EMERALD RESOURCES NL - Annual Report 2010

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ABN: 72 009 795 046

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ANNUAL FINANCIAL REPORT for the year ended 30 June 2010

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Corporate Information ........................................................................................... 1 Glossary of terms .................................................................................................. 1 Letter from the Chairman ....................................................................................... 2 Directors’ Report ................................................................................................... 4 Auditors’ Independence Declaration ....................................................................... 33 Corporate Governance Statement .......................................................................... 34 Statement of Comprehensive Income .................................................................... 38 Statement of Financial Position ............................................................................. 39 Statement of Changes in Equity ............................................................................ 40 Statement of Cash Flows ...................................................................................... 41 Notes to the Financial Statements ......................................................................... 42 Directors’ Declaration .......................................................................................... 77 Independent Auditor’s Report ............................................................................... 78 ASX Additional Information .................................................................................. 80

This financial report covers the consolidated entity consisting of Emerald Oil & Gas NL (“Emerald” or “the Company”) and its subsidiaries (together the “Group” or “Consolidated Entity”). The financial report is presented in the Australian currency.

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

Emerald Oil & Gas NL Suite 2 12 Parliament Place 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 4 to 32, which does not form part of this financial report.

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

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ACN: 009 795 046

Corporate Information

Directors: Jeremy Shervington Chairman

John Hannaford Non Executive Director

Robert Berven Non Executive Director

Registered & Principal Office:

Suite 2, 12 Parliament Place WEST PERTH WA 6005 Telephone: + 618 9482 0510 Facsimile: + 618 9482 0505

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

Mike Krzus Managing Director

Company Secretary Morgan Barron

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

Auditors:

HLB Mann Judd Level 4, 130 Stirling Street PERTH WA 6000

Solicitors:

Share Registry:

Security Transfer Registrars Pty Ltd PO Box 535 APPLECROSS WA 6953 Telephone +618 9315 2333

Jeremy Shervington and Associates 52 Ord Street WEST PERTH WA 6005

Glossary of terms

Bcf: billion cubic feet bbl: barrel of oil BTU: British thermal unit ft: feet km: kilometres Mcf: thousand standard cubic feet of gas Mcfd: thousand standard cubic feet of gas per day MMcf: million standard cubic feet of gas MMcfd: million standard cubic feet of gas per day NRI: net revenue interest = WI x RI RI: revenue interest - the % interest in production revenue available after deduction of royalties and overriding royalty interests TD: total depth of a well WI: working interest

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Letter from the Chairman

Dear Shareholder,

I am pleased to present the 2010 Annual Report of Emerald Oil & Gas NL.

During the year, the Group concentrated on consolidating operational control of the Appalachian Gas Project in Kentucky, USA and increasing its interest in the NW Alice gas/condensate discovery in Texas, USA from 14% to 35%, in anticipation of appraisal drilling later in 2010. Exploration activity in Emerald's large offshore Canning Basin exploration permits in North Western Australia is ongoing with the purchase and interpretation of additional seismic data.

USA Projects

Significant changes were made in Emerald's Appalachian gas business during the year. Emerald partnered with a new operator to form a jointly owned company, Kentucky Energy Partners (KEP), to re-ground Emerald's gas business in Kentucky. This mitigated the non-performance and ultimate bankruptcy of Emerald's original operator, which unfortunately delayed planned gas production from Kentucky. The formation of KEP has resulted in a much stronger land tenure position, with 1400 acres and 14 existing wells currently under lease and operational control of field activities. Initial gas production from KEP's Beetree Project is expected in Q4 2010. Emerald is now exceptionally positioned to generate revenue in the 2011 financial year, while establishing a significant resource/reserve asset for the Group.

In Texas, Emerald, with its partner Oso Exploration, seized an opportunity during the year to acquire Noble Energy's NW Alice interests in existing and additional leases and an additional 15 square miles of 3D seismic data over the 95 Bcf NW Alice gas-condensate discovery. This increased Emerald's working interest from 14% to 35% in an expanded NW Alice Joint Venture which now holds over 5200 lease acres located within 27 square mile AMI area over the gas bearing structure, all of which is covered with good quality 3D seismic. The first appraisal well is planned to be drilled in Q4 2010 and has the potential to add very significant Company value.

Australian projects

Emerald is currently in discussions with its joint venture partners regarding further well operations to determine whether the Stokes Bay 1 is a commercial gas or oil discovery.

During the year, 1600 km of reprocessed 2D seismic located in Emerald's 8600 square kilometres of offshore State and Commonwealth exploration permits was purchased. Initial interpretation of this and all other available seismic data is ongoing. Emerald's total Canning Basin acreage now covers approximately 9,600 square kilometres along the east-west trending Pinnacle fault trend, which has demonstrated a working petroleum system with several oil and gas discoveries.

Emerald is currently positioned to deliver significant cash flow from Appalachian gas production and substantial value growth from successful NW Alice drilling in the coming financial year, while working to demonstrate the exploration potential in its Canning Basin acreage.

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Letter from the Chairman (continued)

Emerald's recent successful rights issue in September 2010 now provides the Company with the funds required to confidently progress its current projects and actively engage with substantial new opportunities for the Company's next growth phase

Your Directors are committed to developing Emerald into a successful exploration and production company and we look forward to the continued support of shareholders in achieving this outcome.

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Yours sincerely, Jeremy Shervington Chairman

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Directors’ Report

Your Directors are pleased to submit their report on the Consolidated Entity (“Consolidated Entity” or “Group”) representing Emerald Oil and Gas NL (the “Company”) and its controlled entities, for the year ended 30 June 2010.

1. DIRECTORS

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

Jeremy Shervington B.Juris, LLB (54) - 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 over 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, Altera Resources Ltd (appointed 8 August 2006) Non Executive Director, Australian Zircon NL (appointed 16 February 1998) Non Executive Director, Prairie Downs Metals Limited (appointed 11 October 2002) Non Executive Director, Papillon Resources Limited (appointed 11 May 2006) Non Executive Chairman, Stirling Resources Limited (appointed 13 July 2009) Non Executive Director, Industrial Minerals Corporation Limited (appointed 17 January 2004)

OTHER DIRECTORSHIPS IN THE LAST THREE YEARS

Non Executive Director, Groote Resources Limited (appointed 11 May 2006, resigned 22 March 2010)

Mike Krzus BSc (Petroleum Engineering) GAIDC, SPE . (52) - appointed 13 August 2009

Chief Executive and Operating Officer/Managing Director

EXPERIENCE AND EXPERTISE

Mike Krzus is an experienced petroleum industry executive with over 25 years experience managing technical and business areas in upstream oil & gas, LNG and geothermal. He holds a Diploma in Oil and Gas Technology from the British Columbia Institute of Technology and a BSc. in Petroleum Engineering Tulsa University.

OTHER CURRENT DIRECTORSHIPS

None

OTHER DIRECTORSHIPS IN THE LAST THREE YEARS

None

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Directors’ Report (continued)

1. DIRECTORS (CONTINUED)

Robert Berven BEng (Geol), MSc (Geol) (69) - appointed 14 June 2006 Non Executive Director

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

John Hannaford BCom (UWA), C.A., F.Fin. (44) - appointed 14 June 2006 Non Executive Director

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

None

OTHER DIRECTORSHIPS IN THE LAST THREE YEARS

Non Executive Director, Atlantic Limited (appointed 4 July 2007, resigned 11 April 2010) Non Executive Chairman, Bathurst Resources Ltd (appointed 30 May 2007, resigned 27 February 2009)

Non Executive Director, NeuroDiscovery Limited (appointed 14 April 2005, resigned 31 July 2009)

2. COMPANY SECRETARY

Morgan Barron B.Com (UWA), C.A. S.A.Fin - (appointed 24 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 transactions.

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Directors’ Report (continued)

3. DIRECTORS’ MEETINGS

During the financial year, thirteen Directors’ meetings were held with the following attendances:

attendances:
Directors	Meetings Attended	Meetings Eligible to Attend
J. Shervington	13	13
R. Berven	13	13
J. Hannaford	13	13
M. Krzus	13*	11

Prior to being appointed as a director, M.Krzus attended two meetings by invitation.

4. PRINCIPAL ACTIVITIES

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

5. OPERATING AND FINANCIAL REVIEW

Activity Summary

During the year Emerald focused primarily on its USA projects, in particular, increasing the Company's interest and progressing drilling on its NW Alice gas discovery and its Appalachian Gas Development Project. This is consistent with Emerald's strategy to deliver an operating cash surplus and achieve step change company growth.

In NW Alice, Emerald increased its working interest from 14% to 35% by purchasing Noble Energy's interests in the NW Alice area with its partner Oso Exploration. The Company now holds a position in over 5200 lease acres and a total of approximately 27 mi[2] of 3D seismic over the large gas/condensate bearing structure drilled by Emerald's RJ Hunter #1 well in 2007. A well is planned for Q4 2010.

Emerald transformed its Appalachian gas business during the reporting period, moving from an unsatisfactory operating arrangement to a successful partnership with a competent local operator. P&J Resources, the local Operator with whom Emerald initially established its Appalachian gas position in 2008, proved incapable of effectively operating Emerald's gas assets under various agreements and ultimately filed for Chapter 11 bankruptcy protection. During the year Emerald formed a new limited liability company, Kentucky Energy Partners LLC (KEP), with Slone Production and is now progressing several gas development projects concurrently in Magoffin County, Kentucky. At the time of this report KEP holds approximately 1400 acres under lease, with 14 wells potentially capable of gas production, six of which have flow tested over 1 MMcfd in aggregate to date.

Emerald's activities on its Australian projects in the Canning Basin in North Western Australia are in early exploration stage and concentrated on desktop studies. A detailed technical review of all Canning Basin acreage was conducted early in the year to assess the prospectivity of the acreage and to better focus exploration effort. As a result of this review, Emerald decided to withdraw its Exploration Permit Application for EPA 4/05-6 and to concentrate its efforts on the more prospective offshore section of the Pinnacle Fault trend extending across its offshore exploration permits using all available data, including 1600km of reprocessed 2D seismic data purchased during the year.

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Emerald's Vision

Build Emerald to $25[+] million market capitalisation with a solid foundation for further growth within the next two years.

Growth Strategy

Establish operating cash surplus through Appalachian gas production and NW Alice gas/condensate production
Prove NW Alice reserves base and demonstrate Appalachian gas potential to deliver step change Company value growth in the short term
Capture one or more upstream oil and gas opportunities with the potential to increase Emerald's market capitalisation to $25[+] million while increasing share price.
Selectively cash out of US assets at optimal value points to fund additional growth opportunities

In implementing the strategy, Emerald intends to:

Ensure its ability to influence key technical, operational and commercial decisions driving asset value (substantial working interests)
Partner only with competent operators having local knowledge
Select a few areas of interest and develop deep technical understanding

Board Commitment

In pursuing Emerald's strategic objectives, the Board is committed to:

Identifying and capturing opportunities that will enhance long term shareholder value.
Applying the Company’s funds prudently and efficiently to provide sustainable returns to Shareholders in accordance with robust and well considered business plans;
Maintaining the highest levels of corporate governance in conducting Emerald's business
Adopting high standards of occupational health and safety, environmental management and ethics;
Recognising and honouring all legal obligations to its stakeholders including employees, joint venture partners, customers, traditional owners and the community as a whole.

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Project Portfolio

Emerald holds a portfolio of gas and oil assets ranging from high potential exploration through to production.

Emerald Oil and Gas NL Asset Portfolio

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R1, EP104, L15
(12.75% WI) (direct EMR interest %)
- 1000 km² permits
- Stokes Bay gas discovery? Canning Basin Cashflow
(Australia) Company Value Growth
High Potential Exploration
TP24, EP463, WA-419-P
(100% WI)
- 8600 km² exploration permits Sweet Gas Projects
- 14 gas wells
- 1400 lease acres
- Multiple gas projects
EMR (100% WI)
- 178 lease acres Appalachian Gas
- Potential RJ Hunter KEP LLC
NW Alice
discovery well re-drill (USA)
(USA)
(75% equity)
Shale Gas Sour Gas
OSO JV -- 5200 lease acresSeveral drilling locations(35% WI) -Devonian Shale currently areally extensive -- shut in gas productionawaiting gas
- first well Q4 2010 undeveloped processing plant
- expect approx 2 Bcf gas,
60,000 bbl oil per well
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Significant Dealings

NW Alice Additional Interest Acquisition

Emerald, together with its partner, Oso Exploration (“ Oso ”) purchased all of Noble Energy Inc interests in the NW Alice project area. Emerald now holds a 35% Working Interest in over 5200 lease acres and 27 square miles of high quality 3D seismic data over the gas/condensate bearing structure near the town of Alice in Jim Wells County, Texas. Emerald paid a total of $US350,000 for its additional interests. Oso and Emerald now plan to drill a well during Q4, 2010 on one of several drilling locations identified from interpretation of the 3D survey data. The well will target the same gas bearing Yegua sands intersected in the RJ Hunter #1 gas/condensate discovery well drilled in 2007.

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Kentucky Energy Partners Formation

In November 2009, Emerald formed Kentucky Energy Partners LLC (KEP) with Slone Production LLC, a competent local gas field operator and engineering consultant. Emerald holds a 75% interest, with Slone owning the remaining 25% in KEP. To date KEP has secured approximately 1400 acres of leases, containing 14 potentially productive existing gas wells in Magoffin County, Kentucky. KEP is concurrently progressing several separate gas projects to build a package of producing Appalachian gas assets.

NOXXE dealings and subsequent legal action

On 11 March 2010, Emerald announced execution of a Memorandum of Understanding securing an option to acquire 31.5% foundation equity interest in a newly formed company, NOXXE LLC (via payment of US$550,000), which holds interests in producing oil and gas leases in Harris and Galveston counties, Texas USA. Subsequently, the other NOXXE parties breached their obligations to Emerald under various agreements and Emerald has filed actions in the District Court of Harris County, Texas against all relevant parties to seek appropriate remedies for such breaches. After filing the legal actions, NOXXE unconditionally tendered funds to Emerald totalling $US550,000, however Emerald is still pursuing its lawsuit against NOXXE.

