UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


FORM
10-Q





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


For the
quarterly period ended October 31, 2009


OR


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


For the
transition period from _________ to ___________.





COMMISSION
FILE NUMBER:  001-32994





OILSANDS
QUEST INC.


(Exact
name of issuer as specified in its charter)





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





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


(Address
of principal executive offices)





(403)
263-1623


(Issuer's
telephone number)





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





Yes Q                No
o





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





Yes o                No
o





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





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





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





As of
December 1, 2009 there were 278,119,961 shares of common stock issued and
outstanding.













OILSANDS
QUEST INC.


FORM
10Q FOR THE QUARTER ENDED


October
31, 2009





Part I.  Financial
      InformationForward-Looking
      StatementsItem
      1.
            
            Financial
      StatementsUnaudited Consolidated Balance
      Sheets as of October 31, 2009 and April 30,
      2009
            2Unaudited Consolidated Statements
      of Operations for the Three and Six Months
      Ended October 31, 2009 and 2008 and for the Period from
      Inception on April 3, 1998 to October 31,
      2009
            3Unaudited Consolidated Statements
      of Stockholders’ Equity for the Six Months Ended October 31, 2009 and
      2008
            4Unaudited Consolidated Statements
      of Comprehensive Income (Loss) for the Three and Six Months Ended October
      31, 2009 and 2008 and for the Period from Inception on April 3, 1998
      to October 31, 2009
            5Unaudited Consolidated Statements
      of Cash Flows for the Six Months Ended October 31, 2009 and 2008
      and for the Period from Inception on April 3, 1998 to October 31,
      2009
            6Unaudited Notes to Consolidated
      Financial Statements
            7Item
      2.
            
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            14Item
      3.
            
            Quantitative and Qualitative
      Disclosures About Market Risk
            19Item
      4.
            
            Controls and
      Procedures
            19Part II  Other
      InformationItem
      1.
            
            Legal
      Proceedings
            20Item
      1A.
            
            Risk
      Factors
            20Item
      2.
            
            Unregistered Sales of Equity
      Securities and Use of Proceeds
            20Item
      3.
            
            Defaults Upon Senior
      Securities
            20Item
      4.
            
            Submission of Matters to a Vote of
      Security Holders
            20Item
      5.
            
            Other
      Information
            21Item
      6.
            
            Exhibits
            21Signatures
            22





Cautionary Statement about
Forward-Looking Statements


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




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


·
            the
      timing of exploration and development
  activities;


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


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





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




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




It is
presumed that readers have read or have access to our 2009 Annual Report filed
on Form 10-K which includes disclosures regarding critical accounting policies
as part of Management’s Discussion and Analysis or Plan of
Operations.  All future payments in Canadian dollars have been
converted to United States dollars using an exchange rate of $1.00 U.S. =
$1.0819 CDN, which was the October 31, 2009 exchange rate.  Unless
otherwise stated, all dollar amounts are expressed in U.S.
dollars.


i





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Balance Sheets


(Unaudited)





October
      31, 2009
            
            April
      30,2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            34,239,241
            
            
            
            $
            6,986,099Accounts
      receivable
            
            
            439,583
            
            
            
            
            3,616,793Short-term
      investments
            
            
            12,108,330
            
            
            
            
            25,208,748Prepaid
      expenses
            
            
            1,252,053
            
            
            
            
            337,099Available
      for sale equity securities
            
            
            66,558
            
            
            
            
            60,307Total
      Current Assets
            
            
            48,105,765
            
            
            
            
            36,209,046Property and Equipment
      (note 3)
            
            
            440,658,530
            
            
            
            
            398,975,468Total
      Assets
            
            $
            488,764,295
            
            
            
            $
            435,184,514LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable (note 11)
            
            $
            1,859,890
            
            
            
            $
            3,463,642Accrued
      liabilities
            
            
            8,200,570
            
            
            
            5,603,779Flow-through
      share premium liability
            
            
            477,575
            
            
            
            749,287Total
      Current Liabilities
            
            
            10,538,035
            
            
            
            9,816,708Deferred
      Taxes
            
            
            69,243,718
            
            
            
            65,651,035Asset Retirement Obligation(note 4)
            
            
            3,013,304
            
            
            
            2,621,439Stockholders’
      EquityCapital
      StockPreferred
      Stock, par value of $0.001 each, 10,000,000 shares authorized, 1 Series B
      Preferred share outstanding (note 6)
            
            
            1
            
            
            
            1Common
      Stock, par value of $0.001 each, 750,000,000 shares authorized,
      278,099,961 and 241,559,549 shares outstanding at October 31, 2009 and
      April 30, 2009 respectively (notes 7, 8 and 9)
            
            
            278,099
            
            
            
            241,559Additional
      Paid-in Capital
            
            
            744,778,053
            
            
            
            713,573,848Deficit
      Accumulated During Development Stage
            
            
            (348,705,366)
            
            
            
            (330,699,364)Accumulated
      Other Comprehensive Income (Loss)
            
            
            9,618,451
            
            
            
            (26,020,712)Total
      Stockholders’ Equity
            
            
            405,969,238
            
            
            
            357,095,332Total
      Liabilities and Stockholders’ Equity
            
            $
            488,764,295
            
            
            
            $
            435,184,514





Subsequent events(note
12)





See Notes
to Unaudited Consolidated Financial Statements





2





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Operations


(Unaudited)





Three
      Months Ended
              October
      31,
            
            
            
            Six
      Months Ended
              October
      31,
            
            
            From
              Inception
      on April 3, 1998 through to October 31,2009
            
            
            
            2008
            
            
            
            2009
            
            
            
            2008
            
            
            2009ExpensesExploration
      costs
            $
            8,779,402
            
            
            $
            37,274,533
            
            
            $
            12,393,761
            
            
            $
            47,747,275
            
            
            $
            218,650,770General
      and administrativeCorporate
            
            3,361,570
            
            
            
            3,398,870
            
            
            
            7,160,022
            
            
            
            6,253,884
            
            
            
            49,003,298Stock-based
      compensation (note 8)
            
            1,079,081
            
            
            
            8,242,681
            
            
            
            2,814,878
            
            
            
            12,006,453
            
            
            
            144,040,954Foreign
      exchange (gain) loss
            
            129,558
            
            
            
            4,622,474
            
            
            
            (3,114,133)
            
            
            
