The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information included elsewhere in this report.

Overview

Contango is a Houston-based, independent natural gas and oil company. The Company's business is to explore, develop, produce and acquire natural gas and oil properties primarily offshore in the Gulf of Mexico. COI, our wholly-owned subsidiary, acts as operator on certain offshore prospects.

Revenues and Profitability. Our revenues, profitability and future growth depend substantially on prevailing prices for natural gas and oil and on our ability to find, develop and acquire natural gas and oil reserves that are economically recoverable. The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets, liabilities and proved natural gas and oil reserves. We use the successful efforts method of accounting for our natural gas and oil activities.

Reserve Replacement. Generally, our producing properties offshore in the Gulf of Mexico have high initial production rates, followed by steep declines. As a result, we must locate and develop or acquire new natural gas and oil reserves to replace those being depleted by production. Substantial capital expenditures are required to find, develop and acquire natural gas and oil reserves.

Sale of proved properties. From time-to-time as part of our business strategy, we have sold, and in the future may continue to sell some or a substantial portion of our proved reserves to capture current value, using the sales proceeds to further our exploration activities.

Use of Estimates. The preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts 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 periods. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include estimates of remaining proved natural gas and oil reserves and the timing and costs of our future drilling, development and abandonment activities.

Please see "Risk Factors" on page 12 for a more detailed discussion of a number of other factors that affect our business, financial condition and results of operations.

Results of Operations

The following is a discussion of the results of our continuing operations for the fiscal year ended June 30, 2009, compared to the fiscal year ended June 30, 2008, and for the fiscal year ended June 30, 2008, compared to the fiscal year ended June 30, 2007.

Revenues. All of our revenues are from the sale of our natural gas and oil production. Our revenues may vary significantly from year to year depending on changes in commodity prices, which fluctuate widely, and production volumes. Our production volumes are subject to wide swings as a result of new discoveries, weather and mechanical related problems. In addition, our production declines over time as we produce our reserves.

The table below sets forth revenue and production data for continuing operations for the fiscal years ended June 30, 2009, 2008 and 2007.

                                           Year ended June 30,                  Year ended June 30,
                                           2009           2008       %            2008         2007         %
                                                  ($000)                              ($000)
Revenues:
Natural gas and oil sales                $ 190,656      $ 116,498     64 %    $    116,498   $ 14,140       724 %

Total revenues                           $ 190,656      $ 116,498             $    116,498   $ 14,140

Production:
Natural gas (million cubic feet)            20,535          9,089    126 %           9,089      1,792       407 %
Oil and condensate (thousand barrels)          515            185    178 %             185         34       444 %
Natural gas liquids (thousand gallons)      24,803          4,968    399 %           4,968        187      2557 %

Total (million cubic feet equivalent)       27,168         10,909    149 %          10,909      2,023       439 %
Natural gas (thousand cubic feet per
day)                                        56,260         24,833    127 %          24,833      4,910       406 %
Oil and condensate (barrels per day)         1,411            505    179 %             505         93       443 %
Natural gas liquids (gallons per day)       67,953         13,574    401 %          13,574        512      2551 %

Total (thousand cubic feet per day
equivalent)                                 74,434         29,802    150 %          29,802      5,541       438 %

Average Sales Price:
Natural gas (per thousand cubic feet)    $    6.34      $    9.77    -35 %    $       9.77   $   6.62        48 %
Oil and condensate (per barrel)          $   67.72      $  108.36    -38 %    $     108.36   $  59.60        82 %
Natural gas liquids (per gallon)         $    1.03      $    1.55    -34 %    $       1.55   $   0.94        65 %

Operating expenses                       $  23,684      $   6,777    249 %    $      6,777   $    891       661 %
Exploration expenses                     $  20,603      $   5,729    260 %    $      5,729   $  2,380       141 %
Depreciation, depletion and
amortization                             $  32,673      $  11,900    175 %    $     11,900   $  1,607       641 %
Impairment of natural gas and oil
properties                               $  11,075      $     642   1625 %    $        642   $     -        100 %
General and administrative expenses      $   9,467      $  16,929    -44 %    $     16,929   $  6,842       147 %
Interest expense, net of interest
capitalized                              $     741      $   3,933    -81 %    $      3,933   $  2,163        82 %
Interest income                          $     926      $   1,969    -53 %    $      1,969   $    886       122 %
Gain (loss) on sale of assets and
other                                    $    (530 )    $  62,314   -101 %    $     62,314   $ (2,684 )    2422 %

