or personal use only - ASX · Bruce Larson Managing Director Matthew Gauci Non-Executive Director Michael Dentith Mathew Longworth COMPANY SECRETARY Kent Hunter REGISTERED OFFICE

ANNUAL REPORT 2007

ACN 089 531 082

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EPSILON ENERGY LIMITED

CORPORATE DIRECTORY

DIRECTORSChairman

Bruce Larson

Managing Director

Matthew Gauci

Non-Executive Director

Michael DentithMathew Longworth

COMPANY SECRETARY

Kent Hunter

REGISTERED OFFICE9A Agnew Way SUBIACO WA 6008Telephone: (08) 9212 9888Facsimile: (08) 9212 9800

AUDITORSButler Settineri (Audit) Pty LtdLevel 1, Construction House35-37 Havelock StreetWest Perth WA 6005

SHARE REGISTRARSecurity Transfer Registrars Pty LtdLevel 1, 770 Canning HighwayAPPLECROSS WA 6153Telephone: (08) 9315 2333Facsimile: (08) 9212 9800

STOCK EXCHANGE LISTINGAustralian Stock Exchange(Home Exchange: Perth, Western Australia)Code: EPS

Epsilon Board:from left, Matthew Gauci,Bruce Larson, MichaelDentith, Mathew Longworth

TABLE OF CONTENTS

Corporate Directory .............................IC

Chairman’s Report ................................1

Operations Review ................................2

Uranium Information ............................13

Directors Report..................................15

Financial Statements ...........................22

Income Statement ...........................22

Balance Sheet .................................23

Cash Flow Statement ......................24

Statement of Changes in Equity.......25

Notes to the Financial Statements ...26

Directors’ Declaration ......................42

Auditor’s Independence.......................43

Auditor’s Report ..................................44

Additional Shareholder Information ......46

Corporate Governance........................48

Schedule of Tenements .......................54

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ANNUAL REPORT 2007 PAGE 1

CHAIRMAN’S REPORT

Dear Fellow ShareholdersI am pleased to present this first annual report of Epsilon Energy Limited (“Epsilon” or the “Company”).

Epsilon listed strongly on the Australian Stock Exchange on 13 December 2006 and the ensuing 9 months have been gearedtowards establishing a solid and sustainable foundation for growth.

Some of the important milestones reached since listing include:

• The addition of 22 granted tenements to the portfolio, which now totals 36 granted of 53 tenements in 4 differentstates that are present within proven uranium provinces, with the majority of project areas containing known uraniummineralisation, in varying geological settings.

• Commencement of field exploration at all major projects, including Balladonia North & South, Heartbreak, Mt Phillips,Ida Valley, Emu Point, Kakarook and Pandanus West. Ground radiometric studies and sampling programs highlightedareas of interest for follow up remote sensing surveys and drill programs.

• Completion of first pass drilling at Ida Valley identifying a uranium mineralised zone for further follow up.

• Commencement of Airborne Geophysical Surveys at Heartbreak, Balladonia North and Lake Dundas.

• Completion of the In Specie Distribution of shares to Heron Resources Limited shareholders.

• Commencement of Business Development program with the review of uranium exploration and development projectopportunities throughout Australia, North America and Central Asia.

The exploration and business development activities have been taking place against the backdrop of a global renaissancein nuclear energy, driven by the increased requirement of developed nations, and underpinned by the long term requirementof developing nations, to provide consistent base load power while reducing carbon emissions, particularly from nationswith emerging economies, such as India, China and Russia. Additionally, there has been a significant reduction in primaryand secondary supplies in the global market place, creating market disequilibrium. Subsequently, the spot price of uraniumhas risen 600% since 2004 and with changing geopolitics towards the uranium industry in Australia, domestic explorationhas also increased 600% since 2004.

Importantly, most Market Analysts believe the long term price of uranium to be ranging between US$90–$100/lb, representingcompetitive margins for producers, comparative to other commodities and particularly so for large tonnage near surfaceprojects or projects amenable to low operating cost extraction techniques such as In Situ Recovery (ISR).

The political landscape in Australia has also evolved since the listing of Epsilon, with the House of Representatives Committeeon Industry and Resources calling for all governments to reconsider opposition to uranium mining, followed by the FederalLabor Party disposing of its no-new uranium mines policy. Importantly, public opinion is shifting with a recent ANOP pollshowing 50% of Australians (48% in WA) supporting uranium mining and 75% (78% in WA) expecting uranium to make abig contribution to the economy in the future.

With geological variation and geopolitical certainty in the Company’s portfolio of 10,000km2 of projects, an aggressiveexploration and business development program underway and an experienced and motivated team of geoscientists andmanagers, Epsilon has built a solid foundation for growth.

In particular, the Company is undertaking a large and comprehensive program of works at its key project the BalladoniaUranium Project. Three airborne geophysical programs are being flown to better define the extensive palaeochannel networkand basement topography, as well as to identify areas of restricted flow and hence potential accumulation and reduction trapsites. No modern remote sensing work has previously been undertaken, and the results of these programs will allow for amore targeted drilling campaign to commence in the coming period.

Finally I would like to thank all of those who have made this a solid year for Epsilon. This includes our shareholders, suppliersand all stakeholders, and in particular the operation team whom I am confident will continue to deliver solid results in 2007/08.

Bruce LarsonChairman

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PAGE 2 EPSILON ENERGY LIMITED

OPERATIONS REVIEW Project Location and Summary

Epsilon is a dedicated uranium explorer controlling a project portfolio of 10,000km2. The 11 exploration projects aredistributed across 4 different states and are present within proven uranium provinces. The majority of projects containknown uranium mineralisation, yet are under-explored with modern techniques.

The project portfolio reflects a focus on exploration of early stage and more advanced targets, with carefulconsideration given to geological suitability to economic uranium systems in terms of different styles of mineralisationand resource potential, as well as potential mining and processing costs. The project portfolio also reflects carefulconsideration given to geopolitical certainty in terms of exploring states where the uranium industry is expanding (NT,SA) and where decisions are pending (WA, QLD).

Australia is a leading supplier of uranium to the global nuclear energy market, producing over 7593t U pa, and is alsohost to 40% of the worlds known uranium resources. The geology of uranium in Australia varies considerably with arange of mineralisation styles which include unconformity, sandstone, calcrete, IOCGU, volcanic and metamorphicstyles of uranium. Epsilon is exploring high tonnage, low operating cost systems such as sandstone and calcrete, whiletargeting well known high grade systems such as metamorphic and volcanic.

Despite the country’s potential, Australian exploration and mining has been in a hiatus for more than 25 years with theimplementation of the Labor Party’s no-new uranium mines policy in 1983, limiting production to just 3 mines, andhence reducing exploration and development efforts throughout the domestic industry. Since 2004, however, the spotprice of uranium has risen over 600% while domestic exploration has similarly increased over 600%.

WEST FROME

PANDANUS WEST

MT DENISON

KAKAROOK

EMU POINT

BALLADONIA NORTH

BALLADONIA SOUTH

LAKE DUNDAS

HEARTBREAK

IDA VALLEY

MT PHILLIPS

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This rapid increase in spot prices and exploration has occurred in line with the growing supply-demand disequilibrium, drivenpredominantly by a reduction in primary and secondary supplies, and the increase in long term demand from both developedand developing nations. Developing nations, particularly, are embracing nuclear energy as a solution to meeting their dualenergy goals of providing consistent base load power while reducing carbon emissions.

Epsilon is in a prime position to take advantage of this step change in global energy requirements by compiling a portfolioof uranium exploration projects that cover varying mineralisation styles and resource potential supported by a multi-disciplinedand uranium experienced board and management team.

The Company has implemented an aggressive exploration and business development strategy aimed at advancing its currentprospective portfolio, while also actively reviewing value creating opportunities in the global uranium exploration anddevelopment industry.

Balladonia Uranium Project (Eucla & Gunbarrel Basin, WA, 100% Uranium Rights)

The Balladonia Uranium project covers 6,736km2 over 40 tenements (with 29 granted) approximately 250km South East ofKalgoorlie, where the Yilgarn Craton and Albany Fraser Oregen meet the Western Eucla Basin, in Western Australia.

The targets identified to date are Balladonia North, Balladonia South, Heartbreak, Lake Dundas, Emu Point and Kakarook.The Western Eucla and adjacent Gunbarrel basin hosts two large tonnage uranium deposits, namely Ponton Creek (20,000tU) and Mulga Rock (47,000t U), providing appropriate uranium deposit models in nearby drainage networks and similargeological settings.

Historic exploration work at the Balladonia Uranium Project was primarily conducted by CRAE for lignites and includedaircore, rotary mud and diamond drilling, down-hole gamma logging and lithology studies. The partly delineated lignitetypically occurs beneath 20-60m of cover sediments at the Balladonia North, Balladonia South and Heartbreak targets.

OPERATIONS REVIEW CONTINUED

Epsilon’s Pandanus West Project

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Analyses for uranium are few, though there is evidence ofholes indicating uranium enrichment in the area at a redoxfront in permeable sediments. Additionally, peak gammalog responses at the Balladonia North, Balladonia Southand Heartbreak targets occur at the base of oxidisationand on the upper surface of the lignite rocks, representingan appropriate exploration model in terms of Mulga Rockstyle uranium deposits.

