---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the transition period from _____________ to
_____________

Commission file number 000-51241

SOURCE PETROLEUM
INC.(Exact name of small business issuer as specified in its
charter)

|Nevada                                                               | 98-0443283                          
|-------------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or
      organization) | (I.R.S. Employer Identification No.)

Suite 620, 304 - 8thAvenue, S.W., Calgary,
Alberta T2P 1C1 Canada(Address of principal executive
offices)

403.444.2893 x 223(Issuers telephone number)

_______________________________________________
  (Former name, former address and former fiscal year, if changed since last report)

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuers
classes of common equity, as of the latest practicable date:

70,845,827 shares of common stock issued and outstanding as
of May 14, 2006.

Transitional Small Business Disclosure Format (Check one): Yes [
] No [X]

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

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PART I  FINANCIAL INFORMATION

|Item 1. | Financial Statements
|------- | --------------------

These financial statements have been prepared by Source
Petroleum Inc. (the Company) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted in accordance with such SEC rules and regulations. In the opinion of
management, the accompanying statements contain all adjustments necessary to
present fairly the financial position of the Company as of March 31, 2007, and
its results of operations, stockholders equity, and its cash flows for the
three month period ended March 31, 2007 and 2006. The results for these interim
periods are not necessarily indicative of the results for the entire year. The
accompanying financial statements should be read in conjunction with the
financial statements and the notes thereto filed as a part of the Companys Form
10-KSB.

2

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|SOURCE PETROLEUM INC.               
|------------------------------------
|(An exploration stage enterprise)   
|Unaudited Consolidated Balance Sheet
|(Expressed in U.S. Dollars)         
|March 31, 2007                      

|                                                                                                    |   | March 31,2007 |  
|--------------------------------------------------------------------------------------------------- | - | ------------- | -
|ASSETS                                                                                              |   |               |  
|Current assets                                                                                      |   |               |  
|Cash and cash equivalents                                                                           | $ | 339,898       |  
|Prepaid expenses                                                                                    |   | 122,451       |  
|Total current assets                                                                                |   | 462,349       |  
|Loan receivable (Note 3)                                                                            |   | 4,279,219     |  
|Mineral properties (Note 4)                                                                         |   | -             |  
|Petroleum & natural gas properties (Note 5)                                                         |   | 46,995,787    |  
|                                                                                                    |   |               |  
|Total assets                                                                                        | $ | 51,737,355    |  
|LIABILITIES                                                                                         |   |               |  
|Current liabilities                                                                                 |   |               |  
|Accounts payable and
      accrued expenses                                                         | $ | 578,542       |  
|Loan payable                                                                                        |   | 900,000       |  
|Total current liabilities                                                                           |   | 1,478,542     |  
|                                                                                                    |   |               |  
|STOCKHOLDERS EQUITY                                                                                |   |               |  
|Share capital                                                                                       |   |               |  
|Preferred stock, $0.0001
      par value, 5,000,000 shares authorized, none issued and outstanding  |   |               |  
|Common
      stock, $0.0001 par value, 4,500,000,000 shares authorized, 70,845,827
      issued and |   |               |  
|outstanding (Note 7)                                                                                |   | 7,084         |  
|Additional paid-in capital                                                                          |   | 52,774,931    |  
|                                                                                                    |   |               |  
|Deficit accumulated during the exploration stage                                                    |   | (2,523,202    | )
|Total
      stockholders equity                                                                    |   | 50,258,813    |  
|Total liabilities and stockholders equity                                                          | $ | 51,737,355    |  

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

3

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|SOURCE PETROLEUM INC.                          
|-----------------------------------------------
|(An exploration stage enterprise)              
|Unaudited Consolidated Statements of Operations
|(Expressed in U.S. Dollars)                    

|                                               |   | Cumulative October 14,            |   |   | Three Month |   |   | Three Month |  
|---------------------------------------------- | - | --------------------------------- | - | - | ----------- | - | - | ----------- | -
|                                               |   | **2001(inception)
      to** **** |   |   | Ended       |   |   | Ended       |  
|                                               |   | March 31,                         |   |   | March 31,   |   |   | March 31,   |  
|                                               |   | 2007                              |   |   | 2007        |   |   | 2006        |  
|Revenue                                        |   |                                   |   |   |             |   |   |             |  
|Interest Income                                | $ | 7,359                             |   | $ | -           |   | $ | -           |  
|General and administrative expenses            |   |                                   |   |   |             |   |   |             |  
|Bank charges                                   | $ | 1,330                             |   | $ | 76          |   | $ | 57          |  
|Consulting fees                                |   | 212,068                           |   |   | 47,500      |   |   | -           |  
|Exchange gain/loss                             |   | (3,173                            | ) |   | (2,096      | ) |   | 23          |  
|Finder fees                                    |   | 1,064,775                         |   |   | -           |   |   | -           |  
|Management fees                                |   | 16,050                            |   |   | -           |   |   | -           |  
|Marketing and investor relation                |   | 83,089                            |   |   | 32,013      |   |   | -           |  
|Mineral property expenditures                  |   | 52,225                            |   |   | -           |   |   | -           |  
|Office and miscellaneous                       |   | 52,289                            |   |   | 13,167      |   |   | 113         |  
|Oil and Gas Expenditures                       |   | 496,556                           |   |   | -           |   |   | -           |  
|Professional fees                              |   | 378,667                           |   |   | 110,451     |   |   | 26,983      |  
|Stock-based compensation                       |   | 135,624                           |   |   | 135,624     |   |   |             |  
|Transfer agent and filing fees                 |   | 30,507                            |   |   | 17,190      |   |   | 352         |  
|Travel &
      promotion                       |   | 10,554                            |   |   | 676         |   |   | -           |  
|                                               |   | 2,530,561                         |   |   | 354,601     |   |   | 27,528      |  
|Net loss                                       | $ | (2,523,202                        | ) | $ | (354,601    | ) | $ | (27,528     | )
|Basic and diluted loss per share               |   |                                   |   |   |             |   |   |             |  
|Net loss per share                             |   |                                   |   | $ | (0.01       | ) | $ | (0.00       | )
|Weighted average number of Common
      shares |   |                                   |   |   |             |   |   |             |  
|outstanding                                    |   |                                   |   |   | 70,845,827  |   |   | 98,992,500  |  

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

4

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|SOURCE PETROLEUM INC.                                      
|-----------------------------------------------------------
|(An exploration stage enterprise)                          
|Unaudited Consolidated Statements of Stockholders' Equities
|(Expressed in U.S. Dollars)                                

|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   | Additional         |   |   |            |   |   | Deficit accumulated |   |   | Total stockholders |  
|---------------------------------------------------------- |  | ------------------- |  |  | ------------ |  |  | ----------- | - | - | ------------ | - | - | ------------------ | - | - | ---------- | - | - | ------------------- | - | - | ------------------- | -
|                                                           |  | **Preferred Stock** |  |  | Common Stock |  |  | paid-in     |   |   | Subscription |   |   | during exploration |   |   | (deficit)  |  
|                                                           |  | **Shares**          |  |  | Amount       |  |  | Shares      |   |   | Amount       |   |   | capital            |   |   | received   |   |   | stage               |   |   | equity              |  
|Stocks issued at $0.000002 per share in
      October 2001 |  | -                   |  |  | -            |  |  | 67,500,000  |   | $ | 6,750        |   | $ | (6,600             | ) |   |            |   | $ | -                   |   | $ | 150                 |  
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Net loss for the period                                    |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (542                | ) |   | (542                | )
|Balance,December 31, 2001                                  |  | -                   |  |  | -            |  |  | 67,500,000  |   |   | 6,750        |   |   | (6,600             | ) |   |            |   |   | (542                | ) |   | (392                | )
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Stocks issued at $0.003 per share in Feb 2002              |  | -                   |  |  | -            |  |  | 8,842,500   |   |   | 884          |   |   | 28,591             |   |   |            |   |   | -                   |   |   | 29,475              |  
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Net loss for the
      period                              |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (9,283              | ) |   | (9,283              | )
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Balance,December 31, 2002                                  |  | -                   |  |  | -            |  |  | 76,342,500  |   |   | 7,634        |   |   | 21,991             |   |   |            |   |   | (9,825              | ) |   | 19,800              |  
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Net loss for the
      period                              |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (24,450             | ) |   | (24,450             | )
|Balance,December 31, 2003                                  |  | -                   |  |  | -            |  |  | 76,342,500  |   |   | 7,634        |   |   | 21,991             |   |   |            |   |   | (34,275             | ) |   | (4,650              | )
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Stocks issued at $0.0044 per share in
      December 2004  |  | -                   |  |  | -            |  |  | 22,500,000  |   |   | 2,250        |   |   | 97,750             |   |   |            |   |   | -                   |   |   | 100,000             |  
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Net loss for the period                                    |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (16,241             | ) |   | (16,241             | )
|Balance,December 31, 2004                                  |  | -                   |  |  | -            |  |  | 98,842,500  |   |   | 9,884        |   |   | 119,741            |   |   |            |   |   | (50,516             | ) |   | 79,109              |  
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Net loss for the
      period                              |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (87,565             | ) |   | (87,565             | )
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Balance,December 31, 2005                                  |  | -                   |  |  | -            |  |  | 98,842,500  |   |   | 9,884        |   |   | 119,741            |   |   |            |   |   | (138,081            | ) |   | (8,456              | )
|                                                           |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Stocks issued at $0.03 per share in March 2006             |  | -                   |  |  | -            |  |  | 1,500,000   |   |   | 150          |   |   | 49,850             |   |   |            |   |   | -                   |   |   | 50,000              |  
|"Units" issued in May 2006                                 |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Stocks issued at $1.00 per share                           |  | -                   |  |  | -            |  |  | 2,000,000   |   |   | 200          |   |   | 622,512            |   |   |            |   |   | -                   |   |   | 622,712             |  
|Value of warrants
      issued with stock                  |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|units ($1.25 per share)                                    |  |                     |  |  |              |  |  |             |   |   |              |   |   | 709,429            |   |   |            |   |   |                     |   |   | 709,429             |  
|Value of warrant
      issued with stock units             |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|($1.50 per share)                                          |  |                     |  |  |              |  |  |             |   |   |              |   |   | 667,860            |   |   |            |   |   |                     |   |   | 667,860             |  
|Share subscriptions received                               |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   | 5,554,890  |   |   |                     |   |   | 5,554,890           |  
|Stock issued under subscriptions                           |  | -                   |  |  | -            |  |  | 3,703,327   |   |   | 370          |   |   | 3,338,128          |   |   | (3,338,498 | ) |   | -                   |   |   | -                   |  
|"Units" issued in July 2006                                |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|Stocks
      issued at $1.50 per share                     |  |                     |  |  |              |  |  | 300,000     |   |   | 30           |   |   | 270,416            |   |   | (270,446   | ) |   |                     |   |   | -                   |  
|Values
      of warrants issued with stock                 |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|units
      ($2.25 per share)                              |  |                     |  |  |              |  |  |             |   |   |              |   |   | 2,396,046          |   |   | (1,945,946 | ) |   |                     |   |   | 450,100             |  
|Value of warrants issued as finders fee
      ($1.50 per  |  |                     |  |  |              |  |  |             |   |   |              |   |   |                    |   |   |            |   |   |                     |   |   |                     |  
|share)                                                     |  |                     |  |  |              |  |  |             |   |   |              |   |   | 461,775            |   |   |            |   |   |                     |   |   | 461,775             |  
|Stocks issued at $1.375 per share in September
      2006  |  |                     |  |  |              |  |  | 32,000,000  |   |   | 3,200        |   |   | 43,996,800         |   |   |            |   |   |                     |   |   | 44,000,000          |  
|Shares cancelled                                           |  |                     |  |  |              |  |  | (67,500,000 | ) |   | (6,750       | ) |   | 6,750              |   |   |            |   |   |                     |   |   | -                   |  
|Net loss for the period                                    |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (2,030,520          | ) |   | (2,030,520          | )
|Balance,December 31, 2006                                  |  |                     |  |  |              |  |  | 70,845,827  |   | $ | 7,084        |   | $ | 52,639,307         |   | $ | -          |   | $ | (2,168,601          | ) | $ | 50,477,790          |  
|Stock options issued, January 2007                         |  |                     |  |  |              |  |  |             |   |   |              |   |   | 135,624            |   |   |            |   |   |                     |   |   | 135,624             |  
|Net loss for the period                                    |  | -                   |  |  | -            |  |  | -           |   |   | -            |   |   | -                  |   |   |            |   |   | (354,601            | ) |   | (354,601            | )
|Balance,March 31, 2007                                     |  |                     |  |  |              |  |  | 70,845,827  |   | $ | 7,084        |   | $ | 52,774,931         |   | $ | -          |   | $ | (2,523,202          | ) | $ | 50,258,813          |  

