OVERVIEW OF THE COMPANY
Magellan is an independent energy company engaged in the exploration, development, production, and sale of crude oil and natural gas. The Company is an oil and gas holding company listed on NASDAQ since 1972. The Company conducts its operations through two wholly owned subsidiaries, Nautilus Poplar LLC ("NP"), which owns Poplar, an oil field in the Williston Basin that the Company believes has significant potential for future development, and Magellan Petroleum Australia Limited ("MPAL"), a successful independent oil and gas company in existence since the 1960s that is active in Australia and the UK. Our mission is to enhance shareholder value by maximizing the full potential of our existing assets.
Currently, on a consolidated basis, our assets at Poplar include a 100% operated working interest in the interval from the surface to the top of the Bakken formation and a 35% non-operated working interest below that interval, which includes the Bakken/Three Forks and Red River formations. Our other assets include working interests in the Mereenie, Palm Valley, and Dingo Fields in the Amadeus Basin in Australia of 35%, 52%, and 34%, respectively; a large exploration license in the Bonaparte Basin in the Timor Sea, offshore Australia; and 270,000 net acres in the Weald-Wessex Basins in the UK that are prospective for unconventional and conventional hydrocarbon deposits.

SUMMARY RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 2012, totaled $4.8 million, compared to $4.9 million in the prior year period, a decrease of 1%. Operating loss for the three months ended March 31, 2012, totaled $4.6 million, compared to $0.1 million in the prior year period. Net loss for the three months ended March 31, 2012, totaled $4.6 million ($0.09/basic share), compared to $0.1 million ($0.00/basic share) in the prior year period. Please refer to the further discussion below in this section under Comparison of Results between the Three Months Ended March 31, 2012 and 2011.
Starting in the previous quarter, we have changed the presentation of our financial statements to conform them to industry-specific norms. Specifically, we have modified the presentation of expenses in the condensed consolidated statements of operations and the presentation of property and equipment, net in the condensed consolidated balance sheets. As a result, certain reclassifications have been made to the prior period financial statements to align them with this revised presentation format. These reclassifications have no impact on previously reported results.

HIGHLIGHTS OF OPERATIONAL ACTIVITIES
During the three months ended March 31, 2012, the Company has been active in developing and enhancing the value of our assets. Key activities and events are discussed below. We believe that we can continue to expand our production capabilities in all three of our operating theaters. Poplar (Montana, USA)
Magellan 100% operated intervals. During the three months ended March 31, 2012, Magellan sold 20 Mbbls of oil attributable to its net revenue interests in Poplar, compared to 17 Mbbls of oil sold during the same period in 2011. These results represent an 18% increase in average daily sales during those periods, from 187 boepd to 220 boepd. Approximately 2 Mbbls out of the 3 Mbbls increase were attributable to sales from the EPU 117 well, which produces out of the Amsden formation, a new pool discovery made in January 2012. This well initially flowed at a rate exceeding 100 boepd. It was put on pump in April 2012, and we are currently establishing a stabilized production rate. The remaining production increase of 1 Mbbls is the result of several workovers and recompletions in existing wells producing out of the Charles formation. The EPU 119 well was initially drilled to gather new data about the various potential formations, particularly the deeper intervals, of Poplar and led to the successful farm-out of the deeper intervals to VAALCO in September 2011. Following the completion of this well in the B-2 zone of the Charles formation in October 2011, Magellan determined that the EPU 119 well was not economical in this specific zone and consequently wrote off the previously capitalized costs in the amount of $0.9 million as an exploration expense in the unaudited condensed consolidated statements of operations. We intend to complete the EPU 119 well in a different zone of the Charles formation in the near future to seek additional production from Poplar.
In addition, Magellan will utilize the EPU 119 well to test our ability to inject CO2 into the Charles formation under actual reservoir conditions. This test will take less than a month to conduct, after which Magellan can recomplete this well in a new zone. In parallel with this injectivity test, Magellan is conducting laboratory analysis to further establish the viability of a CO2 enhanced oil

