UNITED STATES SECURITIES AND EXCHANGE COMMISSION




Washington, D.C.  20549




FORM 20-F




[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g)




OF THE SECURITIES EXCHANGE ACT OF 1934




OR




[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE




SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended April 30, 2009




OR




[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF




THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from ____________ to ____________




Commission file number 000-49760




OR




[  ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF




THE SECURITIES EXCHANGE ACT OF 1934









(Exact name of Registrant as specified in its charter)




Not Applicable




(Translation of Registrant's Name into English)




Alberta, Canada




(Jurisdiction of incorporation or organization)




Suite 800, 926 – 5th Avenue S.W.




Calgary, Alberta, Canada  T2P 0N7




(Address of principal executive offices)




Securities registered or to be registered pursuant to Section 12(b) of the Act:




Not Applicable




Title of Class




Not Applicable




Name of Each Exchange on Which Registered




Securities registered or to be registered pursuant to Section 12(g) of the Act:







Common Shares, Without Par Value




(Title of Class)




Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:




Not Applicable




Title of Class




Indicate the number of outstanding shares of each of the Registrant's classes of capital or common shares as of the close of the period covered by the annual report.




There were 133,244,472common shares, without par value, issued and outstanding as of April 30, 2009 and 133,244,472 common shares, without par value, issued and outstanding as of September 22, 2009.




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.[   ] YES   [X] NO




If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.




[X] YES   [   ] NO




Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.




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




[X] YES   [   ] NO




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer [   ]                                                Accelerated
filer [   ] Non-accelerated filer [X]




Indicate by check mark which financial statement item the registrant has elected to follow.




[] Item 17   [X] Item 18




If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).




[   ] YES   [X] NO




(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)




Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [   ] YES   [   ] NO







PART I




This annual report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act
of 1934.  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may", "should", "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" that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.




Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.




As used in this annual report, the terms "we", "us", "our" and "company" mean MegaWest Energy Corp. and "MegaWest USA" means our directly-owned subsidiary MegaWest Energy (USA) Corp., unless otherwise indicated and all references to "common shares" refer to common shares, without par value, in our capital stock.




Unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars.




ITEM 1.                      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS




Not applicable.




ITEM 2.                      OFFER STATISTICS AND EXPECTED TIMETABLE




Not applicable.




ITEM 3.                      KEY INFORMATION




A.           Selected Financial Data




The following table summarizes selected financial data for our company prepared in accordance with Canadian generally accepted accounting principles (GAAP) for the five fiscal years ended April 30, 2009.  Additional information is presented to show the differences which would result from the application of United States GAAP to
our financial information.  The data set out below for the five year period ended April 30, 2009 is derived from our audited financial statements which were examined by our independent registered public principal accountant.  The data should be read in conjunction with our audited financial statements and related notes included in this annual report and with the information appearing under the heading "Item 5 – Operating and Financial Review and Prospects" below.  The data
is presented in Canadian dollars.




Selected Financial Data
(Stated in Canadian Dollars - Calculated in accordance with Canadian GAAP)Year Ended April 302009
2008
2007
2006
2005Net Income (Loss)(1)
($37,194,937)
($17,903,023)
($6,893,052)
($222,945)
($61,031)Net Income (Loss) from Operations per Common Share
($0.29)
($0.23)
($0.31)
($0.04)
($0.01)Net Income (Loss) per Common Share
($0.29)
($0.23)
($0.31)
($0.04)
($0.01)Total Assets
$27,436,357
$48,555,322
$52,532,847
$31,440
$137,113Net Assets (Deficiency in Assets)
$26,299,731
$44,743,759
$48,148,521
($129,422)
$93,523Capital Stock(2)
$105,811,260
$87,060,351
$66,955,725
$376,092
$376,092Number of Common Shares
133,244,472
95,131,666
72,436,050
6,337,500
6,337,500Dividends per Common Share
$-
$-
$-
$-
$-Weighted Average Number of Common Shares
130,358,921
79,413,793
22,102,129
6,337,500
5,018,322Working Capital
$2,112,007
$4,135,672
$28,152,901
($139,422)
($30,087)Long-Term Debt(3)
$-
$1,828,779
$2,928,442
$-
$-




(1)
Cumulative net loss and deficit from exploration stage since incorporation through April 30, 2009 was $61,933,894 and $78,948,896, respectively.  The difference between the accumulated deficit and losses is a $17,257,042 adjustment related to related party acquisitions and a $242,040 adjustment for the adoption of  new accounting standards.


(2)
Capital stock includes share capital, warrants, contributed surplus and equity portions of convertible promissory notes and exchange shares.


(3)
Long-term debt includes long-term portion of convertible promissory notes and exchange shares.




Reconciliation to United States Generally Accepted Accounting Principles




Canadian GAAP conforms in all material respects with United States GAAP except for certain matters as described in Reconciliation to U.S. GAAP as at April 30, 2009 and 2008 and for the years ended April 30, 2009, 2008 and 2007.  The differences between Canadian GAAP and U.S. GAAP, which affect our financial statements for the
year ended April 30, 2009, are as follows:




·
Increase the amount recorded for oil and gas net assets acquired and related consideration given;




·
adjust stock-based compensation expense for stock options and warrants and;




·
increase the amount recorded for impairment of oil and gas assets.





Had we followed U.S. GAAP, certain selected financial information reported above, would have been reported as follows (stated in Canadian dollars):




Selected Financial Data
(Stated in Canadian Dollars - Calculated in accordance with U.S. GAAP)Year Ended April 30 (Audited)2009
2008
Restated(1)
2007
2006
2005Net Income (Loss)
($68,587,531)
($41,120,124)
($18,112,762)
($222,945)
($61,031)Net Income (Loss) per Common Share
($0.53)
($0.51)
($0.81)
($0.04)
($0.01)Total Assets
$36,390,325
$88,815,951
$97,902,628
$31,440
$137,113Net Assets (Deficiency in Assets)
$35,253,699
$84,983,274
$94,487,486
($129,422)
$93,523Capital Stock
$143,222,324
$124,364,368
$39,713,984
$376,092
$376,092Long-Term Debt
$-
$1,849,893
$1,959,258
$-
$-




(1)
Restatement of Comparative Figures:


The 2008 comparative U.S. GAAP amounts have been restated for the amount of Trinity Sands (Texas) project cost write-downs and certain clerical errors that were contained in the previously reported U.S. GAAP consolidated balance sheet and consolidated statement of operations and accumulated deficit from exploration stage filed with our
annual report on Form 20-F for fiscal 2008.


(a)      The clerical errors for U.S. GAAP purposes were as follows:


i.
The transfer to share capital of the recorded amount of warrants exercised in 2008 was shown as a $5,033,319 increase in the dollar amount of warrants rather than as a $5,033,319 reduction of the dollar amount of warrants.  To correct this entry in the restated U.S. GAAP financial statements, the dollar amount of warrants has been reduced by $10,066,638 and the dollar amount of share capital has been increased
by an equivalent amount.


ii.
A portion of a 2007 entry to record the acquisition of certain properties was not recorded in the 2008 U.S. GAAP financial statements.  To correct this entry, oil and gas assets have been increased by $11,515,824 and share capital has been reduced by $8,599,442.


(b)
Under Canadian GAAP, the Texas properties were written down to $300,000 in 2008.  These properties should also have been recorded at $300,000 for U.S. GAAP purposes.  As a result, oil and gas assets have been reduced by $21,691,160 and the accumulated deficit from exploration stage activities has been increased by an equivalent amount.




Disclosure of Exchange Rate History




The following table sets out average exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars in effect on the last date of each month during the period,
for the following periods:




Year Ended April 302009
2008
2007
2006
2005Average for period
$0.8767
$0.9785
$0.8789
$0.8423
$0.7873




The following table sets out the high and low exchange rates, based on the above-mentioned noon buying rate in New York City for the conversion of Canadian dollars into United States dollars, for the following periods:




High
LowSeptember 1 to September 11, 2009
$0.931
$0.9042August 2009
$0.939
$0.9011July 2009
$0.9267
$0.8584June 2009
$0.9235
$0.8601May 2009
$0.9127
$0.8426April 2009
$0.8376
$0.7911March 2009
$0.8167
$0.7696


On September 11, 2009, the above-mentioned noon buying rate in New York City for the conversion of Canadian dollars into United States dollars was $0.931 per Canadian dollar.




B.           Capitalization and Indebtedness




Not applicable.




C.           Reasons for the Offer and Use of Proceeds




Not applicable.




D.           Risk Factors




Much of the information contained in this annual report includes or is based upon estimates, projections or other "forward looking statements".  Such forward looking statements include any projections or estimates made by our company 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.




The common shares of our company are considered speculative.  You should carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating our company and our business before purchasing our common shares.  Our business, operating or financial condition could
be harmed due to any of the following risks.





Risks Relating to our Financial Condition


We have yet to attain profitable operations and because we will need additional financing to fund our exploration activities, there is substantial doubt about our ability to continue as a going concern.




To date, we have acquired interests in five oil and gas properties; however, we have not established a proved commercial project on any of our properties that generates commercial revenues.  Our short and long-term prospects depend upon the success of our exploration, appraisal and development drilling programs and the production
response to our Marmaton River and Grassy Creek projects in Missouri.  Production at both of these projects is currently suspended due to significantly reduced oil prices.  As at April 30, 2009, all of our projects are unproved.  We also had an accumulated deficit from exploration stage of $78,948,896 and unrestricted cash balances of $1,766,558. For the fiscal year ended April 30, 2009, we incurred a net loss of $37,194,937 (see "Operating Results" below in this annual report).  Accordingly,
we have not generated significant revenues nor have we realized a profit from our operations to date.  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 out herein.  Since we have not generated significant revenues, our continuance is dependent upon raising additional monies through the sale of our equity securities, debt and/or joint venture farmouts in
order to continue our business operations and develop our projects, if determined to be commercial.




We will require additional financing to continue as a going concern.




We expect to require further funds to finance the development of our company.  If additional funds are raised by issuing equity securities, further dilution to existing or future shareholders is likely to result.  Obtaining additional financing is subject to a number of factors, including investor acceptance of any business
we may acquire or combine with in the future and general investor sentiment.  Such financing, if required, may not be available upon terms and conditions acceptable to us, if at all. Our inability to obtain additional financing in a sufficient amount when needed and upon terms and conditions acceptable to us could have a materially adverse effect upon our company.  If adequate funds are not available on acceptable terms when needed, we may be required to delay projects, scale back or suspend
the development of our properties, which could impair our ability to compete in the marketplace, and may result in the dissolution of our company.




Risks Relating to Oil and Gas Operations




The oil and gas industry is highly competitive and we may be unsuccessful in acquiring further leases.




The oil and gas industry is intensely competitive.  We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staff for suitable business opportunities, desirable oil and gas properties for drilling operations,
drilling equipment and funds.  We may be unable to raise the necessary funds or complete any projected work.




As our Missouri, Kansas, Kentucky, Montana and Texas properties are in the exploration stage or early stages of development, we may not be able to establish commercial reserves on these projects.




Exploration for commercial reserves of oil and gas is subject to a number of risk factors.  Few of the prospects that are explored are ultimately developed into producing oil and/or gas wells.  As at April 30, 2009 all of our projects are considered unproved and are without proved reserves of oil and gas.  We
may not be able to establish commercial reserves on any of our projects (see "Business Overview" below in this annual report).




Currently operations are suspended at our projects, including Marmaton River and Grassy Creek projects due to significantly reduced oil prices.




The potential profitability of oil and gas ventures depends upon factors beyond the control of our company, any of which may have a material adverse effect on our company.




The potential profitability of oil and gas projects is dependent upon many factors beyond our control, including:  world prices and markets for oil and gas which are unpredictable, highly volatile, potentially subject to governmental fixing, pegging or controls; adverse weather conditions can hinder drilling and production operations;
production from any well may be unmarketable if it is impregnated with water or other deleterious substances; and the marketability of oil and gas which may be acquired or discovered will be affected by proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection.  The extent of these factors cannot be accurately predicted but the combination of these factors may result in our
company not receiving an adequate return on invested capital.  During fiscal 2009 we recorded impairment charges of $3,166,935, $20,503,054, $9,928,428 and $661,692 in respect of our Kansas, Kentucky, Montana and Texas properties, respectively.




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




Oil and gas operations in United States are also subject to federal and state 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 and production operations to be conducted; we
may not receive such permits.  Furthermore oil and gas operations in the United States are also subject to federal and state laws and regulations including, but not limited to:  the construction and operation of facilities, the use of water in industrial processes, the removal of natural resources from the ground, and the discharge/release of materials into the environment.




Environmental standards imposed by federal and state authorities may be changed and 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 we may elect not to insure against due to prohibitive premium costs and other reasons.  Our current and anticipated exploration and drilling activities are subject to the aforementioned environment regulations. When and if we establish reserves or enter into production, we will become subject to additional regulations which do not currently pertain to us or affect our current operations.




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, 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 we cannot
adequately insure or which we may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.




We have oil and gas leases in respect of the real property associated with our projects, but the real property may be subject to prior unregistered agreements, or transfers which have not been recorded or detected through title searches.


We have oil and gas leases with respect to the real property associated with our projects and we believe our interests are valid (see "Business Overview – Projects" below in this annual report).  These leases do not guarantee title against all possible claims.  The real property may be subject to prior unregistered
agreements, or transfers which have not been recorded or detected through title research.  If the oil and gas leases to the real property associated with our projects are challenged, we may have to expend funds defending any such claims and may ultimately lose some or all of any revenues generated from the projects if we lose our interest in such leases.




Risks Relating to our Common Stock




Shareholders' 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 an unlimited number of common shares, without par value, and an unlimited number of preferred shares, without par value (see "Stock Ownership" below in this annual report).  In the event that we are required to issue additional shares, enter into private placements to raise financing
through the sale of equity securities or acquire additional oil and gas property interests in the future from the issuance of shares of our common stock to acquire such interests, the interests of existing shareholders in our company will be diluted and existing shareholders may suffer dilution in their net book value per share depending on the price at which such securities are sold.  If we do issue additional shares, it will cause a reduction in the proportionate ownership and voting power of all
existing shareholders.




Principal shareholders, senior management and directors have significant influence regarding share ownership.  This concentration could lead to conflicts of interest and difficulties for non-insider investors effecting corporate changes, and could adversely affect our company's share price.




As of August 28, 2009, our senior management, directors and greater than five percent shareholders (and their affiliates), acting together, held approximately 17 percent of the issued and outstanding shares of our company, on a diluted basis, and have the ability to influence all matters submitted to our company's
shareholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our company's assets) and to control our company's management and affairs (see "Stock Ownership" below in this annual report).  Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company, impeding a merger, consolidation, takeover or other business combination involving our company
or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could have a material adverse effect on the market price of our shares.




Employee, director and consultant stock options and warrants could lead to greater concentration of share ownership among insiders and could lead to dilution of share ownership which could lead to depressed share prices.




Because the success of our company is highly dependent upon our respective employees, our company has granted to certain employees, directors and consultants stock options to purchase shares of our common stock as non-cash incentives (see "Stock Ownership" below in this annual report).  To the extent that significant numbers of
such stock options may be granted and exercised, the interests of the other shareholders of our company may be diluted causing possible loss of investment value.




We have never declared or paid cash dividends on our common shares and do not anticipate doing so in the foreseeable future.




Our board of directors may never declare cash dividends, which action is exclusively within our discretion. Shareholders cannot expect to receive a dividend on our common stock in the foreseeable future, if at all.




Trading of our common stock may be restricted by the Securities and Exchange Commission (SEC)'s "Penny Stock" rules which may limit a shareholder's ability to buy and sell our shares.




The SEC has adopted rules which generally define "penny stock" to be any equity security that has a market price (as defined) less than US$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 US$5,000,000 or individuals with a net worth in excess of US$1,000,000 or annual income exceeding US$200,000 or US$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 share 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 shares.




The National Association of Securities Dealer (NASD) has adopted sales practice requirements which may limit a shareholder's ability to buy and sell our shares.




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 shares, which may limit your ability to
buy and sell our shares and have an adverse effect on the market for our shares.




Risks Relating to our Management




Our articles contain provisions indemnifying our officers and directors against all costs, charges and expenses incurred by them.




Our articles contain provisions that state, subject to applicable law, we must indemnify every director or officer of our company, subject to the limitations of the Business Corporations Act (Alberta), against all losses or liabilities that our company's directors or officers may sustain or incur in the execution of their duties.  Our
company's articles further state that no director or officer will be liable for any loss, damage or misfortune that may happen to, or be incurred by our company in the execution of his duties if he acted honestly and in good faith with a view to the best interests of our company.  Such limitations on liability may reduce the likelihood of litigation against our company's officers and directors and may discourage or deter our shareholders from suing our company's officers and directors based upon breaches
of their duties to our company, though such an action, if successful, might otherwise benefit our company and our shareholders.







As a majority of our directors and officers are residents of 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.  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.




Key management employees may fail to properly carry out their duties or may leave, which could negatively impact our corporate operations and/or our share price.




Our company's financial condition and the success of our oil and gas operations is dependent on our ability to hire and retain highly skilled and qualified personnel.  We face competition for qualified personnel from numerous industry sources, and we may not be able to attract and retain qualified personnel on acceptable terms.  The
loss of service of any of our key personnel could have a material adverse effect on our operations and/or financial condition, which may negatively impact our share price.  We do not have key-man insurance on any of our employees and with the exception of R. William Thornton and Pat McCarron, we do not have written employment agreements with any of our key personnel.




Because we have not adopted a formal conflicts of interest policy, the occurrence of one or more conflicts could have a negative impact on our ability to raise capital and/or our share price.




Some of our directors and officers serve or may serve as directors or officers of other oil and gas or mineral exploration companies or have interests in other oil and gas or mineral exploration companies or ventures.  To the extent that our company has dealings with such companies or ventures, certain of our directors and officers
may have a conflict of interest in negotiating and concluding terms respecting the extent of such dealings.  Pursuant to the provisions of the Business Corporations Act (Alberta), our directors and senior officers must disclose material interests in any contract or transaction (or proposed contract or transaction) material to our company (see "Related Party Transactions" below in this annual report).  However, our lack of a formal conflicts of interest policy may make it difficult for our
company to raise additional capital because institutional investors may be unable to invest in our company.  Furthermore, we may be unable to list our shares on an exchange if such exchange requires that we have a formal conflicts of interest policy, which may limit your ability to buy and sell our shares and may have an adverse effect on the value of your investment in our company or the market for our shares.




ITEM 4.                      INFORMATION ON MEGAWEST ENERGY CORP.




A.           History and Development of MegaWest Energy Corp.




We are a corporation organized under the laws of the Province of Alberta, Canada.  We were originally incorporated under the Company Act (British Columbia) on February 8, 2000 under the name "Brockton Capital Corp.".  Our name was changed to "MegaWest Energy Corp." effective February 27, 2007.  At a meeting
of the shareholders of our company on October 29, 2007, the shareholders approved the continuance of our company from the Province of British Columbia into the Province of Alberta under the Business Corporations Act (Alberta).  Effective February 12, 2008, our company continued into the Province of Alberta as a company organized under the Business Corporations Act (Alberta) and we ceased to be a company organized under the Business Corporations Act (British Columbia).  The continuance
was effected to reflect our establishment of principle executive offices in Calgary, Alberta.




Our corporate offices are located at Suite 800, 926 – 5th Avenue SW, Calgary Alberta, Canada  T2P 0N7.  Our telephone number is (403) 984-6342 and our facsimile number is (403) 984-6343.




Our company was originally engaged in the consumer electronics market.  However, due to our inability to generate revenues from this business, subsequent to our fiscal year ended April 30, 2006, new management was hired to pursue alternative business opportunities, namely non-conventional oil and gas resource exploration and development.




During the fiscal year ended April 30, 2007, we completed three private placements to provide us with the necessary working capital to evaluate and pursue non-conventional oil and gas opportunities in the United States and Canada and to establish a head office in Calgary, Alberta.  The first of the private placements, an offering
of 23,500,000 shares of our common stock at US$0.10 per share for aggregate proceeds of US$2,350,000 (C$2,707,168) was completed in December 2006.  In January and February 2007, we completed a further private placement of 8,425,000 units, at a price of US$0.50 per unit, for aggregate proceeds of US$4,212,500 (C$4,709,234), each of which units consisted of one share of our common stock and one-half of one share purchase warrant (each whole warrant entitled the holder to purchase an additional share of
our common stock at an exercise price of US$1.00 per share for a period of one year).  On December 14, 2007, our board of directors approved a six month extension for the share purchase warrants and on July 5, 2008 the share purchase warrants expired.  On February 28, 2007, our company completed an additional private placement of 27,448,550 units, at a price of US$1.00 per unit, for aggregate proceeds of US$27,448,550 (C$28,669,870), each of which units consists of one share of our common
stock and one-half of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share a period of one year).  In conjunction with the February 28, 2007, private placement, we issued 655,848 warrants (each of which entitles the holder to purchase one share of our common stock at US$1.30 per share for a period of one year) to finders, rights to buy an additional 180,000 units under the same terms as the January
2007 private placement and rights to buy a further 375,000 units under the same terms as the February 2007 private placement.  On December 14, 2007, our board of directors approved a six month extension for the share purchase warrants and on August 28, 2008 the share purchase warrants and units expired.  In respect of both of the above-mentioned extensions:  (a) no consideration was given by our company or received by the warrant holders; and (b) the extension was effected to encourage
the warrant holders to continue to hold investments in our company.




In November 2006, we took our first steps to become a non-conventional oil and gas company when in December 2006 we entered into several non-binding letters of intent with companies involved in the business of the exploration of oil and gas resources in Kansas, Missouri, Kentucky and Texas.




On March 26, 2007, we purchased (through our subsidiary, MegaWest Energy (USA) Corp.) all of the assets of Deerfield Energy Kansas Corp.  The purchased assets included certain items of equipment and fixed assets and interests in two oil and gas leases covering 392 unproved acres in respect of the Chetopa project near Chetopa,
Kansas.  The consideration given for the assets was 250,000 shares of our common stock and the assumption of a promissory note in the amount of US$500,000 (C$591,250) payable to a private company, Agosto Corporation Limited.  Pursuant to our assumption of the promissory note, we granted Agosto a conversion feature that enables the holder of the note to convert the principal amount of the loan plus accrued interest into shares of our common stock at a rate of US$0.25 per share.  On
maturity on June 20, 2008 these promissory notes were converted into common shares of our company.




As part of the project, MegaWest is obligated to pay a net revenue interest up to a maximum of U.S. $750,000 on net revenues generated from the Chetopa project.  The net revenue interest becomes payable after MegaWest recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project's
net revenues.  As at August 28, 2009 no amount of net revenue interest has been earned.







On April 2, 2007, we acquired (in conjunction with MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Kentucky Reserves, LLC (Kentucky Reserves) in consideration for US$3,000,000 (C$3,412,500) cash and 5,000,000 shares of our common stock.  Kentucky Reserve's assets included oil and gas leases covering
27,009 unproved acres in the Edmonson, Warren and Butler Counties in Kentucky.  Pursuant to the membership unit purchase agreement, we acquired a 62.5 percent working interest in the shallow rights in certain tar sands and a 37.5 percent interest in the certain deep rights.  Furthermore, pursuant to the purchase agreement, we were committed to undertake a US$15,000,000 work program within the area covered by the leases, which work program was required to be completed by October 2009 for the
purpose of determining the most effective way of extracting heavy oil/bitumen from the leases.  The work program was to consist of field testing and evaluation, drilling, logging and coring of wells, formation and fluid testing, the construction of heavy oil pilot projects such as steam, water flooding, solvent injection, electro-thermal heating, or the like. If we had been unable to expend the work program commitment within the said period, we would have been subject to a 37.5 percent penalty on the
unexpended amount of the work program commitment.  However, pursuant to an amending agreement dated April 9, 2009 with Kentucky Reserves II, LLC (KRII), the said work program obligations and attendant penalty payment provisions were terminated in consideration for: (i) a reduction in our working interest in the shallow rights from 62.5 percent to 37.5 percent; (ii) a transfer of the ownership of the oil and gas leases to KRII; and (iii) our continuing obligation to pay, directly to the lessors
of the lands which make up the Kentucky project, lease rentals for the 24-month period commending March 1, 2009 (estimated at US$225,000).




On April 5, 2007, we acquired (through MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Deerfield Energy LLC (Deerfield Missouri) in consideration for US$925,000 cash, including a change in control fee, and 4,750,000 shares of our common stock.  The assets of Deerfield Missouri include rights
to oil development agreements in Vernon County, Missouri covering 7,620 unproved acres and all of the issued and outstanding units of Deerfield Kansas.  At the closing of the transaction, we paid US$625,000 (C$579,050) of the purchase price.  Owing to potential issues related to certain oil development agreements, the unpaid cash of US$300,000 and 4,750,000 shares of our common stock were placed in an escrow account, set-up for our indemnification in respect of the said claims.  Pursuant
to the escrow agreement, the said cash and shares can be released on a pro-rata basis to the previous unit holders of Deerfield Missouri upon either the modification of certain oil development agreements into oil and gas leases or until 4,000 acres of replacement acreage have been leased.  To rectify the escrow indemnifications, we engaged in a leasing program in Missouri and in October 2007, we surpassed the 4,000 acre threshold of replacement acreage.  As a result, the US$300,000 cash and
4,750,000 shares of our common stock held in escrow were released.  Of the cash held in escrow, US$100,000 plus interest was paid to us for reimbursement of our costs associated with leasing the replacement acreage.




On April 25, 2007, we acquired (in conjunction with MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Trinity Sands Energy LLC (Trinity) in consideration for US$200,000 (C$227,500) cash and 95,000 exchange shares of MegaWest Energy (USA) Corp.  Each exchange share may be exchanged for US$10 in
cash or 100 shares of our common stock during the period January 1, 2008 to July 31, 2008, after this time, we may compel the holders of the exchange shares to convert their exchange shares into shares of our common stock.  The assets of Trinity consisted of a 50 percent working interest in approximately 14,948 unproved acres in Edwards County, Texas and an earn-in agreement to increase the said working interest to 66.67 percent and earn up to a 66.67 percent working interest in an additional 13,348
undeveloped acres in Edwards Country, Texas.  As of February 28, 2008, all of the exchange shares were converted into 9,500,000 shares of our common stock.




In June 2007, we began oil production from the Chetopa project and have shipped approximately 11,500 barrels of oil from the project.  To date this production has been incidental to the pilot project.




On October 24, 2007, we acquired (in conjunction with MegaWest Energy Montana Corp.) a 40 percent working interest in oil and gas leases covering approximately 37,400 unproved acres of land in Montana for consideration of US$300,000 (C$309,034) cash and 500,000 units, of which each unit consists of one share of our common stock and one-half
of one share purchase warrant (each whole warrant entitles the holder to purchase an additional share of our common stock at an exercise price of US$2.50 per share until April 24, 2009).  Pursuant to earn-in agreements, we can earn an additional 20 percent working interest in the lands by completing US$2.5 million of work that includes additional leasing, seismic, geological studies, test wells and pilot project development and implementation.  In addition, our company and the vendors have
established a regional area of mutual interest (AMI) covering approximately 1,000,000 acres that will remain active for the next two years.  The interest in the AMI will be divided 65 percent to our company and 35 percent to the vendors.  We will pay for 100 percent of the lease acquisition, initial geological and geophysical activity, drilling and completing of all wells, if any, comprising an agreed upon initial work program for each new prospect within the AMI and we will receive 100 percent
payout of all such costs and expenses incurred for each such prospect prior to vendor receiving its respective share.




In November 2007, we commenced construction of our first commercial project in Missouri called Marmaton River.  Commissioning and start up of the facility was completed on March 16, 2008 when steam injection commenced and the first oil sales from the project occurred on August 4, 2008 (see "Business Overview" below in this annual
report).




On May 15, 2008, we completed a private placement of 26,750,000 shares of our common stock at US$0.60 per share for aggregate proceeds of US$16,050,000 (C$15,907,637).  The proceeds of the placement were used to fund our ongoing oil and gas exploration and development activities.




During fiscal 2009, we sold 8,812 barrels of oil from our Marmaton River (Missouri) project for $426,567, net of royalties.  However, in December 2008, due to low oil prices, we suspended all our capital projects, including operations at our two Missouri heavy oil projects (Grassy Creek and Marmaton River), pending a recovery
in oil prices and financing.




On August 28, 2009, we entered into a strategic arrangement with the Iroquois Capital Opportunity Fund, L.P. (ICO Fund) aimed at recapitalizing our company and enabling the restart of production at our Missouri projects.  The arrangement involves several transactions, all of which were completed on or about August 28, 2009, including:




·
the sale of a 10 percent working interest in our existing land and production projects on 15,313 acres of our oil and gas leases located in Missouri and Kansas (the Deerfield Area), which area includes our Grassy Creek and Marmaton River projects, to Mega Partners 1, LLC (MP 1), an affiliate of the ICO Fund for US$2.0 million. In connection with
the sale of the working interest, we granted MP 1 various options, including: (i) the option to acquire an additional 10 percent working interest in future development within the Deerfield Area; (ii) the option to acquire up to a 20 percent proportionate interest in any of our properties outside of the Deerfield Area by paying a proportionate 133 percent share of our costs-to-date in respect of such property until the later of the full redemption or conversion of the Series A or Series
B preferred shares (issued pursuant to the arrangement with the ICO Fund) and August 27, 2011; and (iii) the option to participate with our company in any future oil and gas property acquisitions for a proportionate 20 percent share of the cost of any such acquisition until the later of the full redemption or conversion of the Series A or Series B preferred shares and August 27, 2011; and




·
an offering to investors (led by the ICO Fund) of 22,000 Series A convertible preferred shares, each with a stated value of US$100, for gross proceeds of US$2.2 million.  The Series A preferred shares are convertible into shares of our common stock at US$0.07 per common share and have a quarterly cumulative dividend equal to either 5 percent,
if paid in cash (15 percent upon the occurrence of certain events of default) or 7.5 percent, if paid in additional Series A preferred shares.  In connection with the Series A preferred share offering, our company also issued to the subscribers thereunder: (i) 15,400,000 common stock purchase warrants, each entitling the holder thereof to purchase an additional common share at US$0.25 per share until August 28, 2014; and (ii) additional investment rights consisting of the right to purchase 20,000 Series
B convertible preferred shares, each with a stated value of US$100, convertible into common shares at US$0.10 per common share attached to which would be 10,000,000 common share purchase warrants, each entitling the holder thereof to purchase an additional common share at US$0.35 per common share for a period of five years from the date of issuance.  (See "Item 4.B – Liquidity and Capital Resources – Financing Activities"
below for details of the special rights and restrictions attached to the Series A and Series B preferred shares and the warrants issued in connection therewith).







B.           Business Overview




MegaWest is a non-conventional oil company with emphasis on North American heavy oil projects.  The MegaWest has operatorship of, and owns or has the right to earn a majority interest in, over 146,000 gross acres of prospective oil and gas leases in Missouri, Kansas, Kentucky, Montana, and Texas.  MegaWest is incorporated
in Alberta whose shares trade in the United States on the Over-the-Counter Bulletin Board exchange (OTC) under the symbol "MGWSF".




Prior to November 2006, we were a technology company, whose business plan was to acquire the rights to market, sell and distribute a product line of consumer electronic technology products in Canada.




Description of Operations




Our strategy is to evaluate, enhance and exploit each project and prospect through:




·
geoscience and engineering analysis to validate each project and identify technologies which may result in economic recovery;




·
field work including: seismic, drilling and operation of pilot projects to corroborate engineering and geoscience analysis, resulting in a commercial project design and development plan; and




·
engaging an independent third-party to establish the value of commercial reserves, leading to funding and execution of the commercial development plan, farm-out, or sale.




The objectives of our company's fiscal 2009 program were to establish reserves and demonstrate commercial feasibility through delineation drilling and the completion of a thermal pilot or enhanced recovery production tests.  To date, we have identified significant resource potential on part of our lands through delineation drilling
and analysis, which has been confirmed through the results of an independent reserves and resource report, prepared as of June 5, 2009.  In addition, we have demonstrated oil production at our pre-commercial Chetopa steam project, and during fiscal 2009 we sold 8,812 barrels of oil from our Marmaton River, Missouri project.  Construction of the Grassy Creek, Missouri steam drive project has been completed and commenced steam injection in October 2008, but had not yet produced oil when operations
at both Marmaton River and Grassy Creek were suspended in December 2008 due to low oil prices.




Missouri




The Missouri lease holdings now include a 100 percent interest in 38,119 unproved net mineral acres of leases.  MegaWest has built two 500 barrel of oil per day steam drive production facilities (Marmaton River and Grassy Creek), drilled 51 exploration/delineation wells with an 86 percent success rate and completed 148 development
wells.




Phase I of the Marmaton River steam drive project is a 10 acre pre-commercial project, which includes a steam generation and oil treating plant with a throughput capacity of 500 barrels of oil per day, 13 steam injection wells, 40 producing wells, one water source well and one water disposal well.




The wells for the second production phase, consisting of 10 injection wells and 24 production wells on approximately 10 adjacent acres, were drilled and are awaiting tie-in.  The Marmaton Phase II wells will be tied-in and put into production concurrent with the restart of operations.




First oil sales from the project occurred in August 2008.  During fiscal 2009 the Company sold 8,812 barrels of oil for $426,567, net of royalties.  Prior to operations being suspended, the Marmaton River project was producing up to 100 barrels of oil per day, which exceeds the numerical simulation prediction for that
point in time.  The simulation predicts that the field will achieve over 300 barrels of oil per day from the initial 40 producing wells and rates can be increased by bringing the additional drilled acreage into production.