Natural Gas, Oil and NGL Sales. We reported revenues of approximately $190.7 million for the year ended June 30, 2009, up from approximately $116.5 million reported for the year ended June 30, 2008. This increase was attributable to increased natural gas, oil and NGL sales from our Mary Rose #4 discovery which began producing in July 2008, our Eloise North discovery which began producing in December 2008, and our Dutch #4 discovery which began producing in January 2009. This increase was partially offset by reduced sales from our Dutch #1-#3 wells which were shut-in during all of September, October and the majority of November 2008 due to Hurricane Ike. The increase was also attributable to the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

We reported natural gas and oil sales of approximately $116.5 million for the year ended June 30, 2008, up from approximately $14.1 million reported for the year ended June 30, 2007. This increase was attributable to our Dutch #2 discovery which began producing in July 2007, our Dutch #3 discovery which began producing in November 2007, our Mary Rose #1 and #3 discoveries which began producing in April 2008, and our Mary Rose #2 discovery which began producing in June 2008. The increase was also attributable to the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

Natural Gas, Oil and NGL Production and Average Sales Prices. Our net natural gas production for the year ended June 30, 2009 was approximately 56.3 Mmcfd, up from approximately 24.8 Mmcfd for the year ended June 30, 2008. Net oil production for the period was up from 505 bopd to 1,411 bopd, and NGL production was up from 13,574 gallons per day to 67,953 gallons per day for the same period. The increase in natural gas, oil and NGL production was principally attributable to our Mary Rose #4 discovery which began producing in July 2008, our Eloise North discovery which began producing in December 2008, and our Dutch #4 discovery which began producing in January 2009. This increase was partially offset by reduced production from our Dutch #1-#3 wells which were shut-in during all of September, October and the majority of November 2008 due to Hurricane Ike. The increase in production was also attributable to the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008. For the year ended June 30, 2009, the price of natural gas was $6.34 per Mcf while the price for oil and NGLs was $67.72 per barrel and $1.03 per gallon, respectively. For the year ended June 30, 2008, the price of natural gas was $9.77 per Mcf while the price for oil and NGLs was $108.36 per barrel and $1.55 per gallon, respectively.

Our net natural gas production for the year ended June 30, 2008 was approximately 24.8 Mmcfd, up from approximately 4.9 Mmcfd for the year ended June 30, 2007. Net oil production for the period was up from 93 bopd to 505 bopd, and NGL production was up from 512 gallons per day to 13,574 gallons per day for the same period. The increase in natural gas, oil and NGL production was the result of our Dutch #2 discovery which began producing in July 2007, our Dutch #3 discovery which began producing in November 2007, our Mary Rose #1 and #3 discoveries which began producing in April 2008, and our Mary Rose #2 discovery which began producing in June 2008. Another reason for the increase was the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008. For the year ended June 30, 2008, the price of natural gas was $9.77 per Mcf while the price for oil and NGLs was $108.36 per barrel and $1.55 per gallon, respectively. For the year ended June 30, 2007, the price of natural gas was $6.62 per Mcf while the price for oil and NGLs was $59.60 per barrel and $0.94 per gallon, respectively.

Operating Expenses. Operating expenses for the year ended June 30, 2009 were approximately $23.7 million which included approximately $10.7 million for workover costs. The remaining costs related mainly to continuing operations from our four Dutch wells, four Mary Rose wells and Eloise North well, compared to operating expenses for the year ended June 30, 2008 of approximately $6.8 million which related to continuing operations from three Dutch wells and three Mary Rose wells. Operating expenses for the year ended June 30, 2007 were approximately $0.9 million which related mainly to only one Dutch well.

Exploration Expense. We reported approximately $20.6 million of exploration expenses for the year ended June 30, 2009. Of this amount, approximately $7.1 million related to the dry hole the Company drilled at West Delta 77, $12.5 million related to the dry hole the Company drilled at Eugene Island 56, and the remaining $1.0 million related to various geological and geophysical activities, seismic data and delay rentals.

