##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2006
 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: 0 -27659
 OILSANDS QUEST INC.
  Colorado
    
    98-0461154(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 205, 707  7th Avenue SW, Calgary, Alberta, Canada T2P 3H6
 (403) 263-1623
 CanWest Petroleum Corporation
  þ o
 o þ
  o þ




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Six Months Ended October 31, 2006 and 2005
(Unaudited  Prepared by Management)
 INDEX TO INTERIM FINANCIAL STATEMENTS
 Consolidated Balance Sheets
    
    F-1Consolidated Statements of Operations
    
    F-2Consolidated Statements of Stockholders Equity
    
    F-3Consolidated Statements of Cash Flows
    
    F-4Notes to Consolidated Financial Statements
    
    F-5 to F-19




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
 
 Consolidated Balance Sheets
 October 31,
    
    
    April 30,2006
    
    
    2006(Unaudited)
    
    
    (Audited)ASSETSCurrentCash (note 2 (f))
    
    $
    43,842,775
    
    
    $
    22,127,315Accounts receivable (note 14 (a))
    
    
    1,864,265
    
    
    
    675,764Prepaid expenses
    
    
    
    
    
    
    1,013,33345,707,040
    
    
    
    23,816,412Properties(note 4)
    
    
    354,060,449
    
    
    
    17,123,098Investment in Energy 51 Inc.
    
    
    310,291
    
    
    
    310,291$
    400,077,780
    
    
    $
    41,249,801LIABILITIESCurrentAccounts payable (note 5)
    
    $
    1,858,487
    
    
    $
    19,682,268Convertible debentures (note 6)
    
    
    
    
    
    
    295,9281,858,487
    
    
    
    19,978,196Future Income taxes
    
    
    
    
    
    
    1,080,821Non controlling shareholder interest(note 7)
    
    
    
    
    
    
    4,735,6011,858,487
    
    
    
    25,794,618Commitments and contingencies (notes 2, 3, 4, 8, 9, 10, 11, 12, and 14)STOCKHOLDERS EQUITYCapital StockAuthorized500,000,000 Common stock with a par value of $0.001 each
(notes 8, 9, 10 and 11)10,000,000 Preferred stock with a par value of $0.001 each
(notes 3(a) and 8)Issued137,522,384 Common stock
    
    
    137,522115,046,408 Common stock
    
    
    
    
    
    
    115,0461 Series B Preferred stock (notes 3(a) and 8(b))
    
    
    1Additional Paid-in Capital
    
    
    508,080,717
    
    
    
    77,724,920Deficit Accumulated During Exploration Stage
    
    
    (109,817,005
    )
    
    
    (62,640,868
    )Other Comprehensive Income (Loss)
    
    
    (181,942
    )
    
    
    256,085398,219,293
    
    
    
    15,455,183$
    400,077,780
    
    
    $
    41,249,801
  F-1




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
 
 Consolidated Statements of Operations
 (Unaudited  Prepared by Management)
 Frominception onThree Months Ended
    
    
    Six Months Ended
    
    
    April 3, 1998October 31,
    
    
    October 31,
    
    
    through to2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    October 31, 2006ExpendituresStock-based compensation expense
    
    $
    21,614,095
    
    
    $
    
    
    
    $
    43,622,692
    
    
    $
    
    
    
    $
    43,622,692Non-cash financing expense
    
    
    
    
    
    
    3,871,450
    
    
    
    
    
    
    
    5,686,009
    
    
    
    36,472,143Consulting
    
    
    3,203,882
    
    
    
    1,147,371
    
    
    
    4,812,166
    
    
    
    1,966,647
    
    
    
    16,622,849Exploration costs
    
    
    1,948,198
    
    
    
    709,618
    
    
    
    2,597,470
    
    
    
    1,072,033
    
    
    
    13,569,808Advertising and promotion
    
    
    100,254
    
    
    
    357,196
    
    
    
    180,839
    
    
    
    625,257
    
    
    
    3,519,581Professional fees
    
    
    431,978
    
    
    
    100,278
    
    
    
    1,005,316
    
    
    
    187,899
    
    
    
    2,782,803Office
    
    
    169,287
    
    
    
    56,584
    
    
    
    486,132
    
    
    
    106,235
    
    
    
    1,176,083Corporate salaries
    
    
    688,821
    
    
    
    
    
    
    
    972,788
    
    
    
    
    
    
    
    972,788Interest and bank charges
    
    
    1,776
    
    
    
    140,667
    
    
    
    24,781
    
    
    
    157,399
    
    
    
    774,118Transfer agent fee
    
    
    175,112
    
    
    
    44,169
    
    
    
    186,502
    
    
    
    55,190
    
    
    
    436,620Management fee
    
    
    
    
    
    
    (18,000
    )
    
    
    
    
    
    
    
    
    
    
    414,602Travel
    
    
    80,795
    
    
    
    24,657
    
    
    
    109,147
    
    
    
    37,242
    
    
    
    391,679Other Items
    
    
    81,486
    
    
    
    
    
    
    
    81,486
    
    
    
    
    
    
    
    207,706Board fees and expenses
    
    
    85,617
    
    
    
    
    
    
    
    85,617
    
    
    
    
    
    
    
    85,61728,581,301
    
    
    
    6,433,990
    
    
    
    54,164,936
    
    
    
    9,893,911
    
    
    
    121,049,089Other ItemsRecovery of exploration costs
    
    
    
    
    
    
    (736,782
    )
    
    
    
    
    
    
    (736,782
    )
    
    
    (936,469
    )Interest income
    
    
    (450,956
    )
    
    
    (50,739
    )
    
    
    (741,542
    )
    
    
    (50,739
    )
    
    
    (1,014,846
    )Net loss before income tax recovery
and non-controlling
shareholder interest
    
    
    28,130,345
    
    
    
    5,646,469
    
    
    
    53,423,394
    
    
    
    9,106,390
    
    
    
    119,097,774Income tax (recovery) expenses
    
    
    (899,733
    )
    
    
    23,181
    
    
    
    (1,096,174
    )
    
    
    5,700
    
    
    
    (1,157,515
    )Net loss before non-controlling
shareholder interest
    
    
    27,230,612
    
    
    
    5,669,650
    
    
    
    52,327,220
    
    
    
    9,112,090
    
    
    
    117,940,259Non-controlling shareholder interest
    
    
    
    
    
    
    (107,086
    )
    
    
    (5,151,083
    )
    
    
    (345,819
    )
    
    
    (8,123,254
    )Net loss
    
    $
    27,230,612
    
    
    $
    5,562,564
    
    
    $
    47,176,137
    
    
    $
    8,766,271
    
    
    $
    109,817,005Net Loss Per Share
    
    $
    0.21
    
    
    $
    0.08
    
    
    $
    0.38
    
    
    $
    0.14Weighted Average Number
of Shares Outstanding
    
    
    130,054,507
    
    
    
    69,140,286
    
    
    
    123,888,304
    
    
    
    64,746,753
  F-2




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
 
 Consolidated Statements of Stockholders Equity
 For the Six Months Ended October 31, 2006 and the Year Ended April 30, 2006
 (Unaudited  Prepared by Management)
 DeficitAdditional
    
    
    Other
    
    
    Accumulated
    
    
    TotalCommon Stock
    
    
    Preferred Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    During the
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Shares
    
    
    Par Value
    
    
    Capital
    
    
    Income (loss)
    
    
    Exploration Stage
    
    
    EquityBalance, April 30, 2005
    
    
    58,408,661
    
    
    $
    58,409
    
    
    
    
    
    
    $
    
    
    
    $
    13,835,432
    
    
    $
    (165,834
    )
    
    $
    (9,999,965
    )
    
    $
    3,728,042Common stock issued for:Cash
    
    
    24,512,052
    
    
    
    24,512
    
    
    
    
    
    
    
    
    
    
    
    28,888,364
    
    
    
    
    
    
    
    
    
    
    
    28,912,876Cashless exercise of warrants
and options
    
    
    10,971,013
    
    
    
    10,971
    
    
    
    
    
    
    
    
    
    
    
    (10,971
    )
    
    
    
    
    
    
    
    
    
    
    Property
    
    
    385,880
    
    
    
    385
    
    
    
    
    
    
    
    
    
    
    
    500,059
    
    
    
    
    
    
    
    
    
    
    
    500,444Services
    
    
    11,746,945
    
    
    
    11,747
    
    
    
    
    
    
    
    
    
    
    
    9,298,262
    
    
    
    
    
    
    
    
    
    
    
    9,310,009Settlement of debt
    
    
    9,021,857
    
    
    
    9,022
    
    
    
    
    
    
    
    
    
    
    
    5,449,975
    
    
    
    
    
    
    
    
    
    
    
    5,458,997Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,314,505
    
    
    
    
    
    
    
    
    
    
    
    1,314,505Beneficial conversion feature of convertible debenture and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,449,294
    
    
    
    
    
    
    
    
    
    
    
    18,449,294Other comprehensive income
Exchange gain on translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421,919
    
    
    
    
    
    
    
    421,919Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,640,903
    )
    
    
    (52,640,903
    )Balance, April 30, 2006
    
    
    115,046,408
    
    
    
    115,046
    
    
    
    
    
    
    
    
    
    
    
    77,724,920
    
    
    
    256,085
    
    
    
    (62,640,868
    )
    
    
    15,455,183Common stock issued for:Cash
    
    
    11,207,802
    
    
    
    11,208
    
    
    
    
    
    
    
    
    
    
    
    50,974,105
    
    
    
    
    
    
    
    
    
    
    
    50,985,313Settlement of debt
    
    
    3,523,727
    
    
    
    3,524
    
    
    
    
    
    
    
    
    
    
    
    18,689,096
    
    
    
    
    
    
    
    
    
    
    
    18,692,620Cashless exercise of warrants
    
    
    2,213,953
    
    
    
    2,214
    
    
    
    
    
    
    
