UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


FORM
10-Q





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


For the
quarterly period ended January 31, 2010


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 T                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
March 9, 2010 there were 291,003,632 shares of
common stock issued and outstanding.













OILSANDS
QUEST INC.


FORM
10Q FOR THE QUARTER ENDED


January
31, 2010





Part
      I.  Financial InformationForward-Looking
      StatementsItem
      1.
            
            Financial StatementsUnaudited Consolidated Balance Sheets as of January 31, 2010
      and April 30, 2009
            2Unaudited Consolidated Statements of Operations for
      the Three and Nine Months Ended January 31, 2010 and 2009
      and for the Period from Inception on April 3, 1998 to January 31,
      2010
            3Unaudited Consolidated Statements of Stockholders’ Equity for
      the Nine Months Ended January 31, 2010 and
2009
            4Unaudited Consolidated Statements of Comprehensive Income
      (Loss) for the Three and Nine Months Ended January 31, 2010 and 2009 and
      for the Period from Inception on April 3, 1998 to January 31,
      2010
            5Unaudited Consolidated Statements of Cash Flows for
      the Nine Months Ended January 31, 2010 and 2009 and for the
      Period from Inception on April 3, 1998 to January 31,
      2010
            6Unaudited Notes to Consolidated Financial
      Statements
            7Item 2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            16Item 3.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            24Item 4.
            
            Controls and Procedures
            24Part II  Other InformationItem 1.
            
            Legal Proceedings
            24Item 1A.
            
            Risk Factors
            25Item 2.
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            25Item 3.
            
            Defaults Upon Senior Securities
            25Item 4.
            
            Submission of Matters to a Vote of Security
      Holders
            25Item 5.
            
            Other Information
            25Item 6.
            
            Exhibits
            25Signatures
            27





Cautionary Statement about
Forward-Looking Statements


The
following 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, exploration and development
      expenditures;


·
            the
      timing of exploration and development
  activities;


·
            business
      strategies and development of our business plan and exploration programs;
      and


·
            potential
      estimates as to the volume and nature of petroleum deposits that are
      expected to be found present when lands are developed in a
      project.





Forward-looking
statements also typically include words such as "anticipate", "estimate",
"expect", "potential", "could" or similar words suggesting future
outcomes.  Readers are cautioned that forward-looking statements are
not guarantees of future performance and that actual results or developments may
differ materially from those expressed or implied in the forward-looking
statements.





The
Company is under no duty to update any of these forward-looking statements after
the date of this report.  You should not place undue reliance on these
forward-looking statements.





It is
presumed that readers have read or have access to our 2009 Annual Report filed
on Form 10-K which includes disclosures regarding critical accounting policies
as part of Management’s Discussion and Analysis of Financial Condition and
Results of Operations.  All future payments in Canadian dollars have
been converted to United States dollars using an exchange rate of $1.00 U.S. =
$1.065 CDN, which was the January 31, 2010 exchange rate.  Unless
otherwise stated, all dollar amounts are expressed in U.S. dollars.





1





OILSANDS
QUEST INC.
 (A
Development Stage Company)
 Consolidated
Balance Sheets
 (Unaudited)
 
 January
      31, 2010
              
              April
      30,2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
              
              $
              33,016,662
              
              
              $
              6,986,099Accounts
      receivable
              
              
              1,316,073
              
              
              
              3,616,793Short-term
      investments
              
              
              -
              
              
              
              25,208,748Prepaid
      expenses
              
              
              993,987
              
              
              
              337,099Available
      for sale equity securities
              
              
              87,337
              
              
              
              60,307Total
      Current Assets
              
              
              35,414,059
              
              
              
              36,209,046Property and Equipment
      (note 4)
              
              
              436,301,495
              
              
              
              398,975,468Assets held for sale (note 3)
              
              
              4,929,330
              
              
              
              -Total
      Assets
              
              $
              476,644,884
              
              
              $
              435,184,514LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable (note 12)
              
              $
              2,175,785
              
              
              $
              3,463,642Accrued
      liabilities
              
              
              4,084,798
              
              
              5,603,779Flow-through
      share premium liability
              
              
              -
              
              
              749,287Total
      Current Liabilities
              
              
              6,260,583
              
              
              9,816,708Deferred
      Taxes
              
              
              66,131,313
              
              
              65,651,035Asset Retirement Obligation(note 5)
              
              
              3,183,889
              
              
              2,621,439Liabilities related to assets held for
      sale (note 3)
              
              
              1,123,138
              
              
              -Stockholders’
      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,
      288,003,618 and 241,559,549 shares outstanding at January 31,
      2010 and April 30, 2009 respectively (notes 8, 9 and
      10)
              
              
              288,003
              
              
              241,559Additional
      Paid-in Capital
              
              
              756,989,105
              
              
              713,573,848Deficit
      Accumulated During Development Stage
              
              
              (372,441,580)
              
              
              (330,699,364)Accumulated
      Other Comprehensive Income (Loss)
              
              
              15,110,432
              
              
              (26,020,712)Total
      Stockholders’ Equity
              
              
              399,945,961
              
              
              357,095,332Total
      Liabilities and Stockholders’ Equity
              
              $
              476,644,884
              
              
              $
              435,184,514


Contingencies (note 13)


Subsequent events(notes 3 and
14)





See Notes
to Unaudited Consolidated Financial Statements


2








OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Operations


(Unaudited)





Three
      Months Ended
              January
      31,
            
            
            
            Nine
      Months Ended
              January
      31,
            
            
            From
              Inception
      on April 3, 1998 through to
              January
      312010
            
            
            
            2009
            
            
            
            2010
            
            
            
            2009
            
            
            2010ExpensesExploration
      costs
            $
            13,593,038
            
            
            $
            14,395,384
            
            
            $
            25,333,249
            
            
            $
            61,373,904
            
            
            $
            230,374,240General
      and administrativeCorporate
            
            5,671,655
            
            
            
            3,113,263
            
            
            
            12,831,676
            
            
            
            9,367,149
            
            
            
            54,674,955Stock-based
      compensation (note 9)
            
            1,931,555
            
            
            
            4,697,689
            
            
            
            4,746,433
            
            
            
            16,509,527
            
            
            
            145,972,509Foreign
      exchange (gain) loss
            
            (762,684)
            
            
            
            221,052
            
            
            
            (3,876,816)
            
            
            
            5,626,217
            
            
            
            663,105Depreciation
      and accretion
            
            777,801
            
            
            
            417,857
            
            
            
            1,790,823
            
            
            
            1,189,019
            
            
            
            4,795,14221,211,365
            
            
            
            22,845,245
            
            
            
            40,825,365
            
            
            
            94,065,816
            
            
            
            436,479,951Other
      ItemsInterest
      and other income
            
            (48,402)
            
            
            
            (318,710)
            
            
            
            (117,919)
            
            
            
            (1,113,790)
            
            
            
            (6,416,589)Loss
      before deferred income tax benefit
            
            21,162,963
            
            
            
            22,526,535
            
            
            
            40,707,446
            
            
            
            92,952,026
            
            
            
            430,063,362Deferred
      income tax benefit
            
            (1,805,456)
            
            
            
            (2,036,893)
            
            
            
            (3,821,028)
            
            
            
            (16,035,008)
            
            
            
            (55,670,918)Net
      loss from continuing operations
            
            19,357,507
            
            
            
            20,489,642
            
            
            
            36,886,418
            
            
            
            76,917,018
            
            
            
            374,392,444Net
      loss from discontinued
                operations
      (note 3)
            
            4,378,707
            
            
            
            99,319
            
            
            
            4,855,798
            
            
            
            660,509
            
            
            
            5,743,390Net
      loss
            
            23,736,214
            
            
            
            20,588,961
            
            
            
            41,742,216
            
            
            
            77,577,527
            
            
            
            380,135,834Net
      loss attributable to
    noncontrolling  interest
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,694,254)Net
      loss attributable to common stockholders
            $
            23,736,214
            
            
            $
            20,588,961
            
            
            $
            41,742,216
            
            
            $
            77,577,527
            
            
            $
            372,441,580Net
      loss from continuing operations
                per share – Basic and
      Diluted
            $
            0.06
            