P&J Resources Inc Bankruptcy

Emerald has registered its claims in the Kentucky Bankruptcy Court in regard to business dealings with P&J Resources in Kentucky and West Virginia. The court has already awarded Emerald the right to reclaim its wells from the bankruptcy action and re-bond them under a different Operator. Emerald is now in the process of evaluating the wells with the intention of operating them as part of KEP operations.

5.1 Exploration and Production Activities

5.1.1 USA Projects

Appalachian Gas - Magoffin County, Kentucky

- Appalachian Basin Geology and Exploration History

The Appalachian Basin in Eastern USA has a long history of hydrocarbon production, and contains many of the oldest oil & gas fields in the world. This Basin extends from New York State (Northeast) to Alabama (Southwest) a distance in excess of 1,000 kilometres, and contains over 1,000 named fields.

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

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Map of the Appalachian Basin showing the extent of Devonian Shales

The Appalachian Basin still remains an important part of the USA domestic petroleum industry today, with thousands of producing oil & gas wells. The main focus for many years in the Appalachian Basin has been natural gas, with the majority of wells targeting shallow, low risk, blanket-type pay zones at depths above 5,000 feet depths.

More recently, Devonian Shale gas plays such as the Marcellus, Utica and Ohio plays have caused much excitement and attracted significant attention as part of the upsurge in USA shale gas production, which has transformed the US gas market.

Factors contributing to the continued interest & success in this Basin include:

Low geological risk due to multiple, geographically extensive, gas bearing formations
Premium gas prices due to proximity to largest eastern USA population centres (low transportation charges) and high heating value (8-10% premium over Henry Hub prices)
Shallow depths to reservoirs resulting in short drilling times and lower costs
Recent well technology development enabling the areally extensive shale gas deposits to be developed economically.

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

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Magoffin County, USA Location Map

Emerald's areas of interest in the Appalachian Basin are in Magoffin County in Eastern Kentucky. Wells in Emerald’s Appalachian areas of interest typically intersect combinations of several areally extensive gas bearing zones, including the Mississippian Berea Sandstone, the Devonian Shales, Devonian/Silurian Corniferous limestones, the Silurian Big 6 sandstone, and the Ordovician Trenton/Black River. This provides a very low risk geological environment for drilling and opportunities for multiple zone completions in individual well bores.

However, individual well production rates are characteristically low. Productive gas formations can be partially depleted and reservoirs generally exhibit moderate to low permeability. A "good" producer is typically capable of flowing several hundred Mcfd. Gas production is dry, with no liquid hydrocarbons or formation water produced. However, low well costs and the ready availability of thousands of existing wellbores provides the opportunity to establish gas production at low unit costs (i.e. $/Mcf production).

Kentucky Gas Development Activities

Emerald initially attempted to establish an Appalachian gas position in 2008/2009 with P&J Resources Inc, a local gas operator. This was not successful due to operator capability issues and ultimately culminated in P&J's filing for bankruptcy in June 2009. However, valuable experience and insight was gained on the essential requirements for building a successful Appalachian gas business.

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

In November 2009, Emerald formed a new company, Kentucky Energy Partners LLC (KEP), with Slone Production LLC, a competent local gas field operator and engineering consultant. Emerald holds a 75% interest in the new company, with Slone owning the remaining 25%. To date KEP has secured approximately 2000 acres of leases, containing 14 potentially productive existing gas wells in Magoffin County, Kentucky.

Three separate gas projects are being progressed concurrently to build Appalachian gas production. Initial production from the Beetree Project is expected in Q4 2010. An ongoing well assessment program is assessing the condition, production potential and gas quality of wells on KEP's current leases and on leases prospective for future acquisition. To date aggregate sweet gas production potential in excess of 1000 Mcfd has been demonstrated from well tests.

22 Mile Project

KEP's 22 Mile project, consisting of two producing wells and a third well awaiting completion, commenced production in February 2010. The two producing wells had previously been produced at 200 Mcfd into the gathering system in 2008, prior to KEP acquiring the lease. However, unexpectedly high H2S levels in the gas has resulted in limiting production to approximately 30 Mcfd. Options for managing the H2S are being considered to return the wells to stable production at flow rates closer to those previously achieved.

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22 Mile Project gas well

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Beetree Project

The Beetree Project, the second and more ambitious KEP gas project, involves a 10 km gathering line to provide gas market access for a number of stranded sweet gas wells and a new sales gas pipeline tap.

The first 3 km section of line was completed during the year and the remaining 7 km section is expected to be completed in November 2010. Once the line is completed, production from between 2 and 4 wells is expected to start up with initial gas production rates between 500 Mcfd to 1000 Mcfd. Additional wells have been identified for possible acquisition and connection to the line.

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Salt Lick Project

The Salt Lick Project currently consists of approximately 989 lease acres with 7 existing gas wells. A well testing program in the coming months determine its sweet and sour gas production potential.

Shale Gas Potential

Emerald's area of operations in Magoffin County is underlain by the geographically extensive Devonian Shale (see figure in the previous "Appalachian Basin - Geology and Exploration History" section), locally known as the Ohio Shale. The lower section of this shale contains several hundred feet of organic, gas bearing shales, which larger operators in the region are now starting to produce with modern completion techniques and horizontal wells.

Plans to define the shale gas reserves Beetree pipelining operations potential and establish initial shale gas production with re-completions or new horizontal wells are currently being developed. Shale gas is sweet and could therefore be produced through gas gathering infrastructure from KEP projects currently underway.

Sour Gas Potential

Gas from the hundreds of existing wells in the area contains varying levels of Hydrogen Sulphide (H2S), which must be removed prior to sale. Where H2S levels are low, the H2S can be economically removed from the wellhead gas with dry chemical scrubbers (sweet gas). Gas with higher H2S gas which cannot be produced economically with wellhead treatment (sour gas), will require a gas plant to remove the sulphur compounds including H2S.

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

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Emerald is therefore initially targeting sweet gas production for its first projects. However, the sour gas potential of the area is much greater than that of sweet gas. Emerald/KEP is therefore also working with other parties in the area to unlock the sour gas potential of the area through the installation of a central gas processing facility and shared use of existing gathering infrastructure.

Shut in sour gas well

North West Alice - Jim Wells County, Texas

The NW Alice gas/condensate field was discovered by the RJ Hunter #1 well in 2007 (Emerald 10% WI) and is located in central Jim Wells County, near the town of Alice, Texas.

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Jim Wells County, USA Location Map

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Regional Geology

The NW Alice field is the northern extension of a NE-SW Yegua gas trend, a fault bounded structure with several Yegua Gas Fields such as Ben Bolt, Braman, Starr Brite, Los Rubios and Four Sevens. These fields, in Jim Wells and Duval counties, have produced more than 160 Bcf gas and 3 MMbbl condensate from the Yegua sands. The two primary producing reservoirs are known locally as the Y-15 (Middle Yegua) and the

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Y-21 (Lower Yegua) sands. These sands are low-energy shelf deposits (areally extensive blanket sands), fifteen feet thick on average, with lateral porosity and permeability variations.

Shallow gas plays are also present in the Frio, Vicksburg and Stillwell sands. Several of these sands were gas bearing in the RJ Hunter #1 well.

In 2007, Emerald farmed in (10% WI) to a 12.5 mi[2] Area of Mutual Interest (AMI) containing 2500 lease acres located over an undrilled section of the anticline structure to the north of the main producing Yegua fields.

The discovery well, RJ Hunter #1 was drilled in March 2007 to a total depth of 8500 feet. The well intersected 50 feet of net pay containing gas/condensate in two main gas bearing zones and smaller intervals in the Middle and Lower Yegua sands, as well as shallower gas sands. Unfortunately, highly over-pressured Lower Yegua gas sands caused the wellbore casing to collapse on perforating the sand, so no flow test was possible. A subsequent flow test from the Middle Yegua sand was not definitive, producing gas and fresh water volumes. The well was then suspended.

Using well data from RJ Hunter #1 and offset wells, P3 reserves in the 12 mi[2] NW Alice AMI area were estimated at approximately 100 BCF gas and 2.5 million barrels of condensate.

Based on the results from the RJ Hunter #1 well, Noble Energy (Operator), acquired, processed and interpreted approximately 50mi[2] of 3D seismic data, which included the NW Alice AMI and the remainder of the structure to the North East. Noble identified seven drilling locations based on the 3D seismic interpretation and acquired a number of additional leases both inside and outside the AMI area to consolidate its position around the most prospective areas. However, Noble subsequently took a corporate decision to focus on recent large international discoveries.

In June 2010, Noble accepted an offer from OSO Exploration and Emerald, to sell its interests in over 5200 lease acres over the NW Alice gas trend, lying both inside and outside the NW Alice Joint Venture Area of Mutual Interest (AMI) and to license to an additional 15 square miles (9600 acres) of 3D seismic data contiguous to the 12 square miles (7600 acres) of 3D data already held over the previous AMI. As a result of this transaction Emerald increased its Working Interest to 35%, with the remaining interest being held by OSO Exploration.

The newly leased 3D data was interpreted and several drilling locations were identified. Drilling to follow-up the RJ Hunter #1 gas/condensate discovery is planned for Q4 2010.

Separately, during 2009, Emerald acquired 100% WI in the RJ Hunter #1 Discovery well and surrounding 178 acres. This provides Emerald with the option to re-drill the well to a position higher on the structure and complete it as a gas/condensate producer. Emerald is also considering plans to acquire up to an additional 1000 acres of lease acreage contiguous to its current 100% WI area, either as part of the new NW Alice joint venture with OSO or separately at 100% WI.

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

The main targets for NW Alice drilling are the Middle and Lower Yegua sands. Both sands contain similar gas with a gas to condensate ration of 20 to 30 bbl/MMscf. Both sands will be targeted in every well. Gas and condensate recoveries from these sands are expected to be similar. Each successfully drilled sand on this structure could be expected to have characteristics approximately as follows:

2 MMcfd average initial production rate
2.5 Bcf gas & 60,000 Bbl condensate recovered per well
15 year production life

5.1.2 Australian Exploration – Canning Basin

Emerald's exploration acreage in the Canning Basin currently comprises approximately 9,800 square kilometres in the Canning Basin in Western Australia, located approximately 1650 km (1000 mi) NNE of Perth. These permits lie on the highly prospective Pinnacle Fault trend, which runs for approximately 225 km along the northern edge of the basin.

The Pinnacle Fault is a key structural element between the Fitzroy Sub-Basin and the Lennard Shelf. It is believed to be the conduit for oil and gas migration from the Fitzroy Sub-Basin into structural and stratigraphic traps on the adjacent Lennard Shelf to the north. Emerald's acreage includes the western section of the fault's extension offshore as well as a section over the middle of the fault, to the West of the oil producing Blina/Sundown area.

In view of the discovery of porous Devonian “reefal” reservoir rocks in the Stokes Bay #1 well in EP104/R1, Emerald believes there is significant potential to discover oil and gas in several similar analog prospects along the offshore extension of the Pinnacle Fault (see map below).

Current Canning Basin tenement holdings

Exploration Permit/Retention Licence/Applications Emerald Net Working Interest	Permit Size (approx sq km)
EP 104 12.75% Retention Lease R1 12.75% Production Licence L98-1 (option) 12.75% EP463 100% TP24 100% WA-419-P 100% Total	500 300 200 200 400 8,000
	9,600

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5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

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EP104 (12.75% WI) - Onshore Western Australia

Emerald farmed into three permits in the Canning Basin, Western Australia in 2007 - EP104 (R4), Retention Lease R1 and L-98-1 Production License Application.

Two wells, Valentine 1 and Stokes Bay 1, were subsequently drilled.

Valentine 1 is located approximately 20 kilometres north of the township of Derby in northwest Western Australia's Kimberley region. The primary reservoir objective was the Late Devonian-aged Virgin Hills Formation.

ARC Energy drilled Valentine 1 as a vertical well to a total depth of 3,430 metres in September - October 2007.

The well encountered very strong gas shows and indications of porosity in the Anderson and Laurel Formations down-dip from the target interval in the Stokes Bay #1 well. This was an extremely positive indication for Stokes Bay #1 which was then targeted to intersect these objectives within closure, some 90 meters up-dip from the Valentine #1 intersection.

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

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Valentine 1 and Stokes Bay 1 drilling
location
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The Stokes Bay 1 well was drilled as a sidetrack from the Valentine 1 wellbore with a final total depth of 2,777 metres. The purpose of the sidetrack was to test the gas potential of the Nullara reefal carbonates, following gas shows in Valentine-1 well. Pressure gradient studies indicate that the Nullara reefal carbonates could be hydrocarbon-bearing.

The well was suspended after large volumes of drilling mud were lost in what is believed to be a cavernous reef system in the Nullara Formation. Since then, two attempts were made by the Operator, Buru Energy Limited, to induce flow in the well and to obtain a gas sample. Both attempts failed. However wellhead pressures of

1200 psi and gas accumulation in the well bore re-occurred after each attempt.

Well operations are being planned for Q4 2010 to acquire reservoir fluid samples and indicative gas flow rates to determine if the Stokes Bay is a potentially commercial gas discovery. A successful operation on Stokes Bay could confirm a very substantial commercial gas or oil accumulation located in close proximity to the planned LNG hub at James Price Point.

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

L15 (option to farm in for 12.75% WI) - Onshore Western Australia

Early in 2010, the WA Department of Mines and Petroleum granted Production Licence L15 over an area including the West Kora oil discovery. Emerald holds an option to farm in to the West Kora Production Licence by paying 13% of West Kora #1 workover costs to earn a 12.75% WI.

The licence covers two rectangular blocks, 6054 and 6126, and contains the West Kora-1 oil discovery. L15 also is nearby the Point Torment-1 gas discovery and the more recent Stokes Bay-1 well.