Due to then-prevailing economic conditions, specifically low oil prices and significantly reduced equity and capital markets, the Company suspended steaming operations at both the Marmaton River and Grassy Creek projects in December 2008.  Subsequently, MegaWest has identified an alternate natural gas fuel supply at more advantageous
prices than previously attained, which will reduce field operating costs.




The Grassy Creek steam drive project was completed on budget and on schedule.  This project has a steam injection and production treating plant similar to Marmaton River with a design capacity of 500 barrels of oil per day.  Phase I of the project consists of 46 production wells, 15 injection wells, 2 observation wells
and 2 service wells on 19 acres.  Since Grassy Creek commenced steam injection in late October, it was not producing significant quantities of oil when steaming operations were suspended.  Early steam injection results indicate that this portion of the reservoir may respond more effectively to steam drive than Marmaton.




It is anticipated that each of these projects could develop 250 to 300 acres of leases over their 25 to 30 year project life.  Additional drilling phases on each of these projects will be necessary to maintain target production rates.  It is further anticipated that a number of additional projects of similar design and
size may be drilled and constructed across MegaWest's Missouri lease holdings.




The Company has not recorded an impairment charge on its Missouri costs at April 30, 2009 since these projects are the Company's near term primary focus and management believes these projects are commercial at current and expected future oil prices.




On August 28, 2009, we entered into an arrangement with Iroquois Capital Opportunity Fund, L.P. (ICO Fund) whereby we sold a 10 percent working interest in our existing land and production projects on 15,313 acres of our oil and gas leases located in Missouri and Kansas (the Deerfield Area), which area includes our Grassy Creek and Marmaton
River projects, for US$2.0 million to Mega Partners 1, LLC (MP 1), an affiliate of the ICO Fund.  In connection with the sale of the working interest, we granted MP 1 the option to acquire an additional 10 percent working interest in future development within the Deerfield Area.




Kansas




The Chetopa project is a pre-commercial heavy oil demonstration project located two miles south of Chetopa, Kansas.  The project is currently suspended, and includes certain oil and gas equipment and a 100 percent interest in two oil and gas leases covering 385 net mineral acres.  On 15 of these acres are 20 steam injection
wells, 33 production wells and a water well, all of which had been drilled, completed, equipped and tied in for production at the time the Company acquired the project.  A tank battery, steam generator and two transfer stations are also in place on the property.  While the Chetopa project was in operation, 11,561 barrels of oil were sold that resulted in $804,997 of oil sales, net of royalties, included in the Kansas cost pool.  The Company had drilled five wells to evaluate the
prospectivity of the acreage surrounding the existing project.




The Company is obligated to pay a 25 percent net revenue interest up to a maximum total of US$750,000 of net revenues generated from the Chetopa project.  The net revenue interest becomes payable after MegaWest recovers 100 percent of its cumulative capital and operating costs, and will be paid quarterly.  As at April
30, 2009, no net revenue interest has been earned.




During fiscal 2009, the Company recorded an impairment charge against its costs on the Kansas unproven property of $3,166,935.  The impairment was recorded as the Company has no near-term plans to invest funds in the Kansas project because of the lack of capital available for the project and the cost of retrofitting the existing
plant and converting to a natural gas fuel source.  The remaining costs of $99,980 represent the estimated salvage value of the equipment.







Kentucky




The Kentucky lease holdings include a 37.5 percent working interest in the shallow rights (above the base of the Beech Creek limestone formation) and in the deep rights on over 29,000 unproved net mineral acres in Kentucky.




As part of the acquisition of the Kentucky area, MegaWest was obligated to spend U.S. $15,000,000 by October 2009.  In the event MegaWest did not complete this work program or re-negotiate the obligation, the Company was obligated to pay 37.5 percent of the unspent balance to its joint venture partner.  To April 30,
2009, MegaWest had spent $4.9 million of this commitment.  Pursuant to an amending agreement, the work program obligations and the penalty payment provisions were terminated.  In return, MegaWest reduced its working interest in the shallow rights from 62.5 percent to 37.5 percent, transferred operatorship of the leases and prepaid the next 24 months lease rentals.




Eight exploration wells drilled at various strategic locations on the Kentucky land in fiscal 2008 provided confirmation of the commercial prospectivity of three Mississippian heavy oil pay zones found at depths of 200-600 feet from surface.  A number of potential project locations have been identified, and the first location
has been appraised with four delineation wells.  A steam drive enhanced recovery project has been designed and permit applications have been submitted for this location.  Certain equipment and long lead items have been purchased; however, the start-up of this project will be delayed until there is more certainty regarding the availability of project funding.




The New Albany Shale underlies a large portion of the Company's acreage position in Kentucky. 4,343 net mineral acres of the Company's leases have been farmed out for drilling and testing of New Albany Shale gas potential with the Company retaining a 34.75 percent working interest.  In September 2008, two wells were drilled
and logged and it is expected that the operator will proceed with plans to fracture and rate test these wells in calendar 2009.  In May 2009 MegaWest's interest in these leases was transferred to the operator of the wells in exchange for the refund of the Company's working interest share of drilling, completing and logging costs of the wells.




During fiscal 2009, the Company recorded an impairment charge against its costs on the Kentucky unproven property of $20,503,054.  The impairment was recorded based on the implied valuation implicit in the amending agreement and the expected lack of capital available for this project in the near term.  The remaining
costs of $3,216,405 represent the Company's estimate of the fair market value of the leases and amounts invested to date on the demonstration project.




Montana




The Montana leases include working interest in nearly 38,200 unproved net mineral acres in Montana covering three prospects, Teton, Loma and Devils Basin.  At Teton and Loma, the Company has a 40 percent working interest.




Acquisition of new 2D seismic over the Teton and Loma prospects has been completed and processed during fiscal 2009.  Interpretation of this seismic is complete, however the results to date did not validate the Company's geological model.  As a result, additional geological work will be required before future drilling
locations can be determined.  At Teton, MegaWest is targeting a heavy oil reservoir, which if successful, may ultimately be developed through the application of SAGD, steam drive or cyclic steam stimulation. At Loma, MegaWest is targeting a light oil reservoir.




Trade seismic has been purchased on the Devils Basin prospect, which will be used to identify one or more prospective drill locations that MegaWest plans to test with a vertical well.  At Devils Basin, MegaWest is targeting light oil production from the Heath Shale.




During fiscal 2009, the Company recorded an impairment charge against its costs of $9,928,428 on the Montana project.  The impairment was recorded as the Company has no plans in the near term to continue exploration on the lands because of the lack of capital available for this project.  The remaining costs of $1,519,879
represent the Company's estimate of the fair market value of the oil and gas leases supported by oil and gas lease sales for the general area, plus amounts for the recently acquired 2D trade seismic on the Devils Basin leases.  The Company is now developing strategic alternatives related to these prospects, including farm-out of the identified drilling opportunities.




Texas




The Company has working interest in approximately 34,000 gross unproved net mineral acres in Edwards County, Texas.  Pursuant to a farm-in agreement the Company may earn up to a 66.67 percent working interest in all leased acreage.  Included in the total are 20,050 acres in which the Company has already earned a 50 percent
working interest and 13,950 acres in which the Company has already earned a 25 percent working interest.




During the year ended April 30, 2008 the Company wrote-off $5,891,223 of the Texas cost pool.  The Company wrote off additional costs incurred on the Texas project in 2009.  As a result, the Company recorded $661,692 of impairment on the Texas costs during fiscal 2009.  The remaining costs of $300,000 represent
the Company's estimate of the fair market value of the oil and gas leases supported by oil and gas lease sales in the general area.  The Company is continuing to undertake a review of strategic alternatives related to this project.




Principal Markets




The principal market that we compete in is the North American energy market, specifically the North American oil market.  With the exception of the recent production from the Marmaton River and Chetopa projects, we do not have, nor have we ever had, any oil and gas operations.




Extraction Processes




Our business model is dependent on the use of thermal recovery technologies to recover previously uneconomic oil and gas reserves that have now been made economically viable by the recent increases in the price of oil and the development of new technologies in Canada.  Our operational and head office is in Calgary, Alberta, where
we have access to technical experts in the recovery of heavy oil.  We have built a team with expertise in various methods of primary and thermal heavy oil recovery, including Cyclic Steam Stimulation (CSS), Steam Assisted Gravity Drainage (SAGD), steam drive, in situ combustion, ET-DSPÔ (a form of electro-thermal heating) and solvent processes.







Technology Summary




Heavy Oil




North America's heavy oil and bitumen deposits are estimated to contain more than 3 trillion barrels of resource, rivaling the oil reserves of Saudi Arabia.  Crude oil is considered "heavy" if its API gravity is lower than 20 degrees and its viscosity is higher than 1,000 centipoise.  Natural bitumens are even poorer
raw materials, with API gravities lower than 10 degrees and viscosities greater than 10,000 centipoise.  Heavy oil and bitumen are highly viscous requiring heat or dilution to enable significant production and recovery of reserves.




Numerous large oil sands projects, both mining and in situ have been announced and are being actively pursued to exploit this resource.  The well-established North American heavy oil deposits offer world-class exploitation opportunities.  We believe
that the need for North American energy self-sufficiency combined with the encouraging outlook for heavy oil demand, and easy access to refineries make this an ideal time for the re-optimization of non-conventional heavy oil supplies.




Similar to other maturing resources, primary heavy oil production in the Canadian heavy oil industry has peaked and is on decline.  Encouraged by favourable economic terms and long term leases, thermal recovery is rapidly increasing and now exceeds 240,000 bopd.  There are 21 approved Steam Assisted Gravity Drainage
(SAGD)projects, six approved Cyclic Steam Stimulation (CSS) projects and one approved in situ combustion project in the Province of Alberta.  Projections on the future phased developments of these projects indicate that thermal production could reach 1,500,000 bopd by 2013 if investment proceeds as planned. There is a significant
and well-established commercial enhanced recovery technology industry in Canada.




Large unconventional energy resources that are difficult to produce using today's conventional recovery methods are the focus of our company.  These resources represent the key to easing energy supply concerns in the near term and the future.  We are building a team to evaluate and exploit our company's projects using
the best proven or emerging technologies.




In Situ Resource Recovery




Although most heavy oil or bitumen in Canada is currently produced by open pit mining, about 80 percent of the oil sands are buried too deep below the surface for this process to be applied.  This oil must be recovered by in situ techniques, which heat or
dilute the heavy oil, thereby lowering its viscosity and allowing it to migrate towards producing wells, where it is brought to the surface.  A technical review of our prospects will identify the most suitable technology for each resource and may include proven technologies such as cyclic steam stimulation (CSS), steam assisted gravity drainage (SAGD), steam drive, in situ combustion
and CO2 injection or such emerging technologies as ET-DSPÔ (a form of electro-thermal heating) or N-Solv (a solvent based technology).




We will be exploring synergistic technologies to improve capital efficiency, increase energy efficiency, reduce energy costs, reduce the requirement for water, and increase the profitability of in situ processes.  Production from in
situ processes may well replace mining as the main source of heavy oil production from tar sands, contributing significantly to energy self-sufficiency in North America.




On July 13, 2009, we entered into an agreement with Electro-Petroleum, Inc. to evaluate the testing and potential commercial application of its proprietary Electrically Enhanced Oil Recovery (EEOR) technology for the recovery of oil from the Clear Creek area of our company's Missouri leases.  We believe that the successful application
of this technology would add significant resources and reserves to our company on these leases which are not currently accessible using steam drive technology.  EEOR technology involves passing direct current electricity between electrodes at producing wells and electrodes either located at surface or in the oil zone in adjacent wells.  Previous tests appear to indicate that the resulting electrical field has several results: (i) resistance or joule heating; (ii) electro-kinetic
effect; and (iii) electro-chemical effect, resulting in crude oil having higher gravity and lower viscosity.




On August 28, 2009, pursuant to our strategic arrangement with Iroquois Capital Opportunity Fund, L.P., we began co-operation with Iromad LLC (Iromad), a production enhancement and project management consultancy.  We expect that Iromad will assist our company in increasing our recoverable reserves, enhance the production from
our projects and reduce our operating costs.




C.           Organizational Structure




As of the date of this annual report, we have the following directly owned subsidiaries incorporated in the United States:




Subsidiary
Incorporation / Acquisition Date
Ownership PercentageMegaWest Energy (USA) Corp.
January 9, 2007
100%MegaWest Energy Kentucky Corp. (formerly Kentucky Reserves, LLC)
April 2, 2007
100%MegaWest Energy Missouri Corp. (formerly Deerfield Energy LLC)
April 5, 2007
100%MegaWest Energy Kansas Corp. (formerly Deerfield Energy Kansas Corp.)
April 5, 2007
100%MegaWest Energy Texas Corp. (formerly Trinity Sands Energy LLC)
April 25, 2007
100%MegaWest Energy Montana Corp.
October 19, 2007
100%




D.           Property, Plant and Equipment




We currently rent office space located at Suite 800, 926 – 5th Avenue SW, Calgary, Alberta, Canada  T2P 0N7.  On June 30, 2009, our company re-negotiated its leasing terms on the Calgary office with the landlord.  Pursuant
to the revised terms, in exchange for the existing commitments we will pay the landlord $204,287 in several installments until September 1, 2009 and $79,286 in shares valued at 90 days average closing price by June 1, 2010.  Our company was also required to surrender its premises on the seventh floor by July 1, 2009.  In addition, the rent fee has been reduced from $30 per square foot to $13 per square foot for the next 14 months until August 30, 2010.  From August 31, 2010 until
the end of the lease term we will continue paying $30 per square foot to the landlord on our remaining premises.




In addition to the property information described above in this annual report in "Business Overview", the oil and gas acreage under lease and well information at each of our property areas is summarized below in "Oil and Gas Producing Activities and Other Oil and Gas Information" below.  Additionally, we have two completed project
areas, Chetopa in Kansas and the Marmaton River and Grassy Creek projects in Missouri, each of which has equipment for steam injection, oil production, collection and treating.




In addition, we have purchased eight used steam generators for future heavy oil commercial project locations.  Two of these units have been installed at the Marmaton River and Grassy Creek projects in Missouri.  Four of these generators were acquired during fiscal 2009.







Oil and Gas Producing Activities and Other Oil and Gas Information




Oil and Gas Reserves




As at April 30, 2009, all of our oil and gas properties are considered unproved and we have not established substantive proved reserves that are material to our operations or financial position in accordance with SEC reserve guidance set out in Industry Guide 2 - Disclosure
of Oil and Gas Operations.




Specifically, reserves that can be produced economically through applications of improved recovery techniques (such as steam injection) are included in the "proved" classification upon successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which
the project or program was based.  If an improved recovery technique, which has not been verified by routine commercial use in the area is to be applied, the hydrocarbon volumes estimated to be recoverable cannot be classified as proved reserves unless the technique has been demonstrated to be technically and economically successful by a pilot project or installed program in that specific rock volume.




Oil and Gas Wells




The following table sets out the number of oil wells in which we held a working an interest as of April 30, 2009 and 2008.




Producing
Non-ProducingApril 30,
2009
April 30,
2008
April 30,
2009
April 30,
2008(1)Gross
Net
Gross
Net
Gross
Net
Gross
NetUnited StatesKansas
-
-
33
33.0
33
33.0
-
-Missouri
-
-
40
40.0
111
111.0
-
-Kentucky
-
-
-
-
5
3.1
5
3.1Montana
-
-
-
-
-
-
-
-Texas
-
-
-
-
1
0.5
1
0.5Total
-
-
73
73.0
150
147.6
6
3.6




(1)
Corrections have been made to fiscal 2008 well count to exclude service wells and include purchased wells and cased exploratory wells.




The following table sets forth the number of exploratory and development wells which MegaWest completed during its financial year ended April 30, 2009.






Exploratory
DevelopmentGross
Net
Gross
NetOil wells
-
-
71
71.0Gas wells
2
0.7
-
-Service wells
-
-
34
34.0Oilsands Evaluation (Dry holes)
12
12.0
-
-Total Wells
14
12.7
105
105.0




Project Area




The following table sets out the lease areas we have an interest in, by area, as of April 30, 2009 and 2008.




April 30, 2009
April 30, 2008Gross
Net
Gross
NetUnited StatesKansas
385
385
320
320Missouri
38,119
38,119
10,312
10,312Kentucky
29,147
10,930
36,008
22,505Texas
33,994
13,510
36,571
16,767Montana
38,958
16,266
34,603
12,042Total
140,603
79,211
117,814
61,946




Oil and Gas Costs




The following table summarizes the costs incurred in oil and gas property acquisition, exploration, and development activities for our company for the years ended April 30, 2009, 2008 and 2007.






Activity
April 30,
2009
April 30,
2008
April 30,
2007Property acquisition, including equipment
$      442,944
$ 11,254,040
$ 20,140,324Exploration
1,329,109
8,625,175
616,031Development
15,056,843
1,600,745
-Total
$ 16,828,896
$ 21,479,960
$ 20,756,355




ITEM 4A.                      UNRESOLVED STAFF COMMENTS




Not Applicable.




ITEM 5.                      OPERATING AND FINANCIAL REVIEW AND PROSPECTS




The following discussion of our financial condition and results of operations for the fiscal year ended April 30, 2009, should be read in conjunction with our consolidated financial statements prepared in accordance with Canadian GAAP and related notes included in"Item
8 – Financial Information" below.




Overview




MegaWest Energy Corp. was incorporated on February 8, 2000 under the Company Act in theprovince of British Columbia, Canada under the name "Brockton Capital Corp.".  On February 27, 2007, we changed our name to "MegaWest Energy Corp." and on February 12, 2008, our company
was continued into the province of Alberta, where it is currently registered under the Business Corporations Act (Alberta).




Since December 2006, the primary business activity of MegaWest has been the acquisition, exploration and development of oil and gas properties in North America.  We operate a number of unproven, heavy oil properties in the United States and our activities to date have included, analysis and evaluation of technical data, preparation
of geological models, exploration drilling, conceptual engineering, construction of thermal demonstration projects, and securing capital to fund operations and capital expenditures.




In December 2008, due to low oil prices, our company suspended all its capital projects, including operations at our two Missouri heavy oil projects, pending a recovery in oil prices and financing.




In January 2009, our company reduced overall staffing by 71 percent and corresponding salaries by 63 percent.  However, we have retained a core staff to ensure continuity and the capacity to restart our projects in Missouri.




At April 30, 2009, our company had working capital of $2,112,007, including short-term restricted cash of $96,338.




Pursuant to our strategic arrangement with the Iroquois Capital Opportunity Fund, L.P. (ICO Fund), described under "Item 4.A – History and Development of MegaWest Energy Corp." above, our company is in the process of re-starting our Missouri projects.  We will need additional financing to fund our fiscal 2010 capital and
other costs.  In addition, the ultimate development of MegaWest's oil and gas projects, if assessed to be commercial, will require additional funding.  Our future operations are dependent upon our ability to continue to obtain financing and ultimately achieve profitable operations.  Additional capital may be in the form of equity, debt, sale of properties, joint venture farmouts or any combination thereof.




Our company's consolidated financial statements for the year ended April 30, 2009 have been prepared on a going-concern basis.  The going-concern basis of presentation assumes that our company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments
in the normal course of business.  While our arrangement with the ICO Fund provides the necessary short-term working capital to restart production at our Missouri projects, there is uncertainty about the use of the going-concern assumption.  The financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should our company be unable to secure additional funding and attain profitable operations.




Critical Accounting Estimates




Our accounting principles are described in Note 1 to our annual consolidated financial statements for the fiscal year ended April 30, 2009.  We prepare our annual consolidated financial statements in conformity with Canadian GAAP, and have also prepared a Reconciliation to U.S. GAAP as at April 30, 2009 and 2008 and for the years
ended April 30, 2009, 2008 and 2007.




The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses.  On an ongoing basis we evaluate our estimates, including those related to acquisitions, status of oil and gas projects (proved or unproved), asset impairment, tax
valuation allowances, volatility and market value of our share price.  These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may vary from those estimates under different assumptions and conditions.




The critical accounting policies that affect the more significant judgments and estimates used in preparation of our consolidated financial statements are described below.




Oil and Gas Operations




We follow the full cost method to account for our oil and gas operations, whereby all costs associated with the exploration and development of oil and gas reserves are capitalized and accumulated in country-by-country cost centres.  These capitalized costs are then depleted using the unit-of-production method (based on estimates
of proved reserves) once the underlying property in considered proved.  The costs related to unproved properties are not subject to depletion.  At April 30, 2009, all our properties were assessed to be unproven.  Factors used to make this assessment included: land relinquishment, intend to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, assessment of proved reserves, and the economic viability of development if proved reserves are
assigned.




The capitalized costs in each unproved project are assessed to determine whether it is likely that such costs will be recovered in the future.  Costs, which are not likely to be recovered in the future, are written-off.  We assess the carrying amounts of our unproved oil and gas assets for impairment by assessing the
likelihood of recovering our costs through cash flow projections of future net revenues.




Our management prepared estimates of future net revenues using internal and independent estimates of resource potential.  The process of estimating quantities of resource potential is inherently uncertain and complex. It requires judgments and decisions based on available geological, geophysical, engineering and economic data.
These estimates may change substantially as additional data from ongoing exploration activities becomes available and as economic conditions impacting oil and gas prices and costs change. Our resource estimates are based on assumed exploration success, availability of future capital to finance development, future production forecasts, prices and economic conditions.  Additional assumptions and estimates used in the future net revenue calculations include:




·
estimates of production and recovery rates, which vary depending on the method of extraction used and the characteristics of the reservoir and resource estimates;




·
estimates of operating costs, which vary with equipment and facility efficiency, inflation; and




·
estimates of future capital costs, which vary with inflation, equipment and facility performance.




Significant changes in these factors could reduce our estimates of future net revenues and accordingly could result in an impairment of our oil and gas assets.  Our management will perform quarterly assessments of the carrying amounts of its oil and gas assets as additional data from ongoing exploration activities becomes available.




As a result of these procedures, our company recorded a total impairment charge of $34,260,109 on its oil and gas properties during the year ended April 30, 2009







Fair Value of our Company's Common Shares, Options and Warrants




We completed a number of share-based transactions during the three-year period ended April 30, 2009.  Under Canadian GAAP, share based transactions are recorded at their fair values.  Generally, the best indicator of fair value of a company's shares is quoted market prices, unless the market is not active or liquid,
in which case fair value was determined using valuation techniques including recent arm's length market transactions between knowledgeable, willing parties.  In addition, the fair value of options and warrants granted and the incremental fair value of the extension of warrants were based on the Black-Scholes option pricing model, which uses the common share fair value on the grant date as an input.  Prior to January 2008, our company used recent arm's length transactions, specifically private
placements, as indicators of fair value. Subsequently, we used the Black-Scholes option pricing model with the following assumptions:  expected dividend yield of 0 percent, expected volatility of 80 percent – 83 percent, risk-free interest rate of 3.98 percent - 5.04 percent, an expected average life of 4 years and a forfeiture rate of 20 percent.




Share-based transactions impact a number of financial statement items including, stock-based compensation expense, contributed surplus, share capital, warrants, convertible promissory notes, exchange shares and deficit on related party acquisitions.




The determination of whether the market for our shares is active and liquid is based on significant judgments including the volatility of the share price, volume of shares traded in relation to total shares outstanding and value of shares traded in relation to total company market capital.  This determination may change significantly
if any of the underlying assumptions is determined to be incorrect.




A.           Operating Results




The following discussion is prepared in accordance with Canadian GAAP.  For differences between Canadian and U.S. GAAP related to our financial statements, refer to the Reconciliation to U.S. GAAP as at April 30, 2009 and 2008 and for the years ended April 30, 2009, 2008 and 2007.




Years Ended April 30, 2009 and 2008




We reported a net loss of $37,194,937 ($0.29) per share basic and diluted, for the year ended April 30, 2009, compared with a net loss of $17,903,023 ($0.23) per share, for the year ended April 30, 2008.  The loss for the 2009 period was mainly attributable to an impairment charge of $34,260,109 on oil and gas assets, general
and administrative expenses of $4,719,210, offset by a foreign exchange gain of $1,800,058.




General and administrative expenses for the year ended April 30, 2009 totaled $4,719,210 net of $1,544,243 capitalized to oil and gas assets.  During the year ended April 30, 2008, we incurred general and administrative expenses of $5,973,385, net of $1,422,233 capitalized to oil and gas assets. General and administrative expense
includes stock-based compensation, salary and benefits, professional fees, investor relations, office and operations and information technology, as summarized in the table below.




Years Ended April 302009

2008

2007Stock-based compensation:Stock options
$
797,570
$
1,065,860
$
1,863,448Shares issued for services

-

806,000

-Shares issued for services

254,614

394,900

434,900Consulting warrants

-

-

1,600,800Less: capitalized portion

(350,841)

(360,880)

-701,343

1,905,880

3,899,148Salaries and benefits

2,947,852

2,703,669

1,171,885Professional fees

502,712

720,248

229,111Investor relations

216,142

627,091

100,097Office and operations

1,300,594

936,734

272,952Information technology

243,969

141,126

27,101Less: capitalized portion

(1,193,402)

(1,061,353)

(176,600)4,017,867

4,067,515

1,624,546$
4,719,210
$
5,973,395
$
5,523,694




Stock-based compensation expense of $1,052,184 (2008 - $2,266,760) was recorded for the year ended April 30, 2009.  Stock-based compensation expense is comprised of $797,570 (2008 - $1,065,860) attributable to the cost associated with granting stock options to new employees and consultants, $254,614 (2008 - $394,900) attributable
to the cost associated with issuing shares for consulting services and nil (2008 - $806,000) attributable to shares issued as consideration for employee bonuses.  The overall decrease in stock-based compensation from 2008 to 2009 is primarily due to fewer stock option and warrants grants and a lower fair value per share for each option granted as well as options forfeited in 2009 for employees that are no longer with the Company.




Salary and benefit costs of $2,947,852 (2008 - $2,703,669) was recorded during the year ended April 30, 2009.  Even though the Company has reduced overall staffing by 71 percent in January 2009, salaries and benefits are higher than in 2008 due to the overall increase in staffing levels throughout the majority of fiscal 2009
and severances paid in January 2009.




Professional fees totaled $502,712 (2008 - $720,248) and consist of legal, audit, accounting and tax advisory fees.




Investor relation expenses of $216,142 (2008 - $627,091) for the year ended April 30, 2009 and were incurred in an effort to raise investor awareness of the Company.  The decrease in investor relations costs is due to fewer IR consultants engaged during the year.




Office and operations costs during the year ended April 30, 2009 totaled $1,300,594 (2008 - $936,734) and are primarily made up of office rent and supplies, license and maintenance costs, insurance, telephone and internet, travel and miscellaneous costs.




Information technology costs during the year ended April 30, 2009 totaled $243,969 (2008 - $141,126) and mainly consists of software license and maintenance fees.  An increase in information technology costs in 2009 is primarily due to the increased number of software licenses and maintenance costs.




The foreign exchange gain for the year ended April 30, 2009 resulted primarily from the translation of our U.S. dollar denominated cash balances into our Canadian dollar functional currency.  The Canadian dollar decreased in value compared to the U.S. dollar during the year.  The has not entered into any foreign currency
hedging agreements, however the Company holds U.S. dollars to pay its U.S. denominated project costs.







The Company earned interest income of $154,680 for the year ended April 30, 2009 compared with $712,763 for the comparable period.  The decrease in interest income for the 2009 period is related to the overall decrease in cash balances and investment interest rates compared to 2008.




In fourth quarter of 2009 our company's projects remained shut-in.  Net loss of $1,259,289 is mainly attributable to general and administrative expenses of $710,612, additional impairment charges of $374,618 on our Texas and Kansas properties, and stock-based compensation expense of $16,476.




In the fourth quarter of 2008, our company recorded an impairment charge on its Texas oil and gas asset cost pool of $5,891,223 based on the results of oil and gas operations.  This impairment charge, together with the recognition of a loss on marketable securities, is the primary reason for the increased net loss and decrease
of total assets in the fourth quarter of 2008.




During fiscal 2009, our company recorded a total impairment of $34,260,109 against its oil and gas assets.  The table below summarizes the impairment for the year ended April 30, 2009:




Costs Accumulated
to April 30, 2009
Impairment
Remaining CostsKansas
3,266,915
(3,166,935)
99,980Missouri
17,844,628
-
17,844,628Kentucky
23,719,459
(20,503,054)
3,216,405Texas
961,692
(661,692)
300,000Montana
11,448,307
(9,928,428)
1,519,879Other
1,824,210
-
1,824,210Total
59,065,211
(34,260,109)
24,805,102




Years Ended April 30, 2008 and 2007




We reported a net loss of $17,903,023, ($0.23) per share basic and diluted, for the year ended April 30, 2008, compared with a net loss of $6,893,052, ($0.31) per share, for the year ended April 30, 2007.  The loss for the 2008 period was mainly attributable to general and administrative expenses of $5,973,385, the impairment
of Texas oil and gas assets of $5,891,223, non-cash financing cost of $2,466,000 (due to the extension of the term of the warrants), a write-down of marketable securities of $2,094,000, and foreign exchange loss of $1,935,473 on US dollar cash balances translated to Canadian dollars.




General and administrative expenses for the year ended April 30, 2008 totaled $5,973,395 net of $1,422,233 capitalized to oil and gas assets.  During the year ended April 30, 2007, we incurred general and administrative expenses of $5,523,694, net of $176,600 capitalized to oil and gas assets. General and administrative expense
includes stock-based compensation, salary and benefits, professional fees, investor relations, office and operations and information technology.




Stock-based compensation expenses of $2,266,760 (2007 - $3,899,148) were recorded for the year ended April 30, 2008.  Stock-based compensation expenses comprised of $1,065,860 (2007 - $1,863,448) attributable to the cost associated with granting stock options to new employees and consultants, $806,000 (2007 - $nil) attributable
to shares issued as consideration for employee bonuses, $394,900 (2007 - $434,900) attributable to the cost associated with issuing shares for consulting services and $nil (2007 - $1,600,800) attributable to the cost associated with issuance of warrants to various investor relations consultants.  The overall decrease in stock-based compensation is primarily due to fewer stock option and warrant grants in 2008 compared to 2007.




Salary and benefit costs of $2,703,669 (2007 - $1,171,885) were recorded during the year ended April 30, 2008.  The increase in salary and benefit costs in 2008 is due to higher staff levels and our company operating for the entire fiscal year, whereas in 2007 our company operated for less than six months as an oil and gas company.




Financing costs of $2,466,000 were recorded to reflect the incremental costs associated with extending the term of 18,682,623 common share purchase warrants by six months as calculated using the Black-Scholes option pricing model.




B.           Liquidity and Capital Resources




MegaWest's projects are either exploration in nature or in early stages of development, and profitable oil and gas operations have not yet been attained.  Our company incurred negative cash flow from operations of $4,105,071 in fiscal 2009.




Due to low oil prices, we suspended operations at our two Missouri heavy oil projects in December, 2008.  Our company also suspended all capital projects and halted all discretionary spending.  Our company also implemented reductions to its administrative and operating costs.  In January 2009, we reduced overall
staffing by 71 percent and corresponding salaries by 63 percent while retaining a core staff of personnel to ensure continuity and the capacity to restart the projects in Missouri.  In anticipation of this restart, we also identified an alternate natural gas fuel supply at more advantageous prices than previously attained.




At April 30, 2009, our company had working capital of $2,112,007, and cash available of $2,033,451, of which $266,893 was restricted.




On August 28, 2009, our company entered into a strategic arrangement with the ICO Fund intended to recapitalize our company and enable the restart of oil production at our Missouri enhanced recovery projects.  In addition, this arrangement provides the basis for a strategic, long-term relationship between the ICO Fund and our
company involving options for future financing and working interest participation at our existing and future projects located within the Deerfield Area comprised of 15,313 acres of our oil and gas leases located along the border of Missouri and Kansas.




Pursuant to our arrangement with the ICO Fund, we are in the process of re-starting our Missouri projects.  Our company will need additional financing to fund its fiscal 2010 capital and other costs.  The ultimate development of MegaWest's oil and gas projects, if assessed to be commercial, will require additional funding.  MegaWest's
future operations are dependent upon its ability to continue to obtain financing and ultimately achieve profitable operations.  Additional capital may be in the form of equity, debt, sale of properties, joint venture farmouts or any combination thereof.




Cash and Financial Conditions




Our company had working capital of $2,112,007 as at April 30, 2009 compared to working capital of $4,135,672 as at April 30, 2008.  Cash used in operating activities for the year ended April 30, 2009, totaled $4,105,071 on a $37,194,937 net loss for the period.  Cash used in operating activities for the year ended
April 30, 2008 totaled $3,709,747 on a $17,903,023 net loss for the period.




We had working capital of $28,494,151 as at April 30, 2007 compared to a working capital deficiency of $139,422 as at April 30, 2006.  Cash used in operating activities for the year ended April 30, 2007 totaled $424,158 on a $6,893,052 net loss for the year.




Due to low oil prices, our company suspended operations at its two Missouri heavy oil projects in December 2008.  Our company also suspended all capital projects and put a hold on all discretionary spending.  We have identified an alternate natural gas fuel supply at more advantageous prices than previously paid, which
will reduce field operating costs significantly and are in the process of re-starting our Missouri projects.




Our company implemented reductions to its administrative and operating costs.  In January 2009, we reduced overall staffing by 71 percent and corresponding salaries by 63 percent.  Our company retained a core staff of personnel to ensure continuity and the capacity to restart the projects in Missouri which were shut-in
during December 2008.




