CONTINENTAL ENERGY CORPORATION

(An Exploration Stage Company)

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

31 December 2009 and 2008

Expressed in U.S. Dollars

(Unaudited - Prepared by Management)

Reader’s Note:

These unaudited interim consolidated financial statements for the six months ended 31 December 2009 of Continental Energy Corporation (“CEC” or “the Company”) have been prepared by management and have not been reviewed by the Company’s auditors

Nature of Operations and Going Concern (Note 1)

ON BEHALF OF THE BOARD:

"Richard L. McAdoo"      , Director

"Robert V. Rudman"        , Director

- See Accompanying Notes -

- See Accompanying Notes -

- See Accompanying Notes -

- See Accompanying Notes -

Continental Energy Corporation (the “Company” or “Continental”) is an oil and gas exploration company engaged in the acquisition, exploration and development of oil and gas properties with the focus being on properties located in Indonesia held under production sharing contracts (“PSCs”). The Company is an exploration stage company and none of its oil and gas properties are currently generating revenue. The recovery of the Company’s investment in resource properties and attainment of profitable operations is principally dependent upon financing being arranged by the Company to continue operations, explore and develop the resource properties and the discovery, development and sale of oil and gas reserves. The outcome of these matters cannot presently be determined because they are contingent on future events.

These interim consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. Several adverse conditions cast doubt on the validity of this assumption. The Company has incurred operating losses over the past several fiscal years, has no source of operating cash flow, and no assurances that sufficient funding, including adequate financing, will be available to conduct further exploration and development of its oil and gas projects.

The Company’s ability to continue as a going concern is dependent upon its ability to obtain the financing necessary to acquire, explore and develop future oil and gas projects as well as funding ongoing administration expenses by issuance of share capital or through joint ventures, and to realize future profitable production or proceeds from the disposition of oil and gas interests acquired. There can be no assurance that management’s future financing actions will be successful. Factors that could affect the availability of financing include the Company’s performance, the state of international debt and equity markets, investor perceptions and expectations and the global financial and energy markets.

If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary to the carrying values of assets, liabilities, the reported income and expenses and the balance sheet classifications used and such adjustments could be material.

Goodwill and Intangible Assets (Section 3064)

Effective July 1, 2009 the Company adopted CICA HB Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Intangible Assets,” and CICA Section 3450, “Research and Development Costs,” and amendments to Accounting Guideline (“AcG”) 11, “Enterprises in the Development Stage,” and EIC-27, “Revenues and Expenditures During the Pre-operating Period” and CICA Section 1000, “Financial Statement Concepts.” The standard intends to reduce the differences with International Financial Reporting Standards (“IFRS”) in the accounting for intangible assets and results in closer alignment with US GAAP. Under current Canadian standards, more items are recognized as assets than under IFRS or US GAAP. The objectives of CICA Section 3064 are to reinforce the principle-based approach to the recognition of assets only in accordance with the definition of an asset and the criteria for asset recognition; and clarify the application of the concept of matching revenues and expenses such that the current practice of recognizing assets that do not meet the definition and recognition criteria are eliminated. The standard will also provide guidance for the recognition of internally developed intangible assets (including research and development activities), ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. The Company has evaluated the new section and determined that adoption of these new requirements has no impact on the Company’s consolidated financial statements.

International Financial Reporting Standards (“IFRS”)

In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canadian GAAP. This date is for interim and annual financial statements relating to fiscal years beginning on or after 1 January 2011. The Company’s transition date of 1 July 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended 30 June 2011. The Company is currently assessing the financial reporting impact of the transition to IFRS and the changeover date.

Business Combinations – Section 1582

In January 2009, the CICA issued Handbook Section 1582, “Business Combinations” (“CICA 1582”), CICA 1582 requires that all assets and liabilities of an acquired business will be recorded at fair value at acquisition. Obligations for contingent considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after January 1, 2011. The Company is currently assessing the impact of the new standard on its financial statements.

Consolidations and Non-controlling interest – Sections 1601 and 1602

In January 2009, the CICA issued Handbook Section 1601, “Consolidations” (“CICA 1601”), and Section 1602, “Non-controlling Interests” (“CICA 1602”). CICA 1601 establishes standards for the preparation of consolidated financial statements. CICA 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after 1 January 2011. The Company is currently assessing the impact of the new standard on its financial statements.

Management of financial risk

The Company’s financial instruments are exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.

Management of capital risk

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to pursue the development of its resource properties and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. As the Company is in the exploration stage, its principal source of funds is from the issuance of common shares. In the management of capital, the Company includes share capital as well as cash and receivables.

