
      before deferred income tax benefit
            
            
            3,405,839
            
            
            
            2,888,728
            
            
            
            6,294,567Deferred
      income tax benefit
            
            
            (1,497,538)
            
            
            
            -
            
            
            
            (1,497,538)Net
      loss
            
            
            1,908,301
            
            
            
            2,888,728
            
            
            
            4,797,029Net
      loss attributable to non-controlling interest
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss attributable to common stockholders
            
            $
            1,908,301
            
            
            $
            2,888,728
            
            
            $
            4,797,029Net
      loss attributable to common stockholders per share
            
            $
            (0.01)
            
            
            $
            (0.01)
            
            
            $
            (0.02)Weighted
      Average Number of Common Shares Outstanding
            
            
            297,811,710
            
            
            
            -
            
            
            
            297,811,710


12


The
following table outling the impact of the adjustment by financial statement line
items in the Company's consolidated statement of cash flows for the three months
ended July 31, 2009:





As
      previously reported
            
            
            Restatement
      adjustment
            
            
            As
      restatedOperating
      ActivitiesNet
      loss
            
            $
            (1,908,301)
            
            
            $
            (2,888,728
            )
            
            $
            (4,797,029)Non-cash
      adjustments to net lossStock-based
      compensation expense
            
            
            (1,152,931)
            
            
            
            2,888,728
            
            
            
            1,735,797Deferred
      income tax benefit
            
            
            (1,497,538)
            
            
            
            -
            
            
            
            (1,497,538)Depreciation
      and accretion
            
            
            448,416
            
            
            
            -
            
            
            
            448,416Asset
      retirement cost expense
            
            
            -
            
            
            
            -
            
            
            
            -Other
      non-cash items
            
            
            10,255
            
            
            
            -
            
            
            
            10,255Changes
      in Non-Cash Working CapitalAccounts
      receivable and prepaid expenses
            
            
            3,157,979
            
            
            
            
            
            
            
            3,157,979Accounts
      payable and accrued liabilities
            
            
            (3,453,587)
            
            
            
            -
            
            
            
            (3,453,587)Cash
      Used in Operating Activities
            
            
            (4,395,707)
            
            
            
            -
            
            
            
            (4,395,707)Investing
      ActivitiesProperty
      and Equipment Expenditures
            
            
            (440,425)
            
            
            
            -
            
            
            
            (440,425)Short-term
      investment
            
            
            13,067,877
            
            
            
            -
            
            
            
            (13,067,877)Other
      investments
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      used in Investing Activities
            
            
            12,627,452
            
            
            
            -
            
            
            
            12,627,452Financing
      ActivitiesIssuance
      of shares for cash
            
            
            27,824,584
            
            
            
            -
            
            
            
            27,824,584Shares
      issued on exercise of OQI Sask options and warrants
            
            
            -
            
            
            
            -
            
            
            
            -Shares
      issued by OQI Sask to non-controlling interests
            
            
            -
            
            
            
            -
            
            
            
            -Convertible
      debentures
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      Provided by Financing Activities
            
            
            27,824,584
            
            
            
            -
            
            
            
            27,824,584Inflow
      of Cash and Cash Equivalents
            
            
            36,056,329
            
            
            
            -
            
            
            
            36,056,329Effects
      of exchange rate changes on cash and cash
equivalents
            
            
            957,612
            
            
            
            -
            
            
            
            957,612Cash
      and cash equivalents, Beginning of Period
            
            
            6,986,099
            
            
            
            -
            
            
            
            6,968,099Cash
      and cash equivalents, End of Period
            
            $
            44,000,040
            
            
            $
            -
            
            
            $
            44,000,040


13


3.
            BASIS OF
      PRESENTATION





These
consolidated financial statements have been prepared in accordance with
Generally Accepted Accounting Principles in the United States of America (“US
GAAP”) and reflect all adjustments (all of which are normal and recurring in
nature) that, in the opinion of management, are necessary for fair presentation
of the interim financial information. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire year ending April 30, 2010. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These unaudited consolidated financial
statements and notes included herein have been prepared on a basis consistent
with and should be read in conjunction with the Company’s audited consolidated
financial statements and notes for the year ended April 30, 2009 as filed in its
annual report on Form 10-K. Certain comparative figures have been
reclassified to conform to current financial statement
presentation.





The U.S.
dollar is the functional currency for OQI (the parent company).  The
CDN dollar is the functional currency for OQI’s Canadian
subsidiaries.  The assets and liabilities of OQI’s Canadian
subsidiaries are translated into U.S. dollars based on the current exchange rate
in effect at the balance sheet dates.  Canadian income and expenses
are translated at average rates for the periods
presented.  Translation adjustments have no effect on net income and
are included in other comprehensive income in stockholders’
equity.  Gains and losses arising from transactions denominated in
currencies other than the functional currency are included in the results of
operations of the period in which they occur.  Deferred income taxes
are not provided on translation gains and losses where OQI expects earnings of a
foreign operation to be indefinitely reinvested.





Immaterial
Corrections





Subsequent
to the issuance of the consolidated financial statements for the year ended
April 30, 2009, the Company determined that two immaterial errors occurred
in its previously issued consolidated financial statements for the year ended
April 30, 2009.





The first
immaterial error related to an overstated accrual on a short-term discretionary
incentive plan for employees of the Company for the year ended April 30,
2009. The Company concluded that the adjustment was not material to the
financial statements for the year ended April 30, 2009 and reflected the
adjustment as an immaterial correction of prior period comparative financial
information in its interim financial statements for the three months ended
July 31, 2009. The Company determined that the cumulative impact of the
immaterial error, was a decrease to corporate general and administrative
expense, net loss and comprehensive loss of $1.5 million (net of deferred income
tax benefit of zero) for the three months and the year ended April 30, 2009 and
for the period from inception on April 8, 1998 to April 30, 2009 and recorded
corresponding decreases to accrued liabilities and deficit accumulated during
the development stage at April 30, 2009. Basic and diluted net loss attributable
to common stockholders decreased by $0.01 per share for the three months and the
year ended April 30, 2009.  The immaterial correction had no effect on
the results of operation for the three months ended July 31, 2009 and on cash or
liquidity for any prior comparative period.