West Kora-1 was drilled in 1984 in EP 104 by Esso Australia and had oil shows in the Anderson Formation. Following drill stem testing, a production test was carried out over the gross interval 1735-1751m. This resulted in the production of about 20,000 barrels of oil at an initial rate of 350 barrels per day with a water cut of 35%, which subsequently increased to 85%.

Subsequent well operations from June 1992 to January 1998 demonstrated the need for a workover program to isolate the water production.

Emerald is currently awaiting advice from Buru regarding plans for the activity plans to re-establish oil production from West Kora #1 and assess other opportunities in the new Production Licence.

Offshore Exploration Permits: EP463 & TP24 (Lacepede Islands), WA-419-P

In December, 2008, Emerald was awarded 8600 square kilometres of contiguous Exploration Permits in State and Commonwealth areas.

Woodside Petroleum Limited was awarded the three adjacent Commonwealth blocks to the South and West of Emerald's acreage and unsuccessfully bid for the block awarded Emerald as WA-419-P. Woodside is the major participant and Operator of the Browse LNG Project likely to be developed at James Price Point, located approximately 80 kilometres South of Emerald's permits. If the LNG development proceeds as planned, this would significantly increase the potential commerciality of any gas discovery in the area.

Emerald is currently evaluating 1600 km of recently purchased processed 2D seismic data and other available data to further assess prospectivity. Insights from this new data will also inform planning for future seismic acquisition in the permit area over the next few years.

After an initial review of the seismic data is completed, Emerald will be seeking to farm out a portion of its 100% interest in this large permit area in anticipation of new seismic acquisition in 2011.

Emerald is also evaluating potential of its acreage for CO2 geosequestration. Major gas discoveries for all of the potential LNG developments in the Browse Basin contain significant quantities of CO2 which will need to be removed in the LNG process and sequestered to avoid greenhouse gas emissions.

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Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Legislation is in place to enable geosequestration in offshore Commonwealth areas and existing petroleum tenement holders are accorded certain preferential rights in respect of CO2 geosequestration potential in their areas of tenure.

5.2 Corporate

Emerald Oil & Gas NL changed its registered office during the year to Suite 2, 12 Parliament Place, West Perth WA 6005.

5.2.1 Capital raising

During the year Emerald raised $606,000 before costs by way of private placement to sophisticated clients of DJ Carmichael.

5.3 Financial Results

The comprehensive loss of the Group for the financial year 30 June 2010 amounted to $4,578,300 (2009: $2,154,636) after providing for income tax, foreign exchange translation and non-controlling interests.

At 30 June 2010 the Group has no debt and has $0.2 million cash. Subsequent to reporting date, the Group completed a private placement and a rights issue, as detailed in Note 29.

6. 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.

7. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

The Company is not aware of any matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Company or Consolidated Entity, the results of those operations or the state of affairs of the Company and Consolidated Entity in subsequent financial years.

8. SIGNIFICANT EVENTS AFTER THE BALANCE DATE

NOXXE Oil and Gas LLC Unsolicited Return of Funds

Subsequent to year end, as announced on 11 August, NOXXE Oil and Gas LLC unconditionally tendered funds to Emerald of US$550,000, representing Emerald’s equity contributions to date. Emerald is still pursuing its lawsuit against NOXXE.

Private Placement

On 19 August, Emerald issued and allotted 5,000,000 ordinary shares and 2,500,000 free attaching options exercisable at 5 cents each on or before 31 August 2012, being half of a private placement to sophisticated investors. The remaining half of the shares and options were allotted on 26 August 2010, to raise a total of $200,000 before costs.

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Directors’ Report (continued)

8. SIGNIFICANT EVENTS AFTER THE BALANCE DATE (CONTINUED)

Rights Issue

On 2 August 2010, Emerald issued a prospectus for a non-renounceable pro-rata entitlements issue for 960 shares and 480 listed options exercisable at 5 cents each on or before 31 August 2012 for every 1,000 shares held by each shareholder on 16 August 2010. The issue was fully underwritten by RM Capital Pty Ltd and closed on 3 September 2010, raising $2,550,000 before costs.

Apart from those matters listed above, the Company is not aware of any matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Company or Consolidated Entity, the results of those operations or the state of affairs of the Company and Consolidated Entity in subsequent financial years.

9. LIKELY DEVELOPMENTS

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.

10. 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	Unlisted Options	Unlisted Options
Director	Held Directly	Held Indirectly	Held Directly	Held Indirectly	Held Directly	Held Indirectly
J. Shervington	-	8,331,915	-	2,040,469	-	367,577
R. Berven	39,200	8,171,346	9,600	2,001,146	-	-
J. Hannaford	2,828,563	3,925,658	570,260	961,385	-	-
M. Krzus	5,000,000	709,226	2,500,000	173,688	5,000,000	-
Total	7,867,763	21,138,145	3,079,860	5,176,688	5,000,000	367,577

11. REMUNERATION REPORT (AUDITED)

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 Personnel (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.

ACN: 009 795 046

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Directors’ Report (continued)

11. REMUNERATION REPORT (AUDITED) (CONTINUED)

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

A. Names and positions of Directors and Key Management Personnel
B. Principles used to determine the nature and amount of remuneration
C. Details of remuneration
D. Service agreements
E. Share-based compensation
F. Additional information

A. Names and positions of Directors and Key Management Personnel in office at any time during the financial year are:

at any time	during the financial year are:
Name	Position	Appointment / Resignation date
J. Shervington	Non Executive Chairman	Appointed 23 January 2006
R. Berven*	Non Executive Director	Appointed 14 June 2006
J. Hannaford*	Non Executive Director	Appointed 14 June 2006
M. Barron	Company Secretary / CFO	Appointed 24 July 2007
M. Krzus	Chief Executive Officer &	Appointed 12 February 2009
	Managing Director	Appointed 13 August 2009

Mr Berven and Mr Hannaford became Non Executive Directors on 1 August 2009.

There were no changes in KMP after reporting date and before the date the financial report was authorised for issue.

B. Principles used to determine the nature and amount of remuneration

Remuneration philosophy

The remuneration policy of the Group 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 Group. The Key Management Personnel of the Group are the Executive and Non Executive Directors.

For the purposes of this report, the term ‘Executive’ encompasses the Executive Directors of the Group. The Board’s policy for determining the nature and amount of remuneration for Board members and Key Management Personnel of the Group is as follows:

Remuneration structure

In accordance with best practice corporate governance, the structure of Non Executive Director and Executive remuneration is separate and distinct.

Fixed Remuneration

The remuneration policy, setting the terms and conditions for the Executive Directors and Key Management Personnel, was developed by the Board. Non executive directors are remunerated on a consultancy basis based on services provided by each person. The Executive director is employed by the Company and a summary of his employment package is set out in (d) below. The Board reviews Key Management Personnel packages annually by reference to the Group’s performance, executive performance and comparable information from industry sectors and other listed companies in similar industries.

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Directors’ Report (continued)

11. REMUNERATION REPORT (AUDITED) (CONTINUED)

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 Group. 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.

Variable remuneration – short term incentive (STI)

There is currently no variable short term incentives provided to management in the form of a STI or bonus program. The Board is of the opinion that the variable long term remuneration provided to Directors and Executives is sufficient to align the interest of management with shareholders.

Variable remuneration – long term incentive (LTI)

Currently, this is facilitated through the issue of options to Key Management Personnel to encourage the alignment of personal and shareholder interests. The Board as a whole agrees upon an appropriate level of remuneration incentive for each Director, relative to their involvement in the management of the consolidated entity. The main performance criteria of the LTI remuneration is increasing shareholder value through aligning the Company with high quality exploration assets, which in turn increase share price. Options issued to Directors may be subject to market based price hurdles and vesting conditions, and the exercise price of options is set at a level that encourages the Directors to focus on share price appreciation. The Company believes this policy will be effective in increasing shareholder wealth.

On the resignation of Directors the options issued as remuneration lapse within 3 months unless exercised. For details of Directors and Key Management Personnel interests in options at year end, refer Note 8(c) of the financial report.

The Board may exercise discretion in relation to approving incentives such as 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. Consultants, Executive Directors and other Key Management Personnel do not receive any retirement benefits other than superannuation.

C. Details of Remuneration

Details of the remuneration of the Directors and the Key Management Personnel of Emerald Oil & Gas NL are set out in the following table. All individuals were in office for the full year, unless otherwise stated.

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Directors’ Report (continued)

11. REMUNERATION REPORT (AUDITED) (CONTINUED)

C. Details of Remuneration (continued) Key Management Personnel of Emerald Oil & Gas NL (Company and Consolidated Entity)

2010						Performance
	Short term benefits		Post employment benefits	Share-based payments (LTI)	Total	based remuneration and % consisting of
						options
	Salary	Non	Super-
	and Fees	Monetary	annuation	Options
	$	$	$	$	$	%
*Directors – Non Executive*
Jeremy Shervington_(Chairman)_	60,000	-	-	-	60,000	0%
John Hannaford(2)	60,000	-	3,960	-	63,960	0%
Robert Berven(1)	56,499	-	-	-	56,499	0%
*Specified Executives*
*Company Secretary/CFO*
Morgan Barron(2)	84,000	-	-	-	84,000	0%
CEO/COO
Mike Krzus(3)	270,377	-	25,287	91,879	387,543	23.7%
Total	530,876	-	29,247	91,879	652,002	14.1%
2009
*Directors – Non Executive*
Jeremy Shervington_(Chairman)_	60,000	-	-	-	60,000	0%
*Directors - Executive*
Robert Berven(1)	124,000	-	-	-	124,000	0%
John Hannaford(2)	202,000	-	-	-	202,000	0%
*Specified Executives*
*Company Secretary/CFO*
Morgan Barron(2)	86,000	-	-	-	86,000	0%
CEO/COO
Mike Krzus(3)	114,679	-	10,321	34,980	159,980	21.9%
Total	586,679	-	10,321	34,980	631,980	5.5%

(1) Payments were made to Berven Consultants Pty Ltd, a company associated with Mr Berven by the Consolidated Entity totalling $56,499, (2009: $124,000), for the provision of technical consulting and Director’s fees. 2009 payments include 2 months back payment for an increased rate effective from May 2008.

(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 totalling $15,000, (2009: $190,000). Mr Hannaford became a non executive director effective 1 August 2009. Company Secretarial and CFO fees of $84,000 (2009: $86,000) were also payed to Ventnor Capital in the year ended 30 June 2010. Director fees of $1,000 (2009: $12,000) were paid to Riverview Corporation Pty Ltd, a company in which Mr Hannaford has a beneficial interest. 2009 payments include 2 months back payment for an increased rate effective from May 2008.

(3) Appointed CEO on 2 February 2009.

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Directors’ Report (continued)

11. REMUNERATION REPORT (AUDITED) (CONTINUED)

D. Service Agreements
J Shervington, Non Executive Chairman
Monthly contract, agreed and reviewed annually
Director fees of $60,000 p.a. (2009: $60,000 p.a.) paid to Drumgaghan Pty Ltd
There are no termination benefits or provisions in the contract
No explicitly stated notice period

J Hannaford, Non Executive Director

Monthly contract, agreed and reviewed annually
Director fees of $48,000 p.a. (2009: Executive fees of $15,000 per month paid to Ventnor Capital Pty Ltd and Directors fees of $12,000 p.a. paid to Riverview Corporation Pty Ltd. The 2009 expense includes $10,000 relating to prior year fee increases approved in the current year)
There are no termination benefits or provisions in the contract
No explicitly stated notice period
R Berven, Executive Director, Technical
Monthly contract, agreed and reviewed annually
Director fees of $36,000 p.a. paid to Berven Consultants Pty Ltd (2009: Directors fees of $24,000 p.a. and executive fees of $96,000 p.a. paid to Berven Consultants Pty Ltd. The 2009 expense includes $6,000 relating to prior year fee increases approved in the current year)
There are no termination benefits or provisions in the contract
No explicitly stated notice period

Mike Krzus, Managing Director and Chief Executive Officer

Annual contract, agreed and reviewed annually
Salary of $315,000 p.a. (2009: $300,000 p.a.) inclusive of superannuation
There are no termination benefits or provisions in the contract
3 months written notice required for termination
5,000,000 10c options exercisable on or before 31 March 2014. Options vest in 4 tranches and are only exercisable upon Emerald realising a volume weighted average share price of greater than 20 cents for 5 consecutive days. The expense relating to these options in the current year is $91,879 (2009: $34,980).

E. Share-based Compensation

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 in prior periods as part of their remuneration and as incentive options to increase goal convergence between Directors and shareholders. The options are granted for no consideration, and are subject to vesting conditions which relate to the continuation of employment. Options issued in 2009 are subject to performance conditions requiring the share price of the company to be above 20 cents on a 5 day volume weighted average basis.

ACN: 009 795 046

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Directors’ Report (continued)

11. REMUNERATION REPORT (AUDITED) (CONTINUED)

E. Share-based Compensation (continued)

Where the Director ceases employment prior to the vesting of their options, the options are forfeited unless the termination was as a result of redundancy, death or in other circumstances where the Board believes are fair and reasonable. Vested options will lapse 3 months after termination of an Executive’s employment unless exercised. Options granted carry no dividend or voting rights.

The Group currently has no provisions to prohibit Executives from entering into arrangements to protect the value of unvested options. This includes entering into contracts to hedge their exposure to options or shares granted as part of their remuneration package.