Exploration during the year focused on progressing field,desktop and remote sensing exploration activities on alltargets, to effectively plan drill programs, given the sizeand complexity of the mineral system.

Desktop exploration involved accessing, reviewing,digitizing and interpreting historical drill holes, gammalogs and multi-element analysis throughout the projectarea. This work also included modeling remote sensingdata relevant to sandstone hosted uranium deposits insimilar geological settings.

A Thermal Imaging study was completed using NightTime Thermal Infrared (NTTIR) data from the NOAA-AVHRR satellite. The data are used to extract informationrelating to thermal properties of sediments contributingto the interpretation of palaeochannels and hence thetransport of radiogenic ground water under oxidisingconditions.

The work program highlighted what appears to be a largeuranium bearing system shedding from the adjoiningYilgarn Craton, including a complex transgressionsequence, tributaries, palaeochannels, as well asdepositional environments for radiogenic groundwaterunder oxidising conditions.

Additionally, three airborne geophysical programs arebeing flown in the region. The aims of the surveys are tobetter define the extensive palaeochannel network andbasement topography, as well as to identify areas ofrestricted flow and hence potential accumulation andreduction trap sites.

Following the completion of the airborne geophysicalsurveys, three aircore drilling programs are currently being organised for the Heartbreak, Balladonia North and LakeDundas targets, to demonstrate the mineralisation style, define the previously reported redox boundaries and proveup deposition sites.

The Company has signed heritage agreements with the Ngadju, which allows for low impact drilling campaigns priorto an updated heritage survey for high impact drilling. Additionally the operations team have engaged the local stationowners and stakeholders with regards to the programs moving forward.

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Resource Potential and Mineralisation Type

The project is seeking palaeochannel hosted uranium deposits in porous sandy sediments, as per Beverley and Honeymoon,or at the base of oxidisation and on the upper surface of the lignite rocks, as per Mulga Rock. The presence of thesegeological features (including the Werrillup and Pallinup formations, and lignite rocks) is well documented throughout theproject area, which covers 6,736km2.

The favorable features for major uranium deposition at the Balladonia Uranium project include:1) Probable hot granites, both at the fringe of the Yilgarn Craton as a source of the uranium. 2) Large and complex palaeodrainage network with an extensive hinterland. 3) Extensive near surface lignites and sandy sedimentary formations, as accumulation and reduction trap sites, proving

prospective for both roll-front and tabular style uranium deposits. 4) An encouraging drill hole database with high gamma log responses and assays, indicating uranium enrichment in the

area at a redox front in permeable sediments.

The lignite bearing areas, and hence potential accumulation and trapsites at the Balladonia Uranium Project are very large.The area encompassing the lignite associated Mulga Rock deposit is 190km2, yet the prospective area of lignites at Balladoniaexceeds 1600km2. This represents a greater area for possible capture and concentration of uranium.

As with Mulga Rock, the potential deposition site includes peat, clayey peat with supergene enrichment occurring in poroussandy sediments or at the upper contact of extensive lignites within the project area. Uranium is absorbed into organicmatter within peat, with mineralisation forming in tabular and/or roll-front type sandstone hosted deposits, where there is areducing and oxidising component.

There is potential for extraction of uranium via In Situ Recovery (ISR) mining process, from lithological studies alreadyundertaken, with impermeable sediments occurring above and below the potential mineralisation zone. ISR involves leavingthe ore where it is in the ground, and using liquids which are pumped through it to recover the uranium out of the ore byleaching. Consequently there is little surface disturbance, tailings or waste.


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As with Mulga Rock, the potential deposition site includes peat, clayeypeat with supergene enrichment occurring in porous sandy sediments or

at the upper contact of extensive lignites within the project area.Uranium is absorbed into organic matter within peat, with

mineralisation forming in tabular and/or roll-front type sandstonehosted deposits, where there is a reducing and oxidising component.

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Heartbreak Target

The Company has commenced a comprehensive airborneelectromagnetic (AEM) Survey using the TEMPEST systemat the Heartbreak target within the Balladonia UraniumProject.

No modern remote sensing tools such as thermal imagingand AEM have been applied to the project and the workprograms being undertaken will provide the Company withappropriate data to continue to build a geological modeland effectively delineate drill targets. The aim of the surveyis to define the topography of the basement channel andmap the palaeodrainage system. This will provide for betterdefinition of the tributaries that are shedding fromradiogenic granites of the Yilgarn Craton, and map areas ofrestricted flow and hence possible areas of uraniumaccumulation within the drainage system.

The Company has contracted Fugro Airborne Surveys PtyLtd to fly the AEM survey using the TEMPEST System witha base frequency of 25Hz over 2702 line kilometres at200m line spacings in an E-W direction at 90 degrees, witha minimum line length of 8km and a height of 120m.

Balladonia North Target

Epsilon has also commenced a secondcomprehensive AEM Survey at the BalladoniaNorth target within the Balladonia Uraniumproject. Again no modern remote sensing toolssuch as thermal imaging and AEM have beenapplied to the project and the work programsbeing undertaken will provide the Company withappropriate data to continue to build a geologicalmodel and effectively delineate drill targets. Theaim of the survey is to define the topography ofthe basement channel, map the palaeodrainagesystem. This will provide for better definition ofthe tributaries that are shedding from radiogenicgranites of the Yilgarn Craton, and map areas ofrestricted flow and hence possible areas ofuranium accumulation within the drainagesystem.

The Company has contracted Fugro Airborne Surveys Pty Ltd to fly the AEM using the TEMPEST System with a basefrequency of 25Hz over 3076 line kilometres at 400m line spacings, in an E-W direction at 90 degrees, with a minimumline length of 8km and a height of 120m.

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Balladonia South Target

Epsilon plans to commence an airborne geophysical surveyat the Balladonia South Target. At Target A, the upstreampaleodrainage is large, and there is an extensive hinterlandfrom which to derive uranium.

The first significant lignites, and hence potentialaccumulation sites, in this drainage occur here. Potentially alarge amount of uranium could have been mobilised intopalaeochannels around Target area A at Balladonia South.

Target area B within Balladonia South represents an areawhere two very large palaeochannels meet and so wheregroundwater fluid mixing and areas of restricted flow maycontribute to uranium accumulation and deposition.

Target area C is where drainage capture is most apparent.The original huge drainage, coming off Antarctica in thePermian, was north flowing but now is being progressivelycaptured by south flowing drainages. This would favoursupergene enrichment here.


Drilling at Ida Valley

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Lake Dundas

At the Lake Dundas target an airbornegeophysical survey was completed over 200mline spacings at a height of 50m over 454 linekilometres in an E-W direction. UTSGeophysics completed the survey providingboth magnetic and radiometric survey dataover the target.

An older channel appears to exist that mayhave formed an oxbow lake. In an area ofrestricted flow, such as in and around the LakeDundas, one can expect that deposition ofuranium may have occurred in a relativelystagnant reducing environment.

The aim of the airborne geophysical survey isto define the topography of the basementchannel and map the palaeochannel system,which appears to be a confluence of drainagesystems northwards and southwards. Thesurvey was seeking areas of restricted flow andaccumulation of the drainage

This environment is considered favourable forsupergene enrichment of uranium withinsandstone-hosted deposits.

Emu Point

The Ponton Creek system drains a vast area of the Yilgarn block including the Ballard-Marmion-Rebecca Lake systemsand the Noondine-Raeside lake systems. All waters from these systems terminate at the playa south of LakeBoonderoo within the Emu Point Tenements, where potentially huge amounts of uranium have been deposited.

Previous explorers reported consistently high gamma logs ranging between 200 and 1500cps combined withencouraging uranium analyses ranging from 120ppm to 300ppm U3O8 from drilling programs over wide spaced drillholes along an extensive strike length of approximately 10km by 4km within Epsilon’s ELAs at Emu Point.

A field survey was completed which focused on drill hole siting and this program identified further areas of interest fora follow up ground radiometric and soil sampling program, once the tenements are granted.

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Kakarook

The Kakarook Project is located 250kmENE of Kalgoorlie and 15km NE of theMulga Rock uranium deposits (reported47,000t U3O8) in the Gunbarrel Basin,Western Australia. The Project area formedpart of a large regional uranium explorationproject by PNC Australia before thediscovery of the Mulga Rock Deposits.

Areas of uranium mineralisation were foundin and around the project area but were notfollowed-up in detail as the main focus wasdirectly around the Mulga Rock deposit.

Previous exploration for uranium in the arearesulted in the definition of conglomerate-filled palaeochannels which containeduranium, confirming mineralising processeswere active.

Digital terrain data, not available during original exploration, show several interpreted palaeochannels which drained theYilgarn Craton to the N and E and have geometries similar to those in the vicinity of the Mulga Rock deposits.

A field survey was completed which focused on drill hole siting and this program identified further areas of interest for afollow up ground radiometric and soil sampling program, to progress drilling.