—
                The
      Company determined that the net impact of the immaterial error for
      the year ended April 30, 2007 was a decrease to stock-based compensation
      expense, net loss and comprehensive loss of $0.1 million with a
      corresponding decrease to additional paid-in-capital and deficit
      accumulated during the development stage at April 30, 2007. The basic and
      diluted net loss attributable to common stockholders remained unchanged
      for the year ended April 30, 2007.


—
              The
      Company determined that the net impact of the immaterial error for
      the year ended April 30, 2008 was an increase to stock-based compensation
      expense, net loss and comprehensive loss of $1.6 million with a decrease
      to the basic and diluted net loss attributable to common stockholders of
      $0.01 per share for the year ended April 30, 2008. The cumulative impact
      of the immaterial error as of April 30, 2008 was an increase of $1.6
      million to additional paid-in-capital and deficit accumulated during
      the development stage at April 30, 2008.


—
              The
      Company determined that the net impact of the immaterial error for
      the three months ended July 31, 2008 was an increase to stock-based
      compensation expense, net loss and comprehensive loss of $0.2 million
      which did not result in any change to the basic and diluted net loss
      attributable to common stockholders for the three months ended July 31,
      2008.
 —
                The Company determined that the net impact of the
      immaterial error for the year ended April 30, 2009 was an increase to
      stock-based compensation expense, net loss and comprehensive loss of $0.2
      million which did not result in any change to the basic and diluted net
      loss attributable to common stockholders for the year ended April 30,
      2009.  The cumulative impact of the immaterial error as of April 30,
      2009 was an increase of $1.8 million to additional paid-in-capital
      and deficit accumulated during the development stage at April 30,
      2009.





14


Recently
Adopted Accounting Standards





Effective
May 1, 2009, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 160, which amends ARB No. 51, “Consolidated Financial
Statements,” to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in a consolidated entity that should be
reported as equity in the consolidated financial statements. This statement also
changes the way the consolidated statements of income (loss) and comprehensive
income (loss) are presented by requiring consolidated net income (loss) and
comprehensive income (loss) to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. In addition,
SFAS No. 160 establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that do not result in
deconsolidation. SFAS No. 160 required retrospective adoption of the
presentation and disclosure requirements for noncontrolling interests for the
period from inception on April 3, 1998 through July 31, 2009. All other
requirements of SFAS No. 160 have been applied prospectively. Upon the
reorganization on August 14, 2006, the Company acquired the remaining
noncontrolling interest in OQI Sask, accordingly, no adjustment was required to
reclassify the noncontrolling interest to be reported within equity in the
consolidated balance sheet at April 30, 2009.





Effective
May 1, 2009, the Company adopted SFAS No. 161, which amends and expands the
disclosure requirements for derivative instruments and hedging activities
prescribed by SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS No. 161 is effective for the
Company’s fiscal years and interim periods beginning on May 1, 2009 and
encourages, but does not require, comparative disclosure for earlier periods at
initial adoption. The adoption of SFAS No. 161 did not have any impact on
the Company’s consolidated financial statements.





Effective
1, May 2009, the Company adopted SFAS No. 165 “Subsequent Events.” SFAS No.
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The statement sets forth:





1.
            The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements.


2.
            The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements.


3.
            The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.





The
adoption of SFAS No. 165 did not have a significant impact on the Company’s
consolidated financial statements.





Effective
May 1, 2009, the Company adopted SFAS No. 141(R) which replaces SFAS
No. 141, “Business
Combinations”. SFAS No. 141(R) retains the fundamental requirements
in SFAS No. 141 that the acquisition method of accounting be used for all
business combinations and that an acquirer be identified for each business
combination. This statement also establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling (minority)
interests in an acquiree and any goodwill acquired in a business combination or
gain recognized from a bargain purchase. Effective May 1, 2009, the Company also
adopted FASB Staff Position No. 141(R)-1 (FSP FAS 141(R)-1) which amends SFAS
No. 141(R) by establishing a model to account for certain pre-acquisition
contingencies. Under the FSP, an acquirer is required to recognize at fair value
an asset acquired or a liability assumed in a business combination that arises
from a contingency if the acquisition-date fair value of that asset or liability
can be determined during the measurement period. If it cannot be determined, the
recognition criteria in SFAS No. 5, “Accounting for
Contingencies”, and FASB Interpretation No. 14, “Reasonable Estimation of the Amount
of a Loss- an interpretation of FASB Statement No. 5”should be followed.
The adoption of SFAS No. 141(R) and FSP FAS 141(R)-1 did not have any
impact on the Company’s consolidated statements.





15





4.
            PROPERTY
      AND EQUIPMENT





July
      31, 2009
            
            
            April
      30, 2009Saskatchewan
      Oil Sands RightsPermits
            
            $
            378,135,145
            
            
            $
            341,921,978Licenses
            
            
            2,157,724
            
            
            
            1,949,903Alberta
      Oil Sands RightsPermits
            
            
            33,246,871
            
            
            
            30,044,702Leases
            
            
            7,327,918
            
            
            
            6,622,130Saskatchewan
      Oil Shale Rights (Permits)
            
            
            10,408,978
            
            
            
            9,439,575Equipment
            
            
            13,015,929
            
            
            
            11,635,999Less:
      Accumulated Depreciation
            
            
            (3,319,346)
            
            
            
            (2,638,819)Net
      Book Value
            
            $
            440,973,219
            
            
            $
            398,975,468





a)
            Saskatchewan
      Oil Sands Permits





As at
April 30, 2009 and July 31, 2009, the Saskatchewan oil sands permits comprised
an area of approximately 508,080 acres. The oil sands permits were granted by
the Province of Saskatchewan in 2004 under The Oil Shale Regulations, 1964 as
amended, revised or substituted from time to time. The permits provide for the
right to explore and work the permit lands but not to remove, produce or
recover, except for test purposes, oil products until a lease, pursuant to these
regulations has been granted. The initial five-year term of the permits expired
on May 31, 2009 and the Company applied for and received the first of three
one-year extensions of the permits as allowed under the regulation to May 31,
2010. The required exploration expenditures to hold the permits are $1.12 ($1.21
CDN) per acre for each year that the permits are extended.  The
permits are also subject to a $0.04 per barrel royalty.