Options Granted and vested during the year

No Key Management Personnel Options were granted or have vested during the current period. Details of options issued to Key Management Personnel during the comparative period are disclosed in the table below:

2009	2009
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	-	-	-	-	-	-	-	-	-
R. Berven	-	-	-	-	-	-	-	-	-
J. Hannaford	-	-	-	-	-	-	-	-	-

Executives
M. Barron	-	-	-	-	-	-	-	-	-
M. Krzus*	1,250,000	11/05/09	$0.0283	$0.10	31/03/14	1/8/09**	31/03/14	-	-
M. Krzus*	1,250,000	11/05/09	$0.0283	$0.10	31/03/14	1/2/10**	31/03/14	-	-
M. Krzus*	1,250,000	11/05/09	$0.0283	$0.10	31/03/14	1/8/10**	31/03/14	-	-
M. Krzus*	1,250,000	11/05/09	$0.0283	$0.10	31/03/14	1/2/11**	31/03/14	-	-

Mr Krzus was appointed as a Director on 13 August 2009.

** Subject to satisfying vesting conditions and achieving a 5 day volume weighted share price above 20 cents.

The total value of options granted to KMP during the year was $Nil (2009:$ 141,500). $91,879 relating to the 2009 options have been expensed during the current year as non-market based vesting conditions are satisfied, in accordance with Australian Accounting Standards (2009: $34,980).

No options issued to KMP’s were exercised during the year. In 2009, 2,000,000 management options exercisable at $0.25 each with a value of $115,800 expired.

ACN: 009 795 046

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Directors’ Report (continued)

11. REMUNERATION REPORT (AUDITED) (CONTINUED)

F. Additional Information

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.

The Company issues options to Directors and Executives in order to provide incentives to deliver shareholder returns.

The graph below shows the share price of Emerald since relisting on ASX in 2006.

EMR Share Price

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0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
30‐Jun‐06 31‐Aug‐06 31‐Oct‐06 31‐Dec‐06 28‐Feb‐07 30‐Apr‐07 30‐Jun‐07 31‐Aug‐07 31‐Oct‐07 31‐Dec‐07 29‐Feb‐08 30‐Apr‐08 30‐Jun‐08 31‐Aug‐08 31‐Oct‐08 31‐Dec‐08 28‐Feb‐09 30‐Apr‐09 30‐Jun‐09 31‐Aug‐09 31‐Oct‐09 31‐Dec‐09 28‐Feb‐10 30‐Apr‐10 30‐Jun‐10
----- End of picture text -----

In addition to share price performance, Group performance is also reflected in the movement of the Group’s earnings or loss per share over time. The graph below shows the loss per share for the past 4 years (being each full financial year since reinstatement to quotation to the ASX on 30 June 2006).

EMR loss per share (cps)

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0
2007 2008 2009 2010
‐1
‐2
‐3
‐4
‐5
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11. REMUNERATION REPORT (AUDITED) (CONTINUED)

Related party payments

Related party payments
	Consolidated
Other related parties	2010 $	2009 $
1) Legal	19,690	-
2) Serviced office charges	96,000	96,000
3) Bookkeeping, financial accounting, company secretary and admin	93,603	116,415
4), 5) & 6) Consulting fees	336,163	292,000
7) Directors’ fees	139,960	94,000

1) Payments made or payable to Drumgaghan Pty Ltd trading as Jeremy Shervington Legal Practice, for legal services provided by Jeremy Shervington and employees of Jeremy Shervington Legal Practice in relation to the preparation of legal documentation, agreements, prospectus, notice of meeting and other services in relation to secondary capital raisings.

2) Payments made or payable to Ventnor Capital Pty Ltd a company associated with John Hannaford for serviced offices totalling $96,000 (2009: $96,000) (excl GST).

3) Payments made or payable to Ventnor Capital Pty Ltd (a company associated with John Hannaford) for office bookkeeping, financial accounting, company secretarial and administration services provided by John Hannaford and employees of Ventnor Capital totalling $93,603 (2009: $116,415) (excl GST).

4) Payments were made to Berven Consultants Pty Ltd, a company associated with Mr Berven totalling $25,499, (2009: $102,000), for the provision of technical consulting services.

5) Payments were made to Ventnor Capital Pty Ltd, a company associated with Mr Hannaford, for consulting services as financial Director totalling $15,000, (2009: $190,000).

6) Consulting fees include salaries paid directly to Mike Krzus of $295,664 (2009: $125,000).

7) Payments were made to the following related party entities in relation to Directors fees:
(a) Berven Consultants Pty Ltd, a company associated with Mr Berven totalling $31,000 (2009: $22,000).
(b) Riverview Corporation Pty Ltd, a company associated with Mr Hannaford totalling $1,000 (2009: $12,000); and
(c) Drumgaghan Pty Ltd trading as Jeremy Shervington Legal Practice, a company associated with Mr Shervington totalling $60,000 (2009: $60,000).
(d) Payments to John Hannaford directly totalling $47,960 (2009: Nil)

All related party services were provided on normal commercial terms and conditions.

*End of Remuneration Report*

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Directors’ Report (continued)

12. 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.

13. SHARE OPTIONS

SHARES UNDER OPTION

At the date of this report, there are 98,072,754 unissued shares under option outstanding.

Date Granted	Expiry Date	Exercise Price	Number shares under option
23/01/2006 28/11/2008 11/05/2009 25/06/2010 18/08/2010 26/08/2010 17/09/2010	23/01/2011 31/05/2011 31/03/2014 30/06/2012 31/08/2012 31/08/2012 31/08/2012	$0.1768 $0.25 $0.10 $0.10 $0.05 $0.05 $0.05	661,639 2,000,000 5,000,000 11,661,115 2,500,000 2,500,000 73,750,000
			98,072,754

These options do not entitle the holders to participate in any share issue of the Company or any other body corporate. No shares were issued as a result of the exercise of an option during the current or comparative periods. No options have been exercised since balance date.

14. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS

During the financial year, the Company has paid a premium of $11,747 (2009: $21,221) to insure the Directors and Secretary of the Company.

The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Company, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company.

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Directors’ Report (continued)

15. NON-AUDIT SERVICES

There were no non-audit services provided by the Company's auditor, HLB Mann Judd in the current year. In 2009, the Company’s auditor, Ernst & Young provided tax consulting services to the value of $21,851. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The Directors are of the opinion that the services do not compromise the auditor’s independence as all non-audit services have been reviewed to ensure that they do not impact the integrity and objectivity of the auditor and none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board.

The nature and scope of each type of non-audit service provided means that auditor independence was not compromised.

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

Paid or payable to HLB Mann Judd: Audit and review fees Paid or payable to Ernst & Young: Audit and review fees	Consolidated 2010 $ 2009 $ 25,000 - - 36,035

16. AUDITORS’ INDEPENDENCE DECLARATION

The auditors’ independence declaration as required under section 307C of the Corporations Act 2001 for the financial year ended 30 June 2010 has been received and can be found on page 33.

17. AUDITOR

HLB Mann Judd continues in office in accordance with Section 327 of the Corporations Act 2001 .

Signed in accordance with a resolution of the Directors.

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M. Krzus Managing Director Perth 30 September 2010

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AUDITOR’S INDEPENDENCE DECLARATION

As lead auditor for the audit of the financial report of Emerald Oil & Gas NL for the year ended 30 June 2010, I declare that to the best of my knowledge and belief, there have been no contraventions of:

a) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
b) any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Emerald Oil & Gas NL.

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Perth, Western Australia 30 September 2010

L DI GIALLONARDO Partner, HLB Mann Judd

HLB Mann Judd (WA Partnership) ABN 22 193 232 714 Level 4, 130 Stirling Street Perth WA 6000. PO Box 8124 Perth BC 6849 Telephone +61 (08) 9227 7500. Fax +61 (08) 9227 7533. Email: [email protected]. Website: http://www.hlb.com.au Liability limited by a scheme approved under Professional Standards Legislation HLB Mann Judd (WA Partnership) is a member of International, a worldwide organisation of accounting firms and business advisers.

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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”) “Corporate Governance Principles and Recommendations” to the extent that they are applicable to the Company.

Information about the Company’s corporate governance practices available via the Company website 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.

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ACN: 009 795 046

Corporate Governance Statement (continued)

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.

APPOINTMENTS TO OTHER BOARDS

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

RISK MANAGEMENT SYSTEMS

The identification and management of risk, including calculated risk-taking activity is viewed by management as an essential component in creating shareholder value.

Management, through the Chief Executive Officer (CEO) is responsible for developing, maintaining and improving the Company’s risk management and internal control system. Management provides the Board with periodic reports identifying areas of potential risks and the safeguards in place to efficiently manage material business risks. These risk management and internal control systems are in place to protect the financial statements of the entity from potential misstatement, and the Board is responsible for satisfying itself annually, or more frequently as required, that management has developed a sound system of risk management and internal control.

Strategic and operational risks are reviewed at least annually as part of the forecasting and budgeting process. The Company has identified and actively monitors a number of risks inherent in the industry in which the Company operates. These include:

Fluctuations in oil and gas prices
Rights of tenure
Depletion of reserves
Fluctuations in demand for oil and gas
Loss of significant suppliers and customers
Increasing cost of operations
Changes in the regulatory environment

These risk areas are provided to assist shareholders and potential investors to better understand the risks faced by our Company and the industry in which we operate, and are not an exhaustive list of the business risks faced by the Company.

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ACN: 009 795 046

Corporate Governance Statement (continued)

RISK MANAGEMENT SYSTEMS (CONTINUED)

The Board also receives a written assurance from the CEO and Chief Financial Officer (CFO) that to the best of their knowledge and belief, the declaration provided to the Board in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control, and that the system is operating effectively in relation to financial reporting risks. The Board notes that due to its nature, internal control assurance from the CEO and CFO can only be reasonable rather than absolute. This is due to such factors as the need for judgement, the use of testing on a sample basis, the inherent limitations in internal control and because much of the evidence is persuasive rather than conclusive and therefore is not and cannot be designed to detect all weaknesses in internal control procedures.

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 2007 2[nd] edition 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	ASX Principle	Reference/comment
Principle	2: Structure the Board	to add value
2.4	The Board should	The Board has no formal nomination committee. Acting in
	establish a nomination	its ordinary capacity from time to time as required, the
	committee	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	4: Safeguard integrity	in financial reporting
4.1 – 4.4	The Board should	The Company does not have an audit committee. The
	establish an audit	Board believes that, given the small number of Directors on
	committee	the Board, the Board itself is the appropriate forum to deal
		with this function.

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ACN: 009 795 046

Corporate Governance Statement (continued)

CONTINUOUS REVIEW OF CORPORATE GOVERNANCE (CONTINUED)

ASX Principle	ASX Principle	Reference/comment
Principle	8: Remunerate fairly and responsibly
8.1	The Board should	Given the current size of the Board, the Company does not
	establish a remuneration	have a remuneration committee. The Board as a whole
	committee	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.
8.2	Companies should	The Board acknowledges the grant of options to Non
	clearly distinguish the	Executive Directors’ is contrary to Recommendation 8.2 of
	structure of Non	the ASX Corporate Governance Principles and
	Executive Director’s	Recommendations. However, the Board considers the
	remuneration from that	granting of Director Options to be reasonable in the
	of Executive Directors	circumstances, given the necessity to attract and retain the
	and senior executives.	highest calibre of professionals to the Company, whilst
		maintaining the Company’s cash reserves.

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ACN: 009 795 046

Statement of Comprehensive Income

For the year ended 30 June 2010

Notes Revenues 3 Cost of sales Gross Profit Other income 4 Financial administration, insurance and compliance costs Consulting and contracting expenses Impairment of property, plant and equipment 12 Impairment of exploration and evaluation expenditure 13 Impairment of oil and gas assets 14 Write off of exploration expenditure 13 Depreciation expense Share-based payments 24 General administration expenses Results from operating activities Finance income Loss before income tax benefit 5 Income tax benefit 7 Loss for the year 5 Other comprehensive income Exchange differences on translation of foreign operations Total comprehensive loss for the year Loss for the year is attributable to: Owners of the parent Non-controlling interest Total comprehensive loss for the year is attributable to: Owners of the parent Non-controlling interest Basic earnings (loss) per share - cents per share Diluted earnings (loss) per share - cents per share 6 6	Consolidated 2010 $ 2009 $ 28,554 - (25,779) -
	2,775 - 143 519,869 (369,105) (333,012) (703,168) (947,154) (157,264) - (3,085,925) (1,338,783) (273,915) - (40,886) - (20,357) (157) (91,879) (34,980) (281,620) (251,066)
	(5,021,201) (2,385,283) 44,454 230,647
	(4,976,747) (2,154,636)
	347,585 -
	(4,629,162) (2,154,636)
	51,232 -
	51,232 -
	(4,577,930) (2,154,636)
	(4,616,724) (2,154,636) (12,438) -
	(4,629,162) (2,154,636)
	(4,578,300) (2,154,636) 370 -
	(4,577,930) (2,154,636)
	(3.833) (3.833) (1.866) (1.866)

The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

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ACN: 009 795 046

Statement of Financial Position

As at 30 June 2010

Notes ASSETS Current assets Cash and cash equivalents 9 Trade and other receivables 10 Other financial assets 11 Total current assets Non-current assets Plant and equipment 12 Exploration and evaluation assets 13 Oil and gas assets 14 Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables 15 Total current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued Capital 16 Reserves 17 Accumulated losses Total equity attributable to owners of the parent Non-controlling interest TOTAL EQUITY	Consolidated 2010 $ 2009 $ 171,789 2,439,140 10,793 139,313 632,978 -
	815,560 2,578,453
	22,676 165,700 2,795,342 5,053,839 185,205 -
	3,003,223 5,219,539
	3,818,783 7,797,992
	133,179 195,136
	133,179 195,136
	133,179 195,136
	3,685,604 7,602,856
	15,546,499 14,991,022 (48,791) 420,424 (12,054,670) (7,808,590)
	3,443,038 7,602,856 242,566 -
	3,685,604 7,602,856

The above Statement of Financial Position should be read in conjunction with the accompanying notes.