            
            $
            0.08
            
            
            $
            0.12
            
            
            $
            0.30Net
      loss from discontinued operations
                per share – Basic and
      Diluted
            
            0.02
            
            
            
            0.00
            
            
            
            0.02
            
            
            
            0.00Net
      loss attributable to common stockholders per share – Basic and
      Diluted
            $
            0.08
            
            
            $
            0.08
            
            
            $
            0.14
            
            
            $
            0.30Weighted
      average number of common stock outstanding
            
            307,944,334
            
            
            
            259,498,487
            
            
            
            305,069,382
            
            
            
            255,811,160





See Notes
to Unaudited Consolidated Financial Statements


3


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
            
            
            44,789,300
            
            
            44,789
            
            
            -
            
            
            -
            
            
            39,968,976
            
            
            -
            
            
            -
            
            
            40,013,765Stock option
      exercises
            
            
            949,769
            
            
            950
            
            
            -
            
            
            -
            
            
            769,881
            
            
            -
            
            
            -
            
            
            770,831Exchange
      of OQI Sask Exchangeable shares
            
            
            705,000
            
            
            705
            
            
            -
            
            
            -
            
            
            (705)
            
            
            -
            
            
            -
            
            
            -Stock-based
      compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,746,433
            
            
            -
            
            
            -
            
            
            4,746,433Share
      issue costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,069,328)
            
            
            -
            
            
            -
            
            
            (2,069,328)Other
      comprehensive incomeForeign
      exchange gain on translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            41,131,144
            
            
            -
            
            
            41,131,144Net
      loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (41,742,216)
            
            
            (41,742,216)Balance,
      January 31, 2010
            
            
            288,003,618
            
            $
            288,003
            
            
            1
            
            $
            1
            
            $
            756,989,105
            
            $
            15,110,432
            
            $
            (372,441,580)
            
            $
            399,945,961Balance,
      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
            
            
            23,784,917
            
            
            23,785
            
            
            -
            
            
            -
            
            
            91,215,543
            
            
            -
            
            
            -
            
            
            91,239,328Property
            
            
            640,000
            
            
            640
            
            
            -
            
            
            -
            
            
            3,717,760
            
            
            -
            
            
            -
            
            
            3,718,400Premium on flow-through shares
      allocated to liability
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,802,753)
            
            
            -
            
            
            -
            
            
            (1,802,753)Stock
      option exercises
            
            
            35,000
            
            
            35
            
            
            -
            
            
            -
            
            
            165,115
            
            
            -
            
            
            -
            
            
            165,150Exchange
      of OQI Sask Exchangeable Shares
            
            
            1,838,574
            
            
            1,838
            
            
            -
            
            
            -
            
            
            (1,838)
            
            
            -
            
            
            -
            
            
            -Stock-based
      compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            16,509,527
            
            
            -
            
            
            -
            
            
            16,509,527Share
      issue costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,377,050)
            
            
            -
            
            
            -
            
            
            (2,377,050)Proceeds
      from exercise of subsidiary options
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,522,925
            
            
            -
            
            
            -
            
            
            1,522,925Other
      comprehensive incomeTransfer of unrealized loss to net
      loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            141,970
            
            
            -
            
            
            141,970Exchange loss on
      translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (74,278,211)
            
            
            -
            
            
            (74,278,211)Net
      loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (77,577,527)
            
            
            (77,577,527)Balance,
      January 31, 2009
            
            
            240,160,449
            
            $
            240,160
            
            
            1
            
            $
            1
            
            $
            713,271,724
            
            $
            (37,403,874)
            
            $
            (319,079,733)
            
            $
            357,028,278





See Notes
to Unaudited Consolidated Financial Statements


4








OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Comprehensive Income (Loss)





Three
      Months Ended
              January
      31,
            Nine
      Months Ended
              January
      31,
            From Inception on April
      3, 1998 through to2010
            
            
            2009
            
            2010
            
            2009
            
            January
      31, 2010Net
      loss
            
            $
            (23,736,214)
            
            $
            (20,588,961)
            
            $
            (41,742,216)
            
            $
            (77,577,527)
            
            $
            (380,135,834)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
            
            
            5,491,981
            
            
            (5,837,594)
            
            
            41,131,144
            
            
            (74,278,211)
            
            
            15,110,432Comprehensive
      income (loss)
            
            $
            (18,244,233)
            
            
            (26,426,555)
            
            $
            611,072
            
            $
            (151,713,768)
            
            $
            (365,025,402)Comprehensive
      loss attributable to noncontrolling interest
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            7,694,254Comprehensive
      income (loss) attributable to common stockholders
            
            $
            (18,244,233)
            
            $
            (26,426,555)
            
            $
            611,072
            
            $
            (151,713,768)
            
            $
            (357,331,148)





See Notes
to Unaudited Consolidated Financial Statements





5





OILSANDS QUEST
INC.


(A
Development Stage Company)


Consolidated
Statements of Cash Flows


(Unaudited)





Nine
      Months Ended
              January
      31,
            
            
            From
      Inception on April 3, 1998 through to
              January 31,
              20102010
            
            
            2009Operating
      ActivitiesNet
      loss
            
            $
            (41,742,216)
            
            
            $
            (77,577,527)
            
            
            $
            (380,135,834)Non-cash
      adjustments to net lossStock-based
      compensation
            
            
            4,746,433
            
            
            
            16,509,527
            
            
            
            145,972,509Deferred income tax
      benefit
            
            
            (5,617,008)
            
            
            
            (16,279,306)
            
            
            
            (57,795,326)Depreciation and
      accretion
            
            
            1,790,823
            
            
            
            1,189,019
            
            
            
            4,795,142Asset retirement cost
      (reduction) expense
            
            
            (13,811)
            
            
            
            -
            
            
            
            1,053,904Impairment of unproved
      properties (note 3)
            
            
            5,631,145
            
            
            
            -
            
            
            
            5,631,145Other non-cash
      items
            
            
            (27,030)
            
            
            
            508,437
            
            
            
            1,212,253Changes
      in Non-Cash Working CapitalAccounts
      receivable and prepaid expenses
            
            
            1,915,334
            
            
            
            (328,887)
            
            
            
            (2,073,450)Accounts
      payable and accrued liabilities
            
            
            (3,596,103)
            
            
            
            3,148,931
            
            
            
            10,532,126Changes
      in Non-Cash Working Capital Related to Assets Held for
      Sale
            
            
            (389,895)
            
            
            
            19,413
            
            
            
            344,646Cash
      Used in Operating Activities
            
            
            (37,302,328)
            
            
            
            (72,810,393)
            
            
            
            (270,462,885)Investing
      ActivitiesCapital
      expenditures
            
            
            (1,616,884)
            
            
            
            (7,434,256)
            
            
            
            (81,030,489)Short-term
      investment
            
            
            25,208,748
            
            
            
            (1,419,212)
            
            
            
            -Other
      investments
            
            
            -
            
            
            
            116,824
            
            
            
            (548,048)Cash
      Used in Investing Activities
            
            
            23,591,864
            
            
            
            (8,736,644)
            
            
            
            (81,578,537)Financing
      ActivitiesIssuance
      of shares for cash, net of issue costs
            
            
            38,715,267
            
            
            
            89,027,428
            
            
            
            366,276,675Shares
      issued on exercise of subsidiary options and
warrants
            
            
            -
            
            
            
            1,522,925
            
            
            
            4,176,336Shares
      issued by subsidiary to non-controlling interests
            
            
            -
            
            
            
            
            
            
            
            7,663,666Convertible
      debentures
            
            
            -
            
            
            
            -
            
            
            
            8,384,496Cash
      Provided by Financing Activities
            
            
            38,715,267
            
            
            
            90,550,353
            
            
            
            386,501,173Inflow
      of Cash and Cash Equivalents
            
            
            25,004,803
            
            
            
            9,003,316
            
            
            
            34,459,751Effects
      of exchange rate changes on cash and cash
equivalents
            
            
            1,025,760
            
            
            
            (5,217,854)
            
            
            
            (1,443,089)Cash
      and Cash Equivalents, Beginning of Period
            
            
            6,986,099
            
            
            
            26,498,038
            
            
            
            -Cash
      and Cash Equivalents, End of Period
            
            $
            33,016,662
            
            
            $
            30,283,500
            
            
            $
            33,016,662Non-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


6





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 accounting guidance for a
development stage company. 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
January 31, 2010, the Company had working capital of $29 million. The Company
believes that it has sufficient funds to maintain its interests in the existing
properties and to maintain other core activities through January 31, 2011. 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 in the United States of America
(“US GAAP”). 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.
            BASIS
      OF PRESENTATION





These
consolidated financial statements have been prepared in accordance with 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 US GAAP 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 as adjusted in
form 8K filed September 10, 2009. Certain comparative figures have been
reclassified to conform to current financial statement
presentation.