Lake Boondoroo looking south west

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West Frome, Frome Basin, SA (EPS 100%)

The West Frome Project is located within the FromeBasin of South Australia and includes the Mount Fromeand Maggie Hill prospects. These are located betweenthe eastern escarpment of the Flinders Ranges andLake Frome. Granted exploration licences EL3774 andEL3773 cover an area of 930km2.

A number of target areas containing favourablelithologies in proximity to basin margins remain to beadequately tested by modern techniques and areconsidered to be prospective for sedimentary roll fronturanium mineralisation. Previous exploration at MaggieHill and Mt Frome is sparse, however extensive regionalexploration in the Frome basin has been carried outleading to the recent discovery of Beverley Four Mile andthe historical discovery of Beverley.

Palaeochannels in the southern part of the FromeEmbayment flank a structural high in the underlyingbasement, the Benagerie Ridge. Tertiary sand wasderived from Precambrian metamorphics and graniterocks of the adjoining Flinders Ranges and deposited in the channels. Oxidising groundwater, moving slowly throughthe channel sands, leached uranium and re-precipitated it down-gradient at the redox interface.

The Company is currently organising a Thermal Imaging Exploration project. The data is used to extract informationrelating to thermal properties of sediments contributing to the interpretation of palaeochannels in the project area.This will be followed up with Airborne Geophysical studies to effectively plan targeted drill programs.

Mt Denison, Ngalia Basin, NT (EPS 100%)

The Mt Denison Project is located within the Lower Proterozoic Arunta Block of the NT, on the northern margin of theNgalia Basin, a proven uranium province. The Ngalia Basin is asymmetric with a steep tectonised northern boundaryand a shallow northerly dipping unconformity forming the southern basin boundary.

The northern boundary is defined in the east by low angle thrust faults over the Arunta inlier and in the west by highangle reverse faults that have thrust the basement rocks several kilometres over the basin sediments. The basementArunta inlier consists of a metasedimentary sequence which is folded and metamorphosed and intruded by granite.

The project has the potential for occurrences of metamorphic and intrusive related uranium deposits within igneousbasement rocks, and sandstone uranium deposits in the overlying sedimentary units. The basement consists ofmetamorphic rocks and granites and pegmatites and the uranium mineralisation is associated with apatites andgranites nearby.

The uranium mineralisation of the Ngalia Basin is hosted in sedimentary channels, piedmont style, of carbonaceousarkosic sediments located towards the base of the Mt Eclipse Sandstone. The primary source of the uranium is inferredto be from the granites of the Arunta inlier.

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Historic work at the project included radiometric studies and rock chip sampling, which returned values assaying up to0.34%U3O8, which is thought to be related to sporadic supergene concentration, as well as 0.096% U3O8 which isassociated with apatite schists.

The Company plans toundertake further rock chipsampling and ground radiometricsurveys, primarily to testpreviously reported anomalouszones, while also undertakingdrill hole siting for a first pass drillprogram, in the coming period.


Valley Calcrete DepositEpsilon’s Mt James prospect

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Ida Valley Uranium Project, Yilgarn Craton, WA (EPS 100%)

The Ida Valley Project consists of one EL 245km north west of Kalgoorlie, Western Australia. The project covers atypical Yilgarn Craton calcreted drainage system. Exploration during the year consisted of a broad spaced first pass1450m drill program that identified a uranium mineralised zone.

Geochemical results from the program highlighted anomalous uranium mineralisation hosted in massive calcrete nearto the surface with a maximum uranium value of 119ppm U over a four metre composite interval. Most drill holeswere successfully cased with 40mm PVC to permit down hole gamma logging, currently being organised. Theseresults will form the basis for Phase 2 exploration activity on the tenement.

Mt Phillips Uranium Project, Gascoyne Region, WA (EPS 100%)

The Mt Phillips project consists of two full size exploration licences, E09/1195 at the Gascoyne River prospect andE09/1196 at the Mt James prospect, covering 392km2 located approximately 260km east of Carnarvon, WesternAustralia.

The two tenements are granted and cover an extensive area of known uranium mineralised calcrete. The uraniummineralisation is carnotite within valley and terrace calcrete deposits. An additional field survey was undertaken wheresamples were taken throughout the project area, that were subsequently assayed by ALS Chemex identifying areasof interest for the planned drill program.

Pandanus West Uranium Project, Georgetown Uranium Field, QLD (EPS 100%)

The Pandanus West Project is located within the Georgetown–Townsville Uranium field, Queensland. Previousexploration in the region discovered the Ben Lomond and Maureen deposits, with measured and indicated mineralresources estimated at 6792 tonnes U3O8 with an average grade of 0.228% U3O8. A field survey was completedwhich focused on drill hole siting at Pandanus West and this program identified further areas of interest for follow upground radiometric and soil sampling programs.

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Uranium Information

Uranium SupplyAustralia is a leading resource and supplier of uranium for the global Nuclear Energy Industry. In terms of the world's KnownRecoverable Resources of uranium at supply costs of less than $130/kg or $59/lb, Australia contains 24% ahead ofKazakhstan (17%), Canada (9%) and the USA (7%) while it has a larger share (30%) of the world's Reasonably AssuredResources recoverable at supply costs of less than $80/kg or $36/lb.

World primary uranium supply (mines) in 2005 was 49,052 tonnes of U3O8 with the balance to meet demand made upfrom secondary sources and or stockpiles. World uranium production increased by almost 8% in 2005, while stockpilesfrom secondary sources decreased by approximately 8%.

Australia is the second largest producer ofuranium in the world with a share of 23% of themarket behind Canada (28%) and ahead ofKazakhstan (8%).

In 2005 Australia exported 27.19 million lbs ofU3O8 valued at $573 million, generally under longterm contracts with countries with which Australiahas Nuclear Safeguards Agreements, such as theUnited States, the EU, Japan and South Korea.Most recently, the Australian Federal Governmenthas signed a Nuclear Material Transfer Agreementwith China and Russia, which reflects the NuclearSafeguards Agreement.


Terrace Calcrete DepositEpsilon’s Gascoyne River prospect

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Uranium DemandThe World Energy Outlook 2006 from the OECD's International Energy Agency (IEA) highlights the increasing importance ofnuclear power in meeting energy needs while achieving security of supply and minimising carbon emissions.

If policies remain unchanged, world energy demand to 2030 is forecast to increase by 53% accompanied by supply crises,giving a carbon inclusive energy future which appears unsustainable. Over 70% of the increased energy demand is fromdeveloping countries, led by China, Russia and India - China will overtake the USA as top CO2 emitter by 2010.

As Governments seek a combination of secure, economic and clean energy alternatives that provide consistent base loadpower, nuclear energy has emerged as an essential component of global energy policy.

As of August 2006, the World's nuclear reactors have a combined capacity of 370 GWe, which require approximately 68,000tonnes of U3O8 each year from both primary and secondary sources.

CarnotiteAt Epsilon’s Mt James prospect

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DIRECTORS' REPORTYour directors present their report on the Company for the financial year ended 30 June 2007.

1. DIRECTORSThe names of directors in office at any time during or since the end of the year are:

Bruce Larson Chairman (appointed 30 August 2006)Matthew Gauci Managing Director (appointed 19 July 2006)Mathew Longworth Non-Executive DirectorCraig Readhead Non-Executive Director (resigned 9 November 2006)Ian Buchhorn Non-Executive Director (resigned 8 November 2006)Alan Trench Non-Executive Director (resigned 8 November 2006)Michael Dentith Non-Executive Director (appointed 11 October 2006)

Directors have been in office since the start of the financial year to the date of this report unless otherwise stated.

COMPANY SECRETARY

Kent Hunter was appointed as Company Secretary on 1 September 2007.

2. PRINCIPAL ACTIVITIESThe principal activity of the Company during the financial year was mineral exploration.

There were no significant changes in the nature of the Company’s principal activities during the financial year.

3. OPERATING RESULTSThe loss of the Company after providing for income tax amounted to $1,221,734 (2006: $8,815).

4. DIVIDENDS PAID OR RECOMMENDEDThe directors do not recommend the payment of a dividend and no amount has been paid or declared by way of adividend to the date of this report.

5. REVIEW OF OPERATIONSA detailed review of the Company activities during the financial year is set out in the section titled Operations Reviewin this Report.

6. SIGNIFICANT CHANGES IN STATE OF AFFAIRSOn 2 October 2006 the Company issued 5,000,000 ordinary shares at $0.001 each to parties involved in the promotion,management and fund raising activities of the Company.

On 2 November 2006 the Company issued 5,000,000 ordinary shares at $0.075 each to parties involved in providingseed capital to the Company.

On 10 November 2006 the Company lodged a prospectus to raise a total of $4,000,000 by way of issuing 20,000,000shares at an issue price of $0.20 each.

On 13 December 2006 the Company issued 10,000,000 ordinary shares at $0.046 each to Heron Resources Limitedas consideration for exploration assets pursuant to the prospectus dated 10 November 2006.

On 13 December 2006 the Company issued 20,000,000 ordinary shares at $0.20 each to various parties pursuant tothe prospectus dated 10 November 2006. The offer was fully subscribed as the Company commenced quotation onthe Australian Stock Exchange on 13 December 2006.