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ACN: 009 795 046

Statement of Changes in Equity

For the year ended 30 June 2010

CONSOLIDATED Note	Issued Capital $ Options Reserve $ Foreign Exchange Translation Reserve $ Non-controlling Shareholders Premium Reserve $ Accumulated Losses $ Equity attributable to owners of the parent $ Non- controlling interest $ Total Equity $
Total equity at 1 July 2008 Loss for the period Total comprehensive loss for the period Transactions with owners recorded in equity Share-based payments: Options issued during the period 23 Total equity at 30 June 2009	15,001,822 374,644 - - (5,653,954) 9,722,512 - 9,722,512 - - - - (2,154,636) (2,154,636) - (2,154,636)
	- - - - (2,154,636) (2,154,636) - (2,154,636) (10,800) 45,780 - - - 34,980 - 34,980
	14,991,022 420,424 - - (7,808,590) 7,602,856 - 7,602,856
Total equity at 1 July 2009 Loss for the period Other comprehensive income Foreign exchange translation Total comprehensive loss for the period Transactions with owners recorded in equity Non-controlling interest contribution to subsidiary Non-controlling shareholders premium reserve Issue of shares, net of transaction costs Share-based payments: Options issued during the period 23 Options vested during the period Options expired during the period Options expired in prior periods Total equity at 30 June 2010	14,991,022 420,424 - - (7,808,590) 7,602,856 - 7,602,856 - - - - (4,616,724) (4,616,724) (12,438) (4,629,162) - - 38,424 - - 38,424 12,808 51,232
	- - 38,424 - (4,616,724) (4,578,300) 370 (4,577,930) - - - - - - (193) (193) - - - (242,389) - (242,389) 242,389 - 568,992 - - - - 568,992 - 568,992 (13,515) 13,515 - - - - - - - 91,879 - - - 91,879 - 91,879 - (258,844) - - 258,844 - - - - (111,800) - - 111,800 - - -
	15,546,499 155,174 38,424 (242,389) (12,054,670) 3,443,038 242,566 3,685,604

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

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ACN: 009 795 046

Statement of Cash Flows

For the year ended 30 June 2010

Notes Cash flows from operating activities Receipts from customers Interest received Payments to suppliers and employees Income tax benefit received Net cash used in operating activities 18 Cash flows from investing activities Proceeds from sale of assets Purchase of property, plant and equipment Exploration, evaluation and development expenditure Deposit refunded for infrastructure assets Contributions towards equity investments Net cash used in investing activities Cash flows from financing activities Proceeds from issues of shares Capital raising costs Net cash flows provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effect of exchange rates on cash holdings in foreign currencies Cash and cash equivalents at the end of the financial year 9	Consolidated 2010 $ 2009 $ 118,838 177,174 44,454 230,647 (1,517,560) (1,723,922) 347,585 -
	(1,006,683) (1,316,101)
	- 1,298,113 (18,229) (165,857) (1,292,570) (2,784,213) 115,009 - (632,978) -
	(1,828,768) (1,651,957)
	606,278 - (37,286) -
	568,992 -
	(2,266,459) (2,968,058) 2,439,140 5,407,348 (892) (150)
	171,789 2,439,140

The above Statement of Cash Flows should be read in conjunction with the accompanying notes.

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ACN: 009 795 046

Notes to the Financial Statements

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This financial report of Emerald Oil & Gas NL for the year ended 30 June 2010 was authorised for issue in accordance with a resolution of Directors on 30 September 2010.

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 26 June 2006, Emerald Oil & Gas NL acquired all of the outstanding shares in Emerald Gas Pty Ltd via an equity exchange. Emerald Gas Pty Ltd was deemed to be the accounting acquirer in this business combination. The transaction was 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.

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 is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis. The financial report is presented in Australian dollars ($).

The financial report has been prepared on a going concern basis.

During the period ended 30 June 2010, the Group incurred a comprehensive loss of $4,578,300 and net cash outflows of $2,266,459. The cash position of the Group as at 30 June 2010 was $171,789.

In arriving at their belief that the company is a going concern and therefore able to realise its assets and extinguish its liabilities in the normal course of business at the amounts stated in the financial report, the directors have considered the capital raising undertaken subsequent to balance date as detailed in the Directors’ Report and in Note 30.

The group has applied the revised AASB 101 Presentation of Financial Statements which became effective on 1 January 2009. The revised standard requires the separate presentation of a statement of comprehensive income and a statement of changes in equity. All non-owner changes in equity must now be presented in the statement of comprehensive income. As a consequence, the group had to change the presentation of its financial statements. Comparative information has been re-presented so that it is also in conformity with the revised standard.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. Statement of Compliance

The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.

C. Principles of Consolidation

Subsidiaries

The consolidated accounts comprise the assets and liabilities of Emerald Oil & Gas NL and its subsidiaries at 30 June 2010 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 acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group.

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.

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.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

C. Principles of Consolidation (continued)

Investments in Subsidiaries

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

Non-controlling interests

Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent.

Losses are attributed to the non-controlling interest even if that results in a deficit balance.

Joint Ventures

Jointly controlled assets

A jointly controlled asset involves joint control and offers joint ownership by the Group and other venturers of assets contributed to or acquired for the purposes of the joint venture, without the formation of a corporation, partnership or entity.

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 26.

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 date.

Deferred income tax is provided on all temporary differences at the balance 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

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D. Income Tax (continued)
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 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.

Unrecognised deferred income tax assets are reassessed at each balance 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 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 taxconsolidated group as at balance date.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 statement of financial position 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 statement of financial position.

Cash flows are included in the statement of cash flows 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 an allowance for any uncollectible amounts.

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. An impairment allowance 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. Debtors outstanding for greater than 120 days are considered objective evidence of impairment. The amount of impairment loss 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 impairment is recognised in the statement of comprehensive income.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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-to-maturity 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 at 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 non-derivative 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.

H. Exploration and Evaluation Expenditure

Exploration and evaluation expenditure in relation to each area of interest 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 the statement of comprehensive income in the period in which the decision to abandon the area is made.

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.

Once production statements are recieved from a particular well, the carried costs are transferred to oil and gas assets.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I. Oil & Gas Assets

Oil and gas assets are recognised at cost less accumulated amortisation and any impairment losses. Where commercial production in an area of interest has commenced, the associated costs together with any forecast capital expenditure necessary to develop proved and probable reserves are amortised over the estimated economic life of the field on a units-of-production basis.

Changes in factors such as estimates of proved and probable reserves that affect unit-ofproduction calculations are dealt with on a prospective basis.

Although an area of interest has entered the development and production phase, exploration activities within the same area of interest may continue. Such costs, although of an exploration nature, are classified as expenditure on development phase properties and are amortised along with carried forward costs and current financial year development expenditure. Areas of interest are recognised at the cash generating unit level, being the smallest grouping of assets generating independent cash flows which usually is represented by an individual oil or gas well.

J. Plant and equipment

Plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. All other repairs and maintenance are recognised in profit or loss as incurred.

Depreciation is calculated on a straight-line basis over the estimated useful life of the specific assets as follows:

Plant and equipment (office equipment) - over 3 years

The assets' residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end.

Derecognition

An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

K. 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 assets and liabilities denominated in foreign currencies are translated at the year-end exchange rate.

Group companies

The functional currency of the 100% owned overseas subsidiaries is currently Australian dollars, as funding is currently provided by the parent entity, and therefore US operations remain seen as an extension of Emerald Oil & Gas NL’s business activities.

The functional currency of Kentucky Energy Partners LLC (“KEP”) is US dollars. As at the balance date the assets and liabilities of KEP are translated into the presentation currency of Emerald Oil & Gas NL at the rate of exchange ruling at balance date and their statements of comprehensive income are translated at the weighted average exchange rate for the year.

The exchange differences arising on the translation are taken directly to a separate component of recognised in the foreign currency translation reserve in equity.

On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss.

The Board of Directors assess the appropriate functional currency of this entity on an ongoing basis. The functional currency of the Group’s 100% owned US subsidiaries may convert to US dollars upon successful establishment of oil or gas reserves in the USA.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

L. Business Combinations

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expenses as incurred. 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.

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 non-controlling 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 statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired.

Change in accounting policy

A revised AASB 3 Business Combinations became operative on 1 July 2009. While the revised standard continues to apply the acquisition method to business combinations, there have been some significant changes.

All purchase consideration is now recorded at fair value at the acquisition date. Contingent payments classified as debt are subsequently remeasured through profit or loss. Under the Group’s previous policy, contingent payments were only recognised when the payments were probable and could be measured reliably and were accounted for as an adjustment to the cost of acquisition. Acquisition-related costs are expensed as incurred. Previously, they were recognised as part of the cost of acquisition and therefore included in goodwill.

Non-controlling interests in an acquiree are now recognised either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. This decision is made on an acquisition-by-acquisition basis. Under the previous policy, the non-controlling interest was always recognised at its share of the acquiree’s net identifiable assets.

If the Group recognises previous acquired deferred tax assets after the initial acquisition accounting is completed there will no longer be any adjustment to goodwill. As a consequence, the recognition of the deferred tax asset will increase the group’s net profit after tax.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M. 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.

N. Share-based Payments

The Group provides benefits to employees (including Directors and KMP) 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.

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 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 corresponding 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’).

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

N. Share-based Payments (continued)

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.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.

O. Cash and Cash Equivalents

Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

P. Revenue

Revenue is recognised and measured 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 Group uses the sales method to account for sales of natural gas revenues. Under this method, revenues are recognised based on volumes of oil and gas sold to purchasers.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

P. Revenue (continued)

The following specific recognition criteria must also be met before revenue is recognised:

Revenue for product sales is brought to account when the product is passed from the Group’s physical control under an enforceable contract, when selling prices are known or can be reasonably estimated and the products are in a form that requires no further treatment by the Group.

Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, 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).

Q. Issued Capital

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.

R. Segment Reporting

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the existence of a line manager and the level of segment information presented to the board of directors.

Operating segments have been identified based on the information provided to the chief operating decision makers – being the executive management team.

The group aggregates two or more operating segments when they have similar economic characteristics, and the segments are similar in the nature of the minerals targeted.

Operating segments that meet the quantitative criteria as prescribed by AASB 8 are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to users of the financial statements.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

R. Segment Reporting (continued)

Information about other business activities and operating segments that are below the quantitative criteria are combined and disclosed in a separate category for “all other segments”.

Change in accounting policy

The Group has adopted AASB 8 Operating Segments from 1 July 2009. AASB 8 replaces AASB 114 Segment Reporting. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. This has not resulted in a change in the number of reportable segments presented by the Group as operating segments are reported in a manner that is consistent with internal reporting provided to the chief operating decision maker.

S. Earnings per Share

Basic earnings per share

Basic earnings per share is calculated by dividing the profit/loss 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.

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.

T. 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.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

U. Critical Accounting Estimates and Judgements

The preparation of financial statements in conformity with Australian Equivalents to International Financial Reporting Standards (“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:

Exploration and evaluation expenditure

Exploration and evaluation expenditure has been carried forward in accordance with policy 1 (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 statement of comprehensive income.

The carry forward of expenditure in relation to exploration permits in Western Australia and Commonwealth Waters ($169,705) is dependent on the Group meeting work commitments as set out in Note 25.

Impairment of assets

The Group assesses each cash generating unit annually to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, exploration potential and operating performance. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. Fair value for mineral assets is generally determined as the present value of estimated future cash flows arising from the continued use of the asset, which includes estimates such as the cost of future expansion plans and eventual disposal, using assumptions that an independent market participant may take into account. Cash flows are discounted by an appropriate discount rate to determine the net present value. Management has assessed its cash generating units as being an individual well, which is the lowest level for which cash flows are largely independent of other assets.

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.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 2: NEW ACCOUNTING STANDARDS AND INTERPRETATIONS

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.

In the current year, the Group has reviewed 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.

During the year, certain accounting policies have changed as a result of new or revised accounting standards which became operative for the annual reporting period commencing on 1 July 2009.

The affected policies and standards are:

Principles of consolidation – revised AASB 127 Consolidated and Separate Financial Statements and changes made by AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity and Associate
Business combinations – revised AASB 3 Business Combinations
Segment reporting – new AASB 8 Operating Segments
Financial Instruments – revised AASB 7 Financial Instruments: Disclosures

The Group has also reviewed all new Standards and Interpretations that have been issued but are not yet effective for the year ended 30 June 2010. As a result of this review the Directors have determined that there is no impact, material or otherwise, of the new and revised Standards and Interpretations on its business and, therefore, no change is necessary to Group accounting policies.

NOTE 3: REVENUE

Gas sales NOTE 4: OTHER INCOME	Consolidated 2010 $ 2009 $ 28,554 -

Other income Reversal of impairment loss(1) Total other income	143 8,285 - 511,584
	143 519,869

(1) Impairment reversal relates to capitalised costs associated with the Greenbush and Hamlet exploration wells in the USA. The Company farmed out these wells, realising an amount in excess of the carrying amount of these assets, resulting in a reversal of prior impairment losses applied against these assets.

ACN: 009 795 046

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 5: LOSS FOR THE YEAR

Loss before income tax has been determined after: a) Employee benefits expense Wages, salaries and fees(1) Defined contribution superannuation expense Share-based payments Total employee benefits expense b) Other expenses Depreciation Financing expenses	Consolidated 2010 $ 2009 $ 572,324 586,679 29,247 10,321 91,879 34,980
	693,450 631,980
	20,357 157 2,450 1,760

(1) Amounts are prior to re-charges to exploration and evaluation expenditure or business development. Net wages, salaries and fees are included in consulting expenses in the statement of comprehensive income.

NOTE 6: EARNINGS PER SHARE

NOTE 6: EARNINGS PER SHARE
	Consolidated
	2010	2009
Basic earnings per share - cents	(3.833)	(1.866)
Diluted earnings per share - cents	(3.833)	(1.866)
	$	$
Earnings used in the calculation of basic and dilutive EPS	(4,578,300)	(2,154,636)
	No.	No.
Weighted average number of ordinary shares outstanding during the period used in calculation of basic and dilutive EPS.	119,431,383	115,481,534

The total 19,322,754 (2009: 11,486,639) options outstanding at 30 June 2010 are potential ordinary shares but are antidilutive for the periods presented.