            5,405,165
            
            
            
            1,425,789Depreciation
      and accretion
            
            564,606
            
            
            
            453,436
            
            
            
            1,013,020
            
            
            
            771,162
            
            
            
            4,017,34213,914,217
            
            
            
            53,991,994
            
            
            
            20,267,548
            
            
            
            72,183,939
            
            
            
            417,138,153Other
      ItemsInterest
      and other income
            
            (10,753)
            
            
            
            (365,802)
            
            
            
            (69,517)
            
            
            
            (795,080)
            
            
            
            (6,368,186)Loss
      before deferred income tax benefit
            
            13,903,464
            
            
            
            53,626,192
            
            
            
            20,198,031
            
            
            
            71,388,859
            
            
            
            410,769,967Deferred
      income tax benefit
            
            (694,491)
            
            
            
            (10,761,310)
            
            
            
            (2,192,029)
            
            
            
            (14,205,680)
            
            
            
            (54,370,347)Net
      loss
            
            13,208,973
            
            
            
            42,864,882
            
            
            
            18,006,002
            
            
            
            57,183,179
            
            
            
            356,399,620Net loss attributable to
      noncontrolling  interest
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,694,254)Net
      loss attributable to common stockholders
            $
            13,208,973
            
            
            $
            42,864,882
            
            
            $
            18,006,002
            
            
            $
            57,183,179
            
            
            $
            348,705,366Net
      loss attributable to common stockholders per share – Basic and
      Diluted
            $
            0.04
            
            
            $
            0.17
            
            
            $
            0.06
            
            
            $
            0.22Weighted
      average number of common stock outstanding
            
            302,647,372
            
            
            
            259,498,487
            
            
            
            300,229,541
            
            
            
            255,811,160





See Notes
to Unaudited Consolidated Financial Statements


3


OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Stockholders' Equity


(Unaudited)





Common
      Stock
            
            
            Preferred
      Stock
            
            
            Additional
      Paid in
            
            
            Accumulated
      Other Comprehensive Income
            
            
            Deficit
      Accumulated During the
              Development
            
            
            Total
      Stockholders’Shares
            
            
            Par
      Value
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            (Loss)
            
            
            Stage
            
            
            EquityBalance,
      April 30, 2009
            
            
            241,559,549
            
            
            $
            241,559
            
            
            
            1
            
            
            $
            1
            
            
            $
            713,573,848
            
            
            $
            (26,020,712)
            
            $
            (330,699,364)
            
            
            $
            357,095,332Common
      stock and warrants issued for:Cash
            
            
            35,075,000
            
            
            
            35,075
            
            
            
            
            
            
            
            
            
            
            
            29,778,675
            
            
            
            
            
            
            
            
            
            
            29,813,750Stock
      option exercises
            
            
            760,412
            
            
            
            760
            
            
            
            
            
            
            
            
            
            
            
            616,692
            
            
            
            
            
            
            
            
            
            
            617,452Exchange
      of OQI Sask Exchangeable shares
            
            
            705,000
            
            
            
            705
            
            
            
            -
            
            
            
            -
            
            
            
            (705)
            
            
            
            -
            
            
            -
            
            
            
            -Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,814,878
            
            
            
            
            
            
            
            
            
            
            2,814,878Share
      issue costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,005,335)
            
            
            
            
            
            
            
            
            
            
            (2,005,335)Other
      comprehensive incomeForeign
      exchange gain on translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,639,163
            
            
            
            
            
            
            35,639,163Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (18,006,002)
            
            
            
            (18,006,002)Balance,
      October 31, 2009
            
            
            278,099,961
            
            
            $
            278,099
            
            
            
            1
            
            
            $
            1
            
            
            $
            744,778,053
            
            
            $
            9,618,451
            
            $
            (348,705,366)
            
            
            $
            405,969,238Balance,
      April 30, 2008
            
            
            213,861,958
            
            
            $
            213,862
            
            
            
            1
            
            
            $
            1
            
            
            $
            604,322,495
            
            
            $
            36,732,367
            
            $
            (241,502,206
            )
            
            $
            399,766,519Common
      stock issued for:Cash
            
            
            23,784,917
            
            
            
            23,785
            
            
            
            -
            
            
            
            -
            
            
            
            91,215,543
            
            
            
            -
            
            
            -
            
            
            
            91,239,328Property
            
            
            640,000
            
            
            
            640
            
            
            
            -
            
            
            
            -
            
            
            
            3,717,760
            
            
            
            -
            
            
            -
            
            
            
            3,718,400Premium
      on flow-through sharesallocated to
    liability
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,802,753)
            
            
            
            -
            
            
            -
            
            
            
            (1,802,753)Stock
      option exercises
            
            
            35,000
            
            
            
            35
            
            
            
            -
            
            
            
            -
            
            
            
            165,115
            
            
            
            -
            
            
            -
            
            
            
            165,150Exchange
      of OQI Sask Exchangeable Shares
            
            
            1,709,769
            
            
            
            1,709
            
            
            
            -
            
            
            
            -
            
            
            
            (1,709)
            
            
            
            -
            
            
            -
            
            
            
            -Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,006,453
            
            
            
            -
            
            
            -
            
            
            
            12,006,453Share
      issue costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,238,966)
            
            
            
            -
            
            
            -
            
            
            
            (2,238,966)OQI
      Sask options exercises
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,522,925
            
            
            
            -
            
            
            -
            
            
            
            1,522,925Other
      comprehensive incomeTransfer
      of unrealized loss on available for sale securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            141,970
            
            
            -
            
            
            
            141,970Foreign
      exchange loss on translation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (68,440,617)
            
            
            -
            
            
            
            (68,440,617)Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            (57,183,179)
            
            
            
            (57,183,179)Balance,
      October 31, 2008
            
            
            240,031,644
            
            
            $
            240,031
            
            
            
            1
            
            
            $
            1
            
            
            $
            708,906,863
            
            
            $
            (31,566,280)
            
            $
            (298,685,385)
            
            
            $
            378,895,230





See Notes
to Unaudited Consolidated Financial Statements


4





OILSANDS
QUEST INC.