On 15 May 2007 the Company advised that Heron Resources Limited’s shareholding in Epsilon would be distributedto Heron Shareholders with effect on 15 June 2007. The Company announced completion of the distribution on 15June 2007.

There were no other significant changes in the state of affairs of the Company during the financial year.

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7. AFTER BALANCE DATE EVENTSNo matters or circumstances have arisen since the end of the financial year which significantly affected or may significantlyaffect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financialyears.

8. INFORMATION ON DIRECTORSBruce Larson Chairman

Qualifications A Dip Eng, MAICD

Experience Bruce Larson is an experienced senior mining executive with 25 years experience in the mineralsindustry, including 21 years with the Rio Tinto Group. Mr Larson held various senior management andbusiness development roles within Rio Tinto including with the Kintyre Uranium Project andparticipated in the task force teams that led Rio Tinto’s successful takeovers of North Ltd and AshtonMining. Mr Larson was also a Director of Rio Tinto Exploration Pty Ltd. Mr Larson has extensiveexperience in major project approvals, community relations and the negotiation of native titleagreements. He has, through his work with Rio Tinto, an excellent knowledge of the uranium andnuclear industry and was a Board member of the Uranium Information Centre. Mr Larson is a Directorof the newly formed Australian Uranium Association and a member of the Australian Institute ofCompany Directors.

Matthew Gauci Managing Director

Qualifications BSc MBA

Experience Matthew Gauci is a company director and manager with over 12 years experience in the mineralsindustry, including company director, management consulting and operational management roles inboth the junior and international uranium sector. Mr Gauci held operational roles at the Kintyre Projectwith the Rio Tinto Group, and was until recently a founding director of uranium exploration company,Scimitar Resources Limited. Mr Gauci holds a BSc and has completed an MBA from the Universityof Western Australia. Mr Gauci’s experience in the uranium industry, particularly in strategicmanagement, project management, business development and community relations, as well as hisindustry knowledge and business relationships, will assist Epsilon to identify, secure, manage anddevelop a portfolio of high quality uranium assets.

Mathew Longworth Non-Executive Director

Qualifications BSc (Hons), MAusIMM, MAICD

Experience Mathew Longworth is a Geologist with 20 years exploration and development experience with majorAustralian and multinational companies. Mr Longworth commenced his career with Shell/ Billiton inQueensland where he was involved in exploration and feasibility studies for gold and base metals.This was followed by secondment as an engineer to Shell Coal in the Hunter Valley. Mr Longworththen worked at Shell’s Kalgoorlie office on the Sunrise Dam deposit and at Union Reefs during thefeasibility study. Mr Longworth then joined Pancontinental in Kalgoorlie to undertake feasibility studiesand exploration. Upon the takeover of Pancontinental by the Goldfields/RGC group, Mr Longworthmanaged exploration in the Kalgoorlie District for Goldfields, and subsequently AurionGold after themerger with Delta Gold. This included the period when Goldfields discovered the Raleigh andAphrodite gold deposits in addition to numerous smaller discoveries. Mr Longworth was appointedas Managing Director of Heron in January 2007.

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Michael Dentith Non-Executive Director

Qualifications BSc (Hons), Ph D

Experience Mike Dentith is a Professor of Geophysics in the School of Earth & Geographical Sciences at TheUniversity of Western Australia. Mike has 20 years experience in minerals and petroleum industryresearch and consulting, including research on the geophysical characteristics of sandstone-hosteduranium mineralisation. He is currently Research Theme Leader for geophysics in the Centre forExploration Targeting, a research centre created under the Western Australian Government Centre ofExcellence in Science and Innovation Scheme. In addition to the numerous publications he hasproduced two benchmark books on “Geophysical Signatures of Western Australian Mineral Deposits”and “Geophysical Signatures of South Australian Mineral Deposits”, both published by the AustralianSociety of Exploration Geologists.

Directorships of other listed companies

Directorships of other listed companies held by directors in the three years immediately before the end of the financial yearare as follows:

Name Company Period of directorship

Bruce Larson Wildhorse Energy Limited September 2006 to present

Matt Gauci Nil

Matt Longworth Heron Resources Limited May 2004 to present

Mike Dentith Nil

COMPANY SECRETARY

Kent Hunter held the position of Company Secretary as at the date of this report.

Mr Hunter is an experienced Chartered Accountant with over 16 years corporate and company secretarial experience. Hehas been involved in the listing of 17 junior exploration companies on ASX in the past five years with capital raisings exceeding$54 million. Mr Hunter has experience in capital raisings, ASX compliance, regulatory requirements and Company Secretarialduties with various listed uranium and other mineral exploration companies. Mr Hunter is currently a non-executive directorof ASX-listed Cazaly Resources Limited and Scimitar Resources Limited, and AIM-listed Elixir Petroleum Limited.

9. MEETINGS OF DIRECTORSThe number of directors' meetings held during the financial year and the number of meetings attended by each director are:

Directors Meetings

Director Number Eligible to Attend Meetings Attended

Bruce Larson 8 8Matthew Gauci 10 10Mathew Longworth 10 10Michael Dentith 7 7Craig Readhead 4 3Ian Buchhorn 4 3Alan Trench 4 2

The Company does not have a formally constituted audit committee as the board considers that the Company’s size andtype of operation do not warrant such a committee.

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10. REMUNERATION REPORTThis report details the nature and amount of remuneration for each director of Epsilon Energy Limited.

Remuneration Policy

The remuneration policy of Epsilon Energy Limited has been designed to align director objectives with shareholder andbusiness objectives by providing a fixed remuneration component which is assessed on an annual basis in line with marketrates. The board of Epsilon Energy Limited believes the remuneration policy to be appropriate and effective in its ability toattract and retain the best directors to run and manage the Company, as well as create goal congruence between directorsand shareholders.

The board’s policy for determining the nature and amount of remuneration for board members is as follows:

The remuneration policy, setting the terms and conditions for the executive directors and other senior staff members, wasdeveloped by the managing director and approved by the board after seeking professional advice from independent externalconsultants.

In determining competitive remuneration rates, the Board seeks independent advice on local and international trends amongcomparative companies and industry generally. It examines terms and conditions for employee incentive schemes, benefitplans and share plans. Independent advice is obtained to confirm that executive remuneration is in line with market practiceand is reasonable in the context of Australian executive reward practices.

All executives receive a base salary (which is based on factors such as length of service and experience), superannuationand fringe benefits.

The Company is an exploration entity, and therefore speculative in terms of performance. Consistent with attracting andretaining talented executives, directors and senior executives are paid market rates associated with individuals in similarpositions, within the same industry. The Board however acquired and were issued shares as part of the terms of the InitialPublic Offer. Board members have retained these securities which assist in aligning their objectives with overall shareholdervalue.

Options have been issued to Board members to provide a mechanism to participate in the future development of theCompany and an incentive for their future involvement with and commitment to the Company.

Options and performance incentives will be issued in the event that the entity moves from an exploration entity to a producingentity, and key performance indicators such as profits and growth can be used as measurements for assessing Boardperformance.

The executive directors and executives receive a superannuation guarantee contribution required by the government, whichis currently 9% and do not receive any other retirement benefits.

All remuneration paid to directors is valued at the cost to the Company and expensed. Shares given to directors andexecutives are valued as the difference between the market price of those shares and the amount paid by the director orexecutive. Options are valued using the Black-Scholes methodology.

The board policy is to remunerate non-executive directors at market rates for comparable companies for time, commitmentand responsibilities. The managing director in consultation with independent advisors determines payments to the non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. Themaximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by shareholders atthe Annual General Meeting. Fees for non-executive directors are not linked to the performance of the Company. However,to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the Company.

Company Performance, Shareholder Wealth and Directors’ and Executives’ Remuneration

The remuneration policy has been tailored to increase goal congruence between shareholders and directors and executives.This has been achieved by the issue of shares to the majority of the directors and executives to encourage the alignment ofpersonal and shareholder interest.

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Details of Remuneration for Year Ended 30 June 2007

The remuneration for each director of the Company receiving the highest remuneration during the year was as follows:

SHORT-TERM POST SECURITIES TOTAL

------------------BENEFITS------------------ ---------EMPLOYMENT--------- ---------ISSUED--------

Salary & Fees Other Non- Superann- Retirement Equity Options $Monetary uation Benefits

Directors

Bruce Larson - Chairman2007 29,807 - - 33,323 - - 49,134 112,264

Matthew Gauci – Managing Director2007 188,718 - - 16,985 - - 193,890 399,593

Mathew Longworth – Non Executive Director2007 - - - - - - - -

Mike Dentith – Non Executive Director2007 24,704 - - 2,188 - - 18,425 45,317

Total Remuneration Directors2007 243,229 - - 52,496 - - 261,449 557,174

The remuneration for each key management personnel of the Company receiving the highest remuneration during the yearwas as follows:



Salary & Fees Other Non- Superann- Retirement Equity Options(I) $Monetary uation Benefits

Stefan Gawlinski – Exploration Manager2007 65,625 - - 5,906 - - 23,832 95,363

Total Remuneration Key Management Personnel2007 65,625 - - 5,906 - - 23,832 95,363

Employment Contracts of Directors and Senior Executives

The employment conditions of the Managing Director, Matt Gauci are formalised in a contract of employment.