NOTE 7: INCOME TAX

(a) Income tax (benefit) The major components of income tax (benefit) are: Statement of Comprehensive Income Current Income Tax Research and development tax refund 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 (benefit) reported in the statement of comprehensive income	Consolidated 2010 $ 2009 $ (347,585) - - -
	- -
	(347,585) -

(a) Income tax (benefit)
The major components of income tax (benefit) are:
Statement of Comprehensive Income
Current Income Tax
Research and development tax refund
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 (benefit) reported in the statement of
comprehensive income

Consolidated
2010
$
2009
$
(347,585)
-
-
-

-
-

(347,585)
-

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ACN: 009 795 046

Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 7: INCOME TAX (CONTINUED)

(b) Numerical reconciliation between aggregate tax benefit recognised in the statement of comprehensive income and tax benefit calculated per the statutory income tax rate

(b) Numerical reconciliation between aggregate tax benefit recognised in the statement of comprehensive income and tax benefit calculated per the statutory income tax rate	(b) Numerical reconciliation between aggregate tax benefit recognised in the statement of comprehensive income and tax benefit calculated per the statutory income tax rate	(b) Numerical reconciliation between aggregate tax benefit recognised in the statement of comprehensive income and tax benefit calculated per the statutory income tax rate
Loss before income tax (4,976,747) (2,154,636) At statutory income tax rate of 30% (1,493,024) (646,391) Foreign tax rate adjustment 129,205 (93,690) Share-based payments 27,564 10,494 Impairment of exploration assets 925,778 248,160 Sale of exploration assets - 389,434 Other 410,477 91,993 Unrecognised tax losses and deferred tax assets - - Deferred tax assets brought to account/(derecognised) (752,295) (290,942) Decrease in deferred tax liabilities 752,295 290,942 Research and development tax refund (347,585) - Income tax benefit (347,585) - (c) Recognised Deferred Tax Assets and Liabilities Statement of Financial Position Statement of Comprehensive Income 2010 2009 2010 2009 CONSOLIDATED $ $ $ $ Deferred Tax Liabilities Exploration expenditure 999,696 1,751,991 (752,295) (290,942) 999,696 1,751,991 (752,295) (290,942) Deferred tax assets Tax losses 999,696 1,751,991 752,295 290,942 999,696 1,751,991 752,295 290,942 Net deferred tax assets - - Deferred tax income (expense) - -
	999,696 1,751,991 999,696 1,751,991	(752,295) (290,942) 752,295 290,942
	999,696 1,751,991	752,295 290,942
	- -

		- -

Prior period comparatives have been restated following lodgement of 2009 tax returns. The adjustments made to disclosures have had no impact on the statement of comprehensive income or the statement of financial position for the prior year.

(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. Emerald Gas USA LLC (US) has tax losses arising in the United States which are available up to a maximum of ten years.

The Group has available Australian tax losses of $2,834,046 (2009: $3,550,167), and available USA tax losses are estimated to be $4,248,808 (2009: $5,888,987).

The Group has unrecognised deferred tax assets amounting to $1,337,601 (2009: $2,835,254). As at 30 June 2010, a deferred tax asset in relation to tax losses totalling $999,696 (2009: $1,751,991) 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.

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ACN: 009 795 046

Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 7: INCOME TAX (CONTINUED)

(e) Other unrecognised temporary differences

As at 30 June 2010, the Group has other temporary differences (not associated with tax losses) for which no deferred tax assets or liabilities have been recognised, as follows:

Accruals	Consolidated 2010 $ Consolidated 2009 $ 65,750 44,000

NOTE 8: KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) Key Management Personnel compensation

		Short term	benefits	Share-based payments	Total	% Performance
				(LTI)		Related
		Salary	Non
		and Fees	Monetary	Options
		$	$	$	$	%
2010	Consolidated	560,123	-	91,879	652,002	14.1%
2009	Consolidated	597,000	-	34,980	631,980	5.5%

(b) 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 personallyrelated entities is as follows:

2010

2010
Directors Held at beginning of year Movement during year*	Options Exercised Held at 30 June 2009
Directors J. Shervington 3,250,977 1,000,000 M.Krzus - 361,850 R. Berven 3,189,054 1,000,000 J. Hannaford 3,190,928 -	- 4,250,977 - 361,850 - 4,189,054 - 3,190,928
Specified Executives
M.Barron - -	- -
Total 9,630,959 2,361,850	- 11,992,809

Movement represents shares purchased on market during the financial year.

2009
Directors	Held at beginning of year	Movement during year*	Options Exercised		Held at 30 June 2009
Directors
J. Shervington	3,250,977	-		-	3,250,977
R. Berven	3,479,054	(290,000)		-	3,189,054
J. Hannaford	3,190,928	-		-	3,190,928
Specified Executives
M.Barron	-	-		-	-
Total	9,920,959	(290,000)		-	9,630,959

Movement represents shares sold on market during the financial year.

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ACN: 009 795 046

Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 8: KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED)

(c) Option 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:

2010
Unlisted Options
Directors	Held at beginning of year	Movement during year	Exercised	Held at 30 June 2010	Vested and exercisable at 30 June 2010
J. Shervington	967,577	(600,000)	-	367,577	367,577
M. Krzus*	5,000,000	-	-	5,000,000	-
R. Berven	500,000	(500,000)	-	-	-
J. Hannaford	2,250,000	(2,250,000)	-	-	-
Specified
Executives
M. Barron	200,000	-	-	200,000	200,000
Total	8,917,577	(3,350,000)	-	5,567,577	567,577

2009
Unlisted Options
Directors	Held at beginning of year	Movement during year*	Exercised	Held at 30 June 2009	Vested and exercisable at 30 June 2009
J. Shervington	1,567,577	(600,000)	-	967,577	967,577
R. Berven	1,000,000	(500,000)	-	500,000	500,000
J. Hannaford	2,250,000	-	-	2,250,000	2,250,000
Specified
Executives
M. Barron	200,000	-	-	200,000	200,000
M. Krzus*	-	5,000,000	-	5,000,000	-
Total	5,017,577	3,900,000	-	8,917,577	3,917,577

Appointed Managing Director on 13 August 2009. Options issued to M. Krzus have been accounted for as share-based payments and are subject to vesting conditions and achieving a 5 day volume weighted average price above 20 cents.

(d) Loans to or from Key Management Personnel

As at 30 June 2010 there were no loans to or from any Directors.

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ACN: 009 795 046

Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 8: KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED)

(e) Other Transactions and balances with Key Management Personnel

	Consolidated	Consolidated
Other related parties	2010 $	2009 $
1) Legal	19,690	-
2) Serviced office charges	96,000	96,000
3) Bookkeeping, financial accounting, company secretary and admin	93,603	116,415
4), 5) & 6) Consulting fees	336,163	292,000
6) Directors’ fees	139,960	94,000

2) Payments made or payable to Ventnor Capital Pty Ltd a company associated with John Hannaford for serviced offices totalling $96,000 (2009: $96,000) (excl GST).

4) Payments were made to Berven Consultants Pty Ltd, a company associated with Mr Berven totalling $41,976, (2009: $102,000), for the provision of technical consulting services.

5) Payments were made to Ventnor Capital Pty Ltd, a company associated with Mr Hannaford, for consulting services as financial Director $15,000, (2009: $190,000).

6) Consulting fees include salaries paid directly to Mike Krzus of $295,664 (2009: $125,000).

7) Payments were made to the following related party entities in relation to Directors fees:
(a) Berven Consultants Pty Ltd, a company associated with Mr Berven totalling $31,000 (2009: $22,000).
(b) Riverview Corporation Pty Ltd, a company associated with Mr Hannaford totalling $1,000 (2009: $12,000); and
(c) Drumgaghan Pty Ltd trading as Jeremy Shervington Legal Practice, a company associated with Mr Shervington totalling $60,000 (2009: $60,000).
(d) Payments to John Hannaford directly totalling $47,960 (2009: Nil)

All related party services were provided on normal commercial terms and conditions.

NOTE 9: CASH AND CASH EQUIVALENTS

Cash at bank and on hand(a) (a)Cash at bank is bearing floating interest rates at an effective interest rate of:	Consolidated 2010 $ 2009 $ 171,789 2,439,140
	2.27% per annum 2.78% per annum

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ACN: 009 795 046

Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 10: TRADE AND OTHER RECEIVABLES

Current Other receivables Refundable deposits	Consolidated 2010 $ 2009 $ 10,793 24,304 - 115,009
	10,793 139,313

Other receivables do not bear interest and their carrying amount is equivalent to their fair value. Refundable deposits are interest bearing at rates disclosed in Note 29. There are no trade and other receivables considered to be impaired at balance date. There are no past due but not impaired trade and other receivables.

NOTE 11: OTHER FINANCIAL ASSETS

Current Contributions towards equity investments	632,978 -
	632,978 -

Other financial assets consist of equity contributions paid to NOXXE Oil & Gas LLC. Refer Note 30 for further detail.

NOTE 12: PLANT AND EQUIPMENT

Consolidated

Year ended 30 June 2010 At 1 July 2008 net of accumulated depreciation and impairment Additions Depreciation At 30 June 2009 net of accumulated depreciation and impairment Additions Depreciation Provision for impairment At 30 June 2010 net of accumulated depreciation and impairment At 30 June 2010 Cost Accumulated depreciation Accumulated impairment provision Net carrying amount At 30 June 2009 Cost Accumulated depreciation Net carrying amount	Capital Work in Progress Plant and Equipment Total $ $ $ - - - 157,264 8,593 165,857 - (157) (157)
	157,264 8,436 165,700 - 18,229 18,229 - (3,989) (3,989) (157,264) - (157,264)
	- 22,676 22,676
	157,264 26,821 184,085 - (4,145) (4,145) (157,264) - (157,264)
	- 22,676 22,676
	157,264 8,593 165,857 - (157) (157)
	157,264 8,436 165,700

Capital work in progress represents payment made in relation to an amine plant which is under construction. The counterparty to the construction contract filed for bankruptcy during the period, and consequently Emerald has impaired these assets.

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ACN: 009 795 046

Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 13: EXPLORATION & EVALUATION ASSETS

Exploration and evaluation costs carried forward in respect of exploration 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 Impairment of exploration and evaluation expenses* Impairment loss reversal Transfer to oil and gas assets Sale of exploration and evaluation assets Balance at the end of the year	Consolidated 2010 $ 2009 $ 2,795,342 5,053,839
	5,053,839 4,394,937 1,342,774 2,784,213 (40,886) - (3,085,925) (1,338,782) - 511,584 (474,460) - - (1,298,113)
	2,795,342 5,053,839

Exploration and evaluation costs carried forward in respect of
exploration 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
Impairment of exploration and evaluation expenses*
Impairment loss reversal
Transfer to oil and gas assets
Sale of exploration and evaluation assets
Balance at the end of the year

Consolidated
2010
$
2009
$
2,795,342
5,053,839

5,053,839
4,394,937
1,342,774
2,784,213
(40,886)
-
(3,085,925)
(1,338,782)
-
511,584
(474,460)
-
-
(1,298,113)

2,795,342
5,053,839

*Throughout the financial year the Board of Directors reviewed exploration and evaluation costs capitalised on its projects and made impairment adjustments to a number of its prospects based on the fair value less costs to sell.

Exploration and evaluation written off during the year relates to the withdrawal from EPA04/05-6.

Exploration and evaluation expenditure impaired during the year relates to the Crum and Chiaranzelli wells and the Ferguson well location in West Virginia (2009: Steamboat, Palito Blanco and EP-104 oil and gas prospects) and 8 wells in Kentucky. After assessing the potential of each project, the Directors impaired all costs associated with the West Virginian assets, and the costs associated with the 6 wells in Kentucky such that $100,000 carrying value remained for each well.

The recoverability of the carrying amount of deferred exploration and evaluation expenditure is dependent on the successful development and commercial exploitation, or alternatively the sale, of the respective areas of interest.

NOTE 14: OIL AND GAS ASSETS

Costs carried forward in respect of: Oil and gas assets, at cost Reconciliation: A reconciliation of the carrying amounts of oil and gas assets is set out below: Carrying amount at beginning of period Additions Transfer from exploration and evaluation assets Depreciation and depletion expense Impairment expense Carrying amount at end of period	185,205 -
	- - 1,028 - 474,460 - (16,368) - (273,915)
	185,205 -

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 15: TRADE AND OTHER PAYABLES

Trade Creditors Accruals	Consolidated 2010 $ 2009 $ 67,429 151,136 65,750 44,000
	133,179 195,136

Trade payables are non interest bearing, unsecured and are usually paid within 30 days of recognition.

NOTE 16: ISSUED CAPITAL

2010 (a) Issued and Paid Up Capital Fully paid ordinary shares (b) Movements in fully paid shares on issue Opening balance as at 1 July 2008 Options issued during the period Total fully paid shares on issue at 30 June 2009 Issue of shares Capital raising to the public Share issue costs Options issued during the period Total fully paid shares on issue at 30 June 2010	Number of Shares 115,481,534 115,481,534 -	$ 15,546,499 15,001,822 (10,800)
	115,481,534	14,991,022

	17,322,230	606,278
	-	(37,286)
	-	(13,515)
	132,803,764	15,546,499

Consolidated Entity

The issued capital of the Group comprises the issued capital of Emerald Gas Pty Ltd, a company deemed to be the acquirer of Emerald Oil and Gas NL under a reverse acquisition transaction. The monetary share capital balance represents the equity in Emerald Gas Pty Ltd at the time of the acquisition plus the fair value of the equity held in Emerald Oil and Gas NL and subsequent transactions with equity holders of Emerald Oil & Gas NL in their capacity as equity holders.