The strategic and long-term relationship between ICO Fund and our company announced in August 2009 provides options for future financing, options for future working interest participation, and cooperation with Iromad, a production enhancement and project management consultancy.  It is expected that this technical cooperation will
lead to process improvements that will result in higher economic return and increased recovery of oil from these leases.  Restoration of production at the existing plants, continued high oil prices, and access to additional capital could lead to the construction of additional plants in the area.




Our company will need supplementary financing to fund its fiscal 2010 capital and other costs.  Our arrangement with the ICO Fund provides an option for this funding.  In addition, the ultimate development of our company's oil and gas projects, if assessed to be commercial, will require additional funding.  Our
company's future operations are dependent upon our ability to obtain additional financing and ultimately achieve profitable operations.  Additional capital may be in the form of equity, debt, sale of property, joint venture farmouts or any combination thereof.




Investing Activities




Cash used in investing activities was $15,881,301 for the year ended April 30, 2009 (2008 - $18,607,339) and included cash capital expenditures of $15,815,046 incurred on our company's oil and gas assets as follows:




·
$220,282 on the Chetopa project for operations;




·
$9,857,787 in the Missouri area for lease acquisition, geological and geophysical activities, operating costs at the Marmaton River project and construction costs at the Grassy Creek project;




·
$1,773,695 in the Kentucky area for lease rentals, geological and geophysical activities;




·
$221,980 on the Texas project for lease rentals and completing analysis of drilling and testing results;




·
$1,410,007 in the Montana area for lease acquisitions and geological and geophysical activities; and




·
$2,331,295 for other expenditures on oil and gas and office equipment, including costs for the acquisition of four used steam generators.




Cash used in investing activities was $18,607,339 for the year ended April 30, 2008 (2007 - $6,932,653) and included cash capital expenditures of $17,505,081 incurred on our company's oil and gas assets as follows:




·
$2,033,306 on the Chetopa project for facility commissioning and completion;




·
$6,232,784 in the Missouri area for lease acquisition, geological and geophysical activities and costs for the construction of the Marmaton River project;




·
$2,845,169 in the Kentucky area for lease rentals, geological and geophysical activities and costs associated with completing a 12 well exploration and delineation drilling program;




·
$5,071,927 on the Texas project for geological and geophysical activities and costs during the year associated with a seven well exploration program;




·
$554,814 for lease acquisitions and geological and geophysical activities in the Montana area; and




·
$767,081 for other expenditures on oil and gas and office equipment, including costs for the acquisition of used steam generators.




Cash used in investing activities was $6,932,653 for the year ended April 30, 2007 and included expenditures of $7,274,445 as follows:




·
$4,244,360 for the acquisitions of the Chetopa, Deerfield Missouri, Kentucky Reserves and Trinity Sands projects;




·
$836,875 for capital expenditures on oil and gas assets, primarily for the Chetopa project, and other equipment;




·
$1,851,960 for an investment in our Trinity Sands project joint venture partner Energy Finders; and




·
$341,250 cash deposited in trust as contingent consideration for the Deerfield Missouri acquisition.




Financing Activities




Cash received from financing activities was $14,967,372 for the year ended April 30, 2009 (2008 - $321,388), and related to the cash proceeds of $14,839,887 from the 26,750,000 common share private placement and $127,485 cash proceeds from options and warrant exercises.




Subsequent to the year ended April 30, 2009, we issued to investors led by the ICO Fund 22,000 Series A convertible preferred shares, each having a stated value of US$100, for gross proceeds of US$2.2 million.




Our company did not have any debt obligations at April 30, 2009.







The Company's shares trade in the United States on the Over-the-Counter Bulletin Board exchange (OTC).  The number of outstanding shares and the number of shares that could be issued if all dilutive instruments are converted to shares at the following dates were:









September 22,
April 30,
April 30,2009
2009
2008Common shares outstanding
133,244,472
133,244,472
95,131,666Stock options (1)
7,303,500
7,478,500
9,650,000WarrantsPrivate placement (2)
-
-
18,682,623Incentive (3)
-
-
12,575,000Consulting (4)
-
-
6,000,000Acquisition (5)
-
-
250,000Warrants associated with Series A preferred shares (6)
15,400,000
-
-Unit rights (7)
-
-
562,500Convertible promissory notes (8)
-
-
7,356,000Series A preferred shares (6)
31,428,571
-
-Total potential shares (9)
187,376,543
140,722,972
150,207,789






(1)
Represents stock options to purchase common shares at prices from US$0.10 to US$1.57 per share, with expiry dates from March 15, 2011 through to July 17, 2012 and with various vesting terms.




(2)
Represented share purchase warrants issued in connection with private placement offerings.  These warrants expired unexercised in fiscal 2008.




(3)
Represented warrants that entitled the holder to purchase common shares of the Company at a price of US$0.10 per share until January 15, 2009.  These warrants expired unexercised.




(4)
Represented warrants granted to various investor relations and other contractors.  The consulting warrants were exercisable into one common share at an exercise price of US$0.50 and expired on January 5, 2009.  These warrants expired unexercised.




(5)
Represented warrants granted as partial consideration for the acquisition of the Teton and Loma prospects in Montana.  Each warrant was exercisable into one common share at a price of US$2.50 until April 24, 2009.  These warrants expired unexercised.




(6)
Pursuant to our August 28, 2009 arrangement with the ICO Fund, we issued 22,000 Series A convertible preferred shares, each with a stated value of US$100, to investors led by the ICO Fund.  The special rights and restrictions attached to the Series A preferred shares provide as follows: (i) the shares are convertible into shares of our common stock at US$0.07 per share; (ii) a quarterly cumulative dividend,
based upon the stated value of the Series A preferred shares, is payable at the Company's election at a rate equal to either 5 percent, if paid in cash (15 percent upon certain events of default) or 7.5 percent, if paid in additional Series A preferred shares; (iii) upon liquidation, dissolution, winding up or sale of our company any outstanding Series A preferred shares will be paid out ahead of the common shares at a rate of two times the stated value of the Series A preferred shares; and (iv) after 12
months from the date of issue, our company may force the conversion of the Series A preferred shares provided: (A) production from the Deerfield Area (15,313 acres of our oil and gas leases located along the border of Missouri and Kansas) is 15,000 barrels of oil in a 30-day period, (B) our common shares have traded at or above US$0.25 per share for the preceding 20 consecutive trading days, and (C) the daily average dollar trading volume of our common shares has been in excess of US$75,000 per day for the same
20-day period.




In conjunction with the Series A preferred share offering, our company also issued to the subscribers thereunder 15,400,000 Series A warrants.  Each warrant allows the holder thereof to purchase a share in our common stock at US$0.25 per share until August 28, 2014.  After May 28, 2010, the warrants may be exercised on a cashless basis only in respect of common shares not included for unrestricted
public resale in an effective registration statement on the date that notice of exercise is given to our company.




(7)
Represented rights to buy an additional 375,000 units under the same terms as a 2007 private placement. These rights, including the underlying common share purchase warrants, expired on August 28, 2008.




(8)
Represented common shares that could have been issued from the conversion of the principal and accrued interest of the convertible promissory notes at US$0.25 per share.  On June 20, 2008 the convertible promissory notes matured and were converted into 7,412,559 common shares of the Company.




(9)
Pursuant to the agreements with ICO Fund and Investors, until twelve months following the first occasion upon which the Company produces 3,000 barrels over a 30 day period (100 barrels per day average) from the Deerfield Area, the Investors have the option to purchase up to 20,000 Series B convertible preferred shares with a stated value of $100 each (the “Series B Preferred Shares”), for up to US$2,000,000
on similar terms to the Series A Preferred Shares except the conversion price is US$0.10 per common share.  After 12 months from the date of issue, the Company may force the conversion of the Series B Preferred Shares provided: i) production from the Deerfield Area is 30,000 barrels of oil in a 30 day period; ii) the common shares have traded at or above US$0.35 per share for the preceding 20 consecutive trading days; and iii) the daily average dollar trading volume has been in excess of US$150,000
per day for the same 20 day period. In conjunction with the Series B Preferred Share issuance, the Company will issue to the Investors up to 10,000,000 warrants.  Each warrant allows the holder to purchase a common share at US$0.35 per share for a period of five years from issuance.  After nine months from the date of issuance, a cashless conversion option is provided only with respect to warrant shares not included for unrestricted public resale in an effective registration statement on the
date notice of exercise is given to the Company.




C.           Research and Development, Patents and Licenses, etc.




We do not currently, and did not previously, have research and development policies in place.  Over the past three fiscal years, no funds were expended by our company on research and development activities.




D.           Trend Information




We do not currently know of any trends that would be material to our operations.




E.           Off-Balance Sheet Arrangements




We do not have any 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 are material to investors.







F.           Contractual Obligations






Subsequent to April 30, 2009, the Company re-negotiated the terms of its lease on its Calgary office.  The table below reflects the subsequently re-negotiated terms on the Calgary office lease commitments and other office and equipment leases over the upcoming five fiscal years:




Contractual Obligations as at April 30, 2009
(in thousands of Canadian dollars)Total
Less than
1 Year
1-3 Years
3-5
Years
More than
5 YearsOperating Leases
$1,839
$317
$1,354
$168
$-Total
$1,839
$317
$1,354
$168
$-




Pursuant to employment agreements with two senior officers, the Company is obligated to pay up to $450,000 under certain events around employment termination.




G.           Safe Harbour




Not applicable.







ITEM 6.                      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES




A.           Directors and Senior Officers




The following table sets out the names and business experience of each of our directors and senior officers, as of September 22, 2009:




Name and Age
Present Position
with our Company
Date of Commencement
of Office with our CompanyR. William Thornton(1)(2)  (54)
President, Chief Executive Officer and Director
December 21, 2006George T. Stapleton, II(1)(3)  (55)
Director
December 21, 2006George Orr(4)(5)  (48)
Director
December 21, 2006Brian J. Evans(4)  (59)
Director
February 19, 2007Neil McCrank (66)
Director
July 17, 2008




(1)
Mr. Stapleton was the President of our company from December 21, 2006 to February 8, 2008 and the Chief Executive Officer from December 21, 2006 to January 23, 2009.  Mr. Thornton was appointed President of our company on February 8, 2008 and Chief Executive Officer of our company on January 23, 2009.


(2)
Mr. Thornton ceased to be our Chief Operating Officer on January 23, 2009.


(3)
Board Chairman.


(4)
Member of our audit committee.


(5)
Mr. Orr resigned as the Chief Financial Office and Treasurer of our company on October 22, 2008.




The following is a summary of the education and business experience of each of our directors and senior management and identifies all of the public companies each is affiliated with. For the purposes hereof, the term public company means, for Canadian purposes,
a company that is a "reporting issuer" as that term is defined under the Securities Act (Alberta) and, for United State purposes, a company that has a class of securities registered under the Securities Exchange Act of 1934.




R. William Thornton




Mr. Thornton received his Chemical Engineering degree from the University of Alberta in 1977 and Masters of Engineering (reservoir) 1989 from the University of Calgary. He also completed the University of Calgary Executive Development Program in 1988.




He has held senior management and executive positions in all aspects of oil and gas development and in particular enhanced recovery of heavy oil.  He was General Manger – Petroleum Engineering with Western OilSands, Vice-President Engineering with Petrovera Resources and Director of Primary Heavy Oil with Gulf Canada.  Prior
to these positions he worked for 17 years with Murphy Oil on their various enhanced recovery projects and technology development.  During this time, Mr. Thornton spent 3 years working in Murphy's El Dorado, Arkansas and New Orleans, Louisiana offices overseeing engineering and operations on a large portion of Murphy's onshore U.S. production.




Mr. Thornton also has international experience, having worked in drilling operations in interior Peru and as part of a team negotiating a production sharing agreement in northern Iraq.  Mr. Thornton has been our Chief Operating Officer since January 1, 2007, our President since February 8, 2008 and our Chief Executive Officer since
January 20, 2009.




George T. Stapleton, II




Mr. Stapleton received his civil engineering degree from Georgia Institute of Technology in 1975 and has 34 years of international experience in the offshore oil construction and service industry, project development, oil and gas exploration and production and energy infrastructure related projects.




Mr. Stapleton is currently a Director and the Chairman of the Board of our company. He is the Managing Member of Silicon Solutions, LLC and serves as a director of Exousia Advanced Materials, Inc., Valcent Products Inc. and PetroBeam, Inc.  He was formerly the Chief Executive Officer of MegaWest from December 2006 until January 2009.
He was the Chief Operating Officer and a Director of Deerfield Energy LLC from 2005 and the President and a director of Trinity Sands Energy LLC from 2006 until each was acquired by MegaWest. He was formerly the President and remains a Director since 2004 of E-T Energy Ltd., a private Canadian company testing an electro-thermal approach to the production of bitumen from the Athabasca tar sands. From 2000 to 2002 he was responsible for the development of simulation based training packages for the energy and industrial
sectors for Simulis, LLC. He was President - Products & Services for NEOppg Ltd. from 1998 to 2000 where he was responsible for the development of the services side of the company's business plan, focusing on a proprietary multilateral system, heavy oil production systems and artificial lift products. Prior to that he was Vice-President, Operations for Asian Tiger Energy Company, an independent oil company developing oil and gas projects, operating primarily in Southeast Asia.




Before Asian Tiger, Mr. Stapleton spent 19 years overseas with J. Ray McDermott in the Arabian Gulf, North Sea and Asia as Field Engineer, Operations Engineer, Project Manager, Fabrication Division Manager at Batam Island, Indonesia and finally as Division Manager – Business Development and Project Management where he oversaw project
management of all turnkey projects for Southeast Asia and was responsible for business development activities throughout the region.




George Orr




Mr. Orr is a chartered accountant and has several years experience dealing with public company reporting and administrative requirements.  Mr. Orr is currently:  a director and the Chief Financial Officer of Valcent Products Inc., a company listed on the OTC Bulletin Board that is engaged in the business of the design, development
and marketing of innovative products intended for the mass consumer appeal; and has been a director, since August 9, 2007, of Pacific Copper Corp., a mining company engaged in exploration in Peru and Chile.  Additionally, Mr. Orr provides advisory services to a number of other reporting issuers and private companies.






Brian J. Evans




Since August 2006, Mr. Evans has served as the Executive Director of the Werklund Group, a private investment group and prior to that was a partner and associate counsel with Miller Thomson LLP, a national law firm.  Since 1997, Mr. Evans has been a director of CCS Income Trust, an income trust group that was until November 20, 2007
(when it ceased to be a public company) listed on the TSX and that provided energy and environmental waste management services, and Canadian Crude Separators Inc and CCS Inc. (the predecessors of CCS Income Trust).  Mr. Evans was a director of Tusk Energy Corporation until April, 2009 when the TSX-listed oil and gas producer with operations in western Canada was sold to Polar Star Canadian Oil and Gas Inc.






Neil McCrank




Mr. McCrank is Counsel to Borden Ladner Gervais LLP, a national law firm and he is a director of Alta Gas Income Trust, one of Canada’s largest integrated infrastructure and services companies.  He is Chairman of the Canadian Energy Research Institute (CERI), the Chair of the World Petroleum Council Canadian Association and a
member of a number of associations including the Law Society of Alberta, the Canadian and Calgary Bar Association, and the Association of Professional Engineers, Geologists and Geophysicists of Alberta. Mr. McCrank is a director of Petrobank Energy and Resources Ltd.  From 1998 to 2007, Mr. McCrank was Chairman of Alberta Energy and Utilities Board (AEUB) where he was responsible for the direction and coordination of the board’s mandate governing energy resource development and utility matters
in Alberta.  Mr. McCrank holds a science degree in Electrical Engineering and a law degree, both from Queen’s University in Kingston, Ontario, Canada.






Family Relationships




There are no family relationships between any of the directors or executive officers of our company.




There are no arrangements or understandings between any of our directors and/or executive officers and any other person pursuant to which that director and/or executive officer was selected.







B.           Compensation




Executive Compensation




In accordance with applicable securities legislation in Canada, the following executive compensation disclosure is provided in respect of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer as at April 30, 2009 and each of our three most highly compensated executive officers whose annual compensation exceeded
$150,000 in the year ended April 30, 2009 (collectively, the Named Executive Officers).  During the year ended April 30, 2009, the aggregate compensation paid to all of our executive officers whose annual compensation exceeded $40,000 was $1,015,752 (see "Employment Agreements" below in this annual report for details on our employment agreements with Messrs. Stapleton, Orr and Thornton).




Summary Compensation Table




The following table sets forth a summary of all compensation paid during the years ending April 30, 2009, 2008 and 2007 to each of the Named Executive Officers.




Summary Compensation TableName and Principal Position
Year
Annual Compensation
Long Term Compensation
All Other Compen-sation
($)Salary
($)
Bonus
($)
Other Annual Compen-sation
($)
Awards
PayoutsSecurities Under Options (1)/ SARs (2) Granted
(#)
Shares or Units Subject to Resale Restrictions
(#)
LTIP (3)Payouts
(#)R. William Thornton
President, Chief Executive Officer and Director (4)
2009
2008
2007
$250,000
$250,000
$83,333
-
-
$295,000
-
-
-
-
-
1,500,000(5)
-
-
-
-
-
-
-
-(6)
-(6)George T. Stapleton, II
Director (7)
2009
2008
2007
$189,231
$236,899
$89,333
-
-
$335,000
-
-
-
-
-
1,500,000(8)
-
-
-
-
-
-
-
-(9)
-(9)George Orr
Director(10)
2009
2008
2007
$66,965
$138,000
$46,000
-
-
-
-
-
-
-
1,500,000(11)
-
-
-
-
-
-
-
-
-E. Wayne Sampson
Vice President,
Land
2009
2008
2007
$176,496
$168,000
$21,000
-
-
-
-
-
-
-
600,000(12)
-
-
-
-
-
-
-
-(13)
-David Sealock
Vice President, Corporate Services (14)
2009
2008
2007
$37,470
$160,800
$42,188
-
-
-
-
-
-
-
85,000(15)
600,000(16)
-
-
-
-
-
-
-
-(17)
-Kelly Sledz
Vice President, Finance (18)
2009
2008
2007
$110,550
$150,600
$13,009
-
-
-
-
-
-
-
300,000(19)
300,000(20)
-
-
-
-
-
-
-
-(21)
-Pat McCarron
Vice President, Operations
2009
2008
2007
$185,040
-
-
$100,000
-
-
-
-
600,000(22)
-
-
-
-
-
-
-                      -
-
-
-






(1)
"Options" includes all options, share purchase warrants and rights granted by our company as compensation for employment services or office.




(2)
"SAR" or "stock appreciation right" means a right granted by our company, as compensation for employment services or office, to receive cash or an issue or transfer of securities based wholly or in part on changes in the trading price of our company's publicly traded securities.




(3)
"LTIP" or "long term incentive plan" means a plan that provides compensation intended to motivate performance over a period greater than one fiscal year, but does not include Option or SAR plans or plans for compensation through shares or units that are subject to restrictions on resale.




(4)
Mr. Thornton was appointed our President on February 8, 2008 and our Chief Executive Officer on January 23, 2009.  Mr. Thornton was our Chief Operating Officer from January 1, 2007 to January 23, 2009.




(5)
Represents 1,000,000 stock options exercisable at a price of US$0.50 per share until January 8, 2011 and 500,000 stock options exercisable at a price of US$0.10 per share until December 20, 2011.  Of the total options granted to the period, 500,000 were awarded for acting as director.




(6)
On June 26, 2007, Mr. Thornton was assigned 1,750,000 incentive warrants, exercisable at a price of US$0.10 per share until January 15, 2009, from Endurance Energy Consulting Ltd. as described below in "Item 7.B – Related Party Transactions".  The warrants were exercised into 1,750,000 common shares on April 10, 2008.




(7)
Mr. Stapleton was the President of our company from December 21, 2006 to February 8, 2008 and the Chief Executive Officer from December 21, 2006 to January 23, 2009.




(8)
Includes 1,000,000 stock options exercisable at a price of US$0.50 per share until January 8, 2011 and 500,000 stock options exercisable at a price of US$0.10 per share that were exercised on March 23, 2007.  Of the total options granted to the period, 500,000 were awarded for acting as director.




(9)
During the year ended April 30, 2007, our company completed three acquisitions that were considered related party transactions as described below "Item 7.B – Related Party Transactions".  As a result, George T. Stapleton, II, or a private company controlled by him, received 5,293,000 common shares and US$346,617 cash as consideration.




(10)
Mr. Orr was our Chief Financial Officer from December 21, 2006 to October 27, 2008.




(11)
Represents 1,000,000 stock options exercisable at a price of US$0.50 per share until January 8, 2011 and 500,000 stock options exercisable at a price of US$0.10 per share that were exercised on April 8, 2008.  Of the total options granted to the period, 500,000 were awarded for the role as director.




(12)
Represents 600,000 stock options originally exercisable at a price of US$1.00 per share until March 19, 2011 and modified on November 4, 2008 to 600,000 stock options exercisable at $0.15 per share until November 1, 2011.




(13)
Mr. Sampson was assigned 1,200,000 incentive warrants, exercisable at a price of US$0.10 per share until January 15, 2009, from Endurance Energy Consulting Ltd. as described below in "Item 7.B – Related Party Transactions". The warrants were exercised into 1,200,000 common shares on August 20, 2008.




(14)
Mr. Sealock resigned from our company effective June 27, 2008.




(15)
Represents 85,000 stock options exercisable at a price of US$2.20 per share until July 9, 2011 all of which have been forfeited.




(16)
Represents 600,000 stock options exercisable at a price of US$0.50 per share until January 8, 2011 of which 150,000 stock options were exercised in fiscal 2009.  The 450,000 unexercised options have been forfeited.




(17)
Mr. Sealock was assigned 1,200,000 incentive warrants, exercisable at a price of US$0.10 per share until January 15, 2009, from Endurance Energy Consulting Ltd. as described below in "Item 7.B – Related Party Transactions". The warrants were exercised on a cashless basis into 1,116,667 common shares on February 5, 2008.




(18)
Mr. Sledz resigned from our company effective January 23, 2009.




(19)
Represents 300,000 stock options originally exercisable at a price of US$1.70 per share until November 11, 2011 and modified on November 4, 2008 to 300,000 stock options exercisable at $0.15 per share until November 1, 2011, all of which have been forfeited.




(20)
Represents 300,000 stock options originally exercisable at a price of US$1.00 per share until February 28, 2011 and modified on November 4, 2008 to 300,000 stock options exercisable at $0.15 per share until November 1, 2011, all of which have been forfeited.




(21)
Mr. Sledz was assigned 850,000 incentive warrants, exercisable at a price of US$0.10 per share until January 15, 2009, from Endurance Energy Consulting Ltd. as described below in "Item 7.B – Related Party Transactions".  The warrants were exercised on a cashless basis into 790,972 common shares on February 5, 2008.




(22)
Represents 600,000 stock options originally exercisable at $0.46 per share until July 16, 2012 and modified on November 4, 2008 to 600,000 stock options exercisable at $0.15 per share until November 1, 2011.







Aggregated Options Exercised During the Year Ended April 30, 2009 and Year-End Option Values




The value of the unexercised Options or SARs held by each Named Executive Officer, based upon a closing price for our company's shares of US$0.03 on April 30, 2009, is as follows:




Name
Securities Acquired
on Exercise
(#)
Aggregate
Value
Realized(1)
($)
Unexercised Options/SARs
at April 30, 2009
Value of Unexercised in-the-
money Options/SARs at
April 30, 2009(2)Exercisable
(#)
Unexercisable
(#)
Exercisable
($)
Unexercisable
($)R. William Thornton
-
-
1,500,000
-
-
-George T. Stapleton, II
-
-
1,000,000
-
-
-George Orr
-
-
1,000,000
-
-
-E. Wayne Sampson
-(3)
-
-
600,000
-
-David Sealock(4)
-
-
-
-
-
-Kelly Sledz(5)
-
-
-
-
-
-Pat McCarron
-
-
-
600,000
-
-




(1)
"Aggregate Value Realized" is calculated by determining the difference between the market value of the securities underlying the options or SARs at the date referred to and the exercise price of the options or SARs and is not necessarily indicative of the value (i.e. loss or gain) actually realized by the Named Executive Officers.


(2)
"in-the-money Options" means the excess of the market value of our company's shares on April 30, 2008 over the exercise price of the options.  Our company's shares trade on the Over-the-Counter-Bulletin Board in the United States.  The last trade on April 30, 2008 was as US$0.60 per share.  Therefore, these calculations are based upon the trading price of US$0.60 per share.


(3)
In addition to stock options, Mr. Sampson held 1,200,000 incentive warrants exercisable at a price of US$0.10 per share.   The incentive warrants were exercised into 1,200,000 common shares on August 28, 2008.


(4)
Mr. Sealock resigned from our company effective June 27, 2008.


(5)
Mr. Sledz resigned from our company effective January 23, 2009.




Option and SAR Repricings




Other than as set out herein, no options were re-priced during the year ended April 30, 2009. Effective November 4, 2008, our board of directors approved certain changes to certain employee stock options in an effort to strengthen employee relations.  The changes required that 4,543,500 outstanding stock options held by employees
be returned and cancelled in exchange for 4,093,500 new stock options with an exercise price of US$0.15 per share, a then recent 30-day average trading price of our common stock.  The vesting period for the exchanged stock options began anew and was extended.




None of these new options granted to our directors or to our President and Chief Executive Officer have been exchanged or modified.




Retirement Benefits




We do not have in place any pension or actuarial plan to provide pension, retirement or similar benefits and no funds were set aside or accrued by our company or its subsidiaries during the fiscal year ended April 30, 2009 to provide pension, retirement or similar benefits.







Employment Agreements




We entered into an executive employment agreement made effective as of December 15, 2006 with R. William Thornton, whereby we have agreed to employ Mr. Thornton as our Chief Operating Officer as of January 1, 2007 (as of February 8, 2008 Mr. Thornton was appointed as our President and as of January 23, 2009 he resigned as our Chief Operating
Officer and was appointed our Chief Executive Officer).  Pursuant to the agreement, Mr. Thornton will receive an annual salary of $250,000 and bonuses as may be determined by our board.  Upon execution of the agreement, we paid Mr. Thornton a signing bonus in the amount of US$250,000.  Mr. Thornton will be entitled to coverage under Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence), all at our
company's expense.  If Mr. Thornton's employment is terminated for just cause or by Mr. Thornton without constructive dismissal, we will pay to Mr. Thornton the amount of his unpaid annual salary to and including the date of termination, any declared but unpaid bonus and all outstanding vacation pay and expense reimbursements.  If Mr. Thornton's employment is terminated by our company without just cause or by Mr. Thornton for constructive dismissal, then in addition to the foregoing amounts,
Mr. Thornton will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions of our company's stock plan, all stock options held by Mr. Thornton will automatically vest.  Additionally, in the event of a change of control (as defined below) of our company, we and/or Mr. Thornton may terminate Mr. Thornton's employment with our company, on which event, we will pay to Mr.
Thornton the termination payments set out above.




A change of control is defined in the agreement as the occurrence of any of:  (i) the purchase or acquisition of shares of our common stock (or securities convertible thereto or carrying the right to acquire our common stock) as a result of which a person or group of persons, acting jointly or in concert, beneficially owns or
exercises control or direction over shares of our common stock that would have the right to cast more than 50 percent of the votes attached to all our common stock; or (ii) approval by our shareholders of:  (A) an amalgamation, arrangement or combination of our company with another entity pursuant to which our shareholders immediately before such combination do not own securities of the successor or continuing entity which would entitle them to cast more than 50 percent of the votes attaching
to all of our common stock immediately thereafter; (B) a liquidation, dissolution or winding-up of our company; (C) the sale, lease or other disposition of all or substantially all of the assets of our company; (D) the election at a meeting of our shareholders of a number of directors, who were not included in the slate for election as directors approved by our prior board of directors, and who would represent a majority of our board of directors, or (E) the appointment of a number of directors which would represent
a majority of our board of directors and which were nominated by any holder of our voting shares or by any group of holders of our voting shares acting jointly or in concert and not approved by our prior board of directors.




As part of the agreement Mr. Thornton was granted 1,000,000 common share stock options with an exercise price of US$0.50 per share that expire January 5, 2011 and 500,000 common share stock options with an exercise price of US$0.10 per share that expire December 21, 2011.




We have an executive employment agreement with George T. Stapleton, II, whereby we have agreed to employ Mr. Stapleton as our Chief Executive Officer as of January 1, 2007.  Pursuant to the agreement, Mr. Stapleton will receive an annual salary of US$240,000 and performance bonuses as may be determined by our board.  As
part of the agreement, we paid Mr. Stapleton a signing bonus in the amount of US$300,000.  Mr. Stapleton will be entitled to coverage under Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence), all at our company's expense.  If Mr. Stapleton's employment is terminated for just cause or by Mr. Stapleton without constructive dismissal, we will pay to Mr. Stapleton the amount of his unpaid annual salary to and
including the date of termination, any declared but unpaid bonus and all outstanding vacation pay and expense reimbursements.  If Mr. Stapleton's employment is terminated by our company without just cause or by Mr. Stapleton for constructive dismissal, then in addition to the foregoing amounts, Mr. Stapleton will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions
of our company's stock plan, all stock options held by Mr. Stapleton will automatically vest.  Additionally, in the event of a change of control (as defined above) of our company, we and/or Mr. Stapleton may terminate Mr. Stapleton's employment with our company, on which event, we will pay to Mr. Stapleton the termination payments set out above.  As part of the agreement Mr. Stapleton was granted 1,000,000 common share stock options with an exercise price of US$0.50 per share that expire January
5, 2011 and 500,000 common share stock options with an exercise price of US$0.10 per share which were exercised on March 23, 2007.  Effective January 23, 2009, Mr. Stapleton resigned as our Chief Executive Officer, and accordingly our executive employment agreement with Mr. Stapleton was terminated.




Our board of directors approved an executive employment agreement with George Orr, whereby we have agreed to employ Mr. Orr as our Chief Financial Officer as of January 2, 2007.  Pursuant to the agreement, Mr. Orr will receive an annual salary of $138,000 and bonuses as may be determined by our board.  Mr. Orr will be
entitled to coverage under Directors and Officers Liability Insurance and Errors and Omission Insurance (with a minimum cover of at least $2,000,000 per occurrence), all at our company's expense.  If Mr. Orr's employment is terminated for just cause or by Mr. Orr without constructive dismissal, we will pay to Mr. Orr the amount of his unpaid annual salary to and including the date of termination, any declared but unpaid bonus and expense reimbursements.  If Mr. Orr's employment is terminated
by our company without just cause or by Mr. Orr for constructive dismissal, then in addition to the foregoing amounts, Mr. Orr will receive a severance payment in the amount of one year's annual salary plus $10,000 less applicable withholdings and deductions, in respect of lost benefits and notwithstanding any provisions of our company's stock plan, all stock options held by Mr. Orr will automatically vest.  Additionally, in the event of a change of control (as defined above) of our company, we and/or
Mr. Orr may terminate Mr. Orr's employment with our company, on which event, we will pay to Mr. Orr the termination payments set out above. As part of the agreement Mr. Orr was granted 1,000,000 common share stock options with an exercise price of US$0.50 per share that expire January 5, 2011. As part of Mr. Orr's role as a director, our company granted 500,000 common share stock options with an exercise price of US$0.10 per share that were exercised on April 8, 2008.  Effective October 27, 2008, Mr.
Orr resigned as our Chief Financial Officer and accordingly our executive employment agreement with Mr. Orr was terminated.




Compensation of Directors




No cash compensation was paid to any of our directors for services as a director during the year ended April 30, 2009.  Our company has no formal arrangement pursuant to which directors are compensated by us for their services in their capacity as directors, except for the granting from time to time of incentive stock options.  Directors
are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board.  Our board of directors may award special remuneration to any director undertaking any special services on our behalf, other than services ordinarily required of a director.  No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments for the year ended April
30, 2009.







C.           Board Practices




Our directors are re-elected and our officers are re-appointed at the annual general meeting of our shareholders.  Our last annual general meeting was held on October 20, 2008, at which Messrs. Stapleton, Orr, Thornton, Evans, McCrank and Bloomer were re-appointed as directors of our company.  Effective May 26, 2008,
Dr. Bloomer resigned as a director of our company and effective March 31, 2009, Mr. Holmes resigned as a director of our company.  Our board appointed two additional directors, Mr. Neil McCrank and Mr. Jack Holmes, Jr. on July 17, 2008 and August 13, 2008, respectively.




Each of our current directors and officers will continue to hold his respective office until his successor is elected or appointed, unless his office is earlier vacated under any of the relevant provisions of our articles or the Business Corporations Act (Alberta).




Pursuant to the terms of the Series A preferred shares offering, for so long as any Series A preferred shares remain issued and outstanding, the holders of the Series A preferred shares will have the right to nominate one director to be the board of our company, which director will begin to serve immediately if a vacancy then exists on
our board.  In connection therewith, we are required to ensure that our articles and by-laws authorize a board of directors consisting of seven directors.  Furthermore, in the event that any Series B preferred shares are issued, then the holders of such shares will have the right to nominate a director to our board as long as Series B preferred shares remain issued and outstanding.




Other than an executive employment agreements entered into with R. William Thornton, there are also service contracts between our company and Sweetwater Capital, where George Orr, the former CFO is affiliated and Macleod Dixon, where Rick Skeith, the Secretary of the Board, is affiliated.




Our board of directors has four committees, namely: an audit, compensation, corporate governance and human resources, nominating committee and reserves committee as described below.  We do not have an executive committee of our board of directors.  With the recent addition of two new board members, our board will re-evaluate
its committee memberships and composition.