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, enter into joint venture property arrangements or acquire or dispose of assets. In order to maximize ongoing development efforts, the Company does not pay out dividends.

The Company’s investment policy is to invest its cash in highly liquid short-term interest-bearing investments, selected with regards to the expected timing of expenditures from continuing operations.

The Company is not subject to any externally imposed capital requirements.

Bengara-II Property

During the six months ended 31 December 2009, the Company incurred $997 in geological and geophysical interpretation and evaluation costs on the joint venture area of mutual interest surrounding the Bengara-II PSC in Indonesia. At 31 December 2009, no future benefits could be attributed to this property and consequently the capitalized cost were written off.

CGB2

By share purchase and transfer agreements with effective dates of 1 August 1998 and subsequent amendments between 30 September 1998 and 19 January 2000, the Company purchased 100% of the issued and outstanding shares of Continental-GeoPetro (Bengara-II) Ltd. (“CGB2”), a company incorporated in the British Virgin Islands which owned a 100% interest in the Bengara-II PSC in Indonesia.

The Company accounted for the acquisition of CGB2 using the purchase method of accounting for business combinations. On 1 January 2000, the Company farmed out 40% of its 100% interest in CGB2 and its respective underlying properties to GeoPetro.

On 29 September 2006, the Company sold 70% of its 60% interest in CGB2 to CNPC (Hong Kong) Limited (“CNPC-HK”) for a gain of $23,906 and an obligation by CNPC-HK to carry the Company's share of the costs of drilling 4 exploration wells. The Company retained an 18% shareholding of CGB2, which is recorded at $1 in these financial statements.

All of the Company’s oil and gas interests are unproven.

Details are as follows:

2009

On 29 December 2008, a total of 4,000,000 stock options were granted to advisors, directors, and employees having an exercise price of $0.15 per share and expiring on 31 December 2011. The Company calculated the fair value of these options to be $302,578 on the grant date which was charged to operations. The average grant date fair value of these stock options was $0.08.

On 2 December 2008, 1,000,000 stock options having an exercise price of $0.24 per share were cancelled as per an agreement with the former holder.

On 29 December 2008, a total of 1,900,000 stock options having an exercise price of $0.65 per share were cancelled as per written agreements with the former holders.

On 30 September 2008, a total of 100,000 stock options were granted to a consultant having an exercise price of $0.21 per share and expiring on 30 September 2011. The Company calculated the fair value of these options to be $12,054 on the grant date which was charged to operations. The average grant date fair value of these stock options was $0.12.

On 17 July 2008, a total of 500,000 stock options were granted to two advisors having an exercise price of $0.21 per share and expiring on 30 June 2011. The Company calculated the fair value of these options to be $61,495 on the grant date which was charged to operations. The average grant date fair value of these stock options was $0.12.

Total outstanding and exercisable

Details of outstanding share purchase options are as follows:

As at 31 December 2009, the following share purchase options were outstanding:

Total outstanding and exercisable

Details of outstanding share purchase warrants are as follows:

The fair value of each warrant issued and amended (Note 9d) is estimated on the grant date and date of amendment using the Black-Scholes option-pricing model with the following assumptions:

All related party transactions have been disclosed elsewhere in these consolidated financial statements, except as follows:

The above transactions, occurring in the normal course of operations, are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Subsequent to 31 December 2009, the Company made the following amendments to outstanding share purchase warrants and outstanding incentive stock options: A total of 4,975,000 outstanding share purchase warrants originally issued in conjunction with private placements made in the Company and having various exercise prices between $0.15 to $0.40 and terms expiring between 15 May 2010 and 16 September 2012 were amended to all have the same amended exercise price of $0.07 and same expiry date of 31 December 2011.

A total of 360,000 new incentive stock options were granted to employees having an exercise price of $0.07 per share and a term until 31 December 2011.

A total of 4,840,000 outstanding incentive stock options to directors and senior officers having various exercise prices between $0.15 to $0.24 and terms expiring between 31 December 2010 and 2011 were amended to all have the same amended exercise price of $0.07 and same expiry date of 31 December 2011.

A total of 3,250,000 outstanding incentive stock options to employees and consultants having various exercise prices between $0.20 to $0.24 were amended to all have the same amended exercise price of $0.07 but no change to their original expiry dates between of 31 December 2010 and 30 June 2011.

A total of 800,000 outstanding incentive stock options to employees having various exercise prices between $0.15 to $0.24 and terms expiring 31 December 2010 were amended to all have the same amended exercise price of $0.07 and same expiry date of 31 December 2011.