    
    
    
    
    (2,214
    )
    
    
    
    
    
    
    
    
    
    
    Preferred shares issued on reorganization
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    319,022,947
    
    
    
    
    
    
    
    
    
    
    
    319,022,948Exchange of exchangeable shares
    
    
    5,530,494
    
    
    
    5,530
    
    
    
    
    
    
    
    
    
    
    
    (5,530
    )
    
    
    
    
    
    
    
    
    
    
    Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,622,692
    
    
    
    
    
    
    
    
    
    
    
    43,622,692Share issue costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,945,299
    )
    
    
    
    
    
    
    
    
    
    
    (1,945,299
    )Other comprehensive income
Exchange loss on translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (438,027
    )
    
    
    
    
    
    
    (438,027
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,176,137
    )
    
    
    (47,176,137
    )Balance, October 31, 2006
    
    
    137,522,384
    
    
    $
    137,522
    
    
    
    1
    
    
    $
    1
    
    
    $
    508,080,717
    
    
    $
    (181,942
    )
    
    $
    (109,817,005
    )
    
    $
    398,219,293
  F-3




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
 
 Consolidated Statements of Cash Flows
 (Unaudited  Prepared by Management)
 From Inception onFor the Six Months Ended
    
    
    April 3, 1998October 31,
    
    
    through October 31,2006
    
    
    2005
    
    
    2006Operating ActivitiesNet loss
    
    $
    (47,176,137
    )
    
    $
    (8,766,271
    )
    
    $
    (109,817,005
    )Non cash adjustments to net lossNon-cash financing expense
    
    
    
    
    
    
    5,686,009
    
    
    
    36,472,143Stock-based compensation expense
    
    
    43,622,692
    
    
    
    
    
    
    
    43,622,692Consulting expenses satisfied by shares
    
    
    1,204,383
    
    
    
    1,863,624
    
    
    
    11,746,353Exploration costs acquired for shares
    
    
    
    
    
    
    316,685
    
    
    
    578,684Advertising and promotion for shares
    
    
    
    
    
    
    
    
    
    
    1,459,475Write-off of exploration property
    
    
    
    
    
    
    
    
    
    
    856,359Other
    
    
    20,260
    
    
    
    
    
    
    
    146,480Recovery of exploration expenses
    
    
    
    
    
    
    (736,782
    )
    
    
    (936,469
    )Income tax (recovery) expense
    
    
    (1,096,174
    )
    
    
    5,700
    
    
    
    (1,157,515
    )Non controlling shareholder interest
    
    
    (5,151,083
    )
    
    
    (345,819
    )
    
    
    (8,123,254
    )Changes In Non-Cash Working CapitalAccounts receivable and prepaid expenses
    
    
    (180,953
    )
    
    
    31,253
    
    
    
    (856,717
    )Accounts payable
    
    
    578,581
    
    
    
    296,521
    
    
    
    3,396,195Cash Used in Operating Activities
    
    
    (8,178,431
    )
    
    
    (1,649,080
    )
    
    
    (22,612,579
    )Investing ActivitiesAdditions to Property
    
    
    (18,974,433
    )
    
    
    (1,723,964
    )
    
    
    (32,271,002
    )Other investments
    
    
    
    
    
    
    
    
    
    
    (416,799
    )Cash Used in Investing Activities
    
    
    (18,974,433
    )
    
    
    (1,723,964
    )
    
    
    (32,687,801
    )Financing ActivitiesIssuance of shares for cash
    
    
    49,040,014
    
    
    
    1,919,403
    
    
    
    80,334,283Common stock returned to treasury
    
    
    
    
    
    
    
    
    
    
    (15,212
    )Convertible debentures
    
    
    
    
    
    
    5,065,280
    
    
    
    8,384,496Advances from related parties
    
    
    
    
    
    
    (11,627
    )
    
    
    653,062Future income taxes
    
    
    
    
    
    
    (111,720
    )
    
    
    1,120,206Shares issued by subsidiary to
non-controlling interest (note 3(a))
    
    
    250,273
    
    
    
    3,833,709
    
    
    
    7,958,045Cash Provided by Financing Activities
    
    
    49,290,287
    
    
    
    10,695,045
    
    
    
    98,434,880Inflow of Cash
    
    
    22,137,423
    
    
    
    7,322,001
    
    
    
    43,134,500Effects of exchange rate changes on cash
    
    
    (421,963
    )
    
    
    
    
    
    
    708,275Cash, Beginning of Period
    
    
    22,127,315
    
    
    
    1,022,175
    
    
    
    Cash, End of Period
    
    $
    43,842,775
    
    
    $
    8,344,176
    
    
    $
    43,842,775Non-Cash Financing ActivitiesCommon stock issued for properties
    
    $
    
    
    
    $
    
    
    
    $
    3,837,442Warrants granted on purchase of properties
    
    $
    
    
    
    $
    
    
    
    $
    1,763,929Common stock issued for services
    
    $
    1,204,383
    
    
    $
    1,722,204
    
    
    $
    11,592,546Common stock issued for debt
    
    $
    18,692,620
    
    
    $
    1,663,200
    
    
    $
    28,401,029
  F-4




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
 
 Notes to the Consolidated Financial Statements
 For the Six Months Ended October 31, 2006
 (Unaudited  Prepared by Management)
 1.
    
    DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONSOn November 1, 2006 CanWest Petroleum Corporation changed its name to Oilsands Quest Inc.
(OQI). At the same time the name of the companys main operating subsidiary was changed from
Oilsands Quest Inc. to Oilsands Quest Sask Inc. (OQI Sask).OQI together with its subsidiaries (collectively referred to as the Company) is in the
exploration stage and follows the guidance of a development stage company as defined in
statement No. 7 of the Financial Accounting Standards Board. The principal business activity
is the exploration and development of natural resource properties in Canada.2.
    
    BASIS OF PRESENTATION:
 a)
    
    Unaudited financial informationThese consolidated financial statements are presented in United States dollars unless
otherwise indicated and have been prepared in accordance with United States of America
Generally Accepted Accounting Principles (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, 2007.
Certain information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These unaudited consolidated financial statements and notes included
herein have been prepared on a basis consistent with and should be read in conjunction
with the Companys audited consolidated financial statements and notes for the year ended
April 31, 2006 as filed in its annual report on Form 10-KSB.The significant accounting polices used in these consolidated financial statements are
as follows:b)
    
    Principles of consolidationThese consolidated financial statements include the accounts of OQI and all of its
subsidiaries as follows:
 
    
    Oilsands Quest Sask Inc. in which it holds a 100% interest (April 30,
2006  62.75% (note 3(a) and 4 (a));
    
    Western Petrochemicals Corp. (Western Petrochemicals) in which it holds
a 100% interest (note 4 (b));
    
    Township Petroleum Corporation (Township), in which it holds a 100% interest (note 4 (c))
    
    Stripper Energy Services Inc. (Stripper), in which OQI Sask holds a 100% interest (note 3(b))
    
    its wholly owned subsidiary, Anhydride Petroleum (USA), Inc. (Anhydride
USA) and Anhydride USAs wholly owned subsidiary Anhydride Petroleum (Canada) Inc.
(Anhydride Canada), both acquired April 30, 2002, until October 31, 2005 when
Anhydride Canada was sold to a third party for nominal cash proceeds;
 All inter-company transactions and balances have been eliminated.
 F-5




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 2.
    
    BASIS OF PRESENTATION:(continued)
 c)
    
    Use of estimatesThe preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ from those
estimates.d)
    
    Foreign currency translationThe Companys operations and activities are conducted principally in Canada; hence the
Canadian dollar is the functional currency that is translated into U.S. dollars for
reporting purposes as follows:
 (i)
    
    Monetary assets and liabilities at the rate of exchange in effect
as at the balance sheet date;(ii)
    
    Non-monetary assets and liabilities at the exchange rates
prevailing at the time of the acquisition of the assets or assumption of the
liabilities; and,(iii)
    
    Revenues and expenditures at the average rate of exchange for the year.Gains and losses arising from the translation of foreign currency financial
statements are included in other comprehensive income (loss) as a separate
component of stockholders equity.
 e)
    
    Properties and exploration stage expendituresProperties represents the capitalized costs of acquisition of natural resource properties
principally, the right to explore for oil sands deposits in the provinces of Alberta and
Saskatchewan, Canada and oil shale deposits in the province of Saskatchewan, Canada.Property costs are reviewed for impairment at least annually to consider whether there
are conditions that may indicate impairment. The carrying value of each property is
compared to its net recoverable amount as estimated by quantifiable evidence of the
market value of similar land or geological resources. If the carrying value is found to
exceed the estimated net recoverable amount a write down will be recorded.Property amounts reported represent costs incurred to date and do not necessarily reflect
present or future values. All exploration costs incurred to the date of establishing
that a property is economically recoverable are charged to operations.f)
    
    Restricted CashCash includes $30,939,712 ($34,736,015 CDN) representing the balance of proceeds of a
flow through share offering outstanding to be spent on qualifying expenditures. In
accordance with the terms of the offering and pursuant to certain provisions of the
Income Tax Act (Canada) the Company is required to expend these funds on qualifying
resource property expenditures by December 31, 2007.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 2.
    