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

5

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|SOURCE PETROLEUM INC.                          
|-----------------------------------------------
|(An exploration stage enterprise)              
|Unaudited Consolidated Statements of Cash Flows
|(Expressed in U.S. Dollars)                    

|                                                                                 |   | Cumulative       |   |   |             |   |   | Three     |  
|-------------------------------------------------------------------------------- | - | ---------------- | - | - | ----------- | - | - | --------- | -
|                                                                                 |   | October 14, 2001 |   |   | Three Month |   |   | Month     |  
|                                                                                 |   | (inception) to   |   |   | Ended       |   |   | Ended     |  
|                                                                                 |   | March 31,        |   |   | March 31,   |   |   | March 31, |  
|                                                                                 |   | 2007             |   |   | 2007        |   |   | 2006      |  
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Cash flows used in operating activities                                          |   |                  |   |   |             |   |   |           |  
|Net loss for the period                                                          | $ | (2,523,202       | ) | $ | (354,601    | ) | $ | (27,528   | )
|Adjustment to reconcile net loss to net cash
      used in operating activities: |   | -                |   |   |             |   |   |           |  
|Stock based compensation                                                         |   | 135,624          |   |   | 135,624     |   |   |           |  
|Warrants issued as finder
      fee                                              |   | 461,775          |   |   |             |   |   | -         |  
|Changes in non-cash working capital items:                                       |   |                  |   |   |             |   |   |           |  
|Prepaid expenses                                                                 |   | (122,451         | ) |   | 1,103,530   |   |   | -         |  
|Accounts payable and accrued expenses                                            |   | 578,542          |   |   | 218,281     |   |   | 11,383    |  
|                                                                                 |   | -                |   |   |             |   |   |           |  
|Net cash used in
      operating activities                                      |   | (1,469,712       | ) |   | 1,102,832   |   |   | (16,145   | )
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Cash flows from investing activities                                             |   |                  |   |   |             |   |   |           |  
|Loan receivable                                                                  |   | (4,279,219       | ) |   | (600,000    | ) |   | -         |  
|Petroleum & natural gas properties                                               |   | (2,995,787       | ) |   | (1,243,511  | ) |   | -         |  
|                                                                                 |   | -                |   |   |             |   |   |           |  
|Net Cash flows from investing activities                                         |   | (7,275,006       | ) |   | (1,843,511  | ) |   | -         |  
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Cash flows from financing activities                                             |   |                  |   |   |             |   |   |           |  
|Loan proceeds                                                                    |   | 900,000          |   |   | 900,000     |   |   |           |  
|Proceeds from issuance of common stock and warrants                              |   | 8,184,616        |   |   | -           |   |   | 50,000    |  
|Due to a related party                                                           |   | -                |   |   |             |   |   | (2,500    | )
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Net cash from financing activities                                               |   | 9,084,616        |   |   | 900,000     |   |   | 47,500    |  
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Increase (decrease) in cash and cash equivalents                                 |   | 339,898          |   |   | 159,323     |   |   | 31,355    |  
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Cash and cash equivalents,beginning of year                                      |   | -                |   |   | 180,577     |   |   | 162       |  
|                                                                                 |   | -                |   |   |             |   |   |           |  
|Cash and cash equivalents, end of year                                           | $ | 339,898          |   | $ | 339,898     |   | $ | 31,517    |  
|                                                                                 |   |                  |   |   |             |   |   |           |  
|Supplemental cash flow information:                                              |   |                  |   |   |             |   |   |           |  
|Interest expenses paid                                                           | $ | -                |   | $ | -           |   | $ | -         |  
|Income taxes paid                                                                |   | -                |   |   | -           |   |   | -         |  

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

6

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|Source Petroleum, Inc. (an exploration state
      enterprises)
|---------------------------------------------------------------
|Notes to Consolidated Financial Statements                     

|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited interim
balance sheets, statements of operations, statements of shareholders equity and
cash flows reflected all adjustments, consisting of normal recurring adjustments
and other adjustments, that are, in the opinion of management, necessary for a
fair presentation of the financial position of the Company, at March 31, 2007
and the results of operations, shareholders equity and cash flows for the
interim period ended March 31, 2007. The accompanying unaudited financial
statements have been prepared in accordance with the instruction from Form
10-QSB pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and notes normally
provided in audited financial statements and should be read in conjunction with
the Companys financial statements filed with Form 10-KSBfor the fiscal year
ended December 31, 2006. The result of operations for the interim periods
presented is not necessarily indicative of the results to be expected for the
full year.

| | a) | Organization
| | -- | ------------

Source Petroleum, Inc. (the Company)
was formed as Red Sky Resources, Inc. on December 20, 2004 upon the merger (the
Merger) of Pacific Petroleum Inc., a Delaware corporation (Pacific
Petroleum) with its wholly owned subsidiary, Red Sky Resources Inc., a Nevada
corporation (Red Sky Nevada). Pacific Petroleum was incorporated under the
laws of the State of Delaware on October 14, 2001. Red Sky Nevada was
incorporated under the laws of the State of Nevada on November 23, 2004. At the
time of the Merger, Pacific Petroleum owned all of the issued and outstanding
shares of Red Sky Nevada. Each share of Pacific Petroleum common stock issued
and outstanding immediately prior to the Merger was converted into one share of
common stock of Red Sky Nevada. The surviving legal entity is Red Sky Nevada
while the financial statements are the continuation of Pacific Petroleum. On May
25, 2006, the Company changed into name to Source Petroleum, Inc.

The Company is in the business of
exploring mineral and oil and gas properties. The Company has not yet determined
whether its properties contain mineral or petroleum resources that may be
economically recoverable. The Company therefore is considered to be an
exploration stage company.

The recoverability of mineral property
costs is dependent upon the existence of economically recoverable reserves,
confirmation of the Companys interest in the underlying mineral claims, and the
ability of the Company to obtain necessary financing to complete the exploration
and upon future profitable production.

On April 25, 2006, the Company entered
into a non-binding letter of intent to acquire all of the issued and outstanding
shares of 1245147 Alberta Ltd., an Alberta corporation engaged in the oil and
gas exploration business that was wholly-owned by Source Projects, Inc. The
Company purchased all of the issued shares of Source Projects, Inc. by way of a
share exchange in September 2006 to further its mineral properties exploration
on December 8, 2006. Source Projects, Inc. was dissolved the Company became the
sole shareholder of 12451147 Alberta Ltd.

| | b) | Going Concern
| | -- | -------------

These consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
applicable to a going concern, which contemplates the realization of assets and
the satisfaction of liabilities and commitments in the normal course of
business. The Company has not generated any revenue and requires additional
funds to maintain its operations. Managements plans in this regard are to raise
equity financing as required.

These conditions raise substantial
doubt about the Companys ability to continue as a going concern. These
financial statements do not include any adjustments that might result from this
uncertainty. The consolidated financial statements for the fiscal years ended
December 31, 2006 and 2005 were prepared assuming that the Company would
continue as a going concern. The Companys ability to continue as a going
concern is an issue raised as a result of recurring losses from operations and
working capital

7

---

deficiency. The Companys ability to
continue as a going concern is also subject to its ability to obtain necessary
funding from outside sources, including obtaining additional funding from the
sale of its securities. The Company is currently pursuing financing
opportunities through private investment offering of its securities. and is
optimistic about the likelihood of obtaining such financing based on recent
positive preliminary results from exploration activities undertaken at its
properties.

|2. | Significant Accounting Policies
|-- | -------------------------------

| | a) | Basis of Consolidation
| | -- | ----------------------

These consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, 1223121
Alberta Ltd. All significant inter-company balances and transactions have been
eliminated.

| | b) | Cash and Cash Equivalents
| | -- | -------------------------

Cash equivalents comprise certain
highly liquid instruments with a maturity of three months or less when
purchased. As at March 31, 2007, cash and cash equivalents consist of cash and
trust only.

| | c) | Accounting Estimates
| | -- | --------------------

The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and assumptions.

| | d) | Mineral Properties/ Petroleum & natural gas
      properties
| | -- | ------------------------------------------------------------

The Company utilizes the full cost
method to account for its investment in mineral, oil and gas properties.
Accordingly, all costs associated with acquisition, exploration and development
of mineral, oil and gas reserves, including such costs as leasehold acquisition
costs, interest costs relating to unproved properties, geological expenditures
and direct internal costs are capitalized into the full cost pool. As of
December 31, 2006, the Company has no properties with proven reserves. When the
Company obtains proven mineral, oil and gas reserves, capitalized costs,
including estimated future costs to develop the reserves and estimated
abandonment costs, net of salvage, will be depleted on the units-of-production
method using estimates of proved reserves. Investments in unproved properties
and major development projects including capitalized interest, if any, are not
amortized until proved reserves associated with the projects can be determined.
If the future exploration of unproved properties are determined uneconomical,
the amount of such properties are added to the capitalized cost to be amortized.
As of March 31, 2007, all of the Companys mineral, oil and gas properties were
unproved and were excluded from amortization.

The capitalized costs included in the
full cost pool are subject to a ceiling test, which limits such costs
to the aggregate of the estimated present value, using an estimated discount
rate, of the future net revenues from proved reserves, based on current economic
and operating conditions and the estimated value of unproven properties. As of
March 31, 2007, none of the Companys unproved mineral, oil and gas properties
were considered impaired.

| | e) | Foreign Currency Transactions
| | -- | -----------------------------

The Company maintains its accounting
records in U.S. Dollars, as follows:

At the transaction date, each asset,
liability, revenue and expense is translated into U.S. dollars by the use of the
exchange rate in effect at that date. At the period end, monetary assets and
liabilities are remeasured by using the exchange rate in effect at that date.
The resulting foreign exchange gains and losses are included in operations.

8

---

| | f) | Fair Value of Financial Instruments
| | -- | -----------------------------------

The Companys financial instruments
consist of cash and cash equivalents, loan receivable, and accounts payable and
accrued liabilities. The carrying amounts of these financial instruments
approximate fair value due to the short-term nature of these items. Management
is of the opinion that the Company is not exposed to significant interest,
currency or credit risks arising from these financial instruments.

| | g) | Income Taxes
| | -- | ------------

The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires the Company to recognize deferred tax liabilities and assets for
the expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns using the liability method. Under
this method, deferred tax liabilities and assets are determined based on the
temporary differences between the financial statements and tax bases of assets
and liabilities using enacted tax rates in effect in the periods in which the
differences are expected to reverse.

| | h) | Contingencies
| | -- | -------------

The Company is subject to legal claims
and disputes in the ordinary course of its exploration activities. The Company
estimates that any financial impact from legal claims and disputes will not be
material to the consolidated financial statements.

| | i) | Comprehensive Income
| | -- | --------------------

The Company adopted SFAS No. 130,
Reporting Comprehensive Income, which requires inclusion of foreign currency
translation adjustments, reported separately in its Statement of Stockholders
Equity, in other comprehensive income. The Company had no other comprehensive
income for the periods presented.

| | j) | Loss per Share
| | -- | --------------

Loss per share is computed using the
weighted average number of shares outstanding during the periods. The Company
has adopted SFAS No. 128, Earnings per Share. Diluted loss per share is
equivalent to basic loss per share since the warrants outstanding are all anti
dilutive for the periods presented because the Company had a net loss.

