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

On November 29, 2011, Oilsands Quest Inc. and its subsidiaries (collectively, the “Company” or “Oilsands Quest”), 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 the Company the opportunity to restructure its financial affairs. The stay of proceedings is currently in effect until May 18, 2012, 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”). The Monitor will monitor the Company's assets and liabilities, 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 the CCAA proceedings. 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. Certain stakeholders whose rights 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 May 17, 2012, Oilsands Quest has not obtained a further 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, a Debtor-in-Possession (“DIP”) Charge to Century Services Inc. in sums as may be borrowed up to $3.75 million; (discussed in detail below);

Second, 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

a financial advisor charge in a maximum amount of CAD$1 million in connection with the engagement of TD Securities Inc. (“TD Securities”). This charge ranks equally with the administration and represents a security for all amounts due to be paid to TD Securities pursuant to their engagement; and

Third, 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 proceedings.

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 bitumen resource properties that will require substantial further investment to bring on to production.

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 ("Special Committee") with advice from TD Securities 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 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 have, if consummated, 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 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 Company's 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. The CCAA process will allow the Company to reassess its business strategy with a view to developing a comprehensive financial and business restructuring plan.

On January 11, 2012 the Company received an approval from the court to conduct a process to solicit offers to acquire, restructure or recapitalize the Company (the “Solicitation Process”).

The Solicitation Process is being overseen by a Special Committee chaired by Paul Ching, and including Ronald Blakely and Brian MacNeill, all of whom are independent directors. The Special Committee will consider all alternatives in developing a plan, including strategic financing opportunities, asset divestitures, joint ventures and/or a corporate sale, merger or other business combination, and will ultimately recommend a course of action to the Company's full Board and the Monitor. With the Court's approval, the Company has reengaged TD Securities as financial advisor to assist it with this process. TD Securities is familiar with Oilsands Quest's assets and business as a result of previous engagements and has assisted Oilsands Quest in prior discussions with potentially interested parties. TD Securities has begun soliciting indications of interest from prospective strategic or financial parties and several confidentiality agreements have been signed with interested parties. Given the time required for potential purchasers to conduct their due diligence, the Company expects to shortlist potential bidders and seek binding offers under the process by April 27, 2012.

On February 7, 2012, the Monitor, in its capacity as the Company's Foreign Representative, commenced proceedings in the United States Bankruptcy Code for the Southern District of New York ("US Bankruptcy Code") pursuant to Chapter 15 of the United States Bankruptcy Code. This order would allow the CCAA proceedings to be recognized as foreign main proceedings along with the automatic stay and certain other provisions of the US Bankruptcy Code to take effect within the United States. Motions seeking a joint administration of the Chapter 15 cases and approval of the form and manner of notice of the Chapter 15 petitions and hearing were granted by the US Bankruptcy Court on February 8, 2012. A final hearing on such recognition is scheduled for March 15, 2012. (See Note 15).

On February 16, 2012, the Court granted the Company's motion to approve secured interim DIP financing with Century Services Inc. for a maximum of CDN$3.75 million to fund operating costs and other expenses while the Company proceeds with the Solicitation Process. The DIP financing is a twelve month term demand facility and will be repayable on the earlier of one year following closing or the termination of the Order from the Court providing creditor protection under the CCAA. The Company expects that the DIP facility will be available for draw down by mid-March 2012. There can be no assurance that this funding will be sufficient to fund the Company's operations and ongoing creditors' obligations during the period that the Company may spend in creditor protection under the CCAA or until a plan is approved. (See Note 15).

On February 22, 2012, the Court approved the sale of the Company's non-core Eagles Nest asset to FAMA Capital Ltd. (“FAMA”), an unrelated third party, for CDN$7.0 million. The approval followed a short Court-directed limited bidding process, and the Company signed a Purchase and Sale Agreement with FAMA. FAMA paid deposits in the amount of CDN$50,000 and was required to pay an additional deposit of CDN$350,000 on February 24, 2012. However, FAMA did not make the deposit and the agreement was terminated. On March 7, 2012, the Court approved a new bidding process for the Eagles Nest asset. Bids for the asset are to be submitted to the Monitor by 4 PM MST, March 12, 2012. The bids must be accompanied by an unconditional executed Purchase and Sale Agreement and a deposit representing 10% of the purchase price with closing to occur on or before March 30, 2012. There can be no assurance that the sale will be concluded. (See Note15).

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 those reserves. As at January 31, 2012, the Company had working capital (excluding restricted cash) of $1.1 million including cash and cash equivalents of $1.8 million and a deficit accumulated during the development phase of $726.0 million.

During the nine months ended January 31, 2012, the Company expended $11.4 million on operating activities, $2.0 million on property and equipment and $0.5 million on funding restricted cash. Management anticipates that the Company will be able to fund its activities at a reduced level through June 2012 with its working capital as at January 31, 2012, and the interim DIP facility of $3.75 million available for draw-down by mid-March 2012. 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 June 2012.

On November 29, 2011, the NYSE Amex LLC (“NYSE”) halted trading in the Company's common shares and imposed an ongoing suspension in trading of the shares. Accordingly, delay in the resumption of trading on the NYSE reduces the liquidity of the Company's common shares and limits the Company's availability to obtain equity financing. The NYSE granted the Company an extension until May 18, 2012 to regain compliance with the continued listing standards.

Financial Accounting Standards Board (FASB) Accounting Standards Codification FASB ASC 852 Reorganizations, which is applicable to companies under creditor protection, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from postpetition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The Company applied FASB ASC 852 effective November 29, 2011 and has segregated those items as outlined above for the reporting periods subsequent to such date.

The accompanying 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 CCAA. While the Company has filed and been granted creditor protection, 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 provides the Company with a period of time to stabilize its operations and financial condition and develop a 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 accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the CCAA. 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 prepetition 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.