(c) Terms and conditions of issued capital

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 options issued, exercised and expired during the financial year and options outstanding at the end of the financial year, is set out below:

Parent Entity and Group Balance at beginning of the year Issued during the year Expired during the year Balance at the end of the year	2010 2009 No. No. 11,486,638 6,486,638 11,661,115 7,000,000 (3,825,000) (2,000,000)
	19,322,753 11,486,638

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Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 16: ISSUED CAPITAL (CONTINUED)

(e) Capital management

The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor, and market confidence and to sustain future development of the business. Given the stage of the Company’s development there are no formal targets set for return on capital. Capital consists of issued capital as disclosed in the statement of financial position. There were no changes to the Company’s approach to capital management during the year. The Company is not subject to externally imposed capital requirements.

NOTE 17: RESERVES

Nature and purpose of reserves

1) Options reserve - The options reserve is used to record the value of options issued for the services provided by employees and consultants.
2) Foreign exchange translation reserve – the foreign currency translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.
3) Non-controlling shareholders premium reserve – arises as a result of the adjustment made to the interest of non-controlling shareholders in the equity of Kentucky Energy Partners LLC.

Refer to the statement of changes in equity for movements in reserves for the year.

NOTE 18: SEGMENT REPORTING

Identification of reportable segments

The group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors (the chief operating decision maker) in assessing performance and in determining the allocation of resources.

The operating segments are identified by management based on the location of activity. Discrete financial information about each of these locations is reported to the Board of Directors on at least a monthly basis.

Reportable segments requiring disclosure are operating segments that meet any of the following thresholds:

Segment loss greater than 10% of combined loss of loss making operating segments; and
Segment assets greater than 10% of combined assets of all operating segments.

In accordance with AASB 8, the reportable segments are based on aggregated operating segments determined by the similarity of the locations, as these are the sources of the Group’s major risks and have the most effect on the rates of return.

Once reportable segments have been identified, all remaining segments that do not satisfy the thresholds are to be aggregated together to form an all other segments reporting segment. In accordance with AASB 8 Segment Reporting corporate and administration activities are included in the ‘all other segments’ reporting segment.

The Group operates in one business segment, being the exploration of oil and gas, and two geographical segments, being Australia and USA.

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 18: SEGMENT REPORTING (CONTINUED)

Description of Operating Segments

Appalachian (USA)

Emerald’s subsidiaries Emerald Gas USA Holdings LLC, Emerald Gas Developments LLC. Emerald Kentucky Gas Ventures LLC and Kentucky Energy Partners LLC undertake onshore oil and gas exploration activities in the USA. Each of these entities are determined to be an operating segment and the combined operations represent a single reportable segment.

Texas (USA)

Emerald’s subsidiary Emerald Gas USA LLC undertake onshore oil and gas exploration activities in the USA. This entities activities forms both an operating an reportable segment.

All Other Segments (Australia)

Emerald Gas Pty Ltd, a wholly owned subsidiary of the Company, is the holder of onshore and offshore leases in the north west of Western Australia which are prospective for hydrocarbons. The Australian oil and gas exploration operating segment does not meet the thresholds for reportable segments and have been included in all other segments for reporting purposes, which includes the administrative costs incurred by the Company.

Accounting policies and inter-segment transactions

The accounting policies used by the Group in reporting segments internally are the same as those contained in Note 1 to the accounts.

2010 Geographical segment	USA Appalachian $	USA Texas $	Australia All other segments $	Consolidated $
Segment revenues Segment result Segment assets Segment liabilities Included in segment result: Interest revenue Net impairment (losses)/reversals: Exploration properties Oil and gas assets Capital works in progress Share-based payments Depreciation Acquisition of non current assets	28,554 (3,806,251) 1,529,258 - - (3,085,925) (273,915) (157,264) - (16,368) 775,671	143 (181,522) 1,962,223 (16,373) - - - - - - 460,156	44,454 (641,389) 327,302 (116,806) 44,454 - - - (91,879) (3,989) 126,205	73,151 (4,629,162) 3,818,783 (133,179) 44,454 (3,085,925) (273,915) (157,264) (91,879) (20,357) 1,362,032

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 18: SEGMENT REPORTING (CONTINUED)

2009 Geographical segment	USA Appalachian $	USA Texas $	Australia $	Consolidated $
Segment revenues Segment result Segment assets Segment liabilities Included in segment result: Interest income Net impairment (losses)/reversals: Exploration properties Share-based payments Acquisition of non current assets	- (853,879) 4,368,191 - - (156,817) - 2,542,624	511,584 486,588 875,964 - - 492,979 - 314,834	238,932 (1,787,345) 2,553,837 (195,136) 230,647 (1,163,360) (34,980) 92,613	750,516 (2,154,636) 7,797,992 (195,136) 230,647 (827,198) (34,980) 2,950,071

NOTE 19: CASH FLOW INFORMATION

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

Cash flows from operating activities Loss for the year Non cash items: Depreciation Share-based payments Impairment of non-current assets Exploration write offs Effect of exchange rates Changes in assets and liabilities Change in trade creditors and accruals Change in other debtors Change in other assets Change in deferred tax balances Cash flows used in operations	Consolidated 2010 $ 2009 $ (4,629,162) (2,154,636)
	20,357 157 91,879 34,980 3,517,105 827,198 40,886 - 699 150 (61,958) 6,242 13,511 84,817 - (115,009) - -
	(1,006,683) (1,316,101)

(b) Non-cash financing and investing activities Nil.

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 20: INTERESTS IN CONTROLLED ENTITIES

The Company has the following Subsidiaries:

			Percentage held	Percentage held
	Country of	Class of
Name of Subsidiary	Incorporation	Shares	2010	2009
Emerald Gas USA LLC	USA	Ordinary	100%	100%
Emerald Gas Pty Ltd	Australia	Ordinary	100%	100%
Emerald Gas USA Holdings Inc	USA	Ordinary	100%	100%
Emerald Gas Development USA LLC	USA	Ordinary	100%	100%
Emerald Gas Kentucky Processing LLC*	USA	Ordinary	100%	-
Emerald Gas West Virginia Processing LLC*	USA	Ordinary	100%	-
Emerald Gas Development West Virginia LLC*	USA	Ordinary	100%	-
Emerald Gas Kentucky Ventures LLC*	USA	Ordinary	100%	-
Kentucky Energy Partners LLC*	USA	Ordinary	75%	-
* Entity incorporated/formed during the year.

NOTE 21: 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 20.

(c) Key Management personnel

Disclosures relating to key management personnel are set out in Note 8.

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.

NOTE 22: PARENT ENTITY DISCLOSURES

Financial Position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Equity Issued capital Accumulated losses Reserves Options reserve Total Equity	2010 $ 2009 $
	145,272 2,453,662 3,613,467 4,263,121
	3,758,739 6,716,783
	114,806 191,636 - -
	114,806 191,636
	95,909,156 95,353,679 (92,474,396) (89,302,956) 209,173 474,424
	3,643,933 6,525,147

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Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 22: PARENT ENTITY DISCLOSURES (CONTINUED)

Financial Performance Loss for the year Other comprehensive loss Total comprehensive loss	2010 $ 2009 $
	(3,542,084) (2,861,421) - - (3,542,084) (2,861,421)

Refer to Note 25 for expenditure commitments.

NOTE 23: AUDITORS’ REMUNERATION

Amounts received or due and receivable by HLB Mann Judd Audit of the financial report of the entity and any other entity in the Group Amounts received or due and receivable by Ernst & Young Audit of the financial report of the entity and any other entity in the Group	Consolidated 2010 $ 2009 $ 25,000 - - 36,035

NOTE 24: 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 Key Management Personnel(1) Options issued to other parties(2) The above expenses are represented by the following:	Consolidated 2010 $ 2009 $ 91,879 34,980 13,515 10,800
	105,394 45,780

(1) During the year, no options were issued to executives (2009: 5,000,000). Options issued in the current and previous years resulted in an expense of $91,879 (2009: $34,980) in the current year.

(2) During the year, 3,000,000 (2009: 2,000,000) options were issued to consultants in relation to capital raising services provided to the Company. This resulted in a reduction of issued capital of $13,515 (2009: $10,800) in the current year. These were valued using the Black & Scholes model. Inputs are detailed in part (d).

(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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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 24: 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:

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	2010 2009 No. WAEP No. WAEP 325,000 $0.25 325,000 $0.25 - - - - - - - - (325,000) $0.25 - -
	- - 325,000 $0.25

The outstanding ESOP option balance at 30 June 2009 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 ESOP share options outstanding as at 30 June 2009 is 0.5 years and they are exercisable at 25 cents.

(d) Weighted average fair value

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.

2010
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	%
3,000,000(1)	25/6/10	$0.0045	$0.10	30/6/12	25/06/10	30/6/12	3,000,000	100

2009
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	%
2,000,000(1)	28/11/08	$0.0054	$0.25	31/5/11	28/11/08	31/5/11	2,000,000	100
1,250,000(2)	11/5/09	$0.0283	$0.10	31/3/14	1/8/09	31/3/14	-	-
1,250,000(2)	11/5/09	$0.0283	$0.10	31/3/14	1/2/10	31/3/14	-	-
1,250,000(2)	11/5/09	$0.0283	$0.10	31/3/14	1/8/10	31/3/14	-	-
1,250,000(2)	11/5/09	$0.0283	$0.10	31/3/14	1/2/11	31/3/14	-	-

(1) Options issued to unrelated parties in consideration for capital raising.

(2) Options issued to Mike Krzus who was appointed Managing Director on 13 August 2009.

Subject to satisfying vesting conditions and achieving a 5 day volume weighted average price above 20 cents.

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Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 24: SHARE-BASED PAYMENTS (CONTINUED)

The weighted average remaining contractual life of all share options outstanding as at 30 June 2010 is 3.1 years (2009: 2.8 years) at a weighted average exercise price of 11.8 cents (2009: 18.9 cents).

The table below summaries the model inputs for options granted during 2010:

Model Inputs
1. Options granted for no consideration:	3,000,000
2. Exercise price (cents):	10
3. Issue date:	25 June 2010
4. Assumed exercise date:	30 June 2012
5. Underlying security spot price at grant date (cents):	2.2
6. Expected price volatility of the company’s shares:	75%
7. Expected dividend yield:	0%
8. Risk-free interest rate	4.50%
Black & Scholes Valuationper Option(cents)	0.45

NOTE 25: EXPENDITURE COMMITMENTS

Expenditure commitments At 30 June 2010 the Group has commitments being minimum work requirements under exploration permits for petroleum as follows: Less than one year Within one to five years Greater than five years Total	Consolidated 2010 $ 2009 $ 39,050,000 21,010,000
	50,000 330,000 39,000,000 10,180,000 - 10,500,000*
	39,050,000 21,010,000

The Group is pursuing opportunities to farm out some of this expenditure.

Exploration permits in Western Australia and Commonwealth Waters are granted on the basis of Work Commitments. These Work Commitments are an undertaking to perform certain exploration activities in certain permit years to maintain the permits in good standing. Indicative costs for the Work Commitments are required on application for the permits, however the commitment involves activities rather than a defined expenditure. Further, Work Commitments are only obligatory for the first 2 or 3 years of each Exploration Permit and can be varied by negotiation with the Regulator.

NOTE 26: CONTINGENCIES

The Directors are not aware of any other contingencies that the company is party to that are quantifiable. Contingencies in relation to joint venture assets held are set out in Note 27.

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 27: JOINT VENTURE ASSETS

The capitalised exploration expenditure in the statement of financial position includes the costs incurred on the following non-operated exploration joint venture assets:

Kentucky (USA) – Appalachian Basin

100% working interest (87.5% NRI) in 8 wells located in Kentucky, USA. Carrying value at 30 June 2010: $785,205 (2009: $2,690,043).

KEP Projects – 75% equity interest in Kentucky Energy Partners LLC, which is progressing 3 gas projects located in Kentucky, USA. Carrying value at 30 June 2010: $700,199 (2009: $Nil).

North West Alice (USA) - 35% working interest (2009: 14%) in the North West Alice gas exploration project located in Texas. Carrying value at 30 June 2010: $1,325,438 (2009: $866,309).

EP104/Retention Lease R1 – Canning Basin (Western Australia) - 12.75% working interest in the EP104 and R1 oil and gas joint ventures with projects located in the Canning basin in Western Australia. Carrying value at 30 June 2010: $13,180 (2009: $Nil).

Joint venture commitments and contingencies

There are no commitments within the current Joint Ventures.

The Directors are not aware of any contingent liabilities arising from the Joint Venture operations.

NOTE 28: 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 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 currency risk refers to the risk that the fair value of future cash flows of a financial instrument will fluctuate due to exchanges in foreign exchange rates. Emerald is exposed to foreign exchange currency risk primarily through undertaking certain transactions denominated in foreign currency. Risks are managed at Board level but there are currently no formal measures in place.

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 28: FINANCIAL RISK MANAGEMENT (CONTINUED)

At 30 June 2010, the Group had the following exposures to US$ foreign currency risk that is not designated in cash flow hedges:

Financial assets Cash and cash equivalents Deposits and prepayments Other financial assets Total financial assets Financial liabilities Net exposure	Consolidated 2010 2009 $ $ 32,470 9,903 - 115,009 632,978 -
	665,448 124,912 - (3,500)
	665,448 121,412

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 statement of financial position either as available for sale or at fair value through profit or loss.

The Company is exposed to commodity price risk through the future sales of oil and gas. During the current year, a total of $28,554 (2009: Nil) was received from gas sales. This amount is considered immaterial and therefore a sensitivity analysis has not been included in the financial statements.

c) Credit Risk

The maximum exposure of the Group and the Company to credit risk at balance date in relation to each class of recognised financial asset is limited to the carrying amounts of the financial assets as indicated in the statement of financial position. The credit risk relates to trade and other receivables and deposits. At balance date there are no receivables past due. The Company monitors its debtors consistently to minimise its exposure to credit risk.

Emerald is currently aligned with financial institutions that demonstrate high credit quality, significantly mitigating credit risk in regard to the Group’s financial assets.