On February 3, 2006, the Board approved
a forward stock split on a 30 new for 1 old basis. On April 15, 2006, the Board
approved another forward stock split on a 1.5 new for 1 old basis. All per share
date in these consolidated financial statements is presented on a post split
basis.

| | k) | Stock-based Compensation
| | -- | ------------------------

The Company accounts for stock-based
awards in accordance with SFAS No. 123(R) using the modified prospective method,
which requires measurement of compensation cost for all stock-based awards at
fair value on the date of grant and recognition of compensation over the service
period for awards expected to vest. The fair value of stock options is
determined using the Black-Scholes valuation model, which is consistent with the
Companys valuation techniques previously utilized for options in footnote
disclosures required under SFAS No. 123, Accounting for Stock Based
Compensation, as amended by SFAS No. 148, Accounting for Stock Based
Compensation Transition and Disclosure.

| | l) | New Accounting Pronouncements
| | -- | -----------------------------

In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, (FAS 159). FAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported

9

---

earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. FAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company has not yet
determined the impact of adopting FAS 159 on the Companys financial position.

|3. | Loan Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company loaned total of $4,279,219 US at March 31,
      2007 to a third party pursuant to a letter of intent to acquire all of the
      issued and outstanding shares of that company. The loan is secured by all
      of the assets of the borrower company and is due in full may 31,
    2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4. | Mineral Property                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | During the year ended December 31, 2004, the Company
      staked twenty-five mining claims located in the Iliamna Recording District
      of Southwestern Alaska. As the claims do not contain any known reserves,
      the exploration costs were expensed during the periods. The mineral claims
      are renewable on the first day of every September conditional on paying
      the annual filing fee of $2,500 to the State of Alaska by November 30,
      2006 and meeting mineral exploration expenditure of $10,000 or by paying
      cash in lieu of mineral exploration expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|5. | Petroleum & natural gas properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Harmony Valley PropertyThe farmout agreement
      relating to the Harmony Valley property was entered into between Dual
      Exploration Inc. as the farmor and 1245147 Alberta Ltd. as the farmee on
      July 4, 2006. The Company acquired the then corporate parent of 1245147
      Alberta Ltd., Source Projects Inc., by issuing 32,000,000 shares of common
      stock to the former shareholders of Source Projects Inc. The transaction
      was accounted for as a purchase transaction; that is, the transaction is
      equivalent to the issuance of shares by Source Petroleum Inc. for the net
      assets of Source Projects. The value of the purchase was determined at
      $44,000,000 based on the closing market price of the shares issued by the
      Company as of the date of the acquisition discounted by a percentage which
      is managements estimate of the dilution effect expected to occur from the
      issuance of such a large block of shares. Of the $44,000,000 petroleum and
      natural gas properties acquisition cost, $43,000,000 was allocated to the
      Harmony Valley property. The allocation is based on the managements
      assessment of fair market value of the properties at the time.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On December 8, 2006, the Company dissolved Source
      Projects Inc. and 1245157 Alberta Ltd. became a wholly owned subsidiary of
      the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On October 31, 2006, Dual Exploration Inc., as the
      operator, submitted an application for a primary recovery scheme within
      sections 15, 16, 17, 20, 21, and 29 of 83-19W5M on the Harmon Valley
      property. Pursuant to the farmout agreement, we prepaid 100% of the costs
      for drilling of the first horizontal well in the amount of US$900,000 in
      October of 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Woking PropertyThe farmout agreement relating to
      the Woking property was entered into between Dual Exploration Inc. as the
      farmor and 1245147 Alberta Ltd. as the farmee on July 4, 2006. The Company
      acquired the then corporate parent of 1245147 Alberta Ltd., Source
      Projects Inc., by issuing 32,000,000 shares of common stock to the former
      shareholders of Source Projects Inc. The transaction was accounted for as
      a purchase transaction; that is, the transaction is equivalent to the
      issuance of shares by Source Petroleum Inc. for the net assets of Source
      Projects. The value of the purchase was determined at $44,000,000 based on
      the closing market price of the shares issued by the Company as of the
      date of the acquisition discounted by a percentage which is managements
      estimate of the dilution effect expected to occur from the issuance of
      such a large block of shares. Of the $44,000,000 petroleum and natural gas
      properties acquisition cost, $1,000,000 was allocated to the Woking
      property. The allocation is based on the managements assessment of fair
      market value of the properties at the time.                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On December 8, 2006, the Company dissolved Source
      Projects Inc. and 1245157 Alberta Ltd. became a wholly owned subsidiary of
      the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

10

---

On September 29, 2006, we received
notice of the commencement of drilling operations on the Woking, Alberta
property from Dual Exploration Inc., our joint venture partner and operator. We
prepaid $1,882,272 to Dual Explorations Inc. pursuant to the farmout agreement
relating to Woking Area in Alberta, Canada, which represents 75% of the costs
for drilling of a test well on the property. This test well has been completed
and Dual Explorations Inc. has also concluded an extended production test on the
well. Because we have paid the 75% of the costs of drilling, completing and
equipping of this exploration well, we have earned our 37.5% working interest in
the three sections comprising the farmout lands under this farmout agreement. As
the owner of a 37.5% working interest in the farmout lands, we will be required
to pay our proportionate share of all land, title, lease bonuses and drilling
costs associated with the farmout lands covered by this farmout agreement.

The exploration activities on these
farmout lands are in very early stages and there can be no assurance that we
will be able to successfully locate commercially viable resources or reserves or
any at all

The total costs incurred and excluded
from amortization for the Companys oil and gas properties are summarized as
follows:

|                                   |   | Property    |  |   | Drilling and |  |   | Geological and |  |   |            |   |   |            | 
|---------------------------------- | - | ----------- |  | - | ------------ |  | - | -------------- |  | - | ---------- | - | - | ---------- | 
|                                   |   | acquisition |  |   | gathering    |  |   | geophysical    |  |   | Adjustment |   |   | Total      | 
|Harmon Valley                      |   |             |  |   |              |  |   |                |  |   |            |   |   |            | 
|Balance, December 31, 2006         |   | 43,000,000  |  |   | 34,042       |  |   | -              |  |   | 1,755      |   |   | 43,035,797 | 
|Addition                           |   |             |  |   | 1,193,958    |  |   | 49,554         |  |   |            |   |   | 1,243,512  | 
|Balance, March 31,
      2007      | $ | 43,000,000  |  | $ | 1,228,000    |  | $ | 49,554         |  | $ | 1,755      |   | $ | 44,279,309 | 
|Woking Property                    |   |             |  |   |              |  |   |                |  |   |            |   |   |            | 
|Balance, December
      31, 2006   |   | 1,000,000   |  |   | 1,716,478    |  |   | 1,755          |  |   | (1,755     | ) |   | 2,716,478  | 
|Balance, March 31, 2007            | $ | 1,000,000   |  | $ | 1,716,478    |  | $ | 1,755          |  | $ | (1,755     | ) | $ | 2,716,478  | 
|Total Oil and Gas
      Properties | $ | 44,000,000  |  | $ | 2,944,478    |  | $ | 51,309         |  | $ | -          |   | $ | 46,995,787 | 

As of March 31, 2007, all of the
Companys oil and gas properties are considered unproven. Based on the status of
the Companys exploration activities, management has determined that no
impairment has occurred

|6. | Related Party Transactions
|-- | --------------------------

During the year ended March 31, 2007,
the Company paid consulting fees in the amount of $27,000 and $102,499 worth of
stock-base compensation was recorded for options granted to two officers and
directors.

|7. | Common Stock
|-- | ------------

On May 11, 2006, the Company issued
2,000,000 units (each a Unit) due to the closing of the Companys private
placement at $1.00 per Unit for total proceeds of $2,000,000. Each Unit consists
of one share of common stock of the Company and two share purchase warrants,
with one warrant exercisable into one common share at the price of US$1.25 for a
period of 2 years, and the second warrant exercisable into one common share at
the price of US$1.50 for a period of 2 years.

On July 5, 2006, the Company issued
4,003,327 units (each a Unit) at a price of US$1.50 per unit for gross
proceeds of $6,004,991. Each unit consists of one common share and one common
share purchase

11

---

warrant, with one of such warrants entitling the holder thereof
to purchase one share at a price of USD$2.25 per share for a period of two
years. The Company has agreed to pay certain individuals finders fees for
assisting the Company in raising funds in connection with its recent private
placements of units at $1.50. $593,000 cash is paid in July 2006. The Company
allots 395,330 warrants which will be exercisable into one common share at the
price of US$1.50 for a period of two years.

On September 6, 2006 the Company completed the acquisition of
all the issued and outstanding common stock of Source Projects Inc. In exchange
for all of the issued and outstanding shares of Source Projects Inc., the
Company issued to the shareholders of Source Projects Inc. an aggregate of
32,000,000 shares of common stock.

On September 6, 2006, 67,500,000 shares of common stock were
returned. to the Company for cancellation.

Warrants outstanding and exercisable as of March 31, 2007:

Date
      Granted
    Date Expired
    Excise Price
    No.5/11/2006
    5/11/2008
    1.25
    2,000,0005/11/2006
    5/11/2008
    1.50
    2,000,0007/5/2006
    7/5/2008
    2.25
    4,003,3277/5/2006
    7/5/2008
    1.50
    395,330


|8. | Stock - Based Compensation
|-- | --------------------------

On January 17, 2007, the Company
adopted a Stock Base Compensation Plan. The Company granted stock options to one
consultant and two directors and officers of the company to purchase an
aggregate of 2,000,000 shares of the common stock, 500,000 of which at an
exercise price of $1.30 per share and 1,500,000 of which at an exercise price of
$1.00 per share. The stock options are exercisable until January 17, 2012. These
stock options were issued pursuant to exemptions from registration as set out
under Rule 903 of Regulation S promulgated under the Securities Act of 1933, as
amended. 5,000,000 shares were reserved under the Plan.