Other than the Managing Director, all executives are permanent employees of Epsilon Energy Limited.

Mr Gauci’s employment contract was executed on 31 August 2006 and expires on 16 July 2009. The employment contractstates it may be terminated by either party by providing three months written notice and upon payment of any outstandingfees for services rendered. The Company may terminate an employment contract without cause by providing three monthswritten notice or making payment in lieu of notice, based on the individual’s annual salary component. The employmentcontract does not contain a provision for performance based remuneration.

11. FUTURE DEVELOPMENTSThe entity will continue its mineral exploration activity at and around its exploration projects with the object of identifyingcommercial resources.

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12. ENVIRONMENTAL ISSUESThe Company is aware of its environmental obligations with regards to its exploration activities and ensures that it complieswith all regulations when carrying out any exploration work.

13. OPTIONSOptions issued as part of remuneration for the year ended 30 June 2007

During and since the end of financial year, the following options were issued to Directors and executives as part ofremuneration.

Directors Number Exercise Price Expiry Date

Bruce Larson 400,000 $0.25 30 August 2009300,000 $0.30 30 August 2009300,000 $0.40 30 August 2009

Matthew Gauci 1,500,000 $0.25 19 July 2009500,000 $0.30 19 July 2009

1,000,000 $0.40 19 July 20091,000,000 $0.60 19 July 2009

Michael Dentith 350,000 $0.25 30 September 2009

Executives Number Exercise Price Expiry Date

Stefan Gawlinski 525,000 $0.25 11 October 2009

At the date of this report unissued ordinary shares of the company under option are:

Expiry Date Exercise Price Number of Shares

30 August 2009 $0.25 400,000

30 August 2009 $0.30 300,000

30 August 2009 $0.40 300,000

19 July 2009 $0.25 1,500,000

19 July 2009 $0.30 500,000

19 July 2009 $0.40 1,000,000

19 July 2009 $0.60 1,000,000

30 September 2009 $0.25 350,000

11 October 2009 $0.25 525,000

15 March 2010 $0.45 150,000

15 March 2010 $0.60 100,000

20 June 2009 $0.25 17,000,000

There has been no issue of ordinary shares as a result of the exercise of options during or since the end of the financial year.

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14. INDEMNIFYING OFFICERS OR AUDITORIn accordance with the constitution, except as may be prohibited by the Corporations Act 2001 every Officer, auditor or agentof the Company shall be indemnified out of the property of the Company against any liability incurred by him in his capacityas Officer, auditor or agent of the Company or any related corporation in respect of any act or omission whatsoever andhowsoever occurring or in defending any proceedings, whether civil or criminal.

The Company has paid premiums to insure each director and officer against liabilities for costs and expenses incurred bythem in defending any legal proceedings arising out of their conduct while acting in their capacity of director or officer of theCompany, other than conduct involving a wilful breach of duty in relation to the Company. The total amount of premiums paidwas $15,000.

15. PROCEEDINGS ON BEHALF OF COMPANYNo person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings towhich the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of theseproceedings.

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

16. AUDITORS INDEPENDENCE DECLARATIONThe lead auditor’s independence declaration for the year ended 30 June 2007 has been received and can be found on page43 of the annual financial report.

17. NON-AUDIT SERVICESThe directors are satisfied that no non audit services were provided to the Company by its auditors during the year ended30 June 2007.

Signed in accordance with a resolution of the Board of Directors.

Matthew GauciManaging Director

Perth, 28 September 2007

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Financial Statements

INCOME STATEMENTFor the Financial Year Ended 30 June 2007

2007 2006

NOTE $ $

Revenue 2 107,414 -

Administration expense (373,798) (4,885)

Compliance and regulatory expense (92,267) -

Consultancy expense (219,533) -

Directors fees (144,985) -

Employee benefit expense (351,505) -

Occupancy expense (19,434) -

Public relations (94,370) -

Depreciation expense 9 (7,336) -

Exploration written off 10 (25,920) (3,930)

Loss before income tax expense 3 (1,221,734) (8,815)

Income tax expense 6 - -

Net Loss attributable to members (1,221,734) (8,815)

Basic loss per share (cents per share) 18 (5.41) -

The accompanying notes form part of these financial statements.

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BALANCE SHEETAs at 30 June 2007

2007 2006

NOTE $ $

CURRENT ASSETS

Cash and cash equivalents 7 3,088,117 42,512

Receivables 8 138,182 1,046

Prepayments 8 17,200 -

TOTAL CURRENT ASSETS 3,243,499 43,558

NON CURRENT ASSETS

Receivables 8 14,000 7,483

Plant and equipment 9 51,409 3,135

Exploration and evaluation expenditure 10 1,682,166 549,820

TOTAL NON CURRENT ASSETS 1,747,575 560,438

TOTAL ASSETS 4,991,074 603,996

CURRENT LIABILITIES

Trade and other payables 11 257,207 693,662

Provisions 12 20,195 -

TOTAL CURRENT LIABILITIES 277,402 693,662

TOTAL LIABILITIES 277,402 693,662

NET ASSETS/(LIABILITIES) 4,713,672 (89,666)

EQUITY

Issued capital 13 4,648,821 10

Reserves 14 1,376,261 -

Accumulated losses 15 (1,311,410) (89,676)

NET (DEFICIENCY)/EQUITY 4,713,672 (89,666)


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CASH FLOW STATEMENTFor the Year Ended 30 June 2007

2007 2006

NOTE $ $

Cash Flows from Operating Activities

- Payments to suppliers (809,195) (5,932)

- Payments for exploration and evaluation (339,139) (77,424)

- Other payments (bond) (14,000)

- Interest received 104,685 -

- Other revenue 2,729 -

Net cash used in operating activities 17 (ii) (1,054,920) (83,356)

Cash Flows from Investing Activities

- Payments for plant and equipment (48,287) (3,135)

Net cash used in investing activities (48,287) (3,135)

Cash Flows from Financing Activities

- Proceeds from issue of shares 4,365,000 -

- Payment for costs of issue of shares (216,188) -

- Proceeds from borrowings - 110,369

- Loans to associated entities - (11,060)

Net cash provided by financing activities 4,148,812 99,309

Net increase in cash and cash equivalents 3,045,605 12,818

Cash and cash equivalents at beginning of financial year 42,512 29,694

Cash and cash equivalents at end of financial year 7 3,088,117 42,512

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STATEMENT OF CHANGES IN EQUITYFor the Financial Year Ended 30 June 2007

Issued Reserves Accumulated TotalCapital Losses

$ $ $ $

At the beginning of financial year 10 - (89,676) (89,666)

Issue of share capital 4,865,000 - - 4,865,000

Issue of options - 1,376,261 - 1,376,261

Cost to issue (216,189) - - (216,189)

Loss for the year - - (1,221,734) (1,221,734)

Balance at 30 June 2007 4,648,821 1,376,261 (1,311,410) 4,713,672

Issued Reserves Accumulated TotalCapital Losses

$ $ $ $

At the beginning of financial year 10 - (80,861) (80,851)

Issue of share capital - - - -

Issue of options - - - -

Loss for the year - - (8,815) (8,815)

Balance at 30 June 2006 10 - (89,676) (89,666)



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Notes to the Financial Statements for the year ended 30 June 2007

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIESThe financial report is a general purpose financial report that has been prepared in accordance with Australian AccountingStandards, Urgent Issues Group Interpretations, other authoritative pronouncements of the Australian Accounting StandardsBoard and the Corporations Act 2001.

The financial report covers the Company of Epsilon Energy Limited. Epsilon Energy Limited is a listed public Company,incorporated and domiciled in Australia.

The financial report complies with all Australian equivalents to International Financial Reporting Standards (AIFRS) in theirentirety.

The financial report has been prepared on an accruals basis under the historical cost convention.

Basis of Preparation

Accounting Policies

(a) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquidinvestments with original maturities of three months or less, and bank overdrafts.

For the purpose of the cash flow statement, cash includes cash on hand and other funds held at call net of bankoverdrafts.

(b) Exploration, Evaluation and Development Expenditure

Exploration, evaluation and production expenditure incurred is accumulated in respect of each identifiable area ofinterest. These costs are carried forward only if they relate to an area of interest for which rights of tenure are currentand in respect of which:

(i) such costs are expected to be recouped through successful development and exploitation or from sale of the area;or

(ii) exploration and evaluation activities in the area have not, at balance date, resulted in booking economicallyrecoverable reserves, and active operations in, or relating to, this area are continuing.

Accumulated costs in respect of areas of interest which are abandoned are written off in full against profit in the yearin 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 forwardcosts in relation to that area of interest.

(c) Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurredis not recoverable from the Australian Tax Office (“ATO”). In these circumstances the GST is recognised as part of thecost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement offinancial position are shown inclusive of GST.

The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balancesheet.

Cash flows are included in the cash flow statement on a gross basis. The GST components of cash flows arising frominvesting and financing activities which are recoverable from, or payable to, the ATO are classified as operating cashflows.

