1.	COMPANIES' CREDITORS ARRANGEMENT ACT (CANADA) PROCEEDINGS AND GOING CONCERN

On November 29, 2011, Oilsands Quest Inc. and certain subsidiaries, requested and obtained an order from the Alberta Court of Queen's Bench (the “Court”) providing creditor protection under the Companies' Creditors Arrangement Act (Canada) (“CCAA”). While under CCAA protection, the Company will continue with its day to day operations. CCAA protection stays creditors and others from enforcing rights against the Company and affords Oilsands Quest the opportunity to restructure its financial affairs. The initial order is in effect until December 21, 2011, and may be further extended as required and approved by the Court.

Under the terms of the initial order, Ernst & Young Inc. was named as the court-appointed monitor (“Monitor”) under CCAA. The Monitor will monitor the Company's property, business and financial affairs and report to the Court from time to time on the Company's financial and operational position and any other matters that may be relevant to CCAA proceeding. In addition, the Monitor may advise the Company on the development of a comprehensive restructuring plan and, to the extent required, assist the Company with a restructuring.

While under CCAA protection, the Board of Directors maintains its usual role and management of the Company remains responsible for the day to day operations. The Board of Directors and management, with advice from the Monitor, will be responsible for determining whether a given plan for restructuring the Company's affairs is feasible. Stakeholders whose right would be compromised by the plan will have an opportunity to vote on the plan. Before a plan is implemented it must be approved by the requisite number and value of affected stakeholders contemplated by law and approved by the Court.

CCAA protection enables the Company to continue with its day to day operations until the CCAA status changes. The implications of this process for Oilsands Quest shareholders will not be known until the end of the restructuring process. If the affected stakeholders do not approve a plan in the manner contemplated by law, Oilsands Quest will likely be placed into receivership or bankruptcy. If by December 21, 2011, Oilsands Quest has not obtained an extension of the initial order or filed a plan, creditors and others will no longer be stayed from enforcing their rights.

In connection with the CCAA, the Company has granted a charge against its assets and any proceeds from and sales thereof, as follows and in the following priority:

·	First, an administration charge, in an amount not to exceed CAD$1 million, in favour of the Monitor and its counsel and counsel to the Company, to secure payment of professional fees and disbursements before and after the commencement of the CCAA proceedings; and

Second, a directors' and officers' charge, in an amount not to exceed CAD$1 million, in favour of the directors and officers of the Company as security for the Company's obligation to indemnify them against obligations and liabilities that they may incur as directors and officers after the commencement of the CCAA proceeding.

While the Company's assets on its balance sheet are in excess of its liabilities, the majority of the asset value is in long term, heavy oil production reserves that will require substantial further investment to bring on to production.

Based on the Company's cash flow projections the Company has determined that additional priority borrowings are not necessary from the date of its court filing to December 31, 2011. Therefore, the Company has not made arrangements for DIP financing at this time. Although Oilsands Quest reserves its rights to reapply to the Court for such a DIP financing facility there is no assurance that such facility could be attained, should such financing be required to satisfy the Company's ongoing creditor obligations.

On August 17, 2010 the Company announced that it had initiated a process to explore strategic alternatives for enhancing shareholder value. The strategic alternative process was overseen by a special committee (the "Special Committee") with advice from TD Securities Inc. which was engaged as a financial advisor to assist with this process. The Special Committee considered all alternatives to increase shareholder value, including strategic financing opportunities, asset divestitures, joint ventures and/or a corporate sale, merger or other business combination. The Company had many initial expressions of interest and exploratory conversations and signed confidentiality agreements with a number of entities who carried out detailed due diligence.

The formal strategic alternative process did not result in any proposals to the Company, and the process was concluded in June, 2011 upon the recommendation of the Special Committee.

The Company then proceeded to attempt to raise the funds required to advance the development of the Company's assets and on July 18, 2011, the Company commenced a rights offering (the "Rights Offering") under which the existing shareholders were given the right to purchase shares in the Company. This Rights Offering process was terminated, on the basis of the factors described below, on September 12, 2011, and the Company has, to date, been unable to raise the funds required to advance the development of the Company's assets. The decision to cancel the Rights Offering was based on the fact that the negotiation of a material transaction had reached an advanced stage – a transaction that would, if consummated, have significantly changed the use of proceeds described in the Rights Offering prospectus and that the Company would not achieve a full $60 million subscription through the Rights Offering.

On September 25, 2011, the Company entered into a non-binding letter of intent (the "Letter of Intent") with a third party to sell its Wallace Creek assets for total consideration of $60 million, which included $40 million cash at closing and a $20 million contingent payment that was subject to certain future events. The sale of the Wallace Creek property would have provided the Company with the financial resources to focus on moving its largest and most advanced asset, Axe Lake, toward commercial development.

Completion of the transaction was subject to a number of terms and conditions, including negotiation of a definitive agreement, board approvals, due diligence, financing and approval by BQI shareholders. On November 28, 2011, negotiations for the sale of the Wallace Creek assets were terminated as the potential purchaser could not complete the conditions outlined above within the time frames agreed to in the Letter of Intent.

Following the termination of the negotiations for the sale of the Wallace Creek, the Company initiated the CCAA process in order to preserve its liquidity and fund operations during the restructuring process. CCAA will allow the Company to reassess its business strategy with a view to developing a comprehensive financial and business restructuring plan.

To date the Company has not received any revenue from any of its natural resource properties, none of its estimated bitumen resources have been classified as proved reserves, and the Company's exploration and development work is capital intensive. The Company expects that significant additional exploration and development activities will be necessary to establish proved bitumen reserves, and to develop the infrastructure necessary to facilitate production, from the reserves. As at October 31, 2011, the Company had negative working capital of $5.6 million (excluding restricted cash), including cash and cash equivalents of $4.5 million, and a deficit accumulated during the development phase of $721.7 million.

During the six months ended October 31, 2011, the Company expended $8.4 million on operating activities and $2.8 million on property and equipment. Management anticipates that the Company will be able to fund its activities at a reduced level through January 2012 with its cash and cash equivalents as at October 31, 2011. Accordingly, there is substantial doubt about our ability to continue as a going concern and, without additional working capital, we may not be able to maintain operations beyond January 2012.

The consolidated financial statements have been prepared using U.S. GAAP and the rules and regulations of the SEC as consistently applied by Oilsands Quest prior to the commencement of the CCAA proceeding. While the CCAA proceedings are underway, the consolidated financial statements continue to be prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The CCAA proceeding provides the Company with a period of time to stabilize its operations and financial condition and develop a restructuring plan. However, it is not possible to predict the outcome of these proceedings and, as such, the realization of assets and discharge of liabilities are each subject to significant uncertainty. Further, it is not possible to predict whether the actions taken in any plan will result in sufficient improvements to the Company's financial condition to allow it to continue as a going concern. If the going concern basis is not appropriate, adjustments will be necessary to the carrying amounts and/or classification of the Company's assets and liabilities. Further, a comprehensive restructuring plan could materially change the carrying amounts and classifications reported in the consolidated financial statements.

The consolidated financial statements do not purport to reflect or provide for the consequences of the CCAA proceeding. In particular, such consolidated financial statements do not purport to show: (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to shareholders accounts, the effect of any changes that may be made in the Company's capitalization; or (d) as to operations, the effect of any changes that may be made in the Company's business.