We reported approximately $5.7 million of exploration expenses for the year ended June 30, 2008. Of this amount, approximately $4.2 million was related to the dry hole the Company drilled at High Island A198, approximately $0.6 million was attributable to the cost to acquire and reprocess 3-D seismic data offshore in the Gulf of Mexico, and approximately $0.9 million was attributable to the payment of delay rentals.

We reported approximately $2.4 million of exploration expenses for the year ended June 30, 2007. Of this amount, approximately $1.4 million was attributable to the cost to acquire and reprocess 3-D seismic data in the Gulf of Mexico, and approximately $1.0 million was attributable to the payment of delay rentals.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the year ended June 30, 2009 was approximately $32.7 million. For the year ended June 30, 2008, we recorded approximately $11.9 million of depreciation, depletion and amortization. The increase in depreciation, depletion and amortization was primarily attributable to added production from newly added reserves from our Mary Rose #4, Eloise North and Dutch #4 discoveries, as well as from the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

Depreciation, depletion and amortization for the year ended June 30, 2008 was approximately $11.9 million. For the year ended June 30, 2007, we recorded approximately $1.6 million of depreciation, depletion and amortization. The increase in depreciation, depletion and amortization was primarily attributable to added production from newly added reserves from our Dutch #2, Dutch #3, Mary Rose #1, Mary Rose #2 and Mary Rose #3 discoveries, as well as from the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

Impairment of Natural Gas and Oil Properties. For the year ended June 30, 2009, the Company recorded impairment expense of approximately $11.1 million. Of this amount, approximately $2.7 million related to the impairment of Grand Isle 70 and $3.4 million related to the impairment of Grand Isle 72, as a result of the expected future undiscounted net cash flows of these wells being lower than the unamortized capitalized cost. The remaining $5.0 million related to the expiration and relinquishment of 44 lease blocks owned by REX and COE.

For the year ended June 30, 2008, the Company recorded impairment expense of approximately $0.6 million related to the expiration of Eugene Island 209 and Viosca Knoll 161, two leases held by COE. The Company did not report an impairment charge for the fiscal year ended June 30, 2007.

General and Administrative Expenses. General and administrative expenses for the year ended June 30, 2009 were approximately $9.5 million, down from $16.9 million for the year ended June 30, 2008. The decrease is principally attributable to higher bonus payments in fiscal year 2008. Major components of general and administrative expenses for the year ended June 30, 2009 included approximately $1.0 million in salaries, $4.3 million in benefits and bonuses (includes $1.4 million in non-cash expenses related to restricted stock and option awards), $1.7 million in office administration and other expenses, $0.5 million in insurance costs, $0.7 million in accounting and tax services, and $1.3 million in legal and other administrative expenses.

General and administrative expenses for the year ended June 30, 2008 were approximately $16.9 million, up from $6.8 million for the year ended June 30, 2007. The increase is principally attributable to higher bonus payments in fiscal year 2008. Major components of general and administrative expenses for the year ended June 30, 2008 included approximately $1.0 million in salaries, $12.1 million in benefits and bonuses (includes $1.5 million in non-cash expenses to restricted stock and option awards), $1.1 million in office administration and other expenses, $0.4 million in insurance costs, $0.9 million in accounting and tax services, and $1.4 million in legal and other administrative expenses.

General and administrative expenses for the year ended June 30, 2007 were approximately $6.8 million. Major components of general and administrative expenses for the year ended June 30, 2007 included approximately $4.4 million in salaries, benefits and bonuses (includes $1.5 million in non-cash expenses related to restricted stock and option awards), $1.2 million in office administration and other expenses, $0.3 million in insurance costs, $0.5 million in accounting and tax services, and $0.4 million in legal and other administrative expenses.

Interest Expense. Interest expense for the fiscal years ended June 30, 2009, 2008 and 2007 were approximately $0.7 million, $3.9 million, and $2.2 million, respectively. The higher levels of interest expense for fiscal year 2008 and 2007 were attributable to higher levels of bank debt outstanding during such periods. The lower level of interest expense in fiscal year 2009 was attributable to the Company retiring all of its long term debt in the first quarter of fiscal year 2009.