A summary of the Companys stock option
activities is presented below:

| |                            |                   | Non-employee | Weighted Average
| | -------------------------- | ----------------- | ------------ | ----------------
| |                            | Employee/Director | Options      | Exercise Price  
| | Options Outstanding,       |                   |              |                 
| | December 31, 2006          |                   |              |                 
| |                            |                   |              |                 
| | Options granted:           | 1,500,000         | 500,000      | $
      1.08    
| | Options Outstanding, March |                   |              |                 
| | 31, 2007                   | 1,500,000         | 500,000      | $
      1.08    

Outstanding options vest and expired as
follows:

12

---

| |                          | Range of              |      |           |                 
| | ------------------------ | --------------------- | ---- | --------- | ----------------
| |                          | Exercise
      Prices |      |           |                 
| |                          |                       |      | Number    | Weighted Average
| | Vested at April
      30 | High                  | Low  | of Shares | Exercise Price  
| | 2007 and earlier         | 1.30                  | 1.30 | 200,000   | 1.30            
| | Remainder of 2007        | 1.30                  | 1.00 | 225,000   | 1.30            
| | 2008                     | 1.30                  | 1.00 | 162,500   | 1.14            
| | 2009                     | 1.00                  | 1.00 | 87,500    | 1.00            
| | 2010 and remainder       | 1.00                  | 1.00 | 1,325,000 | 1.00            
| |                          |                       |      | 2,000,000 |                 

For purposes of the calculation, the
  following assumptions were used:

| | Risk-free interest rate (%)                          | 4.50%
| | ---------------------------------------------------- | -----
| | Expected dividend yield                              | 0.00%
| | Expected stock price volatility                      | 106% 
| | Expected life of options (years)                     | 5    
| | Per share fair value of options granted in
      the | $    
| | year                                                 | 1.36 

Option-pricing models require the use
of highly subjective estimates and assumptions including the expected stock
price volatility. Changes in the underlying assumptions can materially affect
the fair value estimates and therefore, in managements opinion, existing models
do not necessarily provide reliable measure of the fair value of the Companys
stock options.

|6. | Preferred Shares
|-- | ----------------

$0.0001 par value, 5,000,000 shares
authorized, none issued and outstanding.

|7. | Subsequent Events
|-- | -----------------

None

13

---

|Item 2. | Managements Discussion and Analysis or Plan
      of Operation.
|------- | ----------------------------------------------------------------

FORWARD LOOKING STATEMENTS

This Quarterly Report may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 that involve
risks and uncertainties. In particular such forward-looking statements may be
found in this section. The following discussion and analysis of the financial
condition and results of operations should be read in conjunction with the
financial statements and related notes included elsewhere in this Quarterly
Report. In some cases, you can identify forward-looking statements by
terminology such as may, should, intends, expects, plans,
anticipates, believes, estimates, predicts, potential, or continue
or the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors, including the risks in the section entitled Risk Factors on
page 26, which may cause our or our industrys actual results, levels of
activity or performance to be materially different from any future results,
levels of activity or performance expressed or implied by these forward-looking
statements. Other unidentified risks and uncertainties that may affect our
actual performance and results of operations include the following: general
economic conditions; exploration successes, the acquisition of oil and gas
assets, continued availability of capital and financing; adverse weather;
governmental regulations; changes in governmental and public policy; changes in
economic conditions specific to our business; competition; availability of
equipment and qualified personnel and unexpected operational difficulties. Other
risks and uncertainties may also affect the outcome of our actual performance
and results of operations. You are cautioned not to place undue reliance on the
forward-looking statements made in this Managements Discussion and Analysis or
Plan of Operations.

Overview

We were incorporated under the laws of the State of Nevada on
November 23, 2004 under the name Red Sky Resources Inc. On May 25, 2006, we
changed our name to Source Petroleum Inc.

We were in the business of mineral exploration. We acquired
twenty-five mineral claims in southwestern Alaska via staking which we believe
are prospective for gold and copper. Our mineral claims consist of twenty-five
quarter sections which cover approximately 4,000 acres or 6.25 square miles. The
State of Alaska requires an annual rental fee of $2,500 and a minimum
exploration work expenditure of $10,000 on the 1st of September of each year to
keep the claims in good standing.

Our objective had been to conduct mineral exploration
activities on the property in order to assess whether it possesses commercially
exploitable reserves of minerals. Because we did not discover an economically
viable mineral deposit on the mineral claims, our management decided to
diversify our operations from mineral exploration to oil and gas explorations.
On July 26, 2006, we entered into a share exchange agreement with all of the
shareholders of Source Projects Inc., and 1245147 Alberta Ltd. for the purchase
by our company of all of the issued and outstanding shares of Source Projects
Inc. Source Projects Inc. was the sole shareholder of 1245147 Alberta Ltd.,
which had entered into farm-out agreements for exploration of oilsands relating
to certain farmout lands located in Alberta and Saskatchewan. Upon the
completion of this share exchange agreement, we have shifted our attention to
the exploration of oil sands and oil shales under the farm-out agreements held
by 1245147 Alberta Ltd. We have not maintained the good standing of our mineral
claims in Alaska.

Our Current Business

On September 6, 2006 we completed the acquisition of all the
issued and outstanding common stock of Source Projects Inc. In exchange for all
of the issued and outstanding shares of Source Projects Inc., we issued to the
shareholders of Source Projects Inc. an aggregate of 32,000,000 shares of our
common stock.

Pursuant to the share exchange agreement, our sole director at
that time, Jeff Gillis, resigned, and Hussein Charanek and Scott Rogers were
appointed as directors of our company. Jeff Gillis also resigned as our Chief
Executive Officer, Chief Financial Officer, President and Secretary. Hussein
Charanek was appointed as our President, Chief Executive Officer and Chief
Financial Officer and Scott Rogers was appointed as our Corporate Secretary. On
September 22, 2006, Tarik G. Elsaghir was appointed as a director of our
company. Tarik G. Elsaghir subsequently

14

---

resigned as a director on December 15, 2006. Our current board
of directors consists of Hussein Charanek and Scott Rogers.

On December 8, 2006, we completed a merger with Source Projects
Inc. to streamline our corporate structure. Consequently, we became the sole
shareholder of 1245147 Alberta Ltd., which was incorporated in the Province of
Alberta in May 2006. 1245147 Alberta Ltd. entered into two farm-out agreements
as the farmee with Dual Explorations Inc. as the farmor for exploration of
oilsands relating to certain farmout lands located at TWP 75-4-W6M and TWP
83-19-W5M in the Province of Alberta. 1245147 Alberta Ltd. also purchased the
interest of Scott Oil and Gas Ltd. as the farmee in a farmout agreement with
Western Petrochemical Corp. as the farmor for exploration of oil shales relating
to certain farmout lands located at TWPs 43-49 Rges 1-8, W2M in the Province of
Saskatchewan. Even though we were notified by CanWest Petroleum Corporation, the
corporate parent of Western Petrochemical Corp., that it disputes the validity
of the farmout agreement between Western Petrochemical Corporation and Scott Oil
and Gas Ltd.; we have been assured by Scott Oil and Gas Ltd. that it believes
the farmout agreement was valid and enforceable and that we are entitled to
exercise the rights of Scott Oil and Gas Ltd. under that farmout agreement.

The exploration activities on these farmout lands are in very
early stages and there can be no assurance that we will be able to successfully
locate commercially viable resources or reserves or any at all.

Our current operational focus is to conduct exploration of
oilsands and oil shales on those properties subject to the following farmout
agreements:

Farmout Agreement with Dual Exploration Inc. dated July
  4, 2006(Harmon Valley Area, Alberta)

The farmor to this farmout agreement is Dual Exploration Inc.
and the farmee is 1245147 Alberta Ltd., a wholly owned subsidiary of our
company. This farmout agreement provides that we may explore for oilsands from
the top of the Peace River Formation to the base of the Pekisko Formation in
Sections 15, 16, 17, 20, 21, 29 of Twp. 83, Rge. IO, W5M. The farmout land in
this agreement is covered by Alberta Crown Oil Sands Lease Nos. 7404041030 and
7404080869. Our recent searches indicated that these leases are active, all
rentals have been paid to date and that Dual Exploration Inc. is registered
lessee of an undivided 100% interest in the farmout lands.

This agreement enables our company to acquire from the farmor a
50% working interest in three pre-selected sections comprising part of the
farmout lands, defined as the Test Well Earning Block, upon paying 100% of the
total costs of drilling, completing/equipping or abandoning three horizontal
test wells to be successively drilled from the same specified surface location
to contract depth in three different bottomhole locations to be determined.
Drilling of the first test well was to commence on or before October 31, 2006
subject to surface access, rig availability and regulatory approvals and our
company is obligated to pay all anticipated drilling costs within thirty days
prior to spudding of each test well.

Dual Exploration Inc. acts as contract operator for the
drilling operations and is required to provide us with test well data and an
authorization for expenditure in connection with test wells, effectively
converting the arrangement into a participation agreement.

This farmout agreement incorporates both the CAPL 1997 Farmout
  and Royalty Procedure and the CAPL 1990 Operating Procedure. Dual Exploration
  Inc. has been named as the initial Operator under the Operating Procedure and
  each of Dual Exploration Inc. and our company would have a 50% working interest
  in the earned lands. We have the ability to abort the test well earning program
  in the event that the costs to drill the test wells exceed the authorization
  for expenditure costs plus 15%. Otherwise, we are obligated to pay the cost
  of a supplemental authorization for expenditure prepared by Dual Exploration
  Inc. In the event we elect to abort the program it will be deemed to have earned
  its interest in the Test Well Earning Block despite failing to comply with the
  terms of the Farmout and Royalty Procedure.

Under this farmout agreement we also have the option, upon
completion of the test well earning program, to elect within sixty days of rig
release of the last test well to drill three option wells in order to earn on
the remaining three

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section block of the farmout lands not previously earned,
defined as the Option Well Block. The terms of earning for the option wells are
the same as those for the test wells.

On October 31, 2006, Dual Exploration Inc., as the operator,
submitted an application for a primary recovery scheme within sections 15, 16,
17, 20, 21, and 29 of 83-19W5M. Dual Exploration Inc. has submitted an
application for up to eight single leg horizontal wells proposed to be drilled
from four drilling pads. The horizontal sections in each well are expected to be
1,200-1,500m in length. These wells are to be used to evaluate the productive
potential of the property. Upon successful evaluation, a second application to
the Energy and Utilities Board of the Province of Alberta will follow in order
to allow further development. Pursuant to the farmout agreement, we paid 100% of
the costs for drilling of the first horizontal well in the amount of US$900,000
in October of 2006. On March 28, 2007, we were notified by the operator and
joint venture partner, that the first well of a multi-well program at Harmon
Valley, in the Peace River Oil Sands district, HZ Peace River 1-29-83-19 W5M,
was successfully drilled to appraise the reservoir characteristic and to
delineate the reservoir. This first well of the proposed program, HZ Peace River
1-29-83-19 W5M, targeted the Bluesky - Gething formation. The Core information
and a horizontal leg will assist in developing a plan for a possible primary and
secondary oil recovery scheme. The well confirmed and encountered 12 meters/ 36
feet of net pay in the Blue Sky formation.

We engaged an independent petroleum consulting firm, AJM
Petroleum Consultants, to provide us with a Resource Estimation and Economic
Evaluation Report on the Harmon Valley farmout property effective December 31,
2006. This report has been issued by AJM Petroleum Consultants on March 30, 2007
and our management will be using this report to help us develop a plan for
future exploration program on this property.

Farmout Agreement with Dual Exploration Inc. dated July
  4, 2006(Woking Area, Alberta)

The farmor to this farmout agreement is Dual Exploration Inc.
and the farmee is 1245147 Alberta Ltd. This farmout agreement provides that we
may explore for all petroleum & natural gas below the base of the Halfway
Formation in Section 21, Twp. 75, Rge. 4, W6M; all petroleum & natural gas
below the base of the Stoddart Group in Section 29, Twp. 75, Rge. 4, W6M; and
all petroleum & natural gas below the base of the Bluesky-Bulhead Formation
in Section 31, Twp. 75, Rge. 4, W6M. The farmout land in this agreement is
covered by Alberta Crown P&NG Licence Nos. 5405060306 and 5405060966. Our
recent searches indicated that these leases are active, all rentals have been
paid to date and that Dual Exploration Inc. is registered lessee of an undivided
100% interest in the farmout lands.

The Agreement enables our company to acquire from Dual
Exploration Inc. a 37.5% working interest in the three sections comprising the
farmout lands upon paying 75% of the total costs of drilling,
completing/equipping or abandoning one test well to be drilled from a specific
surface location to contract depth in a specific bottomhole location. Drilling
of the first test well was to commence on or before August 31, 2006 subject to
surface access, rig availability and regulatory approvals and we are obligated
to pay all anticipated drilling costs within thirty days prior to spudding the
test well. We made a loan in the amount of $471,102 to Source Projects Inc. on
August 22, 2006 so it may pay the authorization for expenditure for the drilling
costs of the first test well.