A total of 1,500,000 outstanding incentive stock options to employees and consultants having an exercise price of $0.15 and terms expiring 31 December 2011 were amended to all have the same amended exercise price of $0.07 and same expiry date of 31 December 2010.

MANAGEMENT’S DISCUSSION & ANALYSIS
FORM 51-102F1
CONTINENTAL ENERGY CORPORATION
For the Second Quarter Ended December 31, 2009 of the Fiscal Year Ending June 30, 2010

NATURE OF BUSINESS

Continental Energy Corporation (“Continental” or the “Company”) is an oil and gas exploration company engaged in the assembly of a portfolio of oil and gas exploration properties with high potential resource prospects. Continental is focusing its efforts in Indonesia where large tracts of acreage can be accumulated, there is a long and positive history of oil exploration success, and geological conditions are favorable for hydrocarbon accumulation. Continental owns an 18% participating interest in an Indonesian production sharing contract area covering 901,668 acres, the Bengara-II Block. Continental is an exploration stage company and none of its oil and gas properties currently generate revenue.

Our accompanying consolidated financial statements have been prepared using accounting principles generally accepted in Canada. Our fiscal year end is June 30^th. All reported amounts are in United States dollars unless otherwise noted.

The date of this report is as of February 19, 2010.

FORWARD-LOOKING INFORMATION

This management discussion and analysis (“MD&A”) contains certain forward-looking statements and information relating to Continental that are based on the beliefs of its management as well as assumptions made by and information currently available to Continental. When used in this document, the words “anticipate”, “believe”, “estimate”, “expect” and similar expressions, as they relate to Continental or its management, are intended to identify forward-looking statements. This MD&A contains forward-looking statements relating to, among other things, regulatory compliance, the sufficiency of current working capital, and the estimated cost and availability of funding for the continued exploration and development of the Company’s oil and gas properties. Such statements reflect the current views of Continental with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Aside from factors identified in the annual MD&A, additional important factors, if any, are identified here.

HIGHLIGHTS OF THE PAST QUARTER

The “Past Quarter” ended December 31, 2009 marks the end of the Second Quarter and the first 6 months of the Company’s annual fiscal year ending June 30, 2010. Significant events having material effect on the business affairs of the Company which have occurred during the Past Quarter are summarized below:

Authorized Capital of Preferred Shares Increased
In a press release dated November 11, 2009 the Company announced that it had increased its authorized capital to facilitate financing the Company’s business operations and expansion plans. The Company has increased the number of authorized preferred shares having no par value but with special rights and restrictions attached from 100,000,000 to 500,000,000. There is no change to the Company’s authorized common shares, having no par value, capital of 500,000,000.

Annual Reserves Report
In a press release dated November 11, 2009 the Company announced that it had posted its annual reserves report at fiscal year end June 30, 2009 in the form referred to in item 3 of section 2.1 of Canadian National Instrument 51-101 “Standards of Disclosure for Oil and Gas Activities” (“NI 51-101”).

Annual Report on Form 20F
The Company filed its Annual Report on Form-20F with the US Securities and Exchange Commission dated December 11, 2009 for its most recently completed financial year ended June 30, 2009.

AGM Held
The Company held its Annual General Meeting of shareholders on December 30, 2009. The board of directors was fixed at four. Richard L. McAdoo, Robert V. Rudman, Phillip B. Garrison, and David T.W. Yu were duly elected to the Board of Directors to serve for a term until the next Annual General Meeting. Dale, Matheson, Carr-Hilton, Labonte LLP was appointed for another term as the Company’s auditors.

Dallas Office Closed
The Company closed its Dallas office and terminated the consulting services of Dallas based representative, Chip Langston, effective at December 31, 2009.

USA Contact Office Moved to Tampa, Florida
The Company moved its USA representative office from Dallas to Tampa, Florida, where its principal point of contact for investors and shareholders resident in North America is now: 1413 South Howard Avenue, Suite 220, Tampa, Florida, 33606, phone 813-387-3310, fax 813-251-5684, Attn: Robert V. Rudman, Director and CFO.

Share Purchase Warrants Activity
During the Past Quarter, the following activity involving the Company’s share purchase warrants occurred:

Exercises - No outstanding share purchase warrants were exercised.

New Issues – No new share purchase warrants were issued.

Expiry - No outstanding share purchase warrants expired.