The U.S.
dollar (“USD”) is the functional currency for OQI (the parent
company).  The Canadian dollar (“CDN”) 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 accumulated 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.








7





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 nil) 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
second immaterial correction related to an error in the accounting for
stock-based compensation for the years ended April 30, 2007, 2008 and 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. The Company also corrected the grant date
fair value (a decrease) of one option award which partially offset the
understatement of stock-based compensation expense associated with the forfeited
options.





-             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 and
nine months ended January 31, 2009 was an increase to stock-based compensation,
net loss and comprehensive loss of $0.4 million and $1.5 million respectively,
with a decrease to the basic and diluted net loss attributable to common
stockholders of $nil and $0.01 per share for the three and nine months ended
January 31, 2009 respectively.





-             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.





The
Company concluded that these adjustments were not material to the financial
statements for the years ended April 30, 2007, 2008 and 2009 and reflected them
as immaterial corrections of prior period comparative financial information
in its interim financial statements for the three and nine months ended
January 31, 2010.





Recently
Adopted Accounting Standards





Effective
May 1, 2009, the Company adopted the authoritative guidance issued by the
Financial Accounting Standards Board (“FASB”) on consolidation as it relates to
noncontrolling interests. The guidance establishes accounting and reporting
standards for the noncontrolling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance 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, the guidance establishes a single method of accounting for changes in
a parent’s ownership interest in a subsidiary that do not result in
deconsolidation. The guidance required retrospective adoption of the
presentation and disclosure requirements for noncontrolling interests for the
period from inception on April 3, 1998 through April 30, 2009. All other
requirements of the guidance 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 sheets.








8


Effective
May 1, 2009, the Company adopted the authoritative guidance issued by FASB on
the disclosures about derivative instruments and hedging activities. This
guidance amends and expands the disclosure requirements for derivative
instruments and hedging activities. The new guidance 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. The guidance 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 the guidance did not have any impact on the Company’s consolidated
financial statements.





Effective
May 1, 2009, the Company adopted the authoritative guidance issued by FASB on
subsequent events. The guidance 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 the guidance did not have a significant impact on the Company’s
consolidated financial statements.





Effective
May 1, 2009, the Company adopted the authoritative guidance issued by FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting be used for all business combinations and
that an acquirer be identified for each business combination. This guidance 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 the
authoritative guidance on the accounting for assets acquired and liabilities
assumed in a business combination that arise from contingencies which
establishes a model to account for certain pre-acquisition contingencies. Under
this guidance, 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 prescribed by the guidance on accounting for contingencies
should be followed. The adoption of this guidance did not have any impact on the
Company’s consolidated statements.





3.          ASSETS
HELD FOR SALE AND DISCONTINUED OPERATIONS




On
January 19, 2010 the Company reached an agreement through due process to
sell its Pasquia Hills oil shale properties to a private company formed by
the former President and Chief Executive Officer of the Company (the
“Purchaser”) for consideration of CDN $1 million (US $ 0.9 million) in cash and
8,000,000 shares of the private company.  The sale is conditional on
the Purchaser raising a minimum financing amount as defined in the terms of the
agreement.  The transaction will have an effective date of November 1,
2009 when the condition is met and the Purchaser will be responsible for all
costs incurred related to the properties from the effective date to the date of
close.  As part of this transaction the Company has agreed to loan to
the Purchaser $250,000 and funds to cover certain advisory costs, which will be
repaid when the financing is obtained or if the financing is not
obtained,  all amounts will be forgiven.  The funds were
advanced subsequent to period end.





The
Company has estimated the fair value of the oil shale assets based on the
purchase and sale agreement and has included the lower of their carrying amounts
and fair value less cost to sell of these assets within assets held for sale for
the current period.





Included
in assets held for sale at January 31, 2010 are deposits of $0.3 million related
to the oil shale permits, the cost of the Pasquia Hills assets of $4.6 million
(net of an impairment of the properties of $5.6 million). The liabilities
related to assets held for sale consist of the deferred taxes on the assets held
for sale.





The
Company has accounted for the oil shale properties as discontinued operations
and has reclassified prior period financial statements to exclude these
properties from continuing operations. A summary of financial information
related to the Company’s discontinued operations for each of the periods
presented is as follows:





Three
      Months Ended
              January
      31,
            
            Nine
      Months Ended
              January
      31,
            From Inception on April
      3, 1998 through to2010
            
            
            2009
            
            2010
            
            2009
            
            January
      31, 2010Exploration
      costs
            $
            367,084
            
            $
            136,053
            
            $
            1,020,633
            
            $
            904,807
            
            $
            2,236,652Impairment
      on unproved properties
            
            5,631,145
            
            
            -
            
            
            5,631,145
            
            
            -
            
            
            5,631,145Loss
      before income taxes
            $
            5,998,229
            
            $
            136,053
            
            $
            6,651,778
            
            $
            904,807
            
            $
            7,867,797Provision
      for income taxes
            
            (1,619,522)
            
            
            (36,734)
            
            
            (1,795,980)
            
            
            (244,298)
            
            
            (2,124,407)Net
      loss from discontinued operations
            $
            4,378,707
            
            $
            99,319
            
            $
            4,855,798
            
            $
            660,509
            
            $
            5,743,390


9





4.         PROPERTY
AND EQUIPMENT





January
      31, 2010
            
            
            April
      30,
              2009Saskatchewan
      Oil Sands RightsPermits
            
            $
            382,947,879
            
            
            $
            341,921,978Licenses
            
            
            2,186,088
            
            
            
            1,949,903Alberta
      Oil Sands RightsPermits
            
            
            33,699,063
            
            
            
            30,044,702Leases
            
            
            7,455,443
            
            
            
            6,622,130Saskatchewan
      Oil Shale Rights (Permits)
            
            
            -
            
            
            
            9,439,575Equipment
            
            
            14,610,460
            
            
            
            11,635,999Less:
      Accumulated Depreciation
            
            
            (4,597,438)
            
            
            
            (2,638,819)Net
      Book Value
            
            $
            436,301,495
            
            
            $
            398,975,468





a)         Saskatchewan
Oil Sands Permits





As at
April 30, 2009 and January 31, 2010, 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 January 31, 2010, 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 January 31, 2010, 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 January 31, 2010, 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 January 31, 2010 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.





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




10





e)
            Saskatchewan
      Oil Shale Permits (note 3)





As at
April 30, 2009 and January 31, 2010, 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 January 31, 2010, 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
$278,739 ($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% (2009 – 7%) and an
inflation rate of 2.5% (2009 – 2.5%). At January 31, 2010, the total
undiscounted inflation-adjusted future obligation was approximately $8.7
million.





Continuity
      of Asset Retirement ObligationPresent
      value of obligation at April 30, 2009
            
            $
            2,621,439Liabilities
      incurred
            
            
            204,754Liabilities
      settled
            
            
            (111,622)Accretion
      expense
            
            
            149,522Foreign
      currency translation adjustment
            
            
            319,796Present
      value of obligation at January 31, 2010
            
            $
            3,183,889





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 nine months ended January 31, 2010 and OQI Sask options outstanding
at January 31, 2010 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 Sask exchangeable shares (note
      7)
            
            
            -
            
            
            $
            -Issued
      and outstanding, January 31, 2010
            
            
            1,421,667
            
            
            $
            16.82














11





Exercise
      Price (CDN)
            
            
            Number
              Outstanding
      at
              January
      31, 2010
            
            
            Number
      Exercisable at
              January
      31, 2010
            
            Weighted
      Average Remaining Contractual Life
            Weighted
      Average Grant-Date Fair Value (CDN)
            
            
            
            Aggregate
      Intrinsic Value at January 31, 2010 (CDN)$
            0.50
            
            
            
            75,000
            
            
            
            75,000
            
            1.50
            0.09
            
            
            $
            443,250$
            3.00
            
            
            
            100,000
            
            
            
            100,000
            
            0.54
            0.54
            
            
            
            341,000$
            6.00
            
            
            
            465,000
            
            
            
            465,000
            
            1.00
            28.30
            
            
            
            190,650$
            25.00
            
            
            
            731,667
            
            
            
            731,667
            
            1.25
            26.06
            
            
            
            -$
            50.00
            
            
            
            50,000
            
            
            
            50,000
            
            1.50
            32.00
            
            
            
            -1,421,667
            
            
            
            1,421,667
            
            1.14
            
            
            
            $
            974,900





The
1,421,667 OQI Sask options outstanding at January 31, 2010 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
January 31, 2010, the Company had no unrecognized stock option compensation
expense.