Audit Committee




The terms under which the audit committee operates are set out in the Audit Committee Charter, which provides that the audit committee will, among other things:  (i) review and report to our board of directors our financial statements and MD&A and the auditor's report, if any, prepared in relation to those financial statements,
before they are published; (ii) review our annual and interim earnings press releases we publicly disclose this information; satisfy itself that adequate procedures are in place for the review of our public disclosure of financial information extracted or derived from our financial statements and periodically assess the adequacy of those procedures; (iii) recommend to our board of directors the external auditor to be nominated for the purpose of preparing or issuing an auditor's report or performing other audit,
review or attest services to our company, and the compensation of the external auditor; (iv) oversee the work of the external auditor engaged for the purpose of preparing or issuing an auditor's report or performing other audit, review or attest services for our company, including the resolution of disagreements between management and the external auditor regarding financial reporting; (v) monitor, evaluate and report to our board of directors on the integrity of the financial reporting process and the system
of internal controls that management and the board of directors have established; (vi) monitor the management of the principal risks that could impact the financial reporting of our company; (vii) establish procedures for the receipt, retention and treatment of complaints received by our company regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; (viii) pre-approve
all non-audit services to be provided to our company or its subsidiary entities by our company's external auditor; and (ix) review and approve our company's hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of our company.




The members of our company's audit committee are George Orr (Chairman) and Brian Evans.  Messrs. Orr and Evans are both considered to be independent members.  The test we use to determine the independence of our directors is that set out in the Canadian Securities Regulators' Multilateral Instrument 52-110 – Audit
Committees.  The instrument provides that a member of an audit committee is independent if the member has no direct or indirect material relationship with the issuer (namely, a relationship which could, in the view of the issuer's board of directors, reasonably interfere with the exercise of a member's independent judgement).




Compensation Committee




On October 29, 2007, our board of directors appointed a compensation committee and approved a charter under which it will operate to discharge the Board's responsibilities relating to compensation of our company's Chief Executive Officer and our company's other executive officers, including the Chairman of the Board, President, Principal
Financial Officer, Principal Accounting Officer (or Controller) and Vice President in charge of a principal business unit, division or function such as sales, administration or finance, any other officer who performs a policy-making function, or any other person who performs similar significant policy-making functions for our company (collectively, the Executive Officers).  The Committee has overall responsibility for approving and evaluating all compensation plans, policies and programs of our company
as they affect the Executive Officers.  Prior to October 29, 2007, our corporate governance and human resources committee oversaw our company's compensation matters.




Currently, the responsibilities of the compensation committee are performed by the board as a whole.




Corporate Governance and Human Resources Committee




The function of the corporate governance and human resources committee is to assist our board of directors in fulfilling its oversight responsibilities, primarily through: (i) overseeing the management of programs, including, but not limited to: (A) our company's compensation program, including, but not limited to: benefits program, employee
salary and bonus program, stock option program and group savings plan, and (B) corporate policy and procedure process and controls; and (ii) providing an avenue of communication for internal operations.  The charter under which the corporate governance and human resources committee operates is attached hereto as Exhibit 99.3.




Currently, the responsibilities of the corporate governance and human resources committee are performed by the board as a whole.




Nominating Committee




On October 29, 2007, our board of directors appointed a nominating committee and approved a charter under which it will operate and be responsible for, including: (i) identifying and recommending to our board of directors individuals qualified to be nominated for election to the board; (ii) recommending to our board the members and chairman
for each board committee; (iii) overseeing the annual self-evaluation of the performance of the board and the annual evaluation of our company's management; and (iv) establishing a process for nominating and evaluating new members of our board of directors.




Currently, the responsibilities of the nominating committee are performed by the board as a whole.




Reserves Committee




On August 13, 2008, our board of directors appointed R. William Thornton, Neil McCrank and Jack Holmes, Jr. (who resigned as a director effective March 31, 2009) as members of a reserves committee.  A chairman has not been appointed and a charter has not been approved to date.  The purpose of the reserves committee will
be to oversee the engagement of independent reserve engineers and to assist the board of directors with its regulatory reporting obligations of reserves.




Currently the responsibilities of the reserves committee are performed by the board as a whole.







D.           Employees




As at September 22 2009, we employed 10full-time equivalent people.




E.           Share Ownership




Our authorized share structure consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value.




The following table identifies the number of our company's outstanding shares as at September 22, 2009 and the number of common shares that could be issued if all of our dilutive securities were converted into shares.




September 22, 2009Common shares outstanding
133,244,472Stock options
7,303,500(1)Series A preferred shares issued to ICO Fund and Investors
31,428,571(2)Series A issued to ICO Fund and Investors
15,400,000(2)Total
187,376,543






(1)
Represents stock options to purchase shares of our common stock at prices from US$0.10 to US$1.57 per share, with expiry dates from January 8, 2011 through August 13, 2012 and with various vesting terms.  Effective November 4, 2008, our board of directors approved certain changes to certain employee stock options in an effort to strengthen employee relations.  The changes required that 4,543,500
outstanding stock options held by employees be returned and cancelled in exchange for 4,093,500 new stock options with an exercise price of US$0.15 per share (a then recent 30-day average trading price of our common stock).  The vesting period for the exchanged stock options began anew and was extended.  None of these new options granted to our directors or to our President and Chief Executive Officer have been exchanged or modified.




(2)
Pursuant to our August 28, 2009 arrangement with the ICO Fund, we issued 22,000 Series A convertible preferred shares, each with a stated value of US$100, to investors led by the ICO Fund.  The special rights and restrictions attached to the Series A preferred shares provide as follows: (i) the shares are convertible into shares of our common stock at US$0.07 per share; (ii) a quarterly cumulative dividend,
based upon the stated value of the Series A preferred shares, is payable at the Company's election at a rate equal to either 5 percent, if paid in cash (15 percent upon certain events of default) or 7.5 percent, if paid in additional Series A preferred shares; (iii) upon liquidation, dissolution, winding up or sale of our company any outstanding Series A preferred shares will be paid out ahead of the common shares at a rate of two times the stated value of the Series A preferred shares; and (iv) after 12
months from the date of issue, our company may force the conversion of the Series A preferred shares provided: (A) production from the Deerfield Area (15,313 acres of our oil and gas leases located along the border of Missouri and Kansas) is 15,000 barrels of oil in a 30-day period, (B) our common shares have traded at or above US$0.25 per share for the preceding 20 consecutive trading days, and (C) the daily average dollar trading volume of our common shares has been in excess of US$75,000 per day for the same
20-day period.




In conjunction with the Series A preferred share offering, our company also issued to the subscribers thereunder 15,400,000 Series A warrants.  Each warrant allows the holder thereof to purchase a share in our common stock at US$0.25 per share until August 28, 2014.  After May 28, 2010, the warrants may be exercised on a cashless basis only in respect of common shares not included for unrestricted
public resale in an effective registration statement on the date that notice of exercise is given to our company.




Of the above securities, our Directors and Named Executive Officers owned the following common shares as of September 22, 2009:




Name
Office Held
Common Shares
Options and Dilutive Securities
Exercisable for Common Shares(1)Number Beneficially Owned
Percentage of Class
Number Beneficially Owned
(unexercised)
Exercise
Price
Expiry
DateR. William Thornton
President and Chief Executive Officer and Director
4,595,000
3.5%
1,000,000
US$0.50
January 8, 2011500,000
US$0.10
December 20, 2011George T. Stapleton, II
Director
7,765,643
5.8%
1,000,000
US$0.50
January 8, 2011George Orr
Director
500,000
1.0%
1,000,000
US$0.50
January 8, 2011E. Wayne Sampson
Vice President, Land
1,340,000
1.0%
600,000
US$0.15
November 1, 2011Brian J. Evans
Director
10,000
1.0%
500,000
US$1.00
February 20, 2012Pat McCarron
Vice President, Operations
-
-
600,000
US$0.15
November 1, 2011D. Richard Skeith
Corporate Secretary
-
-
-
-
-Neil McCrank
Director
-
-
500,000
US$0.45
July 17, 2012




(1)
Includes vested and unvested stock options under our company's Canadian equity incentive plan, amended and restated on June 5, 2008, as amended and restated, and our company's U.S. equity incentive plan, amended and restated on June 5, 2008.







Stock Options and Equity Incentive Plans




On June 5, 2008, our board of directors adopted two new equity incentive plans, the Canadian equity incentive plan and the U.S. equity incentive plan.  The Canadian equity incentive plan replaces and supersedes Canadian stock option plan, and the U.S. equity incentive plan replaces and super cedes the U.S. stock option plan.  Each
of our equity and stock option plans are described below.




The purpose of the equity and stock option plans are to provide us with a share-related mechanism to attract, retain and motivate qualified directors, officers, consultants and employees, to reward those persons from time to time for their contributions toward the long-term goals of our company, and to enable and encourage such directors,
officers, consultants and employees to acquire our common shares as long-term investments.




Canadian Equity Incentive Plan




The Canadian equity incentive plan was adopted by our board of directors and became effective on June 5, 2008.  The material terms of the plan are: (i) the total number of shares of our common stock that may be awarded under the plan plus the total number of shares of our common stock that may be awarded under the U.S. equity
incentive plan under a stock option plan, dated June 5, 2008, for United States based employees cannot exceed 10 percent of the total number of shares of our common stock issued and outstanding from time to time; (ii) the plan administrator is appointed by the board of directors; (iii) the term of the plan is indefinite; (iv) awards eligible to be awarded under the plan include stock options, stock appreciation rights, restricted stock units, performance awards and other stock based awards; (v) options are subject
to adjustment in the event of s subdivision or consolidation of our common shares, an amalgamation, or other corporate event affecting our common shares; and (vi) the board determines the date of grant, the number of optioned shares, the exercise price per share, the vesting period and term.  The minimum exercise price of any option granted under the plan is the weighted average price of our common shares on the principal stock exchange on which our common shares trade for the five trading days prior
to and including the date of grant.




The Canadian equity incentive plan is filed as Exhibit 4.37 to our annual report on Form 20-F filed on August 29, 2008.




Canadian Stock Option Plan




We adopted a formal written stock option plan for Canadian resident directors, senior officers, employees and consultants on August 24, 2004.  The plan provides that stock options granted under the plan vest in the manner determined by the administrator appointed under the plan on the date of the grant.  The price at
which a stock option may be exercised is determined by our board of directors at the time of the grant.  The plan also provides that we may not grant stock options to any person or that person's associates that will in aggregate, when exercised, exceed in any 12 month period 5 percent of our issued and outstanding common shares.




As of February 19, 2007 and August 9, 2007, our Canadian stock option plan was amended and restated as follows: (i) to provide that the total number of shares of our common stock that may be issued upon the exercise of stock options issued under the plan plus the total number of shares of our common stock that may be issued upon the exercise
of stock options issued under a stock option plan, dated January 5, 2007, for United States based employees cannot exceed 20 percent of the total number of shares of our common stock issued and outstanding from time to time; (ii) to set out the circumstances under which the number and class of shares issuable upon the exercise of a stock option will be adjusted; (iii) to allow for the immediate vesting of all unexpired and unvested stock options in the event of a change of control of our company and for the acceleration
of the vesting of stock options at the discretion of the administrator appointed under the plan; (iv) to set out how the exercise price of a stock option may be paid and specifically to provide for a (cashless) net exercise option; (v) to provide that our company's obligation to issue shares upon the exercise of a stock option is dependant upon certain factors, including the compliance of the shares with any applicable laws; (vi) to provide an option holder is responsible for the payment of any withholding taxes
in respect of the exercise of a stock option; (vii) to set out the discretion of our board of directors in respect of various matters concerning the interpretation of the plan and the granting and exercise of stock options and, specifically, the discretion to extend the expiry date of the stock options and to determine the price per share at which a stock option may be exercised; and (viii) to correct minor typographical and grammatical errors and inconsistencies in the text of the plan.




The Canadian stock option plan was replaced by the Canadian equity incentive plan on June 5, 2008.




U.S. Equity Incentive Plan




The U.S. equity incentive plan was adopted by our board of directors and became effective on June 5, 2008.  The material terms of the plan are: (i) the total number of shares of our common stock that may be awarded under the plan plus the total number of shares of our common stock that may be awarded under the Canadian equity
incentive plan under a stock option plan, dated June 5, 2008, for Canadian based employees cannot exceed 10 percent of the total number of shares of our common stock issued and outstanding from time to time; (ii) the plan administrator is appointed by the board of directors except that the board of directors may, in its discretion, establish a committee composed of two or more members of the board or two or more other persons to administer the plan; (iii) the term of the plan is 10 years; (iv) awards eligible
to be awarded under the plan include stock options, stock appreciation rights, restricted stock units, performance awards and other stock based awards; (v) options are subject to adjustment in the event of s subdivision or consolidation of our common shares, an amalgamation, or other corporate event affecting our common shares; and (vi) the board determines the date of grant, the number of optioned shares, the exercise price per share, the vesting period and term.  The minimum exercise price of any
option granted under the plan is the weighted average price of our common shares on the principal stock exchange on which our common shares trade for the five trading days prior to and including the date of grant.




The U.S. equity incentive plan is filed as Exhibit 4.38 to our annual report on Form 20-F filed on August 29, 2008.




U.S. Stock Option Plan




As of January 5, 2007, our board of directors adopted a stock option plan for U.S. resident directors, senior officers, employees and consultants.  The material terms of the plan were:  (i) the number of shares of our common stock reserved for issuance under the plan was 20 percent of the issued and outstanding shares
of our common stock from time to time less the number of stock options granted under our Canadian stock option plan; (ii) the plan was administered by our board of directors, except that the board of directors may, in its discretion, establish a committee composed of two or more members of the board or two or more other persons to administer the plan; (iii) incentive stock options (stock options which qualify under Section 422 of the Internal Revenue Code of 1986 (United States) may be granted to any individual
who, at the time the option is granted, is resident in the U.S. and who is an employee of our company or any related corporation; (iv) non-qualified stock options (stock options that do not qualify under Section 422 of the Internal Revenue Code of 1986) may be granted to employees and to such other persons who are not employees as the plan administrator shall select, subject to any applicable laws; (v) the plan provides that, generally, the number of shares subject to each stock option, the exercise price, the
expiry time, the extent to which such stock option is exercisable and other terms and conditions relating to such stock options will be determined by the board of directors of our company or any committee to which such authority is delegated by the board from time to time; (vi) the term of the stock options granted under the plan will not exceed ten years from the date of grant, provided that the term of the stock options will be reduced upon the death of an option holder or if an option holder ceases to be employed
by or hold office with our company; (vii) the vesting of stock options granted under the plan will be in 25 percent increments, beginning one year from the date of the grant, provided that the plan allows for the immediate vesting of all unexpired and unvested stock options in the event of a change of control of our company and for the acceleration of the vesting of stock options at the discretion of the administrator appointed under the plan; (viii) the exercise price of the stock options will be determined
by the plan administrator in compliance with applicable laws, including the rules of an applicable stock exchange or national market system; and (ix) the plan will terminate when all of the stock options, available for grant thereunder, have been granted or when the plan is otherwise terminated by our company (provided that any stock options outstanding when the plan is terminated will remain in effect until they are exercised or expire).




The U.S. stock option plan was replaced by the U.S. equity incentive plan on June 5, 2008.







ITEM 7.                      Major Shareholders and Related Party Transactions




A.           Major Shareholders




As of September 22, 2009, there were 133,244,472 shares of our common stock issued and outstanding.  The following table sets out persons known to us to be the beneficial owners of more than 5 percent of the issued and outstanding shares of our common stock as of September 22, 2009:




Shareholder
Amount Owned
Percentage of Class(1)Sprott Asset Management Inc.
9,550,000
7.2%Agosto Corporation Limited
8,442,201
6.4%George T. Stapleton, II, director
7,765,643
5.8%




(1)
Based on 133,244,472 shares of our common stock issued and outstanding as of September 22, 2009.




The voting rights of our major shareholders do not differ from the voting rights of shareholders who are not major shareholders.




Since our previous fiscal year end April 30, 2008, we issued 38,112,806 shares of our common stock to date.  Since the second-previous year ended April 30, 2007, we have 60,808,422 shares of our common stock to date.




As of September 22, 2009, Computershare Ltd., our registrar and transfer agent, reported that of the 133,244,472 issued and outstanding shares of our common stock, 81,094,526 shares were registered to Canadian residents (227 shareholders), 47,495,616 shares were registered to residents of the U.S. (57 shareholders) and 4,654,330 shares
were registered to residents of countries other than Canada or the U.S. (9 shareholders).




To the best of our knowledge, we are not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person.




There are no arrangements known to us, the operation of which may at a subsequent date result in a change in the control of our company.




B.           Related Party Transactions




Other than as set out herein, to the best of our knowledge, there have been no material transactions or loans from May 1, 2008 to August 28, 2009 between our company and: (i) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, our company; (ii) associates;
(iii) individuals owning, directly or indirectly, an interest in the voting power of our company that gives them significant influence over our company, and close members of any such individual's family; (iv) key management personnel of our company, including directors and senior management of our company and close members of such individuals' families; and (v) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (iii) or (iv) or over which
such a person is able to exercise significant influence.




The Company incurred the following related party transactions during the years ended April 30, 2009, 2008 and 2007.  These transactions were measured at the exchange amount, which is the amount agreed upon by the transacting parties.




A director and the former Chief Financial Officer (CFO) was affiliated with a private company that provided MegaWest A director and the former Chief Financial Officer (CFO) was affiliated with a private company that provided MegaWest with administrative services.  For the years ended April 30, 2009, 2008 and 2007 the Company paid
$13,145, $211,474 and $75,000, respectively for these services.  This contract, which expired in November 2008, has not been extended.




During the year ended April 30, 2009 Company paid $116,416 in professional fees to a law firm, where the Corporate Secretary of the Company is a partner.




During the year ended April 30, 2007, the Company incurred $87,608 in general and administrative costs to entities controlled by former directors.




The acquisitions of the assets of Deerfield Energy Kansas Corp. (Deerfield Kansas), Deerfield, Energy LLC (Deerfield Missouri) and Trinity Sands Energy LLC (Trinity) were considered related party transactions, since at the respective acquisition dates the President and Chief Executive Officer of the Company, was also the Chief Executive
Officer and a unitholder of Trinity (47.37 percent of issued and outstanding units) and the Chief Operating Officer and unitholder of Deerfield Missouri (15.86 percent of the issued and outstanding units), which is also the parent company of Deerfield Kansas.  As a result, the Chief Executive Officer of the Company, or a private company controlled by him, received: (i) 39,650 of the common shares issued for the assets of Deerfield Kansas, (ii) 753,350 common shares and $291,702 cash from Deerfield
Missouri, including a change in control fee, and (iii) 45,000 class B exchange shares of our subsidiary, MegaWest USA, that were converted into 4,500,000 common shares and $107,763 cash of the consideration issued to Trinity.







ITEM 8.                      Financial Information




Financial Statements filed as part of this Annual Report


-
Report of Independent Registered Public Accounting Firm, KPMG LLP, dated August 28, 2009, on the Consolidated Financial Statements of our company as at April 30, 2009-
Consolidated Balance Sheets at April 30, 2009 and 2008-
Consolidated Statements of Operations, Comprehensive Loss and Deficit for the years ended April 30, 2009, 2008 and 2007-
Consolidated Statements of Cash Flows for the years ended April 30, 2009, 2008 and 2007Reconciliation to U.S. GAAP-
Auditors' Report dated August 28, 2009, together with Comments by Auditor for U.S. Readers in Canada – U.S. Reporting Difference-
Supplemental note of reconciliation to U.S. GAAP as of April 30, 2009 and 2008 and for each of the years ended April 30, 2009 and 2008




The financial statements can be found under "Item 18 - Financial Statements" below.




Significant Changes




Other than as disclosed herein, no significant change has occurred in our financial statements since the fiscal year ended April 30, 2009.




Legal Proceedings




There are no pending legal proceedings to which we are a party or of which any of our property is the subject.  There are no legal proceedings to which any director, officer or affiliate of our company or any associate of any such director, officer or affiliate of our company is a party or has a material interest adverse to us.




Dividend Distributions




Holders of our common shares are entitled to receive such dividends as may be declared from time to time by our board, in its discretion, out of funds legally available for that purpose.  We intend to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to pay any cash dividends
in the foreseeable future.







ITEM 9.                      The Offer and Listing




A.           Offer and Listing Details




Our common shares are traded on the OTC Bulletin Board under the symbol "MGWSF".  Our common shares were listed on the Canadian Venture Exchange (now the TSX Venture Exchange) from August 27, 2001 to June 16, 2004.  On March 28, 2005, our common shares were listed for trading on the OTC Bulletin Board under the symbol
"BCKOF".  Effective March 6, 2007, our trading symbol was changed to "MGWSF".




The annual high and low market prices for our common shares for the five most recent full fiscal years are as follows:




Year Ended
TSX Venture Exchange
OTC Bulletin BoardHigh
Low
High
LowApril 30, 2009
N/A
N/A
US$0.705
US$0.01April 30, 2008
N/A
N/A
US$2.75
US$0.40April 30, 2007
N/A
N/A
US$2.75
US$0.50April 30, 2006
N/A
N/A
US$1.01
US$0.30April 30, 2005
N/A
N/A
No trades
No trades




The high and low market prices for our common shares for each full financial quarter for the two most recent full fiscal years on the OTC Bulletin Board were as follows:




Quarter Ended
OTC Bulletin BoardHigh
LowApril 30, 2009
US$0.07
US$0.02January 31, 2009
US$0.12
US$0.01October 31, 2008
US$0.45
US$0.08July 31, 2008
US$0.705
US$0.42April 30, 2008
US$0.86
US$0.40January 31, 2008
US$1.80
US$0.81October 31, 2007
US$2.35
US$1.50July 31, 2007
US$2.75
US$1.80




The high and low market prices of our common shares for each of the most recent six months, from February, 2009 through August 2009, on the OTC Bulletin Board were as follows:




Month Ended
OTC Bulletin BoardHigh
LowAugust 31, 2009
US$0.11
US$0.042July 31, 2009
US$0.05
US$0.024June 30, 2009
US$0.0475
US$0.03May 31, 2009
US$0.05
US$0.0275April 30, 2009
US$0.07
US$0.0275March 31, 2009
US$0.04
US$0.02




B.           Plan of Distribution




Not applicable.




C.           Markets




Our common shares are quoted on the OTC Bulletin Board under the symbol "MGWSF".




D.           Selling Shareholders




Not applicable.




E.           Dilution




Not applicable.




F.           Expenses of the Issue




Not applicable.







ITEM 10.                      Additional Information




A.           Share Capital




Not applicable.




B.           Memorandum and Articles of Association




Our company was incorporated under the laws of the Province of British Columbia, Canada on February 8, 2000.  At a meeting of the shareholders of our company on October 29, 2007, the shareholders approved the continuance of our company from the Province of British Columbia into the Province of Alberta under the Business Corporations
Act (Alberta).  Effective February 12, 2008, our company continued into the Province of Alberta under the Business Corporations Act (Alberta) and we ceased to be a company organized under the Business Corporations Act (British Columbia).  Set out below is a summary of various provisions of our articles of continuance and by-laws prescribed by the Business Corporations Act (Alberta) in respect of:  (i) objects and purposes: (ii) directors; (iii) authorized capital; (iv) rights, preference
and restrictions attached to our classes of shares; (v) shareholder meetings; and (vi) limitation on rights of non-Canadians; (vii) delay of change of control; and (viii) reporting of share ownership.




Objects and Purposes




Neither our articles nor by-laws contain a description of our objects and purposes.




Directors




Neither our articles nor by-laws restrict:  (i) a director's power to vote on a proposal, arrangement or contract in which the director is materially interested; or (ii) our directors' power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body.  Our by-laws provide
that our directors may, without shareholder approval, borrow money upon the credit of our company, issue and sell bonds or debentures and provide guarantees.  Neither our articles nor by-laws set out a mandatory retirement age for our directors and our directors are not required to own securities of our company in order to serve as directors.




Authorized Capital




Our articles provide that our authorized capital consists of an unlimited number of shares of common stock, without par value, and an unlimited number of shares of preferred stock, without par value.  Our preferred stock may be issued in one or more series and our directors may fix the number of shares which is to comprise each
series and the designation, rights, privileges, restrictions and conditions attaching to each series.




Rights, Preferences and Restrictions




Pursuant to our articles, holders of our common stock are entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class of shares are entitled to vote, receive any dividend declared by our company's board of directors and, subject to the rights, privileges, restrictions and conditions attaching
to any other class of shares, receive the remaining property of our company upon dissolution.  Shares of our preference stock of each series rank on a parity with our share of preference stock of any other series and are entitled to a preference over shares of our common stock with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of our company.




The provisions in our articles attaching to our common stock and our preference stock may be altered, amended, repealed, suspended or changed by the affirmative vote of the holders of not less than 2/3s of the outstanding shares of common stock and 2/3s of the shares of preference stock, as applicable.




With the exception of special resolutions (i.e. resolutions in respect of fundamental changes to our company, including: the sale of all or substantially all of its assets, an merger or other arrangement or an alteration to our company's authorized capital) that require the approval of 2/3s of the votes cast by shareholders (holding common
stock) entitled to vote at a meeting, either in person or by proxy, resolutions to approve matters brought before a meeting of our shareholders require approval by a simple majority of the votes cast by shareholders entitled to vote at a meeting, either in person or by proxy.




Shareholder Meetings




The Business Corporations Act (Alberta) provides that:  (i) meetings of shareholders must be held in Alberta, unless otherwise provided in a company's by-laws; (ii) directors must call an annual general of shareholders not later than 15 months after the last preceding annual general;  (iii) for the purpose of determining
shareholders entitled to receive notice of or vote at meetings of shareholders, the directors may fix in advance a date as the record date for that determination, provided that such date shall not precede by more than 50 days or by less than 21 days the date on which the meeting is to be held; (iv) a quorum of shareholders is present at a meeting if the holder or the holders of a majority of shares entitled to vote at the meeting are present in person or represented by proxy (This is modified by our by-laws which
provide that the quorum for the transaction of business at a meeting of our shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 5 percent of the issued shares entitled to be voted at the meeting.); (v) the holders of not less than five percent of the issued shares entitled to vote at a meeting may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition; (vi) only shareholders entitled to vote at the meeting,
our directors and our auditor are entitled to be present at a meeting of shareholders; and (vii) upon the application of a director or shareholder entitled to vote at the meeting, the Court of Queens Bench of Alberta may order a meeting to be called, held and conducted in a manner that the Court directs.




Limitations on Rights of Non-Canadians




Except as provided in the Investment Canada Act, there are no limitations specific to the rights of non-Canadians to hold or vote our common stock under the laws of Canada or Alberta or in our charter documents.  See "Exchange Controls" below in this annual report for a discussion of the principal features of the Investment Canada
Act for non-Canadian residents proposing to acquire our common stock.




Delay of Change of Control




Pursuant to the provisions of the Business Corporations Act (Alberta), at each annual general meeting of our shareholders all of our directors retire and the shareholders appoint a new board of directors.  Each director holds office until our next annual general meeting unless:  (i) he dies or resigns; (ii) he is removed
by ordinary resolution of our shareholders (or class or series of shareholders if such class or series has the exclusive right to elect one or more directors); or (iii) the director becomes disqualified to hold officer, as provided under the Business Corporations Act (Alberta).  A director appointed or elected to fill a vacancy on our board holds office for the unexpired term of his predecessor (generally, until our next annual general meeting).




With the exception of provisions in our articles that limit the number of directors that can be appointed between annual meetings of shareholders and that give our directors the authority to issue blank cheque preferred stock, there are no provisions in our articles or by-laws that would have the effect of delaying, deferring or preventing
a change in control of our company, and that would operate only with respect to a merger, acquisition or corporate restructuring involving our company.




Reporting of Share Ownership




Neither our articles nor our by-laws contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed.  Securities legislation in Canada, however, requires that we disclose in our annual general meeting proxy statement, holders who beneficially own more than 10 percent of our issued
and outstanding shares, and United States Federal securities laws require the disclosure in our annual report on Form 20-F of holders who own more than five percent of our issued and outstanding shares.







C.           Material Contracts




The following is a summary of the material provisions of the agreements referenced below and should be read together with the full text of such agreements.




Effective August 28, 2009, our wholly-owned subsidiary, MegaWest Energy Missouri Corp. (MegaWest Missouri) entered into a purchase and sale agreement with Mega Partners 1, LLC, (MP 1), an affiliate of the Iroquois Capital Opportunity Fund, L.P., pursuant to which we sold a 10 percent working interest in our existing land and enhanced recovery
projects on 15,313 acres of our oil and gas leases located in Missouri and Kansas (the Deerfield Area), including our Grassy Creek and Marmaton River projects, for the purchase price of US$2 million.




Effective August 28, 2009, MegaWest Missouri entered into an operating agreement relating to the operation of the Grassy Creek and Marmaton projects and the exploration and development of future projects within the Deerfield Area.  In particular, the operating agreement provides as follows:  (i) MegaWest Missouri will
operate any existing and future projects in the Deerfield Area; (ii) each party to the operating agreement will pay its proportionate share of development and operating costs; and (iii) MP 1 will have the right to acquire up to an additional 10 percent working interest in future development within the Deerfield Area, on a project-by-project basis, by paying up to a US$300,000 equalization payment per project and thereafter its proportionate share of all future development and operating costs in respect of each
project.




Pursuant to a side letter agreement entered into effective August 28, 2009, between MegaWest Missouri and MP 1, we granted MP 1 the option to acquire up to a 20 percent proportionate interest in any of our properties outside of the Deerfield Area by paying a proportionate 133 percent share of our costs-to-date in respect of such
property until the later of the full redemption or conversion of the Series A or Series B preferred shares (issued pursuant to the arrangement with the ICO Fund) are issued and outstanding and August 27, 2011; and (ii) the option to participate with our company in any future oil and gas property acquisitions for a proportionate 20 percent share of the cost of any such acquisition until the later of the full redemption or conversion of the Series A or Series B preferred shares and August 27, 2011.




In respect of an offering that was completed on August 28, 2009, we entered into a form of private placement subscription agreement pursuant to which we issued to various investors led by the Iroquois Capital Opportunity Fund, L.P. 22,000 Series A convertible preferred shares, each with a stated value of US$100, for aggregate gross proceeds
of US$2.2 million.  In conjunction with the offering of the Series A preferred shares, we also issued to the subscribers thereunder: (i) Series A warrants, each warrant entitling the holder thereof to purchase one share in our common stock at US$0.007 per share; and (ii) additional investment rights consisting of the right to purchase a Series B convertible preferred share convertible into our common stock and Series B warrants representing the right to purchase our common stock.




In addition, the form of subscription agreement provides that:  (i) we will file a registration statement, if required, to be in effect at the time of conversion with respect to the common shares underlying the Series A or Series B preferred shares and the warrants related to each issuance; (ii) certain liens against our properties
are prohibited and consent of a majority interest of the subscribers is required for certain actions that would adversely change the rights of the subscribers while either the Series A or Series B preferred shares are issued and outstanding; (iii) if we issue certain common stock or securities exchangeable into common stock at a price less than the conversion price of the outstanding Series A or Series B preferred shares, then we will adjust the conversion price of the said preferred shares to this lower price;
(iv) the conversion price of the Series A or Series B preferred shares will be adjusted proportionately to take account of any dividends on common stock splits or consolidations, or reclassification of common stock; (v) our company is prohibited from pledging its properties under certain circumstances and our company is prohibited from selling a majority interest in its properties without the consent of a majority interest of the subscribers as long as the Series A or Series B preferred shares are issued and
outstanding.  Such majority interest consent is also required for certain actions that would adversely change the rights of the subscribers while either the Series A or Series B preferred shares are issued and outstanding.  These negative pledges do not pertain to the Series B preferred shares unless Series B preferred shares having a face value of more than US$1,400,000 have been issued; (vi) while Series A preferred shares are issued and outstanding, the Series A preferred shareholders have
the right to nominate one director to our board.  Should Series B preferred shares be issued, the holders of such shares will have the right to nominate one additional director to our board; (vii) certain default provisions result in the dividend rate increasing to 15 percent payable in cash during the event of default; (viii) until August 28, 2010, the ICO Fund has a right of first refusal with respect to any financings or equity linked debt offerings conducted by us; and (ix) we have agreed to pay
US$75,000 of the ICO Fund's legal fees and to engage a technology consulting firm recommended by the ICO Fund for six months at a cost not to exceed US$20,000 per month.




On July 13, 2009, we entered into an agreement with Electro-Petroleum, Inc. (EPI) to evaluate the testing and potential commercial application of its proprietary Electronically Enhanced Oil Recovery (EEOR) technology for recovery of oil from the Clear Creek Area of our Missouri leases.  Our company and EPI will jointly undertake
the review and design of a demonstration project for the EEOR process.  Successful results from the demonstration project would lead to the design and implementation of a commercial scale project on leases held by our company, and EPI would earn a working interest on all acreage developed using the EEOR technology.




On April 9, 2009, we entered into an amending agreement with our joint venture partner, Kentucky Reserves II, LLC (KRII) to resolve its outstanding work commitments under the Kentucky membership unit purchase agreement.  Pursuant to the amending agreement, our company's work program obligations and attendant penalty payment provisions
under the purchase agreement were terminated in consideration for: (i) a reduction in our working interest in the shallow rights (on the Kentucky land) from 62.5 percent to 37.5 percent; (ii) our transfer of ownership of the Kentucky leases to KRII; and (iii) our obligation to continue to pay, directly to the lessors of the lands which make up the Kentucky project, lease rental for the 24-month period commencing March 1, 2009 (estimated to be $225,000).




On July 31, 2008, we entered into a purchase agreement whereby we purchased (in connection with MegaWest Energy Montana Corp.) a 75 percent working interest in oil and gas leases of approximately 4,990 undeveloped acres in Montana.  The consideration we gave for the purchase was US$105,000 cash and 100,000 common shares.