    BASIS OF PRESENTATION:(continued)
 g)
    
    Stock-based compensation:In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 123R. Share Based Payment. SFAS No. 123R
requires companies to estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service period in
the Companys financial statements. Stock based compensation expense recognized during the
period is based on the value of the portion of the share based payment award that is
ultimately expected to vest during the period. The Company estimates the fair value of
stock options using the Black-Scholes valuation model, consistent with the provisions of
SFAS No. 123R and the Companys prior period pro-forma disclosures of net earnings. The
Black-Scholes valuation model requires the input of highly subjective assumptions,
including the options expected life and the expected price volatility of the Companys
common stock. The expected stock price volatility assumption was determined using
historical volatility of the Companys common stock. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option valuation model with the
following weighted average assumptions:
 Six Months Ended October 31,2006
    
    2005Expected Life (years)
    
    
    5.09
    
    
    
    1.58Risk free interest rate
    
    
    4.42%
    
    
    
    3.69%Expected volatility
    
    
    118%
    
    
    
    115%Dividend yield
    
    
    0%
    
    
    
    0%
 The estimated fair value is then amortized on the straight-line method over the vesting
period.The Company adopted SFAS 123R effective May 1, 2006 using the Modified Prospective Method.
This method requires that awards granted, modified, repurchased or cancelled in the
quarter beginning after the adoption date use the fair value method to recognize stock
based compensation.In applying the Modified Prospective Application method for the six months ended October
31, 2006, the Company recorded stock based compensation cost totalling the amount that
would have been recognized had the fair value method been applied since the effective date
of SFAS No.123. Previous amounts have not been restated.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 2.
    
    BASIS OF PRESENTATION:(continued)
 g)
    
    Stock-based compensation (continued)Prior to the adoption of SFAS No. 123R, the Company applied Accounting Principles Board
Opinion No 25. Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations and provided the required pro-forma disclosures of Financial Accounting
Standards 123 Accounting for Stock-based Compensation (SFAS 123). Under APB 25,
compensation expenses are only recorded to the extent that the exercise price is less than
fair value on the measurement date. Non-employee options were recognized at the fair value
of the options as determined by an option-pricing model as the services were performed and
the options earned. The pro-forma information for the six months ended October 31, 2005
was as follows:
 Net loss for the period, as reported
    
    $
    8,766,271Stock-based employee compensation if fair-value
based method applied
    
    
    4,864,554Pro-forma net loss as if fair-value method had been applied
    
    $
    13,630,825Basic and diluted loss per shareAs reported
    
    $
    0.14Pro forma
    
    $
    0.21
 The weighted average fair value of stock options granted during the six months ended
October 31, 2005 was $0.99 per option.h)
    
    Loss per shareLoss per share calculations are based on the weighted average number of shares outstanding
during the period. Diluted loss per share has not been presented separately as the
outstanding warrants and options are anti-dilutive for each of the periods presented.
 3.
    
    ACQUISITIONS
 a)
    
    Acquisition of the minority interest (35.92%) in Oilsands Quest Sask. Inc.On August 14, 2006, OQI completed the reorganization pursuant to the terms of a
reorganization agreement, whereby OQI increased its ownership interest in OQI Sask, going
from a 64.08% ownership interest to a 100% voting interest. OQI acquired all of the minority
interest (35.92%) in OQI Sask.The Company has consolidated the operating results of OQI Sask from its commencement of
operations on September 24, 2004. The total purchase price of the acquisition $319,022,948,
which is comprised of the fully diluted number of Exchangeable Shares, has been allocated to
property costs. The deemed value of the Exchangeable Shares is based on $4.17, being the
average trading price of the Companys common shares for the five days prior to and following
August 14, 2006. Any future proceeds received
from the exercise of OQI Sask options or warrants or the cancellation of OQI Sask options and
warrants will reduce the purchase price if and when these events
occur.
 F-8




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 3.
    
    ACQUISITIONS(continued)
 In connection with the reorganization agreement, OQI also entered into a Voting and Exchange
Trust Agreement with OQI Sask and Computershare Trust Company of Canada (CTC), and a
Support Agreement with OQI Sask. Collectively, these agreements are referred to as the
Acquisition Agreements. According to the Acquisition Agreements, all common shares of OQI
Sask, other than those held by the OQI, were exchanged for a new class of OQI Sask shares
called Exchangeable Shares on the basis of 8.23 Exchangeable Shares for each one OQI Sask
common share. The Exchangeable Shares are exchangeable at any time on a one-for-one basis,
at the option of the holder, for the OQIs shares of common stock. OQI Sask can redeem the
outstanding Exchangeable Shares on the same terms at any time after August 14, 2013 and only
under certain limited circumstances prior to August 14, 2013 in accordance with the
Acquisition Agreements. An Exchangeable Share provides a holder with economic terms and
voting rights, which are, as nearly as practicable, effectively equivalent to those of a
share of the OQIs common stock. Holders of Exchangeable Shares have registration rights
with respect to the resale of the OQIs common stock. The Exchangeable Shares are entitled
to a preference over the OQI Sask common shares in the event of a liquidation, dissolution
or wind-up of OQI Sask whether voluntary or involuntary, or any other distribution of the
assets of OQI Sask among its shareholders for the purpose of winding up its affairs. OQI
may issue up to an aggregate of 76,504,304 shares of OQI common stock of which 5,530,494
have been issued, 53,557,483 may be issued through the conversion of Exchange Shares and the
balance to be issued on the exercise of OQI Sask options and warrants into Exchange Shares
and their subsequent exchange. The Exchangeable Shares are represented for voting purposes
in the aggregate by one share of the OQIs Series B Preferred Stock (note 8(b)).In connection with the closing of the Acquisition Agreements, OQIs financial advisor was
paid a success fee of $1,590,528. In addition, OQI Sask issued 288,050 Exchangeable Shares,
with a deemed value of $1,204,383 and paid $353,450 as success fees to its financial
advisors.b)
    
    Acquisition of Stripper Energy Services Inc.On August 15, 2006 the Company acquired all of the issued and outstanding shares of Stripper
Energy Services Inc. (Stripper) for $17,948,722, which amount includes $116,349 in interest
and working capital adjustments. Stripper is a private inactive Alberta company, whose sole
asset is a 2.5% gross overriding royalty on certain permit lands held by OQI Sask. The total
purchase price for the Stripper shares has been allocated to property costs.In conjunction with the acquisition of Stripper, OQI completed a private placement of
4,150,000 shares of its common stock for gross proceeds of $15,770,000, which according to
the terms of the private placement were used for the purchase of Stripper. No commissions
were paid in connection with this private placement.
  F-9




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 4. PROPERTIES
 OQI Sask
    
    
    Pasquia Hills,Oil Sands
    
    
    Oil Shale
    
    
    Eagles Nest,Exploration
    
    
    Exploration
    
    
    Oil SandsPermits
    
    
    Permits
    
    
    Lease
    
    
    TotalBalance April 30, 2006
    
    $
    12,415,991
    
    
    $
    3,854,648
    
    
    $
    852,459
    
    
    $
    17,123,098Additions to property
    
    
    18,809,958
    
    
    
    
    
    
    
    164,475
    
    
    
    18,974,433Excess of OQI share acquisition cost
over book value
    
    
    16,752,262
    
    
    
    
    
    
    
    
    
    
    
    16,752,262Acquisition of minority interest
    
    
    319,022,948
    
    
    
    
    
    
    
    
    
    
    
    319,022,948Reclass of minority interest at date of
acquisition to property
    
    
    (16,323,010
    )
    
    
    
    
    
    
    
    
    
    
    (16,323,010
    )Proceeds on exercise of OQI Sask options
recorded as a reduction of the minority
interest purchase price
    
    
    (1,489,282
    )
    
    
    
    
    
    
    
    
    
    
    (1,489,282
    )Balance October 31, 2006
    
    $
    349,188,867
    
    
    $
    3,854,648
    
    
    $
    1,016,934
    
    
    $
    354,060,449
 a)
    
    OQI Sask Oil Sands Exploration PermitsOn September 29, 2004, OQI Sask acquired a 49% interest in certain Oil Shale Exploration
Permits (the Permits) in northwestern Saskatchewan near the Alberta border. The 49%
interest in the permits was acquired from a third party for $769,125, the issuance of
50,000 OQI common shares, with a deemed value of $19,000, and a 2.5% gross overriding
royalty (the 2.5% GORR). On May 3, 2005, OQI Sask acquired the remaining 51% interest
in the Permits for $1,202,131, 2 million OQI common shares, with a deemed value of
$640,000 and the assumption of $0.11 per barrel in royalties which may be bought down to
$0.04 per barrel at any time by paying $7,000,000.The Permits are granted by the Province of Saskatchewan and provide for the right to
explore and work the permit lands in the Province of Saskatchewan for a term of five years
to May 31, 2009 or until a lease has been granted for their development. In accordance
with the terms of the Permits, OQI relinquished 40% of the total acreage covered by the
Permits on May 31, 2005, and was required to relinquish another 40% of the remaining
acreage by May 31, 2006. During the quarter, OQI Sask obtained an extension of the 2006
relinquishment to June 1, 2007. As at Oct 31, 2006, the Permits comprised an area of
approximately 847,000 acres and following all relinquishments the Permits will comprise an
area of approximately 508,000 acres.The Permits are subject to annual rental payments and certain levels of expenditures
annually pursuant to the terms of the Permits and government regulations. The annual
rentals are payable in advance as to $0.018 ($0.02 CDN) per acre for the current year and
escalating to $0.089 ($0.10 CDN) per acre in the fifth year. The required exploration
expenditures to hold the permits for the current year are $0.036 ($0.04 CDN) per acre and
escalate to $0.089 ($0.10 CDN) per acre by the fifth year. As a result of OQIs
exploration activities it is in compliance with its exploration expenditure requirements.During the six months ended October 31, 2006 the Company added $18,809,958 to the OQI Sask Oil
Sands exploration permits consisting of $17,948,722 paid for Stripper (note 3(b)) plus $861,236
paid for equipment and other property additions.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 4.
    