b)
            Saskatchewan
      Oil Sands Licenses





As at
April 30, 2009 and July 31, 2009, the Saskatchewan oil sands licenses comprised
an area totaling 109,920 acres. The licenses were granted by the Province of
Saskatchewan on August 13, 2007, under The Petroleum and Natural Gas
Regulations, 1969, as amended revised or substituted from time to time,
for a term of five years for an aggregate cost of $2,140,233 ($2,249,089
CDN).  The licenses provide for the exclusive right to search for oil
sands on the lands granted and to win, recover, extract, carry off, dispose of
and sell the oils sands products found on the license lands.  The oil
sands licenses provide the opportunity to convert up to 100% of the licenses to
a production lease following the completion of specified work requirements.
Licenses require annual rental payments of $0.66 ($0.71 CDN) per
acre.





c)
            Alberta
      Oil Sands Permits





As at
April 30, 2009 and July 31, 2009, four of the Alberta oil sands permits
comprised an area totaling 67,053 acres (“Raven Ridge Prospect”).  The
permits were granted by the Province of Alberta under the terms of theMines and Minerals Act,
Alberta. The permits provide the opportunity to convert up to 100% of the
permits to a production lease following the completion of specified work
requirements.  Permits are granted for a five year primary term which
expires on March 22, 2012 – 55,667 acres and August 10, 2011 – 11,386 acres, and
require annual rental payments of $1.32 ($1.42 CDN) per acre.





As at
April 30, 2009 and July 31, 2009, two of the Alberta oil sands permits comprised
an area totaling 45,546 acres (“Wallace Creek Prospect”). The permits were
granted by the Province of Alberta under the terms of theMines and Minerals Act,
Alberta. The permits provide the opportunity to convert up to 100% of the
permits to a production lease following the completion of specified work
requirements.  Permits are granted for a five year primary term which
expires January 24, 2013 and require annual rental payments of $1.32 ($1.42 CDN)
per acre.





In total
the Alberta permit lands comprise an area totaling 112,598 acres.





d)
            Alberta
      Oil Sands Lease





As at
April 30, 2009 and July 31, 2009 the Alberta oil sands lease comprised an area
of approximately 22,800 acres (the “Eagles Nest Prospect”). The lease was
acquired through a series land and royalty acquisitions. The lease provide for
the right to explore, work, remove, produce and to recover oil products. As part
of the acquisition of the lease, Township granted royalties as to $0.0054
($0.0058 CDN) (net after a buy back) on each barrel of crude bitumen produced,
saved and sold from the Eagles Nest Prospect.





16
 Table of
Contents





The
annual lease rental payable to the Province of Alberta for the Eagles Nest
Prospect is $29,894 ($32,256 CDN) per year.





e)
            Saskatchewan
      Oil Shale Permits





As at
April 30, 2009 and July 31, 2009, the Company held seven oil shale exploration
permits near Hudson Bay, Saskatchewan covering approximately 406,000 acres
granted under The Oil
Shale Regulations, 1964
(Saskatchewan)as amended, revised or substituted from time to time for a
term of five years which expire in September and October 2011. The permits
provide for the right to explore and work the permit lands but not to remove,
produce or recover, except for test purposes, oil products until a lease,
pursuant to these regulations has been granted. The term of the permits may be
extended for up to three one-year extensions subject to regulatory approvals, as
required.





Annual
rentals are payable in advance as to $0.09 ($0.10 CDN) per acre during the term
of the permit.  Required exploration expenditures to hold the permits
are $0.37 ($0.40 CDN) per acre for the current year, $0.75 ($0.81 CDN) per acre
for the remaining years of the permits and $1.12 ($1.21 CDN) per acre for each
year that the permit is extended, as required.





As at
April 30, 2009 and July 31, 2009, the Company held one oil shale exploration
permit granted under The
Petroleum and Natural Gas Regulations, 1969 (Saskatchewan) as amended,
revised or substituted from time to time for a term of five yearstotaling 83,769 acres
in the same area near Hudson Bay, Saskatchewan.  The permit provides
for the right, license, privilege and authority to explore for oil shale within
the permit lands and expires on August 12, 2012 and may be extended for up to
three one-year extensions subject to regulatory approvals, if
required.





This oil
shale permit was acquired under a land sale work commitment bid for the first
two years of the permit.  The Company bid a total work commitment of
$279,488 ($301,568 CDN) to be incurred during the first two years of the permit
and the permit requires a further work commitment of $0.75 ($0.81 CDN) per acre
for the last three years and $1.12 ($1.21 CDN) for each extension year plus
annual rental payments of $0.09 ($0.10 CDN) per acre. Through the exploration
program conducted during the year ended April 30, 2009, the Company has
fulfilled its work commitment for the term of the permit.





5.
            ASSET
      RETIREMENT OBLIGATIONS





The
Company’s obligations with respect to asset retirement relate to reclamation of
an airstrip, camp site, access roads and reservoir test holes. The obligation is
recognized when incurred at the present value of the estimated future
reclamation cost using a credit-adjusted risk-free rate of 7% (2008 – 7%) and an
inflation rate of 2.5% (2008 – 2.5%). At July 31, 2009, the total undiscounted
inflation-adjusted future obligation was approximately $9 million.





Continuity
      of Asset Retirement ObligationPresent
      value of obligation at April 30, 2009
            
            $
            2,621,439Liabilities
      incurred
            
            
            -Liabilities
      settled
            
            
            -Accretion
      expense
            
            
            48,320Foreign
      currency translation adjustment
            
            
            281,837Present
      value of obligation at July 31, 2009
            
            $
            2,951,596





6.
            OQI
      SASK STOCK OPTIONS





OQI
acquired the non-controlling shareholder interest in OQI Sask in August 2006
(“the reorganization”).  Certain stock options issued by OQI Sask
remained outstanding after the reorganization.  On exercise, each OQI
Sask option may be exchanged into 8.23 OQI Sask Exchangeable Shares which are
exchangeable into OQI common shares.  Transactions in OQI Sask options
during the three months ended July 31, 2009 and OQI Sask options outstanding at
July 31, 2009 are detailed below.





