OVERVIEW OF THE COMPANY
Magellan is an independent energy company engaged in the exploration, development, production, and sale of crude oil and natural gas. Our strategy is to enhance shareholder value by maximizing the value of our existing assets. We accomplish this through the exploration and development of our assets as outlined in Items 1 and 2: Business and Properties of this report.

SUMMARY RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2012
For the year ended June 30, 2012, revenues totaled $13.7 million compared to $18.2 million in the prior year, a decrease of 25%. Operating income totaled $19.8 million compared to $28.2 million operating loss in the prior year. Net income totaled $26.5 million ($0.49/basic share), compared to a net loss of $32.4 million ($(0.62)/basic share) in the prior year. Adjusted EBITDAX (see Non-GAAP Financial Measures and Reconciliation under Part 1, Items 1 and 2:
Business and Properties) totaled negative $9.7 million, compared to negative $4.8 million in the prior year, a change of 103%. For further detail, please refer to the discussion below in this section under Comparison of Financial Results and Trends Between Fiscal 2012 and 2011.
During the quarter ended December 31, 2011, we have changed the presentation of our financial statements to conform them to industry-specific norms and to improve our reporting to shareholders and stakeholders. Specifically, we have modified the presentation of expenses in the consolidated statements of operations and the presentation of property and equipment in the 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 fiscal year ended June 30, 2012, management articulated a strategy to focus on proving up the value of its existing assets as the most economic way of increasing shareholder value. Towards that end, management has begun a number of initiatives to evaluate and determine the potential of its oil and gas properties. The below discussion should be read in conjunction with the discussion of Significant Developments in Fiscal Year 2012 under Part1, Items 1 and 2: Business and Properties above and the section covering Comparison of Results and Trends between Fiscal Years 2012 and 2011 below. Poplar (Montana, United States)
Magellan 100% operated intervals. During the year ended June 30, 2012, Magellan sold 75 Mbbls of oil attributable to its net revenue interests in Poplar, compared to 68 Mbbls of oil sold during the same period in 2011. These results represent a 10% increase in average daily sales for the year from 186 boepd to 205 boepd. Approximately 5 Mbbls out of the 7 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 currently produces at a stabilized production rate of 10 to 20 bopd. The remaining production increase of 2 Mbbls is primarily the result of workovers and Magellan's consolidation of its ownership in Poplar in September 2011.
Poplar was discovered in the 1950s by Murphy Oil Company, with much of the field's development occurring in the Charles formation between the 1950s and 1970s. Most of the field's current production is conventional production from the Charles formation generated by wells initially drilled in that era, and these wells require significant workovers and maintenance to maintain stable production.
To improve the production and profitability of Poplar, Magellan implemented a workover and exploration program during the past fiscal year aimed at increasing conventional production from its operated formations. The Company tested and evaluated several unexplored shallow formations which are prospective for hydrocarbons. The discovery of the Amsden formation was a result of this effort, and management is currently evaluating whether it is more economic to develop this formation through the recompletion of existing wells or through the drilling of new ones. In addition, Magellan assessed the effectiveness of certain production-enhancing technologies, such as stimoil treatments, acid stimulations, and water shut-off treatments, in certain intervals. These assessments are ongoing, and, if successful, Magellan will seek to deploy them on a full-field basis.
During the fiscal year, Magellan also focused heavily on evaluating the potential for a CO2-EOR project in the Charles formation at Poplar. During the third and fourth fiscal quarters, the Company commissioned various laboratory analyses of oil samples taken from the Charles formation, including studies of minimum miscibility pressure, CO2 solubility swelling, and viscosity reduction. Magellan received analysis results back between May and August 2012, all of which confirm the potential viability of CO2-EOR at Poplar. In addition, Magellan has utilized the EPU 119 well, initially drilled in 2010, to conduct CO2 injectivity tests into the Charles formation under actual reservoir conditions. Such tests have been completed, and the results will support the viability of a CO2-EOR at Poplar. Magellan is now working diligently to implement a five-well CO2-EOR pilot project to be conducted during the fiscal year ending June 30, 2013.
VAALCO 65% operated intervals. In September 2011, we farmed out part of our interest in the Bakken/Three Forks and deeper formations to VAALCO in return for their commitment to drill three exploration wells. This arrangement allows us to focus on the shallower formations while VAALCO tests the deeper formations, including the Bakken/Three Forks, Nisku, and Red River, on our collective behalf.
Australia
Palm Valley. The Palm Valley gas field, which is operated by MPAL, produced a gross average of approximately 1.2 MMcf/d of natural gas for sale for the year ended June 30, 2012. Gas sales volumes at Palm Valley decreased due to the termination of the PWC Contract during January 2012. Gas sales resumed in February 2012 under month to month arrangements with Santos and were continued with Santos under a long-term gas sales agreement in May 2012 following completion of the Santos SA. Under these arrangements, sale terms were equivalent to those included in the Santos Gas Contract. The Santos Gas Contract became effective upon Completion of the Santos SA on May 25, 2012. To date, gas volumes sold under both the arrangements were significantly lower than under the PWC Contract, although volumes are expected to increase by fiscal year 2015 to levels similar to, and at prices significantly higher than, those realized under the PWC Contract. The average price of gas, net of royalties and prior year royalty adjustments, at Palm Valley was AUD $3.01/Mcf for the year ended June 30, 2012, compared to AUD $2.28/Mcf for the prior year. During the fiscal year, Magellan took steps to reduce costs and improve operational efficiency at Palm Valley, including reducing its field staff from ten to five employees, while maintaining a safe and efficient operation, conducted in accordance with good oil field practice.
Mereenie. The Mereenie oil and gas field, which is operated by Santos, produced a gross average of approximately 473

