Quest Oil 10QSB 2007 Q1 Quarterly report (small business)

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

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

For the quarterly period ended June 30, 2006

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

For the transition period from ___________ to _____________

Commission File Number: 33-90355

QUEST OIL CORPORATION

Nevada	000-26619	90-0281227
(State or other jurisdiction	(Commission File Number)	(IRS Employer
of Incorporation)		Identification Number)
	2038 Corte Del Norgal, Suite 110
	Carlsbad, CA 92011
	(Address of principal executive offices)

	(760) 804-8844
	(Issuer’s Telephone Number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 or the Exchange Act

Yes No X

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes ___ No ____

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of August 15, 2006, 72,921,266 shares of our common stock were issued and outstanding.

Transitional Small Business Disclosure Format: No

PART I

ITEM 1. FINANCIAL STATEMENTS

Our financial statements and related explanatory notes can be found on the “F” Pages at the end of this Report.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes included in this report. The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions.

Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from expectations include, but are not limited to, those set forth under the section “Risk Factors” set forth in this report.

The forward-looking events discussed in this prospectus, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. For these statements, we claim the protection of the “bespeaks caution” doctrine. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

General

We are an independent exploration stage oil and natural gas company that explores for, acquires and develops oil and natural gas properties. Currently, our operations are currently focused in the United States and on the Canadian oil and gas fields of Alberta. We are also exploring other various global opportunities.

Corporate History

We were originally incorporated in the State of Nevada on January 19, 1999 under the name of Luna Technologies, Inc. We have changed our name several times as follows: Luna Medical Technologies, Inc. (May 31, 1999), Lanwerx Entertainment, Inc. (May 19, 2003), GameState Entertainment, inc. (September 24, 2003) and Quest Oil Corporation (September 7, 2004). In 2004, we formed Quest Canada Corp., a wholly owned Canadian subsidiary, which was created to serve as a holding company for our anticipated oil and gas projects in Alberta. In August 2005, we acquired Wallstin Petroleum LLC. Petrostar Oil Services Inc. was created for the purpose of servicing the oil and gas properties in Texas.

Recent Developments

On or about March 20, 2006, our legal counsel, The Baum Law Firm, PC, in connection with our fiscal year end, discovered that there was not a legal and valid adoption by a majority of the directors of the company, of the resolution appointing Mr. William Huntington Stinson to our board of directors and as our President and Chief Executive Officer. Mr. Stinson’s nomination followed the resignation of Mr. Cameron King from all positions he held with the company. Following Mr. King’s resignation, there were four members of our board: Mr. Jim Irwin, Mr. Joseph F. Wallen, Mr. Douglas Brown and Mr. Doug Blackman.

On March 31, 2006, Mr. Blackman resigned from his position on our board of directors.

On March 31, 2006, pursuant to Section 4 of our Bylaws, Mr. Joseph Wallen nominated, and our board appointed, Mr. James B. Panther, II and Mr. Chris Philips as directors of the company. All of our directors approved the appointments of Messrs. Panther, II and Philips to our board.

On March 31, 2006, following the discovery that Mr. Stinson was not a validly appointed officer of the company, pursuant to Section 4 of our Bylaws, our board appointed Mr. James B. Panther, II as our interim President and Chief Executive Officer.

On April 2, 2006, a majority of the voting members of our board, Wallen, Irwin, Brown and Philips, voted to terminate Mr. William Huntington Stinson from his position as Chief Operating Officer of the company.

On April 4, 2006, we filed a Petition and Application For Temporary Restraining Order, Temporary Injunction and Permanent Injunction, and Request for Order for Deposition to Investigate Claims against our former Chief Operating Officer, William Huntington Stinson, Nana Asomani-Arko and Norman S. Neidell in the 11^th Judicial District in the District Court of Harris County, Texas.

On April 10^th, 2006, a settlement was reached in the Petition lawsuit and read into the court record. As a condition for our dismissing the lawsuit, Mr. Stinson agreed, in part, as follows: (i) that Mr. Stinson did not dispute the authority of our board of directors that was appointed in our March 31, 2006 board resolution; (ii) that Mr. Stinson would assist in transferring control of company monies he had control of into a company account that he was not a signatory; and (iii) that as of the date of the settlement, Mr. Stinson did not claim to be a member of our board of directors or an officer of the company.

On April 18, 2006, we filed a non-suit in the Petition lawsuit, dismissing the case against all defendants. On April 19, 2006, Jim Irwin resigned from his position on our board of directors.