recovery program in the Charles formation. This analysis includes various tests, including minimum miscibility pressure. Magellan considers the initial results to be favorable, and testing will continue through June 2012.
VAALCO 65% operated intervals. In accordance with the terms of the VAALCO PSA, VAALCO is required to spud three wells in the deeper formations of Poplar by the end of December 2012 (See Note 4). On January 4, 2012, VAALCO spud its first well, EPU 120. The EPU 120 well was a vertical well drilled to a depth of 9,251 feet. Log data and core samples taken throughout the drilling phase yielded encouraging results from the following deeper formations: Bakken/Three Forks, Nisku, Red River, and Winnipeg.
Based upon their analysis of this data, VAALCO will complete the EPU 120 well for production from one of these formations. Under the terms of the VAALCO PSA, Magellan did not incur any costs in the drilling of the EPU 120 well and is entitled to a 35% share of any profits realized from this well. VAALCO has announced that they will drill their second well at Poplar as a horizontal well targeting the Bakken/Three Forks formations. Australia
Mereenie. The Mereenie oil and gas field, which is operated by Santos, produced a gross average of approximately 620 bbls of oil and condensate per day for sale during the three months ended March 31, 2012, compared to 500 bbls for the prior year period. The average price of oil at Mereenie, net of royalties, was AUD $139.66/bbl for the three months ended March 31, 2012, compared to AUD $135.34/bbl for the prior year period. There were no natural gas sales at Mereenie during the three months ended March 31, 2012.
Palm Valley. The Palm Valley gas field, which is operated by MPAL, produced a gross average of approximately 1.1 MMcf/d of natural gas for sale during the three months ended March 31, 2012. The average price of gas at Palm Valley was AUD $3.79/Mcf for the three months ended March 31, 2012, compared to AUD $2.59/Mcf for the prior year period. The Palm Valley Gas Purchase Agreement with the NT Power and Water Corporation terminated on January 16, 2012, after a 25 year term. New gas sales resumed during February 2012 pursuant to a month to month arrangement with Santos (See Note 7). Under this arrangement, sale terms are equivalent to those included in the Santos Gas Contract, which will become effective upon Completion of the Santos SA. Santos in turn has contracted our Palm Valley production through a Santos Concession Gas Contract to a sizeable mining customer, and Magellan and Santos continue to pursue new contracts for our remaining proved gas reserves.
As operator of the Palm Valley Field, Magellan has reduced its field staff from ten to five employees in an effort to improve operational efficiency and reduce costs while maintaining a safe and efficient operation, conducted in accordance with good oil field practice.
United Kingdom
Northern Petroleum Operated Licenses. In the Weald Basin of Southern England, the Company participated (40% interest) in the Markwells Wood-1 exploration well, which was drilled in PEDL 126 in December 2010. On November 21, 2011, this well was completed for production testing to establish pressures and flow rates in the existing wellbore. Further stimulation of the well was performed during December 2011 and February 2012, and production testing continued through April 2012 to establish a stabilized oil production rate. As operator of the well, Northern Petroleum will continue to publish periodic updates on the well status. Limited quantities of oil volumes have been produced from the Markwells Wood-1 well.
In January 2012, the UK Department of Energy, in the 26th Licensing Round, announced it will award a PEDL to the Isle of Wight Joint Venture, which is composed of Northern Petroleum (63%), Magellan (23%), Egdon Resources (7%), Montrose Industries (5%), and Oil & Gas Investments (2%). The PEDL is an exploration and development license for two part blocks located offshore in the Wessex Basin and contains a potential Wytch Farm type play. Northern Petroleum is the operator. Commitments to the PEDL consist of a contingent "drill-or-drop" well with a decision on drilling to be made before the end of Permit Year 2. Celtique Energie Operated Licenses. In the Weald Basin, Magellan and Celtique Energie each own a 50% working interest in four licenses (PEDL 231, 232, 234, and 243) covering a gross total of approximately 270,000 acres, all expiring on June 30, 2014, unless extended. Celtique Energie continues to gather data to assess the prospect for unconventional and conventional hydrocarbon deposits in these licenses. In September 2011, Celtique completed the acquisition of approximately 200 km of 2D seismic data. This seismic acquisition fulfilled our current work commitment under the licenses. This seismic data revealed several prospects, and an exploratory drilling program is under development. These four licenses remain subject to contingent "drill-or-drop" requirements.