In respect of a private placement that was completed on May 15, 2008, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 27,650,000 common shares, at a price of US$0.60 per share, for aggregate proceeds of US$16,050,000.




On October 24, 2007, we entered into a purchase agreement whereby we purchased (in connection with MegaWest Energy Montana Corp.) a 40 percent working interest in oil and gas leases of approximately 33,000 undeveloped acres in Montana.  As part of the agreement, we can earn an additional 20 percent working interest by carrying
the vendor through the first US$2.5 million of work split over two prospects, after which the vendor will be responsible for its 40 percent working interest share of all cost, risk, expense and benefit related to the prospects.  The remaining consideration we gave for the purchase was US$300,000 cash, 500,000 common shares and 250,000 common share purchase warrants (each of which are exercisable into common shares at a price of US$2.50 until April 24, 2009).




In July 2007, we entered into an executive employment agreement with George T. Stapleton, II, whereby we have agreed to employ Mr. Stapleton as our Chief Executive Officer effective January 1, 2007.  Pursuant to the agreement, Mr. Stapleton will receive an annual salary of US$240,000.  As part of the agreement we paid
Mr. Stapleton a signing bonus in the amount of US$300,000, issued to Mr. Stapleton 1,000,000 fully vested common share stock options with an exercise price of US$0.50 per share exercisable until January 5, 2011 and issued to Mr. Stapleton 500,000 fully vested common share stock options with an exercise price of US$0.10 per share which were exercised on March 23, 2007.




In July 2007, we entered into an executive employment agreement with George Orr, whereby we have agreed to employ Mr. Orr as our Chief Financial Officer effective January 2, 2007.  Pursuant to the agreement, Mr. Orr will receive an annual salary of $138,000.  As part of the agreement we issued to Mr. Orr 1,000,000 fully
vested common share stock options with an exercise price of US$0.50 per share exercisable until January 5, 2011.




In April 2007,we entered into a membership unit purchase agreement whereby we purchased (though our subsidiary, MegaWest Energy (USA) Corp). all of the issued and outstanding membership units of Trinity Sands Energy LLC in consideration for
US$200,000 in cash and 95,000 exchange shares of MegaWest Energy (USA) Corp. and our release of Trinity of its obligations to us in respect of a promissory note (previously assumed by us) in the amount of US$1,200,000 granted by Trinity to Agosto Corporation Limited.  Each exchange share may be exchanged for US$10 in cash or 100 shares of our common stock during the period January 1, 2008 to July 31, 2008.  As of February 28, 2008, all of the exchange shares were converted into 9,500,000 shares
of our common stock.







In April 2007, we entered into a membership unit purchase agreement whereby we purchased (though MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Kentucky Reserves, LLC in consideration for US$3,000,000 in cash and 5,000,000 shares of our common stock.




In April 2007, we entered into a membership unit purchase agreement whereby we purchased (though MegaWest Energy (USA) Corp.) all of the issued and outstanding membership units of Deerfield Energy LLC in consideration for US$800,000 in cash and 4,750,000 shares of our common stock.  In connection with the purchase agreement, we
entered into an escrow agreement whereby part of the consideration of the Deerfield Energy LLC acquisition was placed into escrow, to be released under certain conditions.




In March 2007, we entered into an asset purchase agreement whereby we purchased (though MegaWest Energy (USA) Corp.) all of the assets of Deerfield Energy Kansas Corp. in consideration for 250,000 shares of our common stock and our release of Deerfield Energy LLC (the parent of Deerfield Energy Kansas Corp.) of its obligations to us in
respect of a promissory note (previously assumed by us) in the amount of US$500,000 granted by Deerfield Energy LLC to Agosto Corporation Limited in the amount of US$500,000.




In February 2007, we entered into an agreement with a consultant, Mercury Capital Inc., to provide advisory services to our company whereby we have agreed to issue to the consultant up to 750,000 shares of our common stock.  At November 28, 2007, all 750,000 of the shares were issued.




In respect of a private placement that was completed on March 1, 2007, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 27,448,550 units, at a price of US$1.00 per unit, for aggregate proceeds of $32,115,870, each of which units consists of one share of our common stock
and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share for a period of one year.  On December 14, 2007, the term of the common share purchase warrants was extended six months and they expired on August 28, 2008.




In respect of a private placement that was completed on March 1, 2007, we entered into a rights agreement with PowerOne Capital Markets Limited (an accredited investor) pursuant to the terms of the PowerOne consulting agreement, whereby we issued rights to buy 375,000 units at a price of US$1.00 per unit, of which each unit consists of
one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.30 per share for a period of one year.  On December 14, 2007, the term of the common share purchase warrants was extended six months and they expired on August 28, 2008.




In respect of a private placement that was completed on January 5, 2007, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 8,425,000 units, at a price of US$0.50 per unit, for aggregate proceeds of $4,992,234, each of which units consists of one share of our common stock
and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.00 per share for a period of one year.  On December 14, 2007, the term of the common share purchase warrants was extended was extended six months and they expired on July 5, 2008.




In respect of a private placement that was completed on January 5, 2007, we entered into a rights agreement with PowerOne Capital Markets Limited (an accredited investor) pursuant to the terms of the PowerOne consulting agreement, whereby we issued rights to buy 180,000 units at a price of US$0.50 per unit, of which each unit consists of
one share of our common stock and one-half of one common share purchase warrant, with each whole warrant entitling the holder to purchase an additional share of our common stock at an exercise price of US$1.00 per share for a period of one year.




We entered into a corporate support agreement with Sweetwater Capital Corp. effective January 1, 2007 whereby Sweetwater Capital Corp. provides us with various administrative and consulting services for $15,000 per month, for an initial term of eighteen months.  This contract has expired and is no longer in effect.




Pursuant to a form of debt settlement and subscription agreement dated December 21, 2006, entered into with each of Karkrash Holdings Ltd., Carob Management Ltd., Brian Hanson, Roy Brown and Amisano Hanson, Chartered Accountants, we issued 600,000 shares of our common stock to the said subscribers in settlement of $165,700 of debt.




Pursuant to a consulting agreement with PowerOne Capital Markets Limited dated effective December 20, 2007, we agreed to retain PowerOne to perform capital raising activities.  As compensation for services to be rendered, it was agreed that PowerOne would receive unit rights to acquire units on the same terms as the January 5,
2007 and March 1, 2007 private placements.  The number of units rights was negotiated in an arms length manner between PowerOne and our company on the basis of PowerOne's estimation of the then present value of the underlying common stock and our estimation of the services to be provided.




Pursuant to a form of warrant issuance agreement dated December 20, 2006, we granted 19,500,000 warrants Endurance Energy Consulting Ltd., Gladrock Energy LLC and 1187016 Alberta Ltd. that entitle such persons to purchase shares of our common stock at a price of US$0.10 per share upon the occurrence of certain conditions.  The
conditions include that the warrants are exercisable if the holder thereof delivers an oil or gas exploration or development project with a potential economic value in the amount of at least US$1.00 multiplied by the total number of warrants issued to the holder to our company by January 15, 2009.




Pursuant to a letter of intent dated December 20, 2006, entered into with Trinity Sands Energy LLC and its unit holders in respect of our purchase of all of the issued and membership units of Trinity Sands Energy LLC, we entered into an assumption and loan conversion agreement with a private company, Agosto Corporation Limited dated December 20, 2006,
as amended, whereby we assumed the repayment of a US$1,200,000 loan made by Agosto to Trinity Sands Energy LLC.  In exchange for the assumption of Agosto loan, we issued a convertible promissory note to Agosto in the amount of US$1,200,000 with simple interest accruing at a rate of six percent per annum.




Pursuant to a letter of intent dated December 20, 2006, entered into with Deerfield Energy LLC in respect of our acquisition of all of the assets of Deerfield Energy LLC, we entered into an assumption and loan conversion agreement with Agosto Corporation Limited dated December 20, 2006, as amended, whereby we assumed the repayment of a
US$500,000 loan made by Agosto to Deerfield Energy LLC.  In exchange for the assumption of Agosto loan, we issued a convertible promissory note to Agosto in the amount of US$500,000 with simple interest accruing at a rate of six percent per annum.




In respect of a private placement that was completed December 18, 2006, we entered into a form of private placement subscription agreement with various accredited investors whereby we issued 23,500,000 shares of our common stock at US$0.10 per share for aggregate proceeds of $2,707,168.




Effective December 15, 2006, we entered into an executive employment agreement with R. William Thornton, whereby we have agreed to employ Mr. Thornton as our Chief Operating Officer as January 1, 2007 (as of February 8, 2008, Mr. Thornton has been appointed our President and Chief Operating Officer).  Pursuant to the agreement,
Mr. Thornton will receive an annual salary of $250,000.  Upon execution of the agreement we paid Mr. Thornton a signing bonus in the amount of US$250,000, issued to Mr. Thornton 1,000,000 common share stock options with an exercise price of US$0.50 per share exercisable until January 5, 2011 and issued to Mr. Thornton 500,000 common shares stock options with an exercise price of US$0.10 per share exercisable until December 21, 2011.




D.           Exchange Controls




There are presently no governmental laws, decrees or regulations in Canada which restrict the export or import of capital, or which impose foreign exchange controls or affect the remittance of interest, dividends or other payments to non-resident holders of our common stock.  However, any remittances of dividends to shareholders
not resident in Canada are subject to withholding tax in Canada (see "Taxation" below in this annual report).




Except as provided in the Investment Canada Act, there are no limitations specific to the rights of non-Canadians to hold or vote our common stock under the laws of Canada or Alberta, or in our charter documents.  The following summarizes the principal features of the Investment Canada Act for non-Canadian residents proposing
to acquire our common stock




The Investment Canada Act governs the acquisition of Canadian businesses by non-Canadians.  Under the Investment Canada Act, non-Canadian persons or entities acquiring "control" (as defined in the Investment Canada Act) of a corporation carrying on business in Canada are required to either notify, or file an application for review
with, Industry Canada.  Industry Canada may review any transaction which results in the direct or indirect acquisition of control of a Canadian business, where the gross value of corporate assets exceeds certain threshold levels (which are higher for investors from members of the World Trade Organization, including United States residents, or World Trade Organization member-controlled companies) or where the activity of the business is related to Canada's cultural heritage or national identity. No change
of voting control will be deemed to have occurred, for purposes of the Investment Canada Act, if less than one-third of the voting control of a Canadian corporation is acquired by an investor.




If an investment is reviewable under the Investment Canada Act, an application for review in the form prescribed is normally required to be filed with Industry Canada prior to the investment taking place, and the investment may not be implemented until the review has been completed and the Minister responsible for the Investment Canada
Act is satisfied that the investment is likely to be of net benefit to Canada.  If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian applicant must not implement the investment, or if the investment has been implemented, may be required to divest itself of control of the Canadian business that is the subject of the investment.




Certain transactions relating to our common stock would be exempt from the Investment Canada Act, including:




·
the acquisition of our common stock by a person in the ordinary course of that person's business as a trader or dealer in securities;




·
the acquisition of control of our company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Canada Act; and




·
the acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of our company, through ownership of our common stock, remains unchanged.







E.           Taxation




ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.




Material United States Federal Income Tax Consequences




The following is a general discussion of material United States federal income tax consequences that may apply to holders and prospective holders of shares of our common stock. This discussion is based on the Internal Revenue Code of 1986, as amended, (the Code), Treasury Department regulations promulgated thereunder, published Internal
Revenue Service (IRS) rulings and administrative pronouncements and court decisions of current applicability, any or all of which may materially and adversely change at any time, possibly on a retroactive basis. In addition, this discussion does not consider the potential effects, adverse or beneficial, of any proposed changes in the governing tax law, whether by judicial, executive or legislative action, which, if effected, may be applied, possibly on a retroactive basis. Further, no opinion was requested by
us, or has been provided by our counsel or independent registered public accounting firm, with respect to the United States income tax consequences described in the following discussion. Accordingly, we urge holders and prospective holders of shares of our common stock to consult with, and rely upon, their own tax advisors in analyzing the potential United States federal, state, local and non-United States tax consequences associated with purchasing, owning and disposing of shares of our common stock.




As used in this section the term "U.S. Holder" denotes the beneficial owner of one or more shares of our common stock who is:




·
an individual citizen or resident of the United States;




·
a corporation, or entity taxable as a corporation, that is created or organized under the laws of the United States or of any political subdivision thereof or the District of Columbia;




·
an estate whose income is taxable in the United States irrespective of source; or




·
a trust if: (a) a court within the United States is able to exercise primary supervision over the administration of the trust; and (b) one or more United States persons have the authority to control all substantial decisions of the trust.




This discussion does not address the tax consequences peculiar to, and the term U.S. Holder does not include, persons subject to special provisions of United States federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions,
insurance companies, real estate investment trusts, regulated investment companies, dealers in securities, persons or entities that have a functional currency other than the United States dollar, shareholders subject to the alternative minimum tax, shareholders who hold our common stock as part of a straddle, hedging or a conversion transaction, constructive sale or other arrangement involving more than one position, partners and other pass-through entities and persons holding an interest in such entities, and
shareholders who acquired our common stock through the exercise of employee stock options or otherwise as compensation for services. This discussion is limited to U.S. Holders who own shares of our common stock as capital assets within the meaning of Section 1221 of the Code. This discussion does not address the consequences peculiar to persons or entities holding an interest in a shareholder or the consequences peculiar to a person of the ownership, exercise or disposition of any options, warrants or other rights
to acquire shares of our common stock. If a partnership (including an entity treated as a partnership for United States federal income tax purposes) holds shares of our common stock, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partnership, or a partner in a partnership, holding shares of our common stock, we urge you to consult with, and rely upon, your own tax advisor in analyzing the potential United States federal,
state, local and non-United States tax consequences associated with purchasing, owning and disposing of shares of our common stock.




Dividends




Though we do not anticipate paying any cash dividends in the foreseeable future, should U.S. Holders of shares of our common stock receive dividend distributions:




·
to the extent such distributions are paid out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes, subject to any applicable foreign tax credit, and without a reduction for any Canadian income tax withheld from such distributions, such holders would generally be required to include, in their gross
income for United States federal income tax purposes, an amount equal to the United States Dollar value of such distributions on the date of receipt (based on the exchange rate on such date).




·
to the extent such dividend distributions exceed our current or accumulated earnings and profits, as determined for United States federal income tax purposes, the amount of any distribution so received will:  (i) first be applied to reduce a U.S. Holder's adjusted basis in our common stock, and, as a return of basis, will not be subject to United
States federal income tax; and (ii) thereafter, any residual amount of such distribution will be treated as a gain from the sale or exchange of our common stock, which amount is taxable as a capital gain.




·
Any taxable dividends received on shares of our common stock by a U.S. Holder who is an individual, a trust or an estate (an "Individual Holder") will be treated as qualified dividend income, which is subject to tax at preferential rates through December 31, 2010, provided that:




·
we are a qualified foreign corporation—one eligible for the benefits of a comprehensive income tax treaty with the United States, which the United States Treasury Department has determined to be satisfactory for this purpose and which includes an exchange of information program—for which purposes the Canada-US Income Tax Convention (1980) qualifies;




·
we are not a passive foreign investment company for the taxable year during which the dividend is paid or the immediately preceding taxable year (which we do not believe we are, have been or anticipate that we will be);




·
the Individual Holder has held the common stock for more than 60 days during the 121-day period beginning 60 days prior to the date on which the common stock become ex-dividend; and




·
the Individual Holder is not obligated to make related payments with respect to positions in substantially similar or related property.




Special rules may apply to any extraordinary dividend—a dividend equal to or in excess of 10 percent of a shareholder's adjusted basis, or, under certain circumstances, the fair market value, of a share of common stock—requiring that such a distribution be treated as qualified dividend income. Any loss from the sale or
exchange of shares of our common stock with respect to which an Individual Holder has received an extraordinary dividend treated as qualified dividend income will be deemed a long-term capital loss to the extent of such dividend. Taxable extraordinary dividends not treated as qualified dividend income will be taxed as ordinary income, rather than as capital gains.







Foreign Tax Credit




A U.S. Holder who pays, or has withheld from distributions, Canadian income tax with respect to the ownership of shares of our common stock may be entitled, at his election, to either a deduction or a tax credit for such foreign tax paid or withheld. Furthermore, a U.S. Holder that is a domestic corporation owning 10 percent or more
of our voting stock may be eligible to claim a deemed paid foreign tax credit based on any underlying non-United States income taxes paid by us. The election to credit or deduct foreign taxes is made on a yearly basis and applies to all foreign income taxes paid by, or withheld from, the U.S. Holder during the year.




There are significant and complex limitations applicable to the foreign tax credit and as such we urge you to consult with, and rely upon, your own tax advisor regarding the availability of the foreign tax credit, the deemed paid foreign tax credit available to certain corporations and the application of limitations on the credit in light
of your particular circumstances.




Sale, Exchange or other Disposition of Common Stock




Generally, a U.S. Holder will recognize a taxable gain or loss upon the sale, exchange or other disposition of shares of our common stock in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder's tax basis in such shares. Subject to certain qualifications
and limitations, such gain or loss will be treated as a long-term capital gain or loss if the U.S. Holder has held the common stock for more than one year at the time of the sale, exchange or other disposition. Preferential tax rates for long-term capital gains may apply to certain U.S. Holders who satisfy this minimum holding period. There are presently no preferential tax rates for long-term capital gains recognized by a corporation.




Special Rules




Special United States federal income tax rules apply to shareholders of passive foreign investment companies and controlled foreign corporations. The preceding discussions do not address the United States federal income tax consequences to a U.S. Holder in the event that we were treated as a passive foreign investment company or controlled
foreign corporation. While our management does not believe that we are, or that we are likely to become, a passive foreign investment company or a controlled foreign corporation, the circumstances which would result in our becoming such are not entirely within our control and as such there always exists the possibility, however remote, that we may become a passive foreign investment company or controlled foreign corporation in the future.




Passive Foreign Investment Company




The status of being a passive foreign investment corporation (a PFIC) depends upon the composition of a company's income and assets and the market value of its assets and shares from time to time.  There is no assurance that we will be considered, or not be considered a PFIC for any taxable year.  If we were treated
as a PFIC for any taxable year during which a U.S. Holder held shares, certain adverse tax consequences could apply to the U.S. Holder.




If we are treated as a PFIC for any taxable year, gains recognized by such U.S. Holder on a sale or other disposition of shares would be allocated ratably over the U.S. Holder's holding period for the shares.  The amount allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be
taxed as ordinary income.  The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as applicable, and an interest charge would be imposed on the amount allocated to such taxable year.  Further, any distribution in respect of shares in excess of 125 percent of the average of the annual distributions on shares received by the U.S. Holder during the preceding three years or the U.S. Holder's holding period, whichever
is shorter, would be subject to taxation as described above.  Certain elections may be available to U.S. Holders that may mitigate some of the adverse consequences resulting from PFIC status.  However, regardless of whether such elections are made, dividends paid by a PFIC will not be "qualified dividend income" and will generally be taxed at the higher rates applicable to other items of ordinary income.




U.S. Holders and prospective holders should consult their own tax advisors regarding the potential application of the PFIC rules to their ownership of our common stock.




Controlled Foreign Corporation




A controlled foreign corporation is a foreign corporation of which more than 50 percent of the stock, by vote or value, is owned, directly, indirectly or constructively, by U.S. Holders each of whom, directly, indirectly or constructively, owns 10 percent or more of the total combined voting power of all classes of stock of the
foreign corporation (each a "CFC Shareholder"). If we are a controlled foreign corporation, a CFC Shareholder would be treated as receiving current distributions of an allocable share of certain types of our income at the end of each year. Additionally, such a CFC Shareholder would recognize ordinary income to the extent of an allocable share of our earnings and profits, rather than capital gain, on the sale of his common stock. Our management does not believe that we are a controlled foreign corporation, because
U.S. Holders who directly, indirectly or constructively own 10 percent or more of the total voting power of our outstanding common stock do not own more than 50 percent of shares of our common stock.




United States Federal Income Taxation of Non-U.S. Holders




For purposes of this discussion, a beneficial owner of our common stock that is not a U.S. Holder (other than a partnership or entity treated as a partnership for United States federal income tax purposes) is a "Non-U.S. Holder". If you are a partnership, or a partner in a partnership, holding shares of our common stock, we urge you to
consult with, and rely upon, your own tax advisor in analyzing the potential United States federal, state, local and non-United States tax consequences associated with purchasing, owning and disposing of shares of our common stock.




Distributions on our Common Stock




Any distributions we pay to a Non-U.S. Holder will not be subject to United States federal income tax or withholding tax if the Non-U.S. Holder is not engaged in a United States trade or business. If the Non-U.S. Holder is engaged in a United States trade or business, any distributions we pay will be subject to United States federal income
tax at regular graduated rates if:  (a) those distributions are treated as dividends or capital gains (as previously described with respect to U.S. Holders); (b) are effectively connected with the Non-U.S. Holder's United States trade or business; and (c) if an income tax treaty applies, are attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States. In addition, a branch profits tax may be imposed at a 30 percent rate, or at such lower rate under an applicable
income tax treaty, on the effectively connected earnings of a Non-U.S. Holder that is a corporation.




Sale, Exchange or other Disposition of Common Stock




Non-U.S. Holders generally will not be subject to United States federal income tax on any gain recognized on the disposition of shares of our common stock unless the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent
establishment maintained by the Non-U.S. Holder in the United States. If the Non-U.S. Holder is engaged in a United States trade or business and a gain recognized on the disposition of shares of our common stock is effectively connected with that trade or business, and, if a tax treaty applies, is attributable to a permanent establishment maintained by such Non-U.S. Holder in the United States, such gain will be subject to United States federal income tax at regular graduated rates and, if the Non-U.S. Holder
is a corporation, a branch profits tax may be imposed at a 30 percent rate, or at such lower rate established under an applicable income tax treaty. A Non-U.S. Holder who is: (i) an individual; (ii) present in the United States for 183 days or more in a taxable year; and (iii) who meets certain other requirements will also be subject to United States federal income tax on capital gains recognized during such year, including such gains realized from a disposition of our stock.







Information Reporting and Backup Withholding Tax




Generally, dividend payments or other taxable distributions made within the United States will be subject to information reporting requirements and a United States backup withholding tax if a U.S Holder fails to provide an accurate taxpayer identification number certified under penalties of perjury, as well as certain other information,
or otherwise establish an exemption from backup withholding.




Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on an IRS Form W-8BEN, W-8ECI or W-8IMY as applicable.




If a Non-U.S. Holder sells shares to or through the United States office of a United States or foreign broker, the payment of proceeds generally will be subject to information reporting requirements and a backup withholding tax unless the Non-U.S. Holder properly certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption and the payer or broker does not have actual knowledge or reason to know that the holder is a United States person. Information reporting requirements and backup withholding taxes generally will not apply to the payment of proceeds of the sale of common shares effected outside the United States by a foreign office of a broker. Information reporting requirements (but not backup tax withholding requirements) will apply, however, to the payment of the sale proceeds if the broker is a United
States person or has certain other contacts with the United States.




Backup withholding is not an additional tax. Rather, a holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed such holder's United States federal income tax liability by timely filing a properly completed claim for refund with the IRS.




Material Canadian Federal Income Tax Consequences




The following summary is a general discussion of material Canadian federal income tax consequences that may apply to holders and prospective holders of shares of our common stock that are non-residents of Canada (Non-Canadian Holders). This discussion is based on the Income Tax Act (Canada), the regulations promulgated thereunder, all amendments
thereto publicly proposed by or on behalf of the Minster of Finance (Canada) prior to the date hereof, the published administrative practices of the Canada Revenue Agency and on the current provisions Canada-United States Income Tax Convention (1980), as amended (the Canada-US Treaty), any or all of which may materially and adversely change at any time, possibly on a retroactive basis. In addition, this discussion does not consider the potential effects, adverse or beneficial, of any proposed changes in the governing
tax law, whether by judicial, executive or legislative action, which, if effected, may be applied, possibly on a retroactive basis. No opinion was requested by us, or has been provided by our counsel or independent registered public accounting firm, with respect to the Canadian income tax consequences described in the following discussion. Accordingly, we urge holders and prospective holders of shares of our common stock to consult with, and rely upon, their own tax advisors in analyzing the potential Canadian
federal, provincial, local and non-Canadian tax consequences associated with purchasing, owning and disposing of shares of our common stock.




As used in this section the term "Non-Canadian Holder" denoted the beneficial owner of one or more shares of our common stock who is:




·
a non-resident of Canada;




·
holds our common shares as capital property;




·
deals with us at arm's length; and




·
does not use or hold our common shares in or in the course of carrying on business in Canada.







Dividends




Though we do not anticipate paying any cash dividends in the foreseeable future, should a Non-Canadian Holder of shares of our common stock receive dividend distributions, such holder will be subject to a Canadian withholding tax equal to 25 percent, subject to such lower rate as may be available under an applicable tax treaty, of the gross
amount of any distributions paid or deemed to be paid.




In accordance with the Canada-US Treaty the rate of withholding tax applicable to distributions paid to a Non-Canadian Holder who is a resident of the United States is:




·
to the extent such holder beneficially owns at least 10 percent of our voting stock, 5 percent of the gross amount of such distribution paid; or




·
to the extent such holder beneficially owns less than 10 percent of our voting stock, 15 percent of the gross amount of such distribution paid.




We are required to withhold the applicable amount from each distribution paid and remit the withheld amount directly to the Receiver General for Canada for the account of the Non-Canadian Holder.




In accordance with the Canada-US Treaty, certain tax-exempt entities residing in the United States may be exempt from Canadian withholding taxes, including any withholding taxes levied in respect of dividends received on our common shares.




Sale, Exchange or other Disposition of Common Shares




A Non-Canadian Holder who disposes of shares of our common stock, including by deemed disposition upon death, will not be subject to Canadian federal income tax on any capital gain (or capital loss) thereby realized unless the common shares constitute "taxable Canadian property" as defined by the Income Tax Act (Canada) and no relief is
afforded under any applicable tax treaty. Generally, our common shares will not constitute taxable Canadian property of a Non-Canadian Holder unless:  (i) the common shares are held as capital property used in carrying on a business (other than an insurance business) in Canada; or (ii) the Non-Canadian Holder or persons with whom the Non-Canadian Holder did not deal at arm's-length alone or together held or held options to acquire, at any time within the five years preceding the disposition, 25 percent
or more of the shares of any class of our capital stock.




A Non-Canadian Holder who is resident of the United States and realizes a capital gain on disposition of common shares that are taxable Canadian property will nevertheless, by virtue of the Canada-US Treaty, generally be exempt from Canadian tax thereon unless:  (i) more than 50 percent of the value of the common shares are derived
from, or forms an interest in, Canadian real estate, including Canadian mineral resource properties, (ii) the common shares formed part of the business property of a permanent establishment that the Non-Canadian Holder has or had in Canada within the twelve months preceding disposition, or (iii) the Non-Canadian:  (A) was a resident of Canada at any time within the ten years immediately preceding the disposition and for a total of 120 months during the twenty years, preceding the disposition, and (B)
owned the common share when he ceased to be a resident of Canada.




A Non-Canadian Holder who is subject to Canadian tax in respect of a capital gain on disposition of common shares must include one-half of the capital gain in computing his taxable income earned in Canada. The Non-Canadian Holder may, subject to certain limitations, deduct one half of any capital loss arising on disposition of taxable Canadian
property from taxable capital gains realized in the year of disposition in respect of taxable Canadian property and, to the extent not so deductible, from such taxable capital gains of any of the three preceding years or any subsequent year.




A Non-Canadian Holder whose common shares constitute taxable Canadian property and who is a resident of the United States and entitled to benefits under the Canada-US Treaty generally would be exempt from Canadian tax on any capital gain realized on a disposition of those shares in any event, provided such shares do not derive their value
principally from Canadian real property (including Canadian resource properties). Our management is of the view that our common shares do not derive their value principally from Canadian real property. A Non-Canadian Holder claiming exemption under the Treaty will, however, have Canadian tax filing obligations with respect to a disposition of common shares.







F.           Dividends and Paying Agents




Not applicable.




G.           Statements by Experts




Not applicable.




H.           Documents on Display




Documents and agreements concerning our company referred to in this annual report may be viewed by appointment during normal business hours at our registered and records office at Suite 3700, 400 3rd Ave SW, Calgary, Alberta T2P 4H2.




I.           Subsidiary Information




As of the date of this annual report, we have the following direct and indirectly owned subsidiaries incorporated in the United States:




Subsidiary
Incorporation / Acquisition Date
Ownership PercentageMegaWest Energy (USA) Corp.
January 9, 2007
100%MegaWest Energy Kentucky Corp. (formerly Kentucky Reserves, LLC)
April 2, 2007
100%MegaWest Energy Missouri Corp. (formerly Deerfield Energy LLC)
April 5, 2007
100%MegaWest Energy Kansas Corp. (formerly Deerfield Energy Kansas Corp.)
April 5, 2007
100%MegaWest Energy Texas Corp. (formerly Trinity Sands Energy LLC)
April 25, 2007
100%MegaWest Energy Montana Corp.
October 19, 2007
100%







ITEM 11.                      Quantitative and Qualitative Disclosures About Market Risk




Not applicable.




ITEM 12.                      Description of Securities Other Than Equity Securities




Not applicable.







PART II




ITEM 13.                      Defaults, Dividend Arrearages and Delinquencies




Not applicable.




ITEM 14.                      Material Modifications to the Rights of Security Holders and Use of Proceeds




Not applicable.




ITEM 15.                      Controls and Procedures




Evaluation of Disclosure Controls and Procedures




As required under applicable United States securities regulatory requirements, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures as at April 30, 2009.




Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time period specified in SEC rules and forms. Disclosure controls and procedures include, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Finance Manager and Controller, to allow
timely decisions regarding required disclosure.




The evaluation of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Finance Manager and Controller. Based upon this evaluation, our Chief Executive Officer and Finance Manager and Controller have concluded that our disclosure
controls and procedures are not effective as of April 30, 2009, due to material weaknesses identified in our internal controls over financial reporting, details of which are set out below.




A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.







Management Report on Internal Controls over Financial Reporting




Our management is responsible for establishing and maintaining adequate internal control over financial reporting as required under applicable United States securities regulatory requirements.




Our company maintains internal controls over financial reporting which have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.
A system of internal controls can provide only reasonable, not absolute, assurance that the objectives of the control system are met, no matter how well the system is conceived or operated.




Our company's management assessed the effectiveness of our internal control over financial reporting as of April 30, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on the evaluation
under this framework, our management has concluded that as of April 30, 2009, our company's internal control over financial reporting was not effective as a result of the material weaknesses described below:




·
Our company was required to restate the 2008 comparative amounts to correct certain project cost write-downs and clerical errors in the US GAAP consolidated balance sheet as at April 30, 2008, and consolidated statement of operations, comprehensive loss and deficit for the year ended April 30, 2008. In addition, our auditors' reviews of our interim financial
statements prior to their release resulted in material adjustments to share based compensation costs. Controls were not effective to ensure that significant non-routine transactions were appropriately reviewed, analyzed, and monitored. This material weakness in the period-end financial reporting process caused a material misstatement to the previously issued US GAAP financial position and result of operations and has the potential to cause a material misstatement to future financial statements or cause our company
to miss a filing deadline in the future.




·
Our company's control environment did not sufficiently promote effective internal control over financial reporting throughout the organization. Specifically, we did not effectively educate or communicate to all employees about our code of conduct and whistle blowing procedures. This control deficiency, which could affect all financial statement balances
and disclosures, did not result in adjustments to the financial statements; however, there is a reasonable possibility that this deficiency could contribute to a material misstatement of the financial statements not being prevented or detected on a timely basis.




Our management has reviewed the results of its assessment with our audit committee and our auditors.




As we are not currently an accelerated filer, this annual report does not include an attestation report of our registered public accounting firm on the internal control over financial reporting. Management's report was not subject to attestation by our company's independent registered public accounting firm pursuant to the rules of the
SEC that permit our company to provide only management's report in this annual report.




Changes to Internal Controls and Procedures for Financial Reporting




During the year ended April 30, 2009, our Chief Financial Officer resigned. Our company is currently in the process of recruiting a replacement Chief Financial Officer.




During the year ended April 30, 2009, our company retained an outside consultant to assist in the review and analysis of the accounting for significant non-routine transactions, including the US GAAP implications.




During the year ended April 30, 2009, there were no other changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




ITEM 16.                      Reserved







ITEM 16A.                      Audit Committee Financial Expert




Our board has determined that we have one member of our audit committee that qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B.  We believe that the members of our board of directors, who are the same members of our audit committee, are collectively capable of analyzing and evaluating
our financial statements and understanding internal controls and procedures for financial reporting.




Our board of directors has determined that George Orr and Brian Evans qualify as "independent" members of our audit committee as that term is defined in Rule 4350(d) of the Marketplace Rules of the National Association of Securities Dealers (NASD).  We believe that having an audit committee that consists entirely of independent
directors is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.




ITEM 16B.                      Code of Ethics




We have not formally adopted a written code of ethics that meets the new United States' Sarbanes-Oxley standards.  Our board has approved a formal code of conduct that will be adopted by our company during our next fiscal year.




To date, we have not seen any need to adopt a written code of ethics on the basis that our corporate culture effectively deters wrongdoing and promotes honest and ethical conduct, full, fair and accurate, timely, and understandable disclosure in reports and documents, the compliance with applicable governmental laws, rules and regulations,
the prompt internal reporting.




ITEM 16C.                      Principal Accountant Fees and Services




Our board of directors appointed KPMG LLP as our principal accountant to audit our financial statements for the fiscal year ended April 30, 2009.