Dual Exploration Inc. acts as contract operator for the
drilling operations and is required to provide us with test well data and an
authorization for expenditure in connection with test wells, effectively
converting the arrangement into a participation agreement.

This farmout agreement incorporates both the CAPL 1997 Farmout
and Royalty Procedure and the CAPL 1990 Operating Procedure. Dual Exploration
Inc. is named as the initial Operator under the Operating Procedure and Dual
Exploration Inc. and our company would have 62.5% and 37.5% working interests,
respectively, in the earned lands.

We have the ability to abort the test well earning program in
  the event that the costs to drill the test wells exceed the authorization for
  expenditure costs plus 15%. Otherwise, we are obligated to pay the cost of a
  supplemental authorization for expenditure prepared by Dual Exploration Inc.
  In the event we elect to abort the program it will be deemed to have earned
  its interest in the farmout lands despite failing to comply with the terms of
  the Farmout and Royalty Procedure. However, Dual Exploration Inc. may then elect
  to proceed with the drilling as an independent deepening operation pursuant
  to Clause 1008 of the Operating Procedure, thereby subjecting us to a penalty
  on its share of production.

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On September 29, 2006, we received notice of the commencement
of drilling operations on the Woking, Alberta property from Dual Exploration
Inc., our joint venture partner and operator. We paid $1,882,272 to Dual
Explorations Inc. pursuant to the farmout agreement relating to Woking Area in
Alberta, Canada, which represents 75% of the costs for drilling of a test well
on the property. This test well has been completed and Dual Explorations Inc.
has also concluded an extended production test on the well. Because we have paid
the 75% of the costs of drilling, completing and equipping of this exploration
well, we have earned our 37.5% working interest in the three sections comprising
the farmout lands under this farmout agreement. As the owner of a 37.5% working
interest in the farmout lands, we will be required to pay our proportionate
share of all land, title, lease bonuses and drilling costs associated with the
farmout lands covered by this farmout agreement.

Farmout Agreement between Western Petrochemical Corp. and
  Scott Oil and Gas Ltd. dated February 25, 2006(Pasquia Hill Area, Saskatchewan)

The farmor to this farmout agreement is Western Petrochemcial
Corp. and the farmee is Scott Oil and Gas Ltd. Scott Oil and Gas Ltd.
subsequently transferred its farmee interest in this farmout agreement to
1245147 Alberta Ltd. pursuant to a letter agreement dated May 30, 2006.

This farmout agreement enables the farmee to acquire 100% of
Western Petrochemical Corp.s interest only in the Second Whitespecks formation
underlying: (a) a section of land pre-selected by the farmee as its test well
location; and (b) an additional nine contiguous sections, which ten sections in
total comprise part of the farmout lands. The farmout lands in this farmout
agreement have been identified as Townships 43-49 and Ranges 1-11, all West of
the 2nd Meridian, which are covered by 11 exploration permits issued by
Saskatchewan Oil and Gas. The interest earned by the farmee is subject to the
reservation to the farmor of a non-convertible 12% gross overriding royalty,
which under the CAPL Farmout and Royalty Procedures will be calculated on all
production from the farmout lands in which the farmee has earned its
interest.

Under section 6 of this farmout agreement, approximately 71,680
acres are excluded from the area of the farmout lands in which the farmee may
earn an interest. This excluded Current Mine Area acreage comprises
substantial portion of the lands covered by two exploration permits. Western
Petrochemical Corp. was also given the right to expand this acreage on notice to
the farmee provided that it reimburses the farmee for 300% of the farmees costs
of drilling and/or placing on production any earning well drilled in the
expanded area.

Our searches with Saskatchewan Oil and Gas in July 2006 showed
that 7 out of the 11 exploration permits covering the farmout lands in this
agreement had expired and no lease selection were made for the areas covered by
those permits. Further, additional 2 out of the 11 exploration permits were up
for their final annual renewal on August 19, 2006 and the final 2 out the 11
exploration permits was up for their final annual renewal on October 24, 2006.
We have not found out whether Western Petrochemical Corp. has taken the
necessary steps to renew the 4 exploration permits within the prescribed
deadlines.

CanWest Petroleum Corporation, the corporate parent of Western
Petrochemical Corp., has notified us that it disputes the validity of the
farmout agreement between Western Petrochemical Corporation and Scott Oil and
Gas Ltd. Despite claims asserted by CanWest Petroleum Corporation, Scott Oil and
Gas Ltd. assured us that it believes the farmout agreement is valid and
enforceable. We anticipate our company and Scott Oil and Gas Ltd. will need to
examine this farmout agreement with CanWest Petroleum Corporation and find a
resolution to this dispute.

In addition to the three farmout agreements mentioned above, on
September 26, 2006, we signed a Letter of Intent to acquire one half of the
interest owned by Kodiak Energy Inc., which is an interest in a farmin agreement
to earn up to a 56.25% working interest on the 200,000 acre Exploration License
413 ("EL 413") in the Mackenzie region of Northwest Territories, Canada. We paid
$220,750 to Kodiak Energy Inc. pursuant to this Letter of Intent. Under this
Letter of Intent, we could earn an undivided 5.25% of the EL413 working interest
by funding 55% of the seismic costs and earn 15% of the test blocks by funding
35% of the drilling costs. However, because the obligations under this Letter of
Intent exceeded the financial resources available to our company as at December
2006, our management had decided to not to pursue our interest under this Letter
of Intent.

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On April 10, 2007, we were awarded by Saskatchewan Industry and
Resources 3 permits totaling 360 sections of oil shale rights in the Pasquilla
Hills oil shale region near Hudson Bay, Saskatchewan. Three Townships [108
sections] of the oil shale permits lie 2.5 miles southeast from Canwest
Petroleum (now Oilsands Quest) oil shale project in Pasquilla Hills, which has
assayed results at an average yield of 7 gallons/ ton from an average pay
thickness of 148 feet. Seven Townships [252 sections] lie approximately 9 miles
northwest of the Canwest Petroleum's oil shale project and directly adjacent and
west of the Outrider Energy oil shale permit in Pasquilla Hills. Under the
agreement between Propel Energy Corp. and Source Petroleum, Propel Energy will
receive a carried 15% interest until feasibility with an option to increase an
additional 10% at that stage by covering 10% of the backcosts.

The Oil Sands Industry

According to the National Energy Board of Canada (the NEB)
oil sands contain sand, clay, water and bitumen, a heavy, tar like, viscous form
of crude oil, with a density of approximately 8 degrees to 14 degrees API.
Bitumen-bearing geologic formations, typically containing up to 18 percent
bitumen saturation by weight, can be situated near the surface or hundreds of
feet below. As stated in a paper prepared by the Petroleum Communication
Foundation (the PCF), recovery of oil sands from formations above 75 meters
(250 feet) is by open-pit mining; for deeper formations, in-situ recovery
techniques such as steam-assisted gravity drainage (SAGD) are used.
Development in the oil sands industry in Canada to date has been focused
primarily in Alberta.

The Alberta Energy Utilities Board (the AEUB) estimates there
are 1.6 trillion barrels of bitumen resource in place in Alberta of which 315
billion barrels are thought to be recoverable. The NEB has stated that initial
established reserves (some 178 billion barrels) are considered sufficient to
meet 250 years of Canadian crude oil demand at current rates. According to the
2006 Canadian Energy Survey prepared by PricewaterhouseCoopers (PWC) there are
three main deposits of oil sands in Alberta: Athabasca, which represents
approximately 80 percent, Cold Lake which represents approximately 12 percent
and Peace River which represents approximately 8 percent. The AEUB has estimated
that together, they occupy an area of about 140,000 square kilometers (54,000
square miles).

North America's energy needs are increasingly being met by
bitumen produced from mining and in-situ operations in Alberta's oil sands.
According to the Canadian Association of Petroleum Producers in 2005, Canada's
crude oil and equivalent production totaled about 2.5 million barrels/day; more
than two-thirds of this, 1.7 million barrels/day, came from Alberta, which
included about one million barrels/day from the oil sands. In their survey PWC
stated production from the oil sands is expected to more than double by 2010
and, by 2015, to increase to 3.0 million barrels/day. Total crude oil production
is estimated to grow to 4.6 million barrels/day in 2015 and then to 4.9 million
barrels/day by 2020. According to the Province of Saskatchewan, Saskatchewan is
Canada's second largest oil producer (after Alberta) and produces about 17% of
Canada's total oil production.

Exploration for commercially viable oil sands deposits has
traditionally focused on Alberta, resulting in the establishment of mining and
in-situ projects in the Athabasca oil sands region and in-situ projects in Cold
Lake and Peace River deposits. Production from the world's first commercial oil
sands mine came on stream in 1967. The second mining operation came on stream in
1973; commercial in-situprojects also began contributing production from
deeper oil sands deposits in the 1970s. As stated by PWC in their survey at the
beginning of 2006, there were three mining projects and 12 in-situ projects
operating in the oil sands in Alberta and more than 60 projects in various
stages of planning. The lead time for production from an oil sands project is
generally a minimum of seven to ten years from initial exploration.

Plan of Operations

The following discussion should be read in conjunction with our
financial statements and the related notes included herein. The following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this current report, particularly in the section entitled Risk Factors in
this quarterly report.

Our financial statements are stated in United States Dollars
and are prepared in accordance with United States Generally Accepted Accounting
Principles.

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We have no revenues, have experienced losses since inception,
have only begun our oil and gas exploration operations, have been issued a going
concern opinion by our auditors and rely upon the sale of our securities to fund
operations.

We, including all of our subsidiaries, are in the exploration
stage and do not currently have any income from operating activities. We expect
to use a majority of our existing working capital on exploration activities to
be conducted by our subsidiary, 1245147 Alberta Ltd., which have cash
requirements for the next twelve months as described below. These cash
requirements will likely be met by loans or capital contributions from our
company. We intend to raise additional capital through the issuance of equity
and or debt to finance operations of its subsidiaries, however, no assurance can
be given that we will be successful in its exploration activities, in raising
additional capital or obtaining other funding necessary to meet the cash
requirements of our company and our subsidiary.

For the next twelve months, we intend to continue our
exploration activities pursuant to the 3 farmout agreements. We made a loan in
the amount of $471,102 to Source Projects Inc. on August 22, 2006 for the
drilling costs of the first test well in the Woking Area, Alberta pursuant to
the farmout agreement between Dual Exploration Inc. and our subsidiary, 1245147
Alberta Ltd. Subsequently, we made further payments of $1,411,169 to Dual
Exploration Inc. to pay for 75% of the cost of drilling of the first test well
on the farmout property. This test well has been completed and Dual Explorations
Inc. has also concluded an extended production test on the well. We have also
been advised that production tie in for the gas discovery at Woking, Alberta
farmout property is nearly complete. Because we have paid the 75% of the costs
of drilling, completing and equipping of this exploration well, we have earned
our 37.5% working interest in the three sections comprising the farmout lands
under this farmout agreement. As the owner of a 37.5% working interest in the
farmout lands, we will be required to pay our proportionate share of all land,
title, lease bonuses and drilling costs associated with the farmout lands
covered by this farmout agreement.

The operator and joint venture partner for the Harmon Valley
farmout agreement has also begun working on drilling the first test well in the
Harmon Valley Area as provided under the farmout agreement. We have paid 100% of
the costs for drilling of the first horizontal well in the amount of $900,000 in
October of 2006. On March 28, 2007, we were notified by the operator and joint
venture partner, that the first well of a multi-well program at Harmon Valley,
in the Peace River Oil Sands district, HZ Peace River 1-29-83-19 W5M, was
successfully drilled to appraise the reservoir characteristic and to delineate
the reservoir. This first well of the proposed program, HZ Peace River
1-29-83-19 W5M, targeted the Bluesky - Gething formation. The Core information
and a horizontal leg will assist in developing a plan for a possible primary and
secondary oil recovery scheme. The well confirmed and encountered 12 meters/ 36
feet of net pay in the Blue Sky formation.