bbls of oil and condensate per day for sale during the period from July 1, 2011, to May 25, 2012, when the Santos SA was completed, compared to 493 bbls during the prior year. The average price of oil at Mereenie, net of royalties and prior year royalty adjustments, was AUD $132.92/bbl for the year ended June 30, 2012, compared to AUD $99.67/bbl for the prior year. There were no natural gas sales at Mereenie during fiscal years 2012 and 2011. Magellan sold its interests in Mereenie to Santos as part of the Santos SA (see Note 2) effective May 25, 2012, and the results of operations for fiscal year 2012 reflect a revenue contribution from Mereenie through that date. United Kingdom
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 2-D seismic data. This seismic acquisition fulfilled our current work commitment under the licenses. These four licenses remain subject to contingent "drill-or-drop" requirements. This seismic data revealed several prospects, and an exploratory drilling program is under development. 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. The well was then suspended, and is now being assessed by Northern for further actions. 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 United Kingdom Department of Energy, in the 26th Licensing Round, announced it will award an exploration license (an offshore license) 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 license is an exploration 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 license consist of a contingent "drill-or-drop" well with a decision on drilling to be made before the end of Permit Year 2.

ACQUISITIONS AND DIVESTITURES
During the fiscal year, Magellan executed a series of corporate transactions aimed at streamlining our corporate structure, gaining control and operatorship of our core assets, and allowing management to execute its strategy of proving the value of its assets.
Santos Transactions
On May 25, 2012, Magellan completed the Santos SA which consolidated our ownership in the Palm Valley and Dingo. The transaction had an effective date of July 1, 2011, and resulted in net cash proceeds of $26.6 million, including adjustments of $1.1 million (reflecting activity between the effective date and closing date), in addition to a gain on sale of assets in the amount of $36.2 million. The impact of this transaction is reflected in the consolidated financial statements included in this report (see Note 2). Lease Purchase and Sale and Participation Agreement with VAALCO. On September 6, 2011, the Company entered into a Lease Purchase and Sale and Participation Agreement with VAALCO, pursuant to which VAALCO will receive, subject to certain obligations, an undivided 65% of the Company's working interests at Poplar in formations including and below the Bakken/Three Forks. In exchange, Magellan received $5.0 million in cash proceeds and will be carried for 100% of the capital expenditures on the first three wells VAALCO will drill at Poplar in the deeper formations, all of which wells are due to be spud before December 31, 2012. The Company also recognized a gain on sale of assets in the amount of $4.0 million (see Note 2).
Acquisition of Non-Controlling Interest in Nautilus Poplar LLC and Acquisition of Additional Working Interests.
On September 2, 2011, effective from September 1, 2011, the Company entered into a Purchase and Sale Agreement (the "Nautilus PSA") between the Company and the non-controlling interest owners of its subsidiary, NP, (the "Nautilus Sellers"). The Nautilus PSA provided for the Company's purchase of all membership interests in NP and working interests in the leases of Poplar from the Nautilus Sellers in return for (i) $4.0 million in cash, (ii) $2.0 million less certain adjustments in privately issued shares of Magellan's common stock, and (iii) the potential for future production payments, collectively, of up to $5.0 million if certain increased average daily production milestones are achieved. The impact of this transaction is reflected in the consolidated financial statements included in this report (see Note 2).