AQUISITIONS AND DIVESTITURES
Santos Transactions
On September 14, 2011, Magellan executed the Santos SA and the Santos Gas Contract, the impact of which are not reflected in the unaudited condensed consolidated financial statements included in this report. As of March 31, 2012, the Company has

satisfied all conditions to Completion except final approval by the Minister of the Department of Resources of Northern Territory, Australia. Magellan believes that this is an administrative process, that the Santos SA will be completed, and that the transaction will be reported in the three month period ending June 30, 2012.
For a complete description of these transactions please, see Note 20 of the Notes to the consolidated financial statements included in our Form 10-K for the fiscal year ended June 30, 2011, as well as Notes 6 and 7 included in this report.
Withholding Tax Liability
The Company's improved controls and processes over financial reporting have lead to the identification of a potential liability of approximately $2.0 million. The Company failed to make required U.S. Federal Tax Withholdings in October 2009 in relation to the initial acquisition of Poplar. In October 2009, Magellan acquired 83% of the interests in NP from White Bear LLC ("White Bear"), a related party, and YEP I, SICAV-FES ("YEP I"). Magellan was required to make U.S. Federal Tax Withholdings from the payments to or for the benefit of foreign entities in consideration for the acquisition. Mr. Nikolay Bogachev, a Director of Magellan and a foreign national, is the majority owner of White Bear, and YEP I is a Luxembourg entity. The Company has estimated that it was required to withhold approximately $1.0 million from this distribution of proceeds in October 2009 and that the related penalties and interests are estimated to be an additional $1.0 million. As a result, we have recorded a total liability of $2.0 million in the unaudited condensed consolidated balance sheet included in this report. As of May 10, 2012, Magellan has confirmed that White Bear and its Members, which represent approximately 70% of the payees related to this transaction, will file their respective U.S. income tax returns and pay any income tax and related penalties and interests due. As a result, we have recorded a $1.3 million receivable under other assets in the unaudited condensed consolidated balance sheet, corresponding to White Bear's share of Magellan's liability. The Company is in the process of addressing its requirements with respect to YEP I and has not recorded a receivable as of March 31, 2012. The effect on the unaudited condensed consolidated statement of operations included in this report is an expense of $550 thousand recorded under general and administrative expenses, which reflects the effects of the YEP withholding and penalties, as well as an interest expense of $190 thousand, which reflects the effects of interest the Company is obligated for (See Note 16).

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our activities from cash from operations and our existing cash balance. The Company has limited capital expenditure obligations pertaining to its leases and licenses, which allow for significant flexibility in the use of its capital resources. Based on its existing cash position, the expected upcoming additional proceeds from the completion of the Santos SA, and the various alternative sources of funds generally available to the Company, the Company believes it has sufficient financial resources to fund its ongoing operations and to finance projects that will further establish the full value of its assets.
Uses of Funds
Capital Expenditures Plans. At Poplar, the Company does not face significant mandatory capital expenditure requirements to maintain its acreage position. Substantially all of the leases are held by production and contain producing wells with reserves adequate to sustain multi-year production. Furthermore, approximately 80% of the acreage has been unitized as a Federal Exploratory Unit which is held by production from any one well. Currently Poplar contains 38 producing wells. The Company's discretionary capital expenditure plans over the next two years will be determined by the results of ongoing technical analysis. These plans may include the drilling of additional wells in the shallow formations of Poplar to increase production and proved reserves, as well as the pilot phase of a CO2 enhanced oil recovery program at Poplar. In addition, to the extent that the three wells to be drilled by VAALCO are successful, the Company plans to fund its 35% share of the cost of the future drilling program in the deeper formations of Poplar.
At Palm Valley, the Company's interest in the field is governed by Petroleum Lease No. 3, which expires in 2024 (and is subject to automatic renewal for another 21 years). The Company is not obligated to undertake significant mandatory capital expenditures in order to maintain its position in the lease. The Company's discretionary capital expenditures plans are primarily focused on maximizing gas production from the existing facilities while maintaining a safe and efficient operation, conducted in accordance with good oil field practice. At Dingo, the Company's interest in the field is governed by Retention License No. 2, which expires in February 2014 (and is subject to renewal for a further 5 years). No mandatory capital expenditure is required until new gas sales contracts are secured. Dingo contains 3 shut-in wells, which are producing. Capital expenditures required to bring the field on-stream depend on the development option selected by the Company and could include a 33 mile tie-in pipeline.
In the Bonaparte Basin, offshore Australia, the Company holds a 100% interest in the NT/P82 Exploration Permit. Under the terms of the permit, which is due to expire in May 2016, the Company committed to a minimum 46 square mile 3D seismic survey in 2012. At June 30, 2011, MPAL's obligations regarding the NT/P82 permit were recorded on the balance sheet at AUD $1.8 million, which were included in our disclosure of commitments and contingencies in Note 16 of the Notes to the consolidated financial statements included in our Form 10-K for the fiscal year ended June 30, 2011.

In the UK, the Company's interests are governed by various Petroleum Exploration and Development Licenses. The majority of these licenses expire in 2014 and all are subject to "drill-or-drop" obligations. The Company has minimal remaining capital expenditure obligations with respect to its interest in the Markwells Wood-1 well operated by Northern Petroleum.
Contractual Obligations. See Note 2 for information regarding the contingent consideration payable to the Nautilus Sellers of the non-controlling interest of NP. Please refer to the contractual obligations table in Part II, Item 7 of our Form 10-K for the fiscal year ended June 30, 2011, for information on all other material contractual obligations.
Sources of Funds
Cash and Cash Equivalents. On a consolidated basis, the Company had approximately $17.2 million of cash and cash equivalents at March 31, 2012, compared to $20.4 million as of June 30, 2011. In addition, upon completion of the Santos SA, the Company is due to receive additional net cash proceeds of AUD $25.0 million plus certain adjustments.
The Company considers cash equivalents to be short term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Cash balances totaled $2.4 million as of March 31, 2012, and the remaining $14.8 million was held in several Australian banks in time deposit accounts that have terms of 90 days or less. Due to the international nature of its operations, the Company is exposed to certain legal and tax constraints in matching the capital needs of its assets and its cash resources. As of March 31, 2012, $16.6 million of the Company's consolidated cash and cash equivalents, representing 97% , were deposited in accounts held by MPAL. To the extent that the Company repatriates cash amounts from MPAL to the U.S., the Company would potentially be liable for incremental U.S. federal and state income tax, which may be reduced by the U.S. federal and state net operating loss and foreign tax credit carry forwards available to the Company at that time.
Marketable Securities. The Company may from time to time invest in marketable securities consisting of investments in US Treasury Bills with maturities usually not exceeding six months. As of March 31, 2012, and June 30, 2011, respectively, the Company had no marketable securities.
Existing Credit Facilities. A summary of the Company's existing credit facilities and borrowing base is as follows:

                         March 31, 2012      June 30, 2011
                                   (In thousands)
Outstanding borrowings:
Term loan               $          1,002    $         1,422
Line of credit                       650                  1
Total                   $          1,652    $         1,423

The Company, through its wholly owned subsidiary NP, maintains its only credit facility with Jonah Bank of Wyoming. As of March 31, 2012, the Company's borrowing capacity under these facilities totaled $2.3 million, consisting of a $1.3 million term loan and a $1.0 million line of credit. Of the $1.0 million line of credit, $0.7 million was drawn, $25 thousand secured business credit cards used by NP, $25 thousand secured a line of credit in favor of the Bureau of Land Management, and $0.3 million remained available to borrow. As of March 31, 2012, NP was in compliance with its financial covenants as set forth in the term loan agreement. The credit facilities are collateralized by a first mortgage and an assignment of production for Poplar and are guaranteed by the Company up to $6.0 million but not to exceed the amount of the principal owed, which was $1.7 million as of March 31, 2012.
Other Sources of Financing. In addition to its cash and existing credit facilities, the Company has various alternatives to fund the development of its assets. These alternatives could potentially include entering into a corporate credit facility, a reserve-based loan facility, a farm-out of a portion of the development program of some of the Company's assets, and an issuance of new shares to equity investors.

Cash Flows
The following table presents the Company's cash flow information for the nine
months ended:
                                                                     March 31,
                                                                2012          2011
                                                                  (In thousands)
Cash (used in) provided by:
Operating activities                                         $ (10,309 )   $  (2,501 )
Investing activities                                             9,908       (14,745 )
Financing activities                                            (3,197 )         517
Effect of exchange rate changes on cash and cash equivalents       392         3,389
Net decrease in cash and cash equivalents                    $  (3,206 )   $ (13,340 )

Cash used in operating activities during the nine months ended March 31, 2012, was $10.3 million, compared to cash used of $2.5 million for the same period in 2011. The increase in cash used in operating activities primarily related to a decrease in revenues of $1.3 million over the same period and increased operational spending related to exploration and lease operating expenses. The Company also expects the impact of non-cash foreign transaction gains and losses in the unaudited condensed consolidated statements of cash flows to be reduced in future periods. The source of the impact was primarily generated by MPAL's cash balances in US dollar denominated accounts held in relation to the Evans Shoal Asset Sales Deed. Cash balances held in these accounts have now been reduced to immaterial amounts.
Cash provided by investing activities during the nine months ended March 31, 2012, was $9.9 million, compared to cash used of $14.7 million for the same period in 2011. For the nine months ended March 31, 2012, the increase in cash provided by investing activities consisted of $5.0 million in proceeds from the VAALCO SA, the refund of a $10.9 million deposit related to the Asset Sales Deed, $0.8 million spent on the purchase of non-controlling interests in Poplar, and $5.2 million in expenditures on the development of our assets. Of the $5.2 million, $1.8 million related to the recompletion of eight wells and the repair of one of our salt water disposal wells at Poplar, $1.5 million related to exploration activities at Poplar, primarily for the EPU 117 well, and $1.2 million related to the Markwells Wood-1 well in the UK.
Cash used in financing activities during the nine months ended March 31, 2012, was $3.2 million, compared to cash provided of $0.5 million for the same period in 2011. The increase in cash used in financing activities for the nine months ended March 31, 2012, related to repayment of the Company's long term debt of $0.4 million and a $3.5 million purchase of the non controlling interest in Poplar (See Note 2).
During the nine months ended March 31, 2012, the effect of changes in foreign currency exchange rates positively impacted the translation of our AUD denominated cash and cash equivalent balances into USD and resulted in an increase of $0.4 million in cash and cash equivalents, compared to an increase of $3.4 million for the same period in 2011.

COMPARISON OF RESULTS BETWEEN THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
Oil and Gas Sales Volume
The following table presents oil and gas sales volumes for the three months
ended:
                                March 31,
                              2012     2011    Difference     Percent change
Net sales by field:
Poplar (Mbbls)                 20        17           3             18  %

Palm Valley gas (MMcf)         43       172        (129 )          (75 )%
Mereenie oil (Mbbls)           20        13           7             54  %
Total Australia sales (Mboe)   27        42         (15 )          (36 )%

Net sales by product:
Oil (Mbbls)                    40        30          10             33  %
Gas (MMcf)                     43       172        (129 )          (75 )%

Consolidated sales (Mboe)      47        59         (12 )          (20 )%
Consolidated sales (boepd)    516       648        (132 )          (20 )%

Sales volume for the three months ended March 31, 2012, totaled 47 Mboe (516 boepd), compared to 59 Mboe (648 boepd) sold in the prior year period, a decrease of 20%. Sales volume by product for the three months ended March 31, 2012, was 85% oil and 15% gas, compared to 51% oil and 49% gas in the prior year period. At Poplar, volumes were positively impacted by Magellan's increased interest in Poplar as a result of the Nautilus Restructuring, continued workover and recompletion activities, and new production from the EPU 117 well, which produced 2 Mbbls for the three months ended March 31, 2012. At Mereenie, oil sales volumes increased primarily due to an enhanced oil recovery program. Gas sales volumes at Palm Valley decreased due to the termination of the 25-year agreement with NT Power and Water Corporation during January 2012. Gas sales resumed in February 2012 under a month to month arrangement with Santos (See Note 7).
Oil and Gas Prices
The following table presents the average realized oil and gas prices for the three months ended:

                            March 31,
                         2012      2011     Difference     Percent change
Average realized price:
Poplar (USD/bbl)         84.59     79.39          5.20             7 %
Palm Valley (AUD/Mcf)     3.79      2.59          1.20            46 %
Mereenie oil (AUD/bbl)  139.66    135.34          4.32             3 %
Consolidated (USD/boe)  102.34     60.69         41.65            69 %

The average realized price for the three months ended March 31, 2012, was $102.34/boe compared to $60.69/boe in the prior year period, an increase of 69%. This increase in price is primarily the result of oil prices rising in the . . .