7.
              OQI
      SASK EXCHANGEABLE SHARES AND PREFERRED
STOCK





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 nine months ended January 31, 2010 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
            
            
            (705,000)
            
            
            
            -
            
            
            
            (705,000)Balance,
      January 31, 2010
            
            
            25,038,916
            
            
            
            11,700,319
            
            
            
            36,739,235





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.  Of these costs, $0.7 million
were incurred prior to April 30, 2009.





On
December 23, 2009, the Company issued 9,714,300 at $1.05 per share pursuant to a
private placement offering for net proceeds of $10,136,023.





Under the
terms of the flow-through shares issued on October 3, 2008, in the amount of
CDN$39.7 million ($36.7 million), the Company renounced the tax benefits of
the related expenditures to the subscribers effective December 31, 2008. As at
December 31, 2009, all required expenditures under these flow-through shares had
been incurred by the Company and there is no further spending
obligation.











12





9.
            STOCK
      OPTIONS





Stock
based compensation generally takes the form of equity classified stock options
granted to employees. 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 upon achieving a defined
bitumen in place barrel count. Another set of option grants included both a
market condition based upon total shareholder return over a three year period
and performance conditions based upon achieving a combination of defining a
reservoir recovery configuration and achieving a defined bitumen in place
barrel count.  The fair value of the options containing the performance and
market conditions were estimated at the date of grant and amortization of these
amounts commences when satisfaction of the performance conditions becomes
probable.





The
following summarizes our stock option activity under the Company’s 2006 Stock
Option Plan for the nine months ended January 31, 2010:





Options
            
            
            Weighted-
              Average
              Exercise
      Price
            
            
            Weighted-Average
              Grant-Date
              Fair
      Value
            
            
            Aggregate
      Intrinsic
              ValueOutstanding
      at April 30, 2009
            24,582,962
            
            
            $
            4.03
            
            
            $
            2.95Granted
            4,615,000
            
            
            
            1.09
            
            
            
            0.37Exercised
            (949,769)
            
            
            
            0.81
            
            
            
            0.73
            
            
            $
            358,610Expired
            (30,000)
            
            
            
            6.00
            
            
            
            3.55Forfeited
            (6,637,550)
            
            
            
            4.08
            
            
            
            2.25Outstanding
      at January 31, 2010
            21,580,643
            
            
            $
            3.52
            
            
            $
            2.70Exercisable
      at January 31, 2010
            15,689,729
            
            
            $
            4.11
            
            
            $
            3.28
            
            
            $
            72,238





The
weighted-average remaining contractual term of vested and exercisable options at
January 31, 2010 was 4.1 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 (notes 6 and
7).





During
the nine months ended January 31, 2010, 4,615,000 options were granted and were
accounted for using either the Black-Scholes option-pricing model or the
trinomial option-pricing model for the option grant subject to a market
condition.  The trinomial option-pricing model takes into account the same
input assumptions as the Black-Scholes model; however, it also further
incorporates into the fair-value determination, the possibility that the market
condition may not be satisfied and the impact of the possible differing
stock price paths.   The following weighted average assumptions
were used to determine the fair value of the options granted during the nine
months ended January 31, 2010:





Expected
Life
(years)                                                    7.8


Risk free
interest
rate                                                   3.10%


Expected
volatility                                                      101.9%


Dividend
yield                                                                0.0%





As
at January 31, 2010, the Company had unrecognized stock option compensation cost
of $1,725,516 which will be recorded in future periods as options vest. The
expense is expected to be recognized over a weighted-average period of 1
year.





10.
            WARRANTS





At
January 31, 2010, 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 nine months ended January 31,
2010:





Number
      Of Warrants
            
            
            Weighted
      Average Exercise PriceBalance,
      April 30, 2009
            
            
            6,325,000
            
            
            $
            6.75Warrants
      issued
            
            
            17,537,500
            
            
            
            1.10Expired
            
            
            (6,325,000)
            
            
            
            (6.75)Balance,
      January 31, 2010
            
            
            17,537,500
            
            
            $
            1.10





13


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 January 31, 2010 and April 30, 2009.





As
      of January 31, 2010Fair
      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:Available for sale equity
      securities
            
            $
            87,337
            
            
            $
            87,337
            
            
            $
            87,337
            
            
            
            -
            
            
            
            -Short Term
      Investments
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            -
            
            
            
            -





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:Available for sale equity
      securities
            
            $
            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 labor and equipment
rentals to the Company for field operations.  For the three and nine
months ended January 31, 2010, nil (2009 - $719,160) and nil (2009 - $1,980,684)
respectively, have been included in exploration expense. These transactions are
in the normal course of operations. As at January 31, 2010, 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 a director 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 and nine months ended January 31, 2010,
$602,894 (2009 – $592,402) and $1,107,334 (2009 - $1,344,611) respectively, has
been included in exploration expense. These transactions are in the normal
course of operations. As at January 31, 2010, $199,966 (April 30, 2009 -
$52,010) was payable to the above mentioned company.





The
brother of a director of the Company is a 50% shareholder of a company that
provides geophysical and geological analysis to the Company. For the three and
nine months ended January 31, 2010, $61,840 (2009 - $36,170) and $189,185 (2009
- $109,232) respectively, have been included in exploration expense. These
transactions are in the normal course of operations. As at January 31,
2010, the Company had nil (April 30, 2009 – nil) payable to the above
mentioned company.





14


13.
              CONTINGENCIES




Environmental





The
Company is responsible for compliance with terms and conditions of environmental
and regulatory approvals and all laws and regulations regarding the abandonment
of a project and reclamation of its lands at the end of its economic
life.  The Company has identified a certain number of abandoned wells
at Axe Lake stemming from its early exploration core hole well programs that
will likely require being re-abandoned. The Company has not yet defined a
corrective action plan due to the uncertainties regarding scope and timing of
the re-abandonment.  Based on currently available information,
management believes that it is likely that future costs related to abandonment
and reclamations costs will occur but has not accrued a liability as it is
currently unable to estimate the amount of contingency. These liabilities will
be accrued in the period in which they become reasonably estimable.


Litigation





On
February 24, 2010, a derivative action entitled Make a Difference Foundation
Inc. v. Hopkins, et al., Case No.  10-CV-00408, was filed in United
States District Court for the District of Colorado by plaintiff  Make
a Difference Foundation, Inc.  The derivative action names the
following individual defendants:  Christopher H. Hopkins, T. Murray
Wilson, Ronald Blakely, Paul Ching, Brian MacNeill, Ronald Phillips, John Read,
Gordon Tallman, Pamela Wallin, Thomas Milne and W. Scott Thompson.  In
addition, the Company is named as a nominal defendant.  Plaintiff
asserts, among other things, claims for waste and breaches of the fiduciary duty
of loyalty and good faith by the defendants stemming from the Company's approval
of the proposed sale of the Company's Pasquia Hills assets to Canshale
Corp.  The plaintiff seeks unspecified damages, restitution, and
reasonable costs and expenses including counsel fees and experts'
fees.  A response to the Complaint is currently due on March 16,
2010.  The Company believes the claims are wholly without merit and
intends to file a motion to dismiss the Complaint.





