Source Petroleum (SOPO) 10QSB/A 2006 Q2 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB/A

(Mark One)

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

For the quarterly period ended June 30, 2006

OR

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

For the transition period from _____________ to _____________

Commission file number 000-51241

SOURCE PETROLEUM INC.
(Exact name of small business issuer as specified in its charter)
Nevada	98-0443283
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
509 - 3495 Cambie Street Vancouver, British Columbia, V5Z 4R3, Canada
(Address of principal executive offices)
(778) 863-2259
(Issuer’s telephone number)
RED SKY RESOURCES INC.
(Former name, former address and former fiscal year, if changed since last report)

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

106,345,827 shares of common stock issued and outstanding as of August 18, 2006.

Transitional Small Business Disclosure Format (Check one):    Yes o   No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes xNo o

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

These financial statements have been prepared by Source Petroleum Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with such SEC rules and regulations. In the opinion of management, the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of June 30, 2006, and its results of operations, stockholders’ equity, and its cash flows for the six month period ended June 30, 2006 and 2005. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company’s Form 10-KSB.

2

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Balance Sheet

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

	June 30, 2006	December 31, 2005
ASSETS
Current assets
Cash and cash equivalents	$    7,553,677	$          162
Total current assets	7,553,677	162
Mineral Property (Note 3)	-	-
Total assets	7,553,677	162
LIABILITIES
Current liabilities
Accounts payable and accrued expenses	$      30,011	$         8,618
Total current liabilities	30,011	8,618
STOCKHOLDERS’ EQUITY
Share capital
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding
Common stock, $0.0001 par value, 4,500,000,000 shares authorized, 102,342,500 issued and outstanding (December 31,2005 98,842,500)	10,234	9,884
Share subscriptions received	5,554,890
Additional paid-in capital	2,169,391	119,741
Deficit accumulated during the exploration stage	(210,849)	(138,081)
Total stockholders’ equity	7,523,666	(8,456)
Total liabilities and stockholders’ equity	$    7,553,677	$          162

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

3

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Statements of Operations

(Expressed in U.S. Dollars)

(Unaudited)

	Cumulative October 14, 2001 (inception) to	Three Months Ended	Three Months Ended	Six Months Ended	Six Months Ended
	June 30,	June 30,	June 30,	June 30,	June 30,
	2006	2006	2005	2006	2005
General and administrative expenses
Bank charges	$        1,016	$           27	$         75	$           85	$        222
Consulting fees	11,568	7,500	-	7,500	-
Management fees	16,050	-	-	-	-
Mineral property expenditures	52,225	-	34,034	-	35,771
Office and Miscellaneous	2,828	(2,619)	269	(2,482)	603
Professional fees	114,463	37,497	7,949	64,480	30,366
Transfer agent and filing fees	12,698	2,834	1,807	3,186	5,263
Net (loss) income for the period	$ (210,849)	$    (45,240)	$   (44,134)	$   (72,769)	$   (72,225)
Basic and diluted (loss) income per share
Net (loss) income per share		(0.0004)	(0.0004)	(0.0007)	(0.0007)
Weighted average number of Common shares outstanding		101,441,401	98,842,500	99,677,624	98,842,500

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

4

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Statements of Cash Flows

(Expressed in U.S. Dollars)

(Unaudited)

	Cumulative October 14, 2001 (inception) to	Three Months Ended	Three Months Ended	Six Months Ended	Six Months Ended
	June 30,	June 30,	June 30,	June 30,	June 30,
	2006	2006	2005	2006	2005
Cash flows from (used in) operating activities
Net (loss) income for the period	$      (210,849)	$         (45,240)	$        (44,134)	$         (72,769)	$        (72,225)
Changes in non-cash working capital items:
- accounts payable and accrued liabilities	27,511	10,010	(11,657)	21,394	5,927
Net cash (used in) from operating activities	(183,338)	(35,230)	(55,791)	(51,375)	(66,298)
Cash flows from (used in) financing activities
Proceeds from issuance of common stock	2,179,625	2,000,000	-	2,050,000	-
Subscription Received	5,554,890	5,554,890		5,554,890
Due from a related party	-	-	-	9,000	-
Due to a related party	-	-	-	(11,500)	-
Net cash from financing activities	7,734,515	7,554,890	-	7,602,390	-
Increase (decrease) in cash and cash equivalents	7,553,677	7,522,160	(55,791)	7,553,515	(66,298)
Cash and cash equivalents (deficiency), beginning of period	-	31,517	71,427	162	81,934
Cash and cash equivalents,end of period	$    7,553,677	$     7,553,677	$        15,636	$     7,553,677	$        15,636
Supplemental cash flow information:
Interest expenses paid	$                  -	$                  -	$                  -	$                  -	$                  -
Income taxes paid	-	-	-	-	-