On April 24, 2006, our board of directors resolved that because: (i) we had in good faith attempted to comply with the terms of the settlement agreement with Mr. Stinson; (ii) Mr. Stinson failed to attend the meeting; (iii) there were significant costs associated with making additional attempts to meet with Mr. Stinson; and (iv) the members of the Board of Directors were disinterested in doing any business with Mr. Stinson, we would not make any further attempts to deal directly with Mr. Stinson relative to complying with this term of the settlement agreement.

On April 24, 2006, we received a compensation demand from Mr. Stinson claiming wages owed from August 2005 through April 2006. On April 12, 2006, we receive a compensation demand from N.S. Neidell & Associates claiming that we owned him compensation for his services. We do not believe that either Mr. Stinson or Mr. Neidell are legally entitled to the compensation they claim.

On April 24, 2006, we entered into, and our board of directors approved, an employment agreement with James B. Panther II, who for a term of 24 months, shall serve as our President and Chief Executive Officer.

On April 24, 2006, we entered into, and our board of directors approved, an employment agreement with Mark L. Baum, Esq. who, for a term of 24 months, shall serve as our General Counsel.

On April 24, 2006, we entered into, and our board of directors approved, a 12-month employment agreement with Joseph Wallen to serve as our Chief Financial Officer.

On April 24, 2006, we entered into, and our board of directors approved, a 24-month consulting agreement with Business Consulting Group Unlimited, Inc. Under the terms of the agreement, BCGU will provide the Company with a part-time Controller, bookkeeping, reception, clerical, filing, data management and staffing services.

On April 24, 2006, we entered into, and our board of directors approved, our 2006 Directors Annual Compensation Program.

On April 24, 2006, we entered into, and our board of directors approved, a 3-year sublease agreement with Business Consulting Group Unlimited, Inc., allowing us to have access to the entire BCGU office space.

On May 24, 2006, we canceled the February 15 , 2006, Memorandum with L-TEXX Petroleum, LP, L-TEXX Management, LLC and Longleaf Production, LLC. The cancellation terminated our possible acquisition of the Longleaf entities and/or their assets.

On May 31, 2006, we entered into a new oil purchase agreement with Big Tex Crude, Inc. The contract is for 30 days and continues month to month thereafter.

Results of Operations

For the three months ended June 30, 2006, we had a net loss of $3,418,452 compared to a net loss of $411,006 for the previous period ended June 30, 2005. This increase in expenses is a result of the significant increase in operating expenses since we commenced oil and gas operations. Contributing factors for the increased loss are general and administrative expenses of $2,354,352 and depreciation, depletion and amortization of $713,071. In addition, we had limited oil and gas sales of $139,615.

Liquidity and Capital Resources

At June 30, 2006, we had cash of $540,518 compared to $1,558,146 at March 31, 2006. As of July 31, 2006, we have cash of $308,300.

On October 6, 2005, we entered into a convertible note financing transaction with 25 accredited investors pursuant to which the investors agreed to loan us an aggregate principal amount of $8 million. The notes are released in two tranches of which $6 million was received at closing and the balance of $2 million will be released to us upon the successful effectiveness of a Registration Statement. At their election, the investors are also entitled to invest up to an additional $2 million. Each investor received a Zero Coupon Note equal to 5% of total amount invested by each investor. We issued to the investors, senior secured convertible notes, zero coupon convertible notes and common stock purchase warrants.

The senior secured convertible notes issued at the initial closing are due October 6, 2007, and bear interest, in arrears, at a rate per annum equal to ten percent (10%), payable annually on October 1 of each year commencing October 1, 2006 at our option in (A) cash, (B) additional senior secured convertible promissory notes, or (C) in registered shares of our common stock. Interest is computed on the basis of a 360-day year of twelve (12) 30-day months.

Commencing on the fifth (5^th) month following the issuance of the senior secured convertible notes and continuing thereafter on the first (1^st) business day of each month we are required to pay an amount to each note holder equal to 1/20^th of the original principal amount of the senior secured convertible notes plus any accrued but unpaid interest. Payment may be made at our option in cash or registered shares of our common stock. If we elect to make payments in registered shares of our common stock, the number of shares issued to the note holder shall be discounted to 87.5% of the average of the closing bid price of our common stock for the ten (10) trading days immediately preceding the payment date. Payment may be made in registered shares of our common stock only if: (A) the Registration Statement providing for the resale of the shares of common stock issuable upon conversion of the senior convertible notes is effective and has been effective, without lapse or suspension of any kind, for a period of twenty (20) consecutive calendar days, (B) trading in our common stock has not been suspended by the Securities and Exchange Commission or the OTC Bulletin Board (or other exchange or market on which our common stock is trading), (C) we are in material compliance with the terms and conditions of the senior secured convertible notes and other financing documents, and (D) the issuance of shares of common stock to each note holder does not violate the note holder’s 4.9% or 9.9% ownership cap restrictions.