(A
Development Stage Company)


Consolidated
Statements of Comprehensive Income (Loss)





Three
      Months Ended
              October
      31,
            Six
      Months Ended
              October
      31,
            From
      Inception on April 3, 1998 through to2009
            
            
            2008
            
            2009
            
            2008
            
            October
      31, 2009Net
      loss
            
            $
            (13,208,973)
            
            $
            (42,864,882)
            
            $
            (18,006,002)
            
            $
            (57,183,179)
            
            $
            (356,399,620)Unrealized
      loss on available for sale securities
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (167,631)Transfer
      of unrealized loss on available for sale securities
            
            -
            
            
            -
            
            
            -
            
            
            141,970
            
            
            167,631Foreign
      exchange gain (loss) on translation
            
            
            (154,563)
            
            
            (62,575,662)
            
            
            35,639,163
            
            
            (68,440,617)
            
            
            9,618,451Comprehensive
      income (loss)
            
            $
            (13,363,536)
            
            
            (105,440,544)
            
            $
            17,633,161
            
            $
            (125,481,826)
            
            $
            (346,781,169)Comprehensive
      loss attributable to noncontrolling interest
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            7,694,254Comprehensive
      income (loss) attributable to common stockholders
            
            $
            (13,363,536)
            
            $
            (105,440,544)
            
            $
            17,633,161
            
            $
            (125,481,826)
            
            $
            (339,086,915)





See Notes
to Unaudited Consolidated Financial Statements





5





OILSANDS QUEST
INC.


(A
Development Stage Company)


Consolidated
Statements of Cash Flows


(Unaudited)





Six
      Months Ended
              October
      31,
            
            
            From Inception on
      April 3, 1998through to
              October 31,
              20092009
            
            
            2008Operating
      ActivitiesNet
      loss
            
            $
            (18,006,002)
            
            
            $
            (57,183,179)
            
            
            $
            (356,399,620)Non-cash
      adjustments to net lossStock-based
      compensation
            
            
            2,814,878
            
            
            
            12,006,453
            
            
            
            144,040,954Deferred
      income tax benefit
            
            
            (2,192,029)
            
            
            
            (14,205,680)
            
            
            
            (54,370,347)Depreciation
      and accretion
            
            
            1,013,020
            
            
            
            771,162
            
            
            
            4,017,342Asset
      retirement cost (reduction) expense
            
            
            (44,582)
            
            
            
            -
            
            
            
            1,023,133Other
      non-cash items
            
            
            (6,251)
            
            
            
            145,908
            
            
            
            1,233,030Changes
      in Non-Cash Working CapitalAccounts
      receivable and prepaid expenses
            
            
            2,578,461
            
            
            
            378,737
            
            
            
            (765,879)Accounts
      payable and accrued liabilities
            
            
            199,153
            
            
            
            14,762,148
            
            
            
            14,417,476Cash
      Used in Operating Activities
            
            
            (13,643,352)
            
            
            
            (43,324,451)
            
            
            
            (246,803,911)Investing
      ActivitiesProperty
      and equipment expenditures
            
            
            (1,687,259)
            
            
            
            (6,843,535)
            
            
            
            (81,100,864)Short-term
      investment
            
            
            13,100,418
            
            
            
            (8,753,768)
            
            
            
            (12,108,330)Other
      investments
            
            
            -
            
            
            
            116,824
            
            
            
            (548,048)Cash
      Used in Investing Activities
            
            
            11,413,159
            
            
            
            (15,480,479)
            
            
            
            (93,757,242)Financing
      ActivitiesIssuance
      of shares for cash
            
            
            28,425,867
            
            
            
            89,165,512
            
            
            
            355,987,275Shares
      issued on exercise of OQI Sask options and warrants
            
            
            -
            
            
            
            1,522,925
            
            
            
            4,176,336Shares
      issued by OQI Sask to non-controlling interests
            
            
            -
            
            
            
            -
            
            
            
            7,663,666Convertible
      debentures
            
            
            -
            
            
            
            -
            
            
            
            8,384,496Cash
      Provided by Financing Activities
            
            
            28,425,867
            
            
            
            90,688,437
            
            
            
            376,211,773Inflow
      of Cash and Cash Equivalents
            
            
            26,195,674
            
            
            
            31,883,507
            
            
            
            35,650,620Effects
      of exchange rate changes on cash and cash
equivalents
            
            
            1,057,468
            
            
            
            (6,423,366)
            
            
            
            (1,411,379)Cash
      and Cash Equivalents, Beginning of Period
            
            
            6,986,099
            
            
            
            26,498,038
            
            
            
            -Cash
      and Cash Equivalents, End of Period
            
            $
            34,239,241
            
            
            $
            51,958,179
            
            
            $
            34,239,241Non-Cash
      Financing ActivitiesCommon
      stock issued for properties
            
            $
            -
            
            
            $
            3,718,400
            
            
            $
            10,848,342Warrants
      granted on purchase of properties
            
            $
            -
            
            
            $
            -
            
            
            $
            1,763,929Common
      stock issued for services
            
            $
            -
            
            
            $
            -
            
            
            $
            10,504,594Common
      stock issued for debt settlement
            
            $
            -
            
            
            $
            -
            
            
            $
            28,401,029








See Notes
to Unaudited Consolidated Financial Statements





6





OILSANDS
QUEST INC.


(A
Development Stage Company)


Notes
to Consolidated Financial Statements


(Unaudited)





1.
            DESCRIPTION
      OF BUSINESS AND NATURE OF
OPERATIONS





Oilsands
Quest Inc. (“OQI”) together with its subsidiaries, (collectively the “Company”)
is in the exploration stage and follows the accounting guidance for a
development stage company. The principal business activity is the exploration
and development of natural resource properties in Canada.





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





As at
October 31, 2009, the Company had working capital (excluding flow-through share
premium liability) of $38.0 million. The Company believes that it has sufficient
funds to maintain its interests in the existing properties, to complete the
announced testing activities at its Axe Lake Property, and to maintain other
core activities through October 31, 2010. The Company monitors its expenditure
budgets and adjusts its expenditure plans to conform to available funding.
However, additional funding will be required to complete the exploration or
development activities, or for changes in the nature or cost of the activities
currently planned.