14.
            SUBSEQUENT
      EVENTS





In
preparing these consolidated financial statements, subsequent events have been
considered up to March 9, 2010. On  Feburary
19, 2010, 3,000,000 OQI Sask exchangeable shares were exchanged into 3,000,000
shares of the Company.
 15


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 and nine months ended January 31, 2010, compared to the three and nine
months ended January 31, 2009, 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 filed on Form 10-K which includes disclosures
regarding critical accounting policies as part of Management’s Discussion and
Analysis of Financial Condition and Results of Operations.  All future
payments in Canadian dollars have been converted to United States dollars using
an exchange rate of $1.00 U.S. = $1.065 CDN, which was the January 31, 2010
exchange rate.  Unless otherwise stated, all dollar amounts are
expressed in U.S. dollars.




Overview





Three
Months Ended January 31, 2010





-
            We
      completed the private placement of 9,714,300 shares at $1.05 per share for
      gross proceeds of $10.2 million. This transaction was completed without
      the use of a broker/dealer.




-
            We
      announced the appointment of Paul Ching to our Board of
      Directors.  Mr. Ching has an exceptional background in
      exploration and production reservoir, production, operations, development
      and reservoir research.  Mr. Ching has been appointed the Chair
      of the Reserves & Resources Committee of the Board of Directors and
      his experience on the Board will deliver additional momentum to the
      development of the reservoirs at Axe Lake, Raven Ridge and Wallace
      Creek.





-
            At
      the end of December 2009, we completed the 2-D seismic program on our
      Saskatchewan permits.





-
            In
      early December 2009, we commenced the injection of cold water into the
      reservoir at TS1.  Initial injectivity was achieved and
      circulation tests were conducted between three sets of well pairs that are
      1.5 meters, 10 meters and 18 meters apart, respectively.  Tracer
      tests were also conducted by injecting a saline solution down the injector
      well and measuring the produced volumes of salt and water in the producer
      well.





-
            On
      January 19, 2010,  we announced the sale of the Pasquia Hills
      oil shale properties to Canshale Inc., a private company formed by
      Christopher H. Hopkins, for consideration of CDN $1 million (US $ 0.9million) in cash
      and 8,000,000 shares of Canshale. The transaction is conditional on
      Canshale raising a minimum of CDN $12.5 million (US $ 11.7million).





-
            Mr.
      Hopkins resigned as President and Chief Executive Officer of OQI to assume
      the role of President and Chief Executive Officer of Canshale effective
      January 15, 2009.  Mr. Hopkins remains on the Board of Directors
      of OQI and is the Chair of the Community Relations and
      HS&E.   We had previously announced that Mr. Hopkins
      would also be serving on the Governance and Nominating
      Committee.  Upon review of the relevant stock exchange rules and
      securities laws, it was concluded that Mr. Hopkins is not independent for
      stock exchange rules and he is therefore no longer able to serve on the
      Governance and Nominating
Committee.





-
            T.
      Murray Wilson, Chairman of OQI, assumed the additional roles of President
      and Chief Executive Officer.





-
            W.
      Scott Thompson and Thomas Milne resigned from the Board of Directors of
      OQI on January 15, 2010 and will join the Board of Directors of
      Canshale.





-
            We
      announced that Dr. Erdal Yildirim retired from OQI on February 1,
      2010.





-
            We
      completed the 16 hole coring and advanced logging program portion of the
      overburden characterization study on assessing the nature and character of
      the rock structures overlying the bitumen bearing McMurray (Dina)
      Formation.





-
            The
      cores from the overburden characterization program have been sent to an
      independent laboratory to perform cap-rock integrity
      tests.  Initial results indicate that we have containment over
      our reservoirs to support SAGD extraction
  process.





-
            We
      provided an update of our progress at Test Sites 1 and 3, our overburden
      characterization study and our laboratory and field test studies at the TD
      Unconventional Oil and Gas Forum in London, England on January 11,
      2010.





Nine
Months Ended January 31, 2010





-
            We
      announced updated independent third party resource estimates for our Axe
      Lake and Raven Ridge properties based on the drilling completed in late
      2008 and early 2009 at our Annual General Meeting held October 14,
      2009.


16





-
            We
      commissioned the facilities at Test Site 1 in preparation for the start-up
      of Phase One of the testing.





-
            In
      mid-October we perforated the two vertical wells at Test Site 3, which are
      approximately 3.5 meters apart, and installed temporary water heating and
      injection facilities. We commenced injecting cold water at low pressure
      and volume into the base of the McMurray formation on October 25, 2009 and
      established communication between the two wells.  Cold water
      injection and production was maintained for 24 hours, following which hot
      water was injected and produced, resulting in the mobilization of bitumen
      in the reservoir.





-
            On
      October 29, 2009, a small amount of naphtha was injected and bitumen
      recovery commenced on October 30, 2009.  We continued to
      circulate hot water without naphtha until November 5, 2009, at which time
      the injection and production facilities were removed.  We are
      continuing to monitor the temperature and as part of the test
      program.





-
            We
      completed a 12-hole oil shale coring program on the exploration permits in
      the Pasquia Hills region of central east
  Saskatchewan.




-
            We
      provided an update of our progress at Test Sites 1 and 3, our overburden
      characterization study and our laboratory and field test studies at the
      Canadian Heavy Oil Association on November 10,
  2009.





-
            In
      May, we completed a public offering of 35,075,000 units at a price of
      $0.85 per unit for gross proceeds of $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 expect to 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
      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 the resignation of Jamey Fitzgibbon as President and Chief
      Operating Officer and Dr. Claes Palmgren as Vice President Reservoir
      Engineering.





-
            We
      began applying heat to the reservoir at Test Site 3 in December 2009
      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
      provided an update of our progress at Test Site 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 examine a potential re-organization of our
      Pasquia Hills oil shale assets, which examination has resulted in the
      conditional sale of these assets as described
  herein.





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





Operations
Summary:





Exploration
Programs





During
the three months ended January 31, 2010, we were preparing for our winter 2010
oil sands exploration plans at Wallace Creek. These activities included the
selection and preparation of well sites, road construction and selection of
suppliers.













17





We
completed the 40 km 2-D seismic program on the permits to the north and south of
Axe Lake in Saskatchewan which will further our geological knowledge of the
deposits and has allowed us to meet 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 2007-2009 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.





Axe
Lake Area – Reservoir Development Activities





Test Site
3





The
objectives of the field test are to: (1) reliably measure pressure and
temperature changes within the reservoir and adjacent formations as a result of
heating and (2) use those measurements to calibrate numerical simulation
calculations to the field measurements in order to optimize a recovery program
for future testing, piloting, commercial applications and reservoir
planning.  The electric downhole heater in well 1OBS 5-29-94-25
provided heat to the reservoir and pressures 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.  Our detailed engineering
and numerical simulation analysis has confirmed the formation characteristics
and related fluid and thermal properties to be used in continued reservoir
planning at Axe Lake.  We presented a more detailed description of the
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
mid-October we perforated the two vertical wells at Test Site 3, which are
approximately 3.5 meters apart, and installed temporary water, heating and
injection facilities.  The objective of this test was to inject and
produce water at different temperatures in order to:





1.
            confirm
      the establishment of early fluid
movement;


2.
            confirm
      the ability to establish convective heat transfer at the bottom of the
      reservoir;


3.
            recover
      bitumen by using both hot water and solvent injection;
  and


4.
            gather
      preliminary data on the horizontal displacement of
  fluids.





We
commenced injecting cold water at low pressure and volume into the base of the
McMurray formation on October 25, 2009 and established communication between the
two wells.  Cold water circulation was maintained for 24 hours,
following which heated water was circulated, resulting in the mobilization of
bitumen in the reservoir.  On October 29, 2009, a small amount of
naphtha was injected and bitumen recovery commenced on October 30,
2009.





We
continued to circulate hot water until November 5, 2009, at which time the
facilities were removed.  We are continuing to monitor the changes in
temperature and pressure as we prepare for the next stage of our testing
program.





Overburden
Testing Program




We
commenced the overburden characterization study on October 19, 2009 and
presented some preliminary findings at the Canadian Heavy Oil Conference on
November 10, 2009.  We completed the 16 hole coring and logging
program that yielded core material and advanced logging data (NMR, Dipole,
sonic and standard suite geophysical logs) of the formation overlying the
bitumen-bearing McMurray (Dina) Formation.
 