Amendments – No amendments were made to to the term of any outstanding share purchase warrants

Incentive Stock Options Activity
During the Past Quarter, the following activity involving the Company’s incentive stock options occurred:

Exercises - No outstanding incentive stock options were exercised.

New Grants – No new incentive stock options were granted.

Expiry - No outstanding incentive stock options expired.

Amendments - No amendments were made to the terms of any outstanding incentive stock options.

Shares Issues
During the Past Quarter, no new shares were issued

SUBSEQUENT EVENTS

The “Past Quarter” ended December 31, 2009 marks the end of the Second Quarter and the first 6 months of the Company’s annual fiscal year ending June 30, 2010. Significant events possibly having material effect on the business affairs of the Company which have occurred since the end of the Past Quarter but prior to publication of this report are summarized below:

Bengara-II Seismic Progress Updated

In a press release dated January 14, 2010 the Company updated the public on the progress on seismic acquisition underway in its Bengara-II Block, East Kalimantan, Indonesia. Continental’s 18% owned subsidiary Continental-GeoPetro (Bengara-II) Ltd. (“CGB2”) has commenced field acquisition operations on a two phase seismic acquisition program in the Bengara-II Block. The surveys include acquisition of 120 square kilometers of full-fold, high resolution 3D seismic data and a reconnaissance 2D survey totaling 844 line kilometers. The surveys are located to define new exploratory drilling targets and guide appraisal well placement. The estimated cost of the combined 2D and 3D surveys was approved by Indonesian oil regulators in 2009 at a budget of US$ 28.3 Million. At year end 2009 estimates that approximately a third of the budget has been expended on site preparations, materials, and mobilization. Regulators have approved a carry-over of the estimated remaining program amount of US$ 18.0 Million into budget year 2010. Survey work, particularly line cutting and shot-hole drilling, have been delayed and continue to be hampered by surface damages compensation claims involved with many prawn farms located in certain portions of the survey areas. CGB2 estimates acquisition of the 3D portion of the survey to be completed in March 2010 and the 2D portion to be completed in May. CGB2 expects to submit a revised budget for 2010 drilling plans in the Bengara-II Block once interpretation of the new seismic and selection of drilling locations is complete.

Share Purchase Warrants Activity
Subsequent to the end of the Past Quarter and up to the date of this report, the following activity involving the Company’s share purchase warrants occurred:

Exercises - No outstanding share purchase warrants were exercised.

New Issues – No new share purchase warrants were issued.

Expiry - No share purchase warrants expired.

Amendments – Amendments were made to outstanding share purchase warrants as follows:

• A total of 4,975,000 outstanding share purchase warrants originally issued in conjunction with private placements made in the Company and having various exercise prices between $0.15 to $0.40 and terms expiring between May 15, 2010 and September 16, 2012 were amended to all have the same amended exercise price of $0.07 and same expiry date of December 31, 2011.

Incentive Stock Options Activity
Subsequent to the end of the Past Quarter and up to the date of this report, the following activity involving the Company’s incentive stock options occurred:

Exercises - No outstanding incentive stock options were exercised.

New Grants – A total of 360,000 new incentive stock options were granted to employees having an exercise price of $0.07 per share and a term until December 31, 2011.

Expiry – No outstanding incentive stock options expired.

Amendments - Amendments were made to outstanding incentive stock options as follows:

• A total of 4,840,000 outstanding incentive stock options to directors and senior officers having various exercise prices between $0.15 to $0.24 and terms expiring between December 31, 2010 and 2011 were amended to all have the same amended exercise price of $0.07 and same expiry date of December 31, 2011.

• A total of 3,250,000 outstanding incentive stock options to employees and consultants having various exercise prices between $0.20 to $0.24 were amended to all have the same amended exercise price of $0.07 but no change to their original expiry dates between of December 31, 2010 and June 30, 2011.

• A total of 800,000 outstanding incentive stock options to employees having various exercise prices between $0.15 to $0.24 and terms expiring December 31, 2010 were amended to all have the same amended exercise price of $0.07 and same expiry date of December 31, 2011.

• A total of 1,500,000 outstanding incentive stock options to employees and consultants having an exercise price of $0.15 and terms expiring December 31, 2011 were amended to all have the same amended exercise price of $0.07 and same expiry date of December 31, 2010.

Shares Issues
Subsequent to the end of the Past Quarter and up to the date of this report, no new shares were issued.

SHAREHOLDING

As of the date of this report the Company had 69,747,381 common shares issued and outstanding.
As of the date of this report the Company had 10,750,000 unexercised stock options issued and outstanding.
As of the date of this report the Company had 15,325,000 unexercised warrants issued and outstanding.
As of the date of this report the Company had Nil preferred shares issued and outstanding.