Based on the data to be received from the first test well, we
will continue to examine the overall prospects for the properties subject to our
farmout agreements, including evaluating future drilling programs, investigating
commercial potential of the resource identified to date, the acquisition of
additional exploration lands and conversion of its existing oil shale
exploration permits to development leases, if appropriate.

We anticipate spending approximately $2,000 in ongoing general
and administrative expenses per month for the next twelve months, for a total
anticipated expenditure of $24,000 over the next twelve months. The general and
administrative expenses for the year will consist primarily of professional fees
for the audit and legal work relating to our regulatory filings throughout the
year, as well as transfer agent fees, annual mineral claim fees and general
office expenses.

On December 30, 2006, we entered into a binding Letter of
Intent with Fuel-x International, Inc. It was contemplated under this Letter of
Intent that we will acquire all of the issued and outstanding shares of Fuel-x
International Inc. through an amalgamation, merger, consolidation, share
exchange, take over bid, plan of arrangement or other transaction arrangement.
On January 18, 2007, pursuant this binding Letter of Intent, we executed an
Arrangement Agreement with Fuel-x International, Inc. whereby we agreed to file
and proceed with a plan of arrangement with Fuel-x International, Inc. Under the
plan of arrangement, all of the issued and outstanding common shares of Fuel-x
International, Inc. will be converted into shares of our common stock at a
pre-determined ratio; certain debentures of Fuel-x International, Inc. will also
be converted into shares of our common stock at a pre-determined ratio; and the
outstanding balance of Fuel-x International, Inc.s debt owed to The K2
Principal Fund LP will also be converted into shares of our common stock at a
pre-determined ratio. The completion of the plan of

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arrangement is subject to a number of condition precedents,
including, among other things, the requirement to apply for and receive an
interim order from a court of competent jurisdiction, the requirement of
shareholders approval of the plan of arrangement by shareholders of both our
company and Fuel-x International, Inc., and the requirement that we change our
jurisdiction of incorporation from the State of Nevada to the Province of
Alberta. We have filed a registration statement/proxy statement on Form S-4 to
solicit proxies for approval of our change of jurisdiction of incorporation from
the State of Nevada to the Province of Alberta.

We also entered into a loan agreement with Fuel-x
International, Inc. on December 22, 2006 whereby we agreed to lend CAD$2,500,000
and US$3,000,000 to Fuel-x International, Inc. We have made advancements in the
amounts of CAD$2,500,000, US$1,500,000 and US$600,000 to Fuel-x International,
Inc. The advancement of CAD$2,500,000 was used by Fuel-x International, Inc. to
make a partial repayment of its loan from K2 Principal Fund L.P. pursuant to the
Forbearance Agreement entered into among our company, Fuel-x International, Inc.
and K2 Principal Fund L.P. The advancements of US$1,500,000 and US$600,000 were
used by Fuel-x International, Inc. to pay its obligations under participation
agreements for its properties in Indonesia. Because Fuel-x International, Inc.
has defaulted on its obligations under the forbearance agreement, we have
determined that all debts owed by Fuel-x International, Inc. to our company
under this loan agreement are due and payable immediately. We have served Fuel-x
International, Inc. with a notice of default and demand repayments of these
debts immediately.

Cash Requirements

We anticipate a cash requirement in the amount of $6 million to
$8 million during the next 12 months, mostly for drill commitments, seismic,
infrastructure costs and professional fees. Accordingly, we will require
additional funds to implement our exploration and development programs. These
funds may be raised through equity financing, debt financing, or other sources,
which may result in further dilution in the equity ownership of our shares.
There is still no assurance that we will be able to maintain operations at a
level sufficient for an investor to obtain a return on his investment in our
common stock. Further, we may continue to be unprofitable. We need to raise
additional funds in the immediate future in order to proceed with our
exploration program.

During the next twelve months, we anticipate that we will not
generate any revenue. Accordingly, we will be required to obtain additional
financing in order to continue our plan of operations. We believe that debt
financing will not be an alternative for funding additional phases of
exploration as we do not have tangible assets to secure any debt financing. We
anticipate that additional funding will be in the form of equity financing from
the sale of our common stock. However, we do not have any financing arranged and
we cannot provide investors with any assurance that we will be able to raise
sufficient funding from the sale of our common stock to fund the next phase of
our exploration program. In the absence of such financing, we will not be able
to continue exploration under our farmout agreements and our business plan will
fail. Even if we are successful in obtaining equity financing to fund the next
phase of our exploration program, there is no assurance that we will obtain the
funding necessary to pursue any advanced exploration of properties subject to
our farmout agreements following the completion of the work program. If we do
not continue to obtain additional financing, we will be forced to abandon our
farmout agreements and our plan of operations

We may consider entering into a joint venture arrangement to
provide the required funding to explore the properties subject to our farmout
agreements. We have not undertaken any efforts to locate a joint venture
partner. Even if we determined to pursue a joint venture partner, there is no
assurance that any third party would enter into a joint venture agreement with
us in order to fund exploration of our farmout agreements. If we entered into a
joint venture arrangement, we would likely have to assign a percentage of our
interest in our farmout agreements to the joint venture partner.

Results of Operations

We have had no operating revenues since our inception on
October 14, 2001 through to March 31, 2007. We anticipate that we will not
generate any revenues while we are solely an exploration stage company. Our
activities have been financed from the proceeds of share subscriptions. >From our
inception on October 14, 2001 to March 31, 2007, we have raised a total of
$8,187,815from private offerings of our securities.

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Results of Operations for the three months ended March 31,
2007 and March 31, 2006

General and Administrative Expenses

Our general and administrative expenses consist primarily of
  office and miscellaneous expenses and related costs for general and corporate
  functions, including finders fees, consulting, stock-based compensation
  and other professional services. Our office and miscellaneous expenses for the
  three months ended March 31, 2007 were $13,167, as compared to the three months
  ended March 31, 2006, which were $ 113. The increase of office and miscellaneous
  expenses was primarily a result of our change of business into an oil and gas
  exploration company and moving of our corporate headquarter to Calgary, Alberta.
  Our finders fees, consulting, stock-based compensation and professional
  services for the three months ended March 31, 2007 were $nil, $47,500, $135,624
  and $110,451 respectively, as compared to the three months ended March 31, 2006,
  which were $nil, $nil, $nil and $26,983 respectively. The increase of consulting
  and professional services for the three months ended March 31, 2007 was a result
  of our completion of a registration statement on Form S-4 for move the jurisdiction
  of our incorporation to Alberta, Canada and our proposed plan of arrangement
  with Fuel-x International, Inc. during the three month period ended March 31,
  2007. The consulting fees were paid to the directors and officers of the Company.
  The stock-based compensation were paid to the directors and a consultant of
  the Company.

Net Loss

Our net loss was $ 354,601 and $27,528 for the three months
ended March 31, 2007 and 2006 respectively. The primary reason for the increase
in net loss is due to our change of business into an oil and gas exploration
company and an increase in our oil and gas exploration expenditures and
recognize of stock-based compensation.

Summary

Presently, we have no significant sources of revenue. We have
incurred operating losses since inception. The continuation of our business is
dependent upon the continuing financial support of our creditors and
stockholders, obtaining further financing, and our acquiring additional oil and
gas properties. There are, however, no assurances we will be able to generate
funds required for these transaction. Accordingly, our consolidated financial
statements contain note disclosures describing the circumstances that lead there
to be doubt over our ability to continue as a going concern.

Liquidity and Capital Resources

At March 31, 2007, we had cash on hand of $339,898 and working
  capital of $(1,016,193). Cash used in operating activities was $1,102,832 for
  the three months ended March 31, 2007 largely due to our professional fees and
  stock base compensation incurred. This compares with cash used in operating
  activities of $ 16,145 for the three month ended 31, 2006.

We anticipate that we will require $24,000 to cover our ongoing
general and administrative expenses for the next twelve months. We believe our
cash on hand is sufficient to carry out our plan of operations and pay for the
costs of our general and administrative expenses for the next twelve months. Our
ability to complete the next phase of our recommended work program will be
subject to us obtaining adequate financing as these expenditures will exceed our
cash reserves. We anticipate that additional funding will be in the form of
equity financing from the sale of our common stock or through shareholder or
related party loans, although there are no assurances any such financing will be
completed.

Off-Balance Sheet Arrangements

Other than described below, we have no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders:

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On December 22, 2006 we entered into a Forbearance Agreement
among our company, K2 Principal Fund L.P. and Fuel-x International Inc. We
signed a letter of intent with Fuel-x International Inc. on November 17, 2006 to
potentially acquire the business of Fuel-x International. One of the condition
precedents in the letter of intent was satisfactory negotiation with K2
Principal Fund L.P. because Fuel-x International Inc. is indebted to K2
Principal Fund L.P. in the amount of $9,300,000. The Forbearance Agreement
signed among our company, K2 Principal Fund L.P. and Fuel-x International Inc.
was the result of such negotiation.

Pursuant to the Forbearance Agreement, K2 Principal Fund L.P.
would forbear Fuel-x International Inc.s obligations under the Credit Facility
Agreement entered into on January 31, 2006 and subsequently amended on August
10, 2006 and October 19, 2006, upon completion of the followings:

- a cash payment of Cdn $2,500,000 from
our company to K2 Principal Fund L.P., which we have made upon execution of the
Forbearance Agreement;

- a cash payment of Cdn $3,500,000 to
K2 Principal Fund L.P. upon completion of a plan of arrangement or other
business combination between our company and Fuel-x International Inc.;

- conversion of the remaining principal
and accrued interest due on the credit facility into common shares in the
capital stock of our company or of the company resulting from the plan of
arrangement between our company and Fuel-x International Inc.;

- upon completion of the plan of
arrangement or other business combination between our company and Fuel-x
International Inc., we will convert K2 Principal Fund L.P.s 3,720,000 warrants
of Fuel-x International Inc. for 1,660,714 warrants of the resulting company;
and

- upon completion of the plan of
arrangement or other business combination between our company and Fuel-x
International Inc., we will further issue 2,000,000 warrants of the resulting
company to K2 Principal Fund L.P. to purchase a common share of the resulting
company at US $1.80 for a period 24 months.

We have paid to K2 Principal Fund L.P. the first Cdn$2,500,000
as provided under the Forbearance Agreement. The Forbearance Agreement further
provides that if the plan of arrangement between our company with Fuel-x
International, Inc. is not completed by March 31, 2007, Fuel-x International,
Inc. is required to make a further payment of $500,000 to continue to the
forbearance period. Because the plan of arrangement between our company and
Fuel-x International, Inc. has not been completed as at the date of this report,
Fuel-x International, Inc. is currently in default of the Forbearance Agreement
and has received a notice to cure its default from K2 Principal Fund L.P. As at
the date of this report, Fuel-x International, Inc. has not cured its default
and K2 Principal Fund L.P. has served Fuel-x International, Inc. with its
intention to enforce its security interest over assets of Fuel-x International,
Inc.

Furthermore, May 31, 2007, the Forbearance Agreement provides
that if the plan of arrangement between our company with Fuel-x International
Inc. is not completed by May 31, 2007 the Forbearance Agreement will be
terminated. The payment by our company to K2 Principal Fund L.P. of the Cdn
$2.500,000 under the Forbearance Agreement is treated as a loan to Fuel-x
International Inc. by our company. Because Fuel-x International, Inc. defaulted
on the Forbearance Agreement, we have also served Fuel-x International, Inc.
with our own notice of default and demand repayment of our loan to Fuel-x
International, Inc. immediately.

Critical Accounting Policies and Estimates

Accounting Estimates

The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions. Our management
routinely makes judgments and estimates about the effects of matters that are
inherently uncertain.