(d) Impairment

At each reporting date, the Company reviews the carrying values of its assets to determine whether there is an indicationthat an asset may be impaired. If such an indication exists, the recoverable amount of the asset, being the higher ofthe asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of theasset’s carrying value over its recoverable amount is expensed to the income statement.

Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates therecoverable amount of the cash-generating unit to which the asset belongs.

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Note 1. Statement of Significant Accounting Policies continued (e) Income Tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recoveredfrom or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that areenacted or substantively enacted by the balance sheet date.

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assetsand liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognisedfor 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 atransaction that is not a business combination and that, at the time of the transaction, affects neither theaccounting profit nor taxable profit or loss; or

• when the taxable temporary difference is associated with investments in subsidiaries, associates or interests injoint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable thatthe 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 assetsand unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductibletemporary 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 initialrecognition of an asset or liability in a transaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss; or

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

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extentthat it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income taxasset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and arerecognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to berecovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year whenthe asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantivelyenacted at the balance sheet date.

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

Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current taxassets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and thesame taxation authority.

(f) Share-based payment transactions

The Company provides benefits to employees (including directors) of the Company in the form of share-based paymenttransactions, whereby employees render services in exchange for shares or rights over shares (“equity-settledtransaction”).

The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date atwhich they are granted. The fair value is determined by an internal valuation using a Black-Scholes option pricingmodel.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the periodin which the performance conditions are fulfilled, ending on the date on which the relevant employees become fullyentitled to the award (“vesting date”).

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i)the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors ofthe Company , will ultimately vest. This opinion is formed based on the best available information at balance date. Noadjustment is made for the likelihood of market performance conditions being met as the effect of these conditions isincluded in the determination of fair value at grant date.


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Note 1. Statement of Significant Accounting Policies continued No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upona market condition.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms hadnot been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result ofthe modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expensenot yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelledaward, and designated as a replacement award on the date that it is granted, the cancelled and new award are treatedas if they were a modification of the original award, as described in the previous paragraph.

(g) Issued Capital

Issued and paid up capital is recognised at the fair value of the consideration received by the Company. Any transactioncosts arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceedsreceived.

(h) Plant and Equipment

Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulateddepreciation.

Plant and Equipment

Plant and equipment are measured on the cost basis.

The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of therecoverable amount from these assets. At each reporting date, the group reviews the carrying values of its tangibleand intangible assets to determine whether there is any indication that those assets have been impaired. If such anindication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell andvalue in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverableamount is expensed to the income statement.

Impairment testing is performed annually for goodwill and intangible assets with indefinite lives.

Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverableamount of the cash-generating unit to which the asset belongs.

Depreciation

The depreciable amount of all fixed assets is depreciated on a diminishing value basis over their useful lives to theconsolidated entity commencing from the time the asset is held ready for use.

The depreciation rates used for each class of depreciable assets are:

Class of Fixed Asset Depreciation Rate Depreciation Rate

2007 2006

Plant and equipment – office 40% 40%Office furniture and equipment 18% -Plant and equipment – field 40% -

(i) Trade and Other Receivables

Trade receivables, which generally have 30-90 day terms, are recognised and carried at original invoice amount lessan allowance for any uncollectible amounts. An allowance for doubtful debts is made when collection of the full amountis no longer probable. Bad debts are written off when identified.

Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as incomeon an accrual basis.

(j) Trade and Other Payables

Trade payables and other accounts payable are recognised when the entity becomes obliged to make future paymentsresulting from the purchase of goods and services. Amounts are unsecured and are usually paid within 30 to 45 daysof recognition.

Payables to related parties are recognised and carried at the nominal amount due.

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Note 1. Statement of Significant Accounting Policies continued (k) Financial Instruments

Recognition

Financial instruments are initially measured at cost on trade date, which includes transaction costs, when the relatedcontractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set outbelow.

Financial assets at fair value through profit and loss

A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if sodesignated by management and within the requirements of AASB 139: Recognition and Measurement of FinancialInstruments. Derivatives are also categorised as held for trading unless they are designated as hedges. Realised andunrealised gains and losses arising from changes in the fair value of these assets are included in the income statementin the period in which they arise.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted inan active market and are stated at amortised cost using the effective interest rate method.

Held-to-maturity investments

These investments have fixed maturities, and it is the Company’s intention to hold these investments to maturity. Anyheld-to-maturity investments held by the Company are stated at amortised cost using the effective interest rate method.

Available-for-sale financial assets

Available-for-sale financial assets include any financial assets not included in the above categories. Available-for-salefinancial assets are reflected at fair value. Unrealised gains and losses arising from changes in fair value are takendirectly to equity.

Financial liabilities

Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments andamortisation.

(l) Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take asubstantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until suchtime as the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised in income in the period in which they are incurred.

(m) Critical accounting judgements, estimates and assumptions

The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions offuture events. The key estimates and assumptions that have a significant risk of causing a material adjustment to thecarrying amounts of certain assets and liabilities within the next annual reporting period are:

Share based payment transactions

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of theequity instruments at the date at which they are granted. The fair value is determined by an internal valuation usingBlack-Scholes option pricing model, using the assumptions detailed in note 4.

Exploration and evaluation costs

Exploration and evaluation expenditure incurred is accumulated in respect of each identifiable area of interest. Thesecosts are carried forward in respect of an area that has not at balance sheet date reached a stage which permits areasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significantoperations in, or relating to, the area of interest are continuing.


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2007 2006

$ $

2. REVENUEOperating activities

- interest received 104,685 -

- other revenue 2,729 -

Total Revenue 107,414 -

3. LOSS FOR THE YEAR(i) Expenses

Depreciation of non-current assets

- plant and equipment 3,368 -

- office furniture & equipment 351 -

- field plant and equipment 3,617 -

7,336 -

Exploration expense written off 25,920 -

Employee equity settled benefits 290,261 -

4. KEY MANAGEMENT PERSONNEL COMPENSATIONThe names of directors in office at any time during or since the end of the year are:

Bruce Larson Chairman (appointed 30 August 2006)

Matthew Gauci Managing Director (appointed 19 July 2006)

Mathew Longworth Non-Executive Director

Craig Readhead Non-Executive Director (resigned 9 November 2006)

Ian Buchhorn Non-Executive Director (resigned 8 November 2006)

Alan Trench Non-Executive Director (resigned 8 November 2006)

Michael Dentith Non-Executive Director (appointed 11 October 2006)

a) Details of the nature and amount of emoluments of each director are as follows:



Salary & Fees Other Non- Superann- Retirement Equity Options $Monetary uation Benefits

Directors

Bruce Larson - Chairman2007 29,807 - - 33,323 - - 49,134 112,264

Matthew Gauci – Managing Director2007 188,718 - - 16,985 - - 193,890 399,593

Mathew Longworth – Non Executive Director2007 - - - - - - - -

Mike Dentith – Non Executive Director2007 24,704 - - 2,188 - - 18,425 45,317

Total Remuneration Directors2007 243,229 - - 52,496 - - 261,449 557,174

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Note 4. Key Management Personnel Compensation continued

The remuneration for each key management personnel of the Company receiving the highest remuneration during the yearwas as follows:



Salary & Fees Other Non- Superann- Retirement Equity Options(I) $Monetary uation Benefits

Stefan Gawlinski – Exploration Manager2007 65,625 - - 5,906 - - 23,832 95,363

Total Remuneration Key Management Personnel2007 65,625 - - 5,906 - - 23,832 95,363

(i) The fair value of the Options is calculated at the date of grant using a Black-Scholes model.

The following share-based payment arrangements existed at 30 June 2007:

30 August 2009 $0.25 400,000

30 August 2009 $0.30 300,000

30 August 2009 $0.40 300,000

19 July 2009 $0.25 1,500,000

19 July 2009 $0.30 500,000

19 July 2009 $0.40 1,000,000

19 July 2009 $0.60 1,000,000

30 September 2009 $0.25 350,000

11 October 2009 $0.25 525,000

15 March 2010 $0.45 150,000

15 March 2010 $0.60 100,000

The options hold no voting or dividend rights and are not transferable. When a director ceases employment the options aredeemed to have lapsed. Since balance date, no director has ceased their employment. At balance date, no share optionhas been exercised.

All options granted to key management personnel are ordinary shares in Epsilon Energy Limited, which confer a right of oneordinary share for every option held.

None of the above employee options have vested as at the end of the year.

Number of Weighted Average

Options Exercise Price

$

Outstanding at the beginning of the period - -

Granted 6,125,000 $0.36

Forfeited - -

Exercised - -

Expired - -

Outstanding at the end of the financial period 6,125,000 -

Exercisable at the end of the financial period 6,125,000 -


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The options outstanding at 30 June 2007 had a weighted average exercise price of $0.29 and a weighted average remainingcontractual life of 2.13 years.

The weighted average fair value of the options granted during the year was $0.08.

This price was calculated by using a Black-Scholes option pricing model applying the following inputs:

Underlying share price at 19 April 2007 $0.20

Expected share price volatility 60%

Risk free interest rate 6.00%

Historical volatility has been the basis for determining expected share price volatility as it is assumed that this is indicative offuture tender, which may not eventuate.