Number
            
            
            Weighted
      Average Exercise Price (CDN)Issued
      and outstanding, April 30, 2009
            
            
            1,421,667
            
            
            $
            16.82Exercised
      and exchanged into shares of OQI common stock (note
    5)
            
            
            -
            
            
            $
            -Issued
      and outstanding, July 31, 2009
            
            
            1,421,667
            
            
            $
            16.82





17





Exercise
      Price (CDN)
            
            
            Number
              Outstanding
      at
              July
      31, 2009
            
            
            Number
      Exercisable at July 31, 2009
            
            Weighted
      Average Remaining Contractual Life
            
            Weighted
      Average Grant-Date Fair Value (CDN)
            
            Aggregate
      Intrinsic Value at July 31, 2009 (CDN)$
            0.50
            
            
            
            75,000
            
            
            
            75,000
            
            0.28
      years
            $
            0.09
            $
            528,611$
            3.00
            
            
            
            100,000
            
            
            
            100,000
            
            1.00
      years
            $
            0.54
            $
            454,814$
            6.00
            
            
            
            465,000
            
            
            
            465,000
            
            1.50
      years
            $
            28.30
            $
            719,814$
            25.00
            
            
            
            731,667
            
            
            
            731,667
            
            1.75
      years
            $
            26.06
            
            -$
            50.00
            
            
            
            50,000
            
            
            
            37,500
            
            2.00
      years
            $
            32.00
            
            -1,421,667
            
            
            
            1,409,167
            
            1.55
      years
            
            
            $
            1,703,239





The
1,421,667 OQI Sask options outstanding at July 31, 2009 represent 11,700,319 OQI
Sask Exchangeable Shares that would be issued on exercise of the OQI Sask
options as a result of the completion of the acquisition of the non-controlling
interest in OQI Sask (see note 7).





As at
July 31, 2009, the Company had no unrecognized stock option compensation
expense.





7.
            PREFERRED
      SHARES





Holders
of OQI Sask common shares received Exchangeable Shares which can be exchanged
into shares of OQI common stock at any time at each holder’s option or by the
Company upon the occurrence of certain events or any time thereafter on August
14, 2013 if the holder has yet to exchange the shares.  Transactions
in Exchangeable Shares during the three months ended July 31, 2009 are detailed
below.  For voting purposes holders of Exchangeable Shares are
represented by one outstanding Series B preferred share which carries a number
of votes equal to the number of Exchangeable Shares then
outstanding.





OQI
      Sask Exchangeable Shares
            
            
            OQI
      Sask Exchangeable Shares issuable on exercise of OQI Sask
      options
            
            
            Total
      Exchangeable
              SharesBalance,
      April 30, 2009
            
            
            25,743,916
            
            
            
            11,700,319
            
            
            
            37,444,235OQI
      Sask options exercised (note 6)
            
            
            -
            
            
            
            -
            
            
            
            -Exchangeable
      Shares exchanged into OQI common shares
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      July 31, 2009
            
            
            25,743,916
            
            
            
            11,700,319
            
            
            
            37,444,235





8.
            COMMON
      STOCK





On May
12, 2009, the Company issued 35,075,000 units at a price of $0.85 per unit for
gross proceeds of $29,813,750 pursuant to a marketed public offering. Each unit
was comprised of one share of common stock and one-half of a share of common
stock purchase warrant with each whole warrant entitling the holder to purchase
one share of common stock of the Company for $1.10 per share until May 12, 2011.
The Company paid an aggregate of $1.5 million in fees to a syndicate of agents
under the terms of the agency agreement and $1.2 million of legal fees and other
expenses in relation to the offering.





Under the
terms of the flow-through shares issued on October 3, 2008, the Company
renounced the tax benefits of the related expenditures to the subscribers
effective December 31, 2008. As at July 31, 2009, approximately CDN $27 million
($22 million US) has been expended on exploration in Canada leaving
approximately CDN $12.7 million ($11.7 million US) to be incurred.





9.
            STOCK
      OPTIONS





Share
based compensation generally take the form of stock options granted to employees
all of which are equity classified. Options are granted under the Company’s 2006
Stock Option Plan and vest over various terms – generally 18 months to three
years. One set of option grants included a performance condition based on
achieving a defined bitumen in place barrel count. The fair value of the options
containing the performance condition was estimated at the date of grant and
amortization of this amount commenced when satisfaction of the performance
condition was reasonably assured.





18





The
following summarizes our stock option activity under the Company’s 2006 Stock
Plan (SOP 2006) for the three months ended July 31, 2009:





Options
            
            
            Weighted-
              Average
              Exercise
      Price
            
            
            Weighted-Average
              Grant-Date
              Fair
      Value
            
            
            Aggregate
      Intrinsic
              ValueOutstanding
      at April 30, 2009
            
            
            24,582,962
            
            
            
            4.03
            
            
            
            2.92Granted
            
            
            -Exercised
            
            
            (19,962)
            
            
            
            0.81
            
            
            
            0.73
            
            
            $
            4,192Forfeited
            
            
            (2,842,500)
            
            
            
            4.11
            
            
            
            1.56Expired
            
            
            (30,000)
            
            
            
            6.00
            
            
            
            3.55Outstanding
      at July 31, 2009
            
            
            21,690,500
            
            
            $
            4.02
            
            
            $
            3.10Exercisable
      at July 31, 2009
            
            
            12,120,000
            
            
            $
            4.39
            
            
            $
            3.55
            
            
            $
            121.900





The
weighted-average remaining contractual term of vested and exercisable options at
July 31, 2009, was 4.42 years.





In
addition to the above, OQI Sask has 1,421,667 outstanding options which may be
exercised and exchanged into OQI Sask Exchangeable Shares whereby up to an
additional 11,700,319 OQI common shares may be issued (note 6 and
7).





During
the three months ended July 31, 2009, no options were granted.





As at
July 31, 2009, the Company had unrecognized stock option compensation cost (as
restated) of $4,762,508 which will be recorded in future periods as options
vest. The expense is expected to be recognized over a weighted-average period of
1.25 years.





10.
            WARRANTS





At July
31, 2009, 6,325,000 warrants to purchase that same number of shares of common
stock at $6.75 and 17,537,500 warrants to purchase that same number of shares of
common stock at $1.10 are outstanding.