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Mineral Properties/ Petroleum & natural gas
properties

We utilize the full cost method to account for its investment
in mineral, oil and gas properties. Accordingly, all costs associated with
acquisition, exploration and development of mineral, oil and gas reserves,
including such costs as leasehold acquisition costs, interest costs relating to
unproved properties, geological expenditures and direct internal costs are
capitalized into the full cost pool. As of March 31, 2007, we have no properties
with proven reserves. When the we obtain proven mineral, oil and gas reserves,
capitalized costs, including estimated future costs to develop the reserves and
estimated abandonment costs, net of salvage, will be depleted on the
units-of-production method using estimates of proved reserves. Investments in
unproved properties and major development projects including capitalized
interest, if any, are not amortized until proved reserves associated with the
projects can be determined. If the future exploration of unproved properties are
determined uneconomical, the amount of such properties are added to the
capitalized cost to be amortized. As of March 31, 2007, all of our mineral, oil
and gas properties were unproved and were excluded from amortization.

The capitalized costs included in the full cost pool are
subject to a ceiling test, which limits such costs to the aggregate of
the estimated present value, using an estimated discount rate, of the future net
revenues from proved reserves, based on current economic and operating
conditions and the estimated value of unproven properties. As of March 31, 2007,
none of our unproved mineral, oil and gas properties were considered impaired.

RISK FACTORS

Much of the information included in this annual report includes
or is based upon estimates, projections or other forward looking statements.
Such forward looking statements include any projections and estimates made by us
and our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.

Such estimates, projections or other forward looking
statements involve various risks and uncertainties as outlined below. We
caution the reader that important factors in some cases have affected and, in
the future, could materially affect actual results and cause actual results to
differ materially from the results expressed in any such estimates, projections
or other forward looking statements.

Shares of our common stock are speculative, especially since we
are in the exploration-stage of our new business. We operate in a volatile
sector of business that involves numerous risks and uncertainties. The risks and
uncertainties described below are not the only ones we face. Other risks and
uncertainties, including those that we do not currently consider material, may
impair our business. If any of the risks discussed below actually occur, our
business, financial condition, operating results or cash flows could be
materially adversely affected. This could cause the trading price of our
securities to decline, and you may lose all or part of your investment.
Prospective investors should consider carefully the risk factors set out below.

RISKS RELATED TO OUR BUSINESS

We have had negative cash flows from operations.

To date we have had negative cash flows from operations and we
have been dependent on sales of our equity securities and debt financing to meet
our cash requirements and have incurred losses totaling approximately $354,601,
for the quarter ended March 31, 2007, and cumulative losses of $2,523,202 to
March 31, 2007. Our net cash used in operations for the quarter ended March 31,
2007 was $ 1,102,833. As of March 31, 2007 we had working capital of
$(1,016,193) as a result of recent Fuel X loan obligation. We do not expect
positive cash flow from operations in the near term. There is no assurance that
actual cash requirements will not exceed our estimates. In particular,
additional capital may be required in the event that:

- drilling and completion costs increase beyond our expectations; or

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- we encounter greater costs associated with general and administrative
  expenses or offering costs.

The occurrence of any of the aforementioned events could
adversely affect our ability to meet our business plans.

We will depend almost exclusively on outside capital to pay for
the continued exploration and development of our properties. Such outside
capital may include the sale of additional stock and/or commercial borrowing.
Capital may not continue to be available if necessary to meet these continuing
development costs or, if the capital is available, that it will be on terms
acceptable to us. The issuance of additional equity securities by us would
result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash commitments.

If we are unable to obtain financing in the amounts and on
terms deemed acceptable to us, we may be unable to continue our business and as
a result may be required to scale back or cease operations for our business, the
result of which would be that our stockholders would lose some or all of their
investment.

A decline in the price of our common stock could affect our
ability to raise further working capital and adversely impact our
operations.

A prolonged decline in the price of our common stock could
result in a reduction in the liquidity of our common stock and a reduction in
our ability to raise capital. Because our operations have been and will be
primarily financed through the sale of equity securities, a decline in the price
of our common stock could be especially detrimental to our liquidity and our
continued operations. Any reduction in our ability to raise equity capital in
the future would force us to reallocate funds from other planned uses and would
have a significant negative effect on our business plans and operations,
including our ability to develop new products and continue our current
operations. If our stock price declines, we may not be able to raise additional
capital or generate funds from operations sufficient to meet our obligations.

We have a history of losses and insignificant operating
results.

From inception through to March 31, 2007, we have incurred
aggregate losses of approximately $$2,523,202. Our loss from operations for the
quarter ended March 31, 2007 was $354,601. There is no assurance that we will
operate profitably or will generate positive cash flow in the future. In
addition, our operating results in the future may be subject to significant
fluctuations due to many factors not within our control, such as the
unpredictability of when customers will purchase our services, the size of
customers purchases, the demand for our services, and the level of competition
and general economic conditions. If we cannot generate positive cash flows in
the future, or raise sufficient financing to continue our normal operations,
then we may be forced to scale down or even close our operations. Until such
time as we generate revenues, we expect an increase in development costs and
operating costs. Consequently, we expect to incur operating losses and negative
cash flow until our properties enter commercial production.

We have a limited operating history and if we are not
successful in continuing to grow our business, then we may have to scale back or
even cease our ongoing business operations.

We have no history of revenues from operations and have no
significant tangible assets. We have yet to generate positive earnings and there
can be no assurance that we will ever operate profitably. We were in the
business of exploration for gold, copper and other minerals before our
acquisition of Source Projects Inc. We have only decided to shift the focus of
our exploration activities from mineral to oil and gas after we completed our
acquisition of Source Projects Inc. Our company has no operating history in
exploration of oil and gas at this time and must be considered in the very early
development stage. The success of our company is significantly dependent on a
successful acquisition, drilling, completion and production program. Our
companys operations will be subject to all the risks inherent in the
establishment of a developing enterprise and the uncertainties arising from the
absence of a significant operating history. We may be unable to locate
recoverable reserves or operate on a profitable basis. We are in the development
stage and potential investors should be aware of the difficulties normally
encountered by enterprises in the development stage. If our business plan is not
successful, and we are not able to operate profitably, investors may lose some
or all of their investment in our company.

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The validity of the farmee interest owned by our subsidiary
in the farmout agreement between Western Petrochemical Corp. and Scott Oil and
Gas Ltd. is disputed. We cannot assure you that the resolution of this dispute
will be in favour of our company.

CanWest Petroleum Corporation, the corporate parent of Western
Petrochemical Corp., has notified us that it disputes the validity of the
farmout agreement between Western Petrochemical Corporation and Scott Oil and
Gas Ltd. This farmout agreement relates to rights to explore for oil shales on
certain farmout land in the Pasquia Hill area of Saskatchewan. Scott Oil and Gas
Ltd. purported transferred its farmee interest in this farmout agreement to
1245147 Alberta Ltd., a wholly owned subsidiary of Source Projects Inc. Despite
claims asserted by CanWest Petroleum Corporation, Scott Oil and Gas Ltd. assured
us that it believes the farmout agreement is valid and enforceable. We
anticipate our company and Scott Oil and Gas Ltd. will need to examine this
farmout agreement with CanWest Petroleum Corporation and find a resolution to
this dispute. We cannot assure you that the resolution of this dispute will be
in favour of our company.

There are significant title risks associated with the
properties subject to our farmout agreements.

None of the exploration permits underlying our farmout
agreement in Saskatchewan have been converted to development leases. In the
event that we do not meet the regulated expenditure requirements, or development
conditions to convert our permits to leases or obtain an extension of such
development requirements, our right to explore for bitumen or oil shale, as
applicable, may be lost. We believe that we have good and proper right, title
and interest in and to the permits that we intend to exploit. However, we have
not obtained title opinions on any of our interests. Accordingly, ownership of
the oil sands exploration rights could be subject to prior unregistered
agreements or interests or undetected claims or interests. Furthermore,
aboriginal peoples have claimed aboriginal title and rights to a substantial
portion of western Canada.

Nature of Oil Sands Exploration and Development involves
many risks that we may not be able to overcome.

Oil sands exploration and development is very competitive and
involves many risks that even a combination of experience, knowledge and careful
evaluation may not be able to overcome. As with any petroleum property, there
can be no assurance that commercial deposits of bitumen will be produced from
any of the properties subject to our farmout agreements. Furthermore, the
marketability of any discovered resource will be affected by numerous factors
beyond our control. These factors include, but are not limited to, market
fluctuations of prices, proximity and capacity of pipelines and processing
equipment, equipment availability and government regulations (including, without
limitation, regulations relating to prices, taxes, royalties, land tenure,
allowable production, importing and exporting of oil and gas and environmental
protection). The extent of these factors cannot be accurately predicted, but the
combination of these factors may result in us not receiving an adequate return
on invested capital.

We have not yet established any reserves and resources and
we cannot assure you that we will ever establish any reserve or resource on the
properties subject to our farmout agreements.

There are numerous uncertainties inherent in estimating
quantities of bitumen resources, including many factors beyond our control, and
no assurance can be given that the recovery of bitumen will be realized. In
general, estimates of recoverable bitumen resources are based upon a number of
factors and assumptions made as of the date on which the resource estimates were
determined, such as geological and engineering estimates which have inherent
uncertainties and the assumed effects of regulation by governmental agencies and
estimates of future commodity prices and operating costs, all of which may vary
considerably from actual results. All such estimates are, to some degree,
uncertain and classifications of resources are only attempts to define the
degree of uncertainty involved. For these reasons, estimates of the recoverable
bitumen, the classification of such resources based on risk of recovery,
prepared by different engineers or by the same engineers at different times, may
vary substantially. No estimates of commerciality or recoverable bitumen
resources can be made at this time, if ever.

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The marketability of natural resources will be affected by
numerous factors beyond our control which may result in us not receiving an
adequate return on invested capital to be profitable or viable.

The marketability of natural resources which may be acquired or
discovered by us will be affected by numerous factors beyond our control. These
factors include market fluctuations in oil and gas pricing and demand, the
proximity and capacity of natural resource markets and processing equipment,
governmental regulations, land tenure, land use, regulation concerning the
importing and exporting of oil and gas and environmental protection regulations.
The exact effect of these factors cannot be accurately predicted, but the
combination of these factors may result in us not receiving an adequate return
on invested capital to be profitable or viable.

Oil and gas operations are subject to comprehensive
regulation which may cause substantial delays or require capital outlays in
excess of those anticipated causing an adverse effect on our company.

Oil and gas operations are subject to federal, state, and local
laws relating to the protection of the environment, including laws regulating
removal of natural resources from the ground and the discharge of materials into
the environment. Oil and gas operations are also subject to federal, state, and
local laws and regulations which seek to maintain health and safety standards by
regulating the design and use of drilling methods and equipment. Various permits
from government bodies are required for drilling operations to be conducted; no
assurance can be given that such permits will be received. Environmental
standards imposed by federal, provincial, or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which it may elect not to insure against due to
prohibitive premium costs and other reasons. To date we have not been required
to spend any material amount on compliance with environmental regulations.
However, we may be required to do so in future and this may affect our ability
to expand or maintain our operations.

Exploration and production activities are subject to certain
environmental regulations which may prevent or delay the commencement or
continuance of our operations.

In general, our exploration and production activities are
subject to certain federal, state and local laws and regulations relating to
environmental quality and pollution control. Such laws and regulations increase
the costs of these activities and may prevent or delay the commencement or
continuance of a given operation. Compliance with these laws and regulations has
not had a material effect on our operations or financial condition to date.
Specifically, we are subject to legislation regarding emissions into the
environment, water discharges and storage and disposition of hazardous wastes.
In addition, legislation has been enacted which requires well and facility sites
to be abandoned and reclaimed to the satisfaction of state authorities. However,
such laws and regulations are frequently changed and we are unable to predict
the ultimate cost of compliance. Generally, environmental requirements do not
appear to affect us any differently or to any greater or lesser extent than
other companies in the industry.