    PROPERTIES(continued)
 b)
    
    Pasquia Hills, Oil Shale Exploration PermitsDuring the period ended October 31, 2006, all of the permits expired and have been
returned to the Saskatchewan government. The Company then reapplied to the Saskatchewan
government to reacquire the permits and was granted a certain number of them with the
balance of the permits pending Saskatchewan government approval.c)
    
    Eagles Nest, Oil Sands LeaseOn June 1, 2005, Township entered into an agreement with three third parties (collectively
the Triple 7 Joint Venture) to post, acquire, develop and produce oil sands deposits
located in the Athabasca Region of Alberta, Canada (the Triple 7 Joint Venture Agreement).
As a result of this agreement, Township acquired one lease consisting of approximately
22,800 acres (the Eagles Nest, Oil Sands Lease) at a cost of $727,187. Pursuant to the
terms of this agreement OQI issued the Triple 7 Joint Venture 114,015 of its common shares
with a deemed value of $127,432. Township has also agreed to pay the Triple 7 Joint
Venture partners, as ongoing fees, $133,606 ($150,000 CDN) in cash or common shares of OQI
(at the discretion of the Company) on the first and second anniversary dates of the
agreement. Any shares issued under the agreement are subject to piggyback registration
rights. On the third anniversary date and each subsequent anniversary date of the
agreement Township shall pay to the Triple 7 Joint Venture $400,819 ($450,000 CDN) until
such time as the lease is surrendered or a commercial project has been identified. In the
event that Township receives a feasibility study, conducted by an independent third party,
that indicates that a commercial project is economic and wishes to construct a commercial
project, Township is required to notify the Triple 7 Joint Venture. Upon commencement of
construction of such a commercial project Township shall pay to the Triple 7 Joint Venture
the sum of $5,344,259 ($6,000,000 CDN). In addition to such payments Township has granted
each of the three Triple 7 Joint Venture partners a royalty in the acquired leases of
$0.027 ($0.03 CDN) on each barrel of crude bitumen produced, saved and sold or $400,819
($450,000 CDN) per year, whichever is greater. Such royalty is governed by the royalty
procedure, which stipulates, among other things, that the royalty will be secured by a
lien, first charge or security interest on the royalty lands, and that the royalty is
assignable or transferable subject to a right of first offer to Township.To finance the acquisition of the project OQI issued convertible debentures pursuant to
which Township also granted royalties as to $0.0052 ($0.0058 CDN), net after a buy back,
on each barrel of crude bitumen produced, saved and sold from the project.Pursuant to the terms of the lease Townships lease rental payments are $28,731 ($32,256
CDN) per year.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 5.
    
    ACCOUNTS PAYABLEAccounts payable consists of the following:
 October 31,
    
    
    April 30,2006
    
    
    2006Accounts payable and accrued liabilities
    
    $
    1,858,487
    
    
    $
    2,369,645Penalty share accrual (note 9(a))
    
    
    
    
    
    
    17,312,623$
    1,858,487
    
    
    $
    19,682,268
 6.
    
    CONVERTIBLE DEBENTURESThe convertible debentures outstanding at April 30, 2006 were converted into 821,701 OQI
common shares during the six months ended October 31, 2006.7.
    
    NON-CONTROLLING SHAREHOLDER INTERESTThe non-controlling shareholder interest as calculated to the date of acquisition by OQI was
transferred to the OQI Sask property account.
 CommonShares
    
    
    AmountBalance, April 30, 2006
    
    
    6,962,459
    
    
    $
    4,735,601Shares issued to non controlling shareholders
    
    
    5,875
    
    
    
    10,518Share of net loss of OQI Sask to date of acquisition
    
    
    
    
    
    
    (5,151,083
    )Non controlling shareholders interest in shares issued
to OQI
    
    
    
    
    
    
    16,727,974Balance held by non-controlling interest at date of acquisition
(representing 35.92% of total common shares outstanding)
    
    
    6,968,334
    
    
    
    16,323,010Transferred to the OQI Sask property account on acquisition
of the minority interest (see note 4)
    
    
    (6,968,334
    )
    
    
    (16,323,010
    )
    
    
    $
    
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 7.
    
    NON-CONTROLLING SHAREHOLDER INTEREST(continued)The following tables summarize information about OQI Sask share purchase warrants outstanding
at October 31, 2006:
 Weighted AverageNumber
    
    Exercise Price (CDN)Issued and outstanding,
April 30, 2006
    
    
    2,216,013
    
    
    $
    6.48Exercised
    
    
    (1,944,813
    )
    
    $
    7.14Issued and outstanding,
October 31, 2006
    
    
    271,200
    
    
    $
    1.82
 Expiry
    
    Exercise
    
    Number ofDate
    
    Price (CDN)
    
    WarrantsMay 31, 2007
    
    $
    2.00
    
    
    
    96,200June 15, 2007
    
    $
    2.00
    
    
    
    50,000Feb 28, 2008
    
    $
    1.60
    
    
    
    93,750April 1, 2008
    
    $
    1.60
    
    
    
    31,250271,200
 The following tables summarize information about OQI Sask stock options outstanding at October
31, 2006:
 Weighted AverageNumber
    
    Exercise Price (CDN)Issued and outstanding,
April 30, 2006
    
    
    700,000
    
    
    $
    4.00Granted
    
    
    1,280,000
    
    
    $
    21.40Exercised
    
    
    (135,000
    )
    
    $
    1.93Issued and outstanding,
October 31, 2006
    
    
    1,845,000
    
    
    $
    16.15
 Number
    
    Number
    
    Weighted AverageExercise Price
    
    Outstanding at
    
    Exercisable at
    
    Remaining Contractual(CDN)
    
    Oct 31, 2006
    
    Oct 31, 2006
    
    Life$0.50
    
    
    100,000
    
    
    
    100,000
    
    
    3.04 Years$3.00
    
    
    100,000
    
    
    
    100,000
    
    
    1.79 Years$6.00
    
    
    680,000
    
    
    
    680,000
    
    
    3.33 Years$25.00
    
    
    915,000
    
    
    
    615,000
    
    
    4.06 Years$50.00
    
    
    50,000
    
    
    
    12,500
    
    
    4.75 Years1,845,000
    
    
    
    1,507,500
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 7.
    
    NON-CONTROLLING SHAREHOLDER INTEREST(continued)In conjunction with the issuance of the OQI Sask stock options the Company has recorded a
stock based compensation expense of $23,996,573 (2005  $0), for the six months ended October
31, 2006 and has an unrecorded stock based compensation expense of $6,746,671 which will be
recorded in future periods as options vest.OQI Sask options and warrants outstanding at October 31, 2006 total 2,116,200 and represent
17,416,326 Exchangeable Shares that may be issued (see notes 3(a) and 8(b)).8.
    
    PREFERRED SHARES
 a)
    
    Series A Preferred SharesAs at March 9, 2006 OQI adopted a shareholders right plan and reserved 250,000 of its
preferred shares for issuance pursuant to the exercise of the rights. The rights are
designed to have certain anti-takeover effects and as such they will cause substantial
dilution to a person or group that attempts to acquire OQI without conditioning the offer
on a substantial number of rights being acquired, or in a manner or on terms not approved
by the board of directors of OQI. The rights, however, should not deter any prospective
offer or willingness to negotiate in good faith with the board of directors, nor should
the rights interfere with any merger or other business combination approved by the board
of directors. To effect the shareholders rights plan OQI declared a distribution of one
right to each outstanding share of common stock, payable to shareholders of record on
March 23, 2006. This right will be attached to the underlying common share and remain
with the common share should the common share be sold or transferred.b)
    
    Series B Preferred StockOn August 14, 2006, OQI closed a reorganization agreement with OQI Sask, which was
initially executed on June 9, 2006, whereby OQI acquired the minority interest in OQI
Sask, going from a 64.08% ownership interest to a 100% voting interest (the
Reorganization Agreement). In connection with the Reorganization Agreement, OQI Sask
also entered into a Voting and Exchange Trust Agreement with OQI Sask and Computershare
Trust Company of Canada (CTC), and a Support Agreement with OQI Sask. Collectively,
these agreements are referred to as the Acquisition Agreements.According to the Acquisition Agreements, all holders of OQI Sask common stock other than
OQI were exchanged for a new class of OQI Sask shares called Exchangeable Shares pursuant
to a ratio of one OQI Sask common share to 8.23 Exchangeable Shares. The Exchangeable
Shares are exchangeable at any time on a one-for-one basis, at the option of the holder,
for OQI shares of common stock. An Exchangeable Share provides a holder with economic
terms and voting rights which are, as nearly as practicable, effectively equivalent to
those of a share of OQI common stock. Holders of Exchangeable Shares have registration
rights with respect to the resale of OQI common stock to be received upon exchanging the
Exchangeable Shares into OQI shares. The holders of the Exchangeable Shares may receive
up to an aggregate of 76,504,304 shares of OQI common stock at each holders election.
The Exchangeable Shares are represented for voting purposes in the aggregate by one share
of OQI Series B Preferred Stock (the Preferred Share), which Preferred Share is held by
CTC. CTC will in turn vote the one Series B Preferred Share as indicated by the
individual holders of Exchangeable Shares. The one Preferred Share represents a number of
votes equal to the total outstanding Exchangeable Shares on the applicable record date
for the vote submitted to OQI shareholders.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 8.
    
    PREFERRED SHARES(continued)
 b)
    
    Series B Preferred Stock (continued)Exchangeable shares issuable as a result of the Acquisition Agreements (note 3(a))
 Exchangableshares issuableOQI Sask
    
    on the exercise
    
    TotalExchangeable
    
    of options and
    
    Exchangeableshares
    
    warrants
    
    shares issuableAcquisition date, August 14, 2006
    
    
    57,349,388
    
    
    
    19,154,916
    
    
    
    76,504,304OQI Sask options and warrants exercised
    
    
    1,738,589
    
    
    
    (1,738,589
    )
    
    
    Exchangeable Shares exchanged into
OQI common shares
    
    
    (5,530,494
    )
    
    
    
    
    
    
    (5,530,494
    )Balance, October 31, 2006
    
    
    53,557,483
    
    
    
    17,416,327
    
    
    
    70,973,810
 Subsequent to October 31, 2006 4,300,315 OQI common shares were issued on the exchange of
OQI Sask Exchangeable Shares.
 9.
    