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

5

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Statements of Stockholders’ Equity

For the period from inception (October 14, 2001) to June 30, 2006

(Expressed in U.S. Dollars)

(Unaudited)

							Deficit
							accumulated	Total
					Additional		during	stockholders’
	Preferred Stock		Common Stock		paid-in	Subscription	exploration	(deficit)
	Shares	Amount	Shares	Amount	capital	received	stage	equity
Stocks issued at $0.000002 per share in October 2001	-	-	67,500,000	$6,750	-$6,600		$              -	$150
Net loss for the period	-	-	-	-	-		-542	-542
Balance, December 31, 2001	-	-	67,500,000	6,750	-6,600		-542	-392
Stocks issued at $0.003 per share in Feb 2002	-	-	8,842,500	884	28,591		-	29,475
Net loss for the period	-	-	-	-	-		-9,283	-9,283
Balance, December 31, 2002	-	-	76,342,500	7,634	21,991		-9,825	19,800
Net loss for the period	-	-	-	-	-		-24,450	-24,450
Balance, December 31, 2003	-	-	76,342,500	7,634	21,991		-34,275	-4,650
Stocks issued at $0.0044 per share in December 2004	-	-	22,500,000	2,250	97,750		-	100,000
Net loss for the period	-	-	-	-	-		-16,241	-16,241
Balance, December 31, 2004	-	-	98,842,500	9,884	119,741		-50,516	79,109
Net loss for the period	-	-	-	-	-		-87,565	-87,565
Balance, December 31, 2005	-	-	98,842,500	9,884	119,741		-138,081	-8,456
Stocks issued at $0.03 per share in March 2006
	-	-	1,500,000	150	49,850		-	50,000
Net loss for the period	-	-	-	-	-		-27,528	-27,528
Balance, March 31, 2006	-	-	100,342,500	10,034	169,591	-	-165,609	14,016
Stocks issued at $1.00 per share in May 2006	-	-	2,000,000	200	1,999,800		-	2,000,000
Share subscriptions received, for 3,703,260 shares at $1.50 per share						5,554,890		5,554,890
Net loss for the period	-	-	-	-	-		-45,240	-45,240
Balance, June 30, 2006			102,342,500	$10,234	$2,169,391	$5,554,890	-$210,849	$7,523,666

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

6

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Notes to Financial Statements

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim balance sheets, statements of operations, statements of shareholders’ equity and cash flows reflected all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position of the Company, at June 30, 2006 and the results of operations, shareholders’ equity and cash flows for the interim period ended June 30, 2006. The accompanying unaudited financial statements have been prepared in accordance with the instruction from Form 10-QSB pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and notes normally provided in audited financial statements and should be read in conjunction with the Company’s financial statements for the fiscal year ended December 31, 2005. The result of operations for the interim periods presented is not necessarily indicative of the results to be expected for the full year.

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in recent years resulting in a substantial accumulated deficit. As of June 30, 2006, the Company had a total of $7,553,677 in cash; however this amount is insufficient to sustain operations over the course of the next twelve months in light of the pending completion of the Company’s acquisition of Source Projects Inc. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to meet its commitments as they become payable is dependent on the ability of the Company to obtain necessary financing or achieving a profitable level of operations. To meet these objectives, the Company plans to seek additional equity and expects to raise funds through private or public equity investment in order to support existing operations and expand the range and scope of its business. There is no assurance that such additional funds will be available for the Company on acceptable terms, if at all. Management believes that actions presently taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern. The Company’s ability to achieve these objectives cannot be determined at this time. There are no assurances that the Company will be successful in achieving these goals.

a) Organization

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

On February 3, 2006, the Company approved a forward stock split of its common stock on a 30 new for 1 old basis to stockholders of record on February 17, 2006. The par value of common stock was not changed.