RESULTS OF OPERATIONS

Financial Results for the First Quarter Ended December 31, 2009
The “Past Quarter” ended December 31, 2009 marks the end of the Second Quarter and the first 6 months of the Company’s annual fiscal year ending June 30, 2010.

Summary of Quarterly Results
The following table sets out selected unaudited quarterly financial information of Continental and is derived from unaudited quarterly consolidated financial statements as filed on SEDAR.

• Current Working Capital Situation
  As at December 31, 2009, the Company's interim consolidated financial statements reflect a working capital position of $82,657. This represents a decrease in the working capital of $445,381 compared to the June 30, 2009 working capital of $528,038. The main use of funds during the current period was the Company’s general and administrative expenditures during the period. The cash balance at December 31, 2009 was $116,060 compared to $591,930 as at June 30, 2009, a decrease of $475,870.
  
  The Company used $474,873 for operating activities during the six months ended December 31, 2009 compared with $500,911 in the six months ended December 31, 2008.
  
  The cash resources used for investing activities during the six months ended December 31, 2009 was $997 compared with $1,924,751 in the six months ended December 31, 2008.
  
  The cash resources provided by financing activities during the six months ended December 31, 2009 was $Nil compared with $Nil in the six months ended December 31, 2008.

• Investments
  The Company’s oil and gas property expenditures continue to be at a maintenance level until management decides to commence further exploration and development of its Indonesian properties.

• Finance
  There were no financing activities during the six months ended December 31, 2009 and 2008.
  
  On December 31, 2009, the Company had options outstanding granted to directors, officers and consultants to purchase an aggregate of 10,390,000 shares at prices ranging from $0.15 to $0.24 and expiring at varying dates between December 31, 2010 and September 16, 2012.
  
  On December 31, 2009, the Company had warrants outstanding to purchase an aggregate of 15,325,000 shares at prices ranging from $0.09 to $0.90 and expiring at varying dates between May 15, 2010 and September 16, 2012.

• Operations
  Overall, the Company had a loss from operations during the six months ended December 31, 2009 of $622,806 compared to $1,225,171 in the six months ended December 31, 2008. The Company had a loss per share of $0.01 in 2009 compared to a loss per share of $0.02 in 2008.
  
  During the current period the Company generated $2 in interest income compared with $6,310 in the prior period. The decrease is due to lower cash balances on hand during the current period.
  
  In the prior period, the Company wrote off its investment in Continental Biofuels amounting to $82,811. The Company did not have any similar write off during the six months ended December 31, 2009.
  
  General and administrative expenses decreased by $513,151 from $1,132,962 to $619,811 for the six months ended December 31, 2008 and 2009 respectively. The significant changes to general and administrative expenses are as follows. Management salaries and wages decreased $250,808 from $432,298 to $181,490 as the Company did not have a CFO in place during the current period as well as all other management taking a reduction in pay effective April 1, 2009. Office expenses decreased $26,493 from $78,920 to $52,427 as the former CFO’s Dallas office was closed during the prior year. Professional fees decreased by $30,209 from $108,402 to $78,193 partially due to not incurring the same amount of consulting fees for SOX 404 testing in the current period as well as the timing of corporate tax work done in the prior period. Travel and accommodation decreased by $48,687 from $64,747 to $16,060 as the Company was not working on any acquisition deals during the period that required extensive travel. The Company recorded stock-based compensation expense, relating to management and consulting contracts, of $165,864 for the six months ended December 31, 2009 compared to $376,127 in the six months ended December 31, 2008 for a decrease of $210,263. The current period expense relates to the options and warrants granted to Robert Rudman, the Company’s new CFO, Agoracom Investor Relations Corp. (“Agoracom”) and Aspen Capital Partners LLC (“Aspen”). Investor relations fees increased from $2,154 to $29,485. This is due to the Company commencing more investor relations activities with the engagement of Agoracom. Consulting fees increased from $Nil to $47,500 as the result of an agreement that was signed with Aspen in September. All other expense groups do not significantly differ from the prior period.

ADDITIONAL DISCLOSURE

The “Past Quarter” ended December 31, 2009 marks the end of the Second Quarter and the first 6 months of the Company’s annual fiscal year ending June 30, 2010.

Material Contracts & Commitments
During the Past Quarter, no new material contracts or commitments were undertaken and not elsewhere disclosed herein or in the unaudited and management prepared financial statements for the Past Quarter published herewith.