Audit Fees




The aggregate fees billed by KPMG LLP for professional services rendered for the audit of our annual financial statements for the year ended April 30, 2009 were $65,000 (2008 - $165,000).  The aggregate fee billed in 2008 for the audit of internal controls over financial reporting was $125,000.




Audit Related Fees




The aggregate fees billed for assurance and related services by KPMG LLP relating to the performance of interim reviews of our financial statements and involvement in prospectus/registration documents, for the year ended April 30, 2009 which are not reported under the heading "Audit Fees" above, were $55,500 (2008 - $71,828).




Tax Fees




For the year ended April 30, 2009, the aggregate fees billed for tax compliance, tax advice and tax planning by KPMG LLP was $11,000 (2008 - $2,000).




Audit Committee Pre-Approved Procedures




Our audit committee pre-approves all services provided by our principal accountant.  All of the services and fees described under the headings "Audit Fees", "Audit Related Fees", "Tax Fees" and "All Other Fees" above were reviewed and approved by the audit committee before the respective services were rendered and none of such
services were approved by the audit committee pursuant to paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X.







ITEM 16D.                      Exemption from the Listing Standards for Audit Committees




Not Applicable.




ITEM 16E.                      Purchases of Equity Securities by our Company and Affiliated Purchasers




Not Applicable.




PART III







ITEM 17.                      Financial Statements




Refer to "Item 18 – Financial Statements" below.




ITEM 18.                      Financial Statements




Financial Statements Filed as Part of this Annual Report


Consolidated Financial Statements of MegaWest Energy Corp.-
Report of Independent Registered Public Accounting Firm, KPMG LLP, dated August 28, 2009, on the Consolidated Financial Statements of our company as at April 30, 2009 and 2008-
Consolidated Balance Sheets at April 30, 2009 and 2008-
Consolidated Statements of Operations, Comprehensive Loss and Deficit for the years ended April 30, 2009, 2008 and 2007-
Consolidated Statements of Cash Flows for the years ended April 30, 2009, 2008 and 2007-
Notes to Consolidated Financial Statements April 30, 2009Reconciliation to U.S. GAAP-
Auditors' Report dated August 28, 2009, together with Comments by Auditor for U.S. Readers in Canada – U.S. Reporting Difference-
Supplementary note of reconciliation to U.S. GAAP as at April 30, 2009 and 2008 and for each of the years ended April 30, 2009 and 2008.
















KPMG LLP


Chartered Accountants                                                      Telephone                      (403)
691-8000


2700-205 5 Avenue SW                                                      Telefax              (403)
691-8008


Calgary AB  T2P 4B9                                                      Internet www.kpmg.ca










CONSENT OF INDEPENDENT REGISTERED PUBLIC


ACCOUNTING FIRM






To the Board of Directors of MegaWest Energy Corp.




We consent to the inclusion in the annual report on Form 20-F of:




–
our auditors’ report dated August 28, 2009 on the consolidated balance sheet of MegaWest Energy Corp. (the “Company”) as at April 30, 2009 and 2008 and the consolidated statements of operations, comprehensive loss and deficit, accumulated other comprehensive loss and cash flows for each of the years in the three-year period ended April
30, 2009;




–
our audit report on the reconciliation to United States GAAP supplemental note dated August 28, 2009; and




–
our comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Differences dated August 28, 2009,




each of which is contained in the annual report on Form 20-F of the Company for the fiscal year ended April 30, 2009.




Our report audit report on the reconciliation to United States GAAP supplemental note contains an explanatory paragraph that explains that the 2008 reconciliation to United States GAAP supplemental note has been restated to correct misstatements.




We also consent to incorporation by reference in the Company’s Registration Statement No. 333-146347 on Form S-8 and Registration Statement No. 333-151626 on Form S-8 of the above mentioned audit reports and comments.












Chartered Accountants






Calgary, Canada




September 24, 2009








KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG


network of independent member firms affiliated with KPMG International, a Swiss cooperative.


KPMG Canada provides services to KPMG LLP










-  -













































an Exploration Stage Company




Consolidated Financial Statements




April 30, 2009 and 2008













REPORT OF MANAGEMENT




To the Shareholders of




MegaWest Energy Corp.




The preparation and presentation of the consolidated financial statements and Management’s Discussion and Analysis (MD&A) are the responsibility of management and have been approved by the Board of Directors.




The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles.  Financial statements, by nature, are not precise since they include certain amounts based upon estimates and judgments.  When alternative methods exist, management has chosen those it deems
to be the most appropriate in the circumstances.




The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements.  The Board carries out its responsibility principally through its Audit Committee.




The Audit Committee is appointed by the Board of Directors and consists of a majority of independent, non-management directors.  The Audit Committee meets at least four times a year with management and meets independently with the external auditors and as a group to review any significant accounting, internal control and auditing
matters in accordance with the terms of the Audit Committee charter.  The Audit Committee reviews the consolidated financial statements before they are submitted to the Board of Directors for approval.  The external auditors have free access to the Audit Committee without obtaining prior management approval.




Management is responsible for establishing and maintaining adequate internal control over financial reporting.












/s/ R. William Thornton                                           /s/
F. George Orr


R. William Thornton                                                                                                F.
George Orr


President and Chief Executive Officer                                                                    Chairman
of Audit Committee












August 28, 2009
























AUDITORS’ REPORT




To the Shareholders of




MegaWest Energy Corp.




We have audited the consolidated balance sheets of MegaWest Energy Corp. as of April 30, 2009 and 2008 and the consolidated statements of operations, comprehensive loss and deficit, accumulated other comprehensive loss and cash flows each of the years in the three-year period ended April 30, 2009 and for the period from exploration stage
inception on November 1, 2006 through April 30, 2009. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.




We conducted our audits in accordance with Canadian generally accepted auditing standards and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.




In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as of April 30, 2009 and 2008 and the result of its operations and cash flows for each of the years in the three-year period ended April 30, 2009 and for the period from exploration stage inception on November
1, 2006 through April 30, 2009 in accordance with Canadian generally accepted accounting principles.











KPMG LLP




Calgary, Canada




August 28, 2009









MegaWest Energy Corp (an exploration stage company)


Consolidated Balance Sheets


April 30




(in Canadian dollars)

2009

2008AssetsCurrent assetsCash and cash equivalents
$
1,766,558
$
5,159,927Accounts receivable

77,628

243,840Restricted cash (note 16)

96,338

265,562Prepaid expenses

284,146

154,1182,224,670

5,823,447Oil and gas assets (note 3)

24,805,102

42,236,315Administrative assets (note 4)

236,030

303,157Restricted cash (note 16)

170,555

192,403$
27,436,357
$
48,555,322Liabilities and Shareholders' EquityCurrent liabilitiesAccounts payable and accrued liabilities
$
112,663
$
1,687,775Convertible promissory notes (note 6)

-

1,828,779Asset retirement obligations (note 8)

1,023,963

295,0091,136,626

3,811,563Shareholders' EquityShare capital (note 9)

83,597,427

63,849,504Warrants (note 10)

-

19,935,537Contributed surplus (note 11)

22,213,833

3,154,744Equity portion of convertible promissory notes (note 6)
-

120,566Accumulated deficit from prior operations

(562,633)

(562,633)Accumulated deficit from exploration stage

(78,948,896)

(41,753,959)26,299,731

44,743,759Going concern (note 1)Commitments and contractual obligations (notes 3, 20 and 23)Subsequent events (notes 3, 20 and 23)$
27,436,357
$
48,555,322




See accompanying notes to consolidated financial statements.




Approved by the Board:




/s/ George T. Stapleton, II

/s/ Farid NaghiyevGeorge T. Stapleton II, Director

Farid Naghiyev, Finance Manager and Controller







MegaWest Energy Corp (an exploration stage company)


Consolidated Statements of Operations, Comprehensive Loss and Deficit






From ExplorationStage Inception onYears ended April 30
November 1, 2006through April 30,2009

2008

2007
2009Interest income
$
154,680
$
712,763
$
263,125
$
1,130,566ExpensesImpairment of oil and gas assets (note 3)

34,260,109

5,891,223

-

40,151,332General and administrative (note 13)

4,719,210

5,973,395

5,523,694

16,159,178Financing costs (note 10)

-

2,466,000

-

2,466,000Loss on marketable securities (note 5)

-

2,094,000

-

2,094,000Foreign exchange loss (gain)

(1,800,058)

1,935,473

1,548,840

1,684,255Interest and accretion on promissory notes

24,036

175,743

71,270

271,049Depreciation and accretion

146,320

79,952

12,373

238,64637,349,617

18,615,786

7,156,177

63,064,460Loss and comprehensive loss for the year

(37,194,937)

(17,903,023)

(6,893,052)

(61,933,894)Accumulated deficit, beginning of year

(42,316,592)

(18,807,204)

(505,514)

-Deficit adjustment on related party acquisitions (note 2)

-

(5,848,405)

(11,408,638)

(17,257,042)Adoption of new accounting standard (note 1 (o))

-

242,040

-

242,040Accumulated deficit, end of year
$
(79,511,529)
$
(42,316,592)
$
(18,807,204)
$
(78,948,896)Loss per shareBasic and diluted (note 15)
$
(0.29)
$
(0.23)
$
(0.31)
$Weighted average shares outstandingBasic and diluted

130,358,921

79,413,793

22,102,129




See accompanying notes to consolidated financial statements.









MegaWest Energy Corp (an exploration stage company)


Consolidated Statement Accumulated Other Comprehensive Loss








Years ended April 30(in Canadian dollars)

2009

2008Accumulated other comprehensive loss, beginning of year
$
-
$
-Adoption of new accounting standard (note 1)

-

242,040Marketable securities write-down (note 5)

-

(242,040)Accumulated other comprehensive loss, end of year
$
-
$
-




See accompanying notes to consolidated financial statements.









MegaWest Energy Corp (an exploration stage company)


Consolidated Statements of Cash Flows






From ExplorationStage Inception onYears ended April 30
November 1, 2006through April 30,2009

2008

2007
2009Operating activitiesNet loss
$
(37,194,937)
$
(17,903,023)
$
(6,893,052)
$
(61,934,254)Items not involving cashImpairment of oil and gas assets

34,260,109

5,891,223

-

40,151,332Stock-based compensation

701,343

1,905,880

3,899,148

6,506,371Unrealized foreign exchange loss (gain)

(1,559,426)

1,875,923

1,606,317

1,922,814Interest and accretion on promissory notes

24,036

175,743

71,270

271,049Depreciation and accretion

146,320

79,952

12,373

238,645Loss on marketable securities

-

2,094,000

-

2,094,000Financing costs

-

2,466,000

-

2,466,000Change in non-cash working capital

(482,516)

(295,445)

879,786

51,394(4,105,071)

(3,709,747)

(424,158)

(8,232,648)Financing activitiesProceeds from private placements, net of shareissue costs

14,839,887

-

38,301,221

53,141,108Proceeds from stock option and warrant exercises

127,485

321,388

58,500

507,373Notes payable

-

-

(40,000)

(40,000)14,967,372

321,388

38,319,721

53,608,481Investing activitiesExpenditures on oil and gas assets

(15,815,046)

(17,505,081)

(705,762)

(33,684,096)Expenditures on administrative assets

(42,205)

(241,326)

(131,113)

(414,645)Acquisitions, net of cash acquired

-

(347,429)

(4,244,360)

(4,591,789)Marketable securities

-

-

(1,851,960)

(1,851,960)Change in restricted cash

191,072

(116,715)

(341,250)

(266,893)Change in non-cash working capital relatedto oil and gas assets

(215,122)

(396,788)

341,792

(611,911)(15,881,301)

(18,607,339)

(6,932,653)

(41,421,294)Change in cash and cash equivalents

(5,019,000)

(21,995,698)

30,962,910

3,954,539Exchange rate fluctuations on cash and cashequivalents

1,625,631

(2,173,326)

(1,648,100)

(2,195,794)Cash and cash equivalents, beginning of year

5,159,927

29,328,951

14,141

7,813Cash and cash equivalents, end of year
$
1,766,558
$
5,159,927
$
29,328,951
$
1,766,558




See accompanying notes to consolidated financial statements.













MegaWest Energy Corp ("MegaWest") was incorporated on February 8, 2000 under the Company Act in the province of British Columbia, Canada as Brockton Capital Corp.  On February 27, 2007 the Company changed its name to MegaWest Energy Corp and on February 12, 2008 it was continued in the province of Alberta, where it is currently
registered under the Business Corporations Act (Alberta).




The primary business activity of MegaWest and its subsidiaries (collectively the "Company") is the acquisition, exploration and development of oil and gas properties in North America.  Prior to December 2006, MegaWest was a technology company whose business plan was to acquire the rights to market, sell and distribute a product
line of consumer electronic technology products in Canada.




1.      Significant Accounting Policies:




(a)      Exploration Stage and Going Concern:




MegaWest is an exploration stage company that operates unproven heavy oil properties in the United States.  MegaWest has been in the exploration stage since November 2006 and activities have included analysis and evaluation of technical data, preparation of geological models, exploration drilling, conceptual engineering, construction
of thermal demonstration projects, and securing capital to fund operations and capital expenditures.




In December 2008, due to low oil prices, the Company suspended all its capital projects, including operations at two Missouri heavy oil projects, pending a recovery in oil prices and financing.




At April 30, 2009 MegaWest had working capital of $2,112,007, including restricted cash of $96,338.




With a subsequent financing raising US$4.2 million (see note 23), MegaWest is in the process of re-starting its Missouri projects.  The Company will need additional financing to fund its fiscal 2010 capital and other costs.  The ultimate development of MegaWest’s oil and gas projects, if assessed to be commercial,
will also require additional funding.  MegaWest’s future operations are dependent upon its ability to continue to obtain financing and ultimately achieve profitable operations.  Additional capital may be in the form of equity, debt, sale of properties, joint venture farmouts or any combination thereof.




While the outcome of these matters cannot be predicted with certainty at this time, these financial statements are prepared on a going concern basis.  The going concern basis of presentation assumes the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities
and commitments in the normal course of business.  While there is uncertainty about the use of the going concern assumption, these financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to secure additional funding and attain profitable operations.




(b)      Basis of Presentation:




These financial statements have been prepared using Canadian generally accepted accounting principles ("GAAP").




(c)      Principles of Consolidation:




These financial statements include the accounts of MegaWest and the following wholly-owned subsidiaries:









MegaWest Energy USA Corp.MegaWest Energy Texas Corp.MegaWest Energy Kentucky Corp.MegaWest Energy Missouri Corp.MegaWest Energy Kansas Corp.MegaWest Energy Montana Corp.




All intercompany balances and transactions have been eliminated.




(d)      Use of Estimates and Measurement Uncertainty:




The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these financial statements.  Actual results may differ from those estimates.




Significant estimates used in the preparation of these financial statements include estimates of oil and gas reserves and resources and the estimated value of the unproved properties, stock-based compensation and asset retirement obligations.




(e)      Cash and Cash Equivalents:




Cash and cash equivalents consist of highly liquid investments with terms to maturity, at the date of acquisition, not exceeding 90 days.




(f)      Oil and Gas Operations:




The Company follows the full cost method of accounting for oil and gas operations whereby all costs related to exploration and development of oil and gas reserves are capitalized.  Such costs are capitalized on a country-by-country basis, which to date there is one cost centre, the United States.




These capitalized costs will be depleted using the unit-of-production method based on estimated gross proved oil and gas reserves as determined by independent reservoir engineers.  Oil and gas reserves and production will be converted into equivalent units based upon relative energy content.




Costs of acquiring and evaluating unproved properties are initially excluded from the depletion calculations.  Properties are considered unproved until they have established commercial production for a sustained period of time.  The unevaluated properties are assessed periodically to ascertain whether impairment has
occurred.  The assessment includes consideration of the following factors: land relinquishment; intend to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assessment of proved reserves; and the economic viability of development if reserves are assigned.  When proved reserves are assigned or the property is impaired, the associated costs are added to the costs subject to depletion calculations.







In applying the full cost method, the Company calculates a ceiling test whereby the carrying value of oil and gas assets is compared quarterly to the sum of undiscounted future cash flows expected to result from proved reserves and the lower of cost and market value of unproved properties.  Cash flows are based on third party
quoted forward prices, adjusted for transportation and quality differentials.  Should the ceiling test result in an excess of carrying value, the Company would then measure the amount of impairment by comparing the carrying amounts of oil and gas assets to an amount equal to the estimated net present value of future cash flows from proved plus probable reserves and the market estimated value of unproved properties.  A risk free interest rate would be used to arrive at the net present value
of future cash flows.  The carrying value of oil and gas assets in excess of the discounted future cash flows would be recorded as a permanent impairment.




Proceeds from the sale of oil and gas assets are applied against capitalized costs, with no gain or loss recognized, unless a sale would alter the rate of depletion and depreciation by more than 20 per cent.




(g)      Administrative Assets:




Leasehold improvements, office furniture and equipment are stated at cost.  Depreciation on leasehold improvements, office furniture and equipment is provided on a straight-line basis over five years.




(h)      Asset Retirement Obligations:




The Company recognizes a liability for the estimated fair value of site restoration and abandonment costs when the obligations are legally incurred and the fair value can be reasonably estimated.  The fair value of the obligations is based on the estimated cash flow required to settle the obligations discounted using the Company's
credit adjusted risk-free interest rate.  The obligation is recorded as a liability with a corresponding increase in the carrying amount of the oil and gas assets.  The capitalized amount will be depleted on a unit-of-production method.  The liability is increased each period, or accretes, due to the passage of time and a corresponding amount is recorded in the statement of operations as an operating expense.  Revisions to the estimated fair value would result in an adjustment
to the liability and the capitalized amount in oil and gas assets.




(i)      Convertible Promissory Notes:




Convertible promissory notes were recorded at the amount of proceeds received less the amount attributed to the conversion feature which is included as part of shareholders' equity.  The liability component was accreted to the face value of the promissory note at maturity on an effective yield basis.  The accretion
was charged to the statement of operations as interest expense.




(j)      Foreign Currency Translation:




The Company's subsidiaries are considered financially and operationally integrated.  The Canadian dollar is the Company's functional currency.  As a result, monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the exchange rate in effect at the balance sheet date and
non-monetary assets and liabilities at the exchange rates in effect at the time of the transactions.  Revenues and expenses are translated to Canadian dollars at rates approximating exchange rates in effect at the time of the transactions.  Exchange gains and losses resulting from the period-end translation of monetary assets and liabilities denominated in foreign currencies are recorded in the statement of operations.




(k)      Oil and Gas Revenue:




After an oil and gas project becomes commercial, sales of crude oil and natural gas will be recognized in the period in which the product is delivered to the customer.  Oil and gas revenue represents the Company's share and is recorded net of royalty payments to governments and other mineral interest owners.







(l)      Stock-Based Compensation:




The Company accounts for all stock options and warrants granted to employees, directors and certain service providers using the fair value method.  Under this method, compensation expense is recorded with a corresponding credit to contributed surplus.  Stock-based compensation expense for employees is based on the estimated
fair value of the related option or warrant at the time of grant and is expensed on a straight-line basis over the vesting period of the option.  Stock-based compensation expense for certain service providers is based on the estimated fair value of the related option or warrant once vested.  At the end of each reporting period, the fair value of each option and warrant not vested is re-calculated and the appropriate amount is expensed in that period.  Compensation expense is adjusted
for the estimated amount of forfeitures at the time of issuance.




Consideration received upon the exercise of stock options and warrants together with the amount of non-cash compensation expense recognized in contributed surplus is recorded as share capital.




(m)                 Income Taxes:




The Company uses the asset and liability method of accounting for income taxes.  Under this method, current income taxes are recognized for the estimated income taxes payable for the current year and future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial
statement carrying value and tax basis of assets and liabilities.




Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which these differences are expected to be recovered or settled.  The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the date of enactment or substantive enactment.  A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized.




(n)      Per Share Amounts:




Basic per share amounts are computed by dividing the loss by the weighted average shares outstanding during the reporting period.  Diluted amounts for options and warrants are computed using the treasury stock method.  The treasury stock method assumes that proceeds received from the exercise of in-the-money options
and warrants are used to repurchase shares at the average market price for the period.  The difference between the number of shares that could have been purchased at market prices in the period and the number of in-the-money options and warrants is added to the weighted average shares outstanding.  Dilutive amounts for convertible promissory notes are determined by using the “as if converted method”.




(o)      New Canadian GAAP Accounting Standards:




On May 1, 2008, MegaWest adopted the following new accounting standards from the Canadian institute of Chartered Accountants ("CICA"):




(i)           Financial instruments




The Company adopted new accounting standards for Financial Instruments – Disclosures, and Financial Instruments – Presentation.  The new disclosure standards increase the Company’s disclosures regarding the risks associated with financial instruments and how those risks are managed.  The implementation of these
standards resulted in additional disclosures in note 18.




(ii)           Capital Disclosures




The Company adopted a new accounting standard for Capital Disclosures.  This standard specifies disclosures about objectives, policies and processes for managing capital, quantitative data about what an entity regards as capital, whether an entity has complied with all capital requirements and, if it has not complied, the consequences
of such non-compliance.  The implementation of this standard resulted in additional disclosures in note 19.




In January 2006 the CICA adopted a strategic plan for the direction of accounting standards in Canada.  As part of that plan, accounting standards in Canada for public companies are going to converge with International Financial Reporting Standards ("IFRS") for fiscal periods commencing on or after January 1, 2011.  The
Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS.









On May 1, 2009 the Company will be required to adopt a new accounting standard for Goodwill and Intangible Assets, which defines the criteria for the recognition of intangible assets.  The implementation of this standard is not expected to have an impact on the Company’s financial statements.




In January 2009 the CICA issued Section 1582, Business Combinations, which establishes principles and requirements for the acquisition method for business combinations and related disclosures.  This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after January 2011 with earlier application permitted.  MegaWest is currently evaluating the effects of adopting these changes.




In January 2009 the CICA issued Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests.  Section 1601 establishes standards for the preparation of consolidated financial statements.  Section 1602 provides guidance on accounting for a non-controlling interest in a subsidiary in consolidated
financial statement subsequent to a business combination.  These standards are effective on or after the beginning of the first annual reporting period beginning on or after January 2011 with earlier application permitted.  MegaWest is currently evaluating the effects of adopting these changes.




In June 2009, the CICA issued amendments to CICA Handbook Section 3862, Financial Instruments – Disclosures.  The amendments include the enhanced disclosures related to the fair value of financial instruments and the liquidity risk associated with financial instruments.  The amendments will be effective for annual
financial statements for fiscal years ending after September 30, 2009.  The amendments are consistent with recent amendments to financial instruments disclosure standards in International Financial Reporting Standards.  The Company will include these additional disclosures in its annual financial statements for the year ending April 30, 2010.




2.      Private Company Acquisitions during the Year Ended April 30, 2007:




The following table summarizes the estimated net assets acquired, liabilities assumed and consideration given as of each acquisition date.











Deerfield     Energy LLC

Kentucky    Reserves LLC

Trinity Sands     Energy LLC

Deerfield Energy     Kansas LLC

TotalsNet Assets Acquired:Cash
$
75,330
$
3,521
$
166,750
$
-
$
245,601Oil and gas assets

47,012

18,633,054

930,014

440,042

20,050,122Working capital

7,058

-

-

(13,667)

(6,609)Asset retirement obligations

-

-

-

(160,376)

(160,376)$
129,400
$
18,636,575
$
1,096,764
$
265,999
$
20,128,738Consideration Given:SharesCommon shares

-

5,000,000

-

250,000

5,250,000Exchange shares (note 7)

-

-

95,000

-

95,000Warrants

-

-

-

-

-Incentive warrants

-

9,000,000

-

-

9,000,000Value of common shares
$
-
$
5,772,500
$
-
$
290,325
$
6,062,825Value of exchange shares

-

-

9,660,497

-

9,660,497Value of warrants

-

-

-

-

-Value of incentive warrants

-

9,372,231

-

-

9,372,231Cash

579,050

3,412,500

227,500

-

4,219,050Note payable assumed

-

-

1,361,085

591,250

1,952,335Expenses

162,638

79,344

22,018

6,438

270,438741,688

18,636,575

11,271,100

888,013

31,537,376Deficit adjustment onrelated party acquisitions

(612,288)

-

(10,174,336)

(622,014)

(11,408,638)$
129,400
$
18,636,575
$
1,096,764
$
265,999
$
20,128,738Contingent Consideration:SharesNumber

4,750,000

-

-

-

4,750,000Value
$
5,500,975
$
-
$
-
$
-
$
5,500,975Cash

347,430

-

-

-

347,430$
5,848,405
$
-
$
-
$
-
$
5,848,405




(a)      Deerfield Energy LLC ("Deerfield Missouri"):




On April 5, 2007 MegaWest acquired 100 percent of the membership units of Deerfield Missouri in exchange for $926,480 cash, plus a $144,700 change in control fee recorded as acquisition expenses, and 4,750,000 common shares of the Company.  Of the total consideration, $579,050 cash and the change in control fee was paid on the
closing date, the remaining consideration was contingent upon meeting the terms of an escrow agreement.  The Company met the terms of the escrow agreement in October 2007 and as a result, the cash and shares held in escrow were released and the remaining consideration of $5,848,405 attributable to the acquisition has been recorded as a deficit adjustment (due to the related party nature of the transaction), with a corresponding credit to cash and share capital.




The value of the common shares issued was based on the cash consideration received for private placements of shares around the closing date.  Deerfield Missouri, an exploration stage oil and gas company, was party to oil development agreements on 7,620 unproved acres and also holds all of the issued and outstanding shares of
Deerfield Kansas.




The oil and gas assets of Deerfield Missouri of $47,012 form part of our Missouri Project.







(b)      Kentucky Reserves LLC ("Kentucky Reserves"):




On April 2, 2007 MegaWest acquired 100 percent of the membership units of Kentucky Reserves in exchange for $3,412,500 cash and 5,000,000 common shares of the Company.  The value of the common shares issued was based on the cash consideration received for private placements of shares around the closing date.  Kentucky
Reserves, an exploration stage oil and gas company, owned a 62.5 percent working interest in shallow tar sands rights plus an additional 37.5 percent interest in deep rights of 27,009 unproved acres of oil and gas leases in Kentucky.




Included in the cost of acquisition is $9,372,231 for 9,000,000 incentive warrants which vested on the acquisition of Kentucky Reserves (see note 10).  The fair value of the warrants was estimated to be $1.04 per warrant and was determined using the Black-Scholes pricing model with the following assumptions: expected volatility
80 percent, risk-free interest rate of 5.10 percent and expected term of 0.5 years.




The oil and gas assets of Kentucky Reserves of $18,633,054 form part of our Kentucky Project.




(c)      Trinity Sands Energy LLC ("Trinity"):




On April 25, 2007 MegaWest acquired 100 percent of the membership units of Trinity in exchange for $227,500 cash, the assumption of a $1,361,085 note payable to a third party and 95,000 shares of a MegaWest subsidiary exchangeable into 9,500,000 common shares of the Company (note 7).  The value of the common shares issued was
based on the cash consideration received for recent private placements of shares around the closing date.  Trinity was an exploration stage oil and gas company that had a 50 percent working interest in 14,948 unproved acres of oil and gas leases in Texas, and was party to an earn-in agreement whereby its working interest may be increased to 66.67 and could earn a 66.67 percent working interest in an additional 13,385 unproved acres of oil and gas leases.




The oil and gas assets of Trinity of $930,014 form part of our Texas Project.




(d)      Assets of Deerfield Energy Kansas LLC ("Deerfield Kansas"):




On March 26, 2007 MegaWest acquired the net assets of Deerfield Kansas in exchange for 250,000 common shares of MegaWest and the assumption of a $591,250 note payable to a third party.  The value of the common shares issued was based on the cash consideration received for private placements of shares around the closing date.  Deerfield
Kansas, an exploration stage oil and gas company, owned certain oil and gas equipment and held 100 percent working interest in 392 unproved acres of oil and gas leases in Kansas.




The oil and gas assets of Deerfield Kansas of $440,042 form part of our Kansas Project.




The acquisitions of the assets of Deerfield Energy Kansas Corp., Deerfield Missouri and Trinity were considered related party transactions, since at the respective acquisition dates the President and Chief Executive Officer of the Company, was also the Chief Executive Officer and a unitholder of Trinity (47.37% of issued and outstanding
units) and the Chief Operating Officer and unitholder of Deerfield Missouri (15.86% of the issued and outstanding units), which is also the parent company of Deerfield Kansas.  As a result, the Chief Executive Officer of the Company, or a private company controlled by him, received i) 39,650 of the common shares issued for the assets of Deerfield Kansas, ii) 753,350 common shares and $291,702 cash from Deerfield Missouri, including a change in control fee, and iii) 45,000 class B exchange shares of
our subsidiary, MegaWest USA, that were converted into 4,500,000 common shares and $107,763 cash of the consideration issued to Trinity.









3.  Oil and Gas Assets:




All of the Company’s properties are unproven.  Accordingly, no provision for depletion expense has been made and all oil sales to date have been netted against project costs.  The following table summarizes the oil and gas assets by project.




Cost
Missouri (a)
Kentucky (b)
Montana (c)
Texas (d)
Kansas (e)
Other (f)
TotalBalance , April 30, 2006
$                 -
$                  -
$                -
$               -
$               -
$              -
$                  -Acquisitions (note 2)
47,012
18,633,054
-
930,014
440,042
-
20,050,122Additions
44,269
140,329
-
91,283
421,859
8,493
706,233Balance, April 30, 2007
91,281
18,773,383
-
1,021,297
861,901
8,493
20,756,355Acquisitions (note 3 (c))
-
-
9,690,527
-
-
-
9,690,527Additions
6,491,989
2,967,078
211,008
5,169,926
2,814,489
767,081
18,421,571Impairment
-
-
-
(5,891,223)
-
-
(5,891,223)Pre-commercial oil sales, net
-
-
-
-
(740,915)
-
(740,915)Balance, April 30, 2008
6,583,270
21,740,461
9,901,535
300,000
2,935,475
775,574
42,236,315Additions
11,687,925
1,978,998
1,546,772
661,692
395,522
1,048,636
17,319,545Impairment
-
(20,503,054)
(9,928,428)
(661,692)
(3,166,935)
-
(34,260,109)Pre-commercial oil sales, net
(426,567)
-
-
-
(64,082)
-
(490,649)Balance, April 30, 2009
$ 17,844,628
$    3,216,405
$ 1,519,879
$   300,000
$     99,980
$1,824,210
$  24,805,102




(a)      Missouri




The Company has a 100 percent working interest in approximately 38,119 unproved net acres of oil and gas leases.  Costs incurred relate to lease acquisition, geological and geophysical activities, exploration and delineation drilling and facilities for the Marmaton River and Grassy Creek projects.




To date, the projects have operated in a pre-commercial stage, and a total of $426,567 of oil sales, net of royalties, have been recorded against the costs.




In December 2008 the Company suspended its operations in Missouri; however, with the subsequent financing (see note 23), the Company is in the process of re-starting its Marmaton River and Grassy Creek projects.




(b)      Kentucky




The Company has a 37.5 percent working interest in the shallow rights and an additional 37.5 percent working interest in the deep rights in certain oil and gas leases totaling approximately 29,000 unproved net acres.




As part of the acquisition of the Kentucky area, MegaWest was obligated to spend U.S. $15,000,000 by October 2009.  In the event MegaWest did not complete this work program or re-negotiate the obligation, the Company was obligated to pay 37.5 percent of the unspent balance to its joint venture partner.  To April 30,
2009, MegaWest had spent $4.9 million of this commitment.  Pursuant to a subsequent amending agreement, the work program obligations and the penalty payment provisions were terminated.  In return, MegaWest reduced its working interest in the shallow rights from 62.5% to 37.5%, transferred operatorship of the leases and prepaid the next 24 months lease rentals.











The New Albany Shale underlies a large portion of the Company’s acreage position in Kentucky. 4,343 net mineral acres of the Company’s leases have been farmed out for drilling and testing of New Albany Shale gas potential with the Company retaining a 34.75% working interest.  In September 2008, two wells were drilled
and logged and it is expected that the operator will proceed with plans to fracture and rate test these wells in calendar 2009.  In May 2009 MegaWest’s interest in these leases was transferred to the operator of the wells in exchange for the refund of the Company’s working interest share of drilling, completing and logging costs of the wells.




At April 30, 2009 the Company recorded an impairment charge on the Kentucky property of $20,503,054 (2008 - nil).  The impairment was recorded based on the implied valuation implicit in the amending agreement and the expected lack of capital available for this project in the near term.  The remaining costs of $3,216,405
represent the Company’s estimate of the fair value of the leases.




(c)      Montana




On October 24, 2007 MegaWest completed the acquisition of a 40 percent working interest in two prospects in Montana totaling 37,400 unproved acres.  The cost of the acquisition of $9,690,527 was comprised of:


Cash
$
309,034Common shares (500,000)

486,250Warrants (250,000 exercisable at U.S.$2.50 per warrant)

45,707Incentive warrants (10,000,000, exercisable at U.S. $0.10)

8,810,850Expenses

38,686Total cost
$
9,690,527




MegaWest and its working interest partner have established a two year term regional area of mutual interest (“AMI”) covering approximately 1,000,000 acres. The interest in the AMI shall be divided 65 percent to MegaWest and 35 percent to its partner.  MegaWest shall pay for the lease acquisition, initial geological
and geophysical activity, drilling and completing of any wells, comprising an agreed upon initial work program for each new prospect within the AMI and shall receive 100 percent payout of all such costs and expenses incurred for each such prospect prior to its partner receiving its respective share.