 The cores
are currently being analyzed by an independent reservoir research laboratory.
The primary purpose of the program was to test the potential for the overburden
to perform as a cap rock which has the capacity to contain steam within the
reservoir. The core material shows that this overburden contains layers of dense
clay-rich till.  It is currently being analyzed by an independent reservoir
research laboratory where preliminary results indicate that the overburden
formation is a dense, low permeability cap rock.  Further, additional
laboratory testing and reservoir computer simulations are demonstrating that
this material has steam containment characteristics.  The core samples are
also being correlated with the Axe Lake 3-D seismic data to determine the extent
and continuity of this cap rock across Axe Lake.  We expect to have final
results of our laboratory testing and the 3D seismic correlation work by summer
2010.





Test Site
1





On
October 18, 2009, the electrical, mechanical and boiler facilities at Test Site
1 were successfully commissioned.  Construction is complete,
experienced operating personnel are in place and the facility is ready to
commence operations.





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 will further enhance our
knowledge and modeling of the thermal and geo-mechanical characteristics of our
reservoir.





On
December 5, 2009, we commenced the injection of cold water into the reservoir at
TS1. Initial injectivity was achieved and circulation tests were conducted
between three sets of well pairs that are 1.5m, 10m, and 18m apart respectively.
Tracer tests were also conducted by injecting a saline solution down the
injector well and measuring the produced volumes of salt and water in the
producer well. Inter-well communication was positively confirmed by measurement
of substantial percentages of saline tracer at the producer
wells.


We will
continue to analyze the preliminary results from the circulation and tracer
tests, history match the field results in the computer simulations and to
monitor reservoir pressure and temperature with the down-hole monitoring array
we have in place. In early March 2010 we received regulatory approval to use
solvent in our testing program and made the decision to delay the hot water,
solvent and steam injection phase of the test until after spring break-up to
ensure we have enough time to run the test for several months without
interruption.  The results of the overburden testing program will also
have an impact on the timing of the decision to complete the second phase of the
testing program at TS1. Field staffing and activity levels at TS1 will be
reduced in March to conserve capital and prepare for a resumption of testing
activity later in the calendar year.


18


The next
phase of testing, subject to regulatory approvals, may include the drilling of a
new SAGD well pair in close proximity to the existing wells and infrastructure
at TS1 to build on our growing knowledge of the reservoir and cap rock
characteristics. The addition of traditional SAGD wells to our plan will enable
us to build upon the testing we have done to date on the “bottom up” thermal
recovery process and will enable us to test a bitumen production technology
(SAGD) that has been proven to be effective in similar reservoirs in the
Athabasca basin.





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 (See
"Risk Factors" Section of our Form 10-K and see Part II – Other Information,
Item 1A. Risk Factors
below).





Pasquia
Hills Oil Shale Permit Area





In
September and October 2009, we drilled and logged 12 exploration test holes on
our oil shale prospect in eastern Saskatchewan with ten out of twelve holes
drilled experiencing meaningful intercepts of oil shale of up to 37.0 meters in
thickness.  Detailed evaluation and interpretation of the drilling
results is underway.  We are currently processing core samples in the
laboratory by using Modified Fisher Assay method and some of these samples will
be tested using a commercially proven recovery process to measure recovery
factors.We are
continuing to research potential methods for kerogen recovery from the Pasquia
Hills oil shales.





Corporate





We are
currently recruiting to add senior technical and management resources to assist
in taking our oil sands asset development forward at a faster
pace.  We do have front end strength with existing leadership to
continue to develop and explore somewhat supplemented by the expertise of the
Board of OQI.  Over the past nine months we have added significant
strength to our Board with the addition of Ron Blakely, Brian MacNeill and, most
recently, Paul Ching who takes over as the chair of the Reserves and Resource
Committee.  In addition, we have hired a new Chief Reservoir Engineer,
Allison Aherne, whose recent roles included leading the reservoir engineering
and field operations for Suncor's Firebag SAGD project and we continue to retain
industry leaders such as Dr. Arthur Hale to move ahead briskly without a change
of step.





The
recent conditional sale by Oilsands Quest Inc. (OQI) of our Pasquia Hills
properties to a new company formed by Christopher Hopkins is an important
transaction for OQI and it follows several months of effort to determine the
best use of OQI’s financial and management resources.





The
Pasquia Hills oil shale properties consist of several permits comprising 489,730
acres in south east Saskatchewan.  These exploration permits were
acquired in 2006 and 2007 with five year terms. In 2008 and 2009, we conducted
small exploration programs by drilling 23 exploration holes.  All of
these holes encountered oil shale deposits at various depths.





The
management and Board of Directors of OQI have recognized for some time that
retaining and developing the Pasquia Hills oil shale deposits over the remaining
permit life would require considerable time, effort and financial resources at
the same time that OQI was in the process of exploring and developing its
significant portfolio of oil sands assets. In July of 2009, we announced that we
would explore various options to spin off our oil shale assets.





The Board
appointed a special committee of Directors to oversee this process and make a
recommendation to the Board. This committee, as part of its mandate, engaged TD
Securities to provide financial advice to the OQI Board.





In
evaluating the potential options for the oil shale properties, our financial
advisors determined that there were no similar asset sales to use as a benchmark
in valuing this asset.  The valuation of these properties was also
difficult because of the lack of a proven process to extract the hydrocarbons in
the oil shale and the significant financial resources required to explore and
develop these lands.  Given the limited interest for oil shale
properties, the OQI Board did not expect to receive a significant response from
an auction. As well, the Board sought to retain a significant continuing
position in the asset for OQI.





In
exploring other options, the special committee found that a share or dividend
distribution of the Pasquia Hills properties to current shareholders or new
investors would be cost prohibitive, and could create a potential tax burden to
shareholders.





The Board
also investigated the option of selling the properties to someone experienced
with early stage exploration companies.  This concept appealed to
Christopher Hopkins as he had previously founded and built a number of early
stage exploration companies, including OQI.  Mr. Hopkins will be
joined by Scott Thompson and Tom Milne, former directors of OQI, both of whom
have considerable experience in the development of large, non-conventional
hydrocarbon resources. Mr. Hopkins engaged the services of Genuity Capital
Markets as a financial advisor to Canshale Corp., the corporation established by
Mr. Hopkins to negotiate the acquisition of the Pasquia Hills
properties.


19


Under the
negotiated terms of the transaction, OQI will sell the oil shale properties to
Canshale for consideration of CDN $1 million (US $0.9 million) in cash and
8,000,000 shares of Canshale. The transaction is conditional on Canshale raising
a minimum of CDN $12.5 million (US $11.7 million) through an equity financing.
Following the initial Canshale financing, OQI will retain an ownership interest
of between 10 and 16 per cent in Canshale.





This
transaction focuses OQI's financial and management resources on developing the
significant oil sands project at Axe Lake and continuing with exploration
activities on its remaining lands. The transaction will add cash to the
treasury, reduce the work commitments and permit rental costs on undeveloped oil
shale lands, as well as reduce salary and general administration costs on an
ongoing basis.  OQI retains ownership of 8,000,000 shares of Canshale,
giving OQI shareholders exposure to the potential upside of this venture.
Additionally, this transaction leverages Mr. Hopkins’ expertise in building an
early stage exploration company in Saskatchewan.





For the
reasons above, the Board of Directors of OQI concluded that the sale of the
Pasquia Hills properties is in the best interests of OQI.  Oilsands
Quest can now focus all of its financial resources and management time on the
continuing exploration and development of its oil sands assets.





Environmental
and Regulatory





We
expanded our baseline environmental programs in the Axe Lake, Raven Ridge and
Wallace Creek areas in anticipation of  comprehensive Environmental
Impact Assessment reports required as part of the application for regulatory
approval for development process in Alberta and Saskatchewan.  We
continue to operate our continuous air quality monitoring station at Axe
Lake.





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 and development activities on our permit and license
lands.
 
 We
recently drilled 16 core holes in Axe Lake to improve the understanding of the
overburden characteristics and to test the potential for the overburden to act
as a cap rock to contain steam within the reservoir.
 