The life of the options is based on the historical exercise patterns, which may not eventuate in the future.

Included under employee benefit expense in the income statement is $290,261, and relates, in full, to equity-settled share-based payment transactions.

b) Directors Options

Options issued to Directors for the year ended 30 June 2007

The options are not issued based on performance criteria, but are issued to the majority of directors and executivesof Epsilon Energy Limited to increase goal congruence between executives, directors and shareholders.

Vested No. Granted Grant Value per Exercise First LastNo. Date Option Price Exercise Exercise

at Grant $ Date DateDate

$Bruce Larson 400,000 400,000 30/8/06 0.08 0.25 30/8/07 30/8/09

300,000 300,000 30/8/06 0.07 0.30 30/8/07 30/8/09300,000 300,000 30/8/06 0.05 0.40 30/8/07 30/8/09

Matthew Gauci 1,500,000 1,500,000 19/7/06 0.08 0.25 19/7/07 19/7/09500,000 500,000 19/7/06 0.07 0.30 19/7/07 19/7/09

1,000,000 1,000,000 19/7/06 0.05 0.40 19/7/07 19/7/091,000,000 1,000,000 19/7/06 0.03 0.60 19/7/07 19/7/09

Mathew Longworth - - - - - - -

Mike Dentith 350,000 350,000 30/9/06 0.08 0.25 30/9/07 30/9/09

5,350,000 5,350,000

Options Total Options Options TotalGranted Remuneration exercised lapsed

Representedby Options

Bruce Larson 400,000 43.77% - - 400,000

300,000 - - 300,000

300,000 - - 300,000

Matthew Gauci 1,500,000 48.52% - - 1,500,000

500,000 - - 500,000

1,000,000 - - 1,000,000

1,000,000 - - 1,000,000

Mathew Longworth - - - - -

Mike Dentith 350,000 40.66% - - 350,000

5,350,000 - - - 5,350,000


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c) Key Management Personnel Options

Options issued to Key Management Personnel for the year ended 30 June 2007

The options are not issued based on performance criteria, but are issued to the majority of directors and executivesof Epsilon Energy Limited to increase goal congruence between executives, directors and shareholders.

Vested No. Granted Grant Value per Exercise First LastNo. Date Option Price Exercise Exercise

at Grant $ Date DateDate

$Stefan Gawlinski-Exploration Manager 525,000 525,000 11/10/06 0.09 0.25 11/10/07 11/10/09

525,000 525,000

Options Total Options Options TotalGranted Remuneration exercised lapsed

Representedby Options

Stefan Gawlinski- 525,000 25% - - 525,000

Exploration Manager

525,000 - - - 525,000

d) Shareholdings

Number of Shares held by Directors:

Balance Granted to Options Net Balance1 July 2006 Directors Exercised Change

- Other

30 June 2007

Bruce Larson - 450,000 - 75,000 525,000

Matthew Gauci - 1,000,000 - 270,000 1,270,000

Mathew Longworth - - - 364,865 364,865

Mike Dentith - 300,000 - - 300,000

- 1,750,000 - 709,865 2,459,865

(i) Mr Larson purchased 75,000 shares on-market.

(ii) Mr Gauci purchased 270,000 shares on-market.

(iii) Mr Longworth purchased 190,000 shares at IPO, 150,000 shares on-market and received 24,865 shares pursuant to in-specie distribution of Epsilon shares to Heron Resources Limited shareholders.

e) Shareholdings

Number of Shares held by Key Management Personnel:

Balance Granted Options Net Balance1 July 2006 Exercised Change

- Other

30 June 2007

Stefan Gawlinski-Exploration Manager - - - 50,000 50,000

- - - 50,000 50,000

(i) Mr Gawlinski purchase 50,000 shares at IPO


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The Company policy for determining the nature and amount of emoluments of board members and senior executives of theCompany is as follows:

The remuneration structure for executive officers, including executive directors, is based on a number of factors,including length of service, particular experience of the individual concerned, and overall performance of the Company.The contracts for service between the Company and specified directors and executives are on a continuing basis theterms of which are not expected to change in the immediate future. Upon retirement specified directors and executivesare paid employee benefit entitlements accrued to date of retirement. The Company may terminate the contractswithout cause by providing one to three months written notice or making payment in lieu of notice based on theindividual’s annual salary component at industry award redundancy rates.

Employment Contracts of Directors and Senior Executives

The employment conditions of the Managing Director, Matt Gauci are formalised in a contract of employment.

Other than the Managing Director, all executives are permanent employees of Epsilon Energy Limited.

Mr Gauci’s employment contract was executed on 31 August 2006 and expires on 16 July 2009. The employment contractstates it may be terminated by either party by providing three months written notice and upon payment of any outstandingfees for services rendered. The Company may terminate an employment contract without cause by providing three monthswritten notice or making payment in lieu of notice, based on the individual’s annual salary component. The employmentcontract does not contain a provision for performance based remuneration.

2007 2006

$ $

5. AUDITORS’ REMUNERATIONRemuneration of the auditor for:

- Auditing or reviewing the financial report 17,500 2,500

- Other services - -

17,500 2,500

6. INCOME TAX EXPENSEThe components of the tax expense/(income) comprise:

Current tax - -

Deferred tax - -

Total income tax expense/(benefit) per income statement - -

(a) The prima facie tax on loss from ordinary activities before income tax is reconciled to the income tax as follows:

Net profit/(loss) before tax (1,221,734) (8,815)

Income tax expense/(benefit) on above at 30% (2006 30%) (366,521) (2,644)

Permanent differences 43,474 -

Temporary differences not brought to account 323,047 2,644

Income tax expense/(income) attributable to entity - -

(b) No current or deferred tax loss has been recognised directly in equity.

There are no franking credits available for future years.

(c) Unrecognised deferred tax assets

Deferred tax assets have not been recognised in respect of the following:

Deductible temporary differences 51,885

Tax revenue losses 271,162

Tax capital losses - -

323,047 -

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2007 2006

$ $

7. CASH AND CASH EQUIVALENTSCash at bank 3,088,117 42,512

3,088,117 42,512

8. TRADE AND OTHER RECEIVABLESCurrent

Cash advances 2,000 -

Prepayments 17,200 -

Other receivables 136,182 1,046

155,382 1,046

Non-current

Bonds 14,000 -

Amounts receivable from related entities - 7,483

14,000 7,483

9. PLANT AND EQUIPMENTPlant and equipment - office

At cost 28,300 3,135

Accumulated depreciation (3,368) -

24,932 3,135

Office furniture and equipment

At cost 4,660 -

Accumulated depreciation (351) -

4,309 -

Plant and equipment – field

At cost 25,785 -

Accumulated depreciation (3,617) -

22,168 -

Total plant and equipment 51,409 3,135

Reconciliations

Movement in the carrying amounts for each class of plant and equipment between the beginning and end of the currentfinancial year:-

Plant & Office Plant & Totalequipment furniture equipment $

- office & equipment – field2007 $ $ $Carrying amount at 1 July 2006 3,135 - - 3,135

Additions 25,165 4,660 25,785 55,610

Disposals - - - -

Depreciation/ Amortisation (3,368) (351) (3,617) (7,336)

Carrying amount at 30 June 2007 24,932 4,309 22,168 51,409


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2007 2006

$ $

10. EXPLORATION EXPENDITUREBalance at beginning of year 549,820 475,418

Exploration assets acquired during the year 628,220 -

Exploration costs incurred during the year 530,046 78,332

Exploration costs written off (25,920) (3,930)

Carried forward exploration expenditure 1,682,166 549,820

The ultimate recoupment of costs carried forward is dependent upon the successful development and/or commercialexploitation or alternatively, sale of the respective areas of interest.

The value of the Company’s interest in exploration expenditure is dependent upon:

• the continuance of the Company’s rights to tenure of the areas of interest;• the results of future exploration; and• the recoupment of costs through successful development and exploitation of the areas of interest, or alternatively,

by their sale.The Company’s exploration properties may be subjected to claim(s) under native title, or contain sacred sites, or sites ofsignificance to Aboriginal people. As a result, exploration properties or areas within the tenements may be subject toexploration restrictions, mining restrictions and/or claims for compensation. At this time, it is not possible to quantify whethersuch claims exist, or the quantum of such claims.

2007 2006

$ $

11. TRADE AND OTHER PAYABLESCurrent

Trade payables 165,525 907

Exploration payables 91,682 -

Loan from parent entity - 692,755

257,207 693,662

12. PROVISIONCurrent

Provision for Annual Leave 20,195 -

Number of employees at end of year 2 -

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2007 2006

$ $

13. ISSUED CAPITALFully paid ordinary shares 4,648,821 10

Ordinary Shares $ $

At the beginning of the reporting period 10 10

Shares issued during the year

- promoter shares issued on 2 October 2006 5,000 -

- seed shares issued on 2 November 2006 375,000 -

- vendor shares issued on 13 December 2006 460,000 -

- issue pursuant to prospectus dated 10 November 2006 4,000,000 -

- issue pursuant to placement 21 February 2007 25,000 -

- costs to issue (216,189) -

At reporting date 4,648,821 10

Fully paid ordinary shares 40,125,010 10

Ordinary Shares No. No.