    COMMON STOCK
 a)
    
    Private placement of common sharesIn August 2006 OQI completed a private placement of 4,150,000 shares of its common stock
for gross proceeds of $15,770,000. No commissions were paid in connection with the
Offering. According to the terms of the private placement, the gross proceeds were used
for the purchase of the shares of Stripper Energy Services, Inc., a private Alberta
company, which holds a 2.5% gross overriding royalty on certain permit lands held by OQI
Sask (see Notes 3(a) and 4(a)).During the three months ended July 31, 2006, OQI completed a private placement of
5,668,100 flow through common shares for gross proceeds of $33,684,009.These common
shares have been issued on a flow through basis whereby the proceeds must be used for
exploration in Canada and the tax benefits from that exploration will flow through to
the subscribers. In conjunction with this financing OQI has paid investment banking fees
of $1,852,659 and entered into a subscription agreement with OQI Sask whereby it
purchased 703,054 OQI Sask flow through common shares for $33,684,048.
 F-15




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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 9.
    
    COMMON STOCK(continued)
 During the year ended April 30, 2006 OQI completed a private placement of 15,268,000
units at $1.50 per unit whereby it issued 15,268,000 common shares and 7,634,000 warrants
exercisable at $2.00 until December 12, 2007. Pursuant to this placement OQI paid
consultants $390,870 cash plus 260,580 warrants on similar terms as the issued warrants.
In conjunction with this financing OQI has also granted the investors and consultants
certain registration rights whereby OQI has undertaken to file a resale registration
statement covering the shares and shares underlying the warrants within sixty days of
closing, otherwise it shall pay a 2% penalty for each month and part of month that it is
late in doing so. In addition, OQI must respond to any queries to that resale
registration statement within two weeks of receipt or else be subject to an additional
penalty as to 2% for each two weeks thereafter. The penalties are payable, at the unit
holders election, in either common shares or cash at $1.75 per penalty share. Any
penalty shares will also be qualified for resale by the same SB2 registration statement.
OQI has filed the required SB2 registration statement and has issued 2,889,371 common shares at a deemed cost of $17,312,623.b)
    
    Debt settlementThe Company has reserved 1,961,900 shares to settle outstanding debts of a former
subsidiary. No shares were issued pursuant to these agreements during the six
months ended October 31, 2006.
 10.
    
    STOCK OPTIONSAs at October 31, 2006 OQI had outstanding options to purchase that same number of shares as
follows:
 Stock option
    
    Exercise
    
    Number ofPlan
    
    Expiry Date
    
    Price
    
    OptionsSOP 2005(b)
    
    20-Oct-07
    
    $
    1.50
    
    
    
    400,000SOP 2006
    
    01-Jan-07
    
    $
    1.70
    
    
    
    300,000SOP 2006
    
    01-Jan-08
    
    $
    2.00
    
    
    
    400,000SOP 2006
    
    01-Nov-08
    
    $
    2.58
    
    
    
    600,000SOP 2006
    
    08-Feb-08
    
    $
    4.62
    
    
    
    250,000SOP 2006
    
    17-Feb-09
    
    $
    4.57
    
    
    
    250,000SOP 2006
    
    09-Mar-08
    
    $
    4.60
    
    
    
    250,000SOP 2006
    
    01-May-11
    
    $
    6.75
    
    
    
    1,000,000SOP 2006
    
    14-Aug-11
    
    $
    6.75
    
    
    
    1,000,000SOP 2006
    
    01-May-12
    
    $
    6.75
    
    
    
    1,000,000SOP 2006
    
    01-May-13
    
    $
    6.75
    
    
    
    1,000,000SOP 2006
    
    18-May-08
    
    $
    6.00
    
    
    
    300,000SOP 2006
    
    18-May-09
    
    $
    6.00
    
    
    
    30,000SOP 2006
    
    23-Aug-08
    
    $
    5.05
    
    
    
    75,000SOP 2006
    
    23-Aug-11
    
    $
    5.05
    
    
    
    3,080,000SOP 2006
    
    05-Sep-11
    
    $
    5.10
    
    
    
    300,000SOP 2006
    
    27-Sep-11
    
    $
    3.90
    
    
    
    50,000SOP 2006
    
    02-Oct-11
    
    $
    3.89
    
    
    
    400,00010,685,000
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OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 10.
    
    STOCK OPTIONS(continued)Included in the number of options outstanding as at October 31, 2006 are the following
options which have not completely vested:
 
    
    177,778 options at $2.00 with an expiry date of January 1, 2008 that vest
evenly until June 30, 2007;
    
    1,000,000 options at $6.75 with an expiry date of May 1, 2012 which vest on May 1, 2007;
    
    1,000,000 options at $6.75 with an expiry date of May 1, 2013 which vest on May 1, 2008;
    
    485,000 options which vest on anniversary dates between August 23 and October
2nd in each of 2007, 2008 and 2009;
    
    1,940,000 which vest on or after dates between August 23 and October 2, 2009 as
to 485,000 upon achieving a 750 million bitumen in place (BIP) barrel count
defined as the high resource (P10) estimate of bitumen in place (as determined in
accordance with national Instrument 51-101 Standard of Disclosure for Oil and Gas
Activities) issued by the securities regulatory authorities in Canada) and
485,000 options thereafter for each 250 million increase in the BIP barrel count.
 A summary of the OQIs stock option activity is as follows:
 WeightedAverageNumber
    
    
    Exerciseof Options
    
    
    PriceBalance April 30, 2006
    
    
    2,450,000
    
    
    $
    2.82Options granted
    
    
    8,490,344
    
    
    $
    5.83Options exercised
    
    
    (205,344
    )
    
    $
    5.17Options cancelled
    
    
    (50,000
    )
    
    $
    5.05Balance, Oct 31, 2006
    
    
    10,685,000
    
    
    $
    5.16
 During the six months ended October 31, 2006, 8,285,000 options that were granted were
accounted for using the Black-Scholes option-pricing model, which resulted in a stock based
compensation expense of $19,626,119. As at October 31, 2006 the Company also had an
unrecognized stock option compensation expense of $12,730,433 which will be recorded in
future periods as options vest.In addition to the above, OQI Sask has 1,845,000 outstanding options which may be exercised
and exchanged into Exchangeable Shares whereby up to an additional 15,184,350 OQI common shares may be issued, see note 7.On December 1, 2006 50,000 options to acquire that same number of OQI common shares were
granted to an employee at $5.25 per share for five years.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 11.
    
    WARRANTS
 OQI had the following warrants outstanding to purchase that same number of common shares as
at October 31, 2006:
 Expiry
    
    Exercise
    
    Number ofDate
    
    Price
    
    Warrants19-Sep-07
    
    $
    0.55
    
    
    
    201,02612-Dec-07
    
    $
    2.00
    
    
    
    7,634,00015-Dec-07
    
    $
    2.00
    
    
    
    1,500,00015-Dec-07
    
    $
    1.75
    
    
    
    260,5809,595,606
  WeightedNumber
    
    
    Averageof Shares
    
    
    Exercise PriceBalance April 30, 2006
    
    
    13,565,321
    
    
    
    $ 1.63Warrants expired / cancelled
    
    
    (200,013
    )
    
    
$ 4.50Warrants exercised  cash
    
    
    (1,389,702
    )
    
        
$ 1.10Warrants exercised  cashless
    
    
    (2,380,000
    )
    
    
$ 0.34Balance October 31, 2006
    
    
    9,595,606
    
    
    
$ 1.96
 In addition to the above, OQI Sask has 271,200 outstanding warrants which may be exercised
and exchanged into Exchangeable Shares whereby up to an additional 2,231,976 OQI common
shares may be issued, see note 7.12.
    
    RELATED PARTY TRANSACTIONSThe following non-arms length transactions occurred with parties who are directors and
stockholders of the Company during the six months ended October 31, 2006, other than in the
normal course of business:
 (a)
    
    OQI issued a former officer 100,000 bonus shares at a deemed cost of $517,000
that was included in accounts payable at April 30, 2006. Another former officer also
received 41,667 bonus shares at a deemed cost of $215,418 which was included in
accounts payable as at April 30, 2006.(b)
    
    OQI has entered into employment agreements with all its officers which require
payment of up to twenty-four months salary (including bonuses and benefits) and the
acceleration of the vesting of options on a change of control or termination without
cause.
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##### Table of Contents



OILSANDS QUEST INC.
(Formerly CanWest Petroleum Corporation)
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the Six Months Ended October 31, 2006
(Unaudited  Prepared by Management)
 13. COMPREHENSIVE LOSS
 October 31,2006
    
    
    2005Net loss
    
    $
    47,176,137
    
    
    $
    8,766,271Other comprehensive (income)
    
    
    438,027
    
    
    
    (84,040
    )$
    47,614,164
    
    
    $
    8,682,231
 14. COMMITMENTS
 a)
    
    In support of an expanded drilling program on the OQI Sask Exploration Permits
OQI Sask has committed to the purchase of a $3,562,840 ($4,000,000 CDN) portable
residence camp facility. As at October 31, 2006 OQI has advanced a total of $1,073,305
in relation to the camp facility and this amount is included in accounts receivable.b)
    