The senior secured convertible notes are convertible at any time, at the option of the note holders, into such number of fully paid and non-assessable shares of our common stock as is determined by dividing (x) that portion of the outstanding principal balance plus any accrued but unpaid interest under the notes at the date that the note holder elects to convert by (y) the conversion price of $0.40 which is subject to adjustment.

We may cause the conversion of the senior secured convertible notes if, at any time following the effective date of the Registration Statement which registers the shares underlying the notes, the closing bid price exceeds $0.80 for a period of 10 consecutive trading days and the average daily trading volume for such 10 consecutive trading day period exceeds 250,000 shares of common stock subject to certain conditions. Upon mandatory conversion, the principal amount of the senior secured convertible notes plus all accrued and unpaid interest shall convert into a number of fully paid and nonassessable shares of common stock equal to the quotient of (i) the principal amount of the notes plus all accrued and unpaid interest outstanding on the mandatory conversion date divided by (ii) the conversion price in effect on the mandatory conversion date.

So long as the Registration Statement is effective, in the event that the closing bid price of the common stock is greater than $0.40 and less than $1.25, the maximum number of shares of common stock that may be issued upon conversion of the notes shall not exceed the greater of (1) 25% of the aggregate trading volume for the prior 15 days or (2) 20% of the original principal amount of the notes.

Prepayment of the senior secured convertible notes may be required at the option of the note holder subject to certain conditions. In addition, so long as ten (10%) of the original principal amount of the notes are outstanding, we can require prepayment of the notes by paying in cash, all or portion of the outstanding principal amount of the notes together with all accrued and unpaid interest thereon with 30 days prior written notice to the note holder at a price equal to 125% of the aggregate principal amount of the notes plus any accrued but unpaid interest.

The senior secured convertible notes are secured by a security agreement that we and our subsidiaries entered into with the investors. The security agreement grants the investors a secured interest in all of the collateral, as defined in the agreement, of the company and its subsidiaries until such time as our obligations under the senior secured convertible notes have been meet. In addition to the security agreement, Quest Canada Corp., our wholly owned Canadian subsidiary has entered into a guarantee and indemnity agreement with the investors, whereby Quest Canada has guaranteed payment of the notes and agreed to indemnify the investors against losses arising from our failure to meet the obligations of the notes. Quest Canada has also entered into a pledge and debenture agreement with the investors whereby Quest Canada has pledged $15 million in favor of the investors as a continuing collateral security for the payment and fulfillment of the notes. We and our wholly owned subsidiary, Wallstin Petroleum, LLC have entered into a deed of trust, security agreement, financing statement and assignment of rents and leases with the investors whereby some of our Texas properties, rents, royalties and proceeds have been conveyed to the trustee as collateral security for the notes.

The zero coupon convertible notes are also due on October 6, 2007 and have terms which are substantially similar to the senior secured convertible notes. However, the zero coupon convertible notes do not bear interest.

Also in connection with the transactions, we issued to each of the note holders, and to the Placement Agent, four types of warrants to acquire shares of our common stock, which are classified as “Series A,” “Series B,” “Series C” and “Placement Agent Series A,” “Placement Agent Series B,” “Placement Agent Series C,” and “Placement Agent Series D” Warrants. As discussed below, all warrants have substantially similar terms and conditions except for the exercise prices, the expiration dates and the absence of a call provision.

We issued to each of the note holders and to the Placement Agent, “Series A” warrants entitling the investors and the Placement Agent to acquire an aggregate of 27,500,000 shares of our common stock at an exercise price of $0.80 per share. The warrants issued to the investors have a “cashless exercise” provision which may be utilized by the holder only if one year has elapsed since the date of issuance of the warrant and a Registration Statement registering the common stock underlying the warrant is not in effect as required. The warrants issued to the Placement Agent have a “cashless exercise” provision which may be utilized by the holder without restriction. Subject to certain conditions, including the effectiveness of a Registration Statement providing for the resale of the common stock underlying the warrants, we may call the Series A warrants at any time so long as the value of our common stock is greater than $1.60 for a period of 10 consecutive days immediately prior to the call notice and the average daily trading volume during the 10 day call notice period exceeds 250,000 shares of common stock. The Series A warrants issued to the note holders are exercisable for a period of three years. The Placement Agent Series A warrants are exercisable for a period of five years.