The amounts assigned to the common shares and warrants were based on their fair values on the issue date. The fair value of common shares was based on the cash consideration received for the most recent private placements of shares.  The $45,707 fair value of the warrants was determined by using the Black-Scholes option pricing
model assuming a volatility of 89 percent, risk free interest rate of 3.83 percent and term of 1.5 years.  The incentive warrants were issued in December 2006 to provide additional prospects for MegaWest and the acquisition triggered the vesting of 10,000,000 of these incentive warrants.  The $8,810,850 fair value of the incentive warrants on issuance was determined by using the Black-Scholes option pricing model assuming a volatility of 89 percent, risk free interest rate of 3.83 percent
and term of 1.3 years.




During the year ended April 30, 2009 the Company recorded an impairment charge of $9,928,428 on the Montana project.  The impairment was recorded as the Company has no plans in the near term to continue exploration on the lands because of the lack of capital available for this project.  The remaining costs represent
the Company’s estimate of the fair value of the leases as determined by lease sales in the area and related seismic.





(d)      Texas




The Company is a partner in the Trinity Sands Project covering 34,000 unproved net acres in Texas.  Pursuant to earn-in agreements, MegaWest may earn up to a 66.67 percent working interest in all leased acreage.  Currently, MegaWest has earned a 50 percent working interest in 20,050 net acres and 25 percent working
interest in the remaining 13,950 acres.  Costs incurred relate to land acquisition, geological and geophysical activities and exploration drilling.




During the year ended April 30, 2008 the Company recorded an impairment charge of $5,891,223 on the Texas costs.  During fiscal 2009 the Company recorded an additional impairment of $661,692.  The remaining costs represent management’s estimate of the fair value of all oil and gas leases.  The fair value
was determined based on recent lease sales in the area.




(e)      Kansas




Costs relate to the Chetopa project, a pre-commercial heavy oil demonstration project located two miles south of Chetopa, Kansas.  The costs accumulated in the project include certain oil and gas facilities, equipment, steam injection and oil production wells, a 100 percent interest in two oil and gas leases covering 385 net
acres, pre-commercial operating expenses and oil sales.




To date, the project has operated in a pre-commercial stage, and a total of $804,997 of oil sales, net of royalties, have been recorded against the costs.




As part of the project, MegaWest is obligated to pay a net revenue interest up to a maximum of U.S. $750,000 on net revenues generated from the Chetopa project.  The net revenue interest becomes payable after MegaWest recovers 100 percent of its capital and operating costs, and will be paid quarterly from 25 percent of the project’s
net revenues.  As at April 30, 2009 no amount of net revenue interest has been earned.




The Company recorded an impairment charge against its costs on the Kansas unproven property of $3,166,935 at April 30, 2009.  The remaining costs represent the estimated salvage value of the equipment. The impairment was recorded as the Company has no near-tern plans to proceed with the project because of the lack of capital.




(f)      Other




Other costs consist primarily of seven used steam generators and related equipment that will be assigned to future projects.




During fiscal 2009 the Company capitalized $1,193,402 (2008 - $1,061,353) of general and administrative costs and $350,841 (2008 – $360,880) of capitalized stock-based compensation costs, which have been included as part of the projects additions.









4.      Administrative Assets:




Administrative assets consist of office equipment, furniture and leasehold improvements.




Accumulated Depreciation
Net book                  ValueCostBalance, April 30, 2007
$            131,113
$                2,372
$              128,741Additions
241,326
66,910
174,416Balance, April 30, 2008
372,439
69,282
303,157Additions
42,205
109,332
(67,127)Balance, April 30, 2009
$            414,644
$            178,614
$              236,030


5.      Marketable Securities:




In January 2007 the Company acquired common shares of Energy Finders Inc., at the time representing approximately nine percent of its issued and outstanding share capital.  The Company wrote-off its investment of $2,094,000 in fiscal 2008.




6.      Convertible Promissory Notes:




In December 2006 MegaWest assumed two convertible promissory notes totaling $1,952,335 (U.S. $1,700,000) in conjunction with two acquisitions (see note 2).  As part of the assumption, the Company agreed to pay interest at six percent and the outstanding interest and principal were convertible into MegaWest common shares at U.S.
$0.25 per share until June 20, 2008.   The fair value of the conversion feature at the date of assumption was estimated to be $120,566 and was classified as equity.  The fair value was estimated at $0.02 per share using the Black-Scholes option pricing model.




On June 20, 2008 the promissory notes and accrued interest were converted into 7,412,559 common shares.  On conversion, the liability and equity portions of the promissory notes totaling $2,003,541, were transferred to share capital.




7.  Exchange Shares:




As part of the consideration given to acquire Trinity Sands (see note 2 (c)), MegaWest issued 95,000 class B shares of its subsidiary, MegaWest USA.  Each class B exchange share was convertible into 100 MegaWest shares (9,500,000 common shares of MegaWest could be issued).  The holders of these MegaWest USA shares had
the right to exchange, or receive a cash payment of U.S. $10.00 per exchange share until July 31, 2008.  The cash redemption value of the exchange shares of $1,061,055 was recorded as a liability.  The estimated fair value of the conversion feature of $8,599,442 was classified as equity.  The fair value per exchange share was determined by using the Black-Scholes option pricing model assuming a volatility of 80 percent, risk free interest rate of 5.09 percent and expected term of
fifteen months.




In February 2008 the class B exchange shares were converted into 9,500,000 common shares of MegaWest.  On conversion, the liability and equity portions of the exchange shares were transferred to share capital.









8.  Asset Retirement Obligations:




The total future asset retirement obligation was estimated based on the Company’s ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing and costs to be incurred in future periods.  The present value of this obligation has been projected
using estimates of the future costs denominated in U.S. dollars and the timing of abandonment.  At April 30, 2009 the Company estimated the present value of its asset retirement obligations to be $1,023,963, based on a future undiscounted liability of $1,375,150.  These costs are expected to be incurred within two to fifteen years.  A credit-adjusted risk-free discount rate of ten per cent and an inflation rate of two per cent were used to calculate the present value.




Changes to the asset retirement obligation were as follows:




AmountBalance, April 30, 2007
$                154,244Liabilities incurred during the year
141,881Accretion
13,042Change in foreign exchange rate
(14,158)Balance, April 30, 2008
295,009Liabilities incurred during the year
620,631Accretion
36,988Change in foreign exchange rate
71,335Balance, April 30, 2009
$             1,023,963







9.  Share Capital




The authorized capital of the Company consists of unlimited common shares without par value and 100,000,000 preferred shares without par value (of which none are issued).


Issued common shares:




Number of
Common Shares

AmountOutstanding, April 30, 2006
6,337,500
$
207,342Shares issued on private placement
23,500,000

2,707,168Shares issued on debt settlement
600,000

165,700Shares issued on private placement, net of $283,000 ascribed to warrants
8,425,000

4,709,234Shares issued on private placement, net of $3,446,000 ascribed to warrants
27,448,550

28,669,870Shares issue costs related to private placements
-

(1,882,451)Shares issued for Kentucky property (note 2 (b))
5,000,000

5,772,500Shares issued for Kansas property (note 2 (d))
250,000

290,325Shares issued for services (i)
375,000

434,900Shares issued on stock option exercise, including $35,000 transfer fromcontributed surplus
500,000

93,500Outstanding, April 30, 2007
72,436,050

41,168,088Shares issued for services (i)
375,000

394,900Shares issued for Montana property (note 3 (c))
500,000

486,250Shares issued for Missouri property (note 2(a))
4,750,000

5,500,975Shares issued on conversion of exchange shares (note 7)
9,500,000

9,556,567Shares issued on exercise of 1,025,000 stock options, including$195,714 transfer from contributed surplus
844,593

246,634Shares issued on exercise of 6,925,000 warrants, including $6,189,622transfer from warrants and $36,000 from contributed surplus for unit rights
6,726,023

6,496,090Outstanding, April 30, 2008
95,131,666

63,849,504Shares issued on private placement (ii)
26,750,000

15,907,637Share issue costs related to private placement (ii)


(1,067,750)Shares issued for services (iii)
2,065,000

1,060,614Shares issued on conversion of promissory notes (iv)
7,412,559

2,003,541Shares issued for Montana Devils Basin property (note 3(c))
100,000

42,378Shares issued on exercise of 1,900,000 warrants, including $1,674,018transfered from warrants (v)
1,785,247

1,801,503Outstanding, April 30, 2009
133,244,472
$
83,597,427




(i)
In March 2007 the Company entered into an agreement with a consultant to provide advisory services.  The consideration for the advisory services was 750,000 common shares of the Company, of which 375,000 were issued during the period ended April 30, 2007 and 375,000 were issued during the year ended April 30, 2008.  The value of the common shares was based on the cash consideration received
for private placements of shares around the issuance date.




(ii)
On May 15, 2008, MegaWest closed a private placement financing whereby 26,750,000 common shares were issued for gross proceeds of U.S.$16,050,000.




(iii)
During fiscal 2009 the Company issued 740,000 shares at a fair value of $254,614 as compensation for consulting services and 1,325,000 shares to employees for performance bonuses issued at a fair market value of $806,000.  The performance bonuses were accrued at April 30, 2008.





(iv)
On June 20, 2008, MegaWest issued 7,412,559 common shares on the conversion of the convertible promissory notes (see note 6).




(v)
During fiscal 2009 the Company also issued 585,247 common shares on the cashless exercise of 700,000 warrants and 1,200,000 common shares on the cash exercise of warrants.




10.  Warrants:




Each of the Company’s warrants entitles the holder to acquire one common share. The following table summarizes the changes in warrants during the years ended April 30, 2009, 2008 and 2007:




Number of
Warrants

AmountIncentive warrants issued (i)
19,500,000
$
-Incentive warrants (9,000,000) vested on Kentucky acquisition (i)
-

9,372,231Consulting warrants issued (iii)
6,000,000

1,600,800Granted in January 2007 private placement (ii)
4,212,500

283,000Granted in March 2007 private placement (ii)
14,380,123

3,446,000Outstanding, April 30, 2007
44,092,623
$
14,702,031Incentive warrants (10,000,000) vested on Montana acquisition (i)
-

8,810,850Extension of warrant term (i)
-

55,571Extension of warrant term (ii)
-

2,466,000Warrants issued for Montana property (iv)
250,000

45,707Incentive warrants exercised, transfer to share capital
(6,925,000)

(6,189,622)Warrants issued on exercise of unit rights
90,000

45,000Outstanding, April 30, 2008
37,507,623
$
19,935,537Incentive warrants exercised, transfer to share capital (i)
(1,900,000)

(1,674,018)Expiry of January 2007 private placement warrants (ii)
(4,302,500)

(895,906)Expiry of March 2007 private placement warrants (ii)
(14,380,123)

(5,344,094)Expiry of incentive warrants (i)
(10,675,000)

(10,375,012)Expiry of consulting warrants (iii)
(6,000,000)

(1,600,800)Expiry of warrants issued on Montana acquisition (iv)
(250,000)

(45,707)Outstanding, April 30, 2009
-
$
-




(i)
The incentive warrants were issued in an effort to secure additional oil and gas prospects. The warrants allowed the holders to purchase common shares from MegaWest at an exercise price of U.S.$0.10 per share.  The warrants were to expire December 20, 2007; however, the Company extended the term of the warrants to January 15, 2009.  The estimated incremental fair value of the warrant extension
of $55,571 recorded was determined using the Black-Scholes option pricing model.




In April 2007, 9,000,000 warrants vested on the Kentucky Reserves acquisition (note 2), and in October 2007, 10,000,000 warrants vested on the Montana acquisition (note 3).  The remaining 500,000 warrants expired without vesting on January 15, 2009.




These warrants allowed the holders to purchase common shares from MegaWest at an exercise price of U.S.$0.10 per share until January 15, 2009.  These incentive warrants had a cashless exercise feature.




(ii)
The private placement warrants were issued in conjunction with the private placements completed in January and March 2007.  The warrants were to expire on January 5 and March 1, 2008, respectively. On December 14, 2007 the Company extended the term of these warrants to July 5 and August 28, 2008, respectively and as a result, recorded a financing cost in the amount of $2,466,000.  The estimated
incremental fair value of the warrant extension was determined using the Black-Scholes option pricing model.  On July 5, 2008, 4,302,500 private placement warrants expired unexercised and $895,906 was transferred from warrants to contributed surplus.  On August 28, 2008, 14,380,123 privateplacement warrants expired unexercised and $5,344,094 was transferred from warrants to contributed surplus.




(iii)
The consulting warrants were issued to various investor relations and other contractors.  The consulting warrants had an exercise price of $0.50 per share, vested on grant date, expired on January 5, 2009 and had a cashless exercise feature.  The consulting warrants expired unexercised and $1,600,800 was transferred from warrants to contributed surplus.




(iv)
The purchase warrants were issued in conjunction with the Montana asset purchase in October 2007.  The warrants expired on April 24, 2009 and $45,707 was transferred to contributed surplus.







11.  Contributed Surplus:




The following table summarizes the changes in contributed surplus during the years ended April 30, 2009, 2008 and 2007:




AmountBalance, April 30, 2006
$
168,750Shares and warrants as issue costs from March 2007 private placement

368,400Stock-based compensation expense

1,863,448Transfer to share capital on exercise of 500,000 stock options

(35,000)Balance, April 30, 2007
$
2,365,598Stock-based compensation expense

1,065,860Transfer to share capital on exercise of 1,025,000 stock options

(195,714)Transfer to share capital on exercise of 180,000 unit rights

(36,000)Transfer to warrants on exercise of 180,000 unit rights

(45,000)Balance, April 30, 2008
$
3,154,744Stock-based compensation expense

797,570Transfer from warrants on expiry of 4,302,500 warrants

895,906Transfer from warrants on expiry of 14,380,123 warrants

5,344,094Transfer from incentive warrants on expiry of 10,675,000 warrants

10,375,012Transfer from consulting warrants on expiry of 6,000,000 warrants

1,600,800Transfer from Montana acquisition warrants on expiry of 250,000 warrants

45,707Balance, April 30, 2009
$
22,213,833









12.  Stock Options:




MegaWest has two stock option plans, one intended for Canadian employees (the “2004 plan”) and one for U.S. employees (the “2007 plan”).  The number of shares reserved for issuance in aggregate under both plans was limited to 20 percent of the issued and outstanding common shares of MegaWest.  The
exercise price, term and vesting schedule of stock options granted are set by the board of directors at the time of grant.  Stock options granted under the plans can be exercised on a cashless basis, whereby the employee receives a lesser amount of shares in lieu of paying the exercise price based on the quoted market price of the shares on the exercise date.




The following table summarizes the changes in stock options:




Number of
Weighted Avg.Options
Exercise PriceOutstanding, April 30, 2006
302,500
U.S. $0.15Expired
(302,500)
0.15Granted
10,169,000
0.59Exercised
(500,000)
0.10Outstanding, April 30, 2007
9,669,000
U.S. $0.62Expired
(114,000)
0.67Forfeited
(450,000)
0.67Granted
1,570,000
1.65Exercised
(1,025,000)
0.24Outstanding, April 30, 2008
9,650,000
U.S. $0.81Granted
6,473,000
0.27Forfeited
(4,101,000)
0.53Cancelled
(4,543,500)
0.89Outstanding, April 30, 2009
7,478,500
U.S. $0.41






On May 26, 2008 the Company granted 2,379,500 stock options to certain employees and directors with a four year term at exercise prices ranging from U.S$0.42 to U.S.$0.62 per share.




On June 5, 2008 the Company’s board of directors amended and restated the stock option plans to allow the issue of other equity instruments, including stock appreciation rights.  The amended incentive plans specify that the number of common shares reserved for issuance under the plans is ten percent of the issued and outstanding
common shares and to date, only stock options remain outstanding under the option plans.




On November 4, 2008 MegaWest cancelled 4,543,500 outstanding stock options held by employees and consultants that had a weighted average exercise price of U.S.$0.89 per share and reissued 4,093,500 new stock options to the employees.  The exercise price of the new stock options is US$0.15 per share, the 30-day average trading
price of MegaWest common shares.  The modification resulted in an incremental fair value of $180,760, which will be expensed over the modified vesting period.




During fiscal 2009 the departure of certain employees of the Company resulted in the forfeiture of 4,101,000 options and the reversal of $293,751 of stock based compensation relating to the unvested portion of the forfeited stock options.







For the year ended April 30, 2009, the Company recorded $797,570 (2008 - $1,065,860; 2007- $1,863,448) of stock-based compensation expense related to stock options with a corresponding increase in contributed surplus.




The following table summarizes information about the options outstanding and exercisable at April 30, 2009:




Options Outstanding
Options ExercisableExercise Price
Options
Weighted Avg.
Remaining Life
Weighted Avg.
Exercise Price
Options
Weighted Avg.
Exercise PriceU.S.$0.10 - $0.15
2,929,500
2.5 years
U.S. $ 0.14
500,000
U.S. $ 0.10U.S.$0.42 - $0.62
3,899,000
1.9 years
$0.49
3,438,750
$0.50U.S.$1.00 - $1.57
650,000
2.8 years
$1.13
600,000
$1.107,478,500
2.2 years
U.S.  $0.41
4,538,750
U.S.  $0.53




The fair value of the options granted was determined using the Black-Scholes option pricing model with the following assumptions:




2009

2008

2007Average fair value of options granted, per option
$       0.42

$       0.37

$     0.41Expected volatility
83%

80%

80%Risk-free interest rate
3.98

4.58

5.04Expected lives
4 years

4 years

4 yearsForfeiture
20%

20%

20%









13.  General and Administrative Expenses:




General and administrative expenses for the years ended April 30, 2009, 2008, 2007 and from exploration stage inception on November 1, 2006 to April 30, 2009 are as follows:




From Exploration
Stage Inception on
November 1, 2006
through April 30,2009

2008

2007
2009Stock-based compensation:Stock options
$
797,570
$
1,065,860
$
1,863,448
$
3,726,878Shares issued for services

254,614

1,200,900

434,900

1,890,414Consulting warrants

-

-

1,600,800

1,600,800Less: capitalized portion

(350,841)

(360,880)

-

(711,721)701,343

1,905,880

3,899,148

6,506,371Salaries and benefits

2,947,852

2,703,669

1,171,885

6,823,406Professional fees

502,712

720,248

229,111

1,452,071Investor relations

216,142

627,091

100,097

943,330Office and operations

1,300,594

936,734

272,952

2,453,159Information technology

243,969

141,126

27,101

412,196Less: capitalized portion

(1,193,402)

(1,061,353)

(176,600)

(2,431,355)4,017,867

4,067,515

1,624,546

9,652,807$
4,719,210
$
5,973,395
$
5,523,694
$
16,159,178









14.  Income Taxes:




Income tax recoveries differ from the amount that would be computed by applying the Canadian federal and provincial statutory income tax rates to the loss for the year as follows:




2009
2008
2007Loss for the year
$ (37,194,937)
$ (17,903,023)
$  (6,893,052)Statutory tax rate
29.0%
32.7%
34.5%Expected income tax recovery
(10,786,532)
(5,854,289)
(2,378,103)Increase (decrease) resulting from:Non-deductible stock-based compensation
203,389
623,223
1,345,200Effect of changes in tax rates
(2,069,063)
983,980Non-deductible financing cost
-
806,382
-Effect of U.S. operations
(3,803,247)
-
-Other non-deductible expenses
17,682
129,904
-Change in valuation allowance
16,437,771
3,310,800
1,032,903$                    -
$                    -
$                   -









The components of the April 30 net future income tax asset (liability), after applying corporate income tax rates, are as follows:




2009
2008Net future income tax asset:Oil and gas and administrative assets
$          7,034,557
$        14,009,000Operating losses
25,657,865
1,493,000Share issue costs
87,354
363,000Unrealized loss on marketable securities
554,910
554,900Unrealized foreign exchange loss
459,885
936,90033,794,571
17,356,800Less: valuation allowance
(33,794,571)
(17,356,800)$                        -
$                        -






The Company has accumulated operating losses which expire over the following years:




2009
$               48,9002010
60,1002011
157,2002012
74,8002013
118,400Thereafter
75,640,000Total
$         76,099,400






15.  Per Share Amounts:




There is no change between the basic and diluted per share amounts as the effects of stock options, warrants and convertible promissory notes are anti-dilutive.





16.  Supplemental Cash Flow Information:




From Exploration Stage Inception on November 1, 2006 through April 30, 20092009

2008

2007Non-Cash investing activitiesCommon shares issued for properties
$
42,378
$
5,987,225
$
6,062,825
$
12,092,428Exchange shares issued for properties

-

-

9,660,497

9,660,497Warrants granted for properties

-

45,707

-

45,707Incentive warrants vested on property acquisition

-

8,810,850

9,372,231

18,183,081Capitalized stock-based compensation

350,841

360,880

-

711,721Non-Cash financing activitiesCommon shares issued on debt settlement

-

-

165,700

165,700Common shares issued on cashless exercise ofoptions and warrants

1,690,107

6,421,337

35,000

8,146,444Common shares issued for services

1,060,614

394,900

434,900

1,890,414Common shares issued on conversion of exchange shares

-

9,556,567

-

9,556,567Common shares issued on conversion of promissory notes

2,003,541

-

-

-Cash interest paid (received)

(154,680)

712,763

263,125

(1,130,568)Cash taxes paid

-

-

-

-April 30, 2009

April 30, 2008

April 30, 2007Components of cash, cash equivalents and restricted cashCash and cash equivalents
$
1,766,558
$
5,159,927
$
29,328,951Restricted cash:Current

96,338

265,562

-Long-term

170,555

192,403

341,250266,893

457,965

341,250$
2,033,451
$
5,617,892
$
29,670,201






Total restricted cash of $266,893 consists of $40,786 (short-term) of deposits made to secure a letter of credit, deposits of $55,552 (short-term) with the Company’s bank as security for corporate credit cards, and $170,555 (long-term) of deposits with authorities for the abandonment and reclamation of oil and gas wells.









17.  Related Party Transactions:




All related party transactions were measured at the exchange amount, which is the amount agreed upon by the transacting parties.




Except as disclosed elsewhere in these financial statements, the Company incurred the following related party transactions during the years ended April 30, 2009, 2008 and 2007.




A director and the former Chief Financial Officer ("CFO") was affiliated with a private company that provided MegaWest with administrative services.  For the years ended April 30, 2009, 2008 and 2007 the Company paid $13,145, $211,474 and $75,000, respectively for these services.  This contract, which expired in November
2008, has not been extended.




During the year ended April 30, 2009 Company paid $116,416 in professional fees to a law firm, where the Corporate Secretary of the Company is a partner.




During the year ended April 30, 2007, the Company incurred $87,608 in general and administrative costs to entities controlled by former directors.




18.  Financial Instruments:




The Company has exposure to credit, liquidity and market risks from its use of financial instruments.  This note provides information about the Company's exposure to each of these risks, and the Company's objectives, policies and processes for measuring and managing such risks.  The board of directors has overall responsibility
for the establishment and oversight of the Company's risk management framework.




Liquidity risk




Liquidity risk is the risk that the Company will encounter difficulty in paying obligations as they come due.  The Company's financial liabilities consist of accounts payable and accrued liabilities.  Accounts payable consists of invoices payable to trade suppliers for capital expenditures, field operating activities, and general
corporate expenses.  The Company processes invoices within a normal payment period.




The Company prepares funds from operations and capital expenditure budgets which are regularly monitored and updated.  As well, the Company utilizes authorizations for expenditures on both operated and non-operated projects to manage capital expenditures.




Market risk




Market risk is the risk that changes in market conditions, such as commodity prices, interest rates, and foreign exchange rates, will affect the Company's oil sales, cash flows or the value of its financial instruments.  The objective of market risk management is to manage and control market risk exposures within acceptable limits,
while maximizing returns.




The Company does not utilize financial derivatives or other contracts to manage market risks.








Foreign currency exchange rate risk




The Company is exposed to foreign currency fluctuations as it has cash, short-term deposits and accounts payable denominated in U.S. dollars.  In addition, a significant portion of the Company's operating activities are conducted in U.S. dollars.




A one percent change in foreign exchange rates between the US and Canadian dollars would have resulted in approximately $20,000 change in the net loss in 2009.




There are no exchange rate contracts in place.




Fair Value




At April 30, 2009, the fair value of the Company's financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities approximate their carrying values due to their short terms to maturity.




19.  Capital Management




The Company’s objective is to have a sufficient working capital to maintain financial flexibility and to sustain the future development of the business.  In order to maintain financial flexibility, the Company may from time to time issue shares and adjust its capital spending to manage current and projected capital levels. 
To assess its financial strength, the Company continually monitors its working capital, which is calculated as follows:




As at April 30, 2009
As at April 30, 2008
As at April 30, 2007Current assets
$      2,224,670
$      5,823,447
$      29,454,541Current liabilities
112,663
1,687,775
1,301,640Working capital
$      2,112,007
$      4,135,672
$      28,152,901




The Company monitors its forecasted working capital on a monthly basis.  The Company prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions.  The annual and updated budgets
are approved by the board of directors.




The Company’s share capital is not subject to external restrictions.  The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.  There were no changes to the Company’s approach to capital management during the year.




20.  Commitments and Contractual Obligations:




Except as noted elsewhere in these financial statements, the Company has the following commitments and contractual obligations:




(a)      Office and Equipment Leases:




Subsequent to April 30, 2009, the Company re-negotiated the terms of its lease on its Calgary office.  The table below reflects the subsequently re-negotiated terms on the Calgary office lease commitments and other office and equipment leases over the upcoming five fiscal years:




2010

$               316,7712011

458,7662012

448,3142013

447,7142014

167,674Thereafter

-Total

$             1,839,239




(b)      Severance Obligations:




Pursuant to employment agreements with two senior officers, the Company is obligated to pay up to $450,000 under certain events around employment termination.







21.  Segmented Information:




MegaWest presently has one reportable business segment, that being oil and gas exploration and development. MegaWest’s corporate and administrative operations are carried on in Canada, while all of the oil and gas properties and operations are located in the United States.




Year ended April 30, 2009Canada
USA
ConsolidatedInterest income

$          135,630
$        19,050
$            154,680Expenses

2,277,564
35,072,053
37,349,617Loss and comprehensive loss for the period

(2,141,934)
(35,053,003)
(37,194,937)Oil and gas assets

1,824,210
22,980,892
24,805,102Administrative assets

224,890
11,140
236,030Oil and gas asset additions

-
(17,431,213)
(17,431,213)Administrative asset additions

31,065
11,140
42,205Year ended April 30, 2008Canada
USA
ConsolidatedInterest income

$          712,763
$              -
$            712,763Expenses

12,648,856
5,966,930
18,615,786Loss and comprehensive loss for the period

(11,936,093)
(5,966,930)
(17,903,023)Oil and gas assets

775,574
41,460,741
42,236,315Administrative assets

303,157
-
303,157Oil and gas asset additions

767,081
26,604,102
27,371,183Administrative asset additions

241,326
-
241,326Year ended April 30, 2007Canada
USA
ConsolidatedInterest income

$          263,125
$                -
$            263,125Expenses

7,143,168
13,009
7,156,177Loss and comprehensive loss for the period

(6,880,043)
(13,009)
(6,893,052)Oil and gas assets

8,493
20,747,862
20,756,355Administrative assets

128,741
-
128,741Oil and gas asset additions

8,493
20,747,862
20,756,355Administrative asset additions

131,113
-
131,113









22. Comparative Figures:




Certain comparative figures have been reclassified to conform to current period presentation.




23. Subsequent Events




Except as noted elsewhere in these financial statements, the Company had the following subsequent event.




The Company signed agreements with investors (the “Investors”) led by Iroquois Capital Opportunity Fund, L.P., (“ICO Fund”) as the lead investor and with Mega Partners 1, LLC (“MP1”) of which ICO Fund is a member, the significant terms of which are as follows:




·
The Company sold a 10% working interest in 15,313 acres of the Missouri oil and gas property (located in Missouri and Kansas), including the Grassy Creek and Marmaton River projects, (the “Deerfield Area”) for US$2,000,000 to MP1.




·
MP1 has the option to acquire up to an additional 10% interest in future projects within the Deerfield Area, on a project by project basis, by paying up to a US$300,000 equalization payment per project and thereafter its proportionate share of all future development and operating costs in respect of such project, including a proportionate share of facility
adjustment costs.




·
The Company issued to the Investors 22,000 Series A convertible preferred shares, with a stated value of $100 each (the “Series A Preferred Shares”), for gross proceeds of US$2,200,000.  Based on their stated value, the Series A Preferred Shares are convertible into common shares at US$0.07 per common share.  A quarterly
cumulative dividend based upon the stated value of the Series A Preferred Shares is payable, at the Company’s election, as to either 5% cash or 7.5% in additional Series A Preferred Shares.  The Series A Preferred Shares also have a provision whereby upon liquidation, dissolution, winding up or sale of the Company any outstanding Series A Preferred Shares will be paid out ahead of the common shares at a rate of two times the stated value of the Series A Preferred Shares.  After 12 months
from the date of issue, the Company may force the conversion of the Series A Preferred Shares provided: i) production from the Deerfield Area is 15,000 barrels of oil in a 30 day period; ii) the common shares have traded at or above US$0.25 per share for the preceding 20 consecutive trading days; and iii) the daily average dollar trading volume has been in excess of US$75,000 per day for the same 20 day period.




·
In conjunction with the Series A Preferred Share issuance, the Company has also issued to the Investors 15,400,000 warrants.  Each warrant allows the holder to purchase a common share at US$0.25 per share until August 28, 2014.  After May 28, 2010 a cashless conversion option is provided only with respect to warrant shares not included
for unrestricted public resale in an effective registration statement on the date notice of exercise is given to the Company.




·
Until twelve months following the first occasion upon which the Company produces 3,000 barrels over a 30 day period (100 barrels per day average) from the Deerfield Area, the Investors have the option to purchase up to 20,000 Series B convertible preferred shares with a stated value
of $100 each (the “Series B Preferred Shares”), for up to US$2,000,000 on similar terms to the Series A Preferred Shares except the conversion price is US$0.10 per common share.  After 12 months from the date of issue, the Company may force the conversion of the Series B Preferred Shares provided: i) production from the Deerfield Area is 30,000 barrels of oil in a 30 day period; ii) the common shares have traded at or above US$0.35 per share for the preceding 20 consecutive trading days;
and iii) the daily average dollar trading volume has been in excess of US$150,000 per day for the same 20 day period. In conjunction with the Series B Preferred Share issuance, the Company will issue to the Investors up to 10,000,000 warrants.  Each warrant allows the holder to purchase a common share at US$0.35 per share for a period of five years from issuance.  After nine months from the date of issuance, a cashless conversion option is provided only with respect to warrant shares not included
for unrestricted public resale in an effective registration statement on the date notice of exercise is given to the Company.




·
The agreement includes anti-dilution provisions including: 1) the sale of certain common stock or securities exchangeable into common stock at a price less than the conversion price of the outstanding Series A or B Preferred Shares would result in the adjustment of the conversion price to this lower price; and 2) the conversion price of the Series A or
B Preferred shares will be adjusted proportionately to take account of any dividends on common stock, stock splits or consolidations, or reclassification of common stock.




·
The Company is prohibited from pledging its properties under certain circumstances and the Company is prohibited from selling a majority interest in its properties without the consent of a majority interest of the Investors so long as the Series A or B Preferred Shares are outstanding.  Such majority interest consent is also required for certain
actions that would adversely change the rights of the Investors while either the Series A or B Preferred Shares are outstanding.  These negative pledges do not pertain to the Series B Preferred Shares unless Series B Preferred Shares having a face value of more than US$1,400,000 have been issued.




·
For a period which is the latter of either the Series A or B Preferred Shares (or the underlying investment rights to buy Series B Preferred Shares) being outstanding or August 28, 2011 MP 1, LLC will have the option to acquire up to a 20% proportionate interest in any of the Company’s properties outside of the Deerfield Area by paying a proportionate
133% of the Company’s costs-to-date in respect of such property.




·
For a period which is the latter of either the Series A or B Preferred Shares (or the underlying investment rights to buy Series B Preferred Shares) being outstanding or August 28, 2011, MP 1, LLC will have the option to participate with the Company in any future oil and gas property acquisitions for a proportionate 20% share of any such acquisition.




·
While Series A Preferred Shares are outstanding, the Series A Preferred shareholders have the right to nominate one director to the Board of Directors.  Should Series B Preferred Shares having stated value of not less than US$1.8 million be issued, the holders of such shares will have the right to nominate one director to the Board of Directors
of the Company.




·
With respect to each of the Series A and B Preferred Shares, certain default provisions related to material events result in the dividend rate increasing to 15% payable in cash during the event of default.




·
Until August 28, 2010, ICO Fund has a right of first refusal with respect to certain debt or equity financings.




·
The Company has agreed to pay US$75,000 of ICO Fund’s legal fees and to engage Iromad LLC (a technology consulting firm recommended by ICO Fund) for a minimum of six months at a cost not to exceed US$20,000 per month with an option for this contract to be extended.























INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS AUDIT REPORT ON RECONCILIATION TO UNITED STATES GAAP






To the Board of Directors of MegaWest Energy Corp.




On August 28, 2009, we reported on the accompanying consolidated balance sheets of MegaWest Energy Corp. as at April 30, 2009 and 2008 and the consolidated statements of operations, comprehensive loss and deficit, and accumulated other comprehensive loss and cash flows for each of the years in the three-year period ended April 30, 2009 and for the period from exploration on November 1, 2006 through April 30, 2009
which are included in the annual report on Form 20-F.  In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related supplemental note entitled “Reconciliation to United States GAAP” included in the Form 20-F.  This supplemental note is the responsibility of the Company’s management.  Our responsibility is to express an opinion on this supplemental note based on our audits.