Interest Income. Interest income for the fiscal years ended June 30, 2009, 2008 and 2007 were approximately $0.9 million, $1.9 million, and $0.9 million, respectively. The higher level of interest income

for fiscal year 2008 was attributable to loans made to related parties and interest earned on the proceeds from our various property sales.

Gain on Sale of Assets and Other. For the year ended June 30, 2009, we reported a loss on sale of assets and other of approximately $0.5 million related to a post-closing adjustment for the sale of our Arkansas Fayetteville Shale properties.

For the year ended June 30, 2008, we reported a gain on sale of assets and other of approximately $62.3 million. Of this amount, approximately $63.4 million relates to the gain on the sale of the Company's 10% limited partnership interest in Freeport LNG, $2.1 million relates to a payment from a stockholder related to a short swing profit liability, $0.3 million relates to the gain on the sale of certain overriding royalty interests and onshore properties, offset by a $2.9 million loss recognized on the sale of certain assets held by CVCC and a $0.6 million loss attributable to the write-down of the Company's investment in Moblize.

We reported a loss on sale of assets and other of approximately $2.7 million for the year ended June 30, 2007, consisting of a $2.3 million loss on our sale of Grand Isle 72 and a $0.4 million loss on equity investments.

Discontinued Operations The table and discussions above, along with our financial statements, discuss only continuing operations for all fiscal years presented. Not reflected are the Company's sold producing properties which generated 7.7% and 24.3% of combined revenues for the fiscal years ended June 30, 2008 and 2007, respectively. The Company did not have any discontinued operations for the fiscal year ended June 30, 2009. Please see Note 5 - Sale of Properties - Discontinued Operations of Notes to Consolidated Financial Statements included as part of this Form 10-K, for a discussion of our discontinued operations.

Capital Resources and Liquidity

Cash From Operating Activities. Cash flow from operating activities provided approximately $95.4 million in cash for the year ended June 30, 2009 compared to $112.7 million for the same period in 2008. This decrease in net cash provided by operating activities was primarily attributable to lower net income from continuing operations for the year ended June 30, 2009. This lower net income is due to lower natural gas and oil prices during 2009, partially offset by increased production from our Mary Rose #4, Eloise North and Dutch #4 discoveries which began producing during the year ended June 30, 2009.

Cash flow from operating activities provided approximately $112.7 million in cash for the year ended June 30, 2008 compared to $4.1 million for the same period in 2007. This increase in cash provided by operating activities was attributable to increased natural gas and oil sales from our Dutch #2, Dutch #3, Mary Rose #1, Mary Rose #2 and Mary Rose #3 discoveries which began producing during the year ended June 30, 2008. Another reason for the increase was the added sales attributable to the additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.

Cash From Investing Activities. Cash flows used in investing activities for the year ended June 30, 2009 were approximately $45.8 million, compared to $38.9 million used in investing activities for the year ended June 30, 2008. The lower level of cash flows used in investing activities in 2008 was due primarily to the proceeds received from the sale of certain assets.

Cash flows used in investing activities for the year ended June 30, 2008 were approximately $38.9 million, compared to $55.1 million used in investing activities for the year ended June 30, 2007. This decrease in cash flows used in investing activities was due primarily to the proceeds received from the sale of our Arkansas Fayetteville Shale properties and our 10% limited partnership interest in Freeport LNG, partially offset by the acquisition of additional interests in our Dutch and Mary Rose leases.

Cash From Financing Activities. Cash flows used in financing activities for the year ended June 30, 2009 were approximately $65.1 million, compared to $20.2 million used in financing activities for the same period in 2008. This $65.1 million of cash flows used in financing activities for the year ended June 30, 2009

is primarily composed of purchasing approximately $51.8 million of our common stock and the repayment of $15.0 million of debt.

Cash flows used in financing activities for the year ended June 30, 2008 were approximately $20.2 million, compared to $47.0 million provided by financing activities for the same period in 2007. This decrease in cash flow was primarily attributable to $48.5 million of debt repayment by the Company and its affiliates, $1.5 million of preferred stock dividends paid, and $6.6 million of stock and options repurchased during the year ended June 30, 2008, partially offset by $35.0 million of borrowings under credit facilities.

Income Taxes. Income taxes are our biggest expenditure. During the year ended June 30, 2009 and 2008, we paid approximately $45.6 million and $22.0 million, respectively, in estimated income taxes.