We issued to each of the note holders and to the Placement Agent, “Series B” warrants entitling the investors and the Placement Agent to acquire an aggregate of 13,750,000 shares of our common stock at an exercise price of $0.46 per share. The warrants issued to the investors have a “cashless exercise” provision which may be utilized by the holder only if one year has elapsed since the date of issuance of the warrant and a Registration Statement registering the common stock underlying the warrant is not in effect as required. The warrants issued to the Placement Agent have a “cashless exercise” provision which may be utilized by the holder without restriction. Subject to certain conditions, including the effectiveness of a Registration Statement providing for the resale of the common stock underlying the warrants, we may call the Series B warrants at any time so long as the value of our common stock is greater than $0.56 for a period of 10 consecutive days immediately prior to the call notice and the average daily trading volume during the 10 day call notice period exceeds 250,000 shares of common stock. The Series B warrants issued to the note holders are exercisable for a period of two (2) years following the effective date of the Registration Statement providing for the resale of the shares of common stock underlying the warrants and the shares of common stock issuable upon conversion of the notes. The Placement Agent Series B warrants are exercisable for a period of five years.

We issued to each of the note holders and to the Placement Agent, “Series C” warrants which entitle the investors and the Placement Agent to acquire an aggregate of 13,750,000 shares of our common stock at an exercise price of $0.56 per share. The warrants issued to the investors have a “cashless exercise” provision which may be utilized by the holder only if one year has elapsed since the date of issuance of the warrant and a Registration Statement registering the common stock underlying the warrant is not in effect as required. The warrants issued to the Placement Agent have a “cashless exercise” provision which may be utilized by the holder without restriction. The Series C warrants issued to the note holders are exercisable for a period of seven years. There is no call provision in the Series C warrants. However, the Series C warrants are only exercisable for the number of shares of common stock that has been issued to the warrant holder pursuant to the warrant holder’s exercise of its Series B Warrant. The Placement Agent Series C warrants are exercisable for a period of seven years.

We issued to the Placement Agent, Placement Agent “Series D” warrants which entitle the Placement Agent to acquire an aggregate of 2,500,000 shares of our common stock at an exercise price of $0.40 per share with a “cashless exercise” provision which may be utilized by the holder without restriction. The Placement Agent Series D warrants are exercisable for a period of five years.

Assuming the total principal amount of each senior secured note and each zero coupon note held by each of the selling securityholders is converted into common stock at a conversion price of $0.40 and all the converted shares are sold in this offering, the outstanding shares will be increased by 20,400,000. Assuming all warrants held by the selling securityholders are exercised and all shares underlying the warrants are sold in this offering, the outstanding shares will be increased by an additional 57,500,000.

Our expectations are based on certain assumptions concerning the anticipated costs associated with any new projects. These assumptions concern future events and circumstances that our officers believe to be significant to our operations and upon which our working capital requirements will depend. Some assumptions will invariably not materialize and some unanticipated events and circumstances occurring subsequent to the date of this prospectus.

As of March 31, 2006, we, including our wholly owned subsidiary, Quest Canada Corp, have approximately $1,558,146 cash on hand. From operations, we estimate that we will net approximately $20,000 per month depending on production levels of our operating wells. Given our current commitments and working capital, we believe that we can support our operations for the next 12 months and expand our business at a modest rate. We have received approval to drill 7 wells in Texas. Assuming we are able to successfully drill and bring the additional wells into operation, our anticipated revenues from our combined operations will increase.

Although we believe that we are able to operate without additional financing, in order to expand operations, we may continue to seek additional capital over the next 12 months from the additional sale of our securities. The amount and timing of our future capital requirements will depend upon many factors, including the level of funding received by us, anticipated private placements of our common stock, the level of funding obtained through other financing sources, and the timing of such funding. In the event we are unable to raise additional capital, we will be unable to expand operations as desired.

We intend to retain any future earnings to retire any existing debt, finance the expansion of our business and any necessary capital expenditures, and for general corporate purposes.

We are required to make monthly principal and interest payments under the terms of our Senior Secured Convertible Promissory Notes. If a Registration Statement registering the shares underlying the notes is not effective, we are required to make the monthly payments in cash instead of registered shares of our common stock. Because a Registration Statement is not effective, we have been required to make the first three payments is cash. The first three payments under the terms of the notes were as follows: $505,000, $364,875 and $362,250. However, due to our current cash position, we do not intend to make any additional principal and interest payments in cash to the investors. Making the payments in cash would impair our ability to operate on a day-to-day basis. Should a Registration Statement become effective, we will be able to make any delinquent and future principal and interest payments under the terms of the notes to the investors in the form of registered shares of our common stock. The fact that we will not make the June 2006 principal and interest payments to our investors in cash will mean that we will be in default under the terms of the notes. Such a default may provide the basis for the investors to force the liquidation of our assets. In the case of the liquidation of our assets, our common shareholders will likely lose all of their investment in our common stock.

Equipment

Equipment is recorded at historical cost. The straight line method with a half-year convention is used for depreciation. Asset life in years is a follows:

Computer equipment		5 years
Furniture and equipment		7 years
Well service equipment		7 years
Vehicles		5 years

Foreign Currency Transactions

Monetary assets and liabilities are translated at balance sheet date exchange rates; other assets and liabilities have been translated at the rates prevailing at the date of the transaction. Revenue and expense items, except for amortization, are translated at the average rate of exchange for the year. Amortization is converted using rates prevailing at dates of acquisition. Gains and losses from foreign currency translation are included in the statement of operations. All figures presented are in US dollars.

Critical Accounting Policies - Oil and Gas Activities

We follow the full cost method of accounting for our oil and gas activities; accordingly, all costs associated with the acquisition, exploration, and development of oil and gas properties are capitalized within the appropriate cost center. Any internal costs that are capitalized are limited to those costs that can be directly identified with acquisition, exploration, and development activities undertaken by us for our own account, and do not include any costs related to production, general corporate overhead, or similar activities.

All capitalized costs within a cost center are depleted on the units-of-production method based on estimated proved reserves attributable to the oil and gas properties we own.

For each cost center, capitalized costs less accumulated depletion and related deferred income taxes, may not exceed the cost center ceiling. The cost center ceiling is equal to the sum of: (a) the present value of estimated future net revenues from proved oil and gas reserves, less estimated future expenditures to be incurred in developing the proved reserves computed using a 10 percent discount factor; (b) the cost of properties not being amortized; (c) the lower of cost or fair market value of unproven properties included in the costs being amortized; and (d) income tax effects related to the differences between the book and tax basis of the properties. Any excess is charged to expense during the period in which the excess occurs.

Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center. Abandonments of oil and gas properties are accounted for as adjustments of capitalized costs, and are amortized and subject to the cost center ceiling limitation.

Future site restoration and abandonment costs of our petroleum and natural gas properties are provided for when a reasonable estimate can be made. The estimated provision is reduced by expected equipment salvage values at the time of the abandonment. The resulting net estimated provision, if any, is charged against earnings over the remaining life our proved reserves on a unit-of production basis. Actual expenditures are applied against the accumulated provision account.

Additional Accounting Disclosures

On April 24, 2006, our board of directors authorized our President and Chief Executive Officer, James B. Panther, II, in connection with our March 31, 2006, Annual Report on Form 10-KSB, to engage an independent forensic accounting firm to provide us with a forensic accounting of all of the company’s cash flows for the 12 months preceding March 31, 2006. As of the date of this Report, we have no information that would lead us to believe that there was a misappropriation of any company monies. The board of directors order of the forensic accounting is precautionary given the recent changes in management and to our board of directors.

Stock Based Compensation

The Company has elected to value stock based compensation granted at the fair value as determined using the Black-Scholes option valuation model.

Employees

We currently have seven employees among the parent and all subsidiary companies. We intend to hire additional personnel and our employees will be entitled to paid vacation, paid sick days, and personal days off depending on job classification, length of service, and other factors. Our policy will be to recognize the cost of compensated absences when actually paid to employees.

We have not entered into a collective bargaining agreement with any union. We have not experienced any work stoppages and consider the relations with the individuals working for us to be good.

ITEM 3. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”) we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006, being the date of our most recently completed fiscal quarter. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, they concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to them to allow timely decisions regarding required disclosure. The disclosure controls and procedures were not effective due to late filing and significant adjustments proposed by our auditors that were recorded related to non-cash debt and equity transactions. We are in the process of implementing procedures to properly account for and disclose the non-cash transactions.

As we reported on our Current Reports on Form 8-K:

On March 31, 2006, Mr. Blackman resigned from his position on our board of directors.

On April 24, 2006, we entered into, and our board of directors approved, an employment agreement with Mark L. Baum, Esq. who, for a term of 24 months, shall serve as our General Counsel.

On April 24, 2006, we entered into, and our board of directors approved, a 12 month employment agreement with Joseph Wallen to serve as our Chief Financial Officer.

On April 24, 2006, we entered into, and our board of directors approved, a 24 month consulting agreement with Business Consulting Group Unlimited, Inc. Under the terms of the agreement, BCGU will provide the Company with a part-time Controller, bookkeeping, reception, clerical, filing, data management and staffing services.

On April 24, 2006, we entered into, and our board of directors approved, our 2006 Directors Annual Compensation Program.

On April 24, 2006, we entered into, and our board of directors approved, a 3 year sublease agreement with Business Consulting Group Unlimited, Inc., allowing us to have access to the entire BCGU office space.

On July 14, 2006, Chris Phillips, resigned from his position on our board of directors. Currently, our board of directors consists of: James B. Panther, II, Douglas Brown and Joseph Wallen.