In our opinion, such supplemental note, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.




As discussed in note (a), the April 30, 2008 Reconciliation to United States GAAP supplemental note has been restated to correct misstatements.







KPMG LLP


Calgary, Canada


August 28, 2009








COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA –


UNITED STATES OF AMERICA REPORTING DIFFERENCES






The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements.  Although we conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States), our report to the shareholders dated August 28, 2009 is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors' report when these are adequately disclosed in the financial statements.









KPMG LLP


Calgary, Canada


August 28, 2009











The consolidated financial statements of the Company have been prepared in accordance with GAAP as applied in Canada.  As at April 30, 2009 and 2008 and for each of the years in the three-year period ended April 30, 2009, Canadian GAAP conforms in all material respects with U.S. GAAP except for certain matters, detailed in the following notes and tables.




Consolidated Balance Sheets:As at April 30, 2009

As at April 30, 2008Canadian GAAP

Canadian GAAPU.S. GAAP


U.S. GAAP(as restated note (a))AssetsCurrent assetsCash and cash equivalents
$    1,766,558
$    1,766,558

$    5,159,927
$    5,159,927Restricted cash
96,338
96,338

265,562
265,562Accounts receivable
77,628
77,628

243,840
243,840Prepaid expenses
284,146
284,146

154,118
154,1182,224,670
2,224,670

5,823,447
5,823,447Oil and gas assets (note (b))
24,805,102
33,759,070

42,236,315
82,496,944Administrative assets
236,030
236,030

303,157
303,157Restricted cash
170,555
170,555

192,403
192,403$  27,436,357
$  36,390,325

$  48,555,322
$  88,815,951Liabilities and Shareholders' EquityCurrent liabilitiesAccounts payable and accrued liabilities
$       112,663
$       112,663

$    1,687,775
$    1,687,775Convertible promissory notes (note (c))
-
-

1,828,779
1,849,893Asset retirement obligations
1,023,963
1,023,963

295,009
295,0091,136,626
1,136,626

3,811,563
3,832,677Shareholders' EquityShare capital (note (c))
83,597,427
85,244,737

63,849,504
63,022,017Warrants (note (c))
-
-

19,935,537
50,103,367Contributed surplus (note (c))
22,213,833
57,977,587

3,154,744
11,238,984Equity portion of convertible promissorynotes (note (c))
-
-

120,566
-Accumulated deficit from prior operations
(562,633)
(562,633)

(562,633)
(562,633)Accumulated deficit from explorationstage (notes (c) and (d))
(78,948,896)
(107,405,992)

(41,753,959)
(38,818,461)26,299,731
35,253,699

44,743,759
84,983,274$  27,436,357
$  36,390,325

$  48,555,322
$  88,815,951




Consolidated Statements of Operations and Comprehensive Loss:




The application of U.S. GAAP has the following effects on the consolidated statements of operations and comprehensive loss for each of the years in the three-year period ended April 30, 2009:


Year Ended April 302009
2008
2007(as restated
note (a))Canadian GAAP loss for the year
$  (37,194,937)

$ (17,903,023)

$   (6,893,052)Adjustments for:Reduced interest expense on convertible promissory notes (note (d)(iv))
9,957

70,757

28,695Stock-based compensation expense on stock options (note (d)(v))
(95,890)

(2,122,941)

(11,248,405)Less capitalized stock-based compensation (note (d)(v))
187,005

802,969

–Stock-based compensation on shares issued for services (note (d)(v))
–

(277,726)

–Additional impairment (note (d)(iii))
(31,493,666)

–

–Total adjustments
(31,392,594)

(1,526,941)

(11,219,710)U.S. GAAP loss for the year, previously reported
(68,587,531)

(19,429,964)

(18,112,762)Additional impairment (note (a)(II))
–

(21,690,160)

–U.S. GAAP loss for the year, as restated
$  (68,587,531)

$ (41,120,124)

$ (18,112,762)Adjustment affecting comprehensive income  under U.S. GAAP:Unrealized gain (loss) on marketable securities (note (d)(xi))
–

(242,040)

242,040U.S. GAAP comprehensive loss for the year
$  (68,587,531)

$ (41,362,164)

$ (17,870,722)U.S. GAAP net loss per share – basic and diluted
$           (0.53)

$          (0.51)

$          (1.20)




Consolidated Accumulated Deficit from Exploration Stage:




The application of U.S. GAAP has the following effects on the accumulated deficit from exploration stage for each of the years in the three-year period ended April 30, 2009:


Year Ended April 302009
2008
2007(as restated
note (a))Canadian GAAP accumulated deficit from exploration stage, end of year
$   (78,948,896)

$ (41,753,959)

$  (18,244,571)Adjustments for:Re-class deficit adjustment on related party acquisitions (note (d)(i))
17,257,043

17,257,043

11,408,638Re-measure exchange shares (note (d)(vii))
20,115,266

20,115,266

20,115,266Reduced interest expense on convertible promissory notes (note (d)(iv))
109,409

99,452

28,695Stock-based compensation on stock options (note (d)(v))
(13,467,236)

(13,371,346)

(11,248,405)Less capitalized stock-based compensation (note (d)(v))
989,974

802,969

–Stock-based compensation on shares issued for services (note (d)(v))
(277,726)

(277,726)

–Additional impairment (note (d)(iii))
(53,183,826)

(21,690,160)

–U.S. GAAP accumulated deficit from exploration stage, end of year
$ (107,405,992)

$ (38,818,461)

$  2,059,623







a)
Restatement of Comparative Figures:




The 2008 comparative U.S. GAAP amounts have been restated for clerical errors that were in the previously reported U.S. GAAP consolidated balance sheet and the inclusion of Trinity Sands Project (Texas) cost write-downs in the U.S. GAAP consolidated statement of operations, comprehensive loss and accumulated deficit from exploration stage.




I)
The clerical errors for U.S. GAAP purposes were as follows:




i)
The transfer to share capital of the recorded amount of warrants exercised in 2008 was shown as a $5,033,319 increase in the dollar amount of warrants rather than as a $5,033,319 reduction of the dollar amount of warrants.  To correct this error in the restated U.S. GAAP financial statements, the dollar amount warrants has been reduced by $10,066,638
and the dollar amount of share capital has been increased by an equivalent amount.




ii)
A portion of a 2007 entry to record the acquisition of certain properties was not reflected in the 2008 U.S. GAAP financial statements.  To correct this, oil and gas assets have been increased by $11,515,824 and share capital has been reduced by $8,599,442.




II)
Under Canadian GAAP, the Texas properties were written down to $300,000 in 2008.  These properties should also have been recorded at $300,000 for U.S. GAAP purposes.  As a result, oil and gas assets have been reduced by $21,691,160 and the 2008 loss, comprehensive loss and accumulated deficit from exploration stage has been increased
by an equivalent amount.




b)
Oil and Gas Assets:


As at
April 30, 2009Canadian GAAP:

$ 24,805,102Adjustments for:Measuring oil and gas assets at exchange amounts for related party acquisitions (note (d)(i))

17,257,043Re-measure exchange shares (note (d)(ii))

32,374,953Equity portion of exchangeable shares (note (d)(ii))

11,515,824Additional capitalized stock-based compensation (note (d)(v))

989,974Additional impairment (note (d)(iii))

(53,183,826)U.S. GAAP

$ 33,759,070









As at
April 30, 2008Canadian GAAP:

$ 42,236,315Adjustments for:Measuring oil and gas assets at exchange amounts for related party acquisitions (note (d)(i))

17,257,043Re-measure exchange shares (note (d)(ii))

32,374,953Additional capitalized stock-based compensation (note (d)(v))

802,969U.S. GAAP, previously reported

92,671,280Clerical error (note (a)(I)(ii))

11,515,824Additional impairment (note (a)(II))

(21,690,160)U.S. GAAP

$ 82,496,944




c)
Liabilities and Equity:


As at April 30, 2009Share capital
Warrants
Contributed surplus
Accumulated (Deficit) from exploration stageCanadian GAAP
$   83,597,427
$                   -
$ 22,213,833
$   (78,948,896)Adjustments for:Re-class deficit adjustment on related party
acquisitions (note (d)(i))
-
-
-
17,257,043Property acquisitions (note (d)(ii))
11,029,204
21,345,749
-
-Stock-compensation transactions (note (d)(v))
875,118
4,802,400
8,067,444
-Value of warrants on private placements (note (d)(vi))
(10,657,600)
9,053,000
1,604,600
-Re-measure exchange shares (note (d)(vii))
(8,599,442)
-
-
20,115,266Transfer on stock option exercise (note (d)(viii))
1,278,614
-
(1,278,614)
-Transfer on warrant exercise (note (d)(viii))
7,617,525
(7,617,525)
-
-Transfer on unit exercise (note (d)(viii))
213,300
-
(213,300)
-Transfer on warrant expiry (note (d)(ix))
-
(27,583,624)
27,583,624
-Reduced interest expense on convertible promissory notes (note (d)(iv))
(109,409)
-
-
109,409Stock-based compensation on stock options (note (d)(v))
-
-
-
(13,467,236)Less capitalized stock-based compensation (note (d)(v))
-
-
-
989,974Stock-based compensation on shares issued for services (note (d)(v))
-
-
-
(277,726)Additional impairment (note (d)(iii))
-
-
-
(53,183,826)U.S. GAAP
$ 85,244,737
$                  -
$ 57,977,587
$ (107,405,992)









As at April 30, 2008Convertible promissory notes
Share capital
Warrants
Contributed surplus
Equity portion of convertible promissory notes
Accumulated deficit from exploration stage
Accumulated other comprehensive incomeCanadian GAAP:
$1,828,779
$63,849,504
$19,935,537
$3,154,744
$     120,566
$(41,753,959)
$               -Adjustments for:Re-class deficit adjustment on related party acquisitions (note (d)(i))
-
-
-
-
-
17,257,043
-Property acquisitions (note (d)(ii))
-
11,029,204
21,345,749
-
-
-
-Re-class convertible note (note (d)(iv))
120,566
-
-
-
(120,566)
-
-Stock-compensation transactions (note (d)(v))
-
875,118
4,802,400
7,971,554
-
-
-Value of warrants on private placements (note (d)(vi))
-
(10,657,600)
9,053,000
1,604,600
-
-
-Re-measure exchange shares
(note (d)(vii))
-
-
-
-
-
20,115,266
-Transfer on stock option exercise
(note (d)(viii))
-
1,278,614
-
(1,278,614)
-
-
-Transfer on warrant exercise
(note (d)(viii))
-
(5,033,319)
5,033,319
-
-
-
-Transfer on unit exercise (note (d)(viii))
-
213,300
-
(213,300)
-
-
-Comprehensive income (note (d)(xiv))
-
-
-
-
-
-
242,040Comprehensive loss (note (d)(xiv))
-
-
-
-
-
-
(242,040)Reduced interest expense on convertible
promissory notes (note (d)(iv))
(99,452)
-
-
-
-
99,452
-Stock-based compensation on stock options (note (d)(v))
-
-
-
-
-
(13,371,346)
-Less capitalized stock-based compensation (note (d)(v))
-
-
-
-
-
802,969
-Stock-based compensation on shares issued for services (note (d)(v))
-
-
-
-
-
(277,726)
-U.S. GAAP, previously reported
1,849,893
61,554,821
60,170,005
11,238,984
-
(17,128,301)
-Clerical error (note (a)(I)(i))
-
10,066,638
(10,066,638)
-
-
-
-Clerical error (note (a)(I)(ii))
-
(8,599,442)
-
-
-
-
-Additional impairment (note (a)(II))
-
-
-
-
-
(21,690,160)
-U.S. GAAP, restated
$1,849,893
$63,022,017
$50,103,367
$11,238,984
$                -
$(38,818,461)
$               -











d)
Adjustments:




i)
There is a difference in the measurement basis used to record related party transactions under Canadian GAAP compared to U.S. GAAP when the transacting entities are not under common control.  Under Canadian GAAP, related party transactions are recorded at their carrying amounts unless independent evidence exists to support the exchange amount.  Since
independent evidence did not exist for the exchange amounts of the related party acquisitions of Trinity, Deerfield Missouri and the assets of Deerfield Kansas, they were recorded at their carrying amounts.  Under U.S. GAAP, only related party transactions between transacting entities under common control are recorded at their carrying amount.  As common control did not exist between MegaWest and Trinity, Deerfield Missouri and Deerfield Kansas, these acquisitions were recorded at their exchange
amounts.  As a result, the difference between the carrying amount and exchange amount of $17,257,043 at April 30, 2008 is re-classified from deficit under Canadian GAAP to oil and gas assets under U.S. GAAP.  There were no new related party transactions during the year ended April 30, 2009.




ii)
There is a difference in determining the fair value of shares issued for certain stock-based transactions under Canadian GAAP and U.S. GAAP if the market for the Company's shares is not active and liquid.  Under Canadian GAAP, if the market for the Company's shares is not active and liquid, fair value is established using valuation techniques
that include recent arm's length market transactions.  Under U.S. GAAP, regulatory interpretation requires the use of quoted market prices as fair value.




As a result of this GAAP difference, the amount recorded for oil and gas asset acquisitions was higher under U.S. GAAP when the consideration given includes common shares or warrants.  The following adjustments were made to the acquisitions below:


Equity Portion of Exchangeable Shares
Common Shares
Warrants
TotalAssets of Chetopa Kansas
$                  –
$       383,229
$                  –
$      383,229Deerfield Missouri
–
2,493,275
–
2,493,275Kentucky

7,792,875
14,014,475
21,810,350Montana
–
359,825
7,328,274
7,688,099Texas (Trinity Sands)
11,515,824
–
–
11,515,824April 30, 2008 and 2009
$ 11,515,824
$ 11,029,204
$  21,345,749
$ 43,890,777




In January 2008, the Company’s market for the shares became active and liquid.  As a result, this GAAP difference is no longer be applicable to share-based transactions occurring after January 2008.




iii)
There are certain differences between the full cost method of accounting for oil and gas assets as applied in Canada and in the U.S.  The principal difference is the ceiling test evaluation under the full cost method.  Canadian GAAP requires the ceiling test evaluation to use estimates of future oil and gas prices and costs plus the
value of unproved properties on an undiscounted basis; to calculate the amount of impairment, the future net cash flows of a cost center's proved and probable reserves are discounted using a risk-free interest rate.




In the ceiling test evaluation for U.S. GAAP purposes, under Regulation S-X, future net cash flows from proved reserves using period-end, non-escalated prices and costs, are discounted to present value at 10 percent per annum plus the value of unproved properties is compared to the carrying value of oil and gas assets.




For the year ended April 30, 2009, the fair value of oil and gas assets was determined to be the same for Canadian GAAP and U.S. GAAP for all projects, with the exception of the Missouri project.  As a result, additional impairment of $31,493,666 is required under U.S. GAAP related to certain adjustments described in (d)(i),
(ii) and (v).









Oil and gas assets
As at April 30, 2009
Kansas
Missouri
Kentucky
Texas
Montana
Other
TotalCanadian GAAP
$      99,980
$ 17,844,628
$  3,216,405
$       300,000
$  1,519,879
$ 1,824,210
$ 24,805,102U.S. GAAP adjustments (d)(i), (ii), (v)
1,005,243
8,953,968
21,810,350
21,690,160
7,688,099
989,974
62,137,794Additional impairment – 2008 (note (a)(II))
-
-
-
(21,690,160)
-
-
(21,690,160)Additional impairment – 2009
(1,005,243)
-
(21,810,350)
-
(7,688,099)
(989,974)
(31,493,666)U.S. GAAP
$      99,980
$  26,798,596
$  3,216,405
$      300,000
$  1,519,879
$ 1,824,210
$ 33,759,070






Oil and gas assets
As at April 30, 2008
Kansas
Missouri
Kentucky
Texas
Montana
Other
TotalCanadian GAAP
$ 2,935,475
$    6,583,270
$ 21,740,461
$      300,000
$  9,901,535
$    775,574
$ 42,236,315U.S. GAAP adjustments (d)(i), (ii), (v)
1,005,243
8,953,968
21,810,350
21,690,160
7,688,099
802,969
61,950,789Additional impairment – 2008 (note (a)(II))
-
-
-
(21,690,160)
-
-
(21,690,160)U.S. GAAP
$ 3,940,718
$  15,537,238
$ 43,550,811
$      300,000
$ 17,589,634
$ 1,578,543
$ 82,496,944




iv)
There is a difference in the treatment of convertible promissory notes under Canadian GAAP compared to U.S. GAAP.  Under Canadian GAAP, the equity component of the note is valued using an option pricing model and classified as shareholders' equity.  The residual amount is classified as a liability and interest is recorded, to bring
the liability to its face value at maturity using the effective interest rate method.




Under U.S. GAAP, the convertible promissory notes are classified as liability, and interest is accrued at the contractual rate.  This results in a reduction of interest expense and the re-classification of the equity portion to  a liability, prior to its conversion in June 2008.




v)
The fair value of the Company's stock compensation transactions was estimated using the Black-Scholes options pricing model. One of the assumptions used in the Black-Scholes model is the market price of the underlying share on the grant date.  As a result of the GAAP difference on the fair value of the Company's shares described in (d)(ii), the
stock compensation transactions have a different fair value input under Canadian GAAP compared to U.S. GAAP.  Under Canadian GAAP, the fair value of the Company's shares was based on recent arm's length transactions, including recent private placements.  Under U.S. GAAP, the quoted OTC exchange price is used.




This results in the GAAP differences for the following stock-based transactions:


Year ended April 30, 2009
Canadian GAAP
U.S. GAAP
GAAP adjustment
GAAP
adjustment toCompensation cost on stock options
$ 797,570
$ 893,460
$    95,890
Contributed surplusCompensation cost on  common shares
254,613
254,613
-
Share capital1,052,183
1,148,073
95,890Capitalized stock-based compensation
(350,841)
(537,846)
(187,005)
Oil and gas assetsAdjustment to net loss
$ 701,342
$ 610,227
$ (91,115)
Net loss













Year ended April 30, 2008
Canadian GAAP
U.S. GAAP
GAAP adjustment
GAAP
adjustment toCompensation cost on stock options
$ 1,065,859
$ 3,188,800
$ 2,122,941
Contributed surplusCompensation cost on  common shares
394,900
672,626
277,726
Share capital1,460,759
3,861,426
2,400,667Capitalized stock-based compensation
(360,880)
(1,163,849)
(802,969)
Oil and gas assetsAdjustment to net loss
$ 1,099,879
$ 2,697,577
$ 1,597,698
Net loss






Year ended April 30, 2007
Canadian GAAP
U.S. GAAP
GAAP adjustment
GAAP
adjustment toCompensation cost on stock options
$ 1,863,448
$   7,712,061
$   5,848,613
Contributed surplusCompensation cost on consulting warrants
1,600,800
6,403,200
4,802,400
WarrantsShares issued to settle debt
–
597,392
597,392
Common sharesAdjustment to 2007 net loss
$ 3,464,248
$ 14,712,653
$ 11,248,405
Net loss




In January 2008, the Company’s market for the shares became active and liquid.  As a result, this GAAP difference is no longer applicable to share-based transactions occurring after January 2008.




vi)
The value ascribed to the share purchase warrants issued in connection with the unit private placements is adjusted under U.S. GAAP, as the OTC exchange quoted price is used for the market price input in the option pricing model.  This results in an adjustment of $9,053,000 from share capital to warrants and $1,604,600 from share capital to contributed
surplus for the stock-based issue costs.




In January 2008, the Company’s market for the shares became active and liquid.  As a result, this GAAP difference is no longer applicable to share-based transactions occurring after January 2008.




vii)
There is a difference in the classification and re-measurement of exchange shares under Canadian GAAP compared to U.S. GAAP.  Under Canadian GAAP, the exchange shares are split between the equity and liability components.  The equity component of the exchange shares is valued using an option pricing model and classified as shareholders'
equity.  The residual amount is classified as a liability at its fair value.




Under U.S. GAAP, the exchange shares components are not separated, rather they are accounted for as temporary equity.  The exchange shares are measured at fair value on issuance and for each reporting period, the exchange shares are re-measured to their redemption value, and the resulting difference is recognized as an adjustment
to retained earnings (deficit).




viii)
As a result of the higher stock compensation cost as described in (d)(v), when stock options, warrants and unit rights are exercised, there is an adjustment under U.S. GAAP related to the transfer from contributed surplus and warrants to share capital.




During the year ended April 30, 2009, 1,900,000 incentive warrants were exercised resulting in an additional $2,584,206 transferred to share capital from warrants.




During the year ended April 30, 2008, 1,025,000 options were exercised resulting in an additional $848,614 transferred to share capital from contributed surplus, 6,925,000 warrants were exercised resulting in an additional $5,033,319 transferred to share capital from warrants and 180,000 unit rights were exercised resulting in an
additional $213,300 share capital from contributed surplus.




During the year ended April 30, 2007, 500,000 options were exercised resulting in an additional $430,000 transferred to share capital from contributed surplus.




ix)
As a result of the higher warrant value for U.S. GAAP, when warrants expire, there is an adjustment under U.S. GAAP related to the transfer from warrants to contributed surplus.




During the year ended April 30, 2009, a total of 35,607,623 warrants expired resulting in an additional $27,583,624 transferred to contributed surplus from warrants.




x)
As at April 30, 2009, accounts payable and accrued liabilities consisted of trade payables of $53,369 (2008 – $388,064), salary and bonus accrual of nil (2008 – $876,000) and operational accruals of $59,294 (2008 – $423,711).




xi)
For the year ended April 30, 2007 there was a difference in the carrying amounts of marketable securities under Canadian GAAP compared to U.S. GAAP.  Under Canadian GAAP, marketable securities were recorded at the lower of cost or market value, and were not re-measured unless an impairment of carrying amount occurred.  Under U.S. GAAP,
marketable securities available for sale are recorded and re-measured at each balance sheet date at their fair value.  At April 30, 2007 under U.S. GAAP, the Company recorded a $242,040 unrealized gain on marketable securities as a component of other comprehensive income. During the year ended April 30, 2008, the value of these marketable securities had a permanent decline in value and the Company recognized a loss of $242,000.




After the adoption of new Canadian accounting standards for financial instruments on May 1, 2007, this GAAP difference no longer existed.




e)
Recent Developments in U.S. GAAP:




Effective May 1, 2008, the Company adopted Statement of Financial Accounting Standard No. 157 (“SFAS 157”), as amended, which defines fair value and establishes a framework for measuring fair value when an entity is required to use a fair value measure for recognition or disclosure purposes and expands the disclosures about
fair value measurements.  SFAS 157 was adopted for assets and liabilities measured or disclosed at fair value, with the one year deferral for non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. There was no impact on the financial position, results of operations or cash flows as a result of the adoption of SFAS 157 for financial assets and liabilities. The Company has not assessed the impact of SFAS 157 on non-financial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring basis.




Effective May 1, 2008, the Company adopted Statement of Financial Accounting Standard No. 159 The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159").  Under SFAS 159, entities are provided with an option to report selected
financial assets and liabilities at fair value. The standard permits an entity to elect the fair value option on an instrument-by-instrument basis; and once the election is made, it is irrevocable.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  In addition, SFAS 159 establishes presentation
and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. There was no impact on the financial position, results of operations or cash flows as a result of the adoption of SFAS 159 for financial assets and liabilities.




f)
Recent Accounting Pronouncements Not Yet Adopted:




In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”).  SFAS 160 is to be applied prospectively and becomes effective for business combinations at the beginning of the first annual reporting
period on or after December 15, 2008. The Company will implement this guidance on future acquisitions on or after the effective date.




In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) Business Combinations (“SFAS No. 141(R)”) effective for business combinations for which the acquisition date is on or after May 1, 2009.  SFAS 141(R) requires the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.






In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This Statement is effective for fiscal years beginning on or after November 15, 2008 and requires enhanced disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format provides a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  Management is currently evaluating the impact of adopting SFAS 161.






In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”).  This statement identifies the sources of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements.  This Statement directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to remove the GAAP hierarchy from the auditing standards.  Management is currently
evaluating the impact of adopting SFAS 162.






In May 2008, the FASB issued FASB Staff Position APB No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“APB 14-1”), which applies to convertible debt that includes a cash conversion feature. Under APB 14-1, the liability and equity components
of convertible debt instruments within the scope of this pronouncement shall be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. APB 14-1 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Staff Position No. 14-1 on its consolidated results of operation and financial condition.






In December 2008, FASB issued EITF Issue 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-05”) which supersedes EITF Issue 01-6, The Meaning of Indexed to a Company’s Own Stock  and establishes a two-step process for evaluating whether equity-linked
financial instruments and embedded features are indexed to a company’s own stock for the purposes of determining whether the scope exception described in paragraph 11(a) of SFAS 133, Accounting for Derivative Instruments and Hedging Activities can be applied.   EITF 07-5 is effective for fiscal years beginning after December 15, 2008.  Management is currently evaluating the impact of adopting EITF 07-5.






In December 2008, the Securities and Exchange Commission approved the previously announced revisions to modernize Oil and Gas Company reporting requirements. These new requirements include a change to reporting oil and gas reserves and completing the impairment test by using an average price based on the 12-month period instead of
using the year-end price. These changes are effective for filings on or after January 1, 2010 and for annual reports filed on or after December 31, 2009. The Company is currently assessing the impact of these revisions which will take effect for the Company’s April 30, 2010 year end.






In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepting Accounting Principles—A Replacement of FASB Statement No. 162 (“FAS 168”) which established the “FASB Accounting Standards Codification” (“Codification”) as the single
source of authoritative non-governmental U.S. GAAP which was launched on July 1, 2009.  The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for
interim and annual periods ending after September 15, 2009 and will not have an impact on our Company’s financial condition or results of operations. The Company is currently evaluating the impact to the financial reporting process of providing Codification references in our public filings.






























ITEM 19.                      Exhibits




Exhibits Required by Form 20-F.




Exhibit Number
Description1.1
Certificate of Incorporation – British Columbia (1)1.2
Notice of Articles – British Columbia (2)1.3
Certificate of Name Change – British Columbia (2)1.4
Articles – British Columbia (2)1.5
Certificate of Continuance – Alberta (6)1.6
Articles of Continuance – Alberta (6)1.70
By-law No. 1 – Alberta (6)4.1
Form of Subscription Agreement entered into with various subscribers in December 2006: (2)4.2
Form of Subscription Agreement entered into with various subscribers in December 2006: (2)4.3
Employment Agreement dated December 15, 2006 with R. William Thornton (2)4.4
Letter of Intent dated December 20, 2006 with Deerfield Energy LLC (2)4.5
Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Deerfield Energy LLC (2)4.6
First Supplemental Agreement to Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Deerfield Energy LLC (2)4.7
Letter of Intent dated December 20, 2006 with Trinity Sands Energy LLC (2)4.8
Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Trinity Sands Energy LLC (2)4.9
First Supplemental Agreement to Assumption and Loan Conversion Agreement dated December 20, 2006 with Agosto Corporation Limited and Trinity Sands Energy LLC (2)4.10
Form of Warrant Issuance Agreement dated December 20, 2006 entered into with: (2)
Gladrock Energy LLC
Endurance Energy Consulting Ltd.
1187016 Alberta Ltd.4.11
Form of Debt Settlement and Subscription Agreement dated December 21, 2006 entered into with: (2)
Karkrash Holdings Ltd.
Carob Management Ltd.
Brian Hanson
Roy Brown
Amisano Hanson4.12
Canadian Stock Option Plan dated August 24, 2004, amended and restated February 19, 2007 and August 9, 2007 (3)4.13
U.S. Stock Option Plan dated January 5, 2007 (3)4.14
Form of Subscription Agreement entered into with various subscribers in January and February 2007 (2)4.15
Form of Subscription Agreement entered into with various subscribers in January and February 2007 (2)4.16
Form of Subscription Agreement entered into with various subscribers in March 2007 (2)4.17
Form of Subscription Agreement entered into with various subscribers in March 2007 (2)4.18
Asset Purchase Agreement dated March 26, 2007 with Deerfield Energy Kansas Corp. (2)4.19
Membership Unit Purchase Agreement dated March 26, 2007 with the members of Deerfield Energy LLC (3)4.20
Membership Unit Purchase Agreement dated April 2, 2007 with the members of Kentucky Reserves, LLC (3)4.21
Membership Unit Purchase Agreement dated April 25, 2007 with the members of Trinity Sands Energy LLC (3)4.22
Escrow Agreement dated April 5, 2007 with the unit holders of Deerfield Energy LLC and Clark Wilson LLP (3)4.23
Consulting Agreement dated as of February 15, 2007 with Mercury Capital Inc. (3)4.24
Employment Agreement with George T. Stapleton, II (3)4.25
Employment Agreement with George Orr (3)4.26
Warrant Certificate dated February 28, 2007 for 375,000 units at US$1.30 evidencing Rights Agreement entered into with PowerOne Capital Markets Limited (3)4.27
Warrant Certificate dated January 5, 2007 for 180,000 units at US$0.50 evidencing Rights Agreement entered into with PowerOne Capital Markets Limited (3)4.28
Corporate Support Agreement made effective January 1, 2007 with Sweetwater Capital Corp. (4)4.29
Agreement of Purchase and Sale made as of October 15, 2007 in respect of the Big Sky project in Choteau County, Montana (5)4.30
Regional Area of Mutual Interest Agreement made as of October 24, 2007 in respect of the Big Sky project in Choteau County, Montana (5)4.31
Operating and Farmin Agreement dated October 24, 2007 in respect Loma Area, Montana (Big Sky project) (5)4.32
Operating and Farmin Agreement dated October 24, 2007 in respect Teton Area, Montana (Big Sky project) (5)4.33
Amendment to Warrant Issuance Agreement dated September 18, 2007 with Endurance Energy Consulting (5)4.34
Amendment to Warrant Issuance Agreement dated September 18, 2007 with Gladrock Energy LLC (5)4.35
Amendment to Warrant Issuance Agreement dated September 18, 2007 with 1187016 Alberta Ltd. (5)4.36
Consulting Agreement dated December 20, 2007 with PowerOne Capital Markets Limited (5)4.37
Canadian Equity Incentive Plan, amended and restated June 5, 2008 (8)4.38
U.S. Equity Incentive Plan, amended and restated June 5, 2008 (8)4.39
Form of Subscription Agreement entered into various non U.S. subscribers persons in May 2008 (8)4.40
Amending Agreement to Kentucky Purchase Agreement dated April 8, 2009 with Kentucky
Reserves II, LLC (10)4.41
Clear Creek, Missouri Project Agreement dated July 13, 2009 (8)4.42
Form of Subscription Agreement entered into various U.S. subscribers persons in May 2008 (8)4.43
Agreement of Purchase and Sale dated August 27, 2009 between MegaWest Energy Missouri Corp. and Mega Partners 1, LLC (8)4.44
Operating Agreement dated August 27, 2009 between MegaWest Energy Missouri Corp. and Mega Partners 1, LLC (8)4.45
Side Letter Agreement dated August 27, 2009 between MegaWest Energy Missouri Corp. and Mega Partners 1, LLC (8)4.46
Form of Subscription Agreement entered into with various subscribers in August, 2009 (8)8.1
Significant, direct and indirect, subsidiaries as at August 28, 2008:
MegaWest Energy (USA) Corp. - Nevada
MegaWest Energy Missouri Corp (formerly Deerfield Energy LLC) – Delaware
MegaWest Energy Kansas Corp (formerly Deerfield Energy Kansas Corp.) – Delaware
MegaWest Energy Kentucky Corp (formerly Kentucky Reserves, LLC) – Ohio
MegaWest Energy Texas Corp (formerly Trinity Sands Energy LLC) – Delaware
MegaWest Energy Montana – Delaware12.1
Section 302 Certification under Sarbanes-Oxley Act of 2002 for William Thornton (9)12.2
Section 302 Certification under Sarbanes-Oxley Act of 2002 for Farid Naghiyev (9)12.3
Section 906 Certification under Sarbanes-Oxley Act of 2002 for William Thornton and
Farid Naghiyev (9)23.1
Consent of KPMG LLP (8)99.1
Audit Committee Charter (4)99.2
Compensation Committee Charter (4)99.3
Corporate Governance and Human Resources Committee Charter (4)99.4
Nominating Committee Charter (4)




(1)
Incorporated by reference to our Form 6-K filed with the Securities and Exchange Commission on March 6, 2006.


(2)
Incorporated by reference to our Form 20-F filed with the Securities and Exchange Commission on March 30, 2007.


(3)
Incorporated by reference to our Form 20-F filed with the Securities and Exchange Commission on August 10, 2007.


(4)
Incorporated by reference to our Form F-1/A filed with the Securities and Exchange Commission on November 7, 2007.


(5)
Incorporated by reference to our Form F-1/A filed with the Securities and Exchange Commission on December 31, 2007.


(6)
Incorporated by reference to our Form F-1/A filed with the Securities and Exchange Commission on February 15, 2008.


(7)
Incorporated by reference to our Form F-1/A filed with the Securities and Exchange Commission on March 20, 2008.


(8)
Incorporated by reference to our Form 6-K filed with the Securities and Exchange Commission on September 4, 2009.


(9)
Filed herewith.
(10) Incorporated by reference to our Form 6-K filed with the Securities and Exchange Commission on April 9, 2009




REMAINDER OF PAGE INTENTIONALLY LEFT BLANK




SIGNATURE PAGE TO FOLLOW









SIGNATURES




The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.




MEGAWEST ENERGY CORP.








Per:




//s/ R.William Thornton




R. William (Bill) Thornton




President and Chief Executive Officer and Director




(Principal Executive Officer)




Dated: September 24, 2009