Capital Budget. For fiscal year 2010, our capital expenditure budget calls for us to invest a total of $60 million as we plan to drill up to four wildcat exploration wells, at an estimated dry hole cost of approximately $15 million each, net to Contango. The Company will own approximately a 72% NRI in all four wells. We plan to spud our Ship Shoal 263 prospect ("Nautilus") around November 2009, and our Matagorda Island 617 prospect ("Dude") in early 2010. Our Matagorda Island 607/616 prospect ("El Duderino") may not be drilled, depending on the results from our Dude well. Our fourth prospect has yet to be identified. Assuming we were to drill all four of these prospects by our fiscal year-end of June 30, 2010, and all four wells were dry, we would be able to defer an estimated $20 million in income taxes that would otherwise be owed and thus reduce our projected after-tax capital outlay to approximately $40 million.

The Company often reviews acquisitions and prospects presented to us by third parties and may decide to invest in one or more of these opportunities. There can be no assurance that we will invest, or that any investment entered into will be successful. These potential investments are not part of our current capital budget and would require us to invest additional capital. Natural gas and oil prices continue to be volatile and have fallen dramatically when compared to this period last year. As of September 1, 2009, natural gas was $2.84 per Mmbtu and oil was $68.05 per barrel. Our production is currently approximately 74.8 Mmcfed, net to Contango. If natural gas prices remain at their current levels, our ability to fund our planned capital expenditures may require us to borrow, or alternatively, to reduce our planned capital expenditures. As of September 1, 2009, we had approximately $39.0 million in cash and cash equivalents and no debt outstanding.

Discontinued Operations. The Company, since its inception in September 1999, has raised $484.0 million in proceeds from twelve separate property sales, and views periodic reserve sales as an opportunity to capture value, reduce reserve and price risk, in addition to being a source of funds for potentially higher rate of return natural gas and oil exploration investments. We believe these periodic natural gas and oil property sales are an efficient strategy to meet our cash and liquidity needs by providing us with immediate cash, which would otherwise take years to realize through the production lives of the fields sold. We have in the past and expect to in the future to continue to rely heavily on the sales of assets to generate cash to fund our exploration investments and operations.

These sales bring forward future revenues and cash flows, but our longer term liquidity could be impaired to the extent our exploration efforts are not successful in generating new discoveries, production, revenues and cash flows. Additionally, our longer term liquidity could be impaired due to the decrease in our inventory of producing properties that could be sold in future periods. Further, as a result of these property sales the Company's ability to collateralize bank borrowings is reduced which increases our dependence on more expensive mezzanine debt and potential equity sales. The availability of such funds will depend upon prevailing market conditions and other factors over which we have no control, as well as our financial condition and results of operations.

The table below sets forth the proceeds received from natural gas and oil property sales in each of the fiscal years ended June 30, 2007 and 2008, the impact of these sales on our developed reserve quantities, and a measure of our developed reserves held at the end of each such fiscal year. We had no discontinued operations for the fiscal year ended June 30, 2009. Please see the reserve activity reported in the Supplemental Oil and Gas Disclosures on pages F-25 through F-28 for a more detailed discussion regarding our standardized measure.

                                                                                              Standardized Measure of
Fiscal Year of                    Proceeds          Reserves       Reserves at end of       Discounted Future Net Cash
Property Sale                     Received        Sold (Mmcfe)     Fiscal Year (Mmcfe)      Flows at end of Fiscal Year
2007                            $   7,000,000              426                  84,876     $                 252,297,275
2008                            $ 328,300,000           13,789                 369,076     $               2,233,918,129

For fiscal year 2008, the Company realized approximately $8.1 million in operating cash flows from discontinued operations, approximately $319.0 million in investing cash flows from discontinued operations and zero in financing cash flows from discontinued operations.

Off Balance Sheet Arrangements

None.

Contractual Obligations

The following table summarizes our known contractual obligations as of June 30, 2009:

                                              Payment due by period
                                    Less than 1                               More than 5
                         Total         year        1-3 years    3-5 years        years
    Operating leases     436,824         184,482      252,342           -               -

    Total              $ 436,824   $     184,482   $  252,342   $       -    $          -

Share Repurchase Program

In September 2008, the Company's board of directors approved a $100 million . . .