We believe that the changes in management described above should have a beneficial impact upon our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

On April 4, 2006, our board authorized the retention of the law firm of Zimmerman, Axelrad, Meyer, Stern & Wise, P.C. of Houston, Texas to represent the company as litigation counsel. Zimmerman, on behalf of the company, filed a Petition and Application For Temporary Restraining Order, Temporary Injunction and Permanent Injunction, and Request for Order for Deposition to Investigate Claims against our former Chief Operating Officer, William Huntington Stinson, Nana Asomani-Arko and Norman S. Neidell in the 11^th Judicial District in the District Court of Harris County, Texas. The litigation arose from a dispute with our former Chief Operations Officer, William Huntington Stinson, concerning his alleged appointment as a Director, President, and Chief Executive Officer of the company.

On Thursday, April 6, 2006, our request for a Temporary Restraining Order was heard and denied by the Court. At the time that the denial for a Temporary Restraining Order was issued, the Presiding Judge set the hearing for our Temporary Injunction request for Monday, April 10, 2006. On the morning of April 10, 2006, after denying a Motion and Request for Continuance filed by Mr. Stinson, Judge Mark Davidson commenced the Temporary Injunction hearing. During the middle of Mr. Stinson’s examination, Mr. Stinson’s counsel initiated settlement discussions.

On the afternoon of April 10^th, 2006, a settlement was reached and read into the court record. As a condition for our dismissing the lawsuit, Mr. Stinson agreed, in part, as follows: (i) that Mr. Stinson did not dispute the authority of our board of directors that was appointed in our March 31, 2006 board resolution (which was reported in Section 5.02 of our Current Report on Form 8-K filed on April 7, 2006); (ii) that Mr. Stinson would assist in transferring control of company monies he had control of (and which were “frozen”) into a company account that he was not a signatory; and (iii) that as of the date of the settlement, Mr. Stinson did not claim to be a member of our board of directors or an officer of the company.

As a part of the settlement, we agreed to: (i) hold a meeting, attended by two members of our board of directors to discuss a proposal made by Mr. Stinson regarding the possibility of him continuing to provide services to the company; (ii) subject to our financial claims against Messrs. Stinson and Neidell, pay Messrs. Stinson and Neidell or their assigns, certain monies they claimed they were owed in connection to their service as our Chief Operating Officer and outside consultant, respectively.

On April 21, 2006, pursuant to the terms of the settlement agreement with Mr. Stinson, we appeared at 9:00 a.m. at our Houston, Texas office for the scheduled meeting with Mr. Stinson which had been confirmed by Mr. Stinson’s former counsel. Mr. Stinson failed to appear for the meeting. On April 24, 2006, our board of directors resolved that because: (i) we had in good faith attempted to comply with the terms of the settlement agreement with Mr. Stinson; (ii) Mr. Stinson failed to attend the meeting; (iii) there were significant costs associated with making additional attempts to meet with Mr. Stinson; and (iv) the members of the Board of Directors were disinterested in doing any business with Mr. Stinson, we would not make any further attempts to deal directly with Mr. Stinson relative to complying with this term of the settlement agreement.

On April 18, 2006, the Company filed a non-suit in the above lawsuit, dismissing the case against all defendants.

On April 24, 2006, we received a compensation demand from Mr. Stinson claiming wages owed from August 2005 through April 2006. On April 12, 2006, we receive a compensation demand from N.S. Neidell & Associates claiming that we owed him compensation for his services. We do not believe that either Mr. Stinson or Mr. Neidell are legally entitled to the compensation they claim.

Currently, we are not a party to any pending legal proceedings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Other than as reported on our Current Reports on Form 8-K filed with the SEC, we did not complete any sales of securities without registration under the Securities Act of 1933 during the quarter ended June 30, 2006.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

We are required to make monthly principal and interest payments under the terms of our Senior Secured Convertible Promissory Notes. If a Registration Statement registering the shares underlying the notes is not effective, we are required to make the monthly payments in cash instead of registered shares of our common stock. Because a Registration Statement is not effective, we have made the first three required principal and interest payments in cash pursuant to the terms of the notes. However, due to our current cash position, we do not intend to make any additional principal and interest payments in cash to the investors. Making the payments in cash would impair our ability to operate on a day-to-day basis. Should a Registration Statement become effective, we will be able to make any delinquent and future principal and interest payments under the terms of the notes to the investors in the form of registered shares of our common stock. The fact that we have not made the June, July and August 2006 principal and interest payments to our investors in cash means that we are in default under the terms of the notes. The delinquent principal and interest payments total approximately $1,057,500.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.		Description

3(i).1		Articles of Incorporation. (Attached as an exhibit to our General Form For Registration of Securities on Form 10-SB filed with the SEC on July 7, 1999 and incorporated herein by reference).