Related Party Transactions
During the Past Quarter, no new related party agreements, or modifications to existing agreements, of any kind were made by the Company which are not otherwise already disclosed herein or in the unaudited and management prepared financial statements for the Past Quarter published herewith.

Expenditures made by the Company to related parties during the Past Quarter and balances receivable from related parties as at the end of the Past Quarter are as follows:

• During the period, management, director and officer fees in the amount of $105,000 (2008 - $214,000) were paid or accrued to directors and officers of the Company.

• As at December 31, 2009, $1,880 (30 June 2008 - $Nil) is prepaid to a director of the Company relating to miscellaneous expenditure incurred on the Company’s behalf.

• As at December 31, 2009, $17,500 (30 June 2008 - $3,787) is payable to officers of the Company relating to outstanding management fees.

Investor Relations, Publicity and Promotion
During the Past Quarter, no new arrangements, or modifications to existing agreements, were made by the Company for investor relations services, publicity, promotion or advertising agreements which are not otherwise already disclosed herein.

Finder's Agreements, Financial Advice & Fund Raising
During the Past Quarter, no new arrangements, or modifications to existing agreements, were made by the Company relating to financial advice, fund raising or finder's agreements which are not otherwise already disclosed herein.

Significant Accounting Policies
The details of the Company’s accounting policies are presented in note 2 and elsewhere in the audited financial statements for the fiscal year ended June 30, 2009. The following policies are considered by management to be essential to understanding the processes and reasoning that go into the preparation of the Company’s financial statements and the uncertainties that could have a bearing on the financial results:

Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas operations, as prescribed by the Canadian Institute of Chartered Accountants, whereby all costs of exploring for and developing oil and gas reserves are capitalized and accumulated in cost centres established on a country-by-country basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, interest costs on significant investments in unproved properties and major development projects and overhead charges directly related to acquisition, exploration and development activities, less any government incentives relating thereto.

Upon establishing production, the costs related to each cost centre from which there is production, together with the costs of production equipment, will be depleted and amortized on the unit-of-production method based on the estimated gross proved reserves of each country. Oil and natural gas reserves and production will be converted into equivalent units based upon estimated relative energy content. Costs of acquiring and evaluating significant unproved properties will be initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment in value has occurred. When proved reserves are assigned or the value of the property is considered to be impaired, the cost of the property or the amount of the impairment will be added to costs subject to depletion.

The capitalized costs less accumulated amortization in each cost centre from which there is production will be limited to an amount equal to the estimated future net revenue from proved reserves (based on estimated future prices and costs at the balance sheet date) plus the cost (net of impairments) of unproved properties ("ceiling test"). The total capitalized costs less accumulated depletion and amortization and deferred taxes of all cost centres will be further limited to an amount equal to the estimated future net revenue from proved reserves plus the cost (net of impairments) of all unproved properties less estimated future general and administrative expenses, future financing costs and taxes.

The costs (including exploratory dry holes) related to cost centres from which there has been no commercial production are not subject to depletion until commercial production commences. The capitalized costs are assessed annually to determine whether it is likely such costs will be recovered in the future. Costs unlikely to be recovered in the future are written off.

Proceeds from the farm-out of oil and gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion and amortization.

Management’s Estimates
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Significant areas of assumptions are: impairment of resource properties and the assumptions used in calculating the fair value of options.

Change in Accounting Policies
Goodwill and Intangible Assets (Section 3064)
Effective July 1, 2009 the Company adopted CICA HB Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Intangible Assets,” and CICA Section 3450, “Research and Development Costs,” and amendments to Accounting Guideline (“AcG”) 11, “Enterprises in the Development Stage,” and EIC-27, “Revenues and Expenditures During the Pre-operating Period” and CICA Section 1000, “Financial Statement Concepts.” The standard intends to reduce the differences with International Financial Reporting Standards (“IFRS”) in the accounting for intangible assets and results in closer alignment with US GAAP. Under current Canadian standards, more items are recognized as assets than under IFRS or US GAAP. The objectives of CICA Section 3064 are to reinforce the principle-based approach to the recognition of assets only in accordance with the definition of an asset and the criteria for asset recognition; and clarify the application of the concept of matching revenues and expenses such that the current practice of recognizing assets that do not meet the definition and recognition criteria are eliminated. The standard will also provide guidance for the recognition of internally developed intangible assets (including research and development activities), ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. The Company has evaluated the new section and determined that adoption of these new requirements has no impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted
International Financial Reporting Standards (“IFRS”)
In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canadian GAAP. This date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010. In July 2008 AcSB announced that early adoption will be allowed in 2009 subject to seeking exemptive relief. The Company is currently assessing the financial reporting impact of the transition to IFRS and the changeover date.