Emerald has no significant concentration of credit risk at 30 June 2010. At 30 June 2009, Emerald had a concentration of credit risk relating to refundable deposits carried at $115,009 to one counterparty, as shown in Note 10.

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. The only financial liabilities of the Group at balance date are trade and other payables. The amounts are unsecured and are usually paid within 30 days of recognition.

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Notes to the Financial Statements (continued)

For the year ended 30 June 2010

NOTE 28: FINANCIAL RISK MANAGEMENT (CONTINUED)

e) Cashflow and Fair value Interest Rate Risk

The Group’s exposure to interest rate risk relates primarily to the Company’s floating interest rate cash balance which is subject to movements in interest rates. The Board monitors its cash balance on an ongoing basis and liaises with its financiers regularly to mitigate cash flow and interest rate risk. Refer to Note 29 for interest rate risk exposure and sensitivity analysis.

There were no changes to the risk management policies from prior years.

NOTE 29: FAIR VALUE AND INTEREST RATE RISK

(a) Fair value

All financial assets and financial liabilities recognised in the statement of financial position, 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

Emerald’s exposure to interest rate risk is set out below:

2010 Consolidated	Weighted average effective interest rate	Floating interest rate	Non interest bearing	Total
	%	$	$	$
Financial assets
Cash and cash equivalents	2.27%	171,789	-	171,789
Trade and other receivables		-	10,794	10,794
Deposits		-	632,978	632,978
Total Financial Assets		171,789	643,772	815,561

Financial Liabilities
Trade and other payables		-	(133,179)	(133,179)
Total Financial Liabilities		-	(133,179)	(133,179)

2009 Consolidated	Weighted average effective interest rate	Floating interest rate	Non interest bearing	Total
	%	$	$	$
Financial assets
Cash and cash equivalents	2.78%	2,439,140	-	2,439,140
Trade and other receivables		-	24,304	24,304
Deposits		-	115,009	115,009
Total Financial Assets		2,439,140	139,313	2,578,453

Financial Liabilities
Trade and other payables		-	(195,136)	(195,136)
Total Financial Liabilities		-	(195,136)	(195,136)

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Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 29: FAIR VALUE AND INTEREST RATE RISK (CONTINUED)

Sensitivity Analysis

The table below details sensitivities to the Group’s exposures to changes in the interest rate and the Australian to US dollar exchange rate. The analysis indicates the impact on results and equity values reported at balance date, holding all other variables constant. These sensitivities assume that the movement in a particular variable is independent of other variables.

		Effect	On:	Effect	On:
		Results	Equity	Results	Equity
Risk		2010	2010	2009	2009
Variable	Sensitivity*	$	$	$	$
Interest Rate	+ 1.50%	1,749	1,749	36,298	36,298
	- 1.50%	(1,749)	(1,749)	(36,298)	(36,298)
AUD:USD rate	+ 5.0%	33,272	33,272	6,071	6,071
	- 5.0%	(33,272)	(33,272)	(6,071)	(6,071)

*The method used to arrive at the possible interest rate change was based on the analysis of the absolute nominal change of the Reserve Bank of Australia (RBA) monthly issued cash rate. Historical rates indicate that for the past five financial years, there was a bias towards an increase in interest rate ranging between 0 to 50 basis points. It is considered that 50 basis points is a ‘reasonably possible’ estimate as it accommodates for the maximum variations inherent in the interest rate movement over the past five years. AUD to USD rate movements are considered to be reasonably possible by management.

The possible fluctuation in exchange rates between the Australian and US dollar of +/5% has been determined by the Board of Directors as being a ‘reasonable possible’ estimate of possible movement.

NOTE 30: EVENTS SUBSEQUENT TO BALANCE DATE

NOXXE Oil and Gas LLC Unsolicited Return of Funds

Subsequent to year end, as announced on 11 August, NOXXE unconditionally tendered funds to Emerald of US$550,000, representing Emerald’s equity contributions to date. Emerald is continuing to pursue its lawsuit against NOXXE Oil and Gas LLC.

Private Placement

Rights Issue

On 2 August 2010, Emerald issued a prospectus for a non-renounceable pro-rata entitlements issue for 960 shares and 480 listed options exercisable at 5 cents each on or before 31 August 2012 for every 1,000 shares held by shareholders on 16 August 2010. The issue was fully underwritten by RM Capital Pty Ltd and closed on 3 September 2010, raising $2,550,000 before costs.

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Notes to the Financial Statements (continued) For the year ended 30 June 2010

NOTE 30: EVENTS SUBSEQUENT TO BALANCE DATE (CONTINUED)

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Directors’ Declaration

In the Directors’ opinion:

a) the financial statements, notes and additional disclosures included in the Directors’ Report designated as audited, of the Group are in accordance with the Corporations Act 2001, including:

i. giving a true and fair view of the Group's financial position as at 30 June 2010 and of their performance, as represented by the results of its operations, changes in equity and its cash flows, for the financial year ended on that date; and
ii. complying with Accounting Standards, the Corporations Regulations 2001 ; 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;

c) the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 1(b) to the financial statements; and

d) this declaration has been made after receiving the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001 for the financial year ended 30 June 2010 .

This declaration is made in accordance with a resolution of the Directors pursuant to s.295(5) of the Corporations Act 2001 .

On behalf of the Board

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M. Krzus Managing Director

Perth

30 September 2010

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INDEPENDENT AUDITOR’S REPORT

To the members of EMERALD OIL & GAS NL

Report on the Financial Report

We have audited the accompanying financial report of Emerald Oil & Gas NL (“the company”), which comprises the statement of financial position as at 30 June 2010, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of 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 as set out on pages 38 to 77.

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 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, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements , that the consolidated financial statements comply with International Financial Reporting Standards.

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.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’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 company’s internal control. 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.

Our audit did not involve an analysis of the prudence of business decisions made by directors or management.

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

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001 .

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HLB Mann Judd (WA Partnership) is a member of

International, a worldwide organisation of accounting firms and business advisers.

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Auditor’s Opinion In our opinion:

(a) the financial report of Emerald Oil & Gas NL is in accordance with the Corporations Act 2001 , including:
(i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2010 and of its performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 ; and
(b) the financial statements also comply with International Financial Reporting Standards as disclosed in Note 1(B).

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 23 to 30 of the directors’ report for the year ended 30 June 2010. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s Opinion

In our opinion the Remuneration Report of Emerald Oil & Gas NL for the year ended 30 June 2010 complies with section 300A of the Corporations Act 2001 .

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HLB MANN JUDD Chartered Accountants

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Perth, Western Australia 30 September 2010

L DI GIALLONARDO Partner

ACN: 009 795 046

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ASX Additional Information

Additional information required by the ASX Limited Listing Rules not disclosed elsewhere in this Annual Report is set out below.

Shareholdings

The issued capital of the Company at 31 August 2010 is 142,803,764 ordinary fully paid shares. All ordinary shares carry one vote per share.

Top 20 Shareholders as at 31 August 2010

Top 20 Shareholders as at 31 August 2010
1 HSBC CUSTODY NOM AUST LTD 2 KLIP PL 3 BOUTA PL 4 CADEX PETROLEUM PL 5 UBS WEALTH MGNT AUST NOM 6 ZADAR HLDGS PL 7 LYDEAMORE SHARON TERESA 8 DRUM GAGHAN PL 9 BOUTA PL 10 DICK COOPER EXPL PL 11 GREATCITY PL 12 CHERYL PEARSE ENTPS PL 13 CITICORP NOM PL 14 CASSIM SALIM 15 TOLL BARRY LESLIE + J M 16 VISSER TERRY + HAFIDAH 17 GERRITZEN J T + E A 18 SEET PI ANG 19 SHEHADIE SALEEM 20 PLAYERCORP PL	No. of Shares Held % Held
	11,107,163 7.78% 10,157,299 7.11% 6,296,646 4.41% 4,798,884 3.36% 4,258,047 2.98% 4,029,054 2.82% 3,415,295 2.39% 3,150,977 2.21% 2,990,198 2.09% 2,819,054 1.97% 2,763,000 1.93% 2,600,000 1.82% 2,595,985 1.82% 1,985,175 1.39% 1,675,000 1.17% 1,550,000 1.09% 1,500,000 1.05% 1,500,000 1.05% 1,335,900 0.94% 1,300,000 0.91%
	71,827,677 50.29%

Shares Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number holding less than a marketable parcel size of 26,315 shares at $0.019 per share Shareholders by Location Australian holders Overseas holders	No. of Holders No. of Shares
	287 39,723 101 345,120 299 2,187,617 554 19,069,034 159 121,162,270
	1400 142,803,764
	1006 7,848,499 No. of Holders No. of Shares
	1,356 135,633,758 44 7,170,006
	1,400 142,803,764

Voting Rights

In accordance with the Company’s Constitution, on a show of hands every shareholder present in person or by proxy, attorney or representative of a shareholder has one vote and on a poll every shareholder present in person or by proxy, attorney or representative of a shareholder has in respect of fully paid shares, one vote for every share held. No class of option holder has a right to vote, however the shares issued upon exercise of options will rank pari passu with the then existing issued fully paid ordinary shares.

ACN: 009 795 046

ASX Additional Information (continued)

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Substantial Shareholders as at 31 August 2010

1 HSBC CUSTODY NOM AUST LTD 2 KLIP PL Unlisted Options Options Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Option holders by Location Australian holders Overseas holders	No. of Shares Held % Held 11,107,163 7.78% 10,157,299 7.11% No. of Holders No. of Options
	- - - - - - 4 238,615 26 24,084,139
	30 24,322,754
	No. of Holders No. of Options
	30 24,322,754 - -
	30 24,322,754

Top 20 Unlisted Option Holders

1
PBTL LIFETIME SUPERANNUATION FUND PTY LTD
2
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
3
KLIP PL
4
BLUERISE HOLDINGS PTY LTD
5
MR MATTHEW JAMES BLAKE
6
MS SALLY JUDITH MOLYNEUX
7
SONMIT PTY LTD
8
MR JOHANNUS THEODORUS GERRITZEN & MRS
ELIZABETH ANNE GERRITZEN
9
DRUM GAGHAN PTY LTD
10
AZURE CAPITAL INVESTMENTS PTY LTD
11
CADEX PETROLEUM PTY LIMITED
12
SUPER 1136 PTY LTD
13
MOUNT STREET INVESTMENTS PTY LTD
14
MR L LUTINGH
15
GANDRIA CAPITAL PTY LTD
16
DURACK INVESTMENT CORPORATION PTY LTD
17
ANAITIS NOMINEES PTY LTD
18
NORTHBRIDGE BUSINESS SERVICES PTY LTD
19
M IVEY PTY LTD
20
MR HENRY WIECKECKI

No. of Options
Held
% Held

5,000,000
20.56%
5,000,000
20.56%
3,500,000
14.39%
1,000,000
4.11%
1,000,000
4.11%
1,000,000
4.11%
980,000
4.03%
750,000
3.08%
661,638
2.72%
600,000
2.47%
572,500
2.35%
500,000
2.06%
500,000
2.06%
450,000
1.85%

420,000
1.73%
275,000
1.13%

250,000
1.03%
250,000
1.03%
250,000
1.03%
250,000
1.03%

23,209,138
95.44%

The Company intends to apply for these options to be listed on the ASX.

AI assistant

EMERALD RESOURCES NL — Annual Report 2010

64849_rns_2010-09-29_8ed6f2d7-3ffd-4887-8552-d6749b136f61.pdf

ABN: 72 009 795 046

ACN: 009 795 046

Contents

ACN: 009 795 046

Corporate Information

Registered & Principal Office:

Share Registry:

Glossary of terms

ACN: 009 795 046

Letter from the Chairman

Dear Shareholder,

USA Projects

Australian projects

ACN: 009 795 046

Letter from the Chairman (continued)

ACN: 009 795 046

Directors’ Report

1. DIRECTORS

EXPERIENCE AND EXPERTISE

OTHER CURRENT DIRECTORSHIPS

OTHER DIRECTORSHIPS IN THE LAST THREE YEARS

EXPERIENCE AND EXPERTISE

OTHER CURRENT DIRECTORSHIPS

Directors’ Report (continued)

1. DIRECTORS (CONTINUED)

EXPERIENCE AND EXPERTISE

OTHER CURRENT DIRECTORSHIPS

OTHER DIRECTORSHIPS IN THE LAST THREE YEARS

EXPERIENCE AND EXPERTISE

OTHER CURRENT DIRECTORSHIPS

OTHER DIRECTORSHIPS IN THE LAST THREE YEARS

2. COMPANY SECRETARY

Morgan Barron B.Com (UWA), C.A. S.A.Fin - (appointed 24 July 2007)

Directors’ Report (continued)

3. DIRECTORS’ MEETINGS

4. PRINCIPAL ACTIVITIES

5. OPERATING AND FINANCIAL REVIEW

Activity Summary

ACN: 009 795 046

Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Emerald's Vision

Growth Strategy

In implementing the strategy, Emerald intends to:

Board Commitment

In pursuing Emerald's strategic objectives, the Board is committed to:

ACN: 009 795 046

Directors’ Report (continued)

Project Portfolio

Emerald Oil and Gas NL Asset Portfolio

Significant Dealings

NW Alice Additional Interest Acquisition

ACN: 009 795 046

Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Kentucky Energy Partners Formation

NOXXE dealings and subsequent legal action

P&J Resources Inc Bankruptcy

5.1 Exploration and Production Activities

5.1.1 USA Projects

Appalachian Gas - Magoffin County, Kentucky

- Appalachian Basin Geology and Exploration History

ACN: 009 795 046

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Map of the Appalachian Basin showing the extent of Devonian Shales

ACN: 009 795 046

Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

Magoffin County, USA Location Map

Kentucky Gas Development Activities

ACN: 009 795 046

Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

22 Mile Project

ACN: 009 795 046

Directors’ Report (continued)

5. OPERATING AND FINANCIAL REVIEW (CONTINUED)

EMERALD RESOURCES NL Annual Report 2010