    OQI has entered into an office lease whereby its lease commitments will total
$276,120 ($310,000 CDN) through June 2008.
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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Plans of Operations
   Plan of Operations
 Oilsands Quest Inc. (formerly CanWest Petroleum Corporation) (CanWest or OQI), together with
its subsidiaries Oilsands Quest Sask Inc. (formerly Oilsands Quest Inc.) (OQI Sask), Anhydride
Petroleum (USA) Inc., Township Petroleum Corporation (Township), Stripper Energy Services Inc.
(Stripper) and Western Petrochemicals Corporation (Western Petrochemicals), collectively (the
Company), is in the exploration stage and does not currently have any income from operating
activities. The Company has sufficient working capital and other capital resources to meet the
obligations anticipated by its presently planned activity programs until April 2007. To the
extent these plans may be adjusted or other business opportunities are identified, management may
seek to raise additional capital through the issuance of equity and or debt. No assurance can be
given that the Company will be successful in raising additional capital or that other
opportunities will be found.On August 11, 2006 CanWest became a reporting issuer in the province of Alberta, Canada and its
common shares began to trade on the American Stock Exchange under the symbol BQI on August 24,
2006. Prior to that its shares were traded on the OTCBB.On August 14, 2006 CanWest completed the acquisition of all of the common shares of OQI Sask not
owned by it through a reorganization agreement described herein.On October 30, 2006 the Companys shareholders approved changing the name of CanWest to Oilsands
Quest Inc. (OQI). This change was effected on November 1, 2006 and at the same time, the name of
its main operating subsidiary, Oilsands Quest Inc., was changed to Oilsands Quest Sask Inc. (OQI
Sask).Shareholder approval was given to amend the Articles of Incorporation and Bylaws to provide for
staggered terms for the Board of Directors and the shareholders also approved the following
proposals: the proposal to increase the number of authorized shares of Common Stock from
250,000,000 shares to 500,000,000 shares; the proposal to approve the 2006 Stock Option Plan, as
amended; and the proposal to approve the Shareholders Rights Agreement previously adopted by the
OQI board of directors. The shareholders also elected the following individuals to the Board of
Directors: T. Murray Wilson, Christopher H. Hopkins, Ronald Phillips, Gordon Tallman, Thomas
Milne, and W. Scott Thompson.
 Oilsands Quest Sask Inc., Oil Sands Exploration Permits
 During the six months ended October 31, 2006 the Company, through its operating subsidiary, OQI
Sask, conducted a wide range of exploration activities. By early April 2006, the Winter 2005/2006
exploration drilling program was completed and an assessment of its data began. In August 2006 the
Company received the independent geological consultants assessment of in-place
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volumes of bitumen in the area covered by the Winter 2005/2006 exploration program. The assessment, prepared
by Norwest Corporation of Calgary, was made in accordance with the Canadian Oil and Gas Evaluation
Handbook (COGEH), which is a primary reference for reporting resources under Canadian Securities
Administrators National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. The
area covered in the assessment represents approximately 1.4 percent of OQIs net permit lands
(the Permits) of approximately 508,000 acres. An End of Season report for the Winter 2005/2006
exploration drilling program documenting conformance with the original application plans was
prepared and submitted to the Canadian federal and provincial governments.Previously in March 2006 OQI Sask received approval from the Saskatchewan government to conduct
its winter 2006/2007, 150 hole exploration drilling program, including construction of
approximately 60 miles (100 kilometres) of new access road. This program is designed to test the
prospectivity of OQI Sasks Permit lands along the west edge of the property, adjacent to the
Alberta/Saskatchewan border.In July 2006 an application was prepared and submitted to the Saskatchewan government for a second
exploration program. The purpose of this effort was to expand the area of the discovery made in
the prior winter. This exploration program consisting primarily of a geophysical survey, airborne
surveys and the drilling of an additional 100 holes was also approved.The 2006/2007 Exploration Program commenced in late summer 2006 after receipt of the regulatory
approvals, with road construction and improvement; camp renovation and expansion; and drill site
preparation. A seismic test program was completed successfully and as a result, further seismic
work is scheduled for early in 2007 subject to regulatory approval. In early November, the first
drilling rig arrived at the site and began drilling and coring. With excellent, cold weather
conditions, the decision was made to accelerate the arrival of a second rig, and a third drilling
rig was also ordered ahead of schedule. Originally, this third rig had not been scheduled to
arrive until January 2007. Through the last week of November and until the planned shutdown on or
about December 20 for Christmas, OQI Sask will employ three drilling rigs working 24 hours per
day, 7 days per week.Activity and planning of infrastructure improvements was also undertaken during the six months
ended October 31, 2006. Two new housing complexes were designed and ordered for installation late
in 2006 and early in 2007. These will bring manpower capacity to over 150 persons, sufficient to
support the needs of the planned 2006/2007 exploration program. Access road improvements were
initiated, aggregate pits identified and their extraction rights secured and the application for
the installation of an airstrip submitted.In accordance with the terms of its exploration permits, OQI Sask relinquished 40% of the total
acreage covered by the Permits on May 31, 2005, and was required to relinquish another 40% of the
remaining acreage by May 31, 2006. OQI Sask requested an extension of the 2006 relinquishment from
the Saskatchewan government, which was approved and the relinquishment is now scheduled for June
2007. As at November 30, 2006, the Permit lands comprised an area of approximately 847,000 acres
and following all relinquishments the Permit lands will comprise an area of approximately 508,000
acres. The Permits are regulated under the Saskatchewan Oil Shale Regulations, 1964, subject to
amendment from time to time.
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During the six months ended October 31, 2006, nine of the Companys eleven permits on the Pasquia
Hills Oil Shale Prospect were reacquired as new exploration permits. These new exploration
permits,
with five year terms, cover 581,017 acres (406,712 net). No field operations were carried out on
the Pasquia Hills Oil Shale Prospect during the period as the Company has concentrated its efforts
on acquiring the new permits. The Company has applied for the remaining two permits that reached
the end of their term in the period, totaling 189,369 acres, and has been advised by the regulator
that these remaining two applications will be addressed under the planned revised oil shale
regulations, expected in the spring of 2007.Currently, the Pasquia Hills Oil Shale Prospect covers approximately 581,017 acres (406,712 net)
located near Hudson Bay, Saskatchewan and is comprised of nine Saskatchewan Oil Shale Exploration
Permits. The permits provide for the right to explore, mine, quarry and work the permit lands,
but not to produce or recover oil shales except for test purposes until a lease has been granted.
The overall prospects for this project will continue to be examined in 2006 and beyond.
  Township Petroleum Corporation is the operating subsidiary for the Companys, one township, oil
sands lease in Alberta (Eagles Nest Prospect). No field activity was carried out on this asset
during the period.For both the Eagles Nest and Pasquia Hills Prospects, exploration programs will be developed over
the course of the winter, with implementation planned to commence later in 2007.
 Human Resources
 On August 14, 2006, effective with the Reorganization (as described herein) Messrs. Hopkins and
Hirji, former officers of OQI Sask became officers of OQI, and their prior employment agreements
with OQI Sask were replaced with OQI employment agreements. Mr. Hopkins now serves as President
and Chief Executive Officer of OQI, and Mr. Hirji now serves as Chief Financial Officer of OQI.
T. Murray Wilson, formerly the CEO of OQI now serves as Executive Chairman of OQI. During the
quarter, OQI entered into executive employment agreements with their new Vice President, Corporate
& Strategic Development and the Executive Vice President, Project Development. All executive
employment agreements contain termination clauses whereby OQI has agreed to pay, subject to
certain conditions, up to 24 months salary, benefits and bonuses and an acceleration of the
vesting period of options outstanding should they be terminated for reasons other than cause or
OQI undergoes a change in control.As at December 6, 2006 the Company has 28 employees, including the officers noted above. 12 of
which are short-term employees primarily engaged in the field activities related to the Companys
exploration programs. Additional employees at the exploration site will be added as activity
levels dictate and field exploration increases.
 Liquidity and Capital Resources
 During the six months ended October 31, 2006 the Company was focused on raising funding for
exploration on the OQI Sask Permit lands, the acquisition of the outstanding 2.5% gross overriding
royalty on the OQI Sask Permit lands and planning and infrastructure development for the
exploration program on the OQI Sask Permit lands. The Company also entered into and completed the
Reorganization Agreement with OQI Sask as described herein.
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To facilitate the requirement for exploration funding on the OQI Sask Permit lands, OQI completed
a private placement of 5,668,100 flow-through common shares for gross proceeds of $33,684,009
during the period. These common shares have been issued on a flow through basis whereby the
proceeds must be used for exploration in Canada and the tax benefits from that exploration will
flow through to the subscribers. In conjunction with this financing OQI paid agency fees of
$1,852,659 and entered into a subscription agreement with OQI Sask whereby it purchased 703,054
OQI Sask flow through common shares for $33,684,048. As of October 31, 2006 $2,388,924 has been
spent on qualifying exploration activities.On August 14, 2006, OQI closed the acquisition of OQI Sask under the terms of a reorganization
agreement entered into on June 9, 2006 with OQI Sask (the Reorganization or the Reorganization
Agreement). Pursuant to the terms of the Reorganization Agreement, the Company increased its
ownership interest in OQI Sask, going from a 64.08% ownership interest to a 100% voting interest.
The Company has consolidated the operating results of OQI Sask from its commencement of operations
on September 24, 2004. In connection with the Reorganization Agreement, OQI also entered into a
Voting and Exchange Trust Agreement with OQI Sask and Computershare Trust Company of Canada
(CTC), and a Support Agreement with OQI Sask. Collectively, these agreements are referred to as
the Acquisition Agreements.According to the Acquisition Agreements, all common shares of OQI Sask, other than those held by
CanWest, were exchanged for a new class of OQI Sask shares called Exchangeable Shares on the basis
of 8.23 Exchangeable Shares for each one OQI Sask common share. The Exchangeable Shares are
exchangeable at any time on a one-for-one basis, at the option of the holder, for CanWests
shares. OQI Sask can redeem the outstanding Exchangeable Shares on the same terms at any time
after August 14, 2013 and only under certain limited circumstances prior to August 14, 2013 in
accordance with the Acquisition Agreements. An Exchangeable Share provides a holder with economic
terms and voting rights, which are, as nearly as practicable, effectively equivalent to those of a
share of CanWests common stock. Holders of Exchangeable Shares have registration rights with
respect to the resale of CanWests common stock. The Exchangeable Shares are entitled to a
preference over the OQI Sask common shares in the event of a liquidation, dissolution or wind-up
of OQI Sask whether voluntary or involuntary, or any other distribution of the assets of OQI Sask
among its shareholders for the purpose of winding up its affairs. Under the terms of
Reorganization, OQI may issue up to an aggregate of 76,504,304 shares of OQI common stock. As of
October 31, 2006 5,530,494 OQI common shares have been issued, 53,557,483 may be issued through
the exchange of Exchangeable Shares and the balance may be issued on the exercise of OQI Sask
options and warrants into Exchangeable Shares and their subsequent exchange. The Exchangeable
Shares are represented for voting purposes in the aggregate by one share of CanWests Series B
Preferred Stock.On August 15, 2006 the Company acquired all of the issued and outstanding shares of Stripper
Energy Services, Inc. (Stripper), a private inactive Alberta company, whose sole asset is a 2.5%
gross overriding royalty on certain permit lands held by OQI Sask, for $17,948,722, which amount
includes $116,349 in interest and working capital adjustments. The total purchase price for the
Stripper shares has been recorded as part of property costs. In conjunction with the acquisition
of Stripper, OQI completed a private placement of 4,150,000 shares of its common stock for gross
proceeds of $15,770,000, which according to the terms of the private placement were used for the
purchase of Stripper. No commissions were paid in connection with this private placement.The full future income tax impact of the acquisitions on a
consolidated basis has not yet been determined. OQI will perform
further analysis on the combined companys tax position and it
is anticipated that a future tax liability related to these
acquisitions may be recognized in future periods with a corresponding
addition to the property account.In connection with the closing of the Reorganization, OQIs financial advisor was paid a success
fee of $1,590,528. In addition, OQI Sask issued 288,050 Exchangeable Shares, with a deemed value
of
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$1,204,383 and paid $353,450 as success fees to its financial advisors on closing of the
Reorganization. These costs have been included as part of consulting expenses in the period.As at December 6, 2006, the Company currently had approximately, $41.0 million in cash on hand. Of
this amount the Company is committed to spend approximately $30,939,712 ($34,736,015 CDN) on
qualifying resource property expenditures pursuant to certain provisions of the Income Tax Act
(Canada). The Company believes that it has sufficient funding to complete its upcoming exploration
programs and for general working capital requirements, however, additional funding will be
required if the current exploration programs are increased in scope or changes are made to current
plans. It is expected that the Company will continue to need further funding and we plan to fund
future operations by way of financing, including the public offering or private placement of
equity or debt securities. However, we cannot assure you that debt or equity financing will be
available to us on acceptable terms, if at all, to meet these requirements. We have no revenues,
and our operating results, profitability and future rate of growth depend solely on our ability to
successfully implement our business plan and our ability to raise further funding.
 Changes in Financial Condition
 During the six months ended October 31, 2006 the primary focus of the Company was exploring the
OQI Sask Permit lands, raising exploration funds, completing the acquisition of the non
controlling shareholders interest in OQI Sask (the Reorganization) and the purchase of a 2.5%
gross overriding royalty on certain of the OQI Sask Permit lands. During the six months ended
October 31, 2005, the primary focus of the Company was on completing the purchase of the OQI
Sask Permits, obtaining funds for exploration programs and accessing and acquiring other
possible investment opportunities within the Athabasca Oil Sands region which resulted in the
purchase of the Eagles Nest oil sands lease.In total the Company experienced a net loss of $47,176,137 or $0.38 per share for the six months
ended October 31, 2006, compared to a net loss $8,766,271 or $0.14 per share for the six months
ended October 31, 2005. The Company expects to continue to incur operating losses and will
continue to be dependent on additional equity or debt sales and or property joint ventures to fund
its activities in the future.Stock based compensation expense for the six months ended October 31, 2006 of $43,622,692 (2005 -
$Nil) is related to the issuance of options to directors, officers, employees and consultants of
the Company and was determined based on the Black-Scholes option valuation model. OQI has
unrecognized stock based compensation costs of $12,730,433 and its subsidiary, OQI Sask has
unrecognized stock based compensation costs of $6,746,671 related to unvested options which will
be recognized in future periods as the options vest. Stock based compensation is a non-cash
expense.During the six months ended October 31, 2006 the Companys financing activities did not involve
the issuance of warrants and or convertible debt and as such it did not incur any non-cash
financing expenses. As a result of the Companys convertible note financing activities during the
six months ended October 31, 2005 non-cash financing expenses of $5,686,009 were incurred.Consulting expenses for the six months ended October 31, 2006 of $4,812,166 (2005  $1,966,647).
In 2006 Consulting costs included $1,943,078 in cash expenses and $1,204,383 in non-cash expenses
related to OQI Sask Exchangeable Shares paid to investment advisors by the Company on the
successful completion of the Reorganization. In 2005 Consulting costs included stock option
compensation expenses of $1,072,056 related to the issuance of options to employees and
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##### Table of Contents