Business Combinations – Section 1582

In January 2009, the CICA issued Handbook Section 1582, “Business Combinations” (“CICA 1582”), CICA 1582 requires that all assets and liabilities of an acquired business will be recorded at fair value at acquisition. Obligations for contingent considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after January 1, 2011. The Company is currently assessing the impact of the new standard on its financial statements.

Consolidations and Non-controlling interest – Sections 1601 and 1602

In January 2009, the CICA issued Handbook Section 1601, “Consolidations” (“CICA 1601”), and Section 1602, “Non-controlling Interests” (“CICA 1602”). CICA 1601 establishes standards for the preparation of consolidated financial statements. CICA 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The Company is currently assessing the impact of the new standard on its financial statements.

Capital Resources
The Company has no operations that generate cash flow and its long term financial success is dependant on management’s ability to discover economically viable oil and gas deposits. The oil and gas exploration process can take many years and is subject to factors that are beyond the Company’s control.

In order to finance the Company’s exploration programs and to cover administrative and overhead expenses, the Company raises money through equity sales and from the exercise of convertible securities. Many factors influence the Company’s ability to raise funds, including the health of the resource market, the climate for oil and gas exploration investment, the Company’s track record and the experience and caliber of its management.

With working capital of $82,657 at the December 31, 2009, the Company will not have sufficient funds to meet its administrative, corporate development and exploration activities over the next twelve months. Actual funding requirements may vary from those planned due to a number of factors. The Company believes it will be able to raise the necessary capital it requires, but recognizes there will be risks involved that may be beyond its control. During the Past Quarter the Company retained the services of a financial advisor and an investment banker who are actively sourcing capital for the Company.

Risks and Uncertainties
The Company has no history of profitable operations and its present business is at an early stage. As such, the Company is subject to many risks common to such enterprises, including under-capitalization, cash shortages and limitations with respect to personnel, financial and other resources and the lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders' investment and the likelihood of success must be considered in light of its early stage of operations.

The Company has no source of operating cash flow and no assurance that additional funding will be available to it for further exploration and development of its projects when required. Although the Company has been successful in the past in obtaining financing through the sale of equity securities or joint ventures, there can be no assurance that the Company will be able to obtain adequate financing in the future or that the terms of such financing will be favorable. Failure to obtain such additional financing could result in the delay or indefinite postponement of further exploration and development of its properties.

Recent degradation of the market conditions for the financing of equity and/or debt for oil and gas exploration and development companies has created additional uncertainty for future financing of the acquisition or development of the Company’s projects.

The Company’s property interests are located in remote, undeveloped areas and the availability of infrastructure such as surface access, skilled labour, fuel and power at an economic cost, cannot be assured. These are integral requirements for exploration, development and production facilities on oil and gas properties. Power may need to be generated on site.

Oil and gas exploration is a speculative venture. There is no certainty that the money spent on exploration and development will result in the discovery of an economic oil or gas accumulation. There is no assurance that the Company's exploration activities will result in any discoveries of commercial accumulations of oil or gas. The long-term profitability of the Company's operations will in part be related to the success of its exploration programs, which may be affected by a number of factors that are beyond the control of the Company.

The oil and gas industry is intensely competitive in all its phases. The Company competes with many other oil and gas exploration companies who have greater financial resources and technical capacity.

The market price of energy is volatile and cannot be controlled.

The Company is very dependent upon the personal efforts and commitment of its existing management. To the extent that management's services would be unavailable for any reason, a disruption to the operations of the Company could result, and other persons would be required to manage and operate the Company.

Fair Value of Financial Instruments

Management of capital risk
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to pursue the development of its resource properties and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. As the Company is in the exploration stage, its principal source of funds is from the issuance of common shares. In the management of capital, the Company includes the components of shareholders’ equity as well as cash and receivables.

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, enter into joint venture property arrangements or acquire or dispose of assets. In order to maximize ongoing development efforts, the Company does not pay out dividends.

The Company’s investment policy is to invest its cash in highly liquid short-term interest-bearing investments, selected with regards to the expected timing of expenditures from continuing operations.

The Company expects its current capital resources will be sufficient to carry its exploration and development plans and operations through its current operating period.

Management of financial risk
The Company’s financial instruments are exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.