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





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





2.
            BASIS
      OF PRESENTATION





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





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





7


Immaterial
Corrections





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





The first
immaterial error related to an overstated accrual on a short-term discretionary
incentive plan for employees of the Company for the year ended April 30,
2009. The Company concluded that the adjustment was not material to the
financial statements for the year ended April 30, 2009 and reflected the
adjustment as an immaterial correction of prior period comparative financial
information in its interim financial statements for the three months ended
July 31, 2009. The Company determined that the cumulative impact of the
immaterial error, was a decrease to corporate general and administrative
expense, net loss and comprehensive loss of $1.5 million (net of deferred income
tax benefit of zero) for the three months and the year ended April 30, 2009 and
for the period from inception on April 8, 1998 to April 30, 2009 and recorded
corresponding decreases to accrued liabilities and deficit accumulated during
the development stage at April 30, 2009. Basic and diluted net loss attributable
to common stockholders decreased by $0.01 per share for the three months and the
year ended April 30, 2009.




The
second immaterial correction related to an error in the accounting for
stock-based compensation for the years ended April 30, 2007, 2008 and 2009. The
Company incorrectly calculated stock-based compensation expense by reversing the
expense associated with the portion of forfeited stock option awards that had
already vested, resulting in an understatement of stock-based compensation
expense for the respective periods. The Company also corrected the grant date
fair value (a decrease) of one option award which partially offset the
understatement of stock-based compensation expense associated with the forfeited
options.





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





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





-
            The
      Company determined that the net impact of the immaterial error for the
      three and six months ended October 31, 2008 was a decrease to stock-based
      compensation, net loss and comprehensive loss of $1.3 million and $1.1
      million respectively, with a decrease to the basic and diluted net loss
      attributable to common stockholders of $nil and $0.01 per share for the
      three and six months ended October 31, 2008
  respectively.





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





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





Recently
Adopted Accounting Standards





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





8





Effective
May 1, 2009, the Company adopted the authoritative guidance issued by FASB on
the disclosures about derivative instruments and hedging activities. This
guidance amends and expands the disclosure requirements for derivative
instruments and hedging activities. The new guidance requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. The guidance is effective for the Company’s fiscal years
and interim periods beginning on May 1, 2009 and encourages, but does not
require, comparative disclosure for earlier periods at initial adoption. The
adoption of the guidance did not have any impact on the Company’s consolidated
financial statements.





Effective
1, May 2009, the Company adopted the authoritative guidance issued by FASB on
subsequent events. The guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The statement
sets forth:





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


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


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





The
adoption of the guidance did not have a significant impact on the Company’s
consolidated financial statements.




Effective
May 1, 2009, the Company adopted the authoritative guidance issued by FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting be used for all business combinations and
that an acquirer be identified for each business combination. This guidance also
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling (minority) interests in an acquiree and
any goodwill acquired in a business combination or gain recognized from a
bargain purchase. Effective May 1, 2009, the Company also adopted the
authoritative guidance on the accounting for assets acquired and liabilities
assumed in a business combination that arise from contingencies which
establishes a model to account for certain pre-acquisition contingencies. Under
this guidance, an acquirer is required to recognize at fair value an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If it cannot be determined, the
recognition criteria prescribed by the guidance on accounting for contingencies
should be followed. The adoption of this guidance did not have any impact on the
Company’s consolidated statements.


3.         PROPERTY
AND EQUIPMENT





October
      31, 2009
            
            
            April
      30,
              2009Saskatchewan
      Oil Sands RightsPermits
            
            $
            377,117,774
            
            
            $
            341,921,978Licenses
            
            
            2,151,940
            
            
            
            1,949,903Alberta
      Oil Sands RightsPermits
            
            
            33,172,661
            
            
            
            30,044,702Leases
            
            
            7,308,276
            
            
            
            6,622,130Saskatchewan
      Oil Shale Rights (Permits)
            
            
            10,382,000
            
            
            
            9,439,575Equipment
            
            
            14,351,923
            
            
            
            11,635,999Less:
      Accumulated Depreciation
            
            
            (3,826,044)
            
            
            
            (2,638,819)Net
      Book Value
            
            $
            440,658,530
            
            
            $
            398,975,468





a)
            Saskatchewan
      Oil Sands Permits





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





b)
            Saskatchewan
      Oil Sands Licenses





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





9


c)
            Alberta
      Oil Sands Permits





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





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





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





d)
            Alberta
      Oil Sands Lease


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





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





e)
            Saskatchewan
      Oil Shale Permits





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





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





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





This oil
shale permit was acquired under a land sale work commitment bid for the first
two years of the permit.  The Company bid a total work commitment of
$278,739 ($301,568 CDN) to be incurred during the first two years of the permit
and the permit requires a further work commitment of $0.75 ($0.81 CDN) per acre
for the last three years and $1.12 ($1.21 CDN) for each extension year plus
annual rental payments of $0.09 ($0.10 CDN) per acre. Through the exploration
program conducted during the year ended April 30, 2009, the Company has
fulfilled its work commitment for the term of the permit.


10




4.
            ASSET
      RETIREMENT OBLIGATIONS





The
Company’s obligations with respect to asset retirement relate to reclamation of
an airstrip, camp site, access roads and reservoir test holes. The obligation is
recognized when incurred at the present value of the estimated future
reclamation cost using a credit-adjusted risk-free rate of 7% (2008 – 7%) and an
inflation rate of 2.5% (2008 – 2.5%). At October 31, 2009, the total
undiscounted inflation-adjusted future obligation was approximately $9.5
million.





Continuity
      of Asset Retirement ObligationPresent
      value of obligation at April 30, 2009
            
            $
            2,621,439Liabilities
      incurred
            
            
            82,362Liabilities
      settled
            
            
            (58,852)Accretion
      expense
            
            
            94,896Foreign
      currency translation adjustment
            
            
            273,459Present
      value of obligation at October 31, 2009
            
            $
            3,013,304





5.
            OQI
      SASK STOCK OPTIONS





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




Number
            
            
            Weighted
      Average Exercise Price (CDN)Issued
      and outstanding, April 30, 2009
            
            
            1,421,667
            
            
            $
            16.82Exercised
      and exchanged into shares of OQI Sask exchangeable shares (note
      6)
            
            
            -
            
            
            $
            -Issued
      and outstanding, October 31, 2009
            
            
            1,421,667
            
            
            $
            16.82





Exercise
      Price (CDN)
            
            
            Number
              Outstanding
      at
              October
      31, 2009
            
            
            Number
      Exercisable at
              October
      31, 2009
            
            Weighted
      Average Remaining Contractual Life
            Weighted
      Average Grant-Date Fair Value (CDN)
            