consultants and also included fees related to successful financing attempts that were paid in
stock and cash totaling $580,456.Exploration costs for the six months ended October 31, 2006 were $2,597,470 (2005  $1,072,033).
$2,388,925 of the costs were due to the increased activity on the OQI Sask Permit lands and the
remaining $208,545 was incurred in the other project areas. 2005 exploration costs included
payments related to the Sylvan Lake and Barrhead oil and gas prospects as to $359,120 and
$28,993, respectively and $79,272 in conjunction with its interest in the Sulfoxy Joint
Venture, $91,371 in costs associated with the Eagles Nest prospect, $71,838 in costs
associated with the Pasquia Hills Oil Shale prospect and $97,668 in costs incurred on the OQI
Sask Permit lands. Also included in exploration was $233,333 related to property acquired from the
Anhydride Limited Partnership which was subsequently written off.Professional fees for the six months ended October 31, 2006 of $1,005,316 (2005  $187,899)
included costs related to the successful completion of the Reorganization with OQI Sask and
several major funding initiatives.Corporate salaries during the six months ended October 31, 2006 were $972,788 (2005-$Nil) and
included a bonus of $135,123 paid in conjunction with the hiring of a new CEO. The increase over
the same period in 2005 is related to the expanded activity of the Company and the hiring of
additional employees.Office expenses for the six months ended October 31, 2006 were $486,132 (2005  $106,235). Travel
costs for the six months ended October 31, 2006 were $109,147 (2005  $37,242). This increase has
been as a result of higher activity levels, additional staff and relocation of the corporate
offices.Transfer agent fees for the six months ended October 31, 2006 were $186,502 (2005  $55,190). The
increase was due to costs associated with the annual shareholder meeting during the period and the
completion of the Reorganization with OQI Sask.Advertising and promotion expenses during the six months ended October 31, 2006 of $180,839 (2005
  $625,257) primarily included costs for communication and informational material for the
Companys stakeholders. 2005 costs were a result of the engagement of consulting firm whereby they
agreed to be paid in common shares of the Company. Pursuant to this agreement the Company issued
2,000,000 common shares and booked an advertising and promotion expense of $430,000 for the
six months ended October 31, 2005.Directors fees and reimbursements in the period were $85,617 (2005  $Nil) in accordance with a
corporate policy implemented during the period.Interest and bank charges of $24,781 (2005  $157,399) for the six months ended October 31, 2006
are lower as a result of the timing when various convertible notes converted.The overall increase in the October 31, 2006 period costs over the same period in 2005 can be
attributed to an overall increased level of activity by the Company.During the six months ended October 31, 2005 the Company sold its interest in its subsidiary
Anhydride Petroleum (Canada) Inc. for nominal proceeds which resulted in the Company recording a
$736,782 recovery of exploration expenses pertaining to accounts payable of the subsidiary.
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Interest income for six months ended October 31, 2006 was $741,542 (2005  $50,739). This was
because the Company had pre-funded its exploration programs resulting in cash on hand which was
invested in short term deposits.The consolidated balance sheet as at April 30, 2006 has been corrected with respect to an error
in the amounts reported for Properties and Other Comprehensive Income. The error occurred in
the translation from Canadian to US funds of the OQI balance sheet and the effect was as
follows:
 OtherComprehensiveProperties
    
    
    income (loss)Amounts previously reported
    
    $
    17,831,417
    
    
    $
    964,404Correction of translation error
    
    
    (708,319
    )
    
    
    (708,319
    )As corrected
    
    $
    17,123,098
    
    
    $
    256,085
 The error had no effect on the amounts reported for net loss or net loss per share.
 Critical Accounting Policies
 The preparation of financial statements in conformity with United States generally accepted
accounting principles requires companies to establish accounting policies and to make estimates
that affect both the amount and timing of the recording of assets, liabilities, revenues and
expenses. Some of these estimates require judgments about matters that are inherently uncertain and
therefore actual results may differ from those estimates.A detailed summary of all of the Companys significant accounting policies and the estimates
derived therefrom is included in Note 2 to the Consolidated Financial Statements for the year ended
April 30, 2006. While all of the significant accounting policies are important to the Companys
consolidated financial statements, the following accounting policies and the estimates derived
therefrom, have been identified as being critical:
 
    
    Foreign currency translation;
    
    Properties and exploration stage expenditures;
    
    Income taxes; and
    
    Stock based compensation.
 Foreign currency translation
 The Companys operations and activities are conducted principally in Canada; hence the Canadian
dollar is the functional currency which is translated into U.S. dollars for reporting purposes as
follows:
 (i)
    
    Monetary assets and liabilities at the rate of exchange in effect as at the balance sheet
date;(ii)
    
    Non-monetary assets and liabilities at the exchange rates prevailing at the time of the
acquisition of the assets or assumption of the liabilities; and,(iii)
    