3(i).2		Certificate of Amendment to the Articles of Incorporation (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on October 29, 2004 and incorporated herein by reference).

3(ii)		Bylaws. (Attached as an exhibit to our General Form For Registration of Securities on Form 10-SB filed with the SEC on July 7, 1999 and incorporated herein by reference.).

4.1		2004 Stock Incentive Plan (Attached as an exhibit to our Registration Statement on Form S-8 filed on August 5, 2004 and incorporated herein by reference).

10.4		April 24, 2006 Employment Agreement between Quest Oil Corporation and James B. Panther II (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.5		April 24, 2006 Employment Agreement between Quest Oil Corporation and Mark L. Baum, Esq. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.6		April 24, 2006 Employment Agreement between Quest Oil Corporation and Joseph Wallen. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.6		2006 Directors Annual Compensation Program. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.7		April 24, 2006 Consulting Agreement between Quest Oil Corporation and Business Consulting Group Unlimited, Inc. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.8		April 24, 2006 Office Space Sublease between Quest Oil Corporation and Business Consulting Group Unlimited, Inc. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.9		April 24, 2006 Settlement Agreement between Darren Hayes and Quest Oil Corporation. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.10		April 24, 2006 Consulting Agreement between Luis Leung and Quest Oil Corporation. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.11		April 24, 2006 Consulting Agreement between Jerry Pence and Quest Oil Corporation. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.12		April 24, 2006 Consulting Agreement between Cameron King and Quest Oil Corporation. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

10.13		February 6, 2006 Participation Agreement between Gaither Asset Management and Quest Oil Corporation (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on February 15, 2006 and incorporated herein by reference).

10.14		September 6, 2006 Promissory Note made by Quest Oil Corporation to Coach Capital, LLC (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on October 7, 2005 and incorporated herein by reference).

14.1		Code of Business Conduct and Ethics. (Attached as an exhibit to our Current Report on Form 8-K filed with the SEC on May 4, 2006 and incorporated herein by reference).

16.1		July 10, 2006 letter from MacKay, LLP (Attached as an exhibit to our Amended Current Report on From 8-K filed with the SEC on July 11, 2006 and incorporated herein by reference).

31.1		Certification of James B. Panther, II pursuant to Rule 13a-14(a).

31.2		Certification of Joseph F. Wallen pursuant to Rule 13a-14(a).

32.1		Certification of James B. Panther, II pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Joseph F. Wallen pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1		Evaluation of Gas Reserves Owned by Quest Canada Corp.. in the Arneson Area in the Province of Alberta Effective April 1, 2006. (Attached as an exhibit to our Annual Report on Form 10-KSB filed with the SEC on August 16, 2006 and incorporated herein by reference).

99.2		Reserve Estimation prepared for Quest Oil Corporation as of March 31, 2006 - Hawk Eye & Midkiff Fields, Eastland County Texas & Nettie Gardner Lease, McCullough County Texas. (Attached as an exhibit to our Annual Report on Form 10-KSB filed with the SEC on August 16, 2006 and incorporated herein by reference).

Signatures

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

QUEST OIL CORPORATION

/s/ Joseph F. Wallen
By: Joseph F. Wallen
Its: Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

Signatures	Title	Date

/s/ James B. Panther, II	President, Chief Executive Officer, Director	August 21, 2006
James B. Panther, II

/s/ Joseph Wallen	Chief Financial Officer, Director	August 21, 2006
Joseph Wallen

------INDEX------

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

QUEST OIL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 AND MARCH 31, 2006
(Unaudited)

				June 30,		March 31,
ASSETS				2006		2006

Current assets
	Cash		$	540,518	$	1,558,146
	Accounts receivable			11,433		21,501
	Prepaids and other current assets			29,985		53,293
Total current assets				581,936		1,632,940

Oil and gas properties, using successful efforts accounting
	Proved properties			2,566,003		2,468,449
	Unproved properties			936,373		898,315
	Accumulated depreciation, depletion, amortization and impairment			(1,820,516)		(1,683,654)
Net oil and gas properties				1,681,860		1,683,110

Deferred financing costs				3,046,952		3,459,713
Property and equipment, net of accumulated depreciation of $24,846				191,300		188,205
Other Assets				52,779
TOTAL ASSETS			$	5,554,827	$	6,963,968

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
	Accounts payable		$	266,427	$	85,298
	Accrued liabilities			32,306		452,504
Total current liabilities				298,733		537,802

Notes Payable				417,378		182,305
Asset retirement obligation				21,000		21,000
TOTAL LIABILITIES				737,111		741,107