            
            
            Aggregate
      Intrinsic Value at October 31, 2009 (CDN)$
            0.50
            
            
            
            75,000
            
            
            
            75,000
            
            1.75
            0.09
            
            
            $
            770,679$
            3.00
            
            
            
            100,000
            
            
            
            100,000
            
            0.79
            0.54
            
            
            
            777,572$
            6.00
            
            
            
            465,000
            
            
            
            465,000
            
            1.25
            28.30
            
            
            
            2,220,712$
            25.00
            
            
            
            731,667
            
            
            
            731,667
            
            1.50
            26.06
            
            
            
            -$
            50.00
            
            
            
            50,000
            
            
            
            50,000
            
            1.75
            32.00
            
            
            
            -1,421,667
            
            
            
            1,421,667
            
            1.39
            
            
            
            $
            3,768,963





The
1,421,667 OQI Sask options outstanding at October 31, 2009 represent 11,700,319
OQI Sask Exchangeable Shares that would be issued on exercise of the OQI Sask
options as a result of the completion of the acquisition of the non-controlling
interest in OQI Sask (see note 6).





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





6.
            OQI
      SASK EXCHANGEABLE SHARES





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





OQI
      Sask Exchangeable Shares
            
            
            OQI
      Sask Exchangeable Shares issuable on exercise of OQI Sask
      options
            
            
            Total
      Exchangeable
              SharesBalance,
      April 30, 2009
            
            
            25,743,916
            
            
            
            11,700,319
            
            
            
            37,444,235OQI
      Sask options exercised (note 5)
            
            
            -
            
            
            
            -
            
            
            
            -Exchangeable
      Shares exchanged into OQI common shares
            
            
            (705,000)
            
            
            
            -
            
            
            
            (705,000)Balance,
      October 31, 2009
            
            
            25,038,916
            
            
            
            11,700,319
            
            
            
            36,739,235


11




7.
            COMMON
      STOCK





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





Under the
terms of the flow-through shares issued on October 3, 2008, the Company
renounced the tax benefits of the related expenditures to the subscribers
effective December 31, 2008. As at October 31, 2009, approximately CDN $29.2
million ($27.0 million) has been expended on exploration in Canada leaving
approximately CDN $10.5 million ($9.7 million) to be incurred.





8.
            STOCK
      OPTIONS





Stock
based compensation generally takes the form of equity classified stock options
granted to employees. Options are granted under the Company’s 2006 Stock Option
Plan and vest over various terms – generally 18 months to three years. One set
of option grants included a performance condition based upon achieving a defined
bitumen in place barrel count. Another set of option grants included both a
market condition based upon total shareholder return over a three year period
and performance conditions based upon achieving a combination of defining a
reservoir recovery configuration and achieving a defined bitumen in place
barrel count.  The fair value of the options containing the performance and
market conditions were estimated at the date of grant and amortization of these
amounts commences when satisfaction of the performance conditions becomes
probable.





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





Options
            
            
            Weighted-
              Average
              Exercise
      Price
            
            
            Weighted-Average
              Grant-Date
              Fair
      Value
            
            
            Aggregate
      Intrinsic
              ValueOutstanding
      at April 30, 2009
            24,582,962
            
            
            $
            4.03
            
            
            $
            2.92Granted
            3,985,000
            
            
            
            0.90
            
            
            
            0.82Exercised
            (760,412)
            
            
            
            0.81
            
            
            
            
            
            
            $
            320,573Expired
            (30,000)
            
            
            
            6.00
            
            
            
            3.55Forfeited
            (4,405,083)
            
            
            
            4.04
            
            
            
            1.72Outstanding
      at October 31, 2009
            23,372,467
            
            
            $
            3.60
            
            
            $
            2.86Exercisable
      at October 31, 2009
            14,434,053
            
            
            $
            4.56
            
            
            $
            3.72
            
            
            $
            887,769





The
weighted-average remaining contractual term of vested and exercisable options at
October 31, 2009 was 3.6 years.





In
addition to the above, OQI Sask has 1,421,667 outstanding options which may be
exercised and exchanged into OQI Sask Exchangeable Shares whereby up to an
additional 11,700,319 OQI common shares may be issued (note 5 and
6).





During
the six months ended October 31, 2009, 3,985,000 options were granted and were
accounted for using either the Black-Scholes option-pricing model or the
trinomial option-pricing model for the option grant subject to a market
condition.  The trinomial option-pricing model takes into account the same
input assumptions as the Black-Scholes model; however, it also further
incorporates into the fair-value determination, the possibility that the market
condition may not be satisfied and the impact of the possible differing
stock price paths.   The following weighted average assumptions
were used to determine the fair value of the options granted during the six
months ended October 31, 2009:





Expected
Life (years)10.0
 Risk free
interest rate3.37%
 Expected
volatility                102.4%
 Dividend
yield                       0.0%
  As at
October 31, 2009, the Company had unrecognized stock option compensation cost of
$3,453,032 which will be recorded in future periods as options vest. The expense
is expected to be recognized over a weighted-average period of 1.1
years.




12




9.
            WARRANTS





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





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





Number
      Of Warrants
            
            
            Weighted
      Average Exercise PriceBalance,
      April 30, 2009 (Note 12)
            
            
            6,325,000
            
            
            $
            6.75Exercised
            
            
            -
            
            
            
            -Warrants
      issued
            
            
            17,537,500
            
            
            
            1.10Balance,
      October 31, 2009
            
            
            23,862,500
            
            
            $
            2.60





10.
            FAIR
      VALUE MEASUREMENTS





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





As
      of October 31, 2009Fair
      Value Measures Using:Carrying
      Amount
            
            
            Total
      Fair Value
            
            
            Quoted
      Prices In Active Markets (Level 1)
            
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            
            Significant
      Unobservable Inputs (Level 3)Financial
      Assets:Available
      for sale equity securities
            
            $
            66,558
            
            
            $
            66,558
            
            
            $
            66,558
            
            
            
            -
            
            
            
            -Short
      Term Investments
            
            $
            12,108,330
            
            
            $
            12,108,330
            
            
            $
            12,108,330
            
            
            
            -
            
            
            
            -





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





11.
            RELATED
      PARTY TRANSACTIONS





The
step-mother of a former executive (resigned December 2008) of the Company is the
sole shareholder of a company that facilitates local on-site labour and
equipment rentals to the Company for field operations.  For the three
and six months ended October 31, 2009, nil (2008 - $989,787) and nil (2008 -
$1,328,838) respectively, have been included in exploration expense. These
transactions are in the normal course of operations. As at October 31, 2009, nil
(April 30, 2009 – $220,273) was payable to the above mentioned
company.  The contract with this company was terminated on March 13,
2009.





