Oilsands Quest 10K/A 2010 Annual report (amended)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 2010.

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

FOR THE TRANSITION PERIOD OF TO

Commission File Number: 001-32994

OILSANDS QUEST INC.

(Exact Name of Registrant as Specified in its charter)

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

800, 326 11th AVENUE SW, CALGARY, ALBERTA, CANADA T2R 0C5

(Address of principal executive offices, including zip code)

Issuer’s telephone number: (403) 263-1623

Securities registered under Section 12(b) of the Act:

Title of each class			Name of each exchange on which is registered
Common Stock, $.001 Par Value			NYSE Amex

Common Stock Purchase Warrants

NYSE Amex

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o

No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o

No þ

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

Yes þ

No o

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

Yes o

No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (s 229.405 or this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes þ

No o

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

Large accelerated filer: o	Accelerated filer: þ	Non-accelerated filer: o	Smaller reporting company: o
		(Do not check if a smaller reporting company)

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

The aggregate market value of the common stock held by non-affiliates of the Registrant as of October 31, 2009 was approximately $335,246,000 based upon the closing sale price of the Registrant’s Common Stock on such date.

As of June 30, 2010 there were 312,496,101 shares of common stock issued and outstanding.

Certain portions of the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the fiscal year end of April 30, 2010 are incorporated by reference into Part III of this Annual Report on Form 10-K.

EXPLANATORY NOTE

Due to a scrivener’s error, incomplete dates were contained on the signature pages to our Annual Report on Form 10-K for the year ended April 30, 2010, which was filed with the Securities and Exchange Commission (the “SEC”) on July 13, 2010. The purpose of this Form 10-K/A is to include complete dates on such signatures pages.

Except as stated herein, this Form 10-K/A does not reflect events occurring after the original filing of our Annual Report on Form 10-K on July 13, 2010 and no attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the original filing of our Annual Report on Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with our filings with the SEC subsequent to the original filing of our Annual Report on Form 10-K.

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Form 10-K/A.

TABLE OF CONTENTS

		Page
Forward-Looking Statements
Currency
PART I		2
Item 1.	DESCRIPTION OF BUSINESS	18
Item 1A.	RISK FACTORS	25
Item 2.	PROPERTIES AND STATEMENT OF OIL AND GAS INFORMATION	30
Item 3.	LEGAL PROCEEDINGS	30
Item 4.	(REMOVED AND RESERVED)	30
PART II
Item 5.	MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	30
Item 6.	SELECTED FINANCIAL DATA	33
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	43
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	43
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	43
Item 9A.	CONTROLS AND PROCEDURES	43
Item 9B.	OTHER INFORMATION	44
PART III
Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	44
Item 11.	EXECUTIVE COMPENSATION	44
Item 12.	SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT	44
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	44
Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	44
PART IV
Item 15.	EXHIBITS	44

Cautionary Statement about Forward-Looking Statements

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

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

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the timing of exploration activities;

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potential reservoir recovery optimization processes; and

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business strategies and development of our business plan and drilling programs.

Forward-looking statements are statements other than relating to historical fact and are frequently characterized by words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “potential”, “prospective” and other similar words or statements that certain events or conditions “may” “will” or “could” occur. Forward-looking statements such as references to Oilsands Quest’s drilling program, geophysical programs, reservoir field testing and analysis program, preliminary engineering and economic assessment program for a first commercial project, and the timing of such programs are based on the opinions and estimates of management and the company’s independen t evaluators at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those anticipated in the forward-looking statements, which include but are not limited to risks inherent in the oil sands industry, regulatory and economic risks, land tenure risks, lack of infrastructure in the region in which the company’s resources are located and risks associated with the company’s ability to implement its business plan. The Company undertakes no obligation to update forward-looking information if circumstances or management’s estimates or opinions should change, except as required by law. The reader is cautioned not to place undue reliance on forward-looking statements.

Currency

Unless otherwise specified, all dollar amounts are expressed in United States dollars. All future payments in Canadian dollars have been converted to United States dollars using an exchange rate of $1.00 U.S. = $1.0116 CDN, which was the April 30, 2010 exchange rate.

PART I

When we use the terms “Oilsands Quest Inc.”, the “Company,” “we,” “us,” “our,” or “OQI,” we are referring to Oilsands Quest Inc. and its subsidiaries, unless the context otherwise requires. We have included technical terms important to an understanding of our business under “Glossary of Common Terms” at the end of “Item 1. Description of Business”. Throughout this document we make statements that are classified as “forward-looking.” Please refer to the “Cautionary Statement about Forward-Looking Statements” section at the front of this document for an explanation of these types of assertions.

Item 1. DESCRIPTION OF BUSINESS

Background and Corporate Structure

We are a Colorado corporation formed on April 3, 1998 as Uranium Power Corporation. On November 2, 2004 we changed our name to CanWest Petroleum Corporation. On October 31, 2006 we changed our name to Oilsands Quest Inc. Our principal executive office is located at Suite 800, 326 – 11th Avenue S.W., Calgary, Alberta, Canada T2R 0C5. Our website is www.oilsandsquest.com.

The Company operates through its subsidiary corporations. Our primary operating subsidiary is Oilsands Quest Sask Inc. (“OQI Sask”), an Alberta corporation. OQI Sask was established as an operating subsidiary of the Company primarily to explore for and develop oil sands deposits in the provinces of Saskatchewan and Alberta. We currently own 100% of the issued and outstanding voting common shares of OQI Sask following the acquisition of the non-controlling (minority) interest of OQI Sask on August 14, 2006.

In addition to OQI Sask, we also have the following wholly-owned subsidiaries:

—

Township Petroleum Corporation (“Township”), an Alberta corporation. Township owns an oil sands lease in the Province of Alberta acquired in 2005, (referred to as the Eagles Nest), and is currently developing plans for exploring the oil sands potential on the lease.

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Western Petrochemicals Corp. (“WPC”), an Alberta corporation. WPC formerly owned certain rights relating to exploration for oil shale, referred to as the Pasquia Hills Oil Shale, and is currently inactive.

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Stripper Energy Services Inc. (“Stripper”), acquired in 2007 and currently a wholly- owned subsidiary of OQI Sask.

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1291329 Alberta Ltd., incorporated in 2007 to own assets related to camp facilities and equipment.

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Oilsands Quest Technology Inc., incorporated in 2007 to assess technologies related to bitumen and shale oil extraction and to ensure any proprietary information created from the development of our prospects can be commercially exploited.

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1259882 Alberta Ltd. incorporated on August 4, 2006. The only activity conducted by this subsidiary to date is to have an over-riding call right to acquire the Exchangeable Shares in consideration of it delivering to the shareholder the number of common shares in the Company that a shareholder would otherwise have been entitled to upon a redemption or retraction of the Exchangeable Shares.

Strategy

Our strategy is to focus on business opportunities in the oil sands sector with the objective of maximizing shareholder value on a per share basis. We will execute our strategy by:

Selectively identifying and acquiring key targets in the oil sands sector. We have a large contiguous land position straddling the Saskatchewan/Alberta provincial border with an undivided, 100% interest in each of the permits, licenses and leases held.

Exploring and delineating resources on our lands. Our operating teams have conducted extensive exploration and development programs, consisting of drilling 457 wells, conducting 2,136 kilometres of 2-D and 3-D seismic surveys, and other exploration activities resulting in the discovery of the Axe Lake, Raven Ridge and Wallace Creek reservoirs and the identification of other oil sands prospects. We manage and operate all of our activities.

Exploiting the oil sands resources identified. We are focused on the commercialization of our reservoirs and are in the process of conducting a comprehensive reservoir test program at Axe Lake to determine the optimal recovery processes that will be utilized to produce bitumen from our reservoirs. Our development strategy includes evaluating recovery processes on specific projects to optimize economic recovery and to accelerate the development of such projects in a timely and responsible manner.

Our business plan is to focus on the exploration, delineation and exploitation of bitumen resources on our oil sands permits, licenses and leases located in the provinces of Saskatchewan and Alberta.

General Development of the Business

Acquisition of Oil Sands Exploration Rights

Oil sands permits and licenses in Saskatchewan

On September 24, 2004 we acquired all of the issued and outstanding shares of 808099 Alberta Ltd., which was previously inactive, and on November 3, 2004 this company changed its name to Oilsands Quest Inc. On November 1, 2006, this entity changed its name to Oilsands Quest Sask Inc. Following external issuances of equity by OQI Sask, at July 31, 2006 we owned 64.08% of the shares of common stock of OQI Sask. On August 14, 2006, we closed a reorganization agreement with OQI Sask, which was executed on June 9, 2006, whereby we acquired the non-controlling (minority) interest in OQI Sask, increasing from a 64.08% ownership interest to a 100% voting interest (the “Reorganization Agreement” or the “Reorganization”). In connection with the Reorganization Agreement, we also entered into a Voting and Exchange Trust Agr eement with OQI Sask and Computershare Trust Company of Canada (“CTC”), and a Support Agreement with OQI Sask. Collectively, these agreements are referred to as the “Acquisition Agreements”.

In accordance with the Acquisition Agreements, all OQI Sask common shares other than those held by us were exchanged for a new class of OQI Sask shares called Exchangeable Shares pursuant to a ratio of one OQI Sask common share to 8.23 Exchangeable Shares. The Exchangeable Shares are exchangeable at any time on a one-for-one basis, at the option of the holder, for shares of our common stock. An Exchangeable Share provides a holder with economic terms and voting rights which are, as nearly as practicable, equivalent to those of a share of our common stock. Holders of Exchangeable Shares have registration rights with respect to the resale of our common stock to be received upon exchanging the Exchangeable Shares into our shares. The holders of the Exchangeable Shares will receive up to an aggregate of 76,504,304 shares of our common stoc k at each holder’s election. The Exchangeable Shares are represented for voting purposes in the aggregate by one share of our Series B Preferred

Stock (the “Preferred Share”), which Preferred Share is held by CTC. CTC will in turn vote the one Preferred Share as indicated by the individual holders of Exchangeable Shares. The one Preferred Share represents a number of votes equal to the total outstanding Exchangeable Shares on the applicable record date for the vote submitted to our shareholders. At April 30, 2010, 43,469,494 shares of common stock had been issued on exchange of Exchangeable Shares, 768,131 shares have expired and 32,266,679 shares of common stock remain to be issued on future exchanges of Exchangeable Shares.

On September 29, 2004, OQI Sask acquired a 49% interest in certain oil shale exploration permits that covered approximately 2,000 square miles (1,400,000 acres) in northwestern Saskatchewan along the Alberta border. The 49% interest in the permits was acquired for $769,125, plus 50,000 shares of our common stock and a 2.5% gross overriding royalty (the “2.5% GORR”). In order to finance the purchase of the 49% interest, OQI Sask borrowed funds from the Company in the form of a convertible debenture. On November 18, 2005, the principal and accrued interest on the debenture was converted into 788,769 shares of common stock of OQI Sask.

We entered into an agreement dated November 8, 2004, as amended (the “WCM Agreement”), to acquire all of the shares of Western Canadian Mint Inc. (“WCM”), a company that owned all of the shares of American Oilsands Company Inc., which owned the remaining 51% working interest in the permits, subject to a $0.07 per barrel royalty which could be bought at any time by paying $7,000,000 and a $0.04 per barrel royalty held by various arm’s-length parties. Prior to completing this acquisition, we assigned all of our rights and obligations to OQI Sask pursuant to a letter agreement dated November 12, 2004 and an assignment dated April 27, 2005. As a result, on May 3, 2005, pursuant to the terms of the WCM Agreement, OQI Sask acquired all of the outstanding shares of WCM. The combined consideration paid by us and O QI Sask was $1,202,131, 2,000,000 shares of our common stock and the assumption of the $0.07 per barrel royalty which could be bought at any time by paying $7,000,000 and a $0.04 per barrel royalty held by various arm’s-length parties. WCM was then merged with OQI Sask.

As a result of these transactions, OQI Sask held an undivided 100% interest, subject to the above noted royalties, in Saskatchewan Oil Shale Exploration Permit Nos. PS00205, PS00206, PS00207, PS00208, PS00209, PS00210, PS00211, PS00212, PS00213, PS00214, PS00215, PS00216 and PS00217, granted originally on June 1, 2004. The permits were granted by the Province of Saskatchewan in 2004 under the Oil Shale Regulations, 1964 as amended, revised or substituted from time to time, for a term of five years. The permits provide for the right to explore and work the permit lands but not to remove, produce or recover, except for test purposes, oil products until a lease pursuant to these regulations has been granted. The term of the permits may be extended for up to three, one-year extension s subject to regulatory approvals, as required. On June 21, 2010, the company received a second one year extension pursuant to the regulations.

By agreement with the Saskatchewan government, we were required to relinquish at least 40% of the total acreage covered by the permits by the first anniversary date of the permits (May 31, 2005) and to relinquish a further 40% of the remaining acreage by the second anniversary date (May 31, 2006). OQI Sask relinquished 40% of the total acreage covered by the permits on May 31, 2005, and under an extension of the 2006 relinquishment completed the second relinquishment on July 9, 2007. As of April 30, 2010, the company holds 508,080 acres consisting of Saskatchewan Oil Shale Exploration Permit Nos. PS00205, PS00206, PS00208, PS00210, PS00212, PS00213 and PS00215. On May 31, 2010 OQI Sask relinquished two of the northern permits, PS00213 and PS00215, representing 101,806 acres.

The permits, when granted, were subject to annual rental payments and commitments to certain levels of expenditures annually pursuant to the terms of the permits and government regulations. The annual rentals were payable in advance as to $0.02 ($0.02 CDN) per acre for the first year and escalating to $0.10 ($0.10 CDN) per acre in the fifth year. On May 7, 2007, the Saskatchewan government updated the Oil Shale Regulations, 1964 requiring an increase to annual rentals of $0.10 ($0.10 CDN) per acre for the remaining term of the permits. The required exploration expenditures to hold the permits were also increased to $0.80 ($0.81 CDN) per acre for each of the remaining years of the permits and $1.20 ($1.21 CDN) per acre for each year that the permits are extended. The Company has p aid all required annual rentals and complied with the annual exploration expenditure requirements.

On August 13, 2007, the Company acquired five oil sands licenses totalling 109,920 acres granted under the Petroleum and Natural Gas Regulations, 1969 (Saskatchewan), as amended, revised or substituted from time to time, for a term of five years for an aggregate cost of $2,140,233 ($2,249,089 CDN). The licenses provide for the exclusive right to search for oil sands on the lands granted and to win, recover, extract, carry off, dispose of and sell the oil sands products found on the licensed lands. The oil sands licenses provide the opportunity to convert up to 100% of the licenses to a production lease on the basis of one section of land for every well that intersects an oil sands zone. Licenses require annual rental paymen ts of $0.70 ($0.71 CDN) per acre. The Company has paid all required annual rental payments for the licenses granted.

Gross Overriding Royalties on original Saskatchewan oil sands permit lands

As noted above, as part of the acquisition of the Saskatchewan permits, OQI Sask assumed the 2.5% GORR and a $0.04 per barrel royalty held by various arm’s-length parties.

On August 15, 2006, the Company closed a transaction with the shareholders of Stripper Energy Services Inc. (“Stripper”), a then non-related inactive entity. The Company purchased all of the issued and outstanding shares of Stripper’s common stock for a total purchase price of $17,948,722 ($20,000,000 CDN), including the original option payment of $1,250,000 CDN. Stripper’s sole asset is the 2.5% GORR royalty on the permits. As a result of the transaction, the 2.5% GORR is now held by Stripper, a wholly-owned subsidiary of OQI Sask.

On September 21, 2007, in conjunction with the acquisition of the interests of an external joint venture partner to the Triple 7 Joint Venture described below, the Company acquired the $0.07 per barrel royalty obligation for consideration of $99,980 ($100,000 CDN) cash plus the issuance of 500,000 shares of its common stock valued at $2,195,000 based on the September 20, 2007 closing market price of the shares.

The Saskatchewan permits are now only subject to $0.04 per barrel royalty.

Oil sands permits and lease in Alberta

- Raven Ridge

During the year ended April 30, 2007, the Company acquired four oil sands permits totalling 67,053 acres in a public offering of Crown Oil Sands Rights for an aggregate cost of $22,221,968 ($25,651,985 CDN). The permits were granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The permits provide the opportunity to convert up to 100% of the permits to a production lease following the completion of specified work requirements. Permits are granted for a five-year primary term and require annual rental payments of $1.40 ($1.42 CDN) per acre.

Raven Ridge is located in Alberta directly west of and contiguous to Axe Lake on our oil sands permits in Saskatchewan.

- Wallace Creek

On January 23, 2008, the Company acquired two oil sands permits totalling 45,546 acres in a public offering of Crown Oil Sands Rights (permits were officially granted on January 24, 2008). The total consideration paid for these permits was $9,732,500 ($10,010,880 CDN). The permits were granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The permits provide the opportunity to convert up to 100% of the permits to a production lease following the completion of specified work requirements. Permits are granted for a five-year primary term and require annual rental payments of $1.40 ($1.42 CDN) per acre.

Wallace Creek is located in Alberta directly west of and contiguous to Axe Lake on our oil sands permits in Saskatchewan.

- Eagles Nest

On August 25, 2005, Township acquired Oil Sands Lease No. 7405080355 located in northern Alberta for $727,187 at an Alberta Crown land sale. This lease comprises an area of approximately 22,773 acres and is located in the Athabasca oil sands region in Alberta in Township 101, Range 13 West of the fourth Meridian. The lease provides for the right to drill for, win, work and recover and the right to remove bitumen resources from the lease for a term of 15 years, subject to the Mines and Minerals Act, Alberta.

Prior to bidding on Eagles Nest, on June 1, 2005, Township entered into an agreement with three third parties (collectively the “Triple 7 Joint Venture”) to post, acquire, develop and produce oil sands deposits located in the Athabasca Region of Alberta, Canada (the “Triple 7 Joint Venture Agreement”). As a result of this agreement, Township acquired one lease consisting of approximately 22,773 acres (the “Eagles Nest Oil Sands Lease”) at a cost of $727,187. Pursuant to the terms of this agreement we issued the Triple 7 Joint Venture 114,015 shares of our common stock with a fair value of $127,432. Township also agreed to pay the Triple 7 Joint Venture partners, as ongoing fees, $125,628 ($150,000 CDN) in cash or in shares of our common stock (at the discretion of the Company) on the first and second anniversary dates of the agreement. On the third anniversary date and each subsequent anniversary date of the agreement Township agreed to pay the Triple 7 Joint Venture $376,884 ($450,000 CDN) until such time as the lease is surrendered or a commercial project has been identified. On September 21, 2007, in conjunction with the acquisition of the royalty described above, the Company acquired all of the rights of one of the three external joint venture partners for consideration of $49,939 ($50,000 CDN) plus the issuance of 250,000 shares of the Company’s common stock valued at $1,097,500 based on the September 20, 2007 closing market price of the shares. On June 17, 2008, we acquired the rights of the remaining external joint venture partners for aggregate consideration of $1,632,000 CDN and 640,000 shares of the Company’s common stock valued at $3,718,400 based on the June 17, 2008 closing market price of the shares. The Company’s obligations under the Triple 7 Joint Venture Ag reement have therefore been eliminated.

To finance the acquisition of Eagles Nest in 2005 the Company issued convertible debentures pursuant to which Township also granted royalties of $0.0057 ($0.0058 CDN), net after a buy back, on each barrel of crude bitumen produced, saved and sold from the project. The convertible debentures have all been converted to common stock.

Pursuant to the terms of the lease, Township’s annual lease rentals are $31,886 ($32,256 CDN). OQI Sask has paid all required annual rentals and the lease is in good standing.

Acquisition of Oil Shale Rights in Saskatchewan

- Pasquia Hills Oil Shale

On April 21, 2005, we acquired a 97.53% interest in Western Petrochemicals Corporation (“WPC”) through the issuance of 10,728,124 shares of our common stock and then in April 2006 increased our ownership to 100% by issuing 271,865 shares of our common stock to the remaining WPC shareholders. WPC held a 100% interest in exploration permits covering an area of approximately 337,775 acres granted under the provisions of the Oil Shale Regulations, 1964, as amended or revised or substituted from time to time by the Province of Saskatchewan. The exploration permits were scheduled to expire in 2006, and during the year ended April 30, 2007, all of the original Pasquia Hills exploration permits held by WPC expired and were returned to the Saskatchewan government.

We reacquired nine exploration permits on the original Pasquia Hills oil shale prospect area from the Province of Saskatchewan in September and October 2006. In accordance with the terms of the new permits and following an initial assessment, we relinquished 30% of the total acreage of the granted permits within 90 days of the grant. As of April 30, 2010 we hold Oil Shale Permit Nos. PS00222, PS00223, PS00224, PS00225, PS00226, PS00237 and PS00238 granted under the Oil Shale Regulations, 1964, as amended or revised or substituted from time to time for five-year terms from the date of grants. The term of the permits may be extended for up to three one-year extensions subject to regulatory approvals, as required. The permits total 405,961 acres and are located near Hudson Bay, Saskatchewan. The permits provide for the right to explore, mine, quarry and work the permit lands, but not to produce or recover oil shale except for test purposes until a lease has been granted.

The annual rental payable in advance was $0.05 ($0.05 CDN) per acre for the first year, and on May 7, 2007 the Saskatchewan government updated the regulations requiring annual rentals of $0.10 ($0.10 CDN) per acre for the remaining term of the permit. The required exploration expenditures to hold the permits were also increased to $0.40 ($0.40 CDN) per acre for the second year of the permits, $0.80 ($0.81 CDN) per acre for the last three years of the permits and $1.20 ($1.21 CDN) per acre for each year that the permit is extended, as required.

On August 13, 2007, we acquired one additional oil shale exploration permit granted under the Petroleum and Natural Gas Regulations, 1969 (Saskatchewan) as amended, revised or substituted from time to time for a term of five years totaling 83,769 acres in the same area near Hudson Bay, Saskatchewan. This permit, together with the nine exploration permits acquired in September and October 2006 as described above, are collectively referred to as Pasquia Hills Oil Shale. The permit provides for the right, license, privilege and authority to explore for oil shale within the permit lands. The term of the permit may be extended for up to three one-year extensions subject to regulatory approvals, if required. This oil shale permit was acquired under a land sale work commitment bid for t he first two years of the permit. The Company bid a total work commitment of $298,110 ($301,568 CDN) to be incurred during the first two years of the permit and the permit requires a further work commitment of $0.80 ($0.81 CDN) per acre for the last three years and $1.20 ($1.21 CDN) for each extension year plus annual rental payments of $0.10 ($0.10 CDN) per acre. We have paid the required annual rental payments to maintain this permit in good standing and our 2009 exploration program will comply with our expenditure requirements.

On January 15, 2010 the Company entered into an agreement to sell all of its oil shale properties to Canshale Corp. (“Canshale”) for consideration of CDN $1 million (US $0.9 million) in cash and 8,000,000 common shares of Canshale, which we refer to as the “Canshale Transaction.” The Canshale Transaction is conditional upon Canshale raising a minimum of CDN $12.5 million (US $11.7 million) in cash through a common share financing. Under the terms of the agreement, the Company has the right to terminate the agreement if Canshale does not complete its financing by June 30, 2010. On July 6, 2010, the Company and Canshale amended the agreement to extend the deadline for Canshale to complete its financin g to July 30, 2010 in exchange for an extension incentive of 2.0 million common shares of Canshale. Upon consummation of the Canshale Transaction, the Company will retain an ownership interest of up to 20% of Canshale’s outstanding common shares. The Company does not intend to proceed with the Canshale Transaction unless Canshale is fully capitalized to execute an effective exploration program in respect of the oil shale assets.

Activities to Date

Oil sands permits and licenses

Exploration of our Saskatchewan oil sands permits commenced in the winter of 2005/2006. An initial exploration drilling program consisting of 24 resource delineation wells was completed by April 2006. In August 2006, the Company received the independent geological consultants’ assessment of in-place volumes of bitumen in the area covered by the winter 2005/2006 exploration program. The assessment, prepared by Norwest Corporation of Calgary, was made in accordance with the Canadian Oil and Gas Evaluation Handbook (“COGEH”), which is a primary reference for reporting resources under Canadian Securities Administrators National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51- 101”). The End of Season Report for the winter 2005/2006 exploration drilling program documenting conformance with the original plans and summarizing the environmental effects of the program, impacts, socio-economic benefits, reclamation and mitigative actions was prepared and submitted to the adjacent communities, aboriginal groups and Canadian federal and provincial governments.

In July 2006, we commenced the development of site infrastructure, including road construction, drill pad preparation, camp construction and the installation of an airstrip.

In October 2006, an approximately 5-kilometre (3-mile), 2-D geophysical program was successfully completed, demonstrating that seismic techniques could contribute to the planned exploration program. In November 2006, exploration drilling began with one drilling rig and by the end of the month three drilling rigs were working on the site. These three rigs drilled continuously until the scheduled Christmas break on December 21, 2006. Drilling recommenced in early January 2007 with four rigs and by the end of February 2007 a total of eight rigs were in place and drilling. Overall, for the winter 2006/2007 exploration program, a total of 150 exploration test wells were drilled in Saskatchewan.

In January 2007, due to the extent of land covered by our drilling, we designated an area, plus certain additional prospective lands associated with it, as Axe Lake. The designated Axe Lake area is a project area identified by us as being located in an area of approximately 72 sections (72 square miles) located in Townships 94 and 95, Ranges 24 and 25 West of the 3rd Meridian. As a result of the winter 2007/2008 program, the drilled area of Axe Lake covered approximately 65 sections (65 square miles) of Permits PS00208 and PS00210 (100% Oilsands Quest) located in the north half of Township 94 and the south half of Township 95, Ranges 24 and 25 West of the 3rd Meridian.

In February 2007, an 850-kilometre (528-mile) helicopter-borne, combined electromagnetic and magnetic survey was undertaken and a 166-kilometre (103-mile) 2-D seismic program was completed. This included 64 kilometres (40 miles) of surveys in Alberta.

In May and June 2007, two fixed-wing aircraft completed a high-resolution, intensive 21,000-kilometre (13,000-mile) airborne magnetic survey program within the Company’s Saskatchewan permit lands building further on the airborne surveys made during the 2006/2007 winter program.

In August 2007, we received approvals from the Province of Saskatchewan for the following: testing of Electrical Resistance Tomography; exploration drilling of up to 97 holes under non-frozen ground conditions; miscellaneous use general construction (including road and airstrip construction) permits on the Saskatchewan permit lands; and an extensive 2-D and 3-D seismic program on the Saskatchewan permit lands under non-frozen ground conditions. Approval from the Province of Alberta for a major 2-D and 3-D seismic program on the Raven Ridge Prospect was also received in August 2007. Field work under these approved work programs began immediately with drilling in Saskatchewan commencing on September 14, 2007.

In November 2007, we announced the results of the independent review and evaluation of the Axe Lake area by McDaniel & Associates Consultants Ltd. (“McDaniel”) based on data obtained from the results of drilling up to March 31, 2007 and other sources, including the physical examination of cores and geophysical logs. The independent review and evaluation was prepared and presented in accordance with the standards set out in COGEH and NI 51-101.

In December 2007, a comprehensive exploration program application, consisting of drilling up to 316 core test wells, 2-D seismic surveys and 3-D seismic surveys to be conducted under frozen ground conditions, was submitted to the Federal and Saskatchewan governments for approval. The application also included requests for approvals for conducting reservoir tests, which included the installation and operation of steam generation facilities, thermally completed vertical reservoir test wells and related observation wells including fluid storage facilities at three potential test sites at the Axe Lake area.

In January 2008, we received regulatory approval for our applications and we announced a program of reservoir testing at up to three sites within the Axe Lake area. This reservoir test program was designed on the basis of extensive, ongoing laboratory testing and reservoir simulation studies conducted since June 2007 by our independent consultants and on the studies undertaken by our in-house reservoir engineering group. For a complete description of the nature and activities of the test program, see "-- Axe Lake Area -- Reservoir Development Activities".

We believe our winter 2007/2008 exploration program demonstrated continued success on the Company’s contiguous oil sands exploration lands in Saskatchewan and Alberta. Overall, a total of 175 test wells were drilled with 150 in Saskatchewan and 25 in the Company’s first exploration program conducted on its adjacent land holdings in Alberta. The exploration drilling in Alberta was completed in 12 sections (12 square miles). Of the 175 test wells drilled in the winter 2007/2008 exploration program, 155 were exploration and delineation test wells in Saskatchewan and Alberta of which 103 encountered meaningful intercepts of bitumen-bearing McMurray/Dina formation (67 percent).

A 3-D seismic program conducted in early 2008 covered over 24 square kilometres (15 square miles) in Saskatchewan and 10 square kilometres (6 square miles) in Alberta. A 40-metre (124-foot) by 40 metre grid density was used. The data from this program has been processed and interpretation of the data is complete. 3-D seismic surfaces have been incorporated into our reservoir model and this allows us to map the top and bottom of the reservoir in detail.

In the fall of 2008, we drilled 31 exploration and delineation test wells in the Axe Lake area, and 3 exploration test wells in Saskatchewan. In early 2009, we drilled 23 exploration and delineation test wells in Raven Ridge. A 25 mile (40 kilometer) 2D seismic program was conducted on Saskatchewan permits which had not been explored by us through drilling or seismic exploration. We are also continuing with the interpretation of the 1,847 kilometers (1,149 miles) of 2-D and 3-D seismic data collected and processed in the 2007/2008 winter program, which is aiding in the characterization of the reservoir and adjacent formation specific to our three test sites at Axe Lake and the reservoirs at Raven Ridge and in assessing the geological structures on our lands.

We continued conducting environmental monitoring and baseline assessment activities in support of our exploration and future development activities on our Saskatchewan and Alberta permits. Environmental programs are required as part of the regulatory process for approvals and to ensure compliance with regulatory requirements. The work has formed the basis of an Environmental Protection Plan submitted to and approved by the Federal and Saskatchewan Provincial governments. This program is integral to the timeline for potential project development at Axe Lake, which began in early April 2007, and is an ongoing part of our activities.

In mid-2008 we released McDaniel's independent estimates of discovered and undiscovered bitumen resource volumes, which were prepared in accordance with COGEH and NI 51-101. As of December 31, 2008, McDaniel classified a portion of the discovered resources as contingent resources. These contingent resource estimates were prepared for portions of the Axe Lake and Raven Ridge areas only.

In October 2009 we released an updated independent engineering estimate of contingent, discovered and undiscovered resources which were prepared in accordance with the standards set out in COGEH and NI 51-101. This resource estimate incorporated the results of our 53 well drilling program at Axe Lake in late 2008, and at Raven Ridge in early 2009 and updated the previous estimates provided in December 2008 which were based upon 330 wells drilled up to mid-2008.

In July 2010 we released an updated independent engineering estimate of contingent, discovered and undiscovered resources which were prepared in accordance with the standards set out in COGEH and NI 51-101. This resource estimate incorporated the results of our 9 well drilling program at Wallace Creek in early 2010, the 16 overburden core holes drilled in late 2009 and updated the previous estimates provided in October 2009 which were based upon 383 wells drilled up to early 2009.

The below table summarizes the drilling program accomplishments to date.

Table 1: Results of Oil Sands Drilling Programs

		2009/ 2010	Drilled to Date (Nov.22/05 to April 30/10)
	Wells Drilled		Wells Drilled		Sections Drilled		Wells per Section
Axe Lake Exploration		16		320		78		4.1
Axe Lake Development/Reservoir Test		4		23		n/a		n/a
Axe Lake Groundwater Monitoring		3		19		n/a		n/a
Saskatchewan Exploration (outside Axe Lake)		0		35		28		1.30
Raven Ridge Exploration		0		48		23		2.1
Wallace Creek Exploration		9		0		0		1.0
Eagles Nest Exploration		0		0		0		0.0
Total		32		457		138		3.3

We also completed a comprehensive 2-D and 3-D seismic program which utilized CGG Veritas’ highest-quality three-component 3-D technology. The table below summarizes Oilsands Quest’s completed seismic programs.

Table 2: Seismic Surveys

	Saskatchewan				Alberta
	Km		Miles		Km		Miles
2-D		337		209		106		66
3-D		1,192		741		501		312
Total		1,529		950		607		378

We commenced an overburden characterization study in October 2009 and completed a 16 hole coring and logging program portion that yielded core material and advanced logging data (Nuclear Magnetic Resonance (NMR), Dipole, sonic and standard suite geophysical) of the formation overlying the bitumen-bearing McMurray/Dina formation.

The cores have been analyzed by Weatherford laboratories and results show that the overburden is composed of clay-rich till, which is a dense, low permeability cap layer that demonstrates steam containment characteristics in laboratory and 3-D reservoir computer simulations.

Weatherford Laboratories conducted a high temperature caprock study on the samples provided. To date, 4 samples from the core holes 16-33-092-25W3M, 04-21-094-25W3M, 12-12-095-25W3M and 5-12-095-05W3M have been processed, and the laboratory work demonstrates a range of permeabilities from 0.1-0.002md at 20°C. When the samples are subjected to temperatures of 200°C, a further decrease in permeability to the range of 0.04-0.002 millidarcies ("md") is observed in the laboratory. These permeability measurements indicate that the ability of the fluid or gas to migrate into the glacial till is significantly impaired allowing the overburden to act as an effective cap for SA GD operations.

Detailed evaluation of the continuity of the till layer using 3-D seismic is currently underway. Based on the current data set it appears that the dense glacial till layer is present over the majority of the potential commercial development area.

Generally the dense glacial till layer lies directly on top of the oilsands reservoir zone, however in some areas there are several meters of top water between the oilsands zone and the glacial till. The impact of these zones is being studied and the results will be incorporated into our commercial development plan.

In December 2009, we completed a 40 km 2-D seismic program on the permits to the north and south of Axe Lake which will further our geological knowledge of the region, and we met the work commitments required to extend the exploration permits until May 31, 2010.

We are also continuing with the additional processing and interpretation of the 2,136 kilometres (1,327 miles) of 2-D and 3-D seismic data collected and initially processed in the 2007-2009 winter program. This interpretation is proving valuable in planning for the specific reservoir tests this year and in assessing the geological structures across our permits.

Axe Lake Area – Reservoir Development Activities

Axe Lake is a project area of approximately 108 sections (108 square miles) in Townships 94 and 95, Ranges 24 and 25 West of the 3rd Meridian in Northwestern Saskatchewan. As a result of the 2008/2009 exploration and delineation drilling program the evaluated portion of Axe Lake now covers approximately 72 sections (72 square miles) of permits PS00208 and PS00210 (100% Oilsands Quest) located in the north half of Township 94 and the south half of Township 95, Ranges 24 and 25 West of the 3rd Meridian.

The 3-D seismic survey program in northwest Saskatchewan was concentrated in Axe Lake and covered over 24 square kilometres (15 square miles). We are using the detailed, three component 3-D seismic survey data as one of the key tools to further define the geological structure and reservoir architecture to assist in the ongoing reservoir studies and technical planning related to the development of this resource. For a description of the seismic program on Axe Lake, see tables in “-- Activities to Date”. Geological models have been developed and have incorporated laboratory measurements of fluid properties, geo-mechanical characterization, porosity, permeability as well as special core floods and cap rock integrity measurements.

At Test Site 1, we drilled and completed six vertical test holes and drilled three 750-metre horizontal holes (300 metres length within the reservoir) and procured the horizontal well instrumentation strings necessary to measure the temperature and pressure in the reservoir. We have completed construction of water treatment, steam generation and extraction collection facilities, which includes three steam generators totalling 38 million BTU/hour steam generation capacity, two diesel power generators each with 750 kilowatt power output capacity, water/oil treatment and oil handling equipment, control systems and eight 1,000-barrel heated liquid storage tanks to support related Test Site 1 activities.

Also at Test Site 1, we completed two mini-frac tests that successfully measured the relevant geo-mechanical properties of the oil sands reservoir, as well as the overburden (glacial till materials above the oil sands reservoir) and underburden (Devonian limestone materials below the oil sands reservoir) close to the oil sands reservoir. Calibration of the numerical reservoir simulation tools to the mini-frac tests by conventional history matching techniques has also been completed.

At Test Site 2, the front-end engineering and design work on a facility for solvent testings using hot propane vapour, was completed. Construction has been deferred until the results from Test Site 1 have been evaluated.

At Test Site 3, we conducted low energy tests using a custom, downhole electrical heater. We measured pressures and temperatures at ten different locations inside the oil sands reservoir. This information has been used for preliminary calibration of our reservoir simulator. Information from the simulator will help maximize the efficiency of the steaming tests at Test Site 1. We drilled, completed and instrumented two vertical test holes and we have constructed the supporting infrastructure. One vertical test hole is equipped with a downhole electric heater to provide heat to the reservoir and both test holes are equipped with pressure and temperature sensors to allow for determination of the effective reservoir heat transfer and mobilization of the bitumen at lower temperatures. Heating of the reservoir was initiated in late October 20 08 and re-commenced in mid-January of 2009 with the heater placed at the depth of the Devonian underburden. In April of 2009, the heater was raised to the bottom of the oil sands reservoir and heating was continued.

Pressures and temperatures were measured and recorded continuously at ten locations in the hot heater well, 1OBS 5-29-94-25, and the cold observation well, INJ 5-29-94-25. The heater was removed from the well on June 26, 2009. Our detailed engineering and numerical simulation analysis has confirmed the formation characteristics and related fluid and thermal properties to be used in continued reservoir planning at Axe Lake. The electrical heating program at Test Site 3 enabled the determination of reservoir properties such as effective thermal conductivity.

1.	confirm the establishment of initial fluid movement in areas with water saturation of greater than 35%;

2.	confirm the ability to establish convective heat transfer at the bottom of the reservoir;

3.	determine the conductive heat transfer characteristics at the bottom of the reservoir;

4.	recover bitumen by using both hot water and solvent injection; and

5.	gather preliminary data on the horizontal displacement of fluids.

We commenced injecting cold water at low pressure and volume into the base of the McMurray/Dina formation on October 25, 2009 and established communication between the two wells. Cold water circulation was maintained for 24 hours, following which heated water was circulated, resulting in the mobilization of bitumen in the reservoir. On October 29, 2009, a small amount of naphtha was injected and bitumen recovery commenced on October 30, 2009. We continued to circulate hot water until November 5, 2009, at which time the test equipment was removed.

On October 18, 2009, the electrical, mechanical and boiler facilities at Test Site 1 were successfully commissioned and, on December 5, 2009, we commenced the injection of cold water into the reservoir at Test Site 1. The test was to measure heat and fluid movement under specific operating conditions on a field scale to complement our ongoing simulation and laboratory analysis studies and further enhance our knowledge and modeling of the thermal and geo-mechanical characteristics of our reservoir.

Initial injectivity was achieved and circulation tests were conducted between three sets of well pairs that are 1.5m, 10m, and 18m apart respectively. Tracer tests were also conducted by injecting a saline solution down the injector well and measuring the produced volumes of salt and water in the producer well. Inter-well communication was positively confirmed by measurement of substantial percentages of saline tracer at the producer wells.

We have analyzed the results from the circulation and tracer tests and history-matched the field results in the computer simulations. We have the ability to continue to monitor reservoir pressure and temperature with the down-hole monitoring array we have in place.

The next phase of testing, subject to regulatory approvals, will include the drilling of a new Steam Assisted Gravity Drainage ("SAGD") well pair in close proximity to the existing wells at Test Site 1 to build on our growing knowledge of the reservoir and cap rock characteristics and test the commercial viability of SAGD at Axe Lake. The addition of SAGD wells to our testing plan will enable us to build upon the testing we have done to date and will enable us to test a bitumen production technology that has been proven to be commercially viable in similar reservoirs in the Athabasca basin.

We have received approval of a SAGD pilot at Test Site 1 from Saskatchewan Ministry of Environment ("SME"). The test plan will use one 100 metre long horizontal well pair, with the upper well placed five metres below the top of the interface between the overburden and the oil sands, and will also make use of the existing surface facilities. SAGD has been the most widely used, and therefore best understood, in situ recovery technique for the production of immobile bitumen (at initial reservoir conditions) in the McMurray/Dina formations.

The objectives of this pilot are to:

·	test the effects of steam contact from SAGD operations in the McMurray/Dina formation on the glacial till overburden at Axe Lake and directly demonstrate that the cap will perform as a competent steam containment barrier in SAGD operations;

·	confirm early stage SAGD production and steam rates with a scalable well length in order to improve forecasting for a commercial project;

·	determine the optimal producing pressure for a commercial project;

·	establish gas production rates and composition and produced water composition for facility design; and

·	better understand the initial critical water saturation (minimum saturation at which water becomes mobile) in bitumen rich zones for use in forecast model.

Following the successful completion and interpretation of the initial steam test results, we may submit an application to continue the test for up to another six months in order to further evaluate injection pressures to help determine the optimal operational pressure for designing its commercial project.

At Test Site 1 we drilled two water source wells which showed excellent fluid mobility and sufficient water withdrawal capacity to meet the current needs of the reservoir test program at Axe Lake. At Test Site 3 we drilled and tested two water source wells which did not demonstrate sufficient water mobility and were abandoned.

We drilled, perforated and tested one vertical well (Oilsands Quest Clearwater OBS 4-21-94-25 W3M) near Test Site 3 for water disposal into the McMurray/Dina formation. The testing was positive and an application to dispose water in this well was submitted to the Saskatchewan government in June 2009. Approval to use the 4-21 week for disposal of water for the first phase

of testing at Test Site 1 was granted and the well was used for water disposal in fall 2009. At Test Site 2 we drilled one deep well to test the potential of the underlying Devonian Methy formation for waste water disposal. The results of this well showed that the Devonian Methy formation does not contain enough porosity in the tested location to support water disposal. Other test locations are being investigated.

In May 2010, we filed an application with the SME for approval to develop a 30,000 barrels per day of bitumen project at Axe Lake using SAGD.

Filing with the SME is the first step in a two-stage process to apply for approval of a commercial lease for oil sands development. This application provides the complete vision for the project, giving the regulator helpful context when approving testing activity and giving all stakeholders clarity around the long-term development plans. The second stage of the process consists of an application for commercial project approval to the Saskatchewan Ministry of Energy and Resources ("SMER"). We plan to submit the second application following the successful completion of the SAGD pilot. In preparing the second application, we will continue to develop detailed engineering plans, cost estimates and financing plans for the project based on the ongoing production testing activities at Axe Lake.

The proposed commercial project includes components typical of SAGD operations such as multi-well production pads of horizontal well pairs, and a central processing and bitumen and natural gas treatment facility that includes water treatment, water recycling, steam generation and tank storage facilities. Options for site access, utility service corridors, electricity and natural gas supplies are also being evaluated.

In May 2010 we filed for the second one-year extension of our Saskatchewan oil sands permits and notified SMER that we would, on May 31, 2010, plan to relinquish two of our northernmost land permits (permits PS00213 and PS00215) as we focus our activities to include only those lands that recent exploration activity has demonstrated to be prospective. Exploration activities on these two permits included over 42 miles (68 kilometres) of 2-D seismic and 14 coreholes. Relinquishing these permits will not impact the Company's resource estimates or development plans. We received approval for the extensions on the remaining permits on June 21, 2010.

As part of the overall Axe Lake development plan, we continue to conduct advanced economic feasibility, financial planning and risk assessment studies for full commercial development and we are continuing to study infrastructure and bitumen markets to complement our development planning process. Development of a commercial project remains subject to regulatory approval and other contingencies such as successful reservoir tests, internal approvals, financing and other risks inherent in the oil sands industry (See Part I, Item 1A. "Risk Factors" and see Part II, Item B. "Other Information").

Raven Ridge

In March 2007, prior to acquiring the key permits comprising Raven Ridge, we completed 64 kilometres of 2-D seismic survey to assess the potential of the permit land and identify potential drilling targets. As a result of this survey, we expected that the Axe Lake oil sands reservoir would extend into Alberta and that numerous attractive exploration drilling targets would be identified. A detailed, three component 3-D seismic survey was undertaken covering 6.4 square kilometers (4 square miles) adjacent to the program undertaken at Axe Lake, in Saskatchewan. Initial approval for exploration drilling in Alberta was received in December 2007 and 25 exploration holes were drilled in 12 sections (12 square miles) during the 2007/2008 program. Of the 25 holes, 18 encountered meaningful intercepts of McMurray/Dina formation (72 percent) at d epths of 113 metres (371 feet) to 227 metres (745 feet). The thickness of the bitumen-bearing zone within the McMurray/Dina formation was observed to be between 7 metres (23 feet) and 34 metres (112 feet) (net pay) with an average of 15.5 metres (51 feet).

In early 2009, we drilled an additional 23 exploration and delineation test wells in Raven Ridge. The Raven Ridge drilling program has demonstrated continuity of bitumen characteristics extending from Axe Lake in Northwest Saskatchewan westward into Alberta and we have identified, through drilling, two areas of specific interest for potential development. There was significant correlation observed between the drilling results and the estimates made based on the Company’s 2007 2-D seismic program.

Wallace Creek

In January 2008, prior to acquiring the Wallace Creek permits, we completed 53 kilometres (32 miles) of 2-D seismic survey to assess the potential of the permit lands prior to their purchase. During the 2006/2007 winter exploration program, the Company drilled two holes in Saskatchewan, directly to the east of Wallace Creek and both intercepted bitumen-bearing oil sands. Within the Wallace Creek permit lands, there are also five legacy test wells drilled.

In March 2010, we completed a 9 hole exploration drilling program on lands in the western township (TWP 96 R2 W4) of the Wallace Creek permits that are immediately adjacent to Cenovus' Borealis project area. 4 of the wells drilled encountered significant quantities of bitumen with one well intercepting up to 26 meters of oil sand in the McMurray/Dina formation. McDaniel reviewed the results and provided an updated resource estimate in compliance with COGEH and NI 51-101 in June 2010.

Eagles Nest

Over the winter of 2005/2006 we undertook a detailed assessment of the historical data available on the Eagles Nest Prospect. During 2007/2008 we concentrated our efforts in acquiring the interests of the Triple 7 Joint Venture partners, which was completed in June 2008.

Pasquia Hills Oil Shale Permit Area

In September 2008, we drilled 11 exploration test holes (covering an area of approximately 100 square miles) on our oil shale prospect in southeastern Saskatchewan with all the holes drilled encountering meaningful intercepts of oil shale of up to 21.5 meters in thickness. Detailed evaluation and interpretation of the drilling results is underway. We are continuing to evaluate alternative potential methods for kerogen recovery from oil shale. The key challenge is producing kerogen (oil shale) on a commercial basis lies in finding an economic process. A geologic assessment of our permit lands based on the drill results, together with the data obtained from legacy drilling is being prepared by Norwest Corp. This analysis will also include the preliminary estimate of shale oil-in-plac e.

In September and October 2009, we drilled and logged 12 exploration test holes on our oil shale prospect in eastern Saskatchewan with ten out of twelve holes drilled experiencing meaningful intercepts of oil shale of up to 37.0 meters in thickness. Detailed evaluation and interpretation of the drilling results is underway. We are currently processing core samples in the laboratory by using the Modified Fisher Assay method and some of these samples will be tested using a commercially proven recovery process to measure recovery factors. We are continuing to research potential methods for kerogen recovery from the Pasquia Hills oil shales. Our recent conditional sale of our Pasquia Hills properties to a new company formed by Christopher Hopkins is an important transaction for us and it follows several month s of effort to determine the best use of our financial and management resources.

The management and Board of Directors of OQI have recognized for some time that retaining and developing the Pasquia Hills oil shale deposits over the remaining permit life would require considerable time, effort and financial resources at the same time that OQI was in the process of exploring and developing its significant portfolio of oil sands assets. In July of 2009, we announced that we would explore various options to spin off our oil shale assets.

In the Fall of 2009, the Board appointed a special committee of Directors to oversee this process and make a recommendation to the Board.

In exploring the potential options for the oil shale properties, the special committee found that a share or dividend distribution of the Pasquia Hills properties to current shareholders or new investors would be cost prohibitive, and could create a potential tax burden to shareholders.

The special committee, as part of its mandate, engaged TD Securities to provide financial advice to the Board. TD Securities advised us that there were no recent sales of comparable assets to use as a benchmark in valuing the oil shale properties. The valuation of these properties was also difficult because of the lack of a proven process to extract the hydrocarbons in the oil shale and the significant financial resources required to explore and develop these lands. In addition, the Board sought to retain a continuing position in the oil shale properties for the benefit of OQI shareholders, which further limited the market of potential purchasers.

In order to maximize the value of its desired continuing position in the oil shale properties, the Board was interested in selling the properties to someone experienced with early stage exploration companies. Christopher Hopkins, our former President and Chief Executive Officer and a current director, had previously founded and built a number of early stage exploration companies, including OQI, and expressed interest in acquiring the oil shale properties. Mr. Hopkins, along with Scott Thompson and Tom Milne, former directors of OQI, both of whom have considerable experience in the development of large, non-conventional hydrocarbon resources, formed Canshale Corp. for the purpose of negotiating the acquisition of the oil shale properties. Canshale engaged the services of Genuity Capital Markets as a financial advisor in connection with such negotiations.

On January 15, 2010, after a period of negotiation, OQI entered into an agreement to sell all of its oil shale properties to Canshale for consideration of CDN $1 million (US $0.9 million) in cash and 8,000,000 common shares of Canshale. The Canshale Transaction is conditional upon Canshale raising a minimum of CDN $12.5 million (US $11.7 million) in cash through a common share financing. Under the terms of the agreement, the Company has the right to terminate the agreement if Canshale does not complete its financing by June 30, 2010. On July 6, 2010, the Company and Canshale amended the agreement to extend the deadline for Canshale to complete its financing to July 30, 2010 in exchange for an extension incentive of 2.0 million common shares of Canshale. Upon consummation of the Canshale Transaction, the Company will retain an ownership interest of up to 20% of Canshale’s outstanding common shares. The Company does not intend to proceed with the Canshale Transaction unless Canshale is fully capitalized to execute an effective exploration program in respect of the oil shale assets.

The Canshale Transaction was structured to enable OQI to focus its financial and management resources on developing the significant oil sands project at Axe Lake and continuing with exploration activities on its remaining lands. The Canshale Transaction will put the oil shale assets into the fully-capitalized company (of which OQI will own up to 20%) that is managed by an experienced exploration team, add cash to the OQI treasury, reduce OQI's work commitments and permit rental costs on undeveloped oil shale lands, as well as reduce salary and general administration costs on an ongoing basis.

OQI will retain ownership of 10,000,000 shares of a fully-capitalized Canshale, giving OQI shareholders exposure to the potential upside of this venture that will be managed by an experienced early-stage asset exploration team. This transaction was structured to enable OQI to leverage the expertise of Mr. Hopkins and his team in building an early stage exploration company in Saskatchewan.

Environmental and Regulatory

Our Saskatchewan oil sands permits were granted in 2004 and are for five year terms. These permits expired in 2009. Each permit allows for an option to request three additional year long extensions. On June 21, 2010 we received approval for the second of the possible three one-year extensions. The Company currently plans to seek an additional one-year extension for the oil sands permits in May 2011 and plans to convert these lands to lease in 2012. While we expect that our application for extension will be granted, approval requires that certain conditions are met and that the Company is in compliance with the governing regulations. Currently, the Company is working with the regu lators to assess an issue relating to the re-abandonment of early exploration coreholes. It is possible that the outcome of such assessment could result in cancellation of the permits if the Company does not comply with the governing regulations. Further, if the Company cannot remediate these coreholes to industry standards, our ability to commercially develop the Axe Lake reservoir may be limited. For a complete description of the re-abandonment issue See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Abandonment and Reclamation Costs" and for a complete description of the risk factors associated with permit retention See "Part I, Item 1A. "Risk Factors".

We expanded our baseline environmental programs in the Axe Lake, Raven Ridge and Wallace Creek areas in anticipation of our comprehensive Environmental Impact Assessment required as part of the application for regulatory approval for development process in Alberta and Saskatchewan. We continue to operate our continuous air quality monitoring station at Axe Lake.

The development of a commercial project will remain subject to regulatory approval and other contingencies such as successful reservoir tests, board of directors' approvals, financing and other risks inherent in the oil sands industry. These risks are described in detail elsewhere in this Annual Report on Form 10-K.

Oil Sands Reservoir Analysis

We contributed $1 million to the Saskatchewan Research Council (SRC) for the development and construction of a 3-D scaled physical model for testing oil sands reservoir technology. The 3-D scaled physical model will allow scientists to develop thermal and solvent extraction processes to recover bitumen from oil sands. It will allow testing of bitumen recovery processes under realistic reservoir conditions and provide the data to enable advanced simulation work and design. We will evaluate the recovery and production methods developed with the 3-D scaled physical model for our Axe Lake reservoirs in northwest Saskatchewan.

We continue to investigate and stay abreast of industry advances in bitumen mobilization and recovery processes.

Other

Forum Uranium Corp.

During the year ended April 30, 2008, we received 600,072 common shares of Forum Uranium Corp. (“Forum”) in exchange for our interest in a uranium prospect written off in 2003. As costs associated with the property had previously been written of,f the value of the shares received was credited to exploration costs.

We account for our interest in Forum as available for sale equity securities and will carry the investment on our balance sheet as a current asset valued at the trading value of the securities on the balance sheet date.

Outlook

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

The following is an overview of key activities planned in the next twelve months, although our plans are subject to change based on many factors, some of which are beyond our control:

—

we will continue our reservoir characterization efforts and continue to evaluate well data, perform petrophysical analyses, design and execute pertinent geophysical logging and perform advanced laboratory studies;

—

we are continuing the planning of additional exploration programs to further define the location, extent and quality of the potential bitumen resource in Axe Lake, Raven Ridge, Wallace Creek and Eagles Nest;

—

infrastructure remains a critical element for continued operations and we will continue to investigate various pipe line solutions for gas and liquids transport, different trajectories for permanent road access and possible solutions for the provision of power and we will design and start the execution of a base plan for all infrastructure needs;

—

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

—

we intend to maintain our asset base and core technical team in order to advance to the commercial development plan for our resource.

The Company is continuing to advance reservoir testing programs to evaluate the use of SAGD as a recovery method and determine the containment capabilities and extent of the glacial till layer over our reservoirs. Under the COGEH guidelines, any evaluation of our contingent resource volumes and economics is limited to the use of recovery methods that are developed and verified by testing in our reservoir. The Company engaged McDaniel to conduct its evaluation of our resources assuming the use of SAGD. The McDaniel report summarizes the estimated volumes of contingent and prospective resources at Wallace Creek, Axe Lake, Raven Ridge and Eagles Nest. The remaining bitumen resources are categorized under COGEH as unrecoverable at this time. At this time, only a portion of the contingent resource s assigned by McDaniel have been sub-classified as economic. The company anticipates that successful reservoir testing will result in a portion of the resources currently classified as sub-economic contingent and unrecoverable being reclassified as economic contingent resources.

Employees

As at June 30, 2010, the Company had 46 employees, including 1 seasonal field employee of OQI Sask. Additional employees will be added as activity levels dictate and field exploration and development activities increase.

Available Information

We maintain an internet website at www.oilsandsquest.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K.

We make available on or through our website annual, quarterly and periodic reports, proxy statements and other information that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934, as amended. Alternatively, you may read and copy any information we file with the SEC at the SEC's public reference room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information about the operation of the public reference room by calling 1-800-SEC-0330. You may also obtain this information from the SEC’s website, www.sec.gov. We also file this information with Canadian securities regulators and it is available at www.sedar.com.

The Oil Sands Industry in Canada

The following information quotes liberally from the Canadian Association of Petroleum Producers, the Energy Resources Conservation Board of Alberta, the National Energy Board of Canada and a variety of technical reports and publications.

Canada is the world’s fifth largest producer of energy. It is the world’s third largest natural gas producer and its seventh largest crude oil producer. Between 1980 and 2007, energy production in Canada almost doubled, with oil and gas accounting for 90 percent of the increase.

In terms of global energy sources, Canada’s oil reserves are second only to those of Saudi Arabia, which has an estimated 264 billion barrels of oil reserves. Canada’s oil reserves are estimated to be 179 billion barrels, of which 173 billion barrels are oil sands reserves considered economically recoverable with today’s technology.

Canada’s oil sands deposits contain a vast quantity of crude bitumen: an initial volume-in-place of 1.7 trillion barrels which includes an ultimate potential of 315 billion barrels recoverable. The Canadian Association of Petroleum Producers (“CAPP”) estimates that, at current production levels, oil sands reserves could sustain production of 3.0 million barrels/day for more than 150 years.

Production from the oil sands continues to replace diminishing reserves of conventional crude oil in Western Canada. According to CAPP, oil sands production has grown four-fold since 1990 and, in 2007, exceeded 1.2 million barrels per day. Today, oil sands production accounts for 55 percent of total crude-production in western Canada. It is estimated that, by 2015, oil sands’ share of production will rise to three out of every four barrels. By 2015, CAPP estimates oil sands production will be 2.2 million barrels per day and, by 2025, 3.3 million barrels per day.

CAPP reports that, from 1997 to 2006, a total of $59 billion CDN was invested in the oil sands. The industry has become increasingly vital to meeting the energy needs of both Canada and the United States. Canada is the largest supplier of energy to the U.S. and, in 2007, exported over 1.8 million barrels of crude oil per day to the U.S., almost 19 percent of total U.S. demand. About 1.6 million barrels per day come from western Canada.

Oil sands deposits are composed primarily of sand, silt and clay, water and bitumen, along with minor amounts of other minerals. Typical composition might be 75 to 80 percent inorganic material (mostly quartz sands), 3 to 7 percent water, and 10 to 12 percent by weight bitumen, with bitumen saturation varying between zero and 18 percent by weight.

Oil from the oil sands is often called “crude bitumen” to distinguish it from conventional crude oil. Bitumen is a thick, black, tar-like substance that pours extremely slowly. Compared to typical crude oils, which contain approximately 14 percent hydrogen, bitumen is deficient in hydrogen. In order to make crude bitumen an acceptable feedstock for conventional refineries, it must be upgraded through the addition of hydrogen or the rejection of carbon. In order to transport crude bitumen to refineries, it must be blended with a diluent, usually condensate, to meet pipeline specifications for density and viscosity.

Oil sands deposits are located at a variety of depths. Economically recoverable oil sands that are located less than 200 feet deep can be recovered by open pit mining methods; those located deeper than 200 feet can be produced using in situ (or “in place”) methods of bitumen recovery.

Alberta has three major oil sands areas, each with a number of bitumen-bearing deposits: Athabasca, Cold Lake and Peace River. According to the Energy Resources Conservation Board (“ERCB”) of Alberta, an estimated 20 percent of the Province’s initial established reserves are mineable; the remainder are suitable only for in situ recovery methods. The Athabasca oil sands cover the largest area; this is also where the province’s mineable deposits are located. The ERCB also estimates that, in Alberta, the vast majority of lands thought to contain bitumen that could be recovered by either method are currently already leased.

In 2008 Alberta produced 230 million barrels of oil from the mineable oil sands and 213 million barrels from the in situ area; this is equivalent to 1.2 million barrels per day. In open pit mining operations, overburden is removed, oil sands ore is mined and bitumen is extracted from the mined material essentially using hot water processes. With in situ recovery, generally steam, water or other solvents are injected into the reservoir to reduce the viscosity of the bitumen, which allows it to flow to a vertical or horizontal wellbore.

Commercial production from the Alberta oil sands began in the 1960s. The first two integrated mining projects were Great Canadian Oil Sands (now Suncor), which began operations in 1967, and Syncrude, which came onstream in 1978. The ERCB estimates that, at the end of 2008, almost three-quarters of the initial established reserves in the surface-mineable area were under active development. There are now three mining projects, another two mine projects are under construction and seven are in various stages of project development.

Aside from primary production (including water injection), which has limited use in Cold Lake and Peace River areas, two main in situ methods are being used to commercially produce bitumen: cyclic steam stimulation (CSS) and steam-assisted gravity drainage (SAGD). In the Athabasca oil sands area, there are 10 operating in situ projects and another 41 in various stages of development. In the Cold Lake area, 8 in situ projects are operating and 8 more are in various stages of development. The Peace River area has 2 operating in situ projects and another 3 in various stages of development. The term upgrading is giv en to a process that converts bitumen and heavy crude oil into synthetic crude oil. Alberta’s first crude bitumen upgrader is located in Edmonton; two more are operating in the Athabasca region. Three upgraders are currently under construction in the Athabasca region and another ten are in various stages of development.

In CAPP’s most recent forecast they state "given signs of the beginning of economic recovery, oil sands producers are proceeding with a more balanced pace of development. Producers have returned many projects back to active development but remain mindful to establish a more controlled cost environment as they remain cautious with their estimates for future oil prices."

In addition to economic factors, the challenges Canada’s oil sands industry faces include long term skilled labour shortages and environmental issues. However, according to the National Energy Board: “The challenges faced by the oil sands industry are counter-balanced by the opportunities. At a time of increasing resource nationalism around the world, Canada’s huge oil sands reserves, set in a climate of relatively stable political and economic policy, represent an attractive target for investment. The potential for technological innovation to reduce the costs of bitumen extraction and upgrading is an additional attraction. Given the outlook for continued higher oil prices, return on investment should be sufficient to drive oil sands expansion.”

Government Regulation

Our business is subject to various federal, provincial and local laws and governmental regulations that may be changed from time to time in response to economic, technical or political conditions. In Saskatchewan, the legislated mandate for the responsible development of the Province’s oil and gas resources is set out in the Energy and Mines Act that provides the Minister with the responsibility for the exploration, development, management and conservation of non-renewable resources. The Oil and Gas Conservation Act allows the orderly exploration for, and development of, oil and gas in the Province and optimizes recovery of these resources. For permits granted prior to May 7, 2007, the exploration of oil shales, which includes oil sands, is regulated under the Oil Shale Regulations, 1964, as amended or revised or substituted from time to time, under the Crown Minerals Act. These regulations apply to oil shale rights that are the property of the Province and establish the terms under which exploration permits and leases are granted. Since 2005, the Province of Saskatchewan undertook a consultation review process with all stakeholders in an effort to update the oil sands and oil shale regulations to align regulations better with other regimes in the country and to encourage exploration and development activity in the Province. On May 7, 2007, the Province of Saskatchewan issued new regulations for oil sands and oil shales u nder the Petroleum and Natural Gas Amendment Regulations 2007 whereby oil sands and oil shale mineral rights will be available under the competitive bid and work commitment bid processes, respectively. Previously issued oil sands and oil shale dispositions will continue to be administered under amended provisions to the Oil Shale Regulations, 1964, which were also updated for today’s economic and technical considerations. OQI’s current Saskatchewan oil sand and oil shale permits will continue to be administered under the Oil Shale Regulations, 1964, as amended.

In Alberta, oil sands activities are legislated under the Mines and Minerals Act which governs the management and disposition of rights in Crown owned mines and minerals, including the levying and collecting of bonuses, rents and royalties. The Oil Sands Conservation Act establishes a regulatory regime and scheme of approvals administered by the Energy Resources Conservation Board (formerly the Alberta Energy and Utilities Board) for the development of oil sands resources and related facilities in Alberta. The Acts are supported by the following regulations: Oil Sands Tenure Regulation, Oil Sands Royalty Regulation 1984, Oil Sands Royalty Regulation, 1997, Experimental Oil Sands Royalty Regulation, Oil Sands Conservation Regulation, and Mines and Minerals Administration Regulation.

We are required to comply with the environmental guidelines and regulations established at the federal, provincial and local levels for our field activities and access requirements on our permit lands, license lands and leases. Any development activities, when determined, are expected to require detailed and comprehensive environmental impact assessments studies and approvals of federal, provincial and local regulators. Each provincial jurisdiction also maintains specific royalty regimes that will be applied to all oil sands and oil shale development projects consistent with other resource developments.

Glossary of Common Terms

The terms defined in this section are used throughout this Form 10-K.

Bitumen or crude bitumen

A highly viscous oil which is too thick to flow in its native state, and which cannot be produced without altering its viscosity; a naturally occurring mixture, mainly consisting of viscous hydrocarbons heavier than pentane, that may contain sulphur compounds and that in its naturally occurring viscous state does not usually flow to a well. The density of bitumen is generally less than 10 degrees API (as that term is defined by the American Petroleum Institute).

Core		Cylindrical sample of rock taken from a formation for the purpose of examination and analysis.

Corehole, core test well, Stratigraphic test well, or Exploration Stratigraphic test well		A drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition. Ordinarily, such wells are drilled without the intention of being completed for hydrocarbon production. They include wells for the purpose of core tests and all types of expendable holes related to hydrocarbon exploration.

		Stratigraphic test wells are classified as

		(a) “exploratory type” if not drilled into a proved property; or

		(b) “development type”, if drilled into a proved property.

		Development type stratigraphic wells are also referred to as “evaluation wells”.

Crude oil (conventional)		A mixture that consists mainly of pentanes and heavier hydrocarbons, which may contain sulphur and other non-hydrocarbon compounds, that is recoverable at a well from an underground reservoir and that is liquid at the conditions under which its volume is measured or estimated. It does not include solution gas or natural gas liquids.

Degrees API		A scale defining hydrocarbon density, determined by the American Petroleum Institute ("API"); the lower the number, the higher the viscosity (see “viscosity”). Water has a API of 10○.

Diluent		Lighter viscosity petroleum products that are used to dilute bitumen for transportation in pipelines.


Exploration costs		Costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to have prospects that may contain oil and gas reserves, including costs of drilling exploratory wells and exploratory type stratigraphic test wells.

Extraction		A process unique to the oil sands industry, in which bitumen is separated from its source (oil sands).

Formation		A bed or deposit composed throughout of substantially the same kind of rock. Each different formation is given a name, often as a result of the study of the formation outcrop at the surface and sometimes based on fossils found in the formation.

In situ		In its original place; in position. When referring to oil sands, in situ recovery refers to various methods used to recover deeply buried bitumen deposits, including steam injection, solvent injection and firefloods.
Kerogen		The hydrocarbon content of oil shale. Kerogen is also known as shale oil.

Lease		An agreement granting to the lessee rights to explore, develop and exploit a property.

McMurray/Dina		The McMurray formation is a stratigraphical unit of Cretaceous age in the Western Canadian Sedimentary Basin. The Saskatchewan equivalent is known as the Dina formation.

Oil sands		Sand and other rock materials containing bitumen; the crude bitumen contained in those sands and other rock materials. Bitumen is immobile at the initial reservoir conditions.

Oil sands deposit		A natural reservoir containing or appearing to contain an accumulation of oil sands separated or appearing to be separated from any other accumulation.

Oil shale		A geologic formation consisting of shale which contains hydrocarbons.

Overburden		Thickness of material above an occurrence of bitumen. The thickness of the overburden determines the method of bitumen recovery (mining or in situ techniques). Overburden could consist of layers of sand, gravel and shale; in many places overburden underlies muskeg which is a water-soaked layer of decaying plant material one to three metres (three to ten feet) thick. Muskeg supports the growth of shallow-root trees.

Permeability		Ability of a porous rock to transmit fluid through its pore spaces. A rock may be highly porous and yet impermeable if it has no interconnecting pore network (communication).

Porosity		The proportion of a rock's total volume occupied by voids between mineral grains.

Reservoir		Porous, permeable sedimentary rock structure or trap containing oil and/or gas. A reservoir can contain more than one pool (accumulation of oil or gas).

SAGD		Steam assisted gravity drainage is an example of an in situ process used to recover bitumen from oil sand located too deep to be profitably mined.

Upgrading		The process that converts bitumen or heavy crude oil into a product with a lower density and viscosity.

Viscosity		A measure of the resistance of a liquid to flow. The viscosity of petroleum products is commonly expressed in terms of the time required for a specific volume of the liquid to flow through an orifice of a specific size. As the temperature of a fluid increases its viscosity decrease and therefore it flows more easily.

Working interest		The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and to share in the production.

Item 1A. RISK FACTORS

Our business activities, and the oil and gas industry in general, are subject to a variety of risks. If any of the following risk factors should occur, our profitability, financial condition or liquidity could be materially impacted. As a result, holders of our securities could lose part or all of their investment in Oilsands Quest Inc.

RISKS RELATED TO OUR BUSINESS

Government Regulations and Retention of Permits, Leases and Licenses

The business of resource exploration and development is subject to substantial regulation under Canadian provincial and federal laws relating to the exploration for, and the development, upgrading, marketing, pricing, taxation, and transportation of oil sands bitumen and related products and other matters. Amendments to current laws and regulations governing operations and activities of oil sands exploration and development operations could have a material adverse impact on our business. In addition, there can be no assurance that income tax laws, royalty regulations, environmental regulations and government incentive programs related to the permits in Saskatchewan, oil sands exploration licenses in Saskatchewan, the permits in Alberta and the Eagles Nest Prospect and the oil sands industry generally, will not be changed in a manner wh ich may adversely affect our progress and cause delays, or cause the inability to explore and develop, resulting in the abandonment of these interests.

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

On June 21, 2010 we received approval for the second of the possible three one-year extensions. While we expect that an application for a potential third extension would be granted, approval requires that certain conditions are met and that the Company is in compliance with the governing regulations. Currently, the Company is working with the regulators to assess an issue relating to the re-abandonment of early exploration coreholes. It is possible that the outcome of such assessment could result in cancellation of the permits if the Company does not comply with the governing regulations. Further, if the Company cannot remediate these coreholes to industry standards, our ability to commercially develop the Axe Lake reservoir may be limited.

Certain First Nations and Métis people have treaty and aboriginal rights, and claim aboriginal title, in relation to our permit and lease lands in Alberta and Saskatchewan and other lands that are potentially affected by our activities. The Governments of Canada, Alberta and Saskatchewan have a duty to consult with those aboriginal people in relation to actions and decisions which may impact those rights and claims and, in certain cases, have a duty to accommodate their concerns. These duties have the potential to adversely affect our ability to obtain permits, leases, licenses and other approvals, or the terms of those approvals, which could adversely impact our progress and ability to explore and develop.

Abandonment and Reclamation Obligations

We are responsible for compliance with terms and conditions of environmental and regulatory approvals and all laws and regulations regarding the abandonment of a project and reclamation of its lands at the end of its economic life, which abandonment and reclamation costs may be substantial. A breach of such approvals, legislation and/or regulations may result in the issuance of remedial orders, the suspension of approvals, the seizure of posted security or the imposition of fines and penalties, including an order for cessation of operations at the site until satisfactory remedies are made. All delineation wells are abandoned and reclaimed immediately and these costs are included with our exploration costs incurred. Our estimated abandonment and reclamation costs could change as the reclamation requirements will be a function of regulat ions in place at the time. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates and changes in the estimated timing of abandonment. In the future, we may determine it prudent or be required by applicable regulatory approvals, laws or regulations to establish and fund one or more reclamation funds to provide for payment of future abandonment and reclamation costs.

We record the fair value of a liability for an asset retirement obligation when there is a legal obligation associated with the retirement of a tangible long-lived asset and the liability can be reasonably estimated. The legal obligation to perform the asset retirement activity is unconditional even though uncertainty may exist about the timing and/or method of settlement that may be beyond the Company’s control. This uncertainty about the timing and/or method of settlement is factored into the measurement of the liability when sufficient information exists to reasonably estimate the fair value. The amount of asset retirement obligation recorded reflects the expected costs, taking into account the probability of particular scenarios. The difference between the upper end of the range of these assumptions and the lower end of the r ange can be significant, and consequently changes in these assumptions could have a material effect on the fair value of asset retirement obligations and future losses in a period of change.

If the Company is unable to reabandon the early exploration coreholes to industry regulation standards, it could result in the cancellation of permits or limit our ability to develop the reservoir.

If we fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the price of our common shares may be affected

We are required to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 and related regulations. Any material weakness in our internal control over financial reporting that needs to be addressed, disclosure of management’s assessment of our internal control over financial reporting, or disclosure of our public accounting firm’s report on internal control over financial reporting that reports a material weakness in our internal control over financial reporting may reduce the price of our common shares.

The restatement of our consolidated financial statements may result in litigation and government enforcement actions

We have restated our consolidated financial statements and other financial information for the years ended April 30, 2008 and 2007 and the interim periods from July 31, 2008 through January 31, 2009 primarily with respect to the accounting treatment of our August 2006 acquisition of a non-controlling interest (35.92%) of OQI Sask which together with our 64.08% interest resulted in a 100% interest in OQI Sask. We have also restated our consolidated financial statements and other financial information for the interim period ended July 31, 2009 with respect to accounting for stock-based compensation. The restatement of our prior financial statements may expose us to risks associated with litigation, regulatory proceedings and government enforcement actions, including the risk that the SEC may disagree with the m anner in which we have accounted for and reported the financial impact of the restatement which could result in the Company having to further restate its prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated.

In addition, securities class action litigation has often been brought against companies who have been unable to provide current public information or who have restated previously filed financial statements. Such litigation is complex and could result in substantial costs, divert management’s attention and resources, and harm our business, financial condition and results of operations.

Due to our history of operating losses, we are uncertain that we will be able to maintain sufficient cash to accomplish our business objectives

The consolidated financial statements have been prepared assuming that we will continue as a going concern. During the fiscal years ended April 30, 2010 and 2009 we suffered net losses of $64 million and $89 million, respectively. At April 30, 2010, there was stockholders’ equity and working capital of $399 million and $17 million, respectively. There is no assurance that we can generate net income, generate revenues or successfully explore and exploit our properties.

Significant amounts of capital will be required to explore the permit lands in Saskatchewan and Alberta, oil sands exploration licenses in Saskatchewan and the Eagles Nest area. The only source of future funding presently available to us is through the sale of additional equity capital and borrowing funds or selling a portion of our interest in our assets. There is no assurance that any additional equity capital or borrowings required will be obtainable on terms acceptable to us, if at all. Failure to obtain such additional financing could result in delays or indefinite postponement of further exploration and development of our projects. Equity financing, if available, may result in substantial dilution to existing stockholders. Our financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we become unsuccessful in implementing these plans.

The impact of disruptions in the global financial and capital markets on our ability to obtain financing

The market events and conditions that transpired in 2008 and 2009, including disruptions in the international credit markets and other financial systems and the deterioration of global economic conditions, have, among other things, caused significant volatility in commodity prices. These events and conditions caused a loss of confidence in the broader U.S. and global credit and financial markets and resulted in the collapse of, and government intervention in, numerous major banks, financial institutions and insurers, and created a climate of greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding various actions by governments, concerns about the general condition of the capital markets, financial instruments, banks, investment banks, insurers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to decline substantially. These factors have negatively impacted enterprise valuations and have impacted the performance of the global economy. Although credit markets, equity markets, commodity markets and the United States and global economies have somewhat stabilized (and in some instances experienced substantial recoveries), some prominent government officials, economists and market commentators have expressed concerns regarding the durability of the recovery over the near and medium term, particularly as the fiscal stimulus that was utilized by the world's governments to combat the global financial crises is withdrawn over time in the coming months and years.

Although we expect to meet our near term liquidity needs with our working capital on hand, we will continue to need further funding to achieve our business objectives. In the past, the issuance of equity securities has been the major source of capital and liquidity for us. The recent conditions in the global financial and capital markets have limited the availability of this funding. If the disruptions in the global financial and capital markets continue, debt or equity financing may not be available to us on acceptable terms, if at all. If we are unable to fund future operations by way of financing, including public or private offerings of equity or debt securities, our business, financial condition and results of operations will be adversely impacted. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses.

Status and Stage of Reservoir Test Program

The reservoir test program is currently at the early stages of its planned implementation schedule. There is a risk that the program will not be completed on time or on budget or at all. Additionally, there is a risk that the program may have delays, interruption of operations or increased costs due to many factors, including, without limitation: breakdown or failure of equipment or processes; construction performance falling below expected levels of output or efficiency; design errors; challenges to, or inability to access in a timely or economic fashion; contractor or operator errors; non-performance by third-party contractors; labour disputes, disruptions or declines in productivity; increases in materials or labour costs; inability to attract sufficient numbers of workers; delays in obtaining, or conditions imposed by, regulatory a pprovals; changes in program scope; violation of permit requirements; disruption in the supply of energy; transportation accidents, disruption or delays in availability of transportation services or adverse weather conditions affecting transportation; unforeseen site surface or subsurface conditions; and catastrophic events such as fires, earthquakes, storms or explosions.

Our business plan is highly speculative and its success depends, in part, on exploration success on the permit, license and lease lands and the development of identified discoveries

Our business plan is focused primarily on the exploration for and development of oil sands deposits on our permitted, licensed and leased lands in the Provinces of Saskatchewan and Alberta.

Exploration itself is highly speculative. We are subject to all of the risks inherent in oil sands exploration and development, including identification of commercial projects, selection of optimal recovery processes for successful production, operation and revenue uncertainties, market sizes, profitability, market demand, commodity price fluctuations and the ability to raise further capital to fund activities. There can be no assurance that we will be successful in overcoming these risks.

Access to Infrastructure

Production from our lease, license, and permit lands will depend upon certain infrastructure that does not currently exist in close proximity to where we currently anticipate to locate our initial projects and such infrastructure, if put in place, may be operated by others. Such infrastructure will include, without limitation, the following: pipelines for the transportation of natural gas and certain feedstock to our site and the transportation of bitumen and other petroleum products we produce to upgrading facilities and markets for sale; and electricity transmission and distribution systems for the provision of electricity. The failure to have any of this infrastructure in place on economic terms will negatively impact the operation of any potential commercial project and will adversely affect the ability to convert our resources int o reserves.

Access to Markets

By the time we have a commercial project ready for start-up, it will likely have been preceded by other projects which began development at an earlier time and are more advanced in terms of production. As a result, preferred markets for our products may have already been taken up or upgraders or refiners may lack sufficient capacity to process our products in a timely or economic fashion.

Location of Discovery Areas

With the exception of Eagles Nest, all of Oilsands Quest’s prospective areas are located east of what has to date been considered the established bitumen resources that are exploitable by in situ production techniques in the Athabasca oil sands area. Similar to some other bitumen accumulations within the eastern portion of Alberta, the Axe Lake, Raven Ridge and portions of the Wallace Creek areas lack a distinct overlying shale formation. The absence of this may preclude the use of certain high-pressure in situ recovery methods, but the quality of the reservoirs and high bitumen saturations present at the Axe Lake Raven Ridge and Wallace Creek areas provide the potential for extraction using a number of recovery methods, including SAGD. However, there can be no assurances that any such recovery method will be successful in enabling us to recover significant volumes of bitumen from our reservoirs. See "-- Status and Stage of Reservoir Test Program".

Independent Reviews

Although third parties have prepared reviews, reports and projections relating to the evaluation, viability and expected performance of our resources and plans for development thereof, no assurance can be given that these reports, reviews and projections and the assumptions on which they are based will, over time, prove to be accurate.

Personnel

The design, development and construction of the reservoir test program and any subsequent pilot and commercial projects will require experienced executive and management personnel and operational employees and contractors with expertise in a wide range of areas. No assurance can be given that all of the required personnel and contractors with the necessary expertise will be available. Should other oil sands projects or expansions proceed in the same time frame as Oilsands Quest programs and projects, we will have to compete with these other projects and expansions for qualified personnel and such competition may result in increases to compensation paid to such personnel or in a lack of qualified personnel. Any inability of Oilsands Quest to attract and retain qualified personnel may delay or interrupt the design, development and constr uction of, and commencement of operations at, the reservoir test program and any subsequent pilot and commercial projects. Sustained delays or interruptions could have a material adverse effect on the financial condition of Oilsands Quest.

Operational Hazards

Our exploration and development activities are subject to the customary hazards of operation in remote areas, such as fires, explosions, gaseous leaks, migration of harmful substances, blowouts and spills. A casualty occurrence might result in the loss of equipment or life, as well as injury, property damage or other liability. While we maintain limited insurance to cover current operations, our property and liability insurance may not be sufficient to cover any such casualty occurrences or disruptions. Equipment failures could result in damage to our facilities and liability to third parties against which we may not be able to fully insure or may elect not to insure because of high premium costs or for other reasons. Our operations could be interrupted by natural disasters or other events beyond our control. Losses and liabilities ari sing from uninsured or under-insured events could have a material adverse effect on our business, our financial condition and results of our operations.

Competitive Risks

The Canadian and international petroleum industry is highly competitive in all aspects, including the exploration for, and the development of, new sources of supply, the acquisition of oil interests and the distribution and marketing of petroleum products.

The petroleum industry also competes with other industries in supplying energy, fuel and related products to consumers. Some of these industries benefit from lighter regulation, lower taxes and subsidies. In addition, certain of these industries are less capital intensive.

A number of competing companies are engaged in the oil sands business and are actively exploring for and delineating their resource bases. Some of our competitors have announced plans to begin production of synthetic crude oil, or to expand existing operations. If these plans are effected, they could materially increase the supply of synthetic crude oil and other competing crude oil products in the marketplace and adversely affect plans for development of our lands.

The Loss of current management may make it difficult for us to operate

Investors must rely upon the ability, expertise, judgment, discretion, integrity and good faith of our management and directors. The Company’s success is dependent upon its management and key personnel. We do not maintain key-man insurance for any of our employees. The unexpected loss or departure of any of our key officers and employees could be detrimental to our future success.

Fluctuations in U.S. and Canadian dollar exchange rates may have a material adverse impact

Commodity prices and costs related to the Company’s activities, if and when applicable, will generally be based on a U.S. dollar market price. Fluctuations in the U.S. and Canadian dollar exchange rate may cause a negative impact on revenue and costs and could have a material adverse impact on the Company.

THE BUSINESS OF OIL SANDS EXPLORATION IS SUBJECT TO MANY RISKS

Nature of Oil Sands Exploration and Development

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

The viability of our business plan, business operations, and future operating results and financial condition are and will be exposed to fluctuating prices for oil, natural gas, oil products and chemicals

Prices of oil, natural gas, oil products and chemicals are affected by supply and demand, which can fluctuate significantly. Factors that influence supply and demand include operational issues, natural disasters, weather, political instability, or conflicts, economic conditions and actions by major oil-exporting countries. Price fluctuations can have a material effect on our ability to raise capital and fund our exploration activities, our potential future earnings, and our financial condition. For example, in a low oil and gas price environment oil sands exploration and development may not be financially viable or profitable. Prolonged periods of low oil and gas prices, or rising costs, could result in our exploration projects being delayed or cancelled, as well as the impairment of certain assets.

Reserves and Resources

We have not yet established any reserves. There are numerous uncertainties inherent in estimating quantities of bitumen resources and reserves, including many factors beyond our control, and no assurance can be given that the recovery of bitumen will be realized. In general, estimates of resources and reserves are based upon a number of factors and assumptions made as of the date on which the resources and reserves estimates were determined, such as geological and engineering estimates which have inherent uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from estimated results. All such estimates are, to some degree, uncertain and classifications of resources and reserves are only attempts to define the degree of unc ertainty involved. For these reasons, estimates of reserves and resources, the classification of such resources and reserves based on risk of recovery, prepared by different engineers or by the same engineers at different times, may vary substantially.

Investors are cautioned not to assume that all or any part of a resource is economically or legally extractable.

ENVIRONMENTAL AND REGULATORY COMPLIANCE MAY IMPOSE SUBSTANTIAL COSTS ON US

Our operations are or will be subject to stringent federal, provincial and local laws and regulations relating to improving or maintaining environmental quality. Environmental laws often require parties to pay for remedial action or to pay damages regardless of fault. Environmental laws also often impose liability with respect to divested or terminated operations, even if the operations were terminated or divested many years ago.

Our exploration activities and drilling programs are or will be subject to extensive laws and regulations governing prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, protection and remediation of the environment, protection of endangered and protected species, operational safety, toxic substances and other matters. Exploration and drilling is also subject to risks and liabilities associated with pollution of the environment and disposal of waste products. Compliance with these laws and regulations will impose substantial costs on us and will subject us to significant potential liabilities. In addition, should there be changes to existing laws or regulations, our competitive position within the oil sands industry may be adversely affected, as many industry players have greater resources than we do. The absence of a distinct overlying shale formation on portions of our leases may make it more difficult or costly to obtain regulatory approvals. There is no assurance that regulatory approvals for development will be obtained at all or with conditions acceptable to us.

Third Party Liability and Environmental Liability

The Company’s operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damage. We could be liable for environmental damages caused by previous owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, and the payment of such liabilities could have a material adverse effect on our financial condition and results of operations. The release of harmful substances in the environment or other environmental damages caused by our activities could result in us losing our operating and environmental permits. We currently have a limited amount of insurance and, at such time as we commence additional operations, we expect to be able to obtain and maintain additional insurance c overage for our operations, including limited coverage for sudden environmental damages, but we do not believe that insurance coverage for environmental damage that occurs over time is available at a reasonable cost. Moreover, we do not believe that insurance coverage for the full potential liability that could be caused by environmental damage is available at a reasonable cost. Accordingly, we may be subject to liability or may lose substantial portions of our properties in the event of certain environmental damage. The Company could incur substantial costs to comply with environmental laws and regulations which could affect our ability to operate as planned.

Emissions Regulations

Development of our assets is expected to result in the emission of greenhouse gases ("GHGs") and other pollutants.

On April 26, 2007, the Government of Canada announced a Regulatory Framework for Air Emissions and Other Measures to Reduce Air Emissions, or the “Framework”, which outlined proposed new requirements governing the emission of GHGs and other industrial air pollutants, including sulphur oxides, volatile organic compounds, particulate matter and possibly additional sector-specific pollutants in accordance with the Notice. The Framework introduced further, but not full, detail on new GHG and industrial air pollutant limits and compliance mechanisms that will apply to various industrial sectors, including oil sands extraction, starting in 2010. The Framework proposed GHG emission-intensity reduction targets of six percent per year from 2007 to 2010, followed by annual reductions of two percent through 2015. On March 10, 2008, th e Canadian Federal Government elaborated on the Framework with the release of its "Turning the Corner" policy document. It was contemplated that new regulations would take effect January 1, 2010. Draft regulations were expected to be available for public comment in the Fall of 2008 but have not yet been released, and it is not known when they will be released or implemented.

The proposed regulatory framework provides that existing oil sands facilities in operation by 2004 will be subject to an 18% emission intensity reduction requirement commencing in 2010, with 2% additional annual reductions thereafter until 2020. Facilities commissioned between 2004 to 2011 or facilities existing prior to 2004 which between 2004 and 2011 have had a major expansion resulting in an increase of 25% or more in physical capacity or which undergo a significant change to processes will be exempt from the 2010 emissions intensity reduction target of 18% but will have to report their emissions each year. After their third year of operation they will be required to reduce their emissions intensity by 2% annually from a baseline emissions standard which is to be determined by reference to a sector-specific cleaner-fuel standard. For oil sands facilities, it is contemplated that there will be specific cleaner-fuel standards based on the use of natural gas for each of mining, in situ and upgrading. However, an incentive to deploy carbon capture and storage (CCS) has been included in the proposed regulatory framework. CCS is where carbon dioxide is separated from a facility’s process or exhaust gas emissions before they are emitted, transferred from the facility to a suitable storage location, and injected into deep underground geological formations and monitored to ensure they do not escape into the atmosphere. If a facility commissioned between 2004 and 2011 is built such that it is able or ready to undertake CCS, then it will be exempt from the cleaner-fuel standard until 2018 and it will only be required to reduce its emission-intensity by 2% per year from its actual emissions. In situ oil sands projects and oil sands up graders built after 2011 must have their GHG emissions profiles by 2018 equivalent to that of facilities employing CCS technology. The proposed regulatory framework further encourages widespread use of CCS by 2018 by crediting emitters that make use of CCS technology for investments in pre-certified CCS projects up to 100% of their regulatory obligations through 2017.

The proposed compliance mechanisms include an emissions credit trading system for GHGs and certain industrial air pollutants, and several options for companies to choose among to meet GHG emission intensity reduction targets and encourage the development of new emission reduction technologies, including the option of making payments into a technology fund, an emissions and offset trading system, limited credits for emission reductions created between 1992 and 2006, and international emission credits under the clean development mechanism under the Kyoto Protocol for up to 10% of each firm’s regulatory obligation.

On January 30, 2010, the Government of Canada submitted to the United Nations Framework on Climate Change a non-legally binding commitment under the Copenhagen Accord to reduce Canada’s emissions of GHGs by 17% from 2005 emission levels. This is a significant change from previous international commitments of a 20% reduction in emissions from 2006 levels by 2020. The Government of Canada signaled that a new proposed national emission reduction target is to be met. It is not known whether the previously announced proposed regulatory Framework will proceed or be replaced with a new regulatory framework. We believe that it is reasonably likely that new federal legislation requiring emissions reductions similar to the Framework will be enacted in Canada around the same time as similar legisl ation is enacted in the United States. We also believe that such federal legislation could have a material effect on the development of our assets.

On April 20, 2007, the Government of Alberta passed the Climate Change and Emissions Management Amendment Act establishing a framework for GHG emission reductions similar to the proposed federal Framework. The Specified Gas Emitters Regulation created under the Act came into effect on July 1, 2007. The Specified Gas Emitters Regulation requires facilities that emit more than 100,000 tonnes of carbon dioxide equivalent annually to reduce their emission intensity starting July 1, 2007 by 12 percent from 2003-2005 levels. New facilities in operation less than eight years will be required to achieve these reductions over the fourth to eighth years of operation. These obligations may be met by in-house reductions, the purchase of certain emission reductions or offset credits or a contribution of $15 per tonne of GHG emissions to a provincial technology fund.

On December 1, 2009, the Government of Saskatchewan re-introduced in the Provincial Legislature Bill 126: The Management and Reduction of Greenhouse Gases Act. Bill 126 proposes a policy and regulatory framework for reducing GHG emissions in Saskatchewan. The Bill proposes a new provincial target for a 20% reduction in GHG emissions from 2006 levels by 2020, which is consistent with proposed federal target and different than the 32% reduction previously proposed by the Government of Saskatchewan. The specific GHG emission reduction requirements, and the industries required to meet those reductions, as well as details on the methods by which reductions may be achieved, are to be set by further regulations.

Future legislated GHG and industrial air pollutant emission reduction requirements and emission intensity requirements, or GHG and industrial air pollutant emission reduction or intensity requirements in future regulatory approvals, may require the restriction or reduction of GHG and industrial air pollutant emissions or emissions intensity from our future operations and facilities, payments to technology funds or purchase of emission reductions or offset credits. The reductions may not be technically or economically feasible for our operations and the failure to meet such emission reduction or emission intensity reduction requirements or other compliance mechanisms may materially adversely affect our business and result in fines, penalties and the suspension of operations. As well, equipment from suppliers which can meet future emissi on standards may not be available on an economic basis and other compliance methods of reducing emissions or emission intensity to levels required in the future may significantly increase our operating costs or reduce output. Emission reductions or offset credits may not be available for acquisition or may not be available on an economic basis. There is also the risk that provincial or federal governments, or both, could pass legislation which would tax such emissions.

American climate change legislation could negatively affect markets for crude and synthetic crude oil

Environmental legislation regulating carbon fuel standards in jurisdictions that import crude and synthetic crude oil in the United States could result in increased costs and/or reduced revenue. For example, both California and the United States federal governments have passed legislation which, in some circumstances, considers the lifecycle greenhouse gas emissions of purchased fuel and which may negatively affect our business, or require the purchase of emissions credits, which may not be economically feasible.

Proposed Export Restrictions

The Government of Canada previously announced that it will review and may restrict exports from Canada of bitumen and bitumen blend products to countries with less stringent GHG emissions limits than those which apply in Canada. Any export restrictions imposed with respect to bitumen or bitumen blend products may restrict the markets in which the Company may sell its bitumen and bitumen blend products, which may result in the Company receiving a lower price for its production, if and when applicable.

Royalty Regime

Any development of our resource assets will be directly affected by the royalty regime applicable. The economic benefit of future capital expenditures for the project is, in many cases, dependent on a satisfactory fiscal regime (royalties and taxes). The Government of Saskatchewan receives royalties on production of oil, gas and other minerals from lands in which it owns the relevant mineral rights. The Government of Saskatchewan owns the relevant mineral rights on the OQI Saskatchewan lands. The current royalty regime relating to bitumen production in Saskatchewan provides for a royalty of 1% of gross bitumen revenue and is payable until the project has recovered specified allowed costs. Once such allowed costs are recovered, a net royalty of 20% of operating income is payable.

The Government of Alberta receives royalties on production of natural resources from lands in which it owns the mineral rights. On October 25, 2007, the Government of Alberta announced a new royalty regime. The new regime introduced new royalties for conventional oil, natural gas and bitumen that became effective January 1, 2009 and are linked to commodity prices and production levels and apply to both new and existing oil sands projects and conventional oil and gas activities.

Under the new regime, the Government of Alberta increased its royalty share from oil sands production by introducing price-sensitive formulas which are applied both before and after specified allowed costs have been recovered. The gross royalty starts at one percent of gross bitumen revenue and increased, for every dollar that world oil price, as reflected by the West Texas Intermediate (“WTI”) crude oil price, is above CDN$120 per barrel or higher. The net royalty on oil sands starts at 25 percent of net bitumen revenue and increases for every dollar the WTI crude oil price is above CDN$55 per barrel to 40 percent when the WTI crude oil price is CDN$120 per barrel or higher. Prior to the payout of specified allowed costs, including certain exploration and development costs, operating costs and a return allowance, the gross royalty is payable. Once such allowed costs have been recovered, a royalty of the greater of: (a) the gross royalty and (b) the net royalty is payable. The Government of Alberta has announced that it intends to review and, if necessary, revise current rules and enforcement procedures with a view to clearly defining what expenditures will qualify as specified allowed costs.

There can be no assurance that the Governments of Alberta or Saskatchewan or the Government of Canada will not adopt a new fiscal regime or otherwise modify the existing fiscal regime (royalties and taxes) governing oil sands producers in a manner that could materially affect the financial prospects and results of operations of oil sands developers and producers in Alberta and Saskatchewan.

Title Risks

Aboriginal peoples have claimed aboriginal title and rights to a substantial portion of western Canada, and both First Nations and Metis peoples have commenced and could in the future commence actions claiming, among other things, aboriginal title to our Alberta and Saskatchewan lands and other lands located in the vicinity of those lands. First Nations and Metis peoples have also stated that governments have not complied with their constitutionally mandated duty to consult with and accommodate First Nations and Metis in relation to decisions that enabled us to acquire and that are required to enable us to develop our Saskatchewan and Alberta lands, and have commenced and could in the future commence actions asserting such claims. Certain of these claims, if successful, could have a significant adverse effect on our ability to conduct our business, including impacting our ability to explore and develop by impacting our ability to obtain, retain or exercise rights under permits, leases, licenses and other approvals, and the terms of such approvals.

RISKS RELATING TO OUR COMMON STOCK

We have numerous outstanding options, warrants and commitments to issue shares, which may adversely affect the price of our common stock

As of June 30, 2010, we have reserved 43,914,641 shares of our common stock for issuance upon exercise of outstanding options under plans and warrants at prices as low as $0.72 per share. The Company has also reserved 1,388,567 shares of common stock to be issued on settlement of debt of a former subsidiary. Pursuant to the Reorganization Agreement with OQI Sask dated August 14, 2006, the Company is required to issue up to 75,736,173 shares of its common s tock for all of the OQI Sask Exchangeable Shares (including warrants and options to acquire OQI Sask Exchangeable Shares) issued upon the closing (the “Reorganization”). As of June 30, 2010, 43,786,349 OQI Sask Exchangeable Shares have already been exchanged for shares of our common stock and up to an additional 31,949,824 OQI Sask Exchangeable Shares may be exchanged for common stock. Any sale into the public market of our common stock purchased privately at prices below the current market price could be expected to have a depressive effect on the market price of our common stock.

Future sales of our common stock may cause our stock price to decline

Our stock price may decline due to future sales of our shares or the perception that such sales may occur. The Board of Directors of the Company has discretion to determine the issue price and the terms of issue of shares of our common stock. Such future issuances may be dilutive to investors. Holders of shares of common stock have no pre-emptive rights under our articles of incorporation to participate in any future offerings of securities.

If we issue additional shares of common stock in private financings under an exemption from the registration requirements, then those shares will constitute “restricted shares” as defined in Rule 144 under the Securities Act of 1933 (the “1933 Act”). The restricted shares may only be sold if they are registered under the 1933 Act, or sold under Rule 144, or another exemption from registration under the 1933 Act.

Some of our outstanding restricted shares of common stock are either eligible for sale pursuant to Rule 144 or have been registered under the 1933 Act for resale by the holders. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the stock’s market price to decline.

Dividend Policy

The Company did not declare or pay cash or other dividends on its common stock during the past three fiscal years. Payment of dividends by the Company will depend upon the Company’s financial condition, results of operations, capital requirements and such other factors as the Board of Directors of the Company may deem relevant.

Our stock price can be extremely volatile

The trading price of our common stock has been and could continue to be subject to wide fluctuations in response to announcements of our business developments or those of our competitors, world commodity prices, periodic updates on our resource assessments, quarterly variations in operating results, and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our common stock.

Issuance of Preferred Stock and Our Anti-Takeover Provisions Could Delay or Prevent a Change in Control and May Adversely Affect our Common Stock

We are authorized to issue 10,000,000 shares of preferred stock which may be issued in series from time to time with such designations, rights, preferences and limitations as our Board of Directors may determine by resolution. The rights of the holders of our common stock will be subject to and may be adversely affected by the rights of the holders of any of our preferred stock that may be issued in the future. Issuance of a new series of preferred stock, or providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire, or discourage a third party from acquiring our outstanding shares of common stock. On October 30, 2006, the Company’s shareholders approved staggered terms for the Board of Directors, which could make removal of the Board of Directors more difficult for a third party. The Class A directors will serve until the annual meeting in 2012, the Class B directors until the annual meeting in 2011, and the Class C directors until the annual meeting in 2010, or each until their successors are duly elected or appointed or until their earlier death, resignation or removal. Each term for directors is three years. In addition to a staggered board, our Board of Directors adopted a stockholders rights plan in March 2006 and reserved 250,000 shares of Series A Junior Participating Preferred Stock. This stockholders rights plan could have the effect of discouraging, delaying or preventing an acquisition.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES AND STATEMENT OF OIL AND GAS INFORMATION

Pursuant to NI 51-101 the Company is required to include 100% of the oil and gas interests owned by OQI Sask and Township in the Company’s oil and gas disclosure. No information is provided in respect of reserves attributable to the Company as no reserves have been attributed to any of the Company’s properties to date and, accordingly, the Company has no production or related future net revenue.

Oil and Gas Properties and Wells

Oilsands Quest holds permits, license and lease rights for oil sands exploration and development to 551,566 acres of land in Saskatchewan and Alberta, Canada. We also hold 489,730 acres of oil shale rights in Saskatchewan. The oil shale rights are subject to a sale agreement as more fully described in note 3 to the financial statements.

Saskatchewan, Canada Oil Sands Rights

Oil Sands Permits and Licenses

Block	Description	OQI Working Interest			Gross/Net Acres		Permit Date (2)	Term
Oil Sands Permits
PS00205	Township 92, Ranges 22, 23, 24, 25 (partial), West of the 3rd Meridian		100	%		84,942	Jun 1/04	5 yrs
PS00206	Township 93, Ranges 22, 23, 24, 25 (partial), West of the 3rd Meridian		100	%		81,108	Jun 1/04	5 yrs
PS00208(1)	Township 94, Ranges 22, 23, 24, 25 (partial), West of the 3rd Meridian		100	%		81,012	Jun 1/04	5 yrs
PS00210(1)	Township 95, Ranges 22, 23, 24, 25 (partial), West of the 3rd Meridian		100	%		79,620	Jun 1/04	5 yrs
PS00212	Township 96, Ranges 22, 23, 24, 25 (partial), West of the 3rd Meridian		100	%		79,592	Jun 1/04	5 yrs
Oil Sands Licenses
OSL00001	Township 91, Ranges 21 (partial), 22 (partial), West of the 3rd Meridian		100	%		23,040	Aug 13/07	5 yrs
OSL00002	Township 90, Ranges 23 (partial), 24 (partial), 25 (partial), West of the 3rd Meridian		100	%		23,040	Aug 13/07	5 yrs
OSL00003	Township 91, Range 23, West of the 3rd Meridian		100	%		23,040	Aug 13/07	5 yrs
OSL00005	Township 90, Range 26 (partial), West of the 3rd Meridian		100	%		21,120	Aug 13/07	5 yrs
OSL00006	Township 91, Range 25 (partial), West of the 3rd Meridian		100	%		19,680	Aug 13/07	5 yrs
Total						516,194

(1)

The Axe Lake area covers a portion of these permits – see details below under “Axe Lake Area”

(2)

The Company applied for and received the second of three one-year extensions of the permits as allowed under the regulation to May 31, 2011.

Oil Sands Permits

The permits were granted by the Province of Saskatchewan in 2004 under the Oil Shale Regulations, 1964 as amended, revised or substituted from time to time, for a term of five years. The permits provide for the right to explore and work the permit lands but not to remove, produce or recover, except for test purposes, oil products until a lease, pursuant to these regulations has been granted. The term of the permits may be extended for up to three one-year extensions subject to regulatory approvals, as required. The Saskatchewan permit lands comprise an area totalling 406,274 acres.

The permits are subject to annual rental payments and certain levels of expenditures annually pursuant to the terms of the permits and government regulations. On May 7, 2007, the province updated the Oil Shale Regulations, 1964 requiring an increase to annual rentals of $0.08 ($0.10 CDN) per acre for the remaining term of the permits. The required exploration expenditures to hold the permits were also increased to $0.68 ($0.81 CDN) per acre for each of the remaining years of the permits and $1.01 ($1.21 CDN) per acre for each year that the permits are extended. OQI is in compliance with the current expenditure requirements.

Axe Lake Area

The Axe Lake area is a notional area identified by the Company and located in an area of approximately 72 sections (72 square miles) located in Townships 94 and 95, Ranges 24 and 25 West of the 3rd Meridian. As a result of the winter 2007/2008 program the Axe Lake area now covers approximately 65 sections (65 square miles) of Permits PS00208 and PS00210 (100% Oilsands Quest) located in the north half of Township 94 and the south half of Township 95, Ranges 24 and 25 West of the 3rd Meridian.

Oil Sands Licenses

On August 13, 2007, the Company acquired five oil sands licenses from the Province of Saskatchewan totaling 109,920 acres granted under the Petroleum and Natural Gas Regulations, 1969, as amended, revised or substituted from time to time, for a term of five years. The licenses provide for the exclusive right to search for oil sands on the lands granted and to win, recover, extract, carry off, dispose of and sell the oil sands products found on the license lands.

The oil sands licenses provide the opportunity to convert up to 100% of the licenses to a production lease on the basis of one section of land for every well that intersects an oil sands zone. Licenses require annual rental payments of $0.70 ($0.71 CDN) per acre. The Company has paid all required annual rental payments for the licenses granted.

Alberta, Canada Oil Sands Rights

Block		Description	OQI Working Interest			Gross/Net Acres		Grant Date	Term
Oil Sands Permits
Raven Ridge
	7007030939	North half of the Township 92, Range 1, West of the 4th Meridian		100	%		11,386	Mar 22/07	5 yrs
	7007030940	East half of Township 93 and 94, Range 1, West of the 4th Meridian		100	%		22,773	Mar 22/07	5 yrs
	7007030941	West half of Township 93 and 94, excluding sections 33 and 34, Range 1, West of the 4th Meridian		100	%		21,508	Mar 22/07	5 yrs
	7006080098	South half of the Township 92, Range 1, West of the 4th Meridian		100	%		11,386	Aug 10/06	5 yrs
Wallace Creek
	7008010298	Township 96, Range 1, West of the 4th Meridian		100	%		22,773	Jan 24/08	5 yrs
	7008010299	Township 96, Range 2, West of the 4th Meridian		100	%		22,773	Jan 24/08	5 yrs
Oil Sands Lease
Eagles Nest
	7405080355	Township 101, Range 13, West of the 4th Meridian		100	%		22,773	Aug 25/05	15 yrs
Total							135,372

Oil Sands Permits

Raven Ridge Area

During the year ended April 30, 2007, the Company acquired four oil sands permits totaling 67,053 acres in a public offering of Crown Oil Sands. The permits were granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The permits provide the opportunity to convert up to 100% of the permits to a production lease following the completion of specified work requirements which requires the drilling of at least one delineation core test well per section over the permit term. Permits are granted for a five-year primary term and require annual rental payments of $1.40 ($1.42 CDN) per acre. Following the evaluation of the 2007/2008 Exploration program, we announced a discovery in the Raven Ridge area. The area of the resource estimate within the Raven Ri dge covers approximately ten sections located within Townships 93 and 94, Range 1W4 in Alberta, directly to the east of Axe Lake area.

Wallace Creek Prospect

On January 23, 2008, the Company acquired two oil sands permits totalling 45,546 acres in a public offering of Crown Oil Sands Rights. The permits were granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The permits provide the opportunity to convert up to 100% of the permits to a production lease following the completion of specified work requirements which requires the drilling of at least one delineation core test well per section over the permit term. Permits are granted for a five-year primary term and require annual rental payments of $1.40 ($1.42 CDN) per acre.

Oil Sands Lease

Eagles Nest

Township acquired Alberta Oil Sands Lease No. 7405080355, the “Eagles Nest”, in an Alberta Crown Sale. The lease was granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The lease provides the exclusive right to drill for, win, work and recover together with the right to remove oil sands from the lease lands for a term of 15 years and for so long after that term as the lease is permitted to continue under the Mines and Minerals Act, Alberta. The annual lease rental payable to the Province of Alberta for Eagles Nest is $38,886 ($32,256 CDN) per year. The Company has paid the required annual lease rentals to maintain the lease in good standing.

Saskatchewan, Canada Oil Shale Rights

Block	Description	OQI Working Interest			Total / Net Acres		Grant Date	Term
Pasquia Hills Oil Shale Prospect area
PS00222	Township 45, Ranges 1-2 (partial), West of the 3rd Meridian		100	%		21,120	Sep 7/06	5 yrs
PS00223	Townships 47-48 (partial), Ranges 3-5 (partial), West of the 3rd Meridian		100	%		82,560	Sep 7/06	5 yrs
PS00224	Townships 47-49 (partial), Ranges 3-5 (partial), West of the 3rd Meridian		100	%		19,840	Sep 7/06	5 yrs
PS00225	Townships 46-47 (partial), Ranges 5-7 (partial), West of the 3rd Meridian		100	%		80,000	Sep 7/06	5 yrs
PS00226	Townships 45-46 (partial), Ranges 5-7 (partial), West of the 3rd Meridian		100	%		61,436	Sep 7/06	5 yrs
PS00237	Township 43 (partial), Ranges 1-4 (partial), West of the 3rd Meridian		100	%		82,709	Oct 16/06	5 yrs
PS00238	Township 43 (partial), Ranges 5-6 (partial), West of the 3rd Meridian		100	%		58,296	Oct 16/06	5 yrs
SHP0001	Townships 44-45 (partial), Ranges 1-3 (partial), West of the 3rd Meridian		100	%		83,769	Aug 13/07	5 yrs
Total						489,730

Oil Shale Permits – Pasquia Hills Oil Shale Prospect

The oil shale permits were granted by the Province of Saskatchewan under the Oil Shale Regulations, 1964, as amended, revised or substituted from time to time for a term of five years. The permits provide for the right to explore and work the permit lands but not to remove, produce or recover, except for test purposes, oil products until a lease, pursuant to these regulations has been granted. The term of the permits may be extended for up to three one-year extensions subject to regulatory approvals, as required. The annual rental payable in advance was $0.04 ($0.05 CDN) per acre for the current (first) year. On May 7, 2007, the province updated the regulations requiring annual rentals of $0.10 ($0.10 CDN) per acre for the remaining term of the permit. The required exploration ex penditures to hold the permits were also increased to $0.40 ($0.40 CDN) per acre for the second year of the permits, $0.80 ($0.81 CDN) per acre for the last three years of the permits and $1.20 ($1.21 CDN) per acre for each year that the permit is extended, as required.

On August 13, 2007, the Company acquired one additional oil shale exploration permit granted under the Petroleum and Natural Gas Regulations, 1969 (Saskatchewan) as amended, revised or substituted from time to time for a term of five years totaling 83,769 acres in the same area near Hudson Bay, Saskatchewan. The permits provide for the right, license, privilege and authority to explore for oil shale within the permit lands. The term of the permits may be extended for up to three one-year extensions subject to regulatory approvals, if required. This oil shale permit was acquired under a land sale work commitment bid for the first two years of the permit. The Company bid a total work commitment of $252,570 ($301,568 CDN) to b e incurred during the first two years of the permit and the permit requires a further work commitment of $0.80 ($0.81 CDN) per acre for the last three years and $1.20 ($1.21 CDN) for each extension year plus annual rental payments of $0.10 ($0.10 CDN) per acre.

The Company has paid the required annual rental payments to maintain the permits in good standing.

On January 15, 2010, OQI entered into an agreement to sell all of its oil shale properties to Canshale for consideration of CDN $1 million (US $0.9 million) in cash and 8,000,000 common shares of Canshale, The Canshale Transaction is conditional upon Canshale raising a minimum of CDN $12.5 million (US $ 11.7 million) in cash through a common share financing. Under the terms of the agreement, the Company has the right to terminate the agreement if Canshale does not complete its financing by June 30, 2010. On July 6, 2010 for an extension incentive of an additional 2,000,000 common shares of Canshale Corp., the Company and Canshale amended the agreement to extend the deadline for Canshale to complete its financing to July 30, 2010. Upon c onsummation of the Canshale Transaction, the Company will retain an ownership interest of up to 20% of Canshale's outstanding common shares. The Company does not intend to proceed with the Canshale Transaction unless Canshale is fully capitalized to execute an effective exploration program in respect of the oil shale assets.

Oil and Gas Wells

The Company is an exploration and development company active in the non-conventional areas of oil sands and oil shales, exploring for commercial quantities of bitumen and kerogen. The following table sets forth the number of exploration and development wells which the Company drilled on April 30, 2010. All of the Company’s wells are located onshore, in the provinces of Saskatchewan and Alberta, Canada.

		2009/ 2010		Drilled to Date (Nov.22/05 to April 30/10)
	Wells Drilled			Wells Drilled		Sections Drilled		Wells per Section
Axe Lake Exploration		16			320		78		4.1
Axe Lake Development/Reservoir Test		4			23		n/a		n/a
Axe Lake Groundwater Monitoring		3			19		n/a		n/a
Saskatchewan Exploration (outside Axe Lake)		0			35		28		1.30
Raven Ridge Exploration		0			48		23		2.1
Wallace Creek Exploration			9		0		0		1.0
Eagles Nest Exploration		0			0		0		0.0
Total		32			457		138		3.3

For a complete description of our most important current and likely exploration and development activities, see Part 1, Item 1. “Description of Business — Activities to Date” and “Outlook”.

Properties with No Attributed Reserves

The Company’s lands described in Part I, Item 2. “Oil and Gas Properties and Wells” and “Oil and Gas Wells” have no proved or producing reserves. The Company received the second of three possible one-year extensions on its Saskatchewan oil sands permits on June 21, 2010. We intend to seek an additional extension in 2011 and to covert these permits to lease in 2012.

Forward Contracts

There are no hedging contracts in place.

Information Concerning Abandonment and Reclamation Costs

All delineation wells are abandoned and reclaimed immediately and these costs are included with our exploration costs incurred. As at April 30, 2010, we estimate the total undiscounted inflation – adjusted amount required to settle the asset retirement obligations in respect of the Company’s wells and facilities is approximately $35 million. This estimate includes the costs to re-abandon a number of coreholes at Axe Lake from the Company's early exploration corehole programs. This estimate also includes the costs to reclaim the air strip, camp site, access roads and reservoir test sites which are being brought into income over a period of 5 to 30 years. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an in crease to property and equipment or exploration expense. This estimate could change as the reclamation requirements will be a function of regulatory regulations in place at the time.

Tax Horizon

No income taxes will be payable until a revenue-generating project has been identified and completed. No project has been identified at this time and no taxes will be payable in the near future.

Costs Incurred

Costs incurred by the Company on its properties during the year ended April 30, 2010 are summarized as follows (in $US, in thousands):

Property acquisition costs	$	140
Exploration costs	$	48,682
Development costs		—
Total	$	48,822

Production

Effective April 30, 2010, we did not have any production or production revenue on any of our properties.

Item 3. LEGAL PROCEEDINGS

On February 24, 2010, a derivative action entitled Make a Difference Foundation Inc. v. Hopkins, et al., Case No. 10-CV-00408, was filed in United States District Court for the District of Colorado by plaintiff Make a Difference Foundation, Inc. The derivative action names the following individual defendants: Christopher H. Hopkins, T. Murray Wilson, Ronald Blakely, Paul Ching, Brian MacNeill, Ronald Phillips, John Read, Gordon Tallman, Pamela Wallin, Thomas Milne and W. Scott Thompson. In addition, the Company is named as a nominal defendant. Plaintiff asserts, among other things, claims for waste and breaches of the fiduciary duty of loyalty and good faith by the defendants stemming from the Company's approval of the proposed sale of the Company's Pasquia Hills assets to Canshale Corp. The plaintiff seeks unspecified damages on behalf of the Company, restitution on behalf of the Company, and reasonable costs and expenses including counsel fees and experts' fees. The Company believes the claims are wholly without merit and filed a motion to dismiss the Complaint on May 18, 2010. Plaintiffs have indicated that they will respond to the motion to dismiss by filing an opposition or an amended complaint by July 15, 2010.

Item 4. (REMOVED AND RESERVED)

None.

PART II

Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s common stock commenced trading on the NYSE Amex LLC (“NYSE Amex”) on August 24, 2006 under the symbol BQI. The following table sets forth the high and low sales prices of the Company’s common stock for each quarterly period during the last two fiscal years as reported by the NYSE Amex.

	Fiscal Quarter	High Sales Price		Low Sales Price
Fiscal Year End April 30, 2010	4th Quarter (2/1/10 — 4/30/10)	$	0.99	$	0.66
	3rd Quarter (11/1/09 — 1/31/10)	$	1.28	$	0.81
	2nd Quarter (8/1/09 — 10/31/09)	$	1.69	$	0.85
	1st Quarter (5/1/09 — 7/31/09)	$	1.30	$	0.75
Fiscal Year End April 30, 2009	4th Quarter (2/1/09 — 4/30/09)	$	1.35	$	0.63
	3rd Quarter (11/1/08 — 1/31/09)	$	1.77	$	0.59
	2nd Quarter (8/1/08 — 10/31/08)	$	4.85	$	1.01
	1st Quarter (5/1/08 — 7/31/08)	$	6.95	$	3.99

The closing sales price of the common stock as reported on June 30, 2010 was $0.61 per share.

Holders

As of June 30, 2010, there were 209 holders of record of the Company’s common stock. This does not include persons who hold our common stock in brokerage accounts and otherwise in “street name.”

Dividends

Equity Compensation Plan Information

The following table sets forth information as of April 30, 2010 with respect to compensation plans under which equity securities of the Company are authorized for issuance:

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights			Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Stockholders		23,733,560	(1)	$	3.25		3,937,000	(3)
Equity Compensation Plans Not Approved by Stockholders		0	(2)	$	0.0		1,200,000
TOTAL		23,733,560	(1)(2)	$	3.25		5,137,000

____________

(1)	Includes: options to acquire 23,733,560 shares of common stock under the Company’s 2006 Stock Option Plan.

(2)	All outstanding options to acquire shares of common stock under the Company’s 2005b Stock Option Plan were exercised during the year ended April 30, 2008. The Company does not intend to issue any more securities under this plan.

(3)

The aggregate number of securities issuable under the 2006 Stock Option Plan is the lesser of: (A) 15% of the total outstanding shares of the Company’s common stock, or (B) 30,000,000. As of April 30, 2010, the number of securities available for issuance under the 2006 Stock Option Plan is 3,937,000 (calculated as 30,000,000 maximum less 36,284,000 granted, less 44,000 bonus shares issued plus 10,265,000 forfeited).

Performance Graphs

The following line graph compares cumulative total stockholder returns for the five years ended April 30, 2010 for (i) our common stock, (ii) the Standard & Poor’s 500 Stock Index and (iii) the Amex Oil Index. The graph assumes an investment of $100 on April 30, 2005. The calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay any dividends during the measurement period. The performance shown is not necessarily indicative of future performance.

The following line graph compares cumulative total stockholder returns since August 24, 2006 (the date the Company first listed on the NYSE Amex (formerly the American Stock Exchange) for (i) our common stock, the (ii) the Standard & Poor’s 500 Stock Index and (iii) the Amex Oil Index. The graph assumes an investment of $100 on August 24, 2006. The calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay any dividends during the measurement period. The performance shown is not necessarily indicative of future performance.

Repurchases of Equity Securities

The Company did not repurchase any equity securities during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities

There have not been any sales by the Company of equity securities in the last fiscal year that have not been registered under the 1933 Act, except as previously reported by the Company on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Item 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report. The selected financial data have been derived from our audited consolidated financial statements and are subject to certain reclassifications to make prior years conform to current year presentation. The historical results are not necessarily indicative of results to be expected in any future period.

	Year Ended
(in thousands, except per share amounts)	April 30, 2010		April 30, 2009		April 30, 2008		April 30, 2007		April 30, 2006
Summary of Operations
Loss from continuing operations (1)	$	68,551	$	106,146	$	126,758	$	90,794	$	55,540
Net loss from discontinued operations	$	5,760	$	835	$	42	$	14	$	-
Net loss	$	64,481	$	89,134	$	92,747	$	86,193	$	52,641
Net loss from continuing operations per common share	$	0.19	$	0.34	$	0.41	$	0.50	$	0.64
Loss from discontinued operations per common share	$	0.02	$	-	$	-	$	-	$	-
Net loss attributable to common stockholders	$	0.21	$	0.34	$	0.41	$	0.50	$	0.64
Total Assets	$	484,094	$	435,184	$	510,119	$	438,217	$	47,238
Long Term Obligations	$	6,663	$	5,382	$	8,183	$	3,075	$	-
Balance Sheet Data
Cash and cash equivalents	$	18,642	$	6,986	$	26,498	$	32,394	$	16,127
Short-term investments	$	-	$	25,209	$	19,812	$	2,000	$	6,000
Working capital	$	16,635	$	26,393	$	34,226	$	5,819	$	3,838
Stockholders’ equity	$	398,715	$	357,096	$	399,768	$	295,156	$	17,537

____________

(1)	Defined as loss before income taxes and discontinued operations

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion and analysis presents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future. Our discussion and analysis relates to the following topics:

—

Overview of Business

—

Overview of 2010 Results and Outlook

—

Liquidity and Capital Resources

—

Changes in Financial Condition and Results of Operations

—

Share Capital

—

Critical Accounting Policies

—

Contractual Cash Obligations

Overview of Business

We are a U.S. public company based in Calgary, Alberta engaging in a variety of projects in the oil and gas sector and in particular the oil sands and oil shale sectors in Western Canada. We are aggressively exploring Canada’s largest contiguous oil sands land holding, which is located in northeast Alberta, northwest Saskatchewan and Oilsands Quest is leading the development of an oil sands industry in the Province of Saskatchewan.

Oilsands Quest, together with its subsidiaries, is in the exploration and development stage and does not currently have any income from operating activities. For a more detailed discussion of our business See Part 1, Item 1. “Description of Business”.

Overview of 2010 Results and Outlook

During the year ended April 30, 2010, the Company’s activities included an exploration drilling program of 9 holes on lands in the Wallace Creek area, 16 core holes across Axe lake reservoirs to improve the understanding of the overburden characteristics, a 40 km 2-D seismic program on the permits to the north and south of Axe Lake in Saskatchewan and the advancement of its pre-commercialization evaluation studies and reservoir test program on its Axe Lake discovery. We also expanded our environmental program consisting of monitoring and baseline assessment studies in anticipation of comprehensive Environmental Impact Assessment reports as part of the application for regulatory approval for development process in Alberta and Saskatchewan.

During the year ended April 30, 2010, we raised $38.8 million, net of issuance costs, through a private placement share issuance, a marketed public offering and proceeds of option exercises to fund these activities and future programs.

Operations Summary:

Exploration Program

In October 2009, we released an updated independent engineering estimate of contingent, discovered and undiscovered resources which were prepared in accordance with the standards set out in COGEH and NI 51-101. This resource estimate incorporates the results of our 53 well drilling program at Axe Lake in late 2008, and at Raven Ridge in early 2009 and updates the previous estimates provided in December 2008 which was based upon 330 wells drilled up to mid-2008.

We commenced an overburden characterization study in October 2009 and completed a 16 hole coring and logging program that yielded core material and advanced logging data (NMR, Dipole, sonic and standard suite geophysical logs) of the formation overlying the bitumen-bearing McMurray/Dina Formation. The cores have been analyzed by Weatherford laboratories and results show that the overburden is composed of clay-rich till, which is a dense, low permeability cap layer that demonstrates steam containment characteristics in laboratory and 3-D reservoir computer simulations.

Weatherford Laboratories conducted a High Temperature Caprock study on the samples provided. To date 4 samples from the core holes 16-33-092-25W3M, 04-21-094-25W3M, 12-12-095-25W3M and 5-12-095-05W3M have been processed, and the laboratory work demonstrates that the permeabilities are lower than those indicated on the NMR logs, with a range of permeabilities from 0.1-0.002md at 20⁰C. When the samples are subjected to temperatures of 200⁰C, a further decrease in permeability to the range of 0.04-0.002md is observed in the laboratory.

The core samples are also being correlated with previously drilled exploration core holes and with our extensive Axe Lake and Raven Ridge 3-D seismic data-sets to determine the extent and continuity of this layer across the various reservoirs on both sides of the Saskatchewan/Alberta border. Detailed evaluation of the continuity of the till layer using 3-D seismic is currently underway. Based on the current data set it appears that the dense glacial till layer is present over a large majority of the potential commercial development area.

Generally the dense glacial till layer lies directly on top of the Oilsands reservoir zone, however in some areas there is several meters of top water between the Oilsands zone and the glacial till. The impact of these zones is being studied and the results will be incorporated into our commercial development plan.

In December 2009, we completed a 40 km 2-D seismic program on the permits to the north and south of Axe Lake in Saskatchewan which will further our geological knowledge of the deposits and has allowed us to meet work commitments required to extend the exploration permits until May 31, 2010.

In March 2010, we completed a 9 hole exploration drilling program in the western township corner of the Wallace Creek permits that are immediately adjacent to Cenovus’ Borealis project area. 4 of the wells drilled encountered significant quantities of bitumen with one well intercepting up to 26 meters of oil sand in the McMurray/Dina formation.

For a more detailed discussion on the Company’s exploration program and results, see Part I, Item 1. “Description of Business – Activities To Date” and Part I, Item 2. “Properties and Statement of Oil and Gas Information”.

Axe Lake Discovery — Reservoir Development Activities

At Test Site 1, we successfully commissioned the electrical, mechanical and boiler facilities and performed steam and water injection and tracer tests. Inter-well communication was positively confirmed by measurement of substantial percentages of saline tracer at the producer wells. We have analyzed the results from the circulation and tracer tests and history matched the field results in the computer simulations. The next phase of testing, subject to regulatory approvals, will include the drilling of a new SAGD well pair in close proximity to the existing wells at Test Site 1 to build on our growing knowledge of the reservoir and cap rock characteristics and test the commercial viability of SAGD at Axe Lake. The addition of SAGD wells to our testing plan will enable us to build upon the testing we have done to date and will en able us to test a bitumen production technology (SAGD) that has been proven to be commercially viable in similar reservoirs in the Athabasca basin.

In October of 2009, we perforated the two vertical wells at Test Site 3, which are approximately 3.5 meters apart, and installed temporary water, heating and injection facilities. We commenced injecting cold water at low pressure and volume into the base of the McMurray/Dina formation on October 25, 2009 and established communication between the two wells. Cold water circulation was maintained for 24 hours, following which heated water was circulated, resulting in the mobilization of bitumen in the reservoir. On October 29, 2009, a small amount of naphtha was injected and bitumen recovery commenced on October 30, 2009. We continued to circulate hot water until November 5, 2009, at which time the test equipment was removed.

We have filed two key regulatory submissions to advance the development of our Axe Lake oil sands project. The first is a proposal to the SME for approval to produce up to 30,000 barrels per day of bitumen using SAGD technology. The second submission is for approval of a SAGD pilot to confirm the containment characteristics of the glacial till overlying the Axe Lake reservoir and to determine the operating parameters of a commercial SAGD project.

Abandonment and Reclamation Costs

We are responsible for compliance with terms and conditions of environmental and regulatory approvals and all laws and regulations regarding the abandonment of a project and reclamation of its lands at the end of its economic life, which abandonment and reclamation costs may be substantial. A breach of such legislation and/or regulations may result in the issuance of remedial orders, the suspension of approvals, or the imposition of fines and penalties, including an order for cessation of operations at the site until satisfactory remedies are made. As at April 30, 2010, we estimate the total undiscounted inflation-adjusted amount required to settle the asset retirement obligations in respect of the Company’s wells and facilities is approximately $35 million. This estimate includes the cost to re-abandon a number of wells at Axe L ake from the Company's early exploration corehole well programs. During a review of our development plans and well licenses, we determined that a number of these wells were not abandoned to meet our thermal development requirements. We are also evaluating the wells that are located outside the potential commercial development area and have included a portion of these costs in the re-abandonment liability based on a 50% probability of performing the obligation over a 15 year period. The abandonment and reclamation estimate also includes the costs to reclaim the air strip, camp site, access roads and reservoir test sites which are being brought into income over a period of 10 to 30 years. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to property and equipment or exploration expense.

Currently, the Company is working with the regulators to assess an issue relating to the re-abandonment of early exploration coreholes. It is possible that the outcome of such assessment could result in cancellation of the permits if the Company does not comply with the governing regulations. Further, if the Company cannot remediate these coreholes to industry standards, our ability to commercially develop the Axe Lake reservoir may be limited.

Liquidity and Capital Resources

At April 30, 2010, the Company held cash and cash equivalents and short term investments totalling $18.6 million (April 30, 2009 - $32.2 million).

On May 12, 2009, the Company issued 35,075,000 units at a price of $0.85 per unit for gross proceeds of $29.8 million. The units were issued as part of a public offering and were comprised of a share of the common stock and one-half of a warrant to purchase a share of common stock. The Company paid an aggregate of $1.5 million in fees to a syndicate of agents under the terms of the agency agreement and $1.2 million of legal fees and other expenses in relation to the offering, of which $0.7 million were incurred prior to May 1, 2009.

On December 23, 2009, the Company issued 9,714,300 shares of common stock at a price of $1.05 per share for gross proceeds of $10.2 million pursuant to a non-brokered private placement offering.

During the year ended April 30, 2010, the Company expended $51.6 million on operating activities and $1.8 million on property and equipment.

On May 10, 2010, the Company issued 10.5 million flow-through shares at $1.00 CDN ($0.995 USD) and 9.2 million common shares at $0.85 per share for gross proceeds of $18.6 million pursuant to a non-brokered private placement.

We believe that we have sufficient funds to maintain our interest in the existing properties and maintain other core activities over the next twelve months. If we accelerate commercial development at Axe Lake or any of our other prospects, our cash requirements will increase significantly. Additional funding may also be required if our current planned activities are changed in scope or if actual costs differ from estimates of current plans. We believe the Company will have access to sufficient funding and sources of capital for its planned activities to April 30, 2011. Because we constantly and actively monitor our expenditure budgets, if sufficient funding is not available we can adjust our expenditure plans based on available cash. We plan to fund future operations by way of financing, including a public offering or privat e placement of equity or debt securities. Our development strategy also includes considering partners on a joint venture basis on our specific projects to fund the development of such projects in a timely and responsible manner. However, there is no assurance that debt or equity financing or joint venture partner arrangements will be available to us on acceptable terms, if at all, to meet these requirements.

The Company has no revenues, and its operating results, profitability and the future rate of growth depend solely on management’s ability to successfully implement the business plans and on the ability to raise further funding.

The following discussion of liquidity and capital resources should be read in conjunction with the consolidated financial statements included in Part II, Item 8. “Financial Statements and Supplementary Data”.

Changes in Financial Condition and Results of Operations

During the year ended April 30, 2010, the primary focus of the Company was on the commissioning of the facilities at Test Site 1, the implementation of an overburden characterization study to test the potential for the overburden to act as a cap rock for steam containment capacity within the reservoir and the filing of key regulatory submissions to advance the development of its Axe Lake oil sands project.

During the year ended April 30, 2009, the primary focus of the Company was on the engineering and construction of the testing facilities at Test Sites 1 and 3, the continued delineation of the Axe Lake and Raven Ridge discoveries and completing the acquisition of all the remaining rights of the external joint venture partners to the Triple 7 Joint Venture Agreement.

During the year ended April 30, 2008, the primary focus of the Company was the delineation of the Axe Lake discovery, exploring the Saskatchewan and Alberta permit lands, raising exploration funds, completing the acquisition of an outstanding $0.07 per barrel royalty obligation on the Saskatchewan permit lands, completing the acquisition of all the rights of one of the three external joint venture partners to the Triple 7 Joint Venture Agreement (which encumbered the Eagles Nest Prospect), the acquisition of five oil sands exploration licenses in Saskatchewan, the acquisition of two oil sands exploration permits in Alberta, and the continuation of pre-commercialization studies on our Axe Lake discovery.

During the year ended April 30, 2007, the primary focus of the Company was exploring the Saskatchewan permit lands, raising exploration funds, completing the acquisition of the non-controlling (minority) interest (35.92%) in OQI Sask, the acquisition of a 2.5% gross overriding royalty on the Saskatchewan permit lands, the acquisition of four oil sands exploration permits in Alberta and the initiation of pre-commercialization studies on our Axe Lake discovery.

Net loss

Year ended April 30, 2010 as compared to year ended April 30, 2009. The Company experienced a net loss of $64.5 million or $0.21 per share for the year ended April 30, 2010 as compared to a net loss of $89.1 million or $0.34 per share for the year ended April 30, 2009. The decline in the net loss in the current year as compared to the prior year is due to the reduction in exploration activity, a reduction in stock-based compensation expense and a foreign exchange gain resulting from holding Canadian funds with an appreciation of the Canadian dollar versus the U.S. dollar which were offset by increased asset retirement obligations due to the re-abandonment liability identified during the current year. The Company expects to continue to incur operating losses and will continue to b e dependent on additional equity or debt sales and/or property joint ventures to fund its activities in the future.

Year ended April 30, 2009 as compared to year ended April 30, 2008. The Company experienced a net loss of $89.1 million or $0.34 per share for the year ended April 30, 2009 as compared to a net loss of $92.7 million or $0.41 per share for the year ended April 30, 2008.

Net loss from continuing operations

Year ended April 30, 2010 as compared to year ended April 30, 2009. The Company experienced a net loss from continuing operations of $58.7 million or $0.19 per share for the year ended April 30, 2010 as compared to a net loss from continuing operations of $88.3 million or $0.34 per share for the year ended April 30, 2009. The decline in the net loss from continuing operations in the current year as compared to the prior year is due to the reduction in exploration activity, a reduction in stock-based compensation expense and a foreign exchange gain resulting from holding Canadian funds with an appreciation of the Canadian dollar versus the U.S. dollar which were offset by increased asset retirement obligations due to the re-abandonment liability identified during the cu rrent year.

Year ended April 30, 2009 as compared to year ended April 30, 2008. The Company experienced a net loss from continuing operations of $88.3 million or $0.34 per share for the year ended April 30, 2009 as compared to a net loss from continuing operations of $92.7 million or $0.41per share for the year ended April 30, 2008.

Net loss from discontinued operations

Year ended April 30, 2010 as compared to year ended April 30, 2009. The Company experienced a net loss from discontinued operations of $5.8 million or $0.02 per share for the year ended April 30, 2010 as compared to a net loss of $0.8 million or $nil per share for the year ended April 30, 2009. The activities related to the oil shale program have been reported as discontinued operations in the consolidated statement of income following the announcement of the sale of the Pasquia Hills assets in January 2010.

The net loss of $5.8 million for the year ended April 30, 2010 includes the exploration costs incurred in relation to the oil shale activities for the period and an allowance for impairment of $6.4 million ($4.7 million after tax) expected from the disposal of the assets.

Year ended April 30, 2009 as compared to year ended April 30, 2008. The Company experienced a net loss from discontinued operations of $0.8 million or $nil per share for the year ended April 30, 2009 as compared to a net loss from discontinued operations of $0.04 million or $nil per share for the year ended April 30, 2008. The activities related to the oil shale program have been reported as discontinued operations in the consolidated statement of income following the announcement of the sale of the Pasquia Hills assets in January 2010.

Exploration costs

Year ended April 30, 2010 as compared to year ended April 30, 2009. Exploration costs for the year ended April 30, 2010 were $48.7 million (2009 — $70.8 million). Exploration costs in the current year relate to drilling, seismic, environmental, engineering and construction costs associated with Test Sites 1 and 3 on our Saskatchewan and Alberta permits. Exploration costs also include $13.8 million of additional asset retirement obligations identified during the current year in relation to the re-abandonment of a certain number of wells. The Operations Summary above provides a summary of the exploration activities conducted in the year ended April 30, 2010.

Year ended April 30, 2009 as compared to year ended April 30, 2008. Exploration costs for the year ended April 30, 2009 were $70.8 million (2008 — $96.4 million). Exploration incurred in the year ended April 30, 2009 relate to drilling, seismic, environmental, engineering and construction costs associated with Test Sites 1 and 3 on our Saskatchewan and Alberta permits. Approximately $27.5 million was spent on drilling engineering and construction costs on Test 1 and 3 programs and the balance of costs relates to exploration and related environmental monitoring activity of which approximately 65% was spent in Saskatchewan and 35% was spent in Alberta. Our desire to decrease our expenditures in response to the then current conditions in the global and financial markets is the main reason for the decrease from 2008 to 2009.

General and administrative

Corporate

Year ended April 30, 2010 as compared to year ended April 30, 2009. General and administrative expenses settled with cash for the year ended April 30, 2010 were $17.0 million (2009 — $12.6 million). General and administrative expenses in the year ended April 30, 2010 consist of salaries ($9.4 million), legal and other professional fees ($2.6 million) and general office costs ($5.0 million). Increases in costs in the current fiscal year as compared to the prior year are mainly associated with severance payments.

At April 30, 2010, there were 46 employees. At April 30, 2009, there were 45 employees, including 8 seasonal field employees. The increase in salaries and wages during the year ended April 30, 2010 occurred as result of severances paid during the quarters ended July 31, 2009 and January 31, 2010.

Year ended April 30, 2009 as compared to year ended April 30, 2008. General and administrative expenses settled with cash increased from $11.4 million in 2008 to $12.6 million in 2009. Expenditures for the year ended April 30, 2009 consist of salaries ($5.7 million), legal and other professional fees ($2.7 million) and general office costs ($4.2 million). Expenditures for the year ended April 30, 2008 consist of salaries ($5.6 million), legal and other professional fees ($2.8 million) and general office costs ($3.0 million). Increases in costs in the year ended April 30, 2009 as compared to the prior year are mainly associated with the cost of assembling the executive, professional and technical team required to execute the Company’s plans.

Stock-based compensation

Year ended April 30, 2010 as compared to year ended April 30, 2009. Stock-based compensation for the year ended April 30, 2010 was $5.6 million (2009 — $17.5 million). Stock-based compensation expense for the year ended April 30, 2010 consists of stock-based compensation related to the issuance of options to directors, officers and employees. The decrease during the year ended April 30, 2010 compared to the prior year is the result of 6.9 million options forfeited due to a reduction in the number of employees that was greater than the anticipated forfeiture rate. As at April 30, 2010, the Company has unrecognized stock-based compensation costs of $1.7 million related to unvested options which will be recognized in future periods as the options vest. The average fair va lue of the stock options using either the Black-Scholes valuation model or the trinomial valuation model that were issued during the year ended April 30, 2010 was $0.43 (2009 - $1.93).

Year ended April 30, 2009 as compared to year ended April 30, 2008. Stock-based compensation expense for the year ended April 30, 2009 of $17.5 million (2008 — $20.8 million) consists of stock-based consideration related to the issuance of options to directors, officers, employees and consultants and to bonus shares issued to employees. As at April 30, 2009, the Company had unrecognized stock-based compensation costs of $11.4 million related to unvested options which will be recognized in future periods as the options vest. The decrease in stock based compensation during the year ended April 30, 2009 occurred as a result of the resignation of an officer. The Company modified the terms of unvested awards that would have otherwise been forfeited which resulted in a rever sal of cumulative compensation costs on the awards and immediate expensing of the modification-date fair value of the modified awards for a net reversal of $2 million. Stock-based compensation is a non-cash expense. The average value of the stock options using the Black-Scholes valuation model issued during the year ended April 30, 2009 was $1.93 (2008 - $3.69). The year over year decline in the average value of stock options is due to the decline in the market value of the Company’s stock.

Foreign exchange gain (loss)

Year ended April 30, 2010 as compared to year ended April 30, 2009. Foreign exchange gain of $5.1 million (2009 — loss of $4.8 million) resulted primarily from holding Canadian dollar cash and cash equivalents funds in the parent company with a US dollar functional currency when the value of the Canadian dollar increased compared to the U.S. dollar.

Year ended April 30, 2009 as compared to year ended April 30, 2008. Foreign exchange loss of $4.8 million (2008 — gain of $0.4 million) resulted primarily from holding Canadian dollar cash in the parent company with a US dollar functional currency when the value of the Canadian dollar declined compared to the U.S. dollar.

Depreciation and accretion

Year ended April 30, 2010 as compared to year ended April 30, 2009. Depreciation and accretion expense of $2.5 million (2009 — $1.6 million) relates to camp facilities, equipment and corporate assets which are being depreciated over their useful lives of three to five years. Accretion expense relates to the asset retirement obligation recognized on the airstrip, camp site, access road, and the reservoir test sites which are being brought into income over a period of 10 to 30 years. The change from the year ended April 30 2009 to the year ended April 30, 2010 relates to the increase in assets held during the period. Additions to the property and equipment for the year ended April 30, 2010 totalled $1.8 million.

Year ended April 30, 2009 as compared to year ended April 30, 2008. Depreciation and accretion expense of $1.6 million (2008 — $1.1 million) relates to camp facilities, equipment and corporate assets. Accretion expense relates to the asset retirement obligation recognized on the airstrip, camp site, access road, and the reservoir test sites which are being brought into income over a period of 10 to 30 years.

Interest income

Year ended April 30, 2010 as compared to year ended April 30, 2009. Interest income for the year ended April 30, 2010 amounted to $0.1 million (2009 — $1.1 million). Interest income is earned because the Company pre-funds its activities and the resulting cash and cash equivalents on hand which is invested in short-term deposits. The decrease in interest income this current year as compared to the prior year reflects the decrease in short term investments and the decrease in market interest rates over the intervening year.

Year ended April 30, 2009 as compared to year ended April 30, 2008. Interest income of $1.1 million (2008 — $2.5 million) was recognized in fiscal 2009 because the Company had pre-funded its 2009 exploration and reservoir testing programs resulting in cash on hand which was invested in short-term deposits. The decrease in interest income is due to significant reductions in interest rates.

Income tax benefit

Year ended April 30, 2010 as compared to year ended April 30, 2009. The deferred income tax benefit for year ended April 30, 2010 was $9.8 million (2009 — $17.8 million). The decrease in the deferred tax benefit for the year ended April 30, 2010 compared to the prior year is mainly due to a reduction in exploration costs incurred. The deferred tax benefit otherwise reported is reduced by the impact of flow through expenditures. The net impact for the year ended April 30, 2010 was a reduction of the deferred tax benefit in the amount of $3.5 million (2008 — $4.7 million). The Company has generated deferred tax benefits by expensing all exploration costs for accounting purposes while capitalizing these costs for income tax purposes. This results in a hig her tax basis for the Company's property and equipment when compared to their carrying value. The deferred tax liability reported on the balance sheet is mainly related to the book value of property which will not be deductible for tax purposes and is related primarily to the Company’s 2006 acquisition of the minority interest in OQI Sask. Note 7 to the Financial Statements provides a complete reconciliation of the income tax benefit reported to the amount that would be expected from applying the combined Canadian federal and provincial statutory income tax rate of 27%.

Year ended April 30, 2009 as compared to year ended April 30, 2008. The deferred income tax benefit of $17.8 million (2008 — $34.1 million) relates to the tax benefit that is generated by expensing all exploration costs. This results in a higher tax basis for the Company’s capital assets when compared to their carrying value. The deferred tax benefit otherwise reported is reduced by the impact of flow through expenditures: the deferred tax benefit of which flows through to subscribers. Drawdown of the flow through share premium liability decreases the benefit. The net impact for the year was a reduction of the deferred tax benefit in the amount of $4.7 million (2008 — $6.2 million).

Share Capital

At June 30, 2010, the Company had 312,496,101 shares of common stock issued and outstanding, 26,377,141 options to acquire shares of common stock, and 17,537,500 shares of common stock issuable pursuant to warrants outstanding. The options have a weighted average exercise price of $3.23 per share and the warrants have an exercise price of $1.10 per share.

At June 30, 2010, OQI’s diluted shares of common stock outstanding was 312,496,101 shares issued and outstanding plus 26,377,141 options, plus 17,537,500 warrants, plus Exchangeable Shares and options to acquire exchangeable shares which can be exchanged into 31,949,824 shares, plus 1,388,567 shares reserved for settlement with creditors of a former subsidiary).

An Exchangeable Share provides the holder with economic terms and voting rights which are, as nearly as practicable, equivalent to those of a share of OQI common stock. The Exchangeable Shares are represented for voting purposes in the aggregate by one Preferred Share. The one Preferred Share represents a number of votes equal to the total outstanding Exchangeable Shares on the applicable record date for the vote submitted to OQI shareholders.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires companies to establish accounting policies and to make estimates that affect both the amount and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain and therefore actual results may differ from those estimates.

A detailed summary of all of the Company’s significant accountings policies and the estimates derived therefrom is included in Note 2 to the Consolidated Financial Statements for the year ended April 30, 2010. While all of the significant accounting policies are important to the Company’s consolidated financial statements, the following accounting policies and the estimates derived therefrom have been identified as being critical:

—	Properties and equipment;

—	Income taxes;

—	Stock-based compensation; and

—	Foreign currency translation.

—	Asset retirement obligations

Properties and equipment

Property represents the capitalized costs of acquisition of natural resource properties, principally the rights to explore for oil sands deposits in the provinces of Alberta and Saskatchewan, Canada. At April 30, 2010, the rights to the oil shale deposits in the province of Saskatchewan, Canada are included in assets held for sale.

The Company follows the successful efforts method of accounting for its in situ oil sands and oil shale exploration activities. Under the successful efforts method, acquisition costs of proved and unproved properties are capitalized. Costs of unproved properties are transferred to proved properties when proved reserves are confirmed. Exploration costs, including geological and geophysical costs, are expensed as incurred. Exploratory drilling costs are initially capitalized. If it is determined that a specific well does not contain proved reserves, the related capitalized exploratory drilling costs are charged to expense. To date all exploration costs have been expensed.

Development costs, which include the costs of wellhead equipment, development drilling costs and handling facilities, applicable geological and geophysical costs and the costs of acquiring or constructing support facilities and equipment, are capitalized. Costs incurred to operate and maintain wells and equipment and to lift oil and gas to the surface will be expensed as operating costs.

If and when the Company achieves production, acquisition costs of proved properties will be depleted using the unit-of-production method based on proved reserves. Capitalized exploratory drilling costs and development costs will be depleted on the basis of proved developed reserves by area. Support facilities and equipment will be depreciated on a straight-line basis over their useful lives.

Significant undeveloped properties are assessed periodically for impairment individually, based on the Company’s current exploration plans. If an impairment is indicated, a valuation allowance is provided.

The Company has not yet converted any of its exploration permits or licenses in Saskatchewan and Alberta to development leases. In the event that the Company does not meet the regulated requirements or development conditions to convert its permits or licenses to leases or obtain an extension of such development requirements, its right to explore for bitumen or oil shale, as applicable, may be lost resulting in an impairment being recorded. The Company is satisfied that it has good and proper right, title and interest in and to the permits and licenses.

Equipment is recorded at cost less accumulated depreciation and include corporate assets, camp facilities and field equipment. Depreciation of these assets is provided using the straight-line method based on estimated useful lives ranging from two to five years.

Income taxes

The Company files United States federal and Canadian federal and provincial tax returns. Deferred federal and provincial income taxes are provided on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company recognizes a tax benefit from an uncertain position when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position and will record the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority.

Stock-based compensation

The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s financial statements over the requisite service period. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the input of highly subjective assumptions, including the option’s expected life, the expected price volatility of the Company’s common stock and forfeiture. For the Company’s performance options containing market conditions, fair value is estimated using the Hull-White Trinomial model. This model also contains highly subjective assumptions, including expected price vol atility of the Company’s common stock, forfeiture, employee exit rate and suboptimal exercise factor. The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock. The Company’s share-based payments take the form of stock options granted to employees and non-employees all of which are equity classified.

Asset retirement obligations

An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in the period incurred, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. If the estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement o bligation and the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates and changes in the estimated timing of abandonment. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to property and equipment or exploration expense. The capitalized asset retirement cost is amortized on the same basis as the remaining property and equipment, while the liability is increased as an accretion expense until it is settled or sold.

The Company records the fair value of a liability for an asset retirement obligation when there is a legal obligation associated with the retirement of a tangible long-lived asset and the liability can be reasonably estimated. The legal obligation to perform the asset retirement activity is unconditional even though uncertainty may exist about the timing and/or method of settlement that may be beyond the Company’s control. This uncertainty about the timing and/or method of settlement is factored into the measurement of the liability when sufficient information exists to reasonably estimate the fair value. The amount of asset retirement obligation recorded reflects the expected costs, taking into account the probability of particular scenarios. The difference between the upper end of the range of these assumptions and the lower en d of the range can be significant, and consequently changes in these assumptions could have a material effect on the fair value of asset retirement obligations and future losses in a period of change.

Contractual Cash Obligations

The following summarizes our contractual cash obligations and commercial commitments at April 30, 2010 and the effect such obligations are expected to have on liquidity and cash flows in future periods. Included in the table below are purchase obligations under which we have contractual obligations for payments in specific years.

	Payments Due by Period (in thousands)
	Total		Less than 1 Year		2-3 Years		4-5 Years		After 5 Years
Operating lease obligations (a)	$	6,663	$	1,951	$	2,081	$	1,679	$	952

The Company is subject to flow-through share commitments, annual lease rentals, minimum exploration expenditures and work commitments related to its exploration permits, licenses and lease assets. These required expenditures have not been included in the above schedule. For details of these required expenditures see notes 5 and 11 to the Consolidated Financial Statements.

____________

(a)	See Note 16 to the Consolidated Financial Statements, “Contingencies and Commitments”.

Recent accounting pronouncements

The following new accounting standards were adopted by the Company during the year ended April 30, 2010.

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

The Company adopted a new fair-value-measurement standard as of May 1, 2008. The standard defines fair value, establishes a framework for measuring fair value under existing accounting pronouncements that require fair-value measurements and expands fair-value-measurement disclosures. The Company elected to implement the standard with the one-year deferral permitted for nonfinancial assets and nonfinancial liabilities, except those nonfinancial items recognized or disclosed at fair value on a recurring basis (at least annually). The deferral period ended on January 1, 2009. Accordingly, the Company applies the fair-value framework to nonfinancial assets and nonfinancial liabilities initially measured at fair value, such as assets and liabilities acquired in a business combination, impaired long-lived assets (asset groups ), intangible assets and goodwill, and initial recognition of asset retirement obligations and exit or disposal costs.

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

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

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

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

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

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

In August 2009, the FASB issued an update to the Fair Value Topic of the Codification. The FASB issued the update because some entities have expressed concern that there may be a lack of observable market information to measure the fair value of a liability. The guidance is effective for the first reporting period beginning after August 28, 2009, with earlier application permitted. The guidance provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In such circumstances, the topic specifies that a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guida nce. Examples of the alternative valuation methods include using a present value technique or a market approach, which is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The guidance also states that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustments to other inputs relating to the existence of a restriction that prevents the transfer of the liability. We adopted the guidance effective October 31, 2009, and the adoption did not have a significant impact on our consolidated financial statements.

The following new accounting standards have been issued, but have not yet been adopted by the Company as of April 30, 2010.

In January 2010, the FASB issued an update to the Fair Value Topic, which enhances the usefulness of fair value measurements. The amended guidance requires both the disaggregation of information in certain existing disclosures, as well as the inclusion of more robust disclosures about valuation techniques and inputs to recurring and nonrecurring fair value measurements.

The topic amends the disclosures about fair value measurements in the Fair Value Topic as follows:

Entities must disclose the amounts of, and reasons for, significant transfers between Level 1 and Level 2, as well as those into and out of Level 3, of the fair value hierarchy. Transfers into a level must be disclosed separately from transfers out of the level. Entities are required to judge the significance of transfers based on earnings and total assets or liabilities or, when changes in fair value are recognized in other comprehensive income, on total equity;

Entities must also disclose and consistently follow their policy for when to recognize transfers into and out of the levels, which might be, for example, on the date of the event resulting in the transfer or at the beginning or end of the reporting period;

Entities must separately present gross information about purchases, sales, issuances, and settlements in the reconciliation disclosure of Level 3 measurements, which are measurements requiring the use of significant unobservable inputs;

For Level 2 and Level 3 measurements, an entity must disclose information about inputs and valuation techniques used in both recurring and nonrecurring fair value measurements. If a valuation technique changes, for example, from a market approach to an income approach, an entity must disclose the change and the reason for it. The amendments include implementation guidance on disclosures of valuation techniques and inputs; and

Fair value measurement disclosures must be presented by class of assets and liabilities. Identifying appropriate classes requires judgment, and will often require the disaggregation of assets or liabilities included within a line item on the financial statements. An entity must determine the appropriate classes requiring disclosure based on the nature and risks of the assets and liabilities, their classification in the fair value hierarchy, and the level of disaggregated information required by other U.S. GAAP for specific assets and liabilities, such as derivatives.

The amended guidance does not include the sensitivity disclosures, as had been proposed.

The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years.

Off-Balance Sheet Arrangements

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the potential loss arising from changes in market rates and prices. We are exposed to the impact of market fluctuations associated with the following:

Interest Rate Risk

We consider our exposure to interest rate risk to be immaterial. Interest rate exposures relate entirely to our investment portfolio, as we do not have short-term or long-term debt. Our investment objectives are focused on preservation of principal and liquidity. We manage our exposure to market risks by limiting investments to high quality bank issuers at overnight rates, or government securities of the United States or Canadian federal governments such as Guaranteed Investment Certificates or Treasury Bills. We do not hold any of these investments for trading purposes. We do not expect any material loss from cash equivalents and therefore we believe our interest rate exposure on invested funds is not material.

Foreign Exchange Risk

Our exposure to foreign exchange risk is primarily related to fluctuations between the Canadian dollar and the U.S. dollar. We are exposed to foreign exchange fluctuations when we translate our Canadian operating results into U.S. dollars for reporting purposes. These fluctuations can affect the comparability between quarters and year-to-year. As at April 30, 2010, we had not entered into any market risk sensitive instruments relating to our foreign currency exchange risk.

Commodity Risk

Oil and natural gas prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control. These factors include the level of global demand for petroleum products, international supply of oil and gas, the establishment of and compliance with production quotas by oil exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both international and domestic. We cannot predict future oil and gas prices with any degree of certainty. Sustained weakness in oil and gas prices may adversely affect our ability to obtain capital to fund our activities and could in the future require a reduction in the carrying value of our oil and gas properties. Similarly, an improvement in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. As at April 30, 2010, we had not entered into any market risk sensitive instruments relating to oil and natural gas.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial Statements and Supplementary Data following the signature page of this Annual Report on Form 10-K.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Item 9A. CONTROL AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of April 30, 2010, management has conducted, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on such evaluation, ou r Chief Executive Officer and Chief Financial Officer concluded that as of April 30, 2010, our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit prep aration of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has conducted, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our internal control over financial reporting as of April 30, 2010 in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control — Integrated Framework. Based on this assessment, management concluded that as of April 30, 2010, the Company’s internal control over financial reporting was effective.

KPMG LLP, our independent registered public accounting firm that audited the financial statements included in the annual report containing the disclosure required by this Item, has performed an audit of internal control over financial reporting. Their report is included in this annual report on Form 10-K.

Remediation of Material Weakness

As reported in our Form 10-K for the fiscal year ended April 30, 2009, we determined that we did not maintain effective processes and controls over the accounting for and reporting of complex and non-routine transactions. Specifically, we did not have sufficient appropriate level of technical knowledge, experience and training in the accounting for asset acquisitions, stock-based compensation, and deferred income taxes. We concluded that this control deficiency constituted a material weakness in our internal control over financial reporting. Throughout the year we have designed and implemented new internal control procedures to remediate the controls over our accounting and reporting of complex and non-routine transactions. We consulted with an independent accounting firm on accounting and reporting of selected complex and non-routine transactions and obtained written analysis of the accounting options available to us. We amended our period end close procedures to include access to independent consultation on technical accounting treatment with respect to highly complex transactions. We also revisited the overall structure of the accounting department, reconsidered processes and procedures in light of changes in the department and implemented additional management and oversight controls to review key transactions. These changes were implemented gradually during the year and we believe we have taken the steps necessary to remediate this material weakness relating to the accounting for and reporting of complex and non-routine transactions as of April 30, 2010.

Item 9B. Other Information

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information called for by Item 10 pertaining to directors and corporate governance will be set forth in our definitive proxy statement relating to our 2010 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed within 120 days of the Company’s fiscal year end of April 30, 2010 and is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

The information called for by Item 11 pertaining to executive and director compensation will be set forth in the Proxy Statement and is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS' MATTERS

The information called for by Item 12 pertaining to security ownership of certain beneficial owners and management will be set forth in the Proxy Statement and is incorporated herein by reference. The information regarding compensation plans under which the Company’s equity securities are authorized for issuance is set forth in Part II, Item 5. “Market for Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities — Equity Compensation Plan Information” and is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 pertaining to certain relationships and related transactions and director independence will be set forth in the Proxy Statement and is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by Item 14 pertaining to principal accounting fees and services will be set forth in the Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.

EXHIBITS

3.1		Articles of Incorporation.(1),(4),(6),(11), (16)

3.2		Bylaws.(17)

4.1		2005b Stock Option Plan.(2)

4.2		2006 Stock Option Plan.(13)

4.3		Rights Agreement, dated as of March 9, 2006, between the Company and Computershare Investor Services, Inc., as Rights Agent.(5)

4.4		Warrant indenture between Oilsands Quest Inc. and Computershare Trust Company of Canada dated December 5, 2007.(14)

4.5		Form of Warrant, dated December 12, 2005.(3)

4.6		Warrant Indenture dated May 12, 2009.(20)

4.7		Form of Registration Rights Agreement between the Company and certain investors, dated December 22, 2009.(22)

10.1		Financing Agreement with Oilsands Quest Sask, Inc., dated November 25, 2005.(3)

10.2		Subscription Agreement with Dynamic Power Hedge Fund, dated December 12, 2005.(3)

10.3		Executive Employment Agreement (Amended and Restated) with T. Murray Wilson, dated September 22, 2006 and as amended effective August 1, 2007.(13)


10.4		Reorganization Agreement, dated June 9, 2006.(7)

10.5		Voting Exchange and Trust Agreement dated August 14, 2006.(8)

10.6		Exchangeable Share Provisions.(8)

10.7		Support Agreement dated August 14, 2006.(8)

10.8		Executive Employment Agreement with Christopher Hopkins dated August 14, 2006.(8)

10.9		Form of Indemnity Agreement.(9)

10.10		Subscription Agreement for Flow-Through Shares, dated March 6, 2007.(13)

10.11		Amending Agreement to Subscription Agreement for Flow-Through Shares, dated May 3, 2007.(13)

10.12		Subscription Agreement between the Company and Subscribers, dated May 3, 2007.(13)

10.13		Underwriting Agreement.(15)

10.14		Consulting Services Agreement with Karim Hirji.(18)

10.15		Executive Employment Agreement with Garth Wong.(21)

10.16		Agency Agreement dated April 30, 2009.(19)

10.17		Form of Subscription Agreement between certain investors and the Company, dated December 16, 2009 and December 21, 2009.(22)

10.18		Transition Agreement between the Company and Christopher Hopkins, dated January 13, 2010.(23)

23.1		Consent of KPMG LLP, filed herewith.

31.1		Certification of CEO Pursuant to Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2		Certification of CFO Pursuant to Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

____________

(1)	Incorporated by reference from Form 10-SB, filed October 14, 1999; and Form 8-K, filed November 29, 2004.

(2)	Incorporated by reference from Form SB-2 dated December 29, 2005.

(3)	Incorporated by reference from Form 10-QSB dated March 22, 2006.

(4)	Incorporated by reference from Form 10-QSB dated December 14, 2005.

(5)	Incorporated by reference from Form 8-A dated March 13, 2006.

(6)	Incorporated by reference from Form 8-K dated March 13, 2006.

(7)	Incorporated by reference from Form 8-K dated June 14, 2006.

(8)	Incorporated by reference from Form 8-K dated August 17, 2006.

(9)	Incorporated by reference herein from Form 10-QSB filed March 15, 2007

(10)	Incorporated by reference herein from Form 8-K dated October 12, 2006.

(11)	Incorporated by reference herein from Form 10-QSB filed December 15, 2006.

(12)	Incorporated by reference herein from Form 8-K filed August 21, 2006.

(13)	Incorporated by reference herein from Form 10-KSB filed July 30, 2007.

(14)	Incorporated by reference herein from Form 8-K filed December 5, 2007.

(15)	Incorporated by reference herein from Form 10-K filed November 23, 2007.

(16)	Incorporated by reference herein from Form 8-K filed October 21, 2008.

(17)	Incorporated by reference herein from 10-K filed June 21, 2008.

(18)	Incorporated by reference herein from 10-Q filed March 12, 2009.

(19)	Incorporated by reference herein from Form 8-K filed May 1, 2009.

(20)	Incorporated by reference herein from Form 8-A filed May 12, 2009.

(21)	Incorporated by reference herein from Form 10-K filed July 30, 2009.

(22)	Incorporated by reference herein from Amendment No. 4 to Form S-1 filed January 22, 2010.

(23)	Incorporated by reference herein from Form 8-K filed January 22, 2010.

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.

	OILSANDS QUEST INC.

Date: July 13, 2010	By:	/s/ T. Murray Wilson
		T. Murray Wilson, President, Chief Executive Officer and Chairman (Principal Executive Officer)


Date: July 13, 2010	By:	/s/ Garth Wong
		Garth Wong, Chief Financial Officer (Principal Accounting Officer)

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

/s/ Ronald Blakely	Director	July 13, 2010
Ronald Blakely

/s/ Paul Ching	Director	July 13, 2010
Paul Ching

/s/ Christopher H. Hopkins	Director	July 13, 2010
Christopher H. Hopkins

/s/ Brian MacNeill	Director	July 13, 2010
Brian MacNeill

/s/ Ronald Phillips	Director	July 13, 2010
Ronald Phillips

/s/ John Read	Director	July 13, 2010
John Read

/s/ Gordon Tallman	Director	July 13, 2010
Gordon Tallman

/s/ Pamela Wallin	Director	July 13, 2010
Pamela Wallin

/s/ T. Murray Wilson	President, Chief Executive Officer and Chairman	July 13, 2010
T. Murray Wilson

OILSANDS QUEST INC.

YEAR ENDED APRIL 30, 2010

CONSOLIDATED FINANCIAL STATEMENTS

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets, April 30, 2010 and 2009

Consolidated Statements of Operations, Three Years Ended April 30, 2010 and Period from Inception on April 3, 1998 to April 30, 2010

Consolidated Statements of Stockholders’ Equity, Three Years Ended April 30, 2010 and Period from Inception on April 3, 1998 to April 30, 2010

Consolidated Statements of Comprehensive Loss, Three Years Ended April 30, 2010 and Period from Inception on April 3, 1998 to April 30, 2010

Consolidated Statements of Cash Flows, Three Years Ended April 30, 2010 and Period from Inception on April 3, 1998 to April 30, 2010

Notes to Consolidated Financial Statements

Supplemental Quarterly Information (Unaudited)

Supplemental Information on Oil and Gas Exploration and Producing Activities (Unaudited)

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Oilsands Quest Inc.

We have audited the accompanying consolidated balance sheets of Oilsands Quest Inc. and subsidiaries (a development stage company) as of April 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, comprehensive loss and cash flows for each of the years in the three-year period ended April 30, 2010 and the information included in the cumulative from inception presentations for the period from May 1, 2007 to April 30, 2010 (not separately presented herein). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 about 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oilsands Quest Inc. and subsidiaries (a development stage company) as of April 30, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 2010 and the information included in the cumulative from inception presentations for the period from May 1, 2007 to April 30, 2010 (not separately presented herein), in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of April 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 12, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

(signed) KPMG LLP

Calgary, Canada

July 12, 2010

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Oilsands Quest Inc.

We have audited Oilsands Quest Inc.’s (the “Company”) (a development stage company) internal control over financial reporting as of April 30, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting under Item 9A of the April 30, 2010 Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of m anagement and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Oilsands Quest Inc. and subsidiaries (a development stage company) as of April 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, comprehensive loss and cash flows for each of the years in the three-year period ended April 30, 2010 and the information included in the cumulative from inception presentations for the period from May 1, 2007 to April 30, 2010 (not separately presented herein), and our report dated July 12, 2010 expressed an unqualified opinion on those consolidated financial statements.

(signed) KPMG LLP

Calgary, Canada

July 12, 2010

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Balance Sheets

(in thousands, except share data)

		April 30, 2010	April 30, 2009

ASSETS
Current Assets:
Cash and cash equivalents	$	18,642	$	6,986
Accounts receivable		1,421		3,617
Short-term investments		-		25,209
Prepaid expenses		739		337
Available for sale equity securities		65		60
Total Current Assets		20,867		36,209

Property and Equipment (note 5)		458,168		398,975
Assets held for sale (note 3)		5,059		-
Total Assets	$	484,094	$	435,184

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable (notes 15 and 16)	$	1,606	$	3,463
Accrued liabilities		2,626	5,604
Flow-through share premium liability		-	749
Total Current Liabilities		4,232	9,816

Deferred Taxes (note 7)		62,516	65,651
Asset Retirement Obligation (note 6)		17,485	2,621
Liabilities related to assets held for sale (note 3)		1,146	-

Stockholders’ Equity:
Capital Stock
Preferred Stock, par value of $0.001 each, 10,000,000 shares authorized, 1 Series B Preferred share outstanding (note 10)		-	-
Common Stock, par value of $0.001 each, 750,000,000 shares authorized, 292,491,188 and 241,559,549 shares outstanding at April 30, 2010 and April 30, 2009 respectively (note 11)		292	242
Additional Paid-in Capital		758,007	713,591
Deficit Accumulated During Development Stage		(395,196)	(330,715)
Accumulated Other Comprehensive Income (Loss)		35,612	(26,022)
Total Stockholders’ Equity		398,715	357,096
Total Liabilities and Stockholders’ Equity	$	484,094	$	435,184

Contingencies and commitments (note 16)

Subsequent events (notes 3, 5(a) and 17)

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Operations

(in thousands, except share data and per share amounts)

	For the Years Ended April 30,						From Inception on April 3, 1998 through to April 30, 2010
	2010		2009		2008		From Inception on April 3, 1998 through to April 30, 2010
Expenses
Exploration	$	48,682	$	70,843	$	96,362	$	253,723
General and administrative
Corporate		16,979		12,567		11,386		58,820
Stock-based compensation (notes 9, 11 and 12)		5,584		17,481		20,847		146,827
Foreign exchange (gain) loss		(5,088)		4,780		(441)		(548)
Depreciation and accretion		2,528		1,564		1,073		5,532
		68,685		107,235		129,227		464,354
Other Items
Interest income		(134)		(1,089)		(2,469)		(6,432)
Loss before income tax		68,551		106,146		126,758		457,922
Deferred income tax benefit (note 7)		(9,830)		(17,847)		(34,053)		(61,680)
Net loss from continuing operations		58,721		88,299		92,705		396,242
Net loss from discontinued operations (note 3)		5,760		835		42		6,648
Net loss		64,481		89,134		92,747		402,890
Net loss attributable to non-controlling interest (note 8)		-		-		-		(7,694)
Net loss attributable to common stockholders	$	64,481	$	89,134	$	92,747	$	395,196

Net loss from continuing operations per share – Basic and Diluted	$	0.19	$	0.34	$	0.41
Net loss from discontinued operations per share – Basic and Diluted		0.02		-		-
Net loss attributable to common stockholders per share – Basic and Diluted	$	0.21	$	0.34	$	0.41
Weighted Average Number of Common Shares Outstanding (note 11)		305,327,827		261,510,084		227,054,265

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

									Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Deficit Accumulated During the Development Stage		Total Stockholders’ Equity
	Common Stock				Preferred Stock
	Shares		Par Value		Shares		Par Value

Balance, April 30, 2009		241,559,549	$	242		1	$	-	$	713,591	$	(26,022)	$	(330,715)	$	357,096
Common stock issued for:														-
Cash		44,789,313		45		-		-		39,969		-		-		40,014
Stock option exercises		964,769		-		-		-		782		-		-		782
Exchange of OQI Sask Exchangeable shares		5,177,557		5		-		-		(5)		-		-		-
Stock-based compensation cost		-		-				-		5,584		-		-		5,584
Share issue costs		-		-		-		-		(2,096)		-		-		(2,096)
Proceeds from exercise of OQI Sask options		-		-		-		-		182		-		-		182
Other comprehensive income
Foreign exchange gain on translation		-		-		-		-		-		61,634		-		61,634
Net loss		-		-		-		-		-		-		(64,481)		(64,481)
Balance April 30, 2010		292,491,188	$	292		1	$	-	$	758,007	$	35,612	$	(395,196)	$	398,715

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

	Common Stock				Preferred Stock				Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Deficit Accumulated During the Development Stage		Total Stockholders’ Equity
	Shares		Par Value		Shares		Par Value		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Deficit Accumulated During the Development Stage		Total Stockholders’ Equity

Balance, April 30, 2008		213,861,958	$	214		1	$	-	$	604,403	$	36,732	$	(241,581)	$	399,768
Common stock issued for:
Cash		23,784,917		24		-		-		91,215		-		-		91,239
Property (note 5(d))		640,000		1		-		-		3,718		-		-		3,719
Premium on flow-through shares		-		-		-		-		(1,803)		-		-		(1,803)
Stock option exercises		35,000		-		-		-		165		-		-		165
Exchange of OQI Sask Exchangeable shares		3,237,674		3		-		-		(3)		-		-		-
Stock-based compensation cost		-		-				-		17,481		-		-		17,481
Share issue costs		-		-		-		-		(3,108)		-		-		(3,108)
Proceeds from exercise of OQI Sask options		-		-		-		-		1,523		-		-		1,523
Other comprehensive income
Transfer of unrealized loss on available-for-sale equity securities		-		-		-		-		-		168		-		168
Foreign exchange loss on translation		-		-		-		-		-		(62,922)		-		(62,922)
Net loss		-		-		-		-		-		-		(89,134)		(89,134)
Balance April 30, 2009		241,559,549	$	242		1	$	-	$	713,591	$	(26,022)	$	(330,715)	$	357,096

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

	Common Stock				Preferred Stock				Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Deficit Accumulated During the Development Stage		Total Stockholders’ Equity
	Shares		Par Value		Shares		Par Value		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Deficit Accumulated During the Development Stage		Total Stockholders’ Equity

Balance, April 30, 2007		164,624,278	$	165		1	$	-	$	440,460	$	3,365	$	(148,834)	$	295,156
Common stock issued for:
Cash		31,314,166		31		-		-		128,224		-		-		128,255
Stock option exercises		1,456,250		2		-		-		3,821						3,823
Premium on flow-through shares		-		-		-		-		(4,379)		-		-		(4,379)
Warrant exercises		8,856,015		9						17,510						17,519
Property (notes 5(a) and (d))		750,000		-		-		-		3,292		-		-		3,292
Stock-based compensation		44,000		-		-		-		116		-		-		116
Exchange of OQI Sask Exchangeable shares		6,817,249		7		-		-		(7)		-		-		-
Stock-based compensation cost		-		-				-		20,847		-		-		20,847
Share issue costs		-		-		-		-		(7,079)		-		-		(7,079)
Proceeds from exercise of OQI Sask options and warrants		-		-		-		-		1,598		-		-		1,598
Other comprehensive income
Unrealized loss on available for sale equity securities		-		-		-		-		-		(142)		-		(142)
Foreign exchange gain on translation		-		-		-		-		-		33,509		-		33,509
Net loss		-		-		-		-		-		-		(92,747)		(92,747)
Balance April 30, 2008		213,861,958	$	214		1	$	-	$	604,403	$	36,732	$	(241,581)	$	399,768

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

	Common Stock				Perferred Stock
	Shares	Par Value		Shares		Par Value		Additonal Paid in Capital		Accumulated Other Comprehensive Income		Deficit Accumulated During the Development Stage		Non-Controlling Interest		Total Stockholders' Equity
Common stock issued at inception on April 3, 1998 for assets Common stock issued for:	6,000,000	$	6		-	$	-	$	92	$	-	$	-	$	-	$	98
subscription	77,500		-		-		-		36		-		-		-		36
Property	17,406,604		17		-		-		5,805		-		-		-		5,822
Cash	49,254,199		50		-		-		99,243		-		-		-		99,293
Cashless Exercise of warrants and options	13,184,966		13		-		-		(13)		-		-		-		-
Services	17,973,611		18		-		-		10,836		-		-		-		10,854
Settlement of debt	32,490,383		33		-		-		28,294		-		-		-		28,327
Premium on flow-through shares	-		-		-		-		(2,535)		-		-		-		(2,535)
Preferred shares issued on reorganization (noted 10)	-		-		1		-		223,579		-		-		-		223,579
Exchange of OQI Sask Exchangeables	28,237,015		28		-		-		(28)		-		-		-		-
Share issue costs	-		-		-		-		(2,895)		-		-		-		(2,895)
Stock-based compensation cost	-		-		-		-		56,067		-		-		-		56,067
Proceeds from exercise of OQI Sask options and warrants	-		-		-		-		1,056		-		-		-		1,056
Beneficial convesion feature of Convertible debentures and warrants	-		-		-		-		20,923		-		-		-		20,923
Noncontrolling interest: Shares issued to noncontrolling interest	-		-		-		-		-		-		-		13		13
Net loss attributable to noncontrolling interest	-		-		-		-		-		-		-		(7,694)		(7,694)
Increase in interest arising from share issuance by OQI Sask	-		-		-		-		-		-		-		24,433		24,433
Shares purchased from noncontrolling interest	-		-		-		-		-		-		-		(16,752)		(16,752)
Other comprehensive income:
Unrealized loss on available for sale equity securities	-		-		-		-		-		(26)		-		-		(26)
Foreign excahnge gain on translation	-		-		-		-		-		3,391		-		-		3,391
Net loss	-	-		-		-		-		-		(148,834)		-		(148,834)
Balance April 30, 2007	164,624,278	$	165		1	$	-	$	440,460		3,365	$	(148,834)	$	-	$	295,156

See Notes to Consolidated Financial Statement

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Comprehensive Loss

(in thousands)

	Year Ended April 30,						From Inception on April 3, 1998 through to April 30, 2010
	2010		2009		2008		From Inception on April 3, 1998 through to April 30, 2010

Net loss	$	64,481	$	89,134	$	92,747	$	402,890
Unrealized loss on available for sale equity securities		-		-		142		168
Transfer of unrealized loss on available for sale equity securities to net loss		-		(168)		-		(168)
Exchange (gain) loss on translation		(61,634)		62,922		(33,509)		(35,612)
Comprehensive loss	$	2,845	$	151,888	$	59,380	$	367,278
Comprehensive loss attributable to non-controlling interest		-		-		-		(7,694)
Comprehensive loss attributable to common stockholders	$	2,845	$	151,888	$	59,380	$	359,584

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(in thousands)

	Years Ended April 30,						From Inception on April 3, 1998 Through to April 30, 2010
	2010		2009		2008		From Inception on April 3, 1998 Through to April 30, 2010

Operating Activities
Net loss	$	(64,481)	$	(89,134)	$	(92,747)	$	(402,890)
Non-cash adjustments to net loss
Stock-based compensation		5,584		17,481		20,847		146,827
Deferred income tax benefit		(11,961)		(18,156)		(34,069)		(64,139	)
Depreciation and accretion		2,528		1,564		1,073		5,532
Asset retirement obligation expensed		13,618		1,068		-		14,686
Impairment of unproved properties		6,403		-		-		7,260
Other non-cash items		-		388		(82)		378
Changes in Non-Cash Working Capital
Accounts receivable and prepaid expenses		2,321		(600)		(2,341)		(1,016)
Accounts payable		(5,715)		(4,845)		10,915		8,414
Changes in non-cash working capital related to assets held for sale		(481)		84		-		(397)
Cash Used in Operating Activities		(52,184)		(92,150)		(96,404)		(285,345)
Investing Activities
Property and equipment expenditures		(1,781)		(7,418)		(14,621)		(81,195)
Short-term investment		25,209		(5,397)		(17,812)		-
Other investments		-		117		(248)		(548)
Cash Used in Investing Activities		23,428		(12,698)		(32,681)		(81,743)

Financing Activities
Issuance of shares for cash		38,702		88,297		142,518		366,263
Bank loan		-		-		(21,208)		-
Shares issued on exercise of subsidiary options and warrants		116		1,523		1,598		4,293
Shares issued by subsidiary to non-controlling interest (note 4(a))		-		-		-		7,664
Convertible debentures		-		-		-		8,384
Cash Provided by Financing Activities		38,818		89,820		122,908		386,604

Inflow of Cash and cash equivalents		10,062		(15,028)		(6,177)		19,516
Effects of exchange rate changes on cash		1,594		(4,484)		281		(874)
Cash and cash equivalents, Beginning of Year		6,986		26,498		32,394		-
Cash and cash equivalents, End of Year	$	18,642	$	6,986	$	26,498	$	18,642
Non-Cash Financing Activities
Common stock issued for properties	$	-	$	3,718	$	3,293	$	10,848
Warrants issued for properties	$	-	$	-	$	-	$	1,764
Common stock issued for services	$	-	$	-	$	116	$	10,505
Common stock issued for debt settlement	$	-	$	-	$	-	$	28,401

See Notes to Consolidated Financial Statements

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

1.	DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

On October 31, 2006, CanWest Petroleum Corporation changed its name to Oilsands Quest Inc. (“OQI”). At the same time the name of the Company’s main operating subsidiary was changed from Oilsands Quest Inc. to Oilsands Quest Sask Inc. (“OQI Sask”).

Oilsands Quest Inc. (“OQI”) together with its subsidiaries, (collectively the “Company”) is in the development stage and follows the guidance for a development stage company as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915-10. The principal business activity is the acquisition, exploration and development of natural resource properties in Canada.

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

As at April 30, 2010, the Company has working capital of $16.6 million. On May 10, 2010, the Company raised an additional $18.6 million by issuing 10.5 million flow-through shares at $1.00 CDN ($0.995 USD) and 9.2 million common shares at $0.85 per share. The Company believes that it has sufficient funds to maintain its interests in the existing properties and to maintain other core activities through April 2011. The Company monitors its expenditure budgets and adjusts its expenditure plans to conform to available funding. However, additional funding will be required to complete the exploration or development activities, or for changes in the nature or cost of the activities currently planned.

The Company plans to fund future exploration and development activities by way of financings such as a public offering or private placement of debt or equity securities. The Company’s development strategy may also include entering into partnerships with third parties on a joint venture basis. However, the Company cannot provide any assurance that debt or equity financing or joint venture partner arrangements will be available on acceptable terms, if at all, to meet future requirements.

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

2.	BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with US GAAP and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of the annual financial information. Certain comparative figures have been reclassified to conform to current financial statement presentation. The significant accounting policies used in these consolidated financial statements are as follows:

Principles of consolidation

These consolidated financial statements include the accounts of OQI and all of its wholly-owned Canadian subsidiaries (directly and indirectly) including Oilsands Quest Sask Inc. (“OQI Sask”), Township Petroleum Corporation (“Township”), Western Petrochemicals Corporation, 1291329 Alberta Limited, Oilsands Quest Technology Inc. and Stripper Energy Services, Inc. (“Stripper”).

All inter-company transactions and balances have been eliminated.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include the carrying value of unproved properties, income taxes, stock-based compensation and asset retirement obligations. Actual results could differ from those estimates and changes in estimates are recorded when known.

Foreign currency translation

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

Cash and cash equivalents

Cash and cash equivalents include cash and term deposits that carry terms less than three months at the date of investment. As at April 30, 2010, cash and cash equivalents was comprised of $8.0 million (2009 - $3.1 million) in cash and $10.6 million in money market funds (2009 - $3.9 million in term deposits).

Short-term investments

Short-term investments consist of Guaranteed Investment Certificates with a term to maturity of greater than three months at the date of investment. These investments were at fair value at April 30, 2009. There were no short term investments at April 30, 2010.

Property and equipment

Property represents the capitalized costs of acquisition of natural resource properties, principally the rights to explore for in-situ oil sands deposits in the provinces of Alberta and Saskatchewan, Canada and oil shale deposits in the province of Saskatchewan, Canada. At April 30, 2010 the rights to the oil shale deposits in the province of Saskatchewan, Canada are included in assets held for sale.

The Company follows the successful efforts method of accounting for its in-situ oil sands and oil shale exploration activities. Under the successful efforts method, acquisition costs of proved and unproved properties are capitalized. Costs of unproved properties are transferred to proved properties when proved reserves are confirmed. Exploration costs, including geological and geophysical costs, are expensed as incurred. Exploratory drilling costs are initially capitalized. If it is determined that a specific well does not contain proved reserves, the related capitalized exploratory drilling costs are charged to expense. To date all exploration costs have been expensed.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

If and when the Company achieves production, acquisition costs of proved properties will be depleted using the unit-of-production method based on proved reserves. Capitalized exploratory drilling and development costs will be depleted on the basis of proved developed reserves by area. Support facilities and equipment will be depreciated on a straight-line basis over their useful lives.

The Company has not yet converted any of its exploration permits or licenses in Saskatchewan and Alberta to development leases. In the event that the Company does not meet the regulated requirement or development conditions to convert its permits to leases or obtain an extension of such development requirements, its right to explore for bitumen, as applicable, may be lost resulting in an impairment being recorded. The Company is satisfied that it has good and proper right, title and interest in and to the permits and licenses.

Income Taxes

The Company files United States federal and state, and Canadian federal and provincial tax returns. Deferred federal and provincial income taxes are provided on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company recognizes a tax benefit from an uncertain position when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position and will record the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority.

Stock-based compensation

The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s financial statements over the requisite service period. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the input of highly subjective assumptions, including the option’s expected life, the expected price volatility of the Company’s common stock and forfeitures. For the Company’s performance options containing market conditions, fair value is estimated using the Hull-White Trinomial model. This model also contains highly subjective assumptions, including expected price v olatility of the Company’s common stock, forfeitures, employee exit rate and suboptimal exercise factor. The expected stock price volatility assumption was determined using historical volatility of the Company’s common stock. The Company’s share-based payments take the form of stock options granted to employees and non-employees all of which are equity classified.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Financial Instruments

(i)

Fair value

Fair value is defined as the price that would be received to sell an asset or price paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritizes those inputs based upon the degree to which they are observable. The three levels of the fair-value-measurement hierarchy are as follows:

Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives).

Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).

Level 3 - inputs that are not observable from objective sources, such as the Company’s internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in the Company’s internally developed present value of future cash flows model that underlies the fair-value measurement).

In determining fair value, the Company utilizes observable market data when available, or models that incorporate observable market data. In addition to market information, the Company incorporates transaction-specific details that, in management’s judgment, market participants would take into account in measuring fair value.

In arriving at fair-value estimates, the Company utilizes the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based upon the lowest level of input that is significant to the fair-value measurement.

The carrying amount of cash and cash equivalents, accounts receivable, short term investments, available for sale equity securities and accounts payable and accrued liabilities reported on the balance sheet approximates fair value.

Nonfinancial assets and liabilities initially measured at fair value include certain assets and liabilities acquired in a business combination, impaired long-lived assets (asset groups), intangible assets and goodwill, and initial recognition of asset retirement obligations and exit or disposal costs.

(ii)

Interest rate risk

The Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary current assets and current liabilities.

(iii)

Market risk

The Company is exposed to equity security market risk because of investments held and classified on the balance sheet as available for sale securities.

(iv)

Credit risk

The Company has no significant concentrations of credit risk.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(v)

Foreign currency exchange rate

Foreign currency risk is the risk that we will incur economic losses due to adverse fluctuations in foreign currency exchange rates. This risk arises to the extent that monetary assets and liabilities held or expenditures incurred by the Company and its subsidiaries are not denominated in their respective currencies.

Loss per share

Loss per share calculations are based on the weighted average number of shares (including Exchangeable Shares) outstanding during the period. Diluted loss per share has not been presented separately as the outstanding warrants and options are anti-dilutive for each of the periods presented.

Asset retirement obligations

An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in the period incurred, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. If the estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates and changes in the estimated timing of abandonment. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to property and equipment or exploration expense. The capitalized asset retirement cost is amortized on the same basis as the remaining property and equipment, while the liability is increased as an accretion expense until it is settled or sold.

The Company records the fair value of a liability for an asset retirement obligation when there is a legal obligation associated with the retirement of a tangible long-lived asset and the liability can be reasonably estimated. The legal obligation to perform the asset retirement activity is unconditional even though uncertainty may exist about the timing and/or method of settlement that may be beyond the Company’s control. This uncertainty about the timing and/or method of settlement is factored into the measurement of the liability when sufficient information exists to reasonably estimate the fair value. The amount of asset retirement obligation recorded reflects the expected costs, taking into account the probability of particular scenarios. The difference between the upper end of the range of these assumptions and the lower e nd of the range can be significant, and consequently changes in these assumptions could have a material effect on the fair value of asset retirement obligations and future losses in a period of change.

Environmental contingencies

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations are recognized no later than the time of the completion of the remediation feasibility study. These accruals are adjusted as additional information becomes available or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. At April 30, 2010 and 2009 there were no environmental obligations to be accrued.

Immaterial corrections

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

The first immaterial error related to an overstated accrual on a short-term discretionary incentive plan for employees of the Company for the year ended April 30, 2009. The Company concluded that the adjustment was not material to the financial statements for the year ended April 30, 2009 and has reflected the adjustment as an immaterial correction of prior period comparative financial information in these financial statements.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

The Company determined that the cumulative impact of the immaterial error, was a decrease to corporate general and administrative expense, net loss and comprehensive loss of $1.5 million (net of deferred income tax benefit of nil) for the three months and the year ended April 30, 2009 and for the period from inception on April 8, 1998 to April 30, 2009 and recorded corresponding decreases to accrued liabilities and deficit accumulated during the development stage at April 30, 2009. Basic and diluted net loss attributable to common stockholders decreased by $0.01 per share for the three months and the year ended April 30, 2009.

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

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

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

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

The Company concluded that these adjustments were not material to the financial statements for the years ended April 30, 2007, 2008 and 2009.

Recent accounting pronouncements

The following new accounting standards were adopted by the Company during the year ended April 30, 2010.

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

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

The Company adopted a new fair-value-measurement standard as of May 1, 2008. The standard defines fair value, establishes a framework for measuring fair value under existing accounting pronouncements that require fair-value measurements and expands fair-value-measurement disclosures. The Company elected to implement the standard with the one-year deferral permitted for nonfinancial assets and nonfinancial liabilities, except those nonfinancial items recognized or disclosed at fair value on a recurring basis (at least annually). The deferral period ended on January 1, 2009. Accordingly, the Company applies the fair-value framework to nonfinancial assets and nonfinancial liabilities initially measured at fair value, such as assets and liabilities acquired in a business combination, impaired long-lived assets (asset group s), intangible assets and goodwill, and initial recognition of asset retirement obligations and exit or disposal costs.

The guidance encourages, but does not require, comparative disclosure for earlier periods at initial adoption. The adoption of the guidance did not have any impact on the Company’s consolidated financial statements.

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

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

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

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

Examples of the alternative valuation methods include using a present value technique or a market approach, which is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The guidance also states that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustments to other inputs relating to the existence of a restriction that prevents the transfer of the liability. We adopted the guidance effective October 31, 2009, and the adoption did not have a significant impact on our consolidated financial statements.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

The following new accounting standards have issued, but have not yet been adopted by the Company as of April 30, 2010.

The topic amends the disclosures about fair value measurements in the Fair Value Topic as follows:

The amended guidance does not include the sensitivity disclosures, as had been proposed.

3. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

On January 15, 2010 the Company reached an agreement through due process to sell its Pasquia Hills oil shale properties to Canshale Corp., a private company formed by the former President and Chief Executive Officer of the Company (the “Purchaser”) for consideration of CDN $1 million (US $ 0.9 million) in cash and 8,000,000 shares of the private company. The sale is conditional on the Purchaser raising a minimum financing amount as defined in the terms of the agreement by June 30, 2010. The transaction will have an effective date of November 1, 2009 when the condition is met and the Purchaser will be responsible for all costs incurred related to the properties from the effective date to the date of close. As part of this transaction, the Company has agreed to loan to the Purchaser $250 ,000 and funds to cover certain advisory costs, which will be repaid when the financing is obtained or if the financing is not obtained, all amounts will be forgiven.On July 6, 2010, for an extension incentive of an additional 2,000,000 common shares of Canshale Corp., the Company agreed to an extension of the transaction to July 30, 2010.

The Company has estimated the fair value of the oil shale assets based on the purchase and sale agreement and has included the lower of their carrying amounts and fair value less cost to sell of these assets within assets held for sale for the current period.

Included in assets held for sale at April 30, 2010 are deposits of $0.4 million related to the oil shale permits, the cost of the Pasquia Hills assets of $4.7 million (net of an impairment of the properties of $6.4 million). The liabilities related to assets held for sale consist of the deferred taxes of $1.1 million on the assets held for sale.

The Company has accounted for the oil shale properties as discontinued operations and has reclassified prior period financial statements to exclude these properties from continuing operations. A summary of financial information related to the Company’s discontinued operations for each of the periods presented is as follows:

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

	For the Years Ended April 30,						From Inception on April 3, 1998 through to
	2010		2009		2008			April 30, 2010
	(in thousands)		(in thousands)		(in thousands)			(in thousands)

Exploration costs	$	1,487	$	1,144	$	58		$	2,704
Impairment on unproved properties		6,403		-		-			6,403
Loss before income taxes		7,890		1,144		58			9,107
Provision for income taxes		(2,130)		(309)		(16)			(2,459)
Net loss from discontinued operations	$	5,760	$	835	$	42		$	6,648

4.	ACQUISITIONS

As detailed below, OQI acquired certain businesses for cash, shares and liabilities assumed. These acquisitions were accounted for as asset acquisitions and accordingly, results of operations have been included in the financial statements from their respective dates of acquisition.

Reorganization of Oilsands Quest Sask Inc. and Acquisition of Non-controlling Interest

On August 14, 2006, pursuant to the terms of a reorganization agreement, OQI acquired the non-controlling interest (35.92%) in OQI Sask, going from a 64.08% ownership interest to a 100% voting interest (note 10(b)) (the “Reorganization”).

In connection with the Reorganization, OQI also entered into a Voting and Exchange Trust Agreement with OQI Sask and Computershare Trust Company of Canada (“CTC”), and a Support Agreement with OQI Sask. Collectively, these agreements are referred to as the “Acquisition Agreements”. According to the Acquisition Agreements, all common shares of OQI Sask, other than those held by OQI, were exchanged for a new class of OQI Sask shares called Exchangeable Shares on the basis of 8.23 Exchangeable Shares for each one OQI Sask common share. The Acquisition Agreements also allowed for all OQI Sask options and warrants providing the right to acquire common shares of OQI Sask to have Exchangeable Shares issued on the same basis when such OQI Sask options and warrants were exercised. The Ex changeable Shares are exchangeable at any time on a one-for-one basis, at the option of the holder, for shares of OQI common stock. OQI Sask can redeem the outstanding Exchangeable Shares on the same terms at any time after August 14, 2013 and only under certain limited circumstances prior to August 14, 2013 in accordance with the Acquisition Agreements. An Exchangeable Share provides the holder with economic terms and voting rights which are, as nearly as practicable, equivalent to those of a share of OQI common stock. The Exchangeable Shares are entitled to a preference over the OQI Sask common shares in the event of a liquidation, dissolution or wind-up of OQI Sask, whether voluntary or involuntary, or any other distribution of the assets of OQI Sask among its shareholders for the purpose of winding-up its affairs. The Exchangeable Shares are represented for voting purposes in the aggregate by one share of OQI’s Series B Preferred Stock (note 10(b)).

In connection with the closing of the Acquisition Agreements, OQI’s financial advisor was paid a success fee of $1,590,528. In addition, OQI Sask issued 288,050 OQI Sask Exchangeable Shares with a fair value of $1,204,383 and paid $353,450 as success fees to its financial advisors. These amounts have been included in General and Administration expense.

The Company has consolidated the operating results of OQI Sask from its commencement of operations on September 24, 2004. The total purchase price of acquiring the non-controlling interest in OQI Sask on August 14, 2006 was $223,579,501, calculated at 57,349,391 Exchangeable Shares to be issued for OQI Sask Common Shares multiplied by $3.73 per share and 2,859,514 OQI Sask Warrants at a fair value of $9,666,273. The total purchase price of $223,579,501 has been allocated as follows:

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Consideration comprised of:	(in thousands)

Fair value of Exchangeable Shares issued for OQI Sask Common Shares	$	213,913
Fair value of OQI Sask Warrants		9,666
	$	223,579

Purchase price allocation:
Property	$	322,271
Deferred income taxes		(98,692)
Net assets acquired	$	223,579

This purchase price allocation was based on the fair value of the underlying assets and recognizes that all other assets and liabilities of OQI Sask were carried at fair value.

As a part of the Reorganization, OQI may issue up to an aggregate of 76,504,304 shares of OQI common stock of which 43,429,373 have been issued, 21,409,935 may be issued on the exchange of Exchangeable Shares and the balance to be issued on the exercise of OQI Sask options into Exchangeable Shares and their subsequent exchange. Options representing 768,131 OQI Sask Exchangeable Shares expired in the year ended April 30, 2009. This reduces the number of shares that may be issued. The fair value of the outstanding OQI Sask stock options were excluded in the purchase price of the acquisition. Any future proceeds received from the exercise of OQI Sask options or warrants will be credited to Additional Paid-in Capital (note 9).

Acquisition of Stripper Energy Services Inc.

On August 15, 2006, the Company acquired all of the issued and outstanding shares of Stripper for cash consideration of $17,948,722. Stripper is a private inactive Alberta company, whose sole asset is a 2.5% GORR on certain Saskatchewan permit lands held by OQI Sask. The total purchase price of $17,948,722 has been allocated as follows:

Consideration comprised of:	(in thousands)

Cash Paid	$	17,949

Purchase Price allocation
Property	$	25,407
Deferred income taxes		(7,458	)
Net assets acquired	$	17,949

5.	PROPERTY AND EQUIPMENT

	April 30, 2010		April 30, 2009
	(in thousands)		(in thousands)
Saskatchewan Oil Sands Rights
Permits	$	403,152	$	341,921
Licenses		2,301		1,950
Alberta Oil Sands Rights
Permits		35,478		30,045
Leases		7,849		6,622
Saskatchewan Oil Shale Rights (Permits) (note 3)		-		9,440
Equipment		14,894		11,636
		463,674		401,614
Less: Accumulated Depreciation		(5,506)		(2,639)
Net Book Value	$	458,168	$	398,975

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Saskatchewan Oil Sands Permits

As at April 30, 2007, the Saskatchewan permits comprised an area of approximately 846,680 acres. On July 9, 2007, in accordance with the terms of the Saskatchewan permits, the Company completed the second and final relinquishment of its Saskatchewan permit lands. Following all relinquishments the Saskatchewan permit lands comprised an area totaling 508,080 acres. The permits were granted by the Province of Saskatchewan in 2004 under The Oil Shale Regulations, 1964 as amended, revised or substituted from time to time. The permits provide for the right to explore and work the permit lands but not to remove, produce or recover, except for test purposes, oil products until a lease, pursuant to these regulations has been grante d. The initial five-year term of the permits expired on May 31, 2009 and the Company applied for and received on June 21, 2010, the second of three one-year extensions of the permits as allowed under the regulation to May 31, 2011. The Company is currently working with the regulators to assess an issue relating to the re-abandonment of early exploration coreholes. As indicated by the Ministry of Energy and Resources it is possible that the outcome of such assessment could result in cancellation of the Axe Lake permits if the Company does not comply with the governing regulations (See note 6).

The permits were subject to a 2.5% gross overriding royalty (the “2.5% GORR”), a $0.07 CDN per barrel royalty which may be bought at any time by paying $7,000,000 CDN and a $0.04 CDN per barrel royalty. During the year ended April 30, 2007, the Company purchased the 2.5% GORR for $25,406,544 through the acquisition of Stripper (note 4(b)). On September 21, 2007, in conjunction with the acquisition of the interests of an external joint venture partner to the Triple 7 Joint Venture (note 5(d)), the Company acquired the $0.07 per barrel royalty obligation for consideration of $99,980 ($100,000 CDN) cash plus the issuance of 500,000 shares of its common stock valued at $2,195,000 based on the September 20, 2007 closing market price of the shares. The Saskatchewan permits are now only subject to a $0.04 per barrel ro yalty.

The permits, when granted, were subject to annual rental payments and certain levels of expenditures annually pursuant to the terms of the permits and government regulations. The annual rentals were payable in advance as to $0.02 ($0.02 CDN) per acre for the first year and escalating to $0.10 ($0.10 CDN) per acre in the fifth year. On May 7, 2007, the province updated the Oil Shale Regulations, 1964 requiring an increase to annual rentals of $0.10 ($0.10 CDN) per acre for the remaining term of the permits. The required exploration expenditures to hold the permits were also increased to $0.80 ($0.81 CDN) per acre for each of the remaining years of the permits and $1.20 ($1.21 CDN) per acre for each year that the permits are extended.

Saskatchewan Oil Sands Licenses

On August 13, 2007, the Company acquired five oil sands licenses totaling 109,920 acres granted under The Petroleum and Natural Gas Regulations, 1969, as amended revised or substituted from time to time, for a term of five years which expires on April 12, 2012 for an aggregate cost of $2,140,233 ($2,249,089 CDN). The licenses provide for the exclusive right to search for oil sands on the lands granted and to win, recover, extract, carry off, dispose of and sell the oils sands products found on the license lands. The oil sands licenses provide the opportunity to convert up to 100% of the licenses to a production lease following the completion of specified work requirements. Licenses require annual rental payments of $0.70 ($0.71 CDN) per acre.

Alberta Oil Sands Permits

As at April 30, 2007, the Alberta oil sands permits comprised an area totaling 67,053 acres (“Raven Ridge Prospect”). The permits were granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The permits provide the opportunity to convert up to 100% of the permits to a production lease following the completion of specified work requirements. Permits are granted for a five year primary term which expires on March 22, 2012 – 55,667 acres and August 10, 2011 – 11,386 acres, and require annual rental payments of $1.40 ($1.42 CDN) per acre.

On January 23, 2008, the Company acquired two oil sands permits totaling 45,546 acres (“Wallace Creek Prospect”) in a public offering of Crown Oil Sands Rights. The total consideration paid for these permits was $9,732,500 ($10,010,880 CDN). The permits were granted by the Province of Alberta under the terms of the Mines and Minerals Act, Alberta. The permits provide the opportunity to convert up to 100% of the permits to a production lease following the completion of specified work requirements. Permits are granted for a five year primary term which expires January 24, 2013 and require annual rental payments of $1.40 ($1.42 CDN) per acre. Following the acquisition, the Alberta permit lands comprised an area totaling 112,598 acres.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Alberta Oil Sands Lease

On June 1, 2005, a subsidiary, Township Petroleum Corporation (“township”), entered into an agreement with three third parties (collectively the Triple 7 Joint Venture) to post, acquire, develop and produce oil sands deposits located in the Athabasca Region of Alberta, Canada (the “Triple 7 Joint Venture Agreement”). As a result of this agreement, Township acquired one lease consisting of approximately 22,773 acres (the “Eagles Nest Prospect”).

Township agreed to pay the Triple 7 Joint Venture partners, as ongoing fees, $125,628 ($150,000 CDN) in cash or common shares of OQI (at the discretion of the Company) on the first and second anniversary dates of the agreements. On the third anniversary date and each subsequent anniversary date of the agreement, Township agreed to pay the Triple 7 Joint Venture $376,884 ($450,000 CDN) until such time as the lease was surrendered or a commercial project was identified. Also, if Township received a feasibility study, conducted by an independent third party that indicated that a commercial project was economic and wished to construct a commercial project, Township was required to notify the Triple 7 Joint Venture. Upon commencement of construction of such a commercial project Township was to pay the Triple 7 Joint Venture the sum of $5,0 25,126 ($6,000,000 CDN).

In addition of such payments Township had granted each of the Triple 7 Joint Venture partners a royalty in the acquired leases of $0.03 ($0.03 CDN) on each barrel of crude bitumen produced, saved and sold or $125,628 ($150,000 CDN) per Joint Venture Partner, per year, whichever was greater. Such royalty was governed by the royalty procedure, which stipulated, among other things, that the royalty would be secured by a lien, first charge or security interest on the royalty lands, and that the royalty was assignable or transferable subject to a right of first offer to Township.

On September 21, 2007, the Company acquired rights of one of the three external joint venture partners for consideration of $49,939 ($50,000 CDN) plus the issuance of 250,000 shares of the Company’s common stock valued at $1,097,500 based on the September 20, 2007 closing market price of the shares. On June 17, 2008, the Company acquired the rights of the remaining external joint venture partners for aggregate consideration of $1,600,626 ($1,632,000 CDN) and 640,000 shares of the Company’s common stock valued at $3,718,400 based on the June 17, 2008 closing market price. The Company’s obligations under the Triple 7 Joint Venture Agreement have therefore been eliminated.

As part of the acquisition of the lease, Township granted royalties as to $0.0057 ($0.0058 CDN) (net after a buy back) on each barrel of crude bitumen produced, saved and sold from the Eagles Nest Prospect.

The annual lease rental payable to the Province of Alberta for the Eagles Nest Prospect is $31,886 ($32,256 CDN) per year.

Saskatchewan Oil Shale Permits (note 3)

As at April 30, 2010 and 2009, the Company held seven oil shale exploration permits near Hudson bay, Saskatchewan covering 405,961 acres granted under The Oil Shale Regulations, 1964 (Saskatchewan) as amended, revised or substituted from time to time for a term of five years which expire in September and October 2011. The Permits provide for the right to explore and work the permit lands but not to remove, produce or recover, except for test purposes, oil products until a lease, pursuant to these regulations has been granted. The term of the permits may be extended for up to three on-year extensions subject to regulatory approvals, as required.

Annual rentals are payable in advance as to $0.10 ($0.10 CDN) per acre during the term of the permit. Required exploration expenditures to hold the permits are $0.80 ($0.81 CDN) per acre for the remaining years of the permits and $1.20 ($1.21 CDN) per acre for each year that the permit is extended, as required.

As at April 30, 2010 and 2009, the Company held one oil shale exploration permit granted under The Petroleum and Natural Gas Regulations, 1969 (Saskatchewan) as amended, revised or substituted from time to time for a term of five years totaling 83,769 acres in the same area near Hudson Bay, Saskatchewan. The permit provides for the right, license, privilege and authority to explore for oil shale within the permit lands and expires on August 12, 2012.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

The term of the permits may be extended for up to three one-year extensions subject to regulatory approvals, if required. This oil shale permit was acquired under a land sale work commitment bid for the first two years of the permit. The Company bid a total work commitment of $298,110 ($301,568 CDN) to be incurred during the first two years of the permit and the permit requires a further work commitment of $0.80 ($0.81 CDN) per acre for the last three years and $1.20 ($1.21 CDN) for each extension year plus annual rental payments of $0.10 ($0.10 CDN) per acre. Through the exploration program conducted during the year ended April 30, 2009, the Company has fulfilled its work commitment for the term of the permit.

6.	ASSET RETIREMENT OBLIGATION

The Company’s obligations with respect to asset retirement relate to reclamation of an airstrip, camp site, access roads and reservoir test holes. The obligation is recognized when incurred at the present value of the estimated future reclamation cost using a credit-adjusted risk-free rate of 7 to 13 percent and an inflation rate of 2.5 percent. During the year ended April 30, 2010, the Company conducted a review of their development plans and well licenses and determined that a number of wells were not abandoned to accommodate our thermal development plans. We are also evaluating the wells that are located outside the potential commercial development area and have included a portion of these costs in the re-abandonment liability based on a 50% probability of performing the obligation over a 15 year period. The Compan y has submitted a re-abandonment program to the Saskatchewan Ministry of Energy and Resources that included cost estimates and a timeline to complete the work. At April 30, 2010 the total undiscounted inflation-adjusted future obligation is approximately $35.0 million. The uncertainty related to the timing and/or method of settlement that may be beyond the Company’s control is factored into the measurement of the liability.

At April 30, 2010, the total undiscounted inflation-adjusted future obligation was approximately $35.4 million.

	April 30, 2010			April 30, 2009
	(in thousands)			(in thousands)
Obligation at beginning of year	$	2,621		$	-
Liabilities incurred		14,321			3,873
Liabilities settled		(160	)		-
Accretion expense		210			150
Revisions		-			(998	)
Foreign currency translation adjustment		493			(404	)
Obligation at end of year	$	17,485		$	2,621

Obligations related to property and equipment in the amount of $1.4 million has been capitalized and obligations related to exploration expense in the amount of $15.7 million have been expensed since inception.

7.	DEFERRED INCOME TAX

Deferred tax liability

The following summarizes the temporary differences that give rise to the deferred income tax liability from continuing operations at April 30, 2010 and 2009:

	April 30, 2010		April 30, 2009
	(in thousands)		(in thousands)
Book value of property and equipment in excess of tax values	$	(62,516)	$	(65,651)
Non-capital loss carry-forward benefit		15,640		11,696
Valuation allowance		(15,640)		(11,696)
	$	(62,516)	$	(65,651)

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Deferred income tax benefit differs from that which would be expected from applying the combined effective Canadian federal and provincial income tax rates of 27% (2009 - 27%, 2008 - 27%) to loss from continuing operations before income taxes. The difference results from the following:

	April 30, 2010		April 30, 2009		April 30, 2008

Expected current income tax benefit	$	(18,509)	$	(28,659)	$	(34,225)
Stock-based compensation		1,508		4,720		5,629
Flow-through expenditures		3,524		4,743		6,190
Change in valuation allowance		3,854		3,162		621
Impact of change in Canadian tax rate				-		(12,881)
Other		(207)		(1,813)		613
	$	(9,830)	$	(17,847)	$	(34,053)

At April 30, 2010, the Company had US federal and state and Canadian federal and provincial net operating loss carry-forwards of $62.7 million and $67.9 million respectively, which can be used to offset future tax liabilities and expire at various dates beginning in fiscal 2012. Utilization of these net operating loss carry-forwards may be limited pursuant to provisions of the respective local jurisdiction.

8.	NON-CONTROLLING INTEREST IN OQI SASK

The non-controlling interest (representing 35.92% of total OQI Sask common shares outstanding) related to OQI Sask, as calculated to the date of acquisition by OQI.

	Common Shares			Amount (in thousands)
Balance, April 30, 2006		6,962,459		$	4,736
Shares issued to non-controlling interests		5,875			10
Shares of net loss of OQI Sask to date of acquisition		-			(4,722)
Non-controlling interest in shares issued to OQI		-			16,728
Share of net loss of OQI Sask to date of acquisition		6,968,334			16,752

Transferred to the OQI Sask property account on acquisition of the non-controlling interest (see note 4(a) and 5)		(6,968,334	)		(16,752)
Balance, April 30, 2007, 2008, 2009 and 2010		-		$	-

9.	OQI SASK OPTIONS AND WARRANTS

Upon OQI acquiring the non-controlling interest in OQI Sask on August 14, 2006, certain options and warrants issued by OQI Sask remained outstanding. On exercise, each OQI Sask option and warrant is exchanged into 8.23 OQI Sask Exchangeable Shares which are exchangeable into shares of OQI common stock.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

The following tables summarize information about OQI Sask stock options outstanding for each of the three years ended April 30, 2010:

	Number	Weighted Average Exercise Price (CDN)
Outstanding, April 30, 2006	700,000	$	4.00
Granted	1,280,000	$	21.40
Exercised and exchanged into shares of OQI common stock (note 11)	(205,000)	$	3.32
Outstanding, April 30, 2007	1,775,000	$	16.55
Exercised and exchanged into shares of OQI common stock (note 11)	(135,000)	$	11.63
Outstanding, April 30, 2008	1,640,000	$	16.96
Exercised and exchanged into shares of OQI common stock (note 11)	(125,000)	$	12.50
Expired	(93,333)	$	25.00
Outstanding, April 30, 2009	1,421,667	$	16.82
Exercised and exchanged into shares of OQI common stock (note 11)	(102,500)	$	1.18
Outstanding, April 30, 2010	1,319,167	$	18.04

Exercise Price (CDN)		Number Outstanding at April 30, 2010		Number Exercisable at April 30, 2010	Weighted Average Remaining Contractual Life		Weighted Average Grant-Date Fair Value (CDN)	Aggregate Intinsic Value at April 30, 2010 (CDN)
$	3.00		72,500	72,500		0.29	2.45	318,183
$	6.00		465,000	465,000		0.76	5.02	645,758
$	25.00		731,667	731,667		1.00	26.06	-
$	50.00		50,000	50,000		1.25	34.60	-
			1,319,167	1,319,167		0.89		963,941

The 1,319,167 OQI Sask options outstanding at April 30, 2010 represent 10,856,744 OQI Sask Exchangeable Shares that would be issued on exercise of the OQI Sask options as a result of the completion of the acquisition of the non-controlling interest in OQI Sask.

The following tables summarize information about OQI Sask warrants outstanding for each of the three years ended at April 30, 2010:

	Number			Weighted Average Exercise Price (CDN)
Outstanding, April 30, 2007		16,000		$	2.00
Exercised		(16,000	)	$	2.00
Outstanding, April 30, 2008, 2009 and 2010		-

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

10.	PREFERRED SHARES

Series A Preferred Shares

As at March 9, 2006, OQI adopted a shareholders right plan and reserved 250,000 of its preferred shares for issuance pursuant to the exercise of the rights. The rights are designed to have certain anti-takeover effects and as such they will cause substantial dilution to a person or group that attempts to acquire OQI in a manner or on terms not approved by the Board of Directors of OQI. The rights, however, should not deter any prospective offer or willingness to negotiate in good faith with the Board of Directors, nor should the rights interfere with any merger or other business combination approved by the Board of Directors. To effect the shareholders rights plan OQI declared a distribution of one right to each outstanding share of common stock, payable to shareholders of record on March 23, 2006. 0; After the record date, one right is issued with each share of common stock issued until the earlier of the distribution date (as defined in the plan), the redemption of the right by the Company or termination of the right. This right will be attached to the underlying common share and remain with the common share should the common share be sold or transferred.

Series B Preferred Stock

As noted in note 4(a) in connection with the Reorganization, OQI also entered into a Voting and Exchange Trust Agreement with OQI Sask and Computershare Trust Company of Canada (“CTC”) and a Support Agreement with OQI Sask. Collectively, these agreements are referred to as the “Acquisition Agreements.”

According to the Acquisition Agreements, OQI Sask common shares not held by OQI were exchanged for a new class of OQI Sask shares called Exchangeable Shares on the basis of 8.23 Exchangeable Shares for each OQI Sask common share. The Exchangeable Shares are exchangeable at any time on a one-for-one basis, at the option of the holder, for shares of OQI common stock. An Exchangeable Share provides the holder with economic terms and voting rights which are, as nearly as practicable, effectively equivalent to those of a share of OQI common stock. Holders of Exchangeable Shares have registration rights with respect to the resale of OQI common stock to be received upon exchanging the Exchangeable Shares into OQI shares. The holders of the Exchangeable Shares may receive up to an aggregate of 76,504,304 shares of OQI commo n stock (on a diluted basis) at each holder’s election. The Exchangeable Shares are represented for voting purposes in the aggregate by one share of OQI Series B Preferred Stock (the “Preferred Share”), which Preferred Share is held by CTC. In turn, CTC will vote the one Series B Preferred Share as indicated by the individual holders of Exchangeable Shares.

The one Preferred Share represents a number of votes equal to the total outstanding Exchangeable Shares on the applicable record date for the vote submitted to OQI shareholders.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Exchangeable shares issuable as a result of the Acquisition Agreements (note 4(a)):

	OQI Sask Exchangeable Shares		OQI Sask Exchangeable Shares issuable on exercise of OQI Sask options and warrants			Total Exchangeable Shares

Acquisition date, August 14, 2006		57,349,388		19,154,916			76,504,304
OQI Sask options and warrants exercised		4,414,986		(4,414,986)			-
Exchangeable Shares exchanged into OQI common shares		(28,237,015)		-			(28,237,015)
Balance, April 30, 2007		33,527,359		14,739,930			48,267,289
OQI Sask options and warrants exercised		1,242,730		(1,242,730	)		-
Exchangeable shares exchanged into OQI common shares		(6,817,249)		-			(6,817,249)
Balance, April 30, 2008		27,952,840		13,497,200			41,450,040
OQI Sask options exercised		1,028,750		(1,028,750)			-
OQI Sask options expired		-		(768,131)			(768,131)
Exchangeable shares exchanged into OQI common shares		(3,237,674)		-			(3,237,674)
Balance, April 30, 2009		25,743,916		11,700,319			37,444,235
OQI Sask options exercised		843,575		(843,575)			-
Exchangeable Shares exchanged into OQI common shares		(5,177,556)		-			(5,177,556)
Balance, April 30, 2010		21,409,935		10,856,744			32,266,679

11.	COMMON STOCK

Authorized shares of common stock

The Company’s Articles of Incorporation, as amended, authorize the issuance of up to 750,000,000 shares of common stock.

Share-based compensation

On July 3, 2007 the Board of Directors granted 44,000 bonus shares of common stock to employees under the Company’s 2006 Stock Option Plan (SOP 2006). These bonus shares were valued at the closing share price on the date of grant.

Settlement with Subsidiary Creditors

During the year ended April 30, 2004, in an attempt to settle outstanding liabilities of a subsidiary, OQI made an offer to creditors to settle outstanding debts for shares of OQI common stock with a fair value of $0.10 per share for every $0.15 CDN of debt held. The offer was based on the market trading price for the Company’s shares of common stock at the time of the original proposal to creditors. In May 2003 when the proposal was made the price fluctuated in the range of $0.09 to $0.12 per share. OQI received acceptances from creditors that represented 2,203,227 OQI common shares. OQI has issued 814,660 shares of common stock pursuant to these agreements since May 2003 and has reserved 1,388,567 shares of common stock for further issuances. No shares of common stock were issued during the years ended April 30, 2010 and 2009 pursuant to these agreements. The subsidiary was sold to a third party on October 31, 2005.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Private Placements and Public Offerings of Shares of Common Stock

On July 6, 2006, OQI completed a private placement of 5,668,100 shares of common stock issued on a flow-through basis for gross proceeds of $33,684,009 ($37,409,460 CDN). Because these shares were issued on a flow-through basis, the proceeds must be used for exploration in Canada and the tax benefits from that exploration will flow through to the subscribers. In conjunction with this financing OQI paid investment banking fees of $1,852,659 and entered into a subscription agreement with OQI Sask whereby it purchased 703,054 OQI Sask flow-through shares of common stock for $33,684,048. Under the terms of the flow-through shares, the Company renounced the tax benefits of the related expenditures to the subscribers effective December 31, 2006.

In August 2006 OQI completed a private placement of 4,150,000 shares of common stock for gross proceeds of $15,770,000. No commissions were paid in connection with the Offering. According to the terms of the private placement, the gross proceeds were used for the purchase of the shares of Stripper (see note 4(b)).

On March 6, 2007, the Company entered into an underwriting agreement for a private placement with a syndicate of underwriters to issue up to 5,320,000 shares of the Company’s common stock issued on a flow-through basis at a price of $4.82 ($5.64 CDN) per share for aggregate gross proceeds of $25,642,400 ($30,004,800 CDN). In consideration for the services of the underwriters, the Company agreed to pay a fee equal to $0.241($0.282 CDN) (or 5%) for each flow-through share issued by the Company.

On March 6, 2007 and March 9, 2007, under the terms and conditions of an underwriting agreement, the Company issued 3,155,834 shares of common stock on a flow-through basis for gross proceeds of $15,211,120 ($17,798,904 CDN). These shares of common stock were issued on a flow-through basis whereby the proceeds must be used for exploration in Canada and the tax benefits from that exploration will flow through to the subscribers. The Company fulfilled its obligation to file a resale registration statement under the terms of the private placement on May 4, 2007 and as such no reduction in price was required.

On May 3, 2007, the Company issued 13,900,000 shares of common stock at a price of $2.75 per share for gross proceeds of $38,225,000 pursuant to a private placement. In connection with the private placement, the Company paid an aggregate of $2,197,938 in fees to the agents pursuant to an agency agreement.

On May 3, 2007, the Company issued 2,164,166 shares of common stock on a flow-through basis at a price of $3.44 ($3.85 CDN) per share for gross proceeds of $7,444,731 ($8,332,039 CDN) in a private placement pursuant to an amended underwriting agreement originally entered into on March 6, 2007. These shares have been issued on a flow-through basis whereby the proceeds must be used for exploration in Canada and the tax benefits from that exploration will flow through to the subscribers. In connection with this private placement, the Company received an additional payment of $3,499,419 ($3,873,857 CDN) from the underwriters pursuant to their obligations under the underwriting agreement, as amended. The Company paid an aggregate of $551,305 ($610,295 CDN) in fees to the underwriters.

On September 21, 2007, the Company issued 750,000 shares of common stock as part of the consideration provided for the purchase of a royalty which encumbered the Saskatchewan permit lands and the interests of one of the joint venture partners to the Triple 7 Joint Venture Agreement in the Eagles Nest Prospect (notes 5 (a) and (d)).

On December 5, 2007, the Company issued 11,000,000 units at a price of $5.00 per unit for gross proceeds of $55,000,000 pursuant to a marketed public offering. Each unit was comprised of one share of common stock and one-half of a share of common stock purchase warrant with each whole warrant entitling the holder to purchase one share of common stock of the Company for $6.75 per share until December 5, 2009.

On December 5, 2007, as part of the marketed public offering, the Company issued 2,600,000 shares of common stock of a flow-through basis at a price of $6.11 ($6.17 CDN) per share for gross proceeds of $15,886,000 ($16,042,000 CDN).

On December 20, 2007, an over-allotment option granted to the underwriters as part of the agreement under the marketed public offering was exercised. As a result the Company issued an additional 1,650,000 units at a price of $5.00 per unit for gross proceeds of $8,250,000. Each unit is comprised of one share of common stock and one-half of a share of common stock purchase warrant with each whole warrant entitling the holder to purchase one share of common stock of the Company for $6.75 per share until December 5, 2009.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

Under the terms of the flow-through shares issued on March 6, 2007, March 9, 2007, May 3, 2007 and December 5, 2007, the Company renounced the tax benefits of the related expenditures to the subscribers effective December 31, 2007. As at April 30, 2008 all amounts have been expended on exploration in Canada. The flow-through shares were issued at a premium to the then market price in recognition of the tax benefits accruing to subscribers. The premium was originally recorded as a current liability and then it was drawn down as a reduction of deferred tax expense as the exploration expenditures were incurred.

On May 23, 2008, the Company issued 12,976,761 shares of common stock at a price of $4.20 per share for gross proceeds of $54,502,397 pursuant to a private placement. The Company paid an aggregate of $1,225,120 in fees to a syndicate of agents under the terms of an agency agreement.

On June 17, 2008, the Company issued 640,000 shares of the Company’s common stock as part of the consideration provided for the purchase of the rights of the remaining external partners under the Triple 7 Joint Venture Agreement in the Eagles Nest Prospect (Note 5(d)).

On October 3, 2008, the Company issued 6,008,156 shares of common stock on a flow-through basis at a price of $3.675 CDN ($3.40 US) per share for gross proceeds of $22,079,973 CDN ($20,421,727 US) pursuant to a non-brokered private placement. These proceeds must be used for exploration in Canada and the tax benefits from that exploration will flow through to the subscribers.

On October 3, 2008, the Company issued a further 4,800,000 shares of common stock on a flow-through basis at a price of $3.675 CDN ($3.40 US) per share for gross proceeds of $17,640,000 CDN ($16,315,204 US) pursuant to a private placement. The Company paid an aggregate of $970,200 CDN ($898,369 US) in fees to the agents pursuant to an agency agreement. These proceeds must be used for exploration in Canada and the tax benefits from that exploration will flow through to the subscribers.

Under the terms of the flow-through shares issued on October 3, 2008, the Company renounced the tax benefits of the related expenditures to the subscribers effective December 31, 2008. As at December 31, 2009, all required expenditures under these flow-through shares had been incurred by the Company and there is no further spending obligation.

On May 12, 2009, the Company issued 35,075,000 units at a price of $0.85 per unit for gross proceeds of $29,813,750 pursuant to a marketed public offering. Each unit was comprised of one share of common stock and one-half of a share of common stock purchase warrant with each whole warrant entitling the holder to purchase one share of common stock of the Company for $1.10 per share until May 12, 2011. The Company paid an aggregate of $1.5 million in fees to a syndicate of agents under the terms of the agency agreement and $1.2 million of legal fees and other expenses in relation to the offering. Of these costs, $0.7 million were incurred prior to April 30, 2009.

On December 23, 2009, the Company issued 9,714,300 at $1.05 per share pursuant to a private placement offering for gross proceeds of $10,200,015.

Weighted average shares

Weighted average shares disclosed on the income statement include shares of common stock as well as OQI Sask Exchangeable shares.

12. STOCK OPTIONS

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

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

The following summarizes our stock option activity under the Company’s 2006 Stock Plan (SOP 2006) for the three years ended April 30, 2010:

	Options			Weighted- Average Exercise Price		Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value

Outstanding at April 30, 2007		10,125,000			5.33
Granted		5,077,000			4.19		3.69
Exercised		(1,456,250	)		2.62			$	3,027,625
Forfeited		(718,750	)		4.84		3.72
Outstanding at April 30, 2008		13,027,000			5.22
Granted		13,631,000			3.00		1.57
Exercised		(35,000	)		4.72			$	53,100
Forfeited		(2,040,038	)		4.63		3.19
Outstanding at April 30, 2009		24,582,962		$	4.14	$	2.95
Granted		7,037,000			0.98		0.43
Exercised		(964,769)			0.81		0.73	$	359,405
Forfeited		(6,921,633)			3.58		2.23
Outstanding at April 30, 2010		23,733,560		$	3.25	$	2.49
Exercisable at April 30, 2010		16,333,562		$	3.97	$	3.17	$	329,213

The weighted-average remaining contractual term of vested and exercisable options at April 30, 2010, was 1.25 years.

In addition to the above, OQI Sask has 1,319,167 outstanding options which may be exercised and exchanged into OQI Sask Exchangeable Shares whereby up to an additional 10,856,744 OQI common shares may be issued (note 10).

During the year ended April 30, 2010, 7,037,000 options were granted and were accounted for using either the Black-Scholes option-pricing model or the trinomial option-pricing model for the option grant subject to a market condition. The trinomial option-pricing model takes into account the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination, the possibility that the market condition may not be satisfied and the impact of the possible differing stock price paths. The following weighted average assumptions were used to determine the fair value of the options granted during the year ended April 30, 2010:

	Years Ended April 30,
	2010		2009		2008

Expected life (years)		5.6		7.2		5
Risk free interest rate		2.71		3.40		4.41
Expected volatility		100		84		124
Dividend yield		-		-		-
Grant date fair value	$	0.43	$	1.93	$	3.69

As at April 30, 2010, the Company had unamortized stock-based compensation costs of $1,732,385 which will be recorded in future periods as options vest. The cost is expected to be recognized over a weighted-average period of 10 months. The intrinsic value of options exercised during the years ended April 30, 2010, 2009 and 2008 was $359,405, $53,100 and $3,027,625 respectively. As at April 30, 2010, there were 7,049,228 unvested options with a weighted average grant date fair value of $0.90 (2009 – 13,795,500 and $2.46). The weighted average grant date fair value of options that vested and expired during the year was $2.04 and 1.73 respectively

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

13.

WARRANTS

A summary of OQI’s share purchase warrant activity for the three years ended April 30, 2010:

	Number of warrants			Weighted Average Exercise Price
Balance, April 30, 2007		8,856,067		$	1.98
Issued during the year		6,325,000		$	6.75
Exercised		(8,856,067	)	$	1.98
Balance, April 30, 2008 and 2009		6,325,000		$	6.75
Issued during the year		17,537,500		$	1.10
Expired		(6,325,000)		$	6.75
Balance, April 30, 2010		17,537,500		$	1.10

14. FAIR VALUE MEASUREMENTS

Certain of the Company’s assets and liabilities are reported at fair value in the accompanying balance sheet. The following tables provide fair value measurement information for such assets and liabilities as of April 30, 2010 and 2009.

As of April 30, 2010 (in thousands)
					Fair Value Measures Using:
	Carrying Amount		Total Fair Value		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets (Liabilities):
Securities Held for Sale	$	65	$	65	$	65	$	-	$	-
Asset Retirement Obligation	$	17,485	$	17,485	$	-	$	-	$	17,485

As of April 30, 2009 (in thousands)
					Fair Value Measures Using:
	Carrying Amount		Total Fair Value		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Securities Held for Sale	$	60	$	60	$	60	$	-	$	-
Short-term investment	$	25,209	$	25,209	$	25,209	$	-	$	-

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

15.	RELATED PARTY TRANSACTIONS

The son of a director of the Company is a 50% shareholder of a company that facilitates local on-site kitchen labour and catering functions to the Company for field operations. For the year ended April 30, 2010, $1,741,838 (2009 – $1,638,305) has been included in exploration expense. These transactions are in the normal course of operations. As at April 30, 2010, nil (April 30, 2009 - $52,010) was payable to the above mentioned company.

The step-mother of a former executive (resigned December 2008) of the Company is the sole shareholder of a company that facilitates local on-site labour and equipment rentals to the Company for field operations. For the year ended April 30, 2010, $559 (2009 - $2,247,385) has been included in exploration expense. These transactions are in the normal course of operations. As at April 30, 2010, nil (April 30, 2009 – $220,273) was payable to the above mentioned company. The contract with this company was terminated on March 13, 2009.

The brother of a director of the Company is a 50% shareholder of a company that provides geophysical and geological analysis to the Company. For the year ended April 30, 2010, $194,430 (2009 - $161,361) has been included in exploration expense. These transactions are in the normal course of operations. As at April 30, 2010, nil (April 30, 2009 – nil) was payable to the above mentioned company.

16.	CONTINGENCIES AND COMMITMENTS

CONTINGENCIES

On February 24, 2010, a derivative action entitled Make a Difference Foundation Inc. v. Hopkins, et al., Case No. 10-CV-00408, was filed in United States District Court for the District of Colorado by plaintiff Make a Difference Foundation, Inc. The derivative action names the following individual defendants: Christopher H. Hopkins, T. Murray Wilson, Ronald Blakely, Paul Ching, Brian MacNeill, Ronald Phillips, John Read, Gordon Tallman, Pamela Wallin, Thomas Milne and W. Scott Thompson. In addition, the Company is named as a nominal defendant. Plaintiff asserts, among other things, claims for waste and breaches of the fiduciary duty of loyalty and good faith by the defendants stemming from the Company's approval of the proposed sale of the Company's Pasquia Hills a ssets to Canshale Corp. The plaintiff seeks unspecified damages, restitution, and reasonable costs and expenses including counsel fees and experts' fees. A response to the Complaint is currently due on March 16, 2010. The Company believes the claims are wholly without merit and intends to file a motion to dismiss the Complaint.

COMMITMENTS

The following table sets out OQI’s expected future payment commitments as at April 30, 2010 and the estimated timing of such payments relating to corporate office and operations facility leases:

	As at April 30, 2010
	(in thousands)
Year 1	$	1,951
Year 2		1,087
Year 3		994
Year 4		991
Year 5		688
>5 years		952
	$	6,663

The Company is subject to annual lease rentals, minimum exploration expenditures and work commitments related to its exploration permits, licenses and lease assets. These required expenditures have not been included in the above schedule. For details of these required expenditures refer to note 5.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

17.	SUBSEQUENT EVENTS

Subsequent to April 30, 2010, 4,411,000 options were issued with a weighted average exercise price of $ 0.81 per option. Included in these grants were 3,050,000 options that were comprised of a market condition based upon total shareholder return over a three year period and performance conditions based upon achieving a combination of defining a reservoir recover configuration and achieving a defined bitumen in place barrel count.

On May 31, 2010, the Company relinquished two of its northernmost land permits (PS00213 and PS00215) as it focuses its development opportunities to include those lands that recent exploration activity has demonstrated to be prospective. Relinquishing these permits will not impact the Company’s resource estimates or development plans.

With respect to the purchase and sale agreement made with Canshale Corp., the Company agreed on July 6, 2010 to an extension of the transaction to July 30, 2010 for consideration of an incentive of an additional 2,000,000 common shares of Canshale Corp.

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

SUPPLEMENTARY QUARTERLY INFORMATION (UNAUDITED)

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2010
Net loss from continuing operations	$	4,595	$	12,679	$	19,357	$	22,090	$	58,721
Net loss from discontinued operations		202		530		4,379		649		5,760
Net loss	$	4,797	$	13,209	$	23,736	$	22,739	$	64,481

Net loss from continuing operations per share – basic and diluted	$	0.02	$	0.04	$	0.06	$	0.07	$	0.19
Net loss from discontinued operations per share – basic and diluted		-		-		0.02		-		0.02
Net loss attributable to common stockholders per share - basic and diluted	$	0.02	$	0.04	$	0.08	$	0.07	$	0.21


2009
Net loss from continuing operations	$	14,251	$	42,359	$	19,193	$	12,496	$	88,299
Loss from discontinued operations		73		514		103		145		835
Net loss	$	14,324	$	42,873	$	19,296	$	12,641	$	89,134

Net loss from continuing operations per share – basic and diluted	$	0.06	$	0.17	$	0.07	$	0.04	$	0.34
Net loss from discontinued operations per share – basic and diluted		-		-		-		-		-
Net loss per share attributable to common stockholders - basic and diluted	$	0.06	$	0.17	$	0.07	$	0.04	$	0.34

OILSANDS QUEST INC.

(A Development Stage Company)

Notes to Consolidated Financial Statements

SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCING ACTIVITIES (UNAUDITED)

The following supplemental unaudited information regarding the Company’s oil and gas activities is presented in accordance with SASC 932-235, “Extractive Activities – Oil and Gas – Notes to financial statements”. The Company currently has no proved reserves. All of the Company’s exploration and producing activities are carried out in Canada.

Unless otherwise noted, this supplemental information excludes amounts for all periods presented related to the Company’s discontinued operations.

Capitalized Costs Related to Oil and Gas Activities

	Total At April 30,
	2010		2009
	(in thousands)		(in thousands)
Unproved oil and gas properties	$	448,780	$	389,978
Proved oil and gas		-		-
		448,780		389,978
Accumulated depreciation, depletion, and amortization and valuation allowances		-		-
Net capitalized costs	$	448,780	$	389,978

Costs Incurred in Oil and Gas Activities

	Total Year Ended April 30,
	2010		2009		2008
Property acquisition costs	(in thousands)		(in thousands)		(in thousands)
Proved properties	$	-	$	-	$	-
Unproved properties		140		5,867		15,999
Exploration costs		48,682		70,843		96,362
Development costs		-		-		-
Costs incurred	$	48,822	$	76,710	$	112,361

Oilsands Quest (BQI) Inactive 10-K/A2010 FY Annual report (amended)