 The
cores, currently being analyzed by an independent reservoir research laboratory,
show that the overburden on top of the reservoir contains layers of clay-rich
till.  This is a dense, low permeability cap rock which demonstrates
steam containment characteristics in laboratory testing and reservoir computer
simulations. The core samples are also being correlated with the Axe Lake 3-D
seismic data to determine the extent and continuity of this cap across the
various reservoirs.
 
 The
preliminary results of the testing indicate that the Company may be able to
produce bitumen using either a typical SAGD configuration or the bottom up
recovery process that we have been testing. We now believe that the majority of
the Axe Lake reservoirs could be developed using proven SAGD bitumen recovery
processes, while the remaining resources would likely be more efficiently
produced by way of the bottom up recovery configuration.
 
 Based on
the encouraging results from the cap rock testing, we are developing plans to
accelerate work on a new SAGD pair of wells at Test Site 1 using low pressure
steam injection. As SAGD technology matures in the oil sands industry, lower
pressure SAGD approaches are proving to deliver technical, economic and
environmental benefits, as less energy is required to mobilize the bitumen. The
Axe Lake reservoir, with its high porosity, permeability and homogeneity, is
well suited to lower pressure thermal recovery.
 
 We plan
to apply for regulatory approval to support further testing and commercial
development plans at Axe Lake, which could include the filing of an application
with the Saskatchewan Ministry of Environment, and to initiate front-end
engineering design (FEED) for a 30,000 barrel-per-day commercial project
adjacent to Test Site 1. Under the Saskatchewan regulatory process, companies
file environmental applications for projects separately from energy and
resources applications, enabling environmental impact assessment and public
consultation work to get underway while the engineering is
proceeding.
 
 The
following is an overview of key activities planned in the next twelve
months:
 
 -
              We
      will continue our overburden characterization studies and continue to
      evaluate well data, perform petrophysical analyses, and perform advanced
      laboratory studies. The core samples will be correlated with the Axe Lake
      and Raven Ridge 3-D seismic data to determine the extent and continuity of
      this material across the various reservoirs on both sides of the
      Saskatchewan/Alberta border.
  -
              We
      will evaluate the feasibility of a traditional SAGD well pair at Test Site
      1 at Axe Lake.
 
 -
              We
      expect to submit an application for a commercial development at Axe Lake
      in the spring of 2010.  The project application will be 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
      may begin field activities related to Test Site 2, where we are evaluating
      the testing of other energy efficient and environmentally neutral recovery
      processes.


20






-
            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.




-
            We
      will seek an additional one year extension on our oil sands permits in
      Saskatchewan.




-
            Efforts
      are also continuing on converting a portion of our Saskatchewan permits to
      lease pursuant to the Oil Shale Regulations, 1964, as
    amended.







Liquidity and Capital
Resources





At
January 31, 2010, the Company held cash and cash equivalents and short term
investments totaling $33.0 million (April 30, 2009 - $32.2
million).





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.





On
December 23, 2009, the Company issued 9,714,300 shares of common stock at a
price of $1.05 per share for gross proceeds of $10.2 million pursuant to a
non-brokered private placement.





During
the nine months ended January 31, 2010, the Company expended $37.3 million on
operations and $1.6 million on property and equipment.





We
believe that we have sufficient funds to maintain our interest in the existing
properties and maintain other core 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 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 core activities through to January 31, 2011. 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 January 31, 2010
as compared to three months ended January 31, 2009.The Company
experienced a net loss of $23.7 million or $0.08 per share for the three months
ended January 31, 2010 as compared to a net loss of $20.6 million or $0.08 per
share for the three months ended January 31, 2009. The increase in the net loss
compared to the same quarter last year is primarily due to a $5.6 million
allowance for impairment on the oil shale assets ($4.1 million net of tax)
resulting from an assessment of their net realizable value following the
announcement of the sale of the Pasquia Hills assets on January 19, 2010. In
addition, $1.7 million of compensatory arrangements were paid to certain
officers following their departure during the quarter ended January 31, 2010.
These amounts were partially offset by a $2.8 million reduction in the stock
based compensation expense resulting from an increased number of forfeited
options during the quarter ended January 31, 2010.





Nine months ended January 31, 2010
as compared to nine months ended January 31, 2009. The Company
experienced a net loss of $41.7 million or $0.14 per share for the nine months
ended January 31, 2010 as compared to a net loss of $77.6 million or $0.30 per
share for the nine months ended January 31, 2009.  The decline in the
net loss as compared to the same period last year is due to
the reduction in exploration activity, a reduction in stock-based compensation
expense and a foreign exchange gain resulting from holding Canadian funds with
an appreciation of the Canadian dollar versus the U.S. dollar.





The
Company expects to continue to incur operating losses and will continue to be
dependent on additional sales of equity or debt securities and/or property joint
ventures to fund its activities in the future.








21





Net loss
from continuing operations





Three months ended January 31, 2010
as compared to three months ended January 31, 2009.The Company
experienced a net loss from continuing operations of $19.4 million or $0.06 per
share for the three months ended January 31, 2010 as compared to a net loss of
$20.5 million or $0.08 per share for the three months ended January 31, 2009.
The decrease in the net loss from continuing operations compared to the same
period last year is primarily due to a $2.8 million reduction in the stock based
compensation expense resulting from an increased number of forfeited options
during the quarter ended January 31, 2010 and partially offset by $1.7 million
of compensatory arrangements paid to certain officers following their departure
during the quarter ended January 31, 2010.





Nine months ended January 31, 2010
as compared to nine months ended January 31, 2009. The Company
experienced a net loss from continuing operations of $36.9 million or $0.12 per
share for the nine months ended January 31, 2010 as compared to a net loss from
continuing operations of $76.9 million or $0.30 per share for the nine months
ended January 31, 2009.  The decline in the net loss from continuing
operations as compared to the same period last year is due to the reduction in
exploration activity, a reduction in stock-based compensation expense and a
foreign exchange gain resulting from holding Canadian funds with an appreciation
of the Canadian dollar versus the U.S. dollar.





Net loss
from discontinued operations





Three and nine months ended January
31, 2010 as compared to three and nine months ended January 31, 2009.The
Company experienced a net loss from discontinued operations of $4.4 million or
$0.02 per share for the three months ended January 31, 2010 as compared to a net
loss of $0.1 million or $nil per share for the three months ended January 31,
2009. The Company experienced a net loss from discontinued operations of $4.9
million or $0.02 per share for the nine months ended January 31, 2010 as
compared to a net loss of $0.7 million or $nil per share for the nine months
ended January 31, 2009. The activities related to the oil shale program have
been reported as discontinued operations in the consolidated statement of income
following the announcement of the sale of the Pasquia Hills assets. The net loss
of $4.4 million and $4.9 million for the three and nine months ended January 31,
2010 includes the exploration costs incurred in relation to the oil shale
activities for the period and an allowance for impairment of $5.6 million ($4.1
million after tax) expected from the disposal of the assets.





Exploration
costs





Three and nine months January 31,
2010 as compared to three and nine months ended January 31, 2009.Exploration costs for the three months ended January 31, 2010 were $13.6
million (2009 - $14.4 million).  Exploration costs for the nine months
ended January 31, 2010 were $25.3 million (2009 - $61.4 million). The Operations
Summary above provides a summary of the exploration activities conducted in the
three and nine months ended January 31, 2010.   Exploration
expenditures in the three and nine months ended January 31, 2009 related mainly
to drilling, seismic, engineering, environmental and construction costs
associated with Test Sites 1 & 3.





General
and administrative





Corporate





Three and nine months ended January
31, 2010 as compared to three and nine months ended January 31, 2009.General and administrative expenses settled with cash for the three
months ended January 31, 2010 were $5.7 million (2009 - $3.1 million). 
General and administrative expenses settled with cash for the nine months ended
January 31, 2010 were $12.8 million (2009 - $9.4 million). Expenditures in
the three month period ended January 31, 2010 consist of salaries ($3.8
million), legal and other professional fees ($0.5 million) and general office
costs ($1.4 million).  General and administrative expenses in the nine
months ended January 31, 2010 consist of salaries ($7.3 million), legal and
other professional fees ($1.9 million) and general office costs ($3.6
million).  General and administrative expenses settled with cash in
the three months ended January 31, 2009 consisted of salaries ($1.4 million),
legal and other professional fees ($0.7 million) and general office costs ($1.0
million).  General and administrative expenses in the nine months
ended January 31, 2009 consisted of salaries ($3.7 million), legal and other
professional fees ($2.5 million) and general office costs ($3.2
million).