The son
of an executive of the Company is a 50% shareholder of a company that
facilitates local on-site kitchen labour and catering functions to the Company
for field operations.  For the three and six months ended October 31,
2009, $357,394 (2008 – $685,647) and $504,439 (2008 - $792,347) respectively,
has been included in exploration expense. These transactions are in the normal
course of operations. As at October 31, 2009, nil (April 30, 2009 -52,010) was
payable to the above mentioned company.





The
brother of an executive of the Company is a 50% shareholder of a company that
provides geophysical and geological analysis to the Company. For the three and
six months ended October 31, 2009, $34,782 (2008 - $54,308) and $94,666 (2008 -
$76,960) respectively, have been included in exploration expense. These
transactions are in the normal course of operations. As at October 31, 2009 to
the Company had nil (April 30, 2009 – nil) payable to the above mentioned
company.




13




12.
            SUBSEQUENT
      EVENTS





In
preparing these consolidated financial statements, subsequent events have been
considered up to December 7, 2009.





Subsequent
to October 31, 2009, 6,325,000 warrants with a weighted average exercise price
of $6.75 expired.





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





The
following discussion addresses material changes in our results of operations and
capital resources and uses for the three and six months ended October 31, 2009,
compared to the three and six months ended October 31, 2008, and our financial
condition and liquidity since April 30, 2009.  It is presumed that
readers have read or have access to our 2009 Annual Report on Form 10-K, which
includes disclosure regarding critical accounting policies and estimates as part
of Management’s Discussion and Analysis of Financial Condition and Results of
Operation.  Unless otherwise stated, all dollar amounts are expressed
in U.S. dollars.  All future payments in Canadian dollars have been
converted to U.S. dollars using an exchange rate of $1.00 U.S. = $1.089 CDN,
which was the October 31, 2009 exchange rate.








Overview





Three
Months Ended October 31, 2009





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


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


-
            In
      mid-October we perforated the two vertical wells at Test Site 3, which are
      approximately 3.5 meters apart, and installed temporary water heating and
      injection facilities.


-
            We
      commenced injecting cold water at low pressure and volume into the base of
      the McMurray formation on October 25, 2009 and established communication
      between the two wells.  Cold water injection and production was
      maintained for 24 hours, following which hot water was injected and
      produced, resulting in the mobilization of bitumen in the
      reservoir.


-
            On
      October 29, 2009, a small amount of naphtha was injected and bitumen
      recovery commenced on October 30, 2009.


-
            We
      continued to circulate hot water without naphtha until November 5, 2009,
      at which time the injection and production facilities were
      removed.  We continued to monitor the temperature and pressure
      in preparation for the next stage in our testing program.


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


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


-
            We
      mobilized 2 drilling rigs and started the overburden characterization
      study on October 19, 2009, which includes a 15-hole coring and advanced
      logging program focusing on assessing the nature and character of the rock
      structures overlying the bitumen bearing McMurray (Dina)
      Foundation.


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


-
            We
      announced the resignation of Dr. Claes Palmgren as Vice President
      Reservoir Engineering.


-
            We
      announced and filed an amended Form 10-Q for the period ended July 31,
      2009 on November 27, 2009.








Six
Months Ended October 31, 2009





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


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


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


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


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


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


-
            We
      disclosed our intention to examine a potential re-organization of our
      Pasquia Hills oil shale assets.


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




14





Operations
Summary:





Exploration
Programs





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





Specific
activities we have been planning on our Axe Lake permits include an overburden
core hole drilling and advanced logging program on permits 208 and 210 and
running a 2-D seismic program on the permits to the north and south of Axe Lake
in Saskatchewan. Both of these programs will further our geological knowledge of
the deposits while meeting work commitments required to extend the exploration
permits until May 31, 2010.  We commenced the overburden
characterization study on October 19, 2009 and presented some preliminary
findings at the Canadian Heavy Oil Conference on November 10,
2009.  The overburden characterization study will yield core material
and advanced logging data (NMR, Dipole, sonic and standard suite geophysical) of
the rocks overlying the bitumen-bearing McMurray (Dina)
Foundation.  Preparatory field work for the 2-D seismic program
commenced in late November.





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





In early
2009, we drilled an additional 23 exploration and delineation test wells in
Raven Ridge. The Raven Ridge drilling program has demonstrated continuity of
bitumen characteristics extending from Axe Lake in Northwest Saskatchewan
westward into Alberta.  We released the updated resource estimates by
McDaniel and Associates in mid-October.





Axe
Lake Area – Reservoir Development Activities





Test Site
3





The
objectives of the field test are to: (1) reliably measure pressure and
temperature changes within the reservoir and adjacent formations as a result of
heating and, (2) use those measurements to calibrate numerical simulation
calculations to the field measurements in order to optimize a recovery program
for future testing, piloting, commercial applications and reservoir
planning.  The electric downhole heater in well 1OBS 5-29-94-25
provided heat to the reservoir and pressures and temperatures were measured and
recorded continuously at ten locations in the hot heater well, 1OBS
5-29-94-25, and the cold observation well, INJ 5-29-94-25.  The heater
was removed from the well on June 26, 2009.  Our detailed engineering
and numerical simulation analysis has confirmed the formation characteristics
and related fluid and thermal properties to be used in continued reservoir
planning at Axe Lake.  We presented a more detailed description of the
conceptual reservoir simulation model, analytical heat transfer calculations,
Test Site 3 geo-models, supporting laboratory work and numerical simulations at
the Canadian International Petroleum Conference held June 16-18,
2009.





In
mid-October we perforated the two vertical wells at Test Site 3, which are
approximately 3.5 meters apart, and installed temporary water, heating and
injection facilities.  The objective of this test was to inject and
produce water at different temperatures in order to:




1.
              confirm
      the establishment of early fluid
movement;
 2.
              confirm
      the ability to establish convective heat transfer at the bottom of the
      reservoir;


3.
              recover
      bitumen by using both hot water and solvent injection;
  and
 4.
              gather
      preliminary data on the horizontal displacement of
  fluids.
  