A summary
of OQI’s share purchase warrant activity for the three months ended July 31,
2009:





Number
      Of Warrants
            
            
            Weighted
      Average Exercise PriceBalance,
      April 30, 2009
            
            
            6,325,000
            
            
            $
            6.75Exercised
            
            
            -
            
            
            
            -Warrants
      issued
            
            
            17,537,500
            
            
            
            1.10Balance,
      July 31, 2009
            
            
            23,862,500
            
            
            $
            2.60





19





11.
            FAIR
      VALUE MEASUREMENTS





Certain
of the Company’s assets are reported at fair value in the accompanying balance
sheet. The following tables provide fair value measurement information for such
assets as of July 31, 2009 and April 30, 2009.





As
      of July 31, 2009Fair
      Value Measures Using:Carrying
      Amount
            
            
            Total
      Fair Value
            
            
            Quoted
      Prices In Active Markets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)Financial
      Assets:Securities
      Held for Sale
            
            
            50,053
            
            
            
            50,053
            
            
            
            50,053
            
            
            
            -
            
            
            
            -Short
      Term Investments
            
            
            12,140,871
            
            
            
            12,140,871
            
            
            
            12,140,871
            
            
            
            -
            
            
            
            -





As
      of April 30, 2009Fair
      Value Measures Using:Carrying
      Amount
            
            
            Total
      Fair Value
            
            
            Quoted
      Prices In Active Markets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)Financial
      Assets:Securities
      Held for Sale
            
            
            60,307
            
            
            
            60,307
            
            
            
            60,307
            
            
            
            -
            
            
            
            -Short
      Term Investments
            
            
            25,208,748
            
            
            
            25,208,748
            
            
            
            25,208,748
            
            
            
            -
            
            
            
            -





12.
            RELATED
      PARTY TRANSACTIONS





The
step-mother of a former executive (resigned December 2008) of the Company is the
sole shareholder of a company that facilitates local on-site labour and
equipment rentals to the Company for field operations.  For the three
months ended July 31, 2009, $498 (2008 - $354,331) has been included in
Exploration expense. These transactions are in the normal course of operations.
As at July 31, 2009, nil (April 30, 2009 – $220,273) was payable to the above
mentioned company.  The contract with this company was terminated on
March 13, 2009.





The son
of an executive of the Company is a 50% shareholder of a company that
facilitates local on-site kitchen labour and catering functions to the Company
for field operations.  For the three months ended July 31, 2009,
$147,045 (2008 – $111,507) has been included in Exploration expense. These
transactions are in the normal course of operations. As at July 31, 2009, nil
(April 30, 2009 -52,010) was payable to the above mentioned
company.





The
brother of an executive of the Company is a 50% shareholder of a company that
provides geophysical and geological analysis to the Company. For the three
months ended July 31, 2009, $59,884 (2008 - $23,727) has been included in
Exploration expense. These transactions are in the normal course of operations.
As at July 31, 2009 and April 30, 2009 no amounts were payable to the above
mentioned company.





13.
            SUBSEQUENT
      EVENTS





In
preparing these consolidated financial statements, subsequent events have been
considered up to September 9, 2009.





Subsequent
to July 31, 2009 the Board granted 3,985,000 stock options to directors,
officers and employees.  The exercise price of the options granted was
based on the closing price of the Company’s stock on the day of the
grant.





20





Item
2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations





The
following discussion addresses material changes in our results of operations and
capital resources and uses for the three months ended July 31, 2009, compared to
the three months ended July 31, 2008, and our financial condition and liquidity
since April 30, 2009.  It is presumed that readers have read or have
access to our 2009 Annual Report on Form 10-K, which includes disclosure
regarding critical accounting policies and estimates as part of Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.  Unless otherwise stated, all dollar amounts are expressed
in U.S. dollars.  All future payments in Canadian dollars have been
converted to U.S. dollars using an exchange rate of $1.00 U.S. = $1.079 CDN,
which was the July 31, 2009 exchange rate.





Overview





Three
Months Ended July 31, 2009





—
            We
      completed a public offering of 35,075,000 units at a price of $0.85 per
      unit for gross proceeds to $29.8 million.  The units consisted
      of one common share and a warrant to purchase one-half common
      share.


—
            We
      were granted a one year extension, to May 31, 2010, of our permits in
      northwest Saskatchewan.  We may seek and be granted two
      additional one year extensions of each permit if the Company continues to
      meet its obligations under the terms of the permits.  We may elect to
      convert all or a portion of the permits to leases.


—
            We
      signed a Memorandum of Understanding establishing an economic relationship
      with the Birch Narrows Dene Nation in Saskatchewan through which the
      economic benefits of our exploration and development activities will be
      managed.


—
            We
      announced independent third party resource estimates for our Eagles Nest
      property in Northern Alberta.


—
            We
      announced the resignation of Jamey Fitzgibbon as President and Chief
      Operating Officer and the transition of these responsibilities to
      Christopher Hopkins, the Company's Chief Executive Officer.


—
            We
      resumed construction activities at Test Site 1 in preparation for the
      startup of Phase One of the testing.


—
            We
      began applying heat to the reservoir at Test Site 3 in late 2008 utilizing
      a downhole electric heater and we continue to measure pressures and
      temperatures at ten different locations in the reservoir subsequent to the
      removal of the heater element in June 2009.


—
            We
      have commenced pressure and temperature measurements at Test Site 1 in
      order to capture the baseline reservoir pressure and temperature before
      commencing the vertical well test program.


—
            We
      provided an update of our progress at Test Sites 1 and 3 and laboratory
      and field test studies at the TD Newcrest Unconventional Oil Forum held in
      Calgary on July 8, 2009 and at the Canadian International Petroleum
      Conference held in Calgary on June 16 to 18, 2009.


—
            We
      disclosed our intention to re-organize our non-core assets at Pasquia
      Hills.


—
            We
      restated our financial statements and filed an amended Form 10-K/A for the
      year ended April 30, 2008 and amended Form 10-Qs for the quarterly periods
      ended July 31, 2008, October 31, 2008 and January 31,
  2009.





Operations
Summary:





Exploration
Programs





During
the three months ended July 31, 2009, we focused on developing our 2009-2010 oil
sands exploration plans for the Axe Lake, Raven Ridge, Wallace Creek and Eagles
Nest areas and our oil shale exploration plans for the Pasquia Hills area. These
planning activities included scouting seismic and exploration drilling targets,
preparing regulatory applications and initiating consultation processes for
approval of the winter drilling program.