At
January 31, 2010 there were 62 employees, including 17 seasonal field
employees.  At January 31, 2009, there were 76 employees, including 26
seasonal field employees. The increase in salaries and wages during the nine
months ended January 31, 2010 occurred as result of severances paid during the
quarters ended July 31, 2009 and January 31, 2010.








22





Stock-based
compensation





Three and nine months ended January
31, 2010 as compared to three and nine months ended January 31,
2009.  Stock-based compensation for the three months ended
January 31, 2010 was $1.9 million (2009 – $4.7 million) and $4.7 million for the
nine months ended January 31, 2010 (2009 - $16.5
million).  Stock-based compensation expense for the three and nine
months ended January 31, 2010 and 2009 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 were
estimated using either the Black-Scholes valuation model or the trinomial
option-pricing model, both of which require the input of highly subjective
assumptions, including the expected life of the options and the expected stock
price volatility determined using the historical volatility of the price of
shares of the Company’s common stock.  The decrease during the three
and nine months ended January 31, 2010 compared to the same periods in the prior
year is the result of 5.4 million options forfeited due to a reduction in
the number of employees that was greater than the anticipated forfeiture
rate.





Foreign
exchange (gain) loss





Three and nine months ended January
31, 2010 as compared to three and nine months ended January 31, 2009. A
foreign exchange gain of $0.8 million (2009 —loss of $0.2 million) during the
three months ended January 31, 2010 resulted from holding Canadian funds in the
parent company when the value of the Canadian dollar  increased
compared to the U.S. dollar.  For the nine months ended January 31,
2010, a foreign exchange gain of $3.9 million (2009 – loss of $5.6 million)
resulted from holding Canadian funds in the parent company when the value of the
Canadian dollar increased compared to the U.S. dollar.





Depreciation
and accretion





Three and nine months ended January
31, 2010 as compared to three and nine months ended January 31, 2009.Depreciation and accretion expense for the three months ended January 31,
2010 was $0.8 million (2009 - $0.4 million) and $1.8 million for the nine months
ended January 31, 2009 (2009 - $1.2 million). 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 three and nine-month periods ended January 31,
2010 to the three and nine-month periods ended January 31, 2009 relates to the
increase in assets held during the period.  Additions to the property
and equipment for the nine months ended January 31, 2010 totaled $1.6
million.





Interest
and other income





Three and nine months ended January
31, 2010 as compared to three and nine months ended January 31, 2009.Interest income for the three months ended January 31, 2010 was $0.05
million (2009 - $0.3 million). Interest income for the nine months ended
January 31, 2010 was $0.1 million (2009 - $1.1 million). 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 period as compared to the same period 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 and nine months ended January
31, 2010 as compared to three and nine months ended January 31, 2009. The
deferred income tax benefit for the three months ended January 31, 2010 was
$1.8 million (2009 - $2.0 million).  The deferred income tax benefit
for the nine months ended January 31, 2010 was $3.8 million(2009 – $16.0
million).  The slight decrease  in the deferred tax benefit
during the three months ended January 31, 2010 compared to the same period last
year is due to a reduction in exploration activity. The decrease in the deferred
tax benefit for the nine month period ended January 31, 2010 compared to the
same period last year is mainly due to a reduction in exploration costs
incurred.





The
Company has generated deferred tax benefits by expensing all exploration costs
for accounting purposes while capitalizing these costs for income tax
purposes.  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.








23





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 and Internal Control over Financial
Reporting





As of
January 31, 2010, 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
January 31, 2010, 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 January 31, 2010
existed as we did not maintain effective processes and controls over the
accounting for and reporting of complex and non-routine transactions.
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 and each of the quarters in fiscal 2009 and
2008 and for the first quarter in fiscal 2010.





We plan
to remediate the material weakness described above by consulting with an
independent big four accounting firm on complex accounting issues and by
obtaining 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





On
February 24, 2010, a derivative action entitled Make a Difference Foundation
Inc. v. Hopkins, et al., Case No.  10-CV-00408, was filed in United
States District Court for the District of Colorado by plaintiff  Make
a Difference Foundation, Inc.  The derivative action names the
following individual defendants:  Christopher H. Hopkins, T. Murray
Wilson, Ronald Blakely, Paul Ching, Brian MacNeill, Ronald Phillips, John Read,
Gordon Tallman, Pamela Wallin, Thomas Milne and W. Scott Thompson.  In
addition, the Company is named as a nominal defendant.  Plaintiff
asserts, among other things, claims for waste and breaches of the fiduciary duty
of loyalty and good faith by the defendants stemming from the Company's approval
of the proposed sale of the Company's Pasquia Hills assets to Canshale
Corp.  The plaintiff seeks unspecified damages, restitution, and
reasonable costs and expenses including counsel fees and experts'
fees.  A response to the Complaint is currently due on March 16,
2010.  The Company believes the claims are wholly without merit and
intends to file a motion to dismiss the Complaint.


24







Item
1A.  Risk
Factors





Other
than as described herein, 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.





Emissions
Regulations





Development
of our assets is expected to result in the emission of greenhouse gases (GHGs)
and other pollutants.





Recently,
on January 30, 2010, the Government of Canada submitted to the United Nations
Framework on Climate Change a non- legally binding commitment under the
Copenhagen Accord to reduce Canada's emissions of GHGs by 17% from 2005 emission
levels.  This is a significant change from previous international
commitments of a 20% reduction in emissions from 2006 levels by
2020.  The Government of Canada signaled that the new national
emission reduction target was to be aligned with emission reduction targets of
the United States.  It is unclear how the new proposed national
emission reduction target is to be met and whether the previous announced
proposed regulatory Framework will proceed or be replaced with a new regulatory
framework.  We believe that it is reasonably likely that new federal
legislation requiring emissions reductions similar to the Framework will be
enacted in Canada around the same time as similar legislation is enacted in the
United States.  We also believe that such federal legislation could
have a material effect on the development of our assets.





On
December 1, 2009, the Government of Saskatchewan re- introduced in the
Provincial Legislature Bill 126:  The Management and Reduction of
Greenhouse Gases Act.  Bill 126 proposes a policy and regulatory
framework for reducing GHG emissions in Saskatchewan.  The Bill
proposes a new provincial target for a 20% reduction in GHG emissions from 2006
levels by 2020.  The specific GHG emission reduction requirements, and
the industries required to meet those reductions, as well as details on the
methods by which reductions may be achieved, are to be set by future
regulations.




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





On
December 23, 2009, we issued 9,714,300 shares of Common Stock at a price of
$1.05 per share.   The shares were issued in reliance on the
exemption from registration contained in Section 4(2) and Rule 506 of Regulation
D under the Securities Act.





Item
3.  Defaults Upon Senior
Securities





None.





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





None.





Item
5.  Other
Information





None.





ITEM
6. Exhibits.








4.1
              Form of Registration Rights Agreement between the Company and the
      Investors, dated December 22, 2009 (incorporated by reference to Exhibit
      4.7 to Amendment No. 4 to the Company’s Registration Statement on Form S-1
      (File No. 333-162023) filed with the SEC on January 22,
  2010).


10.1
              Form of Subscription Agreement between the Investors and the Company,
      dated December 16, 2009 and December 21, 2009 (incorporated by reference
      to Exhibit 10.18 to Amendment No. 4 to the Company’s Registration
      Statement on Form S-1(File No.
      333-162023) filed with the SEC on January 22,
2010).





10.2
              Transition
      Agreement between the Company and Christopher Hopkins, dated January 13,
      2010 (incorporated by reference to Exhibit 10.1 to the Company's Current
      Report on Form 8-K filed with the SEC on January 22,
  2010).


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.


25





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.


_______________


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:  March
      9, 2010
            By:
            /s/
      T. Murray WilsonT.
      Murray Wilson, Chairman, President, and Chief Executive
      OfficerDate:  March
      9, 2010
            By:
            /s/
      Garth WongGarth
      Wong, Chief Financial Officer

















27