 We
commenced injecting cold water at low pressure and volume into the base of the
McMurray formation on October 25, 2009 and established communication between the
two wells.  Cold water circulation was maintained for 24 hours,
following which heated water was circulated, resulting in the mobilization of
bitumen in the reservoir.  On October 29, 2009, a small amount of
naphtha was injected and bitumen recovery commenced on October 30,
2009.




15





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





Test Site
1





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





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





In
preparation for Phase Two of the testing program at Test Site 1, we have drilled
and completed observation wells and commissioned the necessary surface
facilities at the site.  Water and steam injection into the 3
horizontal wells already drilled is planned to begin following the completion of
the surface facilities associated with the horizontal test
holes.  This work will commence after the testing and analysis from
Phase One is complete.





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





Pasquia Hills Oil Shale Permit
Area





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





Environmental
and Regulatory





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





Outlook





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





We are
continuing our testing program based on the current assumption/geological
interpretation that there is no overlying Clearwater Shale Formation associated
with our oil sands reservoir. While additional analysis is required, the early
results of the overburden characterization study have confirmed multiple dense,
low permeability units within the overburden.  The results of our
advanced laboratory studies and numerical reservoir simulations indicate that
bitumen production can best be achieved using a reconfiguration of traditional
SAGD methods, where we utilize horizontal wells configured in parallel at the
bottom of the reservoir. Our analysis points to the three essential elements for
a successful application of the bottom-up approach to bitumen
extraction:




1.
            establish
      and maintain mobility at the bottom of the oil sands
      reservoir;


2.
            utilize
      the full length of the horizontal wells while the bitumen is being
      produced; and


3.
            implement
      a comprehensive reservoir monitoring system to observe and manage the
      growth of the swept zone.





A
sequential approach to the reservoir test program is required, both in the scale
of the field operations at Test Site 1 and by moving from vertical wells to
short horizontal wells and then to commercial length horizontal
wells.





16





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





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


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


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


-
            We
      expect to incorporate the results of the overburden characterization study
      into our reservoir simulation
models.


-
            We
      expect to submit an application for a pilot project at Axe Lake in late
      2009 or early 2010.  The pilot project application will be
      partly based on a low pressure steam based bitumen recovery process
      currently being tested as part of the reservoir test program and the
      application will trigger an Environmental Impact
    Assessment.


-
            We
      are continuing the planning of additional exploration programs to further
      define the location, extent and quality of the potential
      bitumen resource in Axe Lake, Raven Ridge, Wallace Creek, Eagles
      Nest, and adjacent areas as appropriate.  We are considering an
      exploration program at Raven Ridge during the 2009/2010 winter drilling
      season.


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


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








Liquidity
and Capital Resources





At
October 31, 2009, the Company held cash and short term investments totalling
$46.3 million (April 30, 2009 - $32.2 million)





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





During
the six months ended October 31, 2009, the Company expended $13.3 million on
operations and $1.7 million on property and equipment.





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





Results
of Operations





Net
loss





Three Months ended October 31, 2009
as compared to three months ended October 31, 2008.The Company
experienced a net loss of $13.2 million or $0.04 per share for the three months
ended October 31, 2009 as compared to a net loss of $42.9 million or $0.17 per
share for the three months ended October 31, 2008. The decline in the net loss
is due to a reduction in exploration activity and stock-based compensation
expense as compared to the same quarter last year.





Six Months ended October 31, 2009 as
compared to six months ended October 31, 2008. The Company experienced a
net loss of $18.0 million or $0.06 per share for the six months ended October
31, 2009 as compared to a net loss of $57.2 million or $0.22 per share for the
six months ended October 31, 2008.  The decline in the net loss is
mainly due to the reduction in exploration activity and stock-based compensation
expense as compared to the same period last year.





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





17





Exploration
costs





Three and six months October 31,
2009 as compared to three and six months ended October 31, 2008.Exploration costs for the three months ended October 31, 2009 were $8.8
million (2008 - $37.3 million).  Exploration costs for the six months
ended October 31, 2009 were $12.4 million (2008 - $47.7 million). The Operations
Summary above provides a summary of the exploration activities conducted in the
three and six months ended October 31, 2009.  Exploration expenditures
in the three and six months ended October 31, 2008 related mainly to drilling,
seismic, engineering, environmental and construction costs associated with Test
Sites 1 & 3.





General
and administrative





Corporate





Three and six months ended October
31, 2009 as compared to three and six months ended October 31, 2008.General and administrative expenses settled with cash for the three
months ended October 31, 2009 were $3.4 million (2008 - $3.4 million). 
General and administrative expenses settled with cash for the six months ended
October 31, 2009 were $7.2 million (2008 - $6.2 million). Expenditures in
the three month period ended October 31, 2009 consist of salaries ($1.4
million), legal and other professional fees ($0.7 million) and general office
costs ($1.3 million).  General and administrative expenses in the six
months ended October 31, 2009 consist of salaries ($3.6 million), legal and
other professional fees ($1.4 million) and general office costs ($2.2
million).  General and administrative expenses settled with cash in
the three months ended October 31, 2008 consisted of salaries ($1.5 million),
legal and other professional fees ($0.7 million) and general office costs ($1.2
million).  General and administrative expenses in the six months ended
October 31, 2008 consisted of salaries ($2.4 million), legal and other
professional fees ($1.6 million) and general office costs ($2.2
million).





At
October 31, 2009 there were 53 employees including 13 seasonal field employees,
at October 31, 2008 there were 117 employees including 69 seasonal field
employees. The increase in salaries and wages during the six months ended
October 31, 2009 occurred as result of severances paid during the quarter ended
July 31, 2009.





Stock-based
compensation





Three and six months ended October
31, 2009 as compared to three and six months ended October 31,
2008.  Stock-based compensation for the three months ended
October 31, 2009 was $1.1 million (2008 – $8.2 million) and $2.8 million for the
six months ended October 31, 2009 (2008 - $12.0 million).  Stock-based
compensation expense for the three and six months ended October 31, 2009 and
2008 consists of stock-based compensation related to the issuance of options to
directors, officers, employees and consultants.   The grant date fair
value of the stock options were estimated using either the Black-Scholes
valuation model or the trinomial option-pricing model, both of which require the
input of highly subjective assumptions, including the expected life of the
options and the expected stock price volatility determined using the historical
volatility of the price of shares of the Company’s common stock.  The
decrease during the three and six months ended October 31, 2009 compared to the
same periods in the prior year is the result of 4.4 million options
forfeited due to a reduction in the number of employees that was greater than
the anticipated forfeiture rate.