The Company and the Nautilus Sellers entered into a Registration Rights Agreement ("RRA"), pursuant to which the Company granted to the Nautilus Sellers certain registration rights with respect to the shares ("Registrable Securities") owned by each Nautilus Seller and issued under the Nautilus PSA. On October 14, 2011, the Company filed a registration statement on Form S-3 with the U.S. Securities Exchange Commission to register for public resale of 1,182,742 shares of the Company's common stock acquired in the Nautilus Restructuring by the Nautilus Sellers (the "Registration Statement"). On November 18, 2011, the Registration Statement on Form S-3 became effective. The Company agreed to pay all expenses associated with the registration of the Registrable Securities except the fees and disbursements of counsel to the Nautilus Sellers. The Company has no continuing obligation related to the RRA.

OTHER ITEMS
U.S. Federal Tax Withholdings
During the third quarter of fiscal year 2012, the Company identified a potential liability of approximately $2.0 million related to the Company's failure to make the required U.S. Federal tax withholding in the course of its initial acquisition of NP. In October 2009, Magellan acquired 83.5% of the membership interests in NP (the "Poplar Acquisition"), from the two majority owners of NP, White Bear LLC ("White Bear") and YEP I, SICAV-FES ("YEP I"). Both of these entities are affiliated with Mr. Bogachev, a Director of Magellan and a foreign national. Due to the status of YEP I as foreign entity and the members of White Bear being foreign nationals, Magellan was required to make U.S. Federal tax withholdings from the payments to or for the benefit of White Bear and YEP I. Of the $2.0 million liability, $1.3 million was estimated to relate to the interest sold by White Bear, $0.6 million to the interest sold by YEP I, and $0.1 million to Magellan's interest on late payment of the U.S. Federal tax withholdings. Upon the filing of U.S. income tax returns in relation to the Poplar Acquisition and payment of corresponding income taxes by White Bear and YEP I, Magellan is deemed to be relieved of its liability for the U.S. Federal tax withholdings as well as related penalties and interest except for Magellan's interest on late payment of the U.S. Federal tax withholdings. With regards to White Bear, Magellan has confirmed that as of the date of this filing, Mr. Bogachev has filed his U.S. income tax return and paid taxes due on the Poplar Acquisition, which were estimated at $0.3 million. Magellan has agreed to pay Mr. Bogachev $0.3 million in additional compensation. Had Mr. Bogachev not filed and paid his tax return, Magellan's liability in relation to its U.S. Federal tax withholdings requirements was estimated at $1.3 million as of June 30, 2012. With regards to YEP I, Magellan continues to seek from YEP I or, because YEP I is a now defunct entity, from its successor entities, the filing of its U.S. income tax return.
As of June 30, 2012, we have recorded a total liability of $1.0 million under accrued and other liabilities in the consolidated balance sheets related to this matter. That amount is comprised of the $0.3 million payment to Mr. Bogachev, $0.6 million in withholdings, penalties, and interest related to YEP I, and $0.1 million related to Magellan's interest on late payment of the U.S. Federal tax withholdings. The effect on the consolidated statements of operations for the year ended June 30, 2012, is an expense of $0.9 million recorded under general and administrative expense and an interest expense of $0.1 million (see Note 11).
Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering SEC Staff Accounting Bulletins Nos. 99 and 108, management believes that any amounts attributable to the years ending June 30, 2010, and 2011, and the impact of correcting such amounts in the year ending June 20, 2012, is not material to any of the Company's consolidated financial statements presented herein.

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 for which we are obligated pertaining to its leases and licenses, which allow for significant flexibility in the use of its capital resources. Based on its existing cash position including, the additional proceeds resulting 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. 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 39 producing wells. In the shallow intervals, which are 100% owned and operated by the Company, discretionary capital expenditure plans over the next two years will be determined by the results of ongoing engineering and technical analysis. In fiscal year 2013, the Company intends to evaluate the potential of CO2-EOR in the Charles formation at Poplar by drilling a five-well pilot, including one CO2 injector well and four producing wells. Magellan expects to incur up to $10.0 million in capital costs on these wells. Timing of the drilling of these wells will depend on the permitting process and drilling rig availability. The four producing wells are designed to yield conventional oil production from the Charles formation in addition to enhanced production as a result of the CO2-EOR. As such, these four wells will constitute a portion of the wells to be drilled in the projections of our proved undeveloped reserves.
In the deeper intervals, which are operated by VAALCO and in which the Company has a 35% working interest, capital expenditures will be determined by the results of the three test wells which VAALCO is required to have spud by the end of calendar year 2012, and for which VAALCO will bear 100% of the capital expenditures. If these test wells are deemed 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 November 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 expenditure plans are primarily focused on maintaining gas production from the existing facilities to meet the Santos Gas Contract demand 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 two suspended wells which are capable of production. The Company is currently evaluating a number of options for the future development of this field and is in the process of identifying potential new gas customers.
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 3-D seismic survey in 2012. Magellan currently plans to shoot 2-D and 3-D seismic over the permit in the second quarter of fiscal year 2013 at an estimated cost of less than $5.0 million, including the costs of processing and analyzing the seismic. Timing of the shoot is subject to finalization of our environment plans with local authorities and to the contract with the vessel and service provider. In the United Kingdom, 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 (for further detail, see Operations under Part 1, Items 1 and 2: Business and Properties). 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. The following table summarizes our obligations and commitments as of June 30, 2012, to make future payments under certain contracts, aggregated by category of contractual obligation, for specified time periods:

                                          Less than                                       More than 5
                            Total          1 year         1-3 years       3-5 years          years
                                                         (In thousands)
Purchase obligations (1) $    5,385     $     5,385     $         -     $          -     $          -
Asset retirement
obligations                   7,784             329           1,321                -            6,134
Contingent consideration
payable (2)                   4,072               -           4,072                -                -
Operating leases (3)          1,152              97             424              541               90
Long term debt,
including interest (4)          918             517             401                -                -
Total                    $   19,311     $     6,328     $     6,218     $        541     $      6,224

(1) Purchase obligations are attributable to certain exploration and capital expenditures related to MPAL.
(2) Assumptions for the timing of these payments are based on our reserve report and planned drilling activity.
(3) Operating lease obligations are shown net of guaranteed sublease income.
(4) Long term debt in this table includes the current portion and accrued interest of $48 thousand for the 6.25% note payable (see Note 3).

Sources of Funds
Cash and Cash Equivalents. On a consolidated basis, the Company had approximately $41.2 million of cash and cash equivalents at June 30, 2012, compared to $20.4 million as of June 30, 2011.
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. As of June 30, 2012, $39.7 million of the Company's consolidated cash and cash equivalents were deposited in accounts held by MPAL, of which $38.6 million was held in several Australian banks in time deposit accounts that have terms of 90 days or less. As of September 24, 2012, the company has repatriated $20.0 million of these Australian held funds to the U.S. The Company does not anticipate that U.S. Federal Income Tax will be owed on this amount. The intended use for the repatriated monies is the funding of Magellan's U.S. based operations, including part of its drilling activity at Poplar.
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. To the extent that the Company repatriates cash amounts from MPAL to the U.S., the Company is potentially 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 U.S. Treasury Bills with maturities usually not exceeding six months. As of June 30, 2012, and June 30, 2011, respectively, the Company had no marketable securities.
Existing Credit Facilities. The Company's outstanding borrowings are summarized below for the years ended:

                               June 30,
                           2012         2011
                            (In thousands)
Outstanding borrowings:
Term loan               $   870       $ 1,422
Line of credit               50             1
Total                   $   920       $ 1,423

The Company, through its wholly owned subsidiary NP, maintains its only credit facility with Jonah Bank of Wyoming. As of June 30, 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 $1.3 million term loan, $0.9 million was drawn as of June 30, 2012. Of the $1.0 million line of credit, $50 thousand 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 $900 thousand remained available to borrow. As of June 30, 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 from Poplar and are guaranteed by the Company up to $6.0 million but not to exceed the amount of the principal owed, which was $920 thousand as of June 30, 2012. . . .