Exploratory drilling involves many risks and we may become
liable for pollution or other liabilities which may have an adverse effect on
our financial position.

Drilling operations generally involve a high degree of risk.
Hazards such as unusual or unexpected geological formations, power outages,
labour disruptions, blow-outs, sour gas leakage, fire, inability to obtain
suitable or adequate machinery, equipment or labour, and other risks are
involved. We may become subject to liability for pollution or hazards against
which it cannot adequately insure or which it may elect not to insure. Incurring
any such liability may have a material adverse effect on our financial position
and operations.

Any change to government regulation/administrative practices
may have a negative impact on our ability to operate and our profitability.

The business of resource exploration and development is subject
to substantial regulation under Canadian provincial and federal laws relating to
the exploration for, and the development, upgrading, marketing, pricing,
taxation, and transportation of oil sands bitumen and related products and other
matters. Amendments to current laws and regulations governing operations and
activities of oil sands exploration and development operations could have a

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material adverse impact on our business. In addition, there can
be no assurance that income tax laws, royalty regulations and government
incentive programs related to the properties subject to our farmout agreements
and the oil sands industry generally, will not be changed in a manner which may
adversely affect our progress and cause delays, inability to explore and develop
or abandonment of these interests.

Permits, leases, licenses, and approvals are required from a
variety of regulatory authorities at various stages of exploration and
development. There can be no assurance that the various government permits,
leases, licenses and approvals sought will be granted in respect of our
activities or, if granted, will not be cancelled or will be renewed upon expiry.
There is no assurance that such permits, leases, licenses, and approvals will
not contain terms and provisions which may adversely affect our exploration and
development activities.

RISKS RELATED TO OUR COMMON STOCK

Trading of our stock may be restricted by the SECs Penny
Stock regulations which may limit a stockholder's ability to buy and sell our
stock

The U.S. Securities and Exchange Commission has adopted
regulations which generally define penny stock to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. Our securities are
covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and accredited investors. The term accredited investor refers
generally to institutions with assets in excess of $5,000,000 or individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of, our common stock.

NASD sales practice requirements may also limit a
stockholders ability to buy and sell our stock.

In addition to the penny stock rules described above, the
NASD has adopted rules that require that in recommending an investment to a
customer, a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending speculative low
priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customers financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the NASD believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The NASD requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may limit your
ability to buy and sell our stock and have an adverse effect on the market for
our shares.

Trading in our common stock on the OTC Bulletin Board is
limited and sporadic making it difficult for our shareholders to sell their
shares or liquidate their investments

Shares of our common stock are currently quoted on the OTC
Bulletin Board. The trading price of our common stock has been subject to wide
fluctuations. Trading prices of our common stock may fluctuate in response to a
number of factors, many of which will be beyond our control. The stock market
has generally experienced extreme

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price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of companies with no current
business operation. There can be no assurance that trading prices and price
earnings ratios previously experienced by our common stock will be matched or
maintained. These broad market and industry factors may adversely affect the
market price of our common stock, regardless of our operating performance.

In the past, following periods of volatility in the market
price of a company's securities, securities class-action litigation has often
been instituted. Such litigation, if instituted, could result in substantial
costs for us and a diversion of management's attention and resources.

Because of the early stage of development and the nature of
our business, our securities are considered highly speculative.

Our securities must be considered highly speculative, generally
because of the nature of our business and the early stage of its development. We
are engaged in the business of exploring and, if warranted, developing
commercial reserves of oil and gas. Our properties are in the exploration stage
only and are without known reserves of oil and gas. Accordingly, we have not
generated any revenues nor have we realized a profit from our operations to date
and there is little likelihood that we will generate any revenues or realize any
profits in the short term. Any profitability in the future from our business
will be dependent upon locating and developing economic reserves of oil and gas,
which itself is subject to numerous risk factors as set forth herein. Since we
have not generated any revenues, we will have to raise additional monies through
the sale of our equity securities or debt in order to continue our business
operations.

We do not intend to pay dividends on any investment in the
shares of stock of our company.

We have never paid any cash dividends and currently do not
intend to pay any dividends for the foreseeable future. To the extent that we
require additional funding currently not provided for in our financing plan, our
funding sources may prohibit the payment of a dividend. Because we do not intend
to declare dividends, any gain on an investment in our company will need to come
through an increase in the stocks price. This may never happen and investors
may lose all of their investment in our company.

RISKS RELATED TO OUR COMPANY

Our By-laws contain provisions indemnifying our officers and
directors against all costs, charges and expenses incurred by them

Our By-laws contain provisions with respect to the
indemnification of our officers and directors against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
actually and reasonably incurred by him, including an amount paid to settle an
action or satisfy a judgment in a civil, criminal or administrative action or
proceeding to which he is made a party by reason of his being or having been one
of our directors or officers.

Investors' interests in our company will be diluted and
investors may suffer dilution in their net book value per share if we issue
additional shares or raise funds through the sale of equity securities

Our constating documents authorize the issuance of
4,500,000,000 shares of common stock with a par value of $0.0001 and 5,000,000
shares of preferred stock with a par value of $0.0001. In the event that we are
required to issue any additional shares or enter into private placements to
raise financing through the sale of equity securities, investors' interests in
our company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold. If we
issue any such additional shares, such issuances also will cause a reduction in
the proportionate ownership and voting power of all other shareholders. Further,
any such issuance may result in a change in our control.

Our By-laws do not contain anti-takeover provisions which
could result in a change of our management and directors if there is a take-over
of our company

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We do not currently have a shareholder rights plan or any
anti-takeover provisions in our By-laws. Without any anti-takeover provisions,
there is no deterrent for a take-over of our company, which may result in a
change in our management and directors.

As a result of a majority of our directors and officers are
residents of other countries other than the United States, investors may find it
difficult to enforce, within the United States, any judgments obtained against
our company or our directors and officers

We do not currently maintain a permanent place of business
within the United States. In addition, a majority of our directors and officers
are nationals and/or residents of countries other than the United States, and
all or a substantial portion of such persons' assets are located outside the
United States. As a result, it may be difficult for investors to enforce within
the United States any judgments obtained against our company or our officers or
directors, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof.

Item 3. Controls and Procedures.

As required by Rule 13a-15 under the Exchange Act, we carried
out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2007, being the end of the
period covered by this quarterly report. This evaluation was carried out under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, Mr. Hussein Charanek. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting management
to material information relating to us required to be included in our periodic
SEC filings as at the end of the period covered by this report. There have been
no changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date we carried out our evaluation.

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 Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC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 management, including our Chief Executive Officer and our Chief
Financial Officer, to allow timely decisions regarding required disclosure.

During our most recently completed fiscal quarter ended March
31, 2007 there were no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to affect, our internal
control over financial reporting.

The term internal control over financial reporting is defined
as a process designed by, or under the supervision of, our principal executive
and principal financial officers, or persons performing similar functions, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:

(a) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our
assets;

(b) Provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
our company are being made only in accordance with authorizations of our
management and directors; and

(c) Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.

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PART II  Other Information

|Item 1. | Legal Proceedings.
|------- | ------------------

We are not party to any legal proceedings.

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

None.

|Item 3. | Default upon Senior Securities.
|------- | -------------------------------

None.

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

None.

|Item 5. | Other Information.
|------- | ------------------

None.

|Item 6. | Exhibits.
|------- | ---------

The following exhibits, required by Item 601 of Regulation S-B,
are being filed as part of this quarterly report, or are incorporated by
reference where indicated:

|Exhibit |                                                                                                                                                                                                                                                                               
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     | Description of Exhibit                                                                                                                                                                                                                                                        
|(3)     | Articles of Incorporation
      and By-laws                                                                                                                                                                                                                                   
|3.1     | Articles of Incorporation (incorporated by reference from
      our registration statement on Form SB-2 filed January 28, 2005)                                                                                                                                               
|3.2     | By-Laws (incorporated by reference from our registration
      statement on Form SB-2 filed January 28, 2005)                                                                                                                                                                 
|3.3     | Articles of Merger, as filed with the Nevada Secretary of
      State (incorporated by reference from our registration statement on Form
      SB-2 filed January 28, 2005)                                                                                                   
|3.4     | Certificate of Merger, as filed with the Delaware
      Secretary of State (incorporated by reference from our registration
      statement on Form SB-2 filed January 28, 2005)                                                                                              
|3.5     | Certificate of Change as filed with the Nevada Secretary
      of State (incorporated by reference from our current report on Form 8-K
      filed February 10, 2006)                                                                                                         
|3.6     | Certificate of Change to increase authorized and issued
      and outstanding share capital (incorporated by reference from our current
      report on Form 8-K filed April 19, 2006)                                                                                        
|3.7     | Certificate of Amendment to Articles of Incorporation
      changing the name from Red Sky Resources Inc. to Source Petroleum Inc., as
      filed with the Nevada Secretary of State (incorporated by reference from
      our current report on Form 8-K filed May 26, 2006)
|(10)    | Material Contracts                                                                                                                                                                                                                                                            
|10.1    | Farmout Agreement with Banks Energy Inc. (formerly, Banks
      Ventures Ltd.) dated June 1, 2003 (incorporated by reference from our
      registration statement on Form SB-2 filed January 28, 2005)                                                                       
|10.2    | Mining Quitclaim Deed dated August 16, 2004 (incorporated
      by reference from our registration statement on Form SB-2 filed January
      28, 2005)                                                                                                                       

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|Exhibit |                                                                                                                                                                                                                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     | Description of Exhibit                                                                                                                                                                                                                                                                               
|10.3    | Agreement and Plan of Merger between Red Sky Resources
      Inc. and Pacific Petroleum Inc. dated December 6, 2004 (incorporated by
      reference from our registration statement on Form SB-2/A (Amendment No. 1)
      filed March 15, 2005)                                                    
|10.4    | Mineral Exploration Management Services Agreement between
      Red Sky Resources Inc. and Alaska Earth Sciences Inc. dated March 7, 2005
      (incorporated by reference from our registration statement on Form SB-2/A
      (Amendment No. 1) filed March 15, 2005)                              
|10.5    | Geophysical Survey Agreement between Red Sky Resources
      Inc. and SJ Geophysical Ltd. dated April 14, 2005 (incorporated by
      reference from our quarterly report on Form 10-QSB filed May 13, 2005)                                                                                         
|10.6    | Share Exchange Agreement among Source Petroleum Inc.,
      Source Projects Inc., shareholders of Source Projects Inc., 1245147
      Alberta Ltd. and Hussein Charanek effective as of July 26, 2006
      (incorporated by reference from our current report on Form 8-K filed July
      26, 2006)
|(31)    | Section 302 Certification                                                                                                                                                                                                                                                                            
|31.1    | Certification Statement of the
        Chief Executive Officer and Chief Financial Officer pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002                                                                                                                                         
|(32)    | Section 906 Certification                                                                                                                                                                                                                                                                            
|32.1    | Certification Statement of the
        Chief Executive Officer and Chief Financial Officer pursuant to Section
        906 of the Sarbanes-Oxley Act of 2002                                                                                                                                         

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SIGNATURES

In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

SOURCE PETROLEUM INC.

|By: | */s/
      Hussein Charanek*                            | 
|--- | ------------------------------------------------------- | 
|    | Hussein Charanek                                        | 
|    | Chief Executive Officer, Chief Financial
      Officer, | 
|    | President, Treasurer and Secretary                      | 
|    | (Principal Executive Officer, Principal
      Financial | 
|    | Officer and Principal Accounting Officer)               | 
|    | Date: May 21, 2007                                      | 

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