Currency risk
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The Company operates in Canada and Indonesia and a portion of its expenses are incurred in Canadian dollars and Indonesian Rupiah. A significant change in the currency exchange rates between the Canadian dollar relative to the US dollar and the Indonesian Rupiah to the US dollar could have an effect on the Company’s results of operations, financial position or cash flows. The Company has not hedged its exposure to currency fluctuations. At December 31, 2009, the Company is exposed to currency risk through the following assets and liabilities denominated in Canadian dollars, Singapore dollars and Indonesian Rupiah:

Based on the above net exposures as at December 31, 2009, and assuming that all other variables remain constant, a 10% depreciation or appreciation of the US dollar against the Canadian dollar would result in an increase/decrease of $793 in the Company’s net earnings. Likewise, a 10% depreciation or appreciation of the US dollar against the Singapore dollar would result in a decrease/increase of $851 and a 10% depreciation or appreciation of the US dollar against the Indonesian Rupiah would result in a decrease/increase of $62 in the Company’s net earnings.

Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company’s cash is held by large Canadian and International financial institutions. The Company’s GST and other receivables consist of general sales tax due from the Federal Government of Canada. Management believes that the credit risk concentration with respect to receivables is remote.

Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Liquidity requirements are managed based on expected cash flows to ensure that there is sufficient capital in order to meet short term obligations. As at December 31, 2009, the Company had a cash balance of $116,060 (June 30, 2009 -$591,930) to settle current liabilities of $61,600 (June 30, 2009 - $69,738).

Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk that the Company will realize a loss as a result of a decline in the fair value of cash is limited. The Company periodically monitors the investments it makes and is satisfied with the credit ratings of its banks.

Price risk
The Company is exposed to price risk with respect to commodity prices. The Company closely monitors commodity prices to determine the appropriate course of action to be taken by the Company.

Additional Disclosure for Venture Issuers without Significant Revenue
Additional disclosure concerning Continental’s general and administrative expenses and resource property costs is provided in the Company’s Interim Consolidated Statement of Loss and Note 7 - Resource Property Costs contained in its Interim Consolidated Financial Statements for December 31, 2009.

Approval
The Board of Directors of Continental has approved the disclosure contained in this MD&A.

Additional Information
Additional information relating to Continental is available on SEDAR at www.sedar.com.

Claims, Contingencies & Litigation
Except for any contingencies elsewhere disclosed herein, or in the unaudited and management prepared, interim financial statements for the Past Quarter published herewith, the Company knows of no material, active or pending claims or legal proceedings against them; nor is the Company involved as a plaintiff in any material proceeding or pending litigation that might materially adversely affect the Company or a property interest of the Company.

CONTINUOUS DISCLOSURE & FILINGS - CANADA

Additional disclosure is made on a continuous basis through periodic filings of Company financial information, significant events, including all press releases and material change reports and disclosure of new or changed circumstances regarding the Company. Unaudited quarterly financial statements are filed by the Company with the British Columbia Securities Commissions (“BCSC”) for each fiscal quarter. Shareholders and interested parties may obtain downloadable copies of mandatory filings made by the Company with Canadian securities regulators on the internet at the “SEDAR” website www.sedar.com which is the “System for Electronic Document Archiving and Retrieval”, employed by Canadian securities regulatory commissions to enable publicly traded companies to electronically file and archive documents and filings in compliance with applicable laws and securities trading regulations. The Company began filing on SEDAR in 1997. All Company filings made on SEDAR during the Past Quarter and up to the date of this filing are incorporated herein by this reference.

CONTINUOUS DISCLOSURE & FILINGS - USA

The Company is also a full reporting issuer and filer of US Securities and Exchange Commission (“US-SEC”) filings. US-SEC filings include Form 20F annual reports and audited financial statements. Interim unaudited quarterly financial reports in this format together with press releases and material contracts and changes are filed under Form-6K. The Company has filed electronically on the US-SEC’s EDGAR database commencing with the Company’s Form 20F annual report and audited financial statements since its fiscal year end 2004. See website www.sec.gov/edgar/searchedgar/webusers.htm. Prior to that event the Company filed with the US-SEC in paper form. All Company filings made to US-SEC during the past fiscal year and during the Past Quarter and up to the date of this filing are incorporated herein by this reference.

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Form 52-109FV2
Certification of interim filings – OTC reporting issuer basic certificate

I, Robert V. Rudman, Chief Financial Officer of Continental Energy Corporation, certify the following:

Form 52-109FV2
Certification of interim filings – OTC reporting issuer basic certificate

I, Richard L. McAdoo, Chief Executive Officer of Continental Energy Corporation, certify the following: