EMERALD RESOURCES NL — Annual Report 2007

Sep 26, 2007

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Emerald Oil & Gas NL ABN: 72 009 795 046

Annual Financial Report 30 June 2007

EMERALD OIL & GAS NL ACN: 009 795 046

Contents Page

CORPORATE INFORMATION ...................................................................................1 DIRECTORS’ REPORT .............................................................................................2 AUDITORS INDEPENDENCE DECLARATION ..........................................................14 CORPORATE GOVERNANCE STATEMENT ...............................................................15 INCOME STATEMENT............................................................................................18 BALANCE SHEET...................................................................................................19 STATEMENT OF CHANGES IN EQUITY...................................................................20 CASH FLOW STATEMENT ......................................................................................22 NOTES TO THE FINANCIAL STATEMENTS .............................................................23 DIRECTORS DECLARATION ..................................................................................49 INDEPENDENT AUDIT REPORT.............................................................................50

This financial report covers both Emerald Oil & Gas NL as an individual entity and the consolidated entity consisting of Emerald Oil & Gas NL and its subsidiaries. The financial report is presented in the Australian currency.

Emerald Oil & Gas NL is a company limited by shares, incorporated and domiciled in Australia. It’s registered office and principal place of business is:

Emerald Oil & Gas NL Level 2 16 Altona Street West Perth WA 6005

A description of the nature of the consolidated entity’s operations and its principal activities is included in the review of operations and activities in the directors’ report on pages 2 to 13, which does not form part of this financial report.

The company has the power to amend and reissue the financial report.

EMERALD OIL & GAS NL ACN: 009 795 046

Corporate Information

Directors:

Jeremy Shervington Chairman

John Hannaford Executive Director – Finance; Company Secretary

Robert Berven Executive Director - Technical

Morgan Barron Company Secretary

Registered & Principal Office:

Level 2, 16 Altona Street WEST PERTH WA 6005 Telephone: + 618 9482 0510 Facsimile: + 618 9482 0505

Postal Address: P.O. Box 902 WEST PERTH WA 6872

Auditors: Ernst & Young 11 Mounts Bay Road PERTH WA 6000

Solicitors: Jeremy Shervington 52 Ord Street WEST PERTH WA 6005

Home Stock Exchange: Australian Stock Exchange Limited Exchange Plaza 2 The Esplanade PERTH WA 6000 ASX Codes – EMR, EMRO

Share Registry: Security Transfer Registrars Pty Ltd PO Box 535 APPLECROSS WA 6953 Telephone (08) 9315 2333

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Directors’ Report

EMERALD OIL & GAS NL ACN: 009 795 046

Your Directors have pleasure in submitting their report on the consolidated entity for the “group”; being the company and its controlled entities, for year ended 30 June 2007.

DIRECTORS

The names and details of Directors in office at any time during the financial year are:

Jeremy Shervington B.Juris, LLB (51) (appointed 23 January 2006) Non Executive Chairman

Experience and Expertise

Mr Shervington operates a legal practice in Western Australia. He specialises in the laws regulating companies and the securities industry in Australia. Mr Shervington has 25 years experience as a lawyer, gained since his admission as a Barrister and Solicitor of the Supreme Court of Western Australia. Mr Shervington has since 1985 served as a director of various ASX listed companies as well as a number of unlisted public and private companies.

Other Current Directorships

Non Executive Director, Australian Zircon NL Non Executive Director, Prairie Downs Metals Limited Non Executive Director, Colonial Resources Limited Non Executive Director, Western Uranium Limited Non Executive Director, Altera Capital Ltd Non Executive Director, Industrial Minerals Corporation Limited

Other Directorships in the last three years

Non Executive Director, BioProspect Ltd Non Executive Director, Biron Apparel Limited Non Executive Director, Riversdale Mining Limited

Robert Berven BEng (Geol), MSc (Geol), Saskatchewan (66) (appointed 14 June 2006)

Executive Director – Technical

Experience and Expertise

Mr Berven is a professional Geologist, with over 40 years experience in the petroleum and mining industries in North America and Australasia. Mr Berven is a member of the Australasian Institute of Mining and Metallurgy, the American Association of Petroleum Geologists, the Petroleum Exploration Society of Australia and the Australian Institute of Company Directors.

Other Current Directorships

None

Other Directorships in the last three years

None

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EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

John Hannaford BCom (UWA), C.A., F.Fin. (41) (appointed 14 June 2006) Executive Director - Finance, Company Secretary

Experience and Expertise

Mr Hannaford is a Chartered Accountant who has worked in various corporate roles within the resources sector in Australia, Asia and Europe. Mr Hannaford is a Fellow of the Financial Services Institute of Australasia, an Associate of the Institute of Chartered Accountants in Australia and holds a Bachelor of Commerce Degree.

Other Current Directorships

Non Executive Director, NeuroDiscovery Limited Non Executive Director, Atlantic Limited (appointed 4 July 2007)

Other Directorships in the last three years

Non Executive Director, Haddington Resources Limited

COMPANY SECRETARY

John Hannaford was appointed to the position of company secretary on 27 February 2006. As Mr Hannaford is also a Director of the company, details of his qualifications and experience are included above under the heading “Directors”.

Morgan Barron was appointed to the position of joint company secretary on 25 July 2007. Morgan Barron is a qualified Chartered Accountant who has worked in various corporate roles both in Australia and Europe. He has been involved in a number of company secretarial functions and ASX junior transactions.

PRINCIPAL ACTIVITIES

The principal activities of the Group were the exploration and development of oil and gas properties in the United States of America and Australia.

RESULTS

The net loss of the Group for the financial year 30 June 2007 after income tax amounted to $1,927,572.

DIVIDENDS PAID OR RECOMMENDED

No dividend was paid or declared during the financial year and the Directors do not recommend the payment of a dividend.

OPERATING AND FINANCIAL REVIEW

During the financial year Emerald participated in the drilling of four wells in the USA. Two wells drilled at the Greenbush project in North Dakota were unsuccessful, as was the well drilled at the Glamour Girl Prospect in South Texas. The RJ Hunter #1 well drilled at the NW Alice Prospect in Jim Wells County, Texas was a multi-zone gas discovery in the Yegua sands. Further details are included below.

Subsequent to the end of the financial year the Company commenced drilling two exploration wells in Texas as well as the first of a two well program at the EP104/R1 project in the Canning Basin of Western Australia. Further details are included under “Significant Events After Balance Date”.

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EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

USA PROJECTS

Greenbush Project, Ward County, North Dakota (Emerald 15% working interest)

The J. Brekhus #1-14 well at the Greenbush project was spudded in July 2006. The well was plugged and abandoned on 27 July 2006, after all objectives were encountered in a structurally low position. Following consultation with working interest partners, the second well Duff #1-24 was deferred pending acquisition of new 3-D seismic data over the prospect. A 3-D seismic survey was completed during the year which allowed more accurate mapping of the structural and stratigraphical targets in this geologically complex area.

The Egeberg #1 well was spudded on 18 May 2007. The Operator Golden Eye Resources LLC reported that during drilling the DST tool became differentially stuck when attempting to pull it out of the hole. Core analysis and petrophysics indicated that the 61 foot Kisbey sand interval had a number of oil shows but was found to be water bearing. An oil show at a higher zone in the Bluell carbonate from 5,895 to 5,905 feet was assessed from wire line logs to be uneconomic and the well was plugged and abandoned.

Emerald earned a 15% working interest in the 7,181 gross-acre (6,821 net acres) Greenbush Prospect through its participation in both wells.

A further assessment of the project potential including two deeper Devonian reef targets is now being carried out by the operator Golden Eye Resources LLC. The 3-D seismic data should enable accurate mapping of these potential reefs.

NW Alice Project, Jim Wells County, Texas (Emerald 10% working interest)

Emerald signed a participation agreement to earn a 10% interest in the NW Alice Project located in Jim Wells County Texas, by contributing a 13.33% proportionate share of drilling costs to casing point in the first well. On April 2, 2007 Emerald announced that the RJ Hunter # 1 well at the NW Alice Project had discovered several gas-bearing zones within the target Yegua formation. Following its review of all drilling data including Schlumberger logs and sidewall core analysis the Operator, Noble Energy proceeded to run production casing to a total depth of 8,500 feet. However, a series of down-hole mechanical issues prevented successful completion of the RJ Hunter #1 well.

Operator Noble Energy is currently conducting a 3-D seismic survey over this large structure and following processing and interpretation will drill a follow up well.

Glamour Girl Project, Jim Hogg County, Texas (Emerald 15% working interest)

The Operator Anderson Oil spudded the Barfield #1 well on 4 April 2007 and reached target depth of 8,300 feet on 24 April 2007. The main objective Queen City "B" sand was encountered 40+ feet high to the offset, however the sand was found to be slightly thinner and the porosity had decreased from that in the Arco well. The final lot of sidewall cores from this sand interval showed formation water underlying the gas-bearing section. Log analysis showed the gas-bearing zone to be too thin and tight to be commercially viable. The partners in the well agreed to plug and abandon the well after disappointing wire line log and sidewall core results. Several other thin, gas-bearing sands were also encountered in the Queen City formation but porosities were deemed too low to produce at commercial rates. The well was plugged and abandoned on 27 April 2007.

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EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

Hope Project, Lavaca County, Texas (Emerald earning a 6.87% working interest)

On 30 April, 2007 Emerald announced that it had entered into an agreement to participate in a 6.87% interest in the Hope Prospect, to be drilled in October 2007. The operator Main Energy is an experienced South Texas explorer and producer.

The Hope Prospect is located in the South Texas Basin in Lavaca County, Texas, 80 miles east southeast of San Antonio. It is on trend with prolific Upper and Lower Wilcox Sand production. Approximately 1,300 acres are currently under lease and the proposed total depth is a 10,500 feet well which is a “non-pipe” test.

Seismic data shows a 50-foot structural gain to a previous well, yielding potentially 65 feet of hydrocarbon column. Reserve potential for the Hammon sand is 25 BCF. Potential resources for the Roeder sand at Hope Prospect exceed 40 BCF. Total resources for Roeder and Hammon sand is 65 BCF of gas.

Pandura Project, Webb County, Texas (Emerald earning 15% Working Interest)

Emerald announced it had reached agreement with Daytona Energy Corporation (“Daytona”) in relation to Emerald’s participation in the Pandura project located in Webb County, Texas. Under the agreed terms Emerald is to pay 21.1875% of the dry hole cost and 15.75% of the completion costs of the Kathleen Marie #2 well to earn a 15.0% working interest post completion in the Pandura leases.

This revised agreement was possible after the Operator had secured new leases covering the project area. The lease renewal process had been delayed by the absence of one of the part-owners of the main lease, forcing the Operator to pursue a court process to secure the lease for renewal. Under the agreement with Daytona, Emerald is not liable for any costs of the lease renewals or associated costs, only it’s pro rata share of drilling costs.

The project was drilled subsequent to the end of the financial year. The Company continues to assess and evaluate new project opportunities in USA.

WESTERN AUSTRALIA

EP104/R1 Project, Canning Basin

(Emerald earning 12.75% working interest)

In May 2007 Emerald reached an agreement with ARC Energy Limited (“ARC”) whereby Emerald assigned to ARC a part of its earn-in interest in the EP104/R1 licences in the Canning Basin. Under the terms ARC will pay 12% of the agreed earn-in expenditure for a 6% working interest in the licences.

Emerald retains the right to earn a 12.75% interest (previously 18.75%) in the EP104/R1 licences for payment of 13% of the costs of the first well (previously 25%).

The Joint Venture approved a program to drill two wells from the same location commencing in August 2007, as follows:

1. Valentine: vertical well to test the Valentine prospect which has the potential to contain up to 1 TCF of gas if hydrocarbons are present;

2. Stokes Bay: deviated well to test the Stokes Bay prospect which is following up the Point Torment gas discovery and has the potential to contain up to 80 BCF of gas and 10.3m bbls condensate.

3. 5 -

EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

RESULTS

The net loss for the year after tax was $1,927,572 (2006:$497,836). This increased loss reflected the exploration activities for the full year, including impairment of exploration expenditure of $997,563. Cash outflows for exploration expenditure of $1,491,058 were recorded in the year compared with $821,345 in the previous financial period.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

During the financial year Emerald entered into participation agreements to earn interests in three (3) new exploration projects in South Texas. Initial wells were drilled at two (2) projects - NW Alice and Glamour Girl. The first well on the third project (Hope) is planned for the fourth quarter of 2007.

Emerald withdrew from the Sharon North project (Mississippi) and the Progresso project (South Texas) operated by TSX listed Daytona Energy Corporation. The Company renegotiated its interest in the Pandura project to achieve more favourable terms following renewal of the project leases by Daytona Energy. The Kathleen Marie #2 well was drilled at the Pandura project subsequent to the end of the year.

SIGNIFICANT EVENTS AFTER THE BALANCE DATE

Placement

Since balance date the Company has issued the remaining shares and options under the placement announced in May 2007. Following shareholder approval the remaining 12,750,000 shares at 18 cents each and 6,375,000 attaching listed options were issued on 2 July 2007. At 30 June 2007 the financial report includes an amount of $2,295,000 in cash at bank relating to subscriptions received in advance relating to these shares issued. A similar amount of $2,295,000 is included as Current Liabilities for subscriptions in advance.

EP104/R1 Canning Basin, Western Australia (Emerald 12.75% working interest)

The Valentine 1 well was spudded on 13 August 2007 at the EP104/R1 project in the Canning Basin of Western Australia. The Operator reached total depth of 3430m on 25 September 2007 and recommended logging then plugging the well after minor sub-economic gas shows in the well.

Pandura Project, Webb County, Texas (Emerald earning 15% Working Interest)

On 5 July 2007 Emerald announced it had reached agreement with Daytona Energy Corporation (“Daytona”) in relation to Emerald’s participation in the Pandura project located in Webb County Texas, USA. Under the agreed terms Emerald committed to pay 21.1875% of the dry hole cost and 15.75% of the completion costs of the Kathleen Marie #2 well to earn a 15.0% working interest post completion in the Pandura leases.

This revised agreement was possible after Daytona had secured new leases covering the project area. The lease renewal process had been delayed by the absence of one of the part-owners of the main lease, forcing the Operator to pursue a court process to secure the lease for renewal. Under the agreement with Daytona, Emerald is not liable for any costs of the lease renewals or associated costs, only it’s pro rata share of drilling costs.

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EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

On 8 August 2007 Emerald announced that the Operator had spudded the Kathleen Marie #2 well. The well reached 8,500 feet total depth on 10 September 2007. Despite encouraging gas shows from the Lobo sands none were concluded to be of economic widths or porosity to support a commercial well and the well was plugged and abandoned.

Palito Blanco Project, Jim Wells and Duval Counties, Texas (Emerald earning 15% working interest)

Subsequent to the end of the financial year Emerald entered into an agreement with Oso Exploration to participate in a 15% interest in the Palito Blanco exploration project in Jim Wells and Duval counties Texas. On 26 August 2007 the Operator spudded the Jaime Garcia Gas Unit #2 well. At the date of this report the well has reached a depth of 7,100 feet, with a total planned depth of 8,250 feet.

LIKELY DEVELOPMENTS

As detailed above, the Company is participating in the Jaime Garcia Gas Unit #2 well at the Palito Blanco project in Texas. At the date of this report the well is nearing its target depth. Depending on the outcome of the drilling after the date of this report, the company will announce the results of the well, which, if successful, may lead to further development and eventual gas production. Completion and development will involve further costs to Emerald however this will also raise the prospect of future production revenues to the Company. Alternatively if the well is unsuccessful the Company may withdraw from the project without further exposure to costs.

Apart from the foregoing there are no likely developments in the operations of the company that were not finalised at the date of this report. Further information as to likely developments in the operations of the Group and company and likely results of those operations would in the opinion of the Directors, be likely to result in unreasonable prejudice to the group.

ENVIRONMENTAL REGULATION

The Directors believe that the consolidated entity has, in all material respects, complied with all particular and significant environmental regulations relevant to its operations.

The Group’s operations are subject to various environmental regulations under the Federal and State Laws of the United States and Australia. The majority of the Group’s activities involve low level disturbance associated with its production facilities and exploration drilling programs. Approvals, licences and hearings and other regulatory requirements are performed by the operators of each permit or lease on behalf of Joint Ventures in which the group participates.

INSURANCE OF OFFICERS

There are no insurance arrangements in place for Directors or other officers of the company.

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Directors’ Report

EMERALD OIL & GAS NL ACN: 009 795 046

DIRECTORS’ INTERESTS IN THE SHARES AND OPTIONS OF THE COMPANY

As at the date of this report, the interests of the Directors in ordinary shares, listed and unlisted options of the company were:

	Shares	Shares	Listed Options	Listed Options	Unlisted Options	Unlisted Options
Director	Held Directly	Held Indirectly	Held Directly	Held Indirectly	Held Directly	Held Indirectly
J. Shervington	-	1,437,982	-	1,337,982	-	1,567,577
R. Berven	30,000	3,249,054	10,000	130,000	-	1,000,000
J. Hannaford	1,188,042	1,561,571	-	100,000	-	2,250,000
Total	1,198,042	6,248,607	10,000	1,567,982	-	4,817,577

MEETINGS OF DIRECTORS’

During the financial year, nineteen meetings of directors were held with the following attendances:

Directors	Meetings Attended	Meetings Eligible to Attend
J. Shervington	19	19
R. Berven	19	19
J. Hannaford	19	19

The above included 7 Circular Resolution meetings held during the year.

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors, executives and key management personnel of the company in accordance with the requirements of the Corporations Act 2001 and its regulations. For the purposes of this report Key Management Personal (KMP) of the group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the company and the group, directly or indirectly, including any director (whether executive or otherwise) of the parent company, and includes the five executives in the parent and the group receiving the highest remuneration.

The remuneration report is set out under the following main headings:

a) Principles used to determine the nature and amount of remuneration

b) Details of remuneration

c) Service agreements

d) Share-based compensation

e) Additional information

The information provided under headings A-D includes remuneration disclosures that are required by paragraphs Aus 25.4 to Aus 25.7.2 of Accounting Standard AASB 124 “Related Party Disclosures”. These disclosures have been transferred from the financial report in accordance with Corporation Regulation 2M. 6.04 and have been audited. The disclosures in Section E are additional disclosures required by the Corporations Act 2001 and the Corporations Regulations 2001 which have not been audited.

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Directors’ Report

EMERALD OIL & GAS NL ACN: 009 795 046

REMUNERATION REPORT (CONTINUED)

a) Principles used to determine the nature and amount of remuneration (audited)

The remuneration policy of the company has been designed to align director and executive objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific long-term incentives based on key performance areas affecting the consolidated entity’s financial results. The board believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best key management personnel and directors to run and manage the consolidated entity. The key management personnel of the company are the executive Directors.

The board’s policy for determining the nature and amount of remuneration for board members and key management personnel of the consolidated entity is as follows:

The remuneration policy, setting the terms and conditions for the executive directors and key management personnel, was developed by the board. All key management personnel are remunerated on a consultancy basis based on services provided by each person. The board reviews key management personnel packages annually by reference to the consolidated entity’s performance, executive performance and comparable information from industry sectors and other listed companies in similar industries.

The board may exercise discretion in relation to approving incentives, bonuses and options. The policy is designed to attract the highest calibre of key management personnel and reward them for performance that results in long-term growth in shareholder wealth.

Key management personnel are also entitled to participate in the employee share and option arrangements.

As consultants, executive directors and other key management personnel do not receive any superannuation contributions, or any other retirement benefits.

The board policy is to remunerate non-executive directors at market rates for comparable companies for time, commitment and responsibilities. The board determines payments to the non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. Independent external advice is sought when required. The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by shareholders at the annual general meeting (currently $200,000). Fees for non-executive directors are not linked to the performance of the consolidated entity. However, to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the company and are able to participate in employee option plans that may exist from time to time.

Performance based remuneration

The remuneration policy has been tailored to increase goal congruence between shareholders and directors and key management personnel. Currently, this is facilitated through the issue of options to key management personnel to encourage the alignment of personal and shareholder interests. The company believes this policy will be effective in increasing shareholder wealth. For details of directors and key management personnel interests in options at year end, refer note 7(d).

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Directors’ Report

EMERALD OIL & GAS NL ACN: 009 795 046

REMUNERATION REPORT (CONTINUED)

b) Details of remuneration (audited)

Details of the remuneration of the directors and the key management personnel of Emerald Oil & Gas NL are set out in the following table.

Key management personnel of Emerald Oil & Gas NL (Company and consolidated entity)

entity)
2007	Short term	benefits	Share based		% performance
			payments	Total	related
	Salary	Non	Options
	and Fees	Monetary
	$	$	$	$	%
Directors
Non-Executive
Jeremy Shervington	40,000	-	34,580	74,580	46.37%
(Chairman)
Directors Executive
Robert Berven(1)	63,890	-	34,580	98,470	35.11%
John Hannaford(2)	130,000	-	51,870	181,870	28.52%
Total	233,890	-	121,030	354,920	34.10%
2006	Short term	benefits	Share based		% performance
			payments	Total	related
	Salary	Non	Options
	and Fees	Monetary
	$	$	$	$	%
Directors
Non-Executive
Jeremy Shervington	-	-	64,740	64,740	100%
(Chairman)
Adam Rankine-Wilson(3)	-	-	18,000	18,000	-
Alistair Coulthard(3)	-	-	6,000	6,000	-
Directors Executive
Robert Berven(1)	13,000	-	28,950	41,950	69.01%
John Hannaford(2)	70,000	15,000	43,425	128,425	33.81%
Total	83,000	15,000	161,115	259,115	58.32%

1) Payments were made to Berven Consultants Pty Ltd, a company associated with Mr Berven by the consolidated entity ($63,890, 2006: $13,000), for the provision of technical consulting and director’s fees.

2) Payments for consulting services as financial director were made to Ventnor Capital Pty Ltd, a company associated with Mr Hannaford, by the consolidated entity ($120,000, 2006:$70,000). Director fees of $10,000 (2006: Nil) were paid to Riverview Corporation Pty Ltd, a company in which Mr Hannaford has a beneficial interest.

3) Resigned on 14 June 2006.

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EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

REMUNERATION REPORT (CONTINUED)

c) Service agreements (audited)

• J Shervington, Non-Executive Chairman

• Monthly contract, agreed and reviewed annually at Annual General Meeting

• • Director fees of $48,000 per annum

• There are no termination benefits or provisions in the contract.

• J Hannaford, Executive Director, Finance & Company Secretary

• Monthly contract, agreed and reviewed annually at Annual General Meeting

• Director fees of $12,000 per annum paid to Riverview Corporation Pty Ltd

• There are no termination benefits or provisions in the contract.

• R Berven, Executive Director, Technical

• Monthly contract, agreed and reviewed annually at Annual General Meeting

• Director fees of $12,000 per annum paid to Berven Consultants Pty Ltd

• There are no termination benefits or provisions in the contract.

d) Share-based compensation (audited)

Details of the share based remuneration of the directors and the key management personnel (as defined in AASB 124 Related Party Disclosures) of the company are set out in the following table. The options were issued to directors during the period as part of their remuneration and as incentive options to increase goal convergence between directors and shareholders. The options are granted under the plan for no consideration. Options granted under the plan carry no dividend or voting rights.

Key management personnel of Emerald Oil & Gas NL (parent and consolidated entity)

Options Granted as part of remuneration

2007	2007
Granted		Terms & Conditions for each Grant								Vested
Directors	No Granted	Grant Date		Fair Value at Grant Date		Exercise Price per Option	Expiry Date	First Exercise Date	Last Exercise Date	No	%
J.Shervington	-	26/06/06		$0.0669		$0.30	31/12/09	26/06/07	31/12/09	600,000	100%
R. Berven	-	26/06/06		$0.0669		$0.30	31/12/09	26/06/07	31/12/09	500,000	100%
J.Hannaford	-	26/06/06		$0.0669		$0.30	31/12/09	26/06/07	31/12/09	750,000	100%
2006
Granted				Terms		& Conditions for each Grant				Vested
Directors	No Granted	Grant Date		Fair Value at Grant Date		Exercise Price per Option	Expiry Date	First Exercise Date	Last Exercise Date	No	%
J.Shervington	367,577	23/01/06		$0.001		$0.1768	23/01/10	23/01/06	23/01/10	367,577	100%
	600,000	26/06/06		$0.0579		$0.25	31/12/08	26/06/06	31/12/08	600,000	100%
	600,000	26/06/06		$0.0669		$0.30	31/12/09	26/06/07	31/12/09	-	-
R. Berven	500,000	26/06/06		$0.0579		$0.25	31/12/08	26/06/06	31/12/08	500,000	100%
	500,000	26/06/06		$0.0669		$0.30	31/12/09	26/06/07	31/12/09	-	-
J.Hannaford*	750,000	26/06/06		$0.0579		$0.25	31/12/08	26/06/06	31/12/08	750,000	100%
	750,000	26/06/06		$0.0669		$0.30	31/12/09	26/06/07	31/12/09	-	-
A. Rankine- Wilson	220,545	23/01/06		$0.001		$0.1768	23/01/10	23/01/06	23/01/10	367,577	100%
A. Coulthard	73,515	23/01/06		$0.001		$0.1768	23/01/10	23/01/06	23/01/10	367,577	100%

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Directors’ Report

EMERALD OIL & GAS NL ACN: 009 795 046

REMUNERATION REPORT (CONTINUED)

e) Additional information (un-audited)

Principles used to determine the nature and amount of remuneration: relationship between remuneration and company performance

The overall level of executive reward takes into account the performance of the Group over a number of years, with greater emphasis given to the current and prior year.

* END OF REMUNERATION REPORT***

PROCEEDINGS ON BEHALF OF THE COMPANY

No person has applied to the Court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings.

The company was not a party to any such proceedings during the year.

SHARE OPTIONS

Shares under Option

At the date of this report there are 42,092,377 unissued shares under option outstanding.

Date Granted	Expiry Date	Exercise Price	Number shares under option
23/01/06 26/06/06 26/06/06 26/06/06 26/06/06 11/10/06 31/05/07 2/07/07	23/01/11 31/05/08 31/12/08 31/12/09 28/02/10 31/12/09 31/05/08 31/05/08	*$0.1768 $0.20 $0.20 $0.25 $0.25 $0.25 $0.20 $0.20	*661,638 27,230,739 2,000,000 2,000,000 1,500,000 325,000 2,000,000 6,375,000
			42,092,377

• Post consolidation

These options do not entitle the holders to participate in any share issue of the company or any other body corporate. No shares where issued as a result of the exercise of an option.

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EMERALD OIL & GAS NL ACN: 009 795 046

Directors’ Report

NON-AUDIT SERVICES

No fees for non-audit services were paid or payable to the external auditors during the year ended 30 June 2007.

During the year the following fees were paid or payable for services provided by the auditors.

Audit Fees	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 32,300 31,006 32,300 24,000

AUDITORS INDEPENDENCE DECLARATION

The auditors’ independence declaration as required under section 307C of the Corporations Act 2001 for the financial year ended 30 June 2007 has been received and can be found on page 46.

AUDITOR

Ernst & Young were appointed auditors of the Company during the period.

Signed in accordance with a resolution of the Directors.

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J. Hannaford

Executive Director - Finance

Perth

25 September 2007

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Auditor’s Independence Declaration to the Directors of Emerald Oil & Gas NL

In relation to our audit of the financial report of Emerald Oil & Gas NL for the financial year ended 30 June 2007, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

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Ernst & Young

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V W Tidy Partner Perth 25 September 2007

-14-

Liability limited by a scheme approved under Professional Standards Legislation.

VT:KT:EMERALD:011

EMERALD OIL & GAS NL ACN: 009 795 046

Corporate Governance Statement

The Board of Directors is responsible for the corporate governance of the company. The Board guides and monitors the business activities and affairs of the company on behalf of the shareholders by whom they are elected and to whom they are accountable. The company has adopted systems of control and accountability as the basis for the administration of corporate governance. The Board is committed to administering the policies and procedures with openness and integrity, pursuing the true spirit of corporate governance commensurate with the company’s needs. The Corporate Governance Statement has been structured with reference to the Australian Stock Exchange Corporate Governance Council’s (“Council”) “Principles of Good Corporate Governance and Best Practice Recommendations” to the extent that they applicable to the Company.

Information about the company’s corporate governance practices are set out below.

The Board of Directors

The company’s Constitution provides that the number of Directors shall not be less than three. There is no requirement for any shareholding qualification.

If the company’s activities increase in size, nature and scope, the size of the Board will be reviewed periodically and the optimum number of Directors required to adequately supervise the company’s activities will be determined within the limitations imposed by the Constitution and as circumstances demand.

The membership of the Board, its activities and composition is subject to periodic review. The criteria for determining the identification and application of a suitable candidate for the Board shall include quality of the individual, background of experience and achievement, compatibility with other Board members, credibility within the company’s scope of activities, intellectual ability to contribute to Board duties and physical ability to undertake Board duties and responsibilities.

Directors are initially appointed by the full Board, subject to election by shareholders at the next annual general meeting. Under the company’s Constitution the tenure of a director (other than managing director, and only one managing director where the position is jointly held) is subject to reappointment by shareholders not later than the third anniversary following his or her last appointment. Subject to the requirements of the Corporations Act, the Board does not subscribe to the principle of retirement age and there is no maximum period of service as a Director. A managing director may be appointed for the period and on any terms the Directors think fit and, subject to the terms of any agreement entered into, the appointment may be revoked on notice.

The company is not currently of a size, nor are its affairs of such complexity, to justify the formation of other separate or special committees at this time. The Board as a whole is able to address the governance aspects of the full scope of the company’s activities and to ensure that it adheres to appropriate ethical standards.

Appointments to Other Boards

Directors are required to take into consideration any potential conflicts of interest when accepting appointments to other boards.

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EMERALD OIL & GAS NL ACN: 009 795 046

Corporate Governance Statement

Independent Professional Advice

The Board has determined that individual Directors have the right in connection with their duties and responsibilities as Directors, to seek independent professional advice at the company’s expense. With the exception of expenses for legal advice in relation to Director’s rights and duties, the engagement of an outside adviser is subject to prior approval of the Chairman and this will not be withheld unreasonably.

Continuous Review of Corporate Governance

Directors consider, on an ongoing basis, how management information is presented to them and whether such information is sufficient to enable them to discharge their duties as Directors of the company. Such information must be sufficient to enable the Directors to determine appropriate operating and financial strategies from time to time in light of changing circumstances and economic conditions. The Directors recognise that oil and gas exploration is a business with inherent risks and that operational strategies adopted should, notwithstanding, be directed towards improving or maintaining the net worth of the company.

ASX Principles of Good Corporate Governance

The board has reviewed its current practices in light of the ASX principles of good corporate governance and best practice guidelines 2004 with a view to making amendments where applicable after considering the company's size and the resources it has available.

As the company's activities develop in size, nature and scope, the size of the board and the implementation of any additional formal corporate governance committees will be given further consideration.

The following table sets out the ASX Corporate Governance Guidelines with which the company does not comply:

	ASX Principle		Reference/comment
Principle	Structure the board to add value
2:
2.1 A majority of board			Given the company’s background, the nature and size
members should be independent directors			of its business and the current stage of its
			development, the board comprises three directors, one
			of whom is non-executive (the chairman). None of the
			directors is independent under the ASX Corporate
			Governance definition.
			The board believes the alignment of the interests of
			directors with those of shareholders as being the most
			efficient way to ensure shareholders interests are
			protected. The board believes that this is both
			appropriate and acceptable at this stage of the
			company’s development.
2.2 The chairperson should			The Chairman Jeremy Shervington is not independent
be an independent director			under definition in the ASX Corporate Governance
			Guidelines. The board believes the alignment of the
			interests of directors with those of shareholders as
			being the most efficient way to ensure shareholders
			interests are protected. The board believes that this is
			both appropriate and acceptable at this stage of the
			company’s development.

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EMERALD OIL & GAS NL ACN: 009 795 046

Corporate Governance Statement

	ASX Principle		Reference/comment
Principle	Structure the board to add value
2:
2.4	The board should		The board has no formal nomination committee. Acting
	establish a nomination		in its ordinary capacity from time to time as required,
	committee		the board carries out the process of determining the
			need for, screening and appointing new directors. In
			view of the size and resources available to the
			company, it is not considered that a separate
			nomination committee would add any substance to this
			process.
Principle	Safeguard integrity in financial reporting
4:
4.1 – 4.4	The board should		The company does not have an Audit Committee. The
	establish an audit		Board believes that, with only 3 Directors on the Board,
	committee		the Board itself is the appropriate forum to deal with
			this function.
Principle	Recognise and manage
7:	risk
7.1 – 7.2	The board or appropriate		While the company does not have formalised policies on
	board committee should		risk management the board recognises its responsibility
	establish policies on risk		for identifying areas of significant business risk and for
	oversight and		ensuring that arrangements are in place for adequately
	management		managing these risks. This issue is regularly reviewed
			at board meetings and risk management culture is
			encouraged amongst employees and contractors.
Principle	Remunerate fairly and
8:	responsibly
8.1	The board should		Given the current size of the board, the company does
	establish a remuneration		not have a remuneration committee. The board as a
	committee		whole reviews remuneration levels on an individual
			basis, the size of the company making individual
			assessment more appropriate than formal remuneration
			policies. In doing so, the board seeks to retain
			professional services as it requires, at reasonable
			market rates, and seeks external advice and market
			comparisons where necessary.

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EMERALD OIL & GAS NL ACN: 009 795 0466

INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2007

Notes Revenue from operations 3 Financial administration, insurance and compliance costs Consulting and contracting expenses Impairment of exploration expenditure 12 Provision for impairment of loan receivable 10 General administration expenses Provision for impairment of investment in subsidiaries Loss before income tax expense Income tax expense 6 Loss from continuing operations Loss from discontinued operations (DOCA) Loss for the year Net loss attributable to members of the parent entity Basic earnings (loss) per share - cents per share Diluted earnings (loss) per share - cents per share 5 5	Consolidated Parent 2007 $ 2006 $ 2007 $ 2006 $ 139,885 4,826 139,876 19,674 (210,695) (128,996) (199,543) (183,292) (505,501) (135,573) (380,301) (142,884) (997,563) - - - - - (1,634,494) - (353,698) (8,893) (353,538) (91,853) - - (2,100,000) -
	(1,927,572) (497,836) (4,528,000) (681,220) - - - -
	(1,927,572) (497,836) (4,528,000) (681,220) - - - (9,709,868)
	(1,927,572) (497,836) (4,528,000) (10,391,028)
	(1,927,572) (497,836) (4,528,000) (10,391,028)
	(4.195) (4.195) (0.10) (0.10)

The above Income Statements should be read in conjunction with the accompanying notes.

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EMERALD OIL & GAS NL ACN: 009 795 0466

BALANCE SHEET AS AT 30 JUNE 2007

		Consolidated	Consolidated	Parent	Parent
		2007	2006	2007	2006
		$	$	$	$
	Notes
ASSETS
Current assets
Cash and cash equivalents	8	4,030,567	3,939,778	4,030,567	3,933,814
Trade and other receivables	9	5,738	35,155	4,729	28,450
Total current assets		4,036,305	3,974,933	4,035,296	3,962,264
Non-current assets
Trade and other receivables	10	-	-	443,647	343,519
Investments in subsidiaries	11	-	-	836,000	2,936,000
Exploration and evaluation costs	12	1,333,517	840,022	8,996	-
Total non-current assets		1,333,517	840,022	1,288,643	3,279,519
TOTAL ASSETS		5,369,822	4,814,955	5,323,939	7,241,783
LIABILITIES
Current liabilities
Trade and Other Payables	13	2,482,620	777,486	2,482,470	649,619
Total current liabilities		2,482,620	777,486	2,482,470	649,619
TOTAL LIABILITIES		2,482,620	777,486	2,482,470	649,619
NET ASSETS		2,887,202	4,037,469	2,841,469	6,592,164
EQUITY
Contributed Equity	14	5,002,891	4,371,030	85,365,548	84,733,687
Reserves	15	374,644	229,200	428,644	283,200
Accumulated losses		(2,490,333)	(562,761)	(82,952,723)	(78,424,723)
TOTAL EQUITY		2,887,202	4,037,469	2,841,469	6,592,164

The above Balance Sheets should be read in conjunction with the accompanying notes.

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EMERALD OIL & GAS NL ACN: 009 795 0466

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2007

2007 (CONSOLIDATED)	Contributed Equity $ Business Combination Reserve $ Options Reserve $ Accumulated losses $ Minority Interest $ Total $
Total equity at 1 July 2006 as previously reported Correction of errors (Note 29) Total equity at 1 July 2006 (restated) Loss for the period Total income/ (expense) for the period Options exercised Share-based payments: Options issued during the period Options vested during the year Shares issued during the period (net of issue costs) Total equity at 30 June 2007	746,253 1,399,037 229,200 (627,862) 2,225,740 3,972,368 3,624,777 (1,399,037) - 65,101 (2,225,740) 65,101
	4,371,030 - 229,200 (562,761) - 4,037,469 - - - (1,927,572) - (1,927,572)
	- - - (1,927,572) - (1,927,572) 3,851 - - - - 3,851 - - 7,124 - - 7,124 - - 138,320 - - 138,320 628,010 - - - - 628,010
	5,002,891 - 374,644 (2,490,333) - 2,887,202

2006 (CONSOLIDATED)	Contributed Equity $ Options Reserve $ Accumulated losses $ Total $
Total equity at 1 July 2005 Loss for the period Total income/ (expense) for the period Issue of shares on acquisition of Emerald Gas Limited Share-based payments: Options issued under ESOP Options issued during the year Total equity at 30 June 2006	3 - (14,048) (14,045) - - (548,713) (548,713)
	- - (548,713) (548,713) 4,371,027 - - 4,371,027 - - - 229,200 - - - 229,200
	4,371,030 229,200 (562,761) 4,037,469

The above Statements of Changes in Equity should be read in conjunction with the accompanying notes.

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EMERALD OIL & GAS NL ACN: 009 795 0466

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2007

	Contributed	Options	Accumulated	Total
2007 (PARENT)	Equity	Reserve	losses
	$	$	$	$
Total equity at 1 July 2006 as
previously reported	84,733,687	283,200	(78,466,397)	6,550,490
Correction of errors (Note 28)	-	-	41,674	41,674
Total equity at 1 July 2006 (restated)	84,733,687	283,200	(78,424,723)	6,592,164
Loss for the period	-	-	(4,528,000)	(4,528,000)
Total income/ (expense) for the		-
period	-		(4,528,000)	(4,528,000)
Share based payments:
Options vested during the year	-	138,320	-	138,320
Options issued under ESOP	-	7,124	-	7,124
Options exercised during the period	3,851	-	-	3,851
Shares issued during the period (net of
issue costs)	628,010	-	-	628,010
Total equity at 30 June 2007	85,365,548	428,644	(82,952,723)	2,841,469
2006 (PARENT)	Contributed	Options	Accumulated	Total
	Equity	Reserve	losses
	$	$	$	$
Total equity at 1 July 2005	77,367,687	-	(67,982,818)	9,384,869
Loss for the period	-	-	(10,441,905)	(10,441,905)
Total income/ (expense) for the
period	-	-	(10,441,905)	(10,441,905)
Issue of shares as part of a DOCA	500,000	-	-	500,000
Issue of shares to unsecured creditors
as part of a DOCA	195,000	-	-	195,000
Balance after consolidation of capital	78,062,687	-	(67,982,818)	10,079,869
Issue of Shares	500,000	-	-	500,000
Issued to acquire Emerald Gas Limited	2,816,000	-	-	2,816,000
Capital raising to the public	3,500,000	-	-	3,500,000
Issue to Daytona for participation
interests	120,000	-	-	120,000
Transaction costs for share issue	(265,000)	-	-	(265,000)
Share based payments (Options
issued during the period)	-	283,200	-	283,200
Total equity at 30 June 2006	84,733,687	283,200	(78,424,723)	6,592,164

The above Statements of Changes in Equity should be read in conjunction with the accompanying notes.

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EMERALD OIL & GAS NL ACN: 009 795 0466

CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2007

		Consolidated	Consolidated	Parent	Parent
		2007	2006	2007	2006
	Notes	$	$	$	$
Cash flows from operating
activities
Receipts from customers		117,531	-	117,531	-
Interest received		132,230	4,826	132,221	17,856
Payments to suppliers and		(1,135,295)	(216,096)	(876,761)	(172,083)
employees
Net cash used in operating
activities	17	(885,534)	(211,270)	(627,009)	(154,227)
Cash flows from investing
activities
Exploration expenditure		(1,491,058)	(821,345)	(8,996)	-
Loans to other Group entities		-	-	(1,734,623)	(306,941)
Cash acquired on reverse
acquisition
- Net Cash acquired		-	4,251,041	-	-
Net cash (used in) from
Investing activities		(1,491,058)	3,429,696	(1,743,619)	(306,941)
Cash flows from financing
activities
Proceeds from issues of shares		720,000	719,650	720,000	4,394,982
Proceeds from exercise of options		3,851	-	3,851	-
Proceeds from share
subscriptions		2,295,000	-	2,295,000	-
Capital raising costs		(551,470)	-	(551,470)	-
Net cash flows provided by
financing activities		2,467,381	719,650	2,467,381	4,394,982
Net increase in cash and cash
equivalents		90,789	3,938,076	96,753	3,933,814
Cash and cash equivalents at the
beginning of the financial year		3,939,778	1,702	3,933,814	-
Cash and cash equivalents at
the end of the financial year	8	4,030,567	3,939,778	4,030,567	3,933,814

The above Cash Flow Statements should be read in conjunction with the accompanying notes.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 1 – CORPORATE INFORMATION / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This financial report of Emerald Oil & Gas NL (formerly Matrix Oil NL) for the year ended 30 June 2007 was authorised for issue in accordance with a resolution of directors on 25 September 2007.

Emerald Oil & Gas NL was incorporated on 15 September 1969 and is a company limited by shares incorporated in Australia. The financial report is presented in Australian currency.

On the 26 June 2006, Emerald Oil & Gas NL acquired all of the outstanding shares in Emerald Gas Pty Ltd via an equity exchange. Under the terms of AASB 3 Business Combinations, Emerald Gas Pty Ltd is deemed to be the accounting acquirer in this business combination as its management exercises operational and financial control over the activities of both entities. This transaction has therefore been accounted for as a reverse acquisition under AASB 3. Accordingly, the consolidated financial statements of Emerald Oil & Gas NL have been prepared as a continuation of the consolidated financial statements of Emerald Gas Pty Ltd. Emerald Gas Pty Ltd, as the deemed acquirer, has acquisition accounted for Emerald Oil & Gas NL from 26 June 2006.

The principal activity of Emerald Oil & Gas NL and its controlled entities (the Group) is the exploration of petroleum and gas properties in the United States of America and Australia.

The significant policies which have been adopted in the preparation of this financial report are:

(a) Basis of Preparation

The financial report has been prepared on a historical cost basis and is presented in Australian dollars.

(b) Statement of Compliance

The general purpose financial report has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards.

The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). The financial report also complies with International Financial Reporting Standards (IFRS)

(c) Principles of Consolidation

Subsidiaries

The consolidated accounts comprise the assets and liabilities of Emerald Oil & Gas NL and its subsidiaries at 30 June 2007 and the results of all subsidiaries for the year then ended. A subsidiary is any entity controlled by Emerald Oil & Gas NL.

Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to note 1(j).

The financial statements of subsidiaries are prepared from the same reporting period as the parent company, using consistent accounting policies.

Adjustments are made to bring into line any dissimilar accounting policies that may exist.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

(c) Principles of Consolidation (continued)

Subsidiaries (continued)

All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Investments in subsidiaries are accounted for at cost less any impairment in the individual financial statements of Emerald Oil & Gas NL.

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period which Emerald Oil & Gas NL has control.

Joint Ventures

Jointly controlled assets

The proportionate interests in the assets, liabilities and expenses of a joint venture activity have been incorporated in the financial statements under the appropriate headings. Details of the joint ventures are set out in Note 25.

(d) Income Tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

Deferred income tax liabilities are recognised for all taxable temporary differences except:

• when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; or

• when the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except:

• when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; or

• when the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

(d) Income Tax (continued)

Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that is has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and deferred tax liabilities are measured at the tax rates that are expected to apply when the asset is realised or the liability is settled, based on those tax rates (and tax laws) which have been enacted or substantively enacted for each jurisdiction at the balance sheet date.

Income taxes relating to items recognised directly in equity are recognised in equity and not in profit or loss.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Tax consolidation legislation

The company and its wholly-owned Australian resident subsidiary have not formed a tax-consolidated group as at balance sheet date.

(e) Goods and Services Tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except where the GST incurred on a purchase of goods and services is not recoverable from the taxation authorities, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense item as applicable and receivables and payables in the balance sheet are shown inclusive of GST

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

Cash flows are included the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

(f) Trade and other receivables

Trade receivables, which generally have 30-90 day terms, are recognised and carried at fair value and subsequently at amortised cost less a provision for any uncollectible amounts.

Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. An allowance for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms or receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognised in the income statement.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

(g) Investments and other financial assets

Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit & loss, loans and receivables, held-tomaturity investments, or available-for-sale financial assets. When financials assets are recognised initially, they are measured at fair value, plus, in the case of investments not a fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, when allowed and appropriate, re-evaluates this designation at each financial year-end.

All regular way purchases and sale of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place.

Loans and receivables

Loans and receivables including loan notes and loans to key management personnel are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit & loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

(g) Investments and other financial assets (Continued)

Investments in Subsidiaries

Investments in subsidiaries are held at the lower of cost and recoverable amount.

(h) Exploration, evaluation and development expenditure

Exploration, evaluation and development expenditure incurred is either written off as incurred or accumulated in respect of each identifiable area of interest. Costs are only carried forward to the extent that they are expected to be recouped through the successful development of the area (or, alternatively by its sale) or where activities in the area have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves and operations in relation to the area are continuing.

Accumulated costs in relation to an abandoned area are written off in full against profit in the period in which the decision to abandon the area is made.

When production commences, the accumulated costs for the relevant area of interest are amortised over the life of the area according to the rate of depletion of the economically recoverable reserves.

A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest.

(i) Foreign Currency translation

Functional and presentation currency

The functional currency of each of the Group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency.

Transaction and balances

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the yearend exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

(i) Foreign Currency translation (continued)

Group companies

The functional currency of the overseas subsidiary (Emerald Gas USA LLC) is currently Australian dollars. The Board of Directors assess the appropriate functional currency of this entity on an ongoing basis. The functional currency of Emerald Gas USA LLC may convert to US dollars upon successful establishment of oil or gas reserves in the USA.

(j) Business combinations

The purchase method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, securities issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity.

(j) Business combinations (continued)

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the Group's share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired.

(k) Impairment of assets

Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount.

Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed.

(l) Share Based Payments

The Group provides benefits to employees (including directors) in the form of share-based compensation, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’).

There is currently an Employee Share Option Plan (ESOP) in place to provide these benefits to directors and senior executives.

The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using the Black & Scholes method.

• 27 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

(l) Share Based Payments (continued)

The Black-Scholes option pricing model takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option.

The fair value of the options granted is adjusted to reflect market vesting conditions, but excludes the impact of any non market vesting conditions. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate.

The cost of equity-settled transactions is recognised, together with a correspondence increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’).

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied.

If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award is treated as if it were a modification of the original award, as described in the previous paragraph.

(m) Cash and cash equivalents

Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and shortterm deposits with an original maturity of three months or less.

For the purposes of the Cash Flow Statement cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(n) Revenue

Revenue is recognised at the fair value of the consideration receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be measured reliably. The following specific recognition criteria must also be met before revenue is recognised.

Interest revenue is recognised on a time proportion basis using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

All revenue is stated net of the amount of goods and services tax (GST).

• 28 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

(o) Contributed Equity

Ordinary Shares are classified as equity. Issued and paid up capital is recognised at the fair value of the consideration received by the company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

(p) Segment Reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments.

(q) Earnings per share

(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

(r) Trade and other payables

Trade payables and other payables are carried at amortised cost. These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition.

(s) Critical Accounting Estimates and Judgements

The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates and judgements. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below:

(i) Exploration and evaluation expenditure

Exploration and evaluation expenditure has been carried forward in accordance with policy 2 (h) on the basis that exploration and evaluation activities have not yet reached a stage which permits reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in relation to the area are continuing. In the event that significant operations cease and/ or economically recoverable resources are not assessed as being present, this expenditure will be expensed to the income statement.

(ii) Share-based payment transactions

The Group measures the cost of equity-settled transactions with management and other parties by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by the Board of Directors using the Black-Scholes formula, taking into account the terms and conditions upon which the equity instruments were granted. The assumptions in relation to the valuation of the equity instruments are detailed in Note 22. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

• 29 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 2 – NEW ACCOUNTING STANDARDS AND UIG INTERPRETATIONS

In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current annual reporting period. The adoption of these new and revised Standards and Interpretations has not resulted in any changes to the Group’s accounting policies nor affected the amounts reported for the current or prior years.

At the date of authorisation of the financial report certain of the Australian Accounting Standards and UIG Interpretations issued or amended but not yet effective have not been adopted by the Group for the financial reporting period ended 30 June 2007. The directors have assessed the impact of these new or amended standards (to the extent relevant to the Group) and interpretations as follows:

• AASB 7 ‘Financial Instruments: Disclosures’ and consequential amendments to other accounting standards resulting from its issue

• AASB 8 ‘Operating Segments’ and consequential amendments to other accounting standards resulting from its issue

• AASB 2007-4 ‘Amendments to Australian Accounting Standards arising from ED 151’ and consequential amendments to other accounting standards resulting from its issue

• AASB 101 ‘Presentation of Financial Statements’ – revised standard

• AASB Interpretation 10 ‘Interim Financial Reporting and Impairment’ and consequential amendments to other accounting standards resulting from its issue

• AASB Interpretation 11 ‘Group and Treasury Share Transactions’ and consequential amendments to other accounting standards resulting from its issue

• Effective for annual reporting periods beginning on or after 1 January 2007

Effective for annual reporting periods beginning on or after 1 January 2009

Effective for annual reporting periods beginning on or after 1 July 2007

• Effective for annual reporting periods beginning on or after 1 January 2007

• Effective for annual reporting periods beginning on or after 1 November 2006

• Effective for annual reporting periods beginning on or after 1 March 2007

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the company or the Group. The circumstances addressed by Interpretation 10, which prohibits the reversal of certain impairment losses, do not affect either the company’s or the Group’s previously reported results and accordingly, there will be no impact to these financial statements on adoption of the Interpretation. Interpretation 11 addresses the accounting for share-based payment transactions in a group and is consistent with the Groups existing accounting policies. Accordingly, there will be no impact to these financial statements on adoption of the Interpretation.

The application of AASB 101 (revised), AASB 2007-4, AASB 7 and AASB 8 will not affect any of the amounts recognised in the financial statements, but will change the disclosures presently made in relation to the company and the Group’s financial instruments and the objectives, policies and processes for managing capital.

Other new standards recently issued but not yet effective are not considered applicable to the Group as the Group does not have any service concession arrangements, borrowing costs in relation to qualifying assets, customer loyalty programs or defined benefit superannuation plans.

These Standards and Interpretations will be first applied in the financial report of the Group that relates to the annual reporting period beginning after the effective date of each pronouncement, which will be the company’s annual reporting period beginning on 1 July 2007.

• 30 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 3 – REVENUE Interest revenue Other revenue NOTE 4 - LOSS Loss before income tax has been determined after : a) Employee benefit expense Consulting fees Expense of share based payments NOTE 5 – EARNINGS PER SHARE Basic earnings per share - cents Diluted earnings per share - cents Earnings used in the calculation of basic and dilutive EPS Weighted average number of ordinary shares outstanding during the period used in calculation of basic and dilutive EPS.	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 132,230 4,826 132,221 19,674 7,655 - 7,655 -
	139,885 4,826 139,876 19,674
	360,057 83,000 234,857 83,000 145,444 229,200 145,444 283,200
	505,501 282,200 380,301 336,200
	(4.195) (0.10) (4.195) (0.10) (1,927,572) (497,836) 45,949,723 4,760,281

Options outstanding at 30 June 2007, totalling 35,717,377 are not considered potential ordinary shares and are therefore not dilutive.

• 31 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 6 - INCOME TAX (a) Income tax expense The major components of income tax expense are: Income Statement Deferred Income Tax Relating to the origination and reversal of temporary differences Relating to the recognition of deferred tax assets arising from tax losses Income tax expense reported in the income statement (b) Numerical reconciliation between aggregate tax expense recognised in the income statement and tax expense calculated per the statutory income tax rate Loss before income tax At statutory income tax rate of 30% Share based payments Provision for impairment of intercompany loan Provision for impairment of investment in subsidiary Other Unrecognised tax losses and deferred tax assets Movements in deferred tax balances Income tax expense	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ - - - -
	- - - -
	- - - -
	(1,927,572) (497,836) (4,528,000) (10,391,028) (578,271) (149,351) (1,358,400) (3,117,308) 43,633 - 43,633 - - - 490,348 - - - 630,000 - (124,315) - - (15,900) 658,953 115,384 194,419 163,054 - - -
	- - - -

• 32 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 6 - INCOME TAX (CONTINUED)

(c) Recognised Deferred Tax Assets and Liabilities

CONSOLIDATED Deferred Tax Liabilities Exploration expenditure Deferred tax assets Tax losses Net deferred tax assets Deferred tax income (expense) PARENT Deferred Tax Liabilities Exploration expenditure Deferred tax assets Tax losses Net deferred tax assets Deferred tax income (expense)	Balance Sheet 2007 2006 $ $ 461,706 -	Income Statement 2007 2006 $ $ (461,706) -
	461,706 - 461,706 -	(461,706) - 461,706 -
	461,706 -	461,706 -
	- -
	Balance Sheet 2007 2006 $ $ - - - -
		- -
		Income Statement 2007 2006 $ $ - - - -
	- -	- -
	- -
		- -

(d) Tax losses

Emerald Oil & Gas NL has tax losses arising in Australia which are available indefinitely to offset against future profits of the Company providing the tests for deductibility against future profits are met.

The consolidated entity has unrecognised Australian tax losses of $1,115,778, and unrecognised USA tax losses are estimated to be $1,251,258. The Company has estimated Australian tax losses of $932,258.

The consolidated entity has unrecognised deferred tax assets amounting to $772,674 and the company has an unrecognised deferred tax asset amounting to $279,677.

As at 30 June 2007, a deferred tax asset in relation to tax losses totalling $431,279 has been recognised. This asset has been recognised to the extent that it nets off from a deferred tax liability in relation to exploration and evaluation expenditure.

(e) Other unrecognised temporary differences

As at 30 June 2007, the consolidated entity has other temporary differences (not associated with tax losses) for which no deferred tax asset has been recognised, as follows:

	Consolidated	Consolidated	Parent	Parent
	2007	2006	2007	2006
	$	$	$	$
Accruals	140,250	21,138	140,250	21,138
Investments in subsidiaries	-	-	2,100,000	-

• 33 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 7 – KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) Names and positions of directors and Key Management Personnel in office at any time during the financial year are:

Name Position Appointment / Resignation date J. Shervington Non-Executive Chairman Appointed 23 January 2006 R. Berven Executive Director - Technical Appointed 14 June 2006 J. Hannaford Executive Director – Finance Appointed 14 June 2006 Company Secretary Appointed 27 February 2006

(b) Key Management personnel compensation

The company has taken advantage of the relief provided by Corporations Regulations 2M.6.04 and has transferred the detailed remuneration disclosures to the Remuneration Report section of the Directors’ Report. These transferred disclosures have been audited.

Consolidated	and			Share
Parent		Short term	benefits	based		% performance
				payments	Total	related
		Salary	Non	Options
		and Fees	Monetary
		$	$	$	$	%
2007 Consolidated	and
Parent		233,890	-	121,030	354,920	34.10%
2006Consolidated		83,000	15,000	136,845	234,845	58.27%
2006 Parent		83,000	15,000	160,845	258,845	62.14%

(c) Share holdings of key management personnel

The movement during the year in the number of ordinary shares of Emerald Oil & Gas NL held, directly, indirectly or beneficially, by each director, including their personally-related entities is as follows:

2007

2007
Directors	Held at Beginning of year	Movement during year*	Options Exercised	Held at 30th June 2007
Directors
J. Shervington	1,387,982	50,000	-	1,437,982
R. Berven	3,119,054	20,000	-	3,139,054
J. Hannaford	2,499,613	150,000	-	2,649,613
Total	7,006,649	220,000	-	7,226,649

• Movement represents shares purchased on market during the financial year

2006

2006
Directors	Held at Beginning year	of	Movement during year(1)	Options Exercised		Held at 30th June 2006
Directors
J. Shervington		-	1,387,982		-	1,387,982
R. Berven		-	3,119,054		-	3,119,054
J. Hannaford		-	2,499,613		-	2,499,613
Total		-	7,006,649			7,006,649

(1) Movements of the shares and options above relate to the recapitalisation, Emerald Gas Limited acquisition, Public offer and shares/ options purchased on market.

• 34 -

Notes to the Financial Statements

EMERALD OIL & GAS NL ACN: 009 795 046

NOTE 7 – KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED)

(d) Options holdings of key management personnel

The movement during the reporting period in the number of options over ordinary shares in Emerald Oil & Gas NL held, directly, indirectly or beneficially, by each specified director and specified executive, including their personally-related entities, is as follows:

2007
Listed Options
Directors	Held at beginning of year	Movement during year*	Exercised	Held at 30 June 2007	Vested and exercisable at 30 June 2007
J. Shervington	1,337,982	-	-	1,337,982	1,337,982
R. Berven	120,000	20,000	-	140,000	140,000
J. Hannaford	100,000	-	-	100,000	100,000
Total	1,557,982	20,000	-	1,577,982	1,577,982

• Movement represents options purchased on market during the financial year

2006
Listed Options
Directors	Held at beginning year	of	Movement during year(1)	Exercised	Held at 30 June 2006	Vested and exercisable at 30 June 2006
J. Shervington		-	1,337,982	-	1,337,982	1,337,982
R. Berven		-	120,000	-	120,000	120,000
J. Hannaford		-	100,000	-	100,000	100,000
Total		-	1,557,982	-	1,557,982	1,557,982

(1) Movements of the shares and options above relate to the recapitalisation, Emerald Gas Limited acquisition, public offer and shares/ options purchased on market.

2007
Unlisted Options
Directors	Held at beginning of	Movement during		Exercised	Held at 30 June 2007	Vested and exercisable at 30 June
	year	year				2007
J. Shervington	1,567,577		-	-	1,567,577	1,567,577
R. Berven	1,000,000		-	-	1,000,000	1,000,000
J. Hannaford	2,250,000		-	-	2,250,000	1,500,000
Total	4,817,577		-	-	4,817,577	4,067,577

2006
Unlisted Options
Directors	Held at beginning year	of	Movement during year(1)	Exercised	Held at 30 June 2006	Vested and exercisable at 30 June 2006
J. Shervington		-	1,567,577	-	1,567,577	967,577
R. Berven		-	1,000,000	-	1,000,000	500,000
J. Hannaford		-	2,250,000	-	2,250,000	1,500,000
Total		-	4,817,577	-	4,817,577	2,967,577

(1) The above movements represent management options which have been accounted for as share based payments.

• 35 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 7 – KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED)

(e) Loans to key management personnel

As at 30 June 2007 there were no loans to any directors.

(f) Loans from key management personnel

As at 30 June 2007 there is an amount of $150 owing to Riverview Corporation Pty Ltd, an entity related to Mr John Hannaford.

(g) Other Transactions and balances with key management personnel

	Consolidated	Consolidated	Parent	Parent
	2007	2006	2007	2006
	$	$	$	$
Other related parties
1) Legal	40,000	-	40,000	128,465
2) Office accommodation	84,097	18,667	84,097	18,667
3) Bookkeeping, financial
accounting and
administration	78,680	-	78,680	40,000
4) Ventnor Capital Options	-	113,400	-	113,400

1) These payments were made to Jeremy Shervington, for legal services provided by of Mr Jeremy Shervington and Associates in relation to the preparation of legal documentation, agreements, prospectus notice of meeting and other services in relation to secondary capital raisings in the current period and the recapitalisation and re-listing of the Company in the prior period. These services were provided on normal commercial terms and conditions.

2) Payments were made to Ventnor Capital Pty Ltd a company associated with John Hannaford for Office accommodation and rent totalling $84,097 (excl GST). These services were provided on normal commercial terms and conditions.

3) Payments were made to Ventnor Capital Pty Ltd a company associated with John Hannaford for Office Bookkeeping, financial accounting and administration totalling $78,680 (excl GST). These services were provided on normal commercial terms and conditions.

4) Ventnor Capital Pty Ltd was issued 1,500,000 management options pursuant to the implementation agreement with Emerald Gas Limited with an exercise price of 25 cents and an expiry date of 28 February 2010. The value of these options under the Black-Scholes option pricing model was $113,400.

NOTE 8 – CASH AND CASH EQUIVALENTS Cash at bank and on hand(a)(b) (a)Cash at bank is bearing floating interest rates at a effective interest rate of: (b)As at 30 June 2007, $2,295,000 is held in trust awaiting shareholder approval in relation to the Private placement. Refer Note 28.	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 4,030,567 3,939,778 4,030,567 3,933,814
	5.44% per annum 4.00% per annum 5.44% per annum 4.00% per annum

• 36 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 9 – TRADE AND OTHER RECEIVABLES (Current) Other receivables	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 56,615 86,032 55,606 79,327

The above amounts do not bear interest and their carrying amount is equivalent to their fair value.

NOTE 10 – TRADE AND OTHER

NOTE 10 – TRADE AND OTHER
RECEIVABLES (Non Current) Loan to subsidiaries Less: Provision for impairment	- - 2,078,141 343,519 - - (1,634,494) -
	- - 443,647 343,519

Loans between Emerald Oil & Gas NL and entities in the wholly owned group are repayable at call. Interest is not charged on at call inter-company loans. Classification of at call related party loans as non-current in the financial statements is based upon current expectations of loan repayments. The directors have considered the indicators of impairment as at 30 June 2007 and consequently reduced the carrying value of the loan to reflect the value inherent in the subsidiaries’ assets.

NOTE 11 – INVESTMENTS IN

SUBSIDIARIES

Shares in subsidiaries At cost (Note 19) Less: Provision for impairment* At fair value	- - 2,936,000 2,936,000 - - (2,100,000) -
	- - 836,000 2,936,000

• The directors have considered the indicators of impairment as at 30 June 2007 and consequently reduced the carrying value of the investments to reflect the inherent value of the subsidiaries’ net assets.

NOTE 12 – EXPLORATION & EVALUATION COSTS

Exploration, evaluation and development costs carried forward in respect of areas of interest in the USA and Australia (a) Reconciled as follows: Balance at the beginning of the year Capitalised during the year Written off during the year* Balance at the end of the year	1,333,517 840,022 - -
	840,022 - - - 1,491,058 840,022 8,996 - (997,563) - - -
	1,333,517 840,022 8,996 -

*Throughout the 2007 financial year the Board of Directors reviewed exploration, evaluation and development costs capitalised on its projects and made write offs to a number of its USA prospects. The write offs were as a result of the directors ongoing analysis of the economic viability of projects and due to the relinquishing of interests in the relevant projects. There were no write offs to Australian projects during the financial year.

• 37 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 13 – TRADE AND OTHER PAYABLES Trade Creditors Accruals Subscriptions received * Other	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 47,220 893,464 47,220 742,170 140,250 - 140,250 - 2,295,000 - 2,295,000 - 150 - - -
	2,482,620 893,464 2,482,470 742,170

*As at 30 June 2007, $2,295,000 is held in trust awaiting shareholder approval in relation to the Private placement. Refer Note 28.

NOTE 14 CONTRIBUTED EQUITY PARENT ENTITY 2007 (a) Issued and Paid Up Capital Fully paid ordinary shares (b) Movements in fully paid shares on issue Opening balance Issue of Shares Capital raising to the public Share issue costs Conversion of options Total fully paid shares on issue	Number of Shares 49,619,261 45,600,000 4,000,000 - 19,261 49,619,261	$ 85,365,548
		85,365,548
		84,733,687 720,000 (91,990) 3,851
		85,365,548

CONSOLIDATED ENTITY

The contributed equity of the consolidated entity comprises the contributed equity of Emerald Gas Pty Ltd, a company deemed to be the acquirer of Emerald Oil and Gas NL under a reverse acquisition transaction occurring in the year ended 30 June 2006. The monetary share capital balance represents the equity in Emerald Gas Pty Ltd at the time of the acquisition and subsequent transactions with equity holders of Emerald Oil & Gas NL in their capacity as equity holders.

(c) Terms and conditions of contributed equity

Ordinary shares have the right to receive dividends as declared, and the proceeds on winding up of the parent entity in proportion to the number of shares held.

At shareholders meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands.

(d) Share Options

Information relating to Emerald Oil & Gas NL options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out in Note 23.

NOTE 15 – RESERVES

Nature and purpose of reserves

1) Options reserve

The options reserve is used to recognise the fair value of options issued but not exercised.

• 38 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 16 – SEGMENT REPORTING

Business Segment – primary reporting segment

The consolidated entity operates solely in the exploration and development of properties for the development of oil and gas within Australia and the USA.

2007 Geographical segment	USA $	Australia $	Eliminations $	Consolidated $
Segment result Unallocated Revenues (Interest) Net loss for the year Segment assets Segment liabilities Impairment losses: Exploration properties Investments Share-based payments Acquisition of exploration & evaluation assets	(1,529,822) - 1,960,836 (2,713,595) (997,563) - - 1,482,062	(4,667,876) - 5,374,816 (2,482,470) - (2,100,000) (145,444) 8,996	4,130,241 - (1,914,953) 2,713,445 - 2,100,000 - -	(2,067,457) 139,885
				(1,927,572)
				5,420,699 (2,482,620) (997,563) - (145,444) 1,491,058
2006 Geographical segment	USA $	Australia $	Eliminations $	Consolidated $
Segment result Unallocated Revenues (Interest) Net loss for the year Segment assets Segment liabilities Share-based payments Acquisition of exploration & evaluation assets	(114,253) - 837,600 - - 837,600	(388,409) 7,292,661 (777,486) (145,444) 2,422	- - (3,264,429) - - -	(502,662) 4,826
				(497,836)
				4,865,832 (777,486) (145,444) 840,022

NOTE 17 – CASH FLOW INFORMATION

Reconciliation of cash flow from operations with loss after income tax:

Loss for the year Non cash items: Share based payments Provision for impairment of loan receivable Provision for impairment of investment in subsidiaries Write off exploration expenditure Loss on DOCA Changes in assets and liabilities Change in trade creditors and accruals Change in other debtors Change in deferred tax balances Cash flows used in operations	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ (1,927,572) (497,836) (4,528,000) (10,391,028)
	145,444 229,200 145,444 283,200 - - 1,634,494 - - - 2,100,000 - 997,563 - - - - - - 9,709,868 (128,428) 74,928 23,722 279,709 27,460 (17,562) (2,669) (35,976) - - - -
	(885,533) (211,270) (627,009) (154,227)

• 39 -

EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 18 – NON CASH INVESTING AND FINANCING ACTIVITIES Acquisition of Emerald Gas Pty Ltd	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ - - - 2,936,000

NOTE 19 – INTERESTS IN CONTROLLED ENTITIES

The Company has the following Subsidiaries:

Name of Subsidiary	Place of	Class of	Percentage	Percentage held
	Incorporation	Shares	held	2006
			2007
Emerald Gas USA LLC	USA	Ordinary	100%	100%
Emerald Gas Pty Ltd	Australia	Ordinary	100%	100%

NOTE 20 – RELATED PARTY TRANSACTIONS

(a) Parent Entities

The parent entity within the Group is Emerald Oil & Gas NL.

(b) Subsidiaries

Interests in subsidiaries are set out in Note 19.

(c) Key management personnel

Disclosures relating to key management personnel are set out in Note 7.

(d) Loans to and from related parties

Loans to Subsidiaries Beginning of the year Loans advanced Provision for impairment End of year	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ - - 343,519 - - - 1,734,622 343,519 - - (1,634,494) -
	- - 443,647 343,519

e) Terms and Conditions

Loans between entities in the wholly owned group are not interest bearing, unsecured and are payable at call. It is not expected that the loans will be called upon in the coming 12 months.

Transactions with other related parties are made on normal commercial terms and conditions and at market rates. Outstanding balances are unsecured and are repayable in cash.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 21 – AUDITORS’	Consolidated	Consolidated	Parent	Parent
REMUNERATION	2007	2006	2007	2006
	$	$	$	$
Amounts received or due and receivable	by PricewaterhouseCoopers:
Audit of the financial report of the
entity and any other entity in the
Group	-	31,006	-	24,000
Amounts received or due and receivable	by Ernst & Young:
Audit of the financial report of the
entity and any other entity in the
Group	32,300	-	32,300	-

NOTE 22 – SHARE BASED PAYMENTS

(a) Expenses arising from share-based payment transactions

Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows:

Options issued to Management Personnel as share based payments under ESOP(1) Options issued to Corporate Advisors(2) Options issued to management and other parties(3)	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 7,124 - 7,124 - - 113,400 - 113,400 138,320 115,800 138,320 169,800
	145,444 229,200 145,444 283,200

The above expenses are represented by the following:

(1) During 2007, 325,000 options were issued to executives and consultants under the Employee Share Option Plan. This resulted in an expense of $7,124 in the current year.

(2) During 2006, 1,500,000 Options were issued to Ventnor Capital Pty Ltd as Corporate Adviser to Emerald Gas Pty Ltd. ($113,400)

(3) During 2006, 4,661,638 management options were issued to Directors ($115,800 consolidated and $169,800 parent) and during 2007, 2,000,000 management options which were issued during 2006, vested, resulting in an expense of $138,320 in the consolidated and parent entity.

(b) Share Based Payment Plans

The Company currently has an Employee Share Option Plan (ESOP) in place for senior executives. Under the ESOP, Options may be issued to senior executives under the plan in accordance with the performance of the company and the services provided by the executive at the discretion of the Board. Options issued under the plan vest immediately and have a contractual life of 3 years.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 22 – SHARE BASED PAYMENTS (CONTINUED)

(c) Summary of Options Granted for the year

Options issued under ESOP arrangements

The following table illustrates the number and weighted average exercise price of, and movements in, share options issued under the ESOP during the year:

These options are represented below:

Outstanding at the beginning of the year Granted during the year Exercised during the year Expired during the year Outstanding and exercisable at the end of the year	2007 2006 No. WAEP No. WAEP - - - 325,000 $0.25 - - - - - - - - - -
	325,000 $0.25 - -

The outstanding balance at 30 June 2007 is represented by options over ordinary shares with an exercise price of $0.25 each, exercisable immediately and until 31 December 2009. These options were issued to executives and consultants.

The weighted average remaining contractual life of the above share options outstanding as at 30 June 2007 is 2.5 years and they are exercisable at 25 cents.

Total Share Based Payment Options Granted for the Year

The following table illustrates the number and weighted average exercise price of, and movements in, all share options during the year:

These options are represented below:

Outstanding at the beginning of the year Granted during the year Exercised during the year Expired during the year Outstanding and exercisable at the end of the year	2007 2006 No. WAEP No. WAEP 6,161,639 $0.26 - - 325,000 $0.25 6,161,639 $0.26 - - - - - -
	6,486,639 $0.26 6,161,639 $0.26

The weighted average remaining contractual life of these options is 2.5 years. The options outstanding at the end of the year have a range of exercise prices of 17.68 – 30 cents.

(d) Weighted average fair value

The weighted average fair value of options issued under the ESOP during the year is $0.02 (2006: $0.05).

The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

2007
Granted	Terms & Conditions for each Grant						Vested
No Granted	Grant Date	Fair Value at Grant Date	Exercise Price per Option	Expiry Date	First Exercise Date	Last Exercise Date	No	%
325,000	11/10/06	0.02192	$0.25	31/12/09	11/10/06	31/12/09	325,000	100

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 22 – SHARE BASED PAYMENTS (CONTINUED)

(d) Weighted average fair value

There were 325,000 options granted during the year under ESOP arrangements. The table below summarises the model inputs for options granted during 2007:

Model Inputs	Options
1. Options are granted for no consideration: 2. Exercise price (cents): 3. Valuation date: 4. Expiry date: 5. Underlying security spot price at grant date (cents): 6. Expected price volatility of the company’s shares: 7. Expected dividend yield: 8. Risk-free interest rate 9. The expected price volatility is based on the historic volatility of an average of comparable companies.	325,000 25 11 October 2006 31 December 2009 9.2 75% 0% 6.25% 75%

The table below summaries the model inputs for options granted during 2006:

Model Inputs	Director Options*	Management Options Trance 1	Management Options Trance 2	Adviser Options
1. Options are granted for no consideration: 2. Exercise price (cents): 3. Valuation (grant) date: 4. Expiry date: 5. Underlying security spot price at grant date (cents): 6. Expected price volatility of the company’s shares: 7. Expected dividend yield: 8. Risk-free interest rate 9. The expected price volatility is based on the historic volatility of an average of comparable companies. 10. Fair Value per option at grant date (cents) 11. Vesting date * Pre Consolidation	90,000,000 0.0013 23-01-06 23-01-10 0.001 75% 0% 6% 75% 0.001 23-01-06	2,000,000 25 26-06-06 31-12-08 16 75% 0% 6% 75% 0.058 26-06-06	2,000,000 30 26-06-06 31-12-09 16 75% 0% 6% 75% 0.067 26-06-07	1,500,000 25 26-06-06 28-02-10 16 75% 0% 6% 75% 0.076 26-06-06

NOTE 23 – EXPENDITURE COMMITMENTS Capital commitments At 30 June 2007 the Group has commitments principally relating to the drilling and development of its oil and gas properties as follows: Within one year	Consolidated 2007 $ Consolidated 2006 $ Parent 2007 $ Parent 2006 $ 1,735,954 1,701,000 - -
	1,735,954 1,701,000 - -

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 24 – NON OPERATOR JOINT VENTURE INTERESTS

The capitalised exploration expenditure on the balance sheet shows the costs incurred on the following exploration joint ventures:

Pandura (USA) - 15% working interest in the Pandura oil and gas exploration project located in Texas. Carrying value at 30 June 2007: $28,513.

Greenbush (USA) - 15% working interest in the Greenbush oil exploration project located in North Dakota. Carrying value at 30 June 2007: $660,711

North West Alice (USA) - 10% working interest in the North West Alice gas exploration project located in Texas. Carrying value at 30 June 2007: 501,906.

Hope (USA) - 8.69% working interest in the Hope gas exploration project located in Texas. Carrying value at 30 June 2007: $117,955.

Steamboat (USA) - 25% working interest in the Steamboat gas exploration project located in Texas. Carrying value at 30 June 2007: $8,121.

EP104 – Canning Basin (Western Australia) - 12.75% working interest in the EP104 oil and gas exploration project located in the Canning basin in Western Australia. Carrying value at 30 June 2007: $1,954.

EPA4/05-6 – Canning Basin (Western Australia) - 100% working interest in the EPA 4/05-6 oil and gas exploration project located in the Canning basin in Western Australia. Carrying value at 30 June 2007: $14,358.

NOTE 25 - FINANCIAL RISK MANAGEMENT

The Group's activities expose it to a variety of financial risks; market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group.

Risk management is carried out by the Executive Director (Finance) under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as mitigating foreign exchange and interest rate and credit risks.

a)Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from currency exposures to the US dollar.

Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting.

b) Market Risk Price risk

The Group is not exposed to equity securities price risk as it holds no investments in securities classified on the balance sheet either as available for sale or at fair value through profit or loss.

The Company is not directly exposed to commodity price risk, but it is indirectly exposed to fluctuations in the oil price.

c) Credit Risk

The maximum exposure of the consolidated entity and the parent to credit risk at balance sheet date in relation to each class of recognised financial asset is limited to the carrying amounts of the financial assets as indicated in the balance sheet.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

d) Liquidity Risk

Prudent liquidity risk management implies maintaining sufficient cash to meet commitments as and when they fall due. Management monitors rolling cash flow forecasts to manage liquidity risk.

e) Cashflow and Fair value Interest Rate Risk

The Group’s exposure to interest rate risk related primarily to the company’s floating interest rate cash balance which is subject to movements in interest rates.

NOTE 26 – FAIR VALUE AND INTEREST RATE RISK

(a) Fair value

All assets and liabilities recognised in the balance sheet, whether they are carried at cost or fair value, are recognised at amounts that represent a reasonable approximation of fair value unless otherwise stated in the applicable notes.

(b) Interest rate risk

Consolidated entity- 2007

Consolidated entity-2007
	Weighted average effective interest rate	Floating interest rate	Non interest bearing	Total
	%	$	$	$
Financial assets
Cash and cash equivalents	5.4%	4,030,567	-	4,030,567
Trade and other receivables		-	56,615	56,615
Total Financial Assets		4,030,567	56,615	4,087,182
Financial Liabilities
Trade and other payables		-	(2,482,620)	(2,482,620)
Total Financial Liabilities		-	(2,482,620)	(2,482,620)

Consolidated entity- 2006

Consolidated entity-2006
	Weighted average effective interest rate	Floating interest rate	Non interest bearing	Total
	%	$	$	$
Financial assets
Cash and cash equivalents	4%	3,939,778	-	3,939,778
Trade and other receivables		-	86,032	86,032
Total Financial Assets		3,939,778	86,032	4,025,810
Financial Liabilities
Trade and other payables		-	(777,486)	(777,486)
Total Financial Liabilities		-	(777,486)	(777,486)

Parent- 2007

Parent-2007
	Weighted average effective interest rate	Floating interest rate	Non interest bearing	Total
	%	$	$	$
Financial assets
Cash and cash equivalents	5.4%	4,030,567	-	4,030,567
Receivables		-	499,253	499,253
Total Financial Assets		4,030,567	499,253	4,529,820
Financial Liabilities
Trade and other payables		-	(2,482,470)	(2,482,470)
Total Financial Liabilities		-	(2,482,470)	(2,482,470)

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 26 – FAIR VALUE AND INTEREST RATE RISK (CONTINUED)

Parent- 2006

Parent-2006
	Weighted average effective interest rate	Floating interest rate	Non interest bearing	Total
	%	$	$	$
Financial assets
Cash and cash equivalents	4%	3,933,814	-	3,933,814
Receivables		-	422,846	422,846
Total Financial Assets
Financial Liabilities
Trade and other payables		-	(649,619)	(649,619)
Total Financial Liabilities		-	(649,619)	(649,619)

NOTE 27 – EVENTS SUBSEQUENT TO BALANCE DATE

Placement

Subsequent to balance date the Company issued the remaining shares and options under the placement announced in May 2007. Following shareholder approval the remaining 12,750,000 shares at 18 cents each and 6,375,000 attaching listed options were issued on 2 July 2007. At 30 June 2007 the financial report includes an amount of $2,295,000 in cash at bank relating to subscriptions received in advance relating to these shares issued. A similar amount of $2,295,000 is included as Current Liabilities for subscriptions in advance.

EP104/R1 Canning Basin, Western Australia (Emerald 12.75% working interest)

The Valentine 1 well was spudded on 13 August 2007 at the EP104/R1 project in the Canning Basin of Western Australia. The Operator reached total depth of 3430m on 25 September 2007 and recommended logging then plugging the well after minor sub-economic gas shows in the well.

Pandura Project, Webb County, Texas (Emerald earning 15% Working Interest)

On 5 July 2007 Emerald announced it had reached agreement with Daytona Energy Corporation (“Daytona”) in relation to Emerald’s participation in the Pandura project located in Webb County Texas, USA. Under the agreed terms Emerald committed to pay 21.1875% of the dry hole cost and 15.75% of the completion costs of the Kathleen Marie #2 well to earn a 15.0% working interest post completion in the Pandura leases.

This revised agreement was possible after Daytona had secured new leases covering the project area. The lease renewal process had been delayed by the absence of one of the part-owners of the main lease, forcing the Operator to pursue a court process to secure the lease for renewal. Under the agreement with Daytona, Emerald is not liable for any costs of the lease renewals or associated costs, only it’s pro rata share of drilling costs.

On 8 August 2007 Emerald announced that the Operator had spudded the Kathleen Marie #2 well. The well reached 8,500 feet total depth on 10 September 2007. Despite encouraging gas shows from the Lobo sands none were concluded to be of economic widths or porosity to support a commercial well and the well was plugged and abandoned.

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EMERALD OIL & GAS NL ACN: 009 795 046

Notes to the Financial Statements

NOTE 27 – EVENTS SUBSEQUENT TO BALANCE DATE (CONTINUED)

Palito Blanco Project, Jim Wells and Duval Counties, Texas (Emerald earning 15% working interest)

Subsequent to the end of the financial year Emerald entered into an agreement with Oso Exploration to participate in a 15% interest in the Palito Blanco exploration project in Jim Wells and Duval counties Texas. On 26 August 2007 the Operator spudded the Jaime Garcia Gas Unit #2 well. At the date of this report the well has reached a depth of 7,100 feet, with a total planned depth of 8,250 feet.

NOTE 28 – CORRECTIONS OF ERRORS

The acquisition of Emerald Gas Pty Ltd on 26 June 2006 was accounted for as a reverse acquisition in the financial year ended 30 June 2006. As the transaction involved an equity exchange that resulted in all owners of Emerald Gas Pty Ltd having an interest in the results and net assets of the consolidated entity and the substance of the transaction is that Emerald Gas Pty Ltd acquired a 100% interest in Emerald Oil & Gas NL a minority interest should not have been recognised at the date of combination. Furthermore, the Business Combination Reserve recognised at the date of combination is in the nature of contributed equity.

During the reconciliation of creditors at 31 December 2006, it was revealed that trade creditors and accruals as at 30 June 2006 were overstated by $115,978. Subsequent to 31 December, a reconciliation of GST balances revealed that GST receivables were overstated by $50,877.

The comparative information has been restated to correct these errors. The effect of the restatement on the balance sheet at 30 June 2006 is as follows:-

Increase in contributed equity Decrease in business combination reserve Decrease in minority interest Net increase in equity as of 30 June 2006 Decrease in GST receivables Decrease in trade payable Increase in net assets as of 30 June 2006	$ 3,624,777 (1,399,037) (2,225,740)
	-
	$ (50,877) 115,978
	65,101

The correction of the errors referred to above have reduced the loss for the comparative period, being the year ended 30 June 2006 and equity at 30 June 2006, by $65,101 and basic and diluted loss per share by 0.02 cents per share.

The revised business combination note which relates to the year ended 30 June 2006 has been reproduced below due to the above correction of errors.

BUSINESS COMBINATION

(a) Summary of Acquisition

On the 26 June 2006, Emerald Oil & Gas NL acquired all of the outstanding shares in Emerald Gas Limited via an equity exchange. Under the terms of AASB 3 Business Combinations, Emerald Gas Limited is deemed to be the accounting acquirer in this business combination as its management exercises operational and financial control over the activities of both entities. This transaction has therefore been accounted for as a reverse acquisition under AASB 3. Accordingly, the consolidated financial statements of Emerald Oil & Gas NL have been prepared as a continuation of the consolidated financial statements of Emerald Gas Limited. Emerald Gas Limited, as the deemed acquirer, has acquisition accounted for Emerald Oil & Gas NL from 26 June 2006.

• 47 -

Notes to the Financial Statements

EMERALD OIL & GAS NL ACN: 009 795 046

NOTE 28 – CORRECTIONS OF ERRORS (CONTINUED)

BUSINESS COMBINATION (CONTINUED)

(a) Summary of Acquisition (continued)

Details of the fair value of the assets and liabilities acquired are as follows:

Purchase consideration (refer to (b) below): Fair value of net identifiable assets acquired (refer to (c) below): Exploration property uplift	Consolidated 2006 $ 3,624,777 (3,624,777)
	-

At the company level the purchase consideration of $2,936,000 was provided to shareholders of Emerald Gas Limited by way of shares in the company.

(b) Purchase consideration

Purchase Price Less: equity consideration Less: Cash balances acquired Inflow of cash	Consolidated 2006 $ Consolidated 2005 $ The Company 2006 $ 3,624,777 - 2,936,000 (3,624,777) - (2,936,000)
	4,251,041 - -
	4,251,041 - -

(c) Assets and liabilities acquired

The assets and liabilities arising from the acquisition are as follows:

Cash Other receivables Trade payables Net identifiable assets acquired	Acquiree’s carrying amount $ 4,251,041 115,907 (742,171) 3,624,777	Fair value $ 4,251,041 115,907 (742,171)
		3,624,777

This acquisition is only relevant to the parent entity as it was part of the reverse acquisition.

• 48 -

EMERALD OIL & GAS NL ACN: 72 009 795 046

Directors Declaration

In the directors’ opinion:

a) the financial statements and notes set out on pages 18 to 48 are in accordance with the Corporations Act 2001, including:

• i. complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and

• ii. giving a true and fair view of the company’s and consolidated entity's financial position as at 30 June 2007 and of its performance, as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; and

b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and

c) the audited remuneration disclosures set out on pages 8 to 11 of the directors’ report comply with Accounting Standards AASB 124 Related Party Disclosures and the Corporations Regulations 2001.

The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001.

This declaration is made in accordance with a resolution of the directors.

On behalf of the board

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J. Hannaford Executive Director - Finance Perth 25 September 2007

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Independent auditor’s report to the members of Emerald Oil & Gas NL

We have audited the accompanying financial report of Emerald Oil & Gas NL (the “company”), which comprises the balance sheet as at 30 June 2007 and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity (the “consolidated entity”) comprising the company and the entities it controlled at the year’s end or from time to time during the financial year.

The company has disclosed information as required by paragraphs Aus 25.4 to Aus 25.7.2 of Accounting Standard 124 Related Party Disclosures (“remuneration disclosures”) , under the heading “Remuneration Report” on pages 8 to 11 of the directors’ report, as permitted by Corporations Regulation 2M.6.04.

Directors’ Responsibility for the Financial Report

The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with the Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001 . This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1 (b) the directors also state that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. The directors are also responsible for the remuneration disclosures contained in the directors’ report.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement and that the remuneration disclosures comply with Accounting Standard AASB 124 Related Party Disclosures .

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have met the independence requirements of the Corporations Act 2001 . We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report.

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Liability limited by a scheme approved under Professional Standards Legislation.

VT;HG;EMERALD;010

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Basis for Disclaimer of Auditor’s Opinion

This disclaimer only applies to the company and not to the consolidated entity.

We were appointed as auditors of Emerald Oil & Gas NL on 28 November 2006 and the predecessor auditor expressed a disclaimer of opinion on the income statement, statement of changes in equity, cash flow statement and associated disclosures of the company for the year ended 30 June 2006 as they were unable to audit the opening balances at 1 July 2005. It has not been practicable for us to carry out normal audit procedures relating to the income statement, statement of changes in equity, cash flow statement and associated disclosures and remuneration disclosures contained on pages 8 to 11 of the directors’ report of the company for the comparative year ended 30 June 2006.

Disclaimer of Auditor’s Opinion

In our opinion, because of the existence of the limitation on the scope of our work as described in the preceding paragraph, and the effect on the financial report of such adjustments, if any, as might have been determined to be necessary had the limitation not existed, we are unable to and do not express an opinion on the income statement, statement of changes in equity, cash flow statement and associated disclosures and remuneration disclosures contained on pages 8 to 11 of the directors’ report for the company for the year ended 30 June 2006, which are shown for the purpose of comparison.

In our opinion:

1. the financial report of Emerald Oil & Gas NL is in accordance with the Corporations Act 2001 , including:

2. (i) giving a true and fair view of the financial position of Emerald Oil & Gas NL and the consolidated entity at 30 June 2007 and of their performance for the year ended on that date; and

3. (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001

4. the financial report also complies with International Financial Reporting Standards as disclosed in Note 1 (b)

5. the remuneration disclosures that are contained on pages 8 to 11 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures

in so far as they relate to:

• (i) the consolidated entity;

• (ii) the financial position of Emerald Oil & Gas NL; and

• iii) the income statement, statement of changes in equity, cash flow statement and associated disclosures and remuneration disclosures contained on pages 8 to 11 of the directors’ report for the financial year ended 30 June 2007 for Emerald Oil & Gas NL.

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Ernst & Young

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V W Tidy Partner Perth 25 September 2007

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VT;HG;EMERALD;010