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

7

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Notes to Financial Statements

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

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

On April 25, 2006, the Company entered into a non-binding letter of intent to acquire all of the issued and outstanding shares of 1223121 Alberta Ltd., a privately-owned Alberta corporation engaged in the oil and gas exploration business. The Company had planned to purchase all of the issued shares of 1223121 Alberta Ltd. by way of a share exchange.

To facilitate the transaction contemplated under the April 25, 2006 letter of intent, the Company approved a one and one half (1.5) for one (1) forward stock split basis to stockholders of record on April 18, 2006. (See Subsequence event for detail)

On May 25, 2006, the Company changed its name to Source Petroleum Inc.

b) Going Concern

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

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might result from this uncertainty.

The Company has not generated any material operating revenues to date.

2. Significant Accounting Policies

a) Cash and Cash Equivalents

Cash equivalents comprise certain highly liquid instruments with a maturity of six months or less when purchased. As at June 30, 2006, cash and cash equivalents consist of cash only.

b) Accounting Estimates

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

c) Mineral Properties

Costs of acquisition, exploration, carrying, and retaining unproven properties are expensed as incurred.

8

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Notes to Financial Statements

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

d) Asset Retirement Obligations

The Company has adopted SFAS No. 143, Accounting for Asset Retirement Obligations which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. SFAS No. 143 requires a liability to be recorded for the present value of the estimated site restoration costs with corresponding increase to the carrying amount of the related long-lived asset. The liability will be accreted and the asset will be depreciated over the life of the related assets. Adjustments for changes resulting from the passage of time and changes to either the timing or amount of the original present value estimate underlying the obligation will be made.

The Company has not recorded any asset retirement obligation to date as the amounts, if any, are not significant at this time.

e) Concentration of Credit Risk

The Company places its cash and cash equivalents with high credit quality financial institutions. As of June 30, 2006 the Company had no balance in a bank beyond insured limits.

f) Foreign Currency Transactions

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

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

g) Fair Value of Financial Instruments

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

h) Income Taxes

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

i) Comprehensive Income

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

9

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Notes to Financial Statements

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

j) Loss Per Share

Loss per share is computed using the weighted average number of shares outstanding during the periods. The Company has adopted SFAS No. 128, “Earnings Per Share”. Diluted loss per share is equivalent to basic loss per share as there are no dilutive securities outstanding.

k) Stock-based Compensation

Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. The intrinsic value method of accounting resulted in compensation expense for stock options to the extent that the exercise prices were set below the fair market price of the Company’s stock at the date of grant.

As of January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock Based Compensation Transition and Disclosure”.

Since the Company did not issue stock options to employees during the six months ended June 30, 2006 or 2005, there is no effect on net loss or earnings per share had the Company applied the fair value recognition provisions of SFAS No. 123(R) to stock-based employee compensation. When the Company issues shares of common stock to employees and others, the shares of common stock are valued based on the market price at the date the shares of common stock are approved for issuance.

l) New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.” This Interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a threshold condition that a tax position must meet for any of the benefit of an uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding derecognition, classification and disclosure of uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that this Interpretation will have a material impact on their financial position, results of operations or cash flows.

3. Mineral Property

During the year ended December 31, 2004, the Company staked twenty-five mining claims located in the Iliamna Recording District of Southwestern Alaska. As the claims do not contain any known reserves, the exploration costs were expensed during the periods. The mineral claims are renewable on the first day of every September conditional on paying the annual filing fee of $2,500 to the State of Alaska by November 30, 2006 and meeting mineral exploration expenditure of $10,000 or by paying cash in lieu of mineral exploration expenditures.

10

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Notes to Financial Statements

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

4. Related Party Transactions

During the quarter ended March 31, 2006, the Company received $9,000 in advances from its sole officer and director of the Company. The $9,000, together with $2,500 advanced during the year ended December 31, 2005, were repaid in full during the last quarter.

5. Common Stock

On February 3, 2006, the Company approved thirty for one forward stock split basis on the stockholders of record on February 17, 2006. All references in the accompanying financial statements to the number of common stock outstanding and per share amounts have been restated to reflect the stock split.

On April 25, 2006, the Company approved one half shares for one forward stock split. As a result, the Company authorized capital increased from 3,000,000,000 shares of common stock with a par value of $0.001 per share to 4,500,000,000 shares of common stock with a par value of $0.001 per share. This also increased our issued and outstanding share capital from 66,895,000 shares of common stock to 100,342,500 shares of common stock as of April 18, 2006. All references in the accompanying financial statements to the number of common stock outstanding and per share amounts have been restated to reflect the stock split.

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

Warrants outstanding and exercisable as of June 30, 2006

Date Granted	Date Expired	Excise Price	No.
05/11/2006	05/11/2008	1.25	2,000,000
05/11/2006	05/11/2008	1.50	2,000,000

6. Preferred Shares

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

7. Subsequent Events

Instead of pursuing the transaction contemplated under the non-binding letter of intent with 1223121 Alberta Ltd. which dated April 25, 2006, the Company entered into an a share exchange agreement dated July 26, 2006, with all of the shareholders of Source Projects Inc., Source Projects Inc., and 1245147 Alberta Ltd. for the purchase by the Company of all of the issued and outstanding shares of Source Projects Inc. Source Projects Inc. is the sole shareholder of 1245147 Alberta Ltd., which has entered into farm-out agreements for exploration of oilsands relating to certain farmout lands located in Alberta and Saskatchewan.

11

SOURCE PETROLEUM INC.

(An exploration stage enterprise)

Notes to Financial Statements

(Expressed in U.S. Dollars)

June 30, 2006

(Unaudited)

The Company proposes to purchase all of the issued shares of Source Projects Inc. by way of a share exchange for the Company’s 32,000,000 common shares, which will be issued to all of the shareholders of Source Projects Inc. on a pro-rata basis in proportion to their shareholdings in Source Projects Inc.

Following the May 2006 2,000,000 private placement, the Company completed another private placement on July 6, 2006, consisting of 4,003,327 units at a price of US$1.50 per unit for gross proceeds of $6,004,991 ($5,554,890 of which was received prior to June 30, 2006 and was included in the Company’s financial statements as at June 30, 2006). Each unit consists of one common share and one common share purchase warrant, with one of such warrants entitling the holder thereof to purchase one share at a price of USD$2.25 per share for a period of two years. The Company has agreed to pay certain individuals finders’ fees for assisting the Company in raising funds in connection with its recent private placements of units at $1.50. In July 2006, the Company paid the finders’ fee by paying $593,000 in cash and allotting 395,330 warrants exercisable into one common share at the price of US$1.50 for a period of two years.

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Item 2. Management’s Discussion and Analysis or Plan of Operation.

FORWARD LOOKING STATEMENTS

This Quarterly Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 that involve risks and uncertainties. In particular such forward-looking statements may be found in this section. The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report. Words or phrases such as “hope”, “expect”, “intend”, “plan” or similar expressions are generally intended to identify forward-looking statements. Those statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed herein. The principal risks and uncertainties that may affect our actual performance and results of operations include the following: general economic conditions; exploration successes, the acquisition of oil and gas assets, continued availability of capital and financing; adverse weather; governmental regulations; changes in governmental and public policy; changes in economic conditions specific to our business; competition; availability of equipment and qualified personnel and unexpected operational difficulties. Other risks and uncertainties may also affect the outcome of our actual performance and results of operations. You are cautioned not to place undue reliance on the forward-looking statements made in this Management’s Discussion and Analysis or Plan of Operations.

Overview

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

Our Current Business

We are in the business of mineral exploration. We acquired twenty-five mineral claims in southwestern Alaska via staking which we believe are prospective for gold and copper. Our mineral claims consist of twenty-five quarter sections which cover approximately 4,000 acres or 6.25 square miles. The State of Alaska requires an annual rental fee of $2,500 and a minimum exploration work expenditure of $10,000 on the 1st of September of each year to keep the claims in good standing. The $2,500 payment and proof of work must be paid and filed with the State of Alaska within 90 days of the 1st of September. We extended the mineral claims to September 1, 2006 by paying the necessary filing fee of $2,500 and filing documentation to support a minimum of $10,000 was spent on the claims.

Our objective has been to conduct mineral exploration activities on the property in order to assess whether it possesses commercially exploitable reserves of minerals. To date, we have not discovered an economically viable mineral deposit on the mineral claims, and there is no assurance that we will ever discover one. A great deal of further exploration will be required before a final evaluation as to the economic and legal feasibility for our future development is determined.

We recently entered into a share exchange agreement dated July 26, 2006 with all of the shareholders of Source Projects Inc., Source Projects Inc., and 1245147 Alberta Ltd. for the purchase by our company of all of the issued and outstanding shares of Source Projects Inc. Source Projects Inc. is the sole shareholder of 1245147 Alberta Ltd., which has entered into farm-out agreements for exploration of oilsands relating to certain farmout lands located in Alberta and Saskatchewan. Upon the completion of this share exchange agreement, we plan to refocus our attention to the exploration of oilsands and oil shales under the farm-out agreements held by 1245147 Alberta Ltd.

Phase One Exploration of Mineral Claims

In late May 2005, we conducted the first phase of exploration on the mineral claims consisting of an induced polarization survey and a ground magnetic survey. The cost of the program was approximately $37,800 which exceeded our initial estimate by $7,800. The increase was a result of higher than expected costs for mobilization, demobilization and labor. The work program commenced in mid May 2005 and lasted approximately ten days.

13

We commissioned a report on the results of phase one from a consulting geophysics firm. The report stated the induced polarization survey encountered various ground conditions during the survey resulting in varying degrees of quality data. There were features of interest on several of the induced polarization lines surveyed but no conclusive evidence can be obtained from the acquired chargeability readings. The combined effects of poor weather conditions, a possible frost layer and the existence of a highly resistive overburden resulted in very low voltage potential.

Plan of Operations

Upon the completion of this share exchange agreement, we plan to improve our shareholders’ value by refocusing our attention to the exploration of oilsands and oil shales under the farm-out agreements held by 1245147 Alberta Ltd. We may also continue exploration of our mineral claims by completing the following objectives for the next twelve months:

1. We may repeat certain portions of the induced polarization survey conducted in phase one in order to gather data before making a decision to move to phase two. The costs to repeat phase one is budgeted at $35,000 and additional funds will have to be raised in order to conduct this work program.

2. If warranted by the results of phase one, we may proceed with phase two of our recommended exploration program. Phase two is estimated to cost $23,000. If we decide to continue exploring our mineral claims, we anticipate that phase two may be conducted during the summer of 2007 and would take approximately six weeks to complete.

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

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

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

New Business

On April 25, 2006, we entered into a non-binding letter of intent to acquire all of the issued and outstanding shares of 1223121 Alberta Ltd., a privately-owned Alberta corporation engaged in the oil and gas exploration business. We had planned to purchase all of the issued shares of 1223121 Alberta Ltd. by way of a share exchange.

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To facilitate the transaction contemplated under the April 25, 2006 letter of intent, our board of directors approved a one and one half (1.5) for one (1) forward stock split of our authorized, issued and outstanding shares of common stock. We amended our Articles of Incorporation by filing a Certificate of Change with the Nevada Secretary of State and issued one and one half (1.5) shares for every one (1) share of common stock issued and outstanding immediately prior to the effective date of the forward stock split. As a result, our authorized capital increased from 3,000,000,000 shares of common stock with a par value of $0.001 per share to 4,500,000,000 shares of common stock with a par value of $0.001 per share. This also increased our issued and outstanding share capital from 66,895,000 shares of common stock to 100,342,500 shares of common stock as of April 18, 2006.

We also agreed to change our name to Source Petroleum Inc. to better reflect our new business focus. The change of our name from “Red Sky Resources Inc.” to “Source Petroleum Inc.” received the requisite approval of our shareholders. We filed and mailed out an Information Statement on Schedule 14C on May 3, 2006. The name change took effect on May 25, 2006.

The April 25, 2006 letter of intent was non-binding in nature and no definitive agreement was entered into between our company and 1223121 Alberta Ltd. Instead of pursuing the transaction contemplated under the non-binding letter of intent with 1223121 Alberta Ltd., we recently entered into a share exchange agreement dated July 26, 2006 with all of the shareholders of Source Projects Inc., Source Projects Inc., and 1245147 Alberta Ltd. for the purchase by our company of all of the issued and outstanding shares of Source Projects Inc. Source Projects Inc. is the sole shareholder of 1245147 Alberta Ltd., which has entered into farm-out agreements for exploration of oilsands relating to certain farmout lands located in Alberta and Saskatchewan.

We propose to purchase all of the issued shares of Source Projects Inc. by way of a share exchange for 32,000,000 common shares of us, which will be issued to all of the shareholders of Source Projects Inc. on a pro-rata basis in proportion to their shareholdings in Source Projects Inc.

In connection with the proposed acquisition of Source Projects Inc, we completed in May of 2006 a private placement of US$2,000,000 through the issuance of units at a price of US$1.00 per unit. Each unit consists of one common share and two common share purchase warrants, with one warrant exercisable into one common share at the price of US$1.25 for a period of 2 years, and the second warrant exercisable into one common share at the price of US$1.50 for a period of 2 years. Subsequently, we completed another private placement consisting of 4,003,327 units of our securities at a price of US$1.50 per unit for gross proceeds of $6,004,991. Each unit of the securities consists of one common share in the capital of our company and one common share purchase warrant, with one of such warrants entitling the holder thereof to purchase one share of our common stock at a price of USD$2.25 per share.

Results of Operations

We have had no operating revenues since our inception on October 14, 2001 through to the June 30, 2006. We anticipate that we will not generate any revenues while we are solely an exploration stage company. Our activities have been financed from the proceeds of share subscriptions. From our inception on October 14, 2001 to June 30, 2006, we have raised a total of $2,179,625 from private offerings of our securities.

For the six months ended June 30, 2006, we incurred operating costs of $72,769 compared to operating costs of $72,225 during the six months ended June 30, 2005. The expenses were comparable during both periods and primarily dealt with our continued reporting requirements under the Securities Exchange Act of 1934. During the six months ended June 30, 2006, we incurred $64,480 in professional fees for the legal and accounting costs of our Form 10-KSB and the legal costs of our stock split, name change and private placements. During the six months ended June 30, 2005, we incurred $30,366 in professional fees for the legal costs for general corporate matters and our Form SB-2. We will continue to incur legal and accounting costs as a reporting company.

Liquidity and Capital Resources

At June 30, 2006, we had cash on hand of $7,553,677 and working capital of $7,523,667.

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Cash used in operating activities was $51,375 for the six months ended June 30, 2006 largely due to our professional fees incurred during the period related to our Form 10-QSB, name change, stock split and private placements. This compares with cash used in operating activities of $66,298 for the six months ended June 30, 2005.

By November 30, 2006, we must make payment to the State of Alaska of an annual rental fee of a total of $2,500 for our twenty-five mineral claims, to keep our claims in good standing. We believe we have met the $10,000 annual labor commitment for the period ended September 1, 2006, but there are no assurances the State of Alaska will accept our report of annual labor.

As stated above in the Plan of Operations section, in the next twelve months, we expect to incur at least $35,000 if we decide to repeat certain portions of the induced polarization survey conducted in phase one of our recommended exploration program. If we decide to proceed to phase two of the exploration program, we can expect to incur an additional $23,000. Furthermore, we anticipate that we will require $24,000 to cover our ongoing general and administrative expenses for the next twelve months. We believe our cash on hand is sufficient to carry out our plan of operations and pay for the costs of our general and administrative expenses for the next twelve months. Our ability to complete the next phase of our recommended work program will be subject to us obtaining adequate financing as these expenditures will exceed our cash reserves. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock or through shareholder or related party loans, although there are no assurances any such financing will be completed.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

Our significant accounting policies are disclosed in Note 2 to the unaudited financial statements included in this Quarterly Report on Form 10-QSB.

Item 8A. Controls and Procedures.

As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2006, being the end of the period covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, Mr. Jeff Gillis. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to material information relating to us required to be included in our periodic SEC filings as at the end of the period covered by this report. There have been no changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.

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

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During our most recently completed fiscal quarter ended June 30, 2006 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

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

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

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

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

PART II – Other Information

Item 1. Legal Proceedings.

We are not party to any legal proceedings.

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

On May 11, 2006, we closed a private placement consisting of 2,000,000 units of our securities at a price of US$1.00 per unit for gross proceeds of $2,000,000. Each unit of the securities consists of one common share in the capital of our company and two common share purchase warrants, with one of such warrants entitling the holder thereof to purchase one share of our common stock at a price of USD $1.25 per share and the other one of such warrants entitling the holder thereof to purchase one share of our common stock at a price of USD $1.50 per share. All of the warrants will be exercisable before May 11, 2008. We issued the securities to four (4) non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2) of the Securities Act of 1933.

On July 5, 2006, we closed a private placement consisting of 4,003,327 units of our securities at a price of US$1.50 per unit for gross proceeds of $6,004,991. Each unit of the securities consists of one common share in the capital of our company and one common share purchase warrant, with one of such warrants entitling the holder thereof to purchase one share of our common stock at a price of USD$2.25 per share. All of the warrants will be exercisable before July 5, 2008. We issued the securities to eighteen (18) non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2) of the Securities Act of 1933 and to two (2) U.S. Accredited Investor (as this term is defined in Regulation D under the 1933 Act).

Item 3. Default upon Senior Securities.

None.

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

Our company received the consent of a majority of the outstanding shares of our common stock for the change of name to "Source Petroleum Inc." on May 2, 2006. Our company filed an Articles of Amendment to amend our

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Certificate of Incorporation changing our name as required under the provisions of the Private Corporations Act of the Nevada Revised Statutes (NRS 78.010 et seq.). Shareholder approval for the change of name of our company from "Red Sky Resources, Inc." to "Source Petroleum Inc." was obtained by written consent of shareholders owning 67,500,000 shares of our common stock, which represented 67.27% on the record date, May 2, 2006. The change of name became effective on May 25, 2006. Our common stock is now quoted on the NASD Over-the-Counter Bulletin Board under the new symbol “SOPO”.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

Exhibit No.	Description of Exhibit
(3)	Articles of Incorporation and By-laws
3.1	Articles of Incorporation (incorporated by reference from our registration statement on Form SB-2 filed January 28, 2005)
3.2	By-Laws (incorporated by reference from our registration statement on Form SB-2 filed January 28, 2005)
3.3	Articles of Merger, as filed with the Nevada Secretary of State (incorporated by reference from our registration statement on Form SB-2 filed January 28, 2005)
3.4	Certificate of Merger, as filed with the Delaware Secretary of State (incorporated by reference from our registration statement on Form SB-2 filed January 28, 2005)
3.5	Certificate of Change as filed with the Nevada Secretary of State (incorporated by reference from our current report on Form 8-K filed February 10, 2006)
3.6	Certificate of Change to increase authorized and issued and outstanding share capital (incorporated by reference from our current report on Form 8-K filed April 19, 2006)
3.7	Certificate of Amendment to Articles of Incorporation changing the name from Red Sky Resources Inc. to Source Petroleum Inc., as filed with the Nevada Secretary of State (incorporated by reference from our current report on Form 8-K filed May 26, 2006)
(10)	Material Contracts
10.1	Farmout Agreement with Banks Energy Inc. (formerly, Banks Ventures Ltd.) dated June 1, 2003 (incorporated by reference from our registration statement on Form SB-2 filed January 28, 2005)
10.2	Mining Quitclaim Deed dated August 16, 2004 (incorporated by reference from our registration statement on Form SB-2 filed January 28, 2005)
10.3	Agreement and Plan of Merger between Red Sky Resources Inc. and Pacific Petroleum Inc. dated December 6, 2004 (incorporated by reference from our registration statement on Form SB-2/A (Amendment No. 1) filed March 15, 2005)

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

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SIGNATURES

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

SOURCE PETROLEUM INC.

By:	/s/ Jeff Gillis
	Jeff Gillis
	Chief Executive Officer, Chief Financial Officer,
	President, Treasurer and Secretary
	(Principal Executive Officer, Principal Financial
	Officer and Principal Accounting Officer)
	Date: August 22, 2006

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