STOCKHOLDERS' EQUITY
	Preferred stock, 50,000,000 shares authorized, $0.001 par value
		none issued and outstanding		—		—
	Common stock, 450,000,000 shares authorized, $0.001 par value
		71,451,266 shares issued and outstanding		71,451		67,673
	Additional paid-in capital			19,832,162		17,886,202
	Retained deficit			(11,668,361)		(11,668,361)
	Other comprehensive income			916		(62,653)
	Net Income (Loss)			(3,418,452)
TOTAL STOCKHOLDERS' EQUITY				4,817,716		6,222,861

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	5,554,827	$	6,963,968

See notes to the financial statements
F-1

QUEST OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2006 and 2005
(Unaudited)

			June 30,		June 30,
			2006		2005
Revenues
	Oil and gas sales	$	139,615	$	—
Total revenues			139,615		—

Expenses
	Production		105,631		—
	General and administrative		2,304,180		352,971
	Consulting				58,000
	Research and development		11,509		—
	Depreciation, depletion, and amortization		713,071		535
Total operating expenses			3,134,391		411,506

Loss from operations			(2,994,776)		(411,506)

Other income (expense)
	Interest income		1,330		—
	Interest expense		(425,006)		500
Total other income (expense)			(423,676)		500

NET LOSS		$	(3,418,452)	$	(411,006)

Basic and diluted loss per common share		$	(0.05)	$	(0.01)

Weighted average common shares outstanding			69,874,686		16,461,920

See notes to the financial statements
F-2

QUEST OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2006 and 2005
(Unaudited)
			June 30,		June 30,
			2006		2005
CASH FLOWS FROM OPERATING ACTIVITIES
	Net Loss	$	(3,418,452)	$	(411,006)
	Adjustments to reconcile net loss to net
	cash used in operating activities:
	Stock based compensation		1,836,549		57,553
	Impairment
	Depreciation, depletion and amortization		1,126,397		535
	Change in:
	Accounts receivable		10,068		(500)
	Prepaid assets and other		(29,358)		(32,500)
	Accounts payable and accrued expenses		102,878		101,702
	Accrued Interest		—		(10,000)
NET CASH USED IN OPERATING ACTIVITIES			(371,945)		(294,216)

CASH FLOWS FROM INVESTING ACTIVITIES
	Purchase of equipment		(7,970)		—
	Capital expenditures for oil and gas properties		(10,800)		(375,600)
NET CASH USED IN INVESTING ACTIVITIES			(18,770)		(375,600)

CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from notes payable		—		800,580
	Payments on notes payable		(630,831)		—
	Loans advanced		—		6,887
NET CASH PROVIDED BY FINANCING ACTIVITIES			(630,831)		807,467

CHANGE DUE TO CURRENCY TRANSLATION			3,918		—

NET CHANGE IN CASH			(1,017,628)		137,651
CASH BALANCES
	Beginning of period		1,558,146		3,197
	End of period	$	540,518	$	140,848

SUPPLEMENTAL DISCLOSURE:
	Interest paid	$	425,006	$	—
	Income taxes paid		—		—

NON-CASH ACTIVITIES:
	Debt converted to common stock	$	113,189	$	463,773
	Issued stock for legal and consulting services		—		57,553

See notes to the financial statements
F-4

QUEST OIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Quest Oil Corporation (“Quest”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in Quest’s latest annual report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal year 2005, as reported in the 10-KSB, have been omitted.

NOTE 2 - EQUITY ISSUANCE

During the period ended June 30, 2006, Quest issued common shares as follows:

·	1,501,816 common shares with a value of $309,229 as payment for services.

·	2,276,351 common shares with a value of $455,270 for the conversion of outstanding debt totaling $113,189 and additional expenses of $342,081.

During the quarter ended June 30, 2006, Quest issued warrants as follows:

·	400,000 warrants to consultants for services valued at $76,733. The warrants vested immediately and are exercisable for five years at $0.22 per share.

8,000,000 warrants to directors and officers for services valued at $1,534,668. At June 30, 2006, 4,133,333 warrants had vested and Quest recorded expense of $792,912 for the period. The remaining warrants vest evenly over the following 150 days. The warrants are exercisable for five years at $0.22 per share.

2,000,000 warrants to directors and officers for services valued at $383,667. At June 30, 2006, 333,333 warrants had vested and Quest recorded expense of $63,944 for the period. The remaining warrants vest evenly over the following 330 days. The warrants are exercisable for five years at $0.22 per share.

The warrants were valued using the Black-Scholes valuation model. Variables used in the Black-Scholes option-pricing model include (1) discount rates of 4.9%, (2) expected option life is the actual remaining life of the options as of each period end, (3) expected volatility of 180% and (4) zero expected dividends.

Quest Oil (QOIL) 10QSB2007 Q1 Quarterly report (small business)