Specific
activities we have been planning on our Axe Lake permits include an overburden
core drilling program on permits 208 and 210 and 2-D seismic on the permits to
the north and south of Axe Lake in Saskatchewan. Both of these programs will
further our geological knowledge of the deposits while meeting work commitments
required to extend the exploration permits until May 31, 2010.





We are
also continuing with the additional processing and interpretation of the 1,847
kilometres (1,149 miles) of 2-D and 3-D seismic data collected and initially
processed in the 2007-2008 winter program. This interpretation is proving
valuable in planning for the specific reservoir tests this year and in assessing
the geological structures across our permits.





We
expanded our baseline environmental programs in the Axe Lake and the Raven Ridge
areas in anticipation of a comprehensive Environmental Impact Assessment report
required as part of the application for regulatory approval for development of
Axe Lake. Other environmental work included initiating baseline environmental
studies in the Wallace Creek and Eagles Nest areas. We commissioned an active
(continuous) air quality monitoring station at Axe Lake during the period, the
first of its kind in northwest Saskatchewan, in addition to our passive
(periodic) air monitoring activities which have been ongoing since
2005.





21





In early
2009, we drilled an additional 23 exploration and delineation test wells in
Raven Ridge. The Raven Ridge drilling program has demonstrated continuity of
bitumen characteristics extending from Axe Lake in Northwest Saskatchewan
westward into Alberta and we are in the process of updating our resource
estimates based on the results of this drilling program.  We expect to
release these results in October of 2009.





Axe
Lake Area – Reservoir Development Activities





At Test
Site 3, the electric downhole heating program was
continued.   The objectives of the field test are to reliably
measure pressure and temperature changes within the reservoir and adjacent
formations as a result of heating and use those measurements to calibrate
numerical simulation calculations to the field measurements in order to reduce
uncertainty in future reservoir planning.  The electric downhole
heater in well 1OBS 5-29-94-25 provided heat to the reservoir and pressure and
temperatures were measured and recorded continuously at ten locations
in the hot heater well, 1OBS 5-29-94-25, and the cold observation well, INJ
5-29-94-25.  The heater was removed from the well on June 26, 2009,
pressures and temperatures were and are being measured and recorded during the
post-heating period, and an application for perforating and continued testing of
1OBS 5-29-94-25 and INJ 5-29-94-25 is being prepared.  Our detailed
engineering and numerical simulation analysis has confirmed the formation
characteristics anticipated and our ability to establish and control the
relevant fluid heat properties to be used in continued reservoir planning at Axe
Lake.  We presented a more detailed description of the conceptual
reservoir simulation model, analytical heat transfer calculations, Test Site 3
geo-models, supporting laboratory work and numerical simulations at the Canadian
International Petroleum Conference held June 16-18, 2009.





In
preparation for the commencement of the field testing of the reservoir test
program we are in the final stages of construction and commissioning of the
facilities at Test Site 1. Phase Three testing in the reservoir test program are
planned:





Phase One
of the test program at Test Site 1 will include the injection of cold water and
will be followed by the injection of hot water and steam into the
reservoir.  The purpose of the test is to measure heat and fluid
movement under specific operating conditions on a field scale to complement our
ongoing simulation and laboratory analysis studies. These Phase One tests are
designed to confirm and demonstrate our "bottom-up" thermal recovery process and
they will further enhance our knowledge and modeling of the thermal and
geo-mechanical characteristics of our reservoir.





Phase Two
of the test program at Test Site 1 will evaluate and analyze information
gathered from Phase One regarding mobilization with steam and/or hot water by
measuring field-scale response using horizontal wells.





As part
of the overall Axe Lake development plan, we continue to conduct advanced
economic feasibility, financial planning and risk assessment studies for full
commercial development and the commissioning of an independent study of
infrastructure and bitumen markets to complement our development planning
process. Development of a commercial project remains subject to regulatory and
other contingencies such as successful reservoir tests, board of directors
approvals, financing and other risks inherent in the oil sands industry ("Risk
Factors" Section of our Form 10-K).





Pasquia
Hills Oil Shale Area





During
the period ended July 31, 2009, the Company initiated the planning and
regulatory approval process for an exploratory drilling program on its oil shale
permits in eastern Saskatchewan. These activities included filing applications
and receiving regulatory approvals for drilling up to fifteen locations,
surveying drill locations, negotiating and obtaining access rights and
contracting for the required services. We expect to commence exploration
drilling on these permits in the last quarter of calendar 2009.





Outlook





Over the
next twelve months we plan to continue the activities necessary to increase our
resource base and to demonstrate the recoverability of our oil sands
resources.  Subject to our financial resources, we will continue to
pursue exploration programs on our permit and license lands.





We are
continuing our testing program based on the current geological interpretation
that there is no capping shale in direct contact with our oil sands reservoir.
The results of our advanced laboratory studies and numerical reservoir
simulations indicate that bitumen production can best be achieved using a
reconfiguration of horizontal wells at the bottom of the reservoir. Our analysis
points to the three essential elements for a successful application of the
bottom-up approach to bitumen extraction: (1) establish and maintain mobility at
the bottom of the oil sands reservoir, (2) utilize the full length of the
horizontal wells while the bitumen is being produced, and (3) implement a
comprehensive reservoir monitoring system to observe and manage the growth of
the swept zone. A sequential approach to the reservoir test program is required,
both in the scale of the field operations at Test Site 1 and by moving from
vertical wells to short horizontal wells and then to commercial length
horizontal wells.  In addition, as part of future pilot activities the
detailed operations protocol will move from cold water to hot water to steam at
each step for the different well configurations.





22





In the
Axe Lake reservoir test program, we are now extending the testing at Test Site 3
and we will be commencing operations at Test Site 1 to demonstrate that we can
establish and maintain communication between vertical wells at the bottom of the
reservoir using water and steam. The following is an overview of key activities
planned in the next twelve months.





—
            We
      expect to submit an application to perforate the two closely spaced
      vertical wells at Test Site 3 and circulate water at different
      temperatures in order to (1) confirm the establishment of early fluid
      movement, (2) confirm the ability for early stage convective heat transfer
      at the bottom of the reservoir, (3) produce and collect samples of bitumen
      through both hot water and solvent injection, and (4) gather preliminary
      data on the horizontal displacement
process.





—
            We
      expect to submit an application to proceed with the Phase One test program
      at Test Site 1 to inject water and steam in order to (1) demonstrate the
      feasibility of establishing and maintaining staged communication at the
      base of the Axe Lake reservoir (2) evaluate reservoir behavior in relation
      to water and steam injection including geo-mechanical effects, and (3)
      calibrate the Axe Lake relative permeability curves for use in our
      reservoir simulators.   Four vertical wells for
      micro-seismic monitoring will be drilled and completed and a baseline will
      be established prior to commencement of vertical well
      operations.  The interpretation of micro-seismic signals is
      expected to enable more effective history matching of the horizontal
      fluid flow and convective heat transfer.  This phase is scheduled to
      begin in October, subject to regulatory and other
    approvals.





—
            In
      preparation for Phase Two of the testing program at Test Site 1, we expect
      to drill and complete observation wells and design, construct and
      commission the necessary surface facilities at the site.  Water
      and steam injection into horizontal wells drilled is planned to begin
      following the completion of the surface facilities associated with the
      horizontal test holes.  This work will commence after the
      testing and analysis from Phase One is
complete.





—
            We
      may begin field activities related to Test Site 2, where we are evaluating
      the testing of other energy efficient and environmentally neutral recovery
      processes.





—
            We
      are planning a program to evaluate the characteristics of the overburden
      at Axe Lake in late 2009.  The program, in combination with our
      extensive 3-D seismic data, is expected to enhance our understanding of
      the formation overlaying our bitumen
deposit.





—
            We
      expect to continue our reservoir characterization studies and continue to
      evaluate well data, perform petrophysical analyses, design and execute
      pertinent geophysical logging and perform advanced laboratory
      studies.





—
            We
      expect to submit an application for a pilot project at Axe Lake in the
      fall of 2009.  The pilot project application will be partly
      based on a low pressure steam based bitumen recovery process currently
      being tested as part of the reservoir test program and the application
      will trigger an Environmental Impact
Assessment.





—
            We
      are continuing the planning of additional exploration programs to further
      define the location, extent and quality of the potential
      bitumen resource in Axe Lake, Raven Ridge, Wallace Creek, Eagles
      Nest, and adjacent areas as
appropriate.





—
            Infrastructure
      remains a critical element for continued operations and we will continue
      to investigate various pipe line solutions for gas and liquids transport,
      different routing alternatives for permanent road access and possible
      solutions for the provision of
power.





—
            Efforts
      are also continuing on converting a portion of our Saskatchewan permits to
      lease pursuant to the Oil Shale Regulations,
      1964, as amended.
      The permits will not be converted to leases until a development plan which
      will require an Environmental Impact Assessment has been
      developed.





—
            We
      intend to maintain our asset base and core technical team in order to
      advance to commercial development of our
  resource.





Liquidity
and Capital Resources





On May
12, 2009, the Company issued 35,075,000 units at $0.85 per unit for gross
proceeds of $29.8 million.  The units were issued as part of a public
offering and were comprised of a share of the common stock and one-half of a
warrant to purchase a share of common stock.  The Company paid an
aggregate of $1.5 million in fees to a syndicate of agents under the terms of
the agency agreement and $1.2 million of legal fees and other expenses in
relation to the offering.





During
the three months ended July 31, 2009, the Company expended $4.4 million on
operations and $0.4 million on property and equipment.


23


At July
31, 2009, the Company held cash, cash equivalents and short term investments
totaling $56.1 million.  At September 1, 2009, the Company held cash,
cash equivalents and short-term investments totaling $53.6 million.




We
believe that we have sufficient funds to carry out our planned activities over
the next twelve months.  If we accelerate commercial development at
Axe Lake or any of our other prospects, our cash requirements will increase
significantly. Additional funding may also be required if our current planned
activities are changed in scope or if actual costs differ from estimates of
current plans. We believe the Company will have access to sufficient funding and
sources of capital for its planned activities through to July 31, 2010. Because
we constantly and actively monitor our expenditure budgets, if sufficient
funding is not available we can adjust our expenditure plans based on available
cash. We plan to fund future operations by way of financing, including a public
offering or private placement of equity or debt securities. Our development
strategy also includes considering partners on a joint venture basis on our
specific projects to fund the development of such projects in a timely and
responsible manner. However, there is no assurance that debt or equity financing
or joint venture partner arrangements will be available to us on acceptable
terms, if at all, to meet these requirements. The Company has no revenues, and
its operating results, profitability and the future rate of growth depend solely
on management’s ability to successfully implement the business plans and on the
ability to raise further funding.





Results
of Operations





Net
loss





Three Months ended July 31, 2009 as
compared to three months ended July 31, 2008.The Company experienced a
net loss of $4,797,029 or $0.02 per share for the three months ended July 31,
2009 as compared to a net loss of $14,318,298 or $0.06 per share for the three
months ended July 31, 2008. The decline in the net loss is mainly due to a
reduction in exploration activity and costs in the current quarter as compared
to the same quarter last year. The Company expects to continue to incur
operating losses and will continue to be dependent on additional sales of equity
or debt of securities and/or property joint ventures to fund its activities in
the future.





Exploration
costs





Three months July 31, 2009 as
compared to three months ended July 31, 2008.Exploration costs for the
three months ended July 31, 2009 were $3,614,359 (2008 - $10,472,742). The
Operations Summary above provides a summary of the exploration activities
conducted in the three months ended July 31, 2009.  Exploration
expenditures in the three months ended July 31, 2009 related mainly to
engineering and construction costs on Test Sites 1 & 3 and to environmental
monitoring activities.





General
and administrative





Corporate





Three months ended July 31, 2009 as
compared to three months ended July 31, 2008.General and administrative
expenses settled with cash for the three months ended July 31, 2009 were
$3,798,450 (2008 - $2,855,016).  Expenditures in the three month
period ended July 31, 2009 consist of salaries ($2.1 million), legal and other
professional fees ($0.7 million) and general office costs ($1.0
million).  General and administrative expenses in the three months
ended July 31, 2008 consist of salaries ($0.9 million), legal and other
professional fees ($0.9 million) and general office costs ($1.0
million).  At July 31, 2009 there were 48 employees including 8
seasonal field employees, at July 31, 2008 there were 72 employees including 30
seasonal field employees. The increase in salaries and wages during the
quarter occurred as result of severance payments.





Stock-based
compensation





Three months ended July 31, 2009 as
compared to three months ended July 31, 2008.  Stock-based
compensation expense for the three months ended July 31, 2009 was $1,735,797
(2008 – $3,763,772).  Stock-based compensation expense for the three
months ended July 31, 2009 and 2008 consists of stock-based compensation related
to the issuance of options to directors, officers, employees and
consultants.   The grant date fair value of the stock options was
estimated using the Black-Scholes valuation model which requires the input of
highly subjective assumptions, including the option’s expected life and the
expected stock price volatility determined using the historical volatility of
the price of shares of the Company’s common stock. The decrease this quarter as
compared to the same quarter in the prior year is the result of 2.8 million
options being forfeited due to a reduction in the number of employees
and  corresponding stock-based
compensation.   Stock-based compensation is a non-cash
expense.





Foreign
exchange gain (loss)





Three months ended July 31, 2009 as
compared to three months ended July 31, 2008. A foreign exchange gain of
$3,243,691 (2008 — loss of $782,690) resulted from holding Canadian dollar cash
in the parent company with a US dollar functional currency when the value of the
Canadian dollar increased as compared to the U.S. dollar.





24





Depreciation
and accretion





Three months ended July 31, 2009 as
compared to three months ended July 31, 2008.Depreciation and accretion
expense for the three months ended July 31, 2009 was $448,416 (2008 -
$317,726).  Depreciation expense relates to camp facilities, equipment
and corporate assets which are being depreciated over their useful lives of
three to five years. Accretion expense relates to the asset retirement
obligation recognized on the airstrip, camp site, access roads and reservoir
test sites which are being brought into income over a period 10 of 30 years. The
change from the quarter ended July 31, 2008 to the quarter ended July 31, 2009
is not significant and relates to the increase in assets held during the
year.





Interest
and other income





Three months ended July 31, 2009 as
compared to three months ended July 31, 2008.Interest income for the
three months ended July 31, 2009 was $58,764 (2008 -
$429,278).  Interest income is earned because the Company pre-funds
its activities and the resulting cash on hand which is invested in short-term
deposits. The decrease in interest income this quarter as compared to the same
quarter in the prior year reflects the decrease in short term investments and
the decrease in market interest rates over the intervening year.





Deferred
income tax benefit





Three months ended July 31, 2009 as
compared to three months ended July 31, 2008. The deferred income tax
benefit for the three months ended July 31, 2009 was $1,497,538 (2008 -
$3,444,370) and relates to the tax benefit that is generated by expensing all
exploration costs. This results in a higher tax basis for the Company’s property
and equipment when compared to their carrying value. The deferred tax liability
reported on the balance sheet is mainly related to the book value of property
which will not be deductible for tax purposes and is related to the Company’s
2006 acquisition of the minority interest in OQI Sask.





Recently
Issued Accounting Standards Not Yet Adopted





There are
no relevant recently issued accounting standards that would impact the
Company.





Off-Balance
Sheet Arrangements





The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or further effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations liquidity,
capital expenditures or capital resources that is material to
investors.





Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Not
applicable.





Item
4.  Controls and
Procedures





Disclosure
Controls and Procedures





As of
July 31, 2009, we carried out an evaluation under the supervision of, and with
the participation of our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15(e) under the Securities and
Exchange Act of 1934, as amended.   Based on the evaluation as of
July 31, 2009 our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures (as defined in Rule 13a-15e) under
the Securities Exchange Act of 1934) were not effective because of the material
weakness in internal control over financial reporting described
below.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The material
weakness in our internal control over financial reporting as of July 31, 2009
existed as we did not maintain effective processes and controls over the
accounting for and reporting of complex and non-routine
transactions.


25


Specifically,
we did not have sufficient appropriate level of technical knowledge, experience
and training in the accounting for asset acquisitions, stock-based compensation,
and deferred income taxes.


This
control deficiency resulted in the restatement of the consolidated financial
statements for the years ended April 30, 2008 and 2007, for each of the quarters
in fiscal 2009 and 2008 and for the first quarter in fiscal 2010. The
restatement of the prior periods also resulted in a material adjustment to the
April 30, 2009 financial statement prior to their issuance.





We plan
to remediate the material weakness described above by consulting with an
independent big four accounting firm on complex accounting issues and obtain
written analysis of the accounting options available to us.  The
analysis would be reviewed with the independent auditors on the appropriateness
of the accounting treatment for any new transactions.  We will also
amend our period close procedures to include access to independent consultation
on technical accounting treatment with respect to highly complex
transactions.





Changes
in Internal Control Over Financial Reporting





We
regularly review our system of internal control over financial
reporting.  There were no changes in our internal control over
financial reporting during the period covered by this report on Form 10-Q that
have materially affected or is reasonably likely to materially affect, our
internal control over financial reporting.





PART
II - OTHER INFORMATION





Item
1.   Legal
Proceedings





None.





Item
1A.  Risk
Factors





There
have been no material changes to the information in the Risk Factors identified
in Item 1A in our Annual Report on Form 10-K for the year ended April 30,
2009.





Item
2. Unregistered Sales of
Equity Securities and Use of Proceeds





None.





Item
3.  Defaults Upon Senior
Securities





None.





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





None.





Item
5.  Other
Information





Effective
August 28th, 2009, Dr.
Claes Palmgren, Vice President Reservoir Engineering, resigned from the Company
for personal reasons.  Dr. Palmgren intends to stay on with the
Company on a consulting basis for a period of approximately six
months.





ITEM
6. Exhibits.





1.1
            Agency
      Agreement dated April 30, 20091





31.1
            Certification
      of CEO Pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
      herewith.





31.2
            Certification
      of CFO Pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
      herewith.





32.1
            Certification
      of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, filed
  herewith.





32.2
            Certification
      of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, filed
  herewith.


_______________





1 Incorporated by reference from
Form 8-K dated April 30, 2009.


26





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.





OILSANDS
      QUEST INC.Date:  November
      27, 2009
            By:
            /s/
      Christopher H. HopkinsChristopher
      H. Hopkins, President, Chief Executive Officer and
  DirectorDate:  November
      27, 2009
            By:
            /s/
      Garth WongGarth
      Wong, Chief Financial Officer and Chief Accounting
  Officer














27