    Revenues and expenditures at the average rate of exchange for the year.
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Gains and losses arising from this translation of foreign currency are included in other
comprehensive income (loss) as a separate component of stockholders equity (deficiency).
 Properties and exploration stage expenditures
 Properties represent the capitalized costs of acquisition of natural resource properties
principally, the right to explore for oil sands deposits in the provinces of Alberta and
Saskatchewan, Canada and oil shale deposits in the province of Saskatchewan, Canada.Property costs are reviewed for impairment at least annually to consider whether there are
conditions that may indicate impairment. The carrying value of each property is compared to its
net recoverable amount as estimated by quantifiable evidence of the market value of similar land
or geological resources. If the carrying value is found to exceed the estimated net recoverable
amount a write down will be recorded.During the six months ended October 31, 2006 the Company acquired the minority interest in OQI
Sask as described herein. The excess of the purchase price of $319,022,948 less the book value of
the minority interest of $16,323,010 was added to the OQI Sask Oil Sands Exploration permits
property.Property amounts reported represent costs incurred to date and do not necessarily reflect present
or future values. All exploration costs incurred to the date of establishing that a property is
economically recoverable are charged to operations.
 Income taxes
 Income taxes are calculated using the liability method of accounting. Temporary differences
arising from the difference between the tax basis of an asset or liability and its carrying amount
on the balance sheet are used to calculate deferred income tax liabilities or assets. These
standards required that the deferred income tax asset and liabilities be measured using tax rates
and laws that are expected to apply when the temporary differences are expected to reverse.
 Stock-based compensation
 The Company adopted SFAS 123R Share Based Payments effective May 1, 2006 using the Modified
Prospective Method. This method requires that awards granted, modified, repurchased or cancelled
in the quarter beginning after the adoption date use the fair value method to recognize stock
based compensation. Also any unvested options, where compensation expense was amortized over the
vesting period, and was previously disclosed in the notes to the financial statements as
pro-forma, shall now be expensed over the same amortization period.
 Prior to May 1, 2006, the Company applied the intrinsic value method of accounting as prescribed
by APB Opinion No. 25 Accounting for Stock Issued to Employees and related interpretations, in
accounting for options granted to employees. As such, compensation expense is recorded on the
date of the grant when the market price of the underlying stock exceeds the exercise price. SFAS
123 Accounting for Stock-based Compensation establishes accounting and disclosure requirements
using the fair value-based method of accounting for stock-based compensation plans. As allowed by
SFAS 123, the Company elected to continue to apply the intrinsic value-based method of accounting
described above and adopted the disclosure requirements of SFAS 123, as amended by SFAS 148
effective May 1, 2003.
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##### Table of Contents



Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control
  Forward-Looking Statements
 These statements are based on certain assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions, expected future
developments and other factors we believe are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks and uncertainties, including such factors as the
volatility and level of oil and natural gas prices, uncertainties in cash flow, expected
acquisition benefits, production rates and reserve replacement, reserve estimates, drilling and
operating risks, competition, litigation, environmental matters, the potential impact of
government regulations, and other matters, many of which are beyond our control. 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.
 PART II  OTHER INFORMATION
 Item 2. Unregistered Sales of Equity Securities
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Item 4. Submission of Matters to a Vote of Security Holders.
  Proposal #1 Change Name of Company
    
    For
    
    Against
    
    AbstainApproval of an amendment to the
Companys Articles of Incorporation
changing the name of the Company to
Oilsands Quest Inc.
    
    
    86,564,916
    
    
    
    2,629,120
    
    
    
    100,837
 Proposal #2  Election of Directors
    
    Voted For
    
    WithheldThe election of the six Nominees to the Companys
Board of Directors:T. Murray Wilson
    
    
    89,150,458
    
    
    
    223,823Christopher H. Hopkins
    
    
    89,153,578
    
    
    
    221,003Thomas Milne
    
    
    88,188,264
    
    
    
    186,017
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##### Table of Contents



Proposal #2  Election of Directors
    
    Voted For
    
    WithheldRonald Phillips
    
    
    89,189,182
    
    
    
    185,099W. Scott Thompson
    
    
    89,174,875
    
    
    
    199,406Gordon Tallman
    
    
    89,113,519
    
    
    
    206,762
 BrokerProposal #3  Staggered Board
    
    For
    
    Against
    
    Abstain
    
    Non-VotesApproval of an amendment to
the Companys Articles of
Incorporation and Bylaws
providing for staggered terms
for the Companys Board of
Directors.
    
    
    48,226,664
    
    
    
    3,422,698
    
    
    
    227,461
    
    
    
    54,115,769
 BrokerProposal #4  Increase Authorized Common Stock
    
    For
    
    Against
    
    Abstain
    
    Non-VotesApproval of an
amendment to the
Companys Articles
of Incorporation to
increase the
authorized shares
of Common Stock
from 250,000,000
shares to
500,000,000 shares.
    
    
    47,268,328
    
    
    
    4,370,456
    
    
    
    229,119
    
    
    
    54,115,769
 BrokerProposal #6  Shareholders Rights Plan
    
    For
    
    Against
    
    Abstain
    
    Non-VotesTo approve the adoption of the
Companys Shareholders Rights Plan.
    
    
    39,175,597
    
    
    
    12,512,909
    
    
    
    180,317
    
    
    
    54,115,768
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##### Table of Contents



BrokerProposal #7  2006 Stock Option Plan
    
    For
    
    Against
    
    Abstain
    
    Non-VotesTo approve the adoption of the
Companys 2006 Stock Option Plan, as
amended.
    
    
    36,147,902
    
    
    
    13,606,394
    
    
    
    2,021,523
    
    
    
    54,115,769
  BrokerProposal #5  Supermajority Vote for Mergers, Acquisitions, Sales or Change in Control
    
    For
    
    Against
    
    Abstain
    
    Non-VotesTo approve an
amendment to the
Companys Articles
of Incorporation
requiring an
affirmative vote of
66-2/3% of votes
entitled to be cast
for certain merger,
acquisition, sale
or change in
control
transactions that
the Board of
Directors has not
approved.
    
    
    37,239,136
    
    
    
    14,417,127
    
    
    
    37,718,318
    
    
    
    54,115,768
  Item 5. Other Information.
 Subsequent
Events
   Item 6. Exhibits.
 3.1
    
    Articles of Incorporation,as amended(1), (2), (3) and filed herewith.3.2
    
    Bylaws, as amended, filed herewith.10.1
    
    Voting Exchange and Trust Agreement dated August 14, 2006.(3)10.2
    
    Exchangeable Share Provisions(3)10.3
    
    Support Agreement dated August 14, 2006.(3)10.4
    
    Executive Employment Agreement with Christopher H. Hopkins dated August 14, 2006.(3)10.5
    
    Executive Employment Agreement with Karim Hirji dated August 14, 2006.(3)10.6
    
    Executive Employment Agreement with Errin Kimball dated August 14, 2006.(3)10.7
    
    Form of Subscription Agreement.(3)10.8
    
    Share Purchase Agreement, effective as of May 31, 2006.(4)10.9
    
    Assignment Agreement with Township Petroleum Corporation, dated June 6, 2006.(4)10.10
    
    Executive Employment Agreement with Patricia A. Beatch, dated September 21, 2006.(5)10.11
    
    Executive Employment Agreement with Erdal Yildirim, dated October 10, 2006.(6)
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##### Table of Contents



31.1
    
    Certification of CEO Pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.31.2
    
    Certification of CFO Pursuant to Exchange Act Rules 13a-14 and 15d-14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.32.1
    
    Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.32.2
    
    Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 (1)
    
    Incorporated by reference from Form 10-SB, filed October 14, 1999.(2)
    
    Incorporated by reference from Form 8-K, filed March 13, 2006.(3)
    
    Incorporated by reference from Form 8-K, filed August 17, 2006.(4)
    
    Incorporated by reference from Form 8-K, filed August 21, 2006.(5)
    
    Incorporated by reference from Form 8-K, filed September 26, 2006 and Form SB-2/A,
filed on October 3, 2006.(6)
    
    Incorporated by reference from Form 8-K, filed October 12, 2006.   OILSANDS QUEST INC.Date: December 15, 2006
    
    By:
    
    /s/ Christopher H. HopkinsChristopher H. Hopkins, President, Chief Executive

    Officer and DirectorDate: December 15, 2006
    
    By:
    
    /s/ Karim HirjiKarim Hirji, Chief Financial Officer and Chief

    Accounting Officer
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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Description3.1
    
    Articles of Incorporation,as amended(1), (2), (3) and filed herewith.3.2
    
    Bylaws, as amended, filed herewith.10.1
    
    Voting Exchange and Trust Agreement dated August 14, 2006.(3)10.2
    
    Exchangeable Share Provisions(3)10.3
    
    Support Agreement dated August 14, 2006.(3)10.4
    
    Executive Employment Agreement with Christopher H. Hopkins dated August 14, 2006.(3)10.5
    
    Executive Employment Agreement with Karim Hirji dated August 14, 2006.(3)10.6
    
    Executive Employment Agreement with Errin Kimball dated August 14, 2006.(3)10.7
    
    Form of Subscription Agreement.(3)10.8
    
    Share Purchase Agreement, effective as of May 31, 2006.(4)10.9
    
    Assignment Agreement with Township Petroleum Corporation, dated June 6, 2006.(4)10.10
    
    Executive Employment Agreement with Patricia A. Beatch, dated September 21, 2006.(5)10.11
    
    Executive Employment Agreement with Erdal Yildirim, dated October 10, 2006.(6)31.1
    
    Certification of CEO Pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.31.2
    
    Certification of CFO Pursuant to Exchange Act Rules 13a-14 and 15d-14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.32.1
    
    Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.32.2
    
    Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 (1)
    
    Incorporated by reference from Form 10-SB, filed October 14, 1999.(2)
    
    Incorporated by reference from Form 8-K, filed March 13, 2006.(3)
    
    Incorporated by reference from Form 8-K, filed August 17, 2006.(4)
    
    Incorporated by reference from Form 8-K, filed August 21, 2006.(5)
    
    Incorporated by reference from Form 8-K, filed September 26, 2006 and Form SB-2/A,
filed on October 3, 2006.(6)
    
    Incorporated by reference from Form 8-K, filed October 12, 2006.