Foreign
exchange gain (loss)





Three and six months ended October
31, 2009 as compared to three and six months ended October 31, 2008. A
foreign exchange loss of $0.1 million (2008 —$4.6 million) during the three
months ended October 31, 2009 resulted from holding Canadian funds in the parent
company when the value of the Canadian dollar slightly declined compared to the
U.S. dollar.  For the six months ended October 31, 2009, a foreign
exchange gain of $3.1 million (2008 – loss of $5.4 million) resulted from
holding Canadian funds in the parent company when the value of the Canadian
dollar increased compared to the U.S. dollar.





Depreciation
and accretion





Three and six months ended October
31, 2009 as compared to three and six months ended October 31, 2008.Depreciation and accretion expense for the three months ended October 31,
2009 was $0.6 million (2008 - $0.5 million) and $1.0 million for the six months
ended October 31, 2009 (2008 - $0.8 million). Depreciation expense relates
to camp facilities, equipment and corporate assets which are being depreciated
over their useful lives of three to five years. Accretion expense relates to the
asset retirement obligation recognized on the airstrip, camp site, access roads
and reservoir test sites which are being brought into income over a period 10 of
30 years. The change from the three and six-month periods ended October 31, 2008
to the three and six-month periods ended October 31, 2009 relates to the
increase in assets held during the period.  Additions to the property
and equipment for the six months ended October 31, 2009 totalled $1.7
million.




18





Interest
and other income





Three and six months ended October
31, 2009 as compared to three and six months ended October 31, 2008.Interest income for the three months ended October 31, 2009 was $0.01
million (2008 - $0.4 million). Interest income for the six months ended
October 31, 2009 was $0.1 million (2008 - $0.8 million). Interest income is
earned because the Company pre-funds its activities and the resulting cash on
hand which is invested in short-term deposits. The decrease in interest income
this period as compared to the same period in the prior year reflects the
decrease in short term investments and the decrease in market interest rates
over the intervening year.





Deferred
income tax benefit





Three and six months ended October
31, 2009 as compared to three and six months ended October 31, 2008. The
deferred income tax benefit for the three months ended October 31, 2009 was
$0.7 million (2008 - $10.8 million).  The deferred income tax benefit
for the six months ended October 31, 2009 was $2.2 million(2008 – $14.2
million).  The decrease in the deferred tax benefit during the three
and six month periods ended October 31, 2009 compared to the same periods last
year is mainly due to a reduction in exploration costs incurred.




The
deferred tax liability reported on the balance sheet is mainly related to the
book value of property which will not be deductible for tax purposes and is
related to the Company’s 2006 acquisition of the minority interest in OQI
Sask.





Recently
Issued Accounting Standards Not Yet Adopted





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





Off-Balance
Sheet Arrangements





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





Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Not
applicable.





Item
4.  Controls and
Procedures





Disclosure
Controls and Procedures and Internal Control over Financial
Reporting





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





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





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The material
weakness in our internal control over financial reporting as of October 31, 2009
existed as we did not maintain effective processes and controls over the
accounting for and reporting of complex and non-routine transactions.
Specifically, we did not have sufficient appropriate level of technical
knowledge, experience and training in the accounting for asset acquisitions,
stock-based compensation, and deferred income taxes. This control deficiency
resulted in the restatement of the consolidated financial statements for the
years ended April 30, 2008 and 2007 and each of the quarters in fiscal 2009 and
2008 and for the first quarter in fiscal 2010.




19





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





Changes
in Internal Control Over Financial Reporting





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





PART
II - OTHER INFORMATION





Item
1.   Legal
Proceedings





None.





Item
1A.  Risk
Factors





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





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





None.





Item
3.  Defaults Upon Senior
Securities





None.





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





On
October 14, 2009, we held our annual meeting of shareholders in Calgary
Alberta.  Two proposals were submitted to the shareholders for
approval as set forth in our definitive proxy statement dated August 28,
2009.  At the meeting shares representing 201,000,000 of the total
votes entitled to be cast were present at the meeting in person or represented
by proxy (being Common Shares outstanding as of the record date and one share of
Series B preferred stock).  This represented approximately 69.92 % of
the total votes entitled to be cast at the meeting and constituted a
quorum.  The votes on each proposal were cast as described
below.




At the
meeting the shareholders voted to elect and/or re-elect: (i) four Class A
directors to serve a three year term until the 2012 annual meeting; (ii) one
Class B director to serve until the 2011 annual meeting; and (iii) one Class C
director to serve until the 2010 annual meeting.  The names of the
directors elected, and the number of votes cast for and withheld were as
follows:




Name
              Votes
      FOR
              WITHOLD
      Authority to VoteClass
      A DirectorsChristopher
      H. Hopkins
              195,983,704
              4,493,851Gordon
      Tallman
              194,338,381
              6,139,174John
      Read
              195,889,530
              4,588,025Pamela
      Wallin
              195,492,404
              4,985,151Cass
      B DirectorRonald
      Blakely
              195,871,738
              4,605,817Class C DiectorBrian
      F. MacNeill
              195,274,519
              5,203,036





As a
result of the Company’s staggered Board of Directors, the following directors
who were not up for re-election at the annual meeting of shareholders continued
to serve on the Company’s Board of Directors, Thomas Milne, Ronald Phillips, and
Scott Thompson.




20




Additionally,
the shareholders ratified and approved KPMG LLP as our independent registered
public accounting firm.  The shares voted for, against and abstained
on the proposal were as follows:




Shares
      FOR
            Shares
      AGAINST
            ABSTAINED162,378,004
            37,794,865
            304,685





Item
5.  Other
Information





None.





ITEM
6. Exhibits.








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.


_______________





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SIGNATURES





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





OILSANDS
      QUEST INC.Date:  December
      7, 2009
            By:
            /s/
      Christopher H. HopkinsChristopher
      H. Hopkins, President, Chief Executive Officer and
  DirectorDate:  December
      7, 2009
            By:
            /s/
      Garth WongGarth
      Wong, Chief Financial Officer and Chief Accounting
  Officer
















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