At the beginning of the reporting period 10 10

Shares issued during the year

- promoter shares issued on 2 October 2006 5,000,000 -

- seed shares issued on 2 November 2006 5,000,000 -

- vendor shares issued on 13 December 2006 10,000,000 -

- issue pursuant to prospectus dated 10 November 2006 20,000,000 -

- issue pursuant to placement 21 February 2007 125,000 -

At reporting date 40,125,010 10

At shareholders meetings each ordinary share is entitled to one vote in proportion to the paid up amount of the share whena poll is called, otherwise each shareholder has one vote on a show of hands.Ordinary shares have the right to receive dividends as declared and, in the event of the winding up of the Company, toparticipate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on sharesheld.

Ordinary shares have no par value and entitle their holder to one vote, either in person or by proxy, at a meeting of theCompany.

2007 2006

$ $

14. OPTION RESERVEReserves at the beginning of the reporting period - -

Options issued to Directors 261,449 -

Options issued to Employees 28,812 -

Options issued to Consultants 126,000 -

Options issued to Vendors 960,000 -

At reporting date 1,376,261 -


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2007 2006

$ $

15. ACCUMULATED LOSSESAt the beginning of the reporting period 89,676 80,861

Net loss for the year 1,221,734 8,815

At reporting date 1,311,410 89,676

16. FINANCIAL INSTRUMENTS(a) Financial Risk Management

The Company’s financial instruments consist mainly of deposits with banks, short-term investments, accountsreceivable and payable, and loans from related parties. The Company does not have any derivative instruments at 30June 2007.

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to theCompany. The Company has adopted the policy of only dealing with credit worthy counterparties and obtainingsufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults.

The Company does not have any significant credit risk exposure to any single counterparty or any group ofcounterparties having similar characteristics. The carrying amount of financial assets recorded in the financialstatements, net of any provisions for losses, represents the Company’s maximum exposure to credit risk.

Liquidity Risk

The group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate unutilised borrowingfacilities are maintained.

(b) Interest Rate Risk

The Company’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a resultof changes in market interest rates and the effective weighted average interest rate for each class of financial assetsand financial liabilities comprises:

2007 Floating Non-interest TotalNote Interest Rate bearing

$ $ $Financial assets

Cash and cash equivalents 8 3,088,117 - 3,088,117

Receivables - 138,182 138,182

3,088,117 138,182 3,226,299

Weighted average

Interest rate 5.97% - -

Financial Liabilities

Payables - 257,207 257,207

- 257,207 257,207

Weighted average interest rate - - -

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Note 16. Financial Instruments continued 2006 Floating Non-interest Total

Interest Rate bearing$ $ $

Financial assets

Cash and cash equivalents 42,502 10 42,512

Receivables - 8,529 8,529

42,502 8,539 51,041

Weighted average

Interest rate - - -

Financial Liabilities

Payables - 693,662 693,662

- 693,662 693,662

Weighted average interest rate - - -

(c) Net Fair Value of Financial Assets and Liabilities

The net fair value of the financial assets and financial liabilities approximates their carrying value.

2007 2006

$ $

17. CASH FLOW INFORMATION(i) Cash and cash equivalents is made up of the following:-

Cash at bank 3,088,117 42,512

(ii) Reconciliation of cash flows from operating activities with loss after income tax

Loss after income tax (1,221,734) (8,815)

- Depreciation 7,336 -

- Exploration assets written off 25,920 3,930

- Share based payments 416,261 -

Changes in assets and liabilities

- Receivables (114,336) (1,954)

- Exploration and evaluation expenditure (339,139) (77,424)

- Increase in trade and other payables 170,772 907

Net cash (outflows) from Operating Activities (1,054,920) (83,356)

(iii) Non-cash Financial and Investing Activities

On 13 December 2006 the Company issued 10,000,000 ordinary shares at $0.046 each and 15,000,000 $0.25 optionsto Heron Resources Limited as consideration for exploration assets pursuant to the prospectus dated 10 November2006.


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2007 2006

$ $

18. EARNINGS PER SHARE(a) Earnings / (Loss) used in the calculation of basic EPS (1,221,734) -

Number of Number ofShares Shares

(b) Weighted average number of ordinary shares outstanding during the period used in the calculation of basic earnings per share: 22,599,255 -

The 23,125,000 options on issue expiring on various dates and exercise prices are not considered dilutive.

19. SEGMENT INFORMATIONThe Company currently operates predominantly in one geographical segment, being Australia, and in one industry,mineral mining and exploration.

20. EVENTS SUBSEQUENT TO REPORTING DATENo matters or circumstances have arisen since the end of the financial period which significantly affected or maysignificantly affect the operations of the Company, the results of those operations, or the state of affairs of the Companyin future financial years.

The financial report was authorised for issue by the Board on 28 September 2007.

21. RELATED PARTY DISCLOSURESTransactions between related parties are on commercial terms and conditions, no more favourable than those available toother parties unless otherwise stated.

Transactions with related entities:

Remuneration (excluding the reimbursement of costs) received or receivable by the directors of the Company andaggregate amounts paid to superannuation plans in connection with the retirement of directors are disclosed in Note4 to the accounts.

These transactions were made on commercial terms and conditions and at market rates.

Until 2 October 2006 Epsilon Energy Limited was a 100% controlled entity of Heron Resources Limited.

An interest free unsecured loan was made to the Company by the former parent entity, Heron Resources Limited. Thebalance of $791,780 was foregiven on 11 December 2006.

An interest free unsecured loan was made by the Company by to related entity, Atriplex Limited. The balance of $2,060was paid on 16 February 2007.

An interest free unsecured loan was made by the Company by to related entity, Hampton Nickel Limited. The balanceof $5,423 was paid on 16 February 2007.

22. CONTINGENT LIABILITIES In the opinion of the directors there were no contingent liabilities at 30 June 2007, and the interval between 30 June 2007and the date of this report

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23. COMMITMENTSa) Exploration

In order to maintain current rights of tenure to mining tenements, the Company has the following discretionaryexploration expenditure requirement up until expiry of leases. These obligations, are subject to renegotiation on expiryof the leases, are not provided for in the financial statements and are payable:

2007 2006

$ $

Not longer than one year 2,029,700 -

Longer than one year, but no longer than five years 8,118,800 -

Longer than five years - -

10,148,500 -

If the Company decides to relinquish certain leases and/or does not meet these obligations, assets recognised in thebalance sheet may require review to determine the appropriateness of carrying values. The sale, transfer or farm-outof exploration rights to third parties will reduce or extinguish these obligations.

b) Operating issues

The Company has entered into a lease agreement with CB Richard Ellis for the premises at 9A Agnew Way, Subiaco,Western Australia. The initial term is for three year expiring on 1 July 2010 in consideration for a rental fee ofapproximately $38,880 per annum.

c) Capital commitments

The Company does not have any current capital commitments.

24. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTEDCertain new accounting standards and interpretations have been published that are not mandatory for 30 June 2007reporting periods. The Company’s assessment of these new standards and interpretations is set out below:

(i) AASB 7 Financial Instruments: Disclosures and AASB 2005-10 Amendments to Australian Accounting Standards [AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 & AASB 1038]

AASB 7 and AASB 2005-10 are applicable to annual reports periods beginning on or after 1 January 2007. TheCompany has not adopted the standards early. Application of the standards will not affect any of the amountsrecognised in the financial statements, but will impact the type of information disclosed in relation to the Company’sfinancial instruments.

(ii) AASB-1 10 Interim Financial Reporting and Impairment

AASB-1 10 is applicable to reporting periods commencing on or after 1 November 2006. The Company has notrecognised an impairment loss in relation to goodwill, investments in equity instruments or financial assets carried atcost in an interim reporting period but subsequently reversed the impairment loss in the annual report. Application ofthe interpretation will therefore have no impact on the Company’s financial statements.

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DIRECTORS' DECLARATION

1. the financial statements and notes, as set out on pages 22 to 41 are in accordance with the Corporations Act 2001and:

(a) comply with Australian Accounting Standards and the Corporations Regulations 2001; and

(b) give a true and fair view of the financial position of the Company as at 30 June 2007 and of its performance forthe year ended on that date;

2. the Chief Executive Officer and Chief Finance Officer have each declared that:

(a) the financial records of the Company for the financial year have been properly maintained in accordance withsection 286 of the Corporations Act 2001;

(b) the financial statements and notes for the financial year comply with Australian Accounting Standards; and

(c) the financial statements and notes for the financial year give a true and fair view;

3. in the Director’s opinion there are reasonable grounds to believe that the Company will be able to pay its debts as andwhen they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of thedirectors by:

Matthew Gauci

Managing Director

Perth, 28 September 2007

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ADDITIONAL SHAREHOLDER INFORMATION

Shareholding

The distribution of members and their holdings of equity securities in the Company as at 17 September 2007 was as follows:

Number Held as at 17 September 2007 Fully Paid Ordinary Shares

1-1,000 1,299

1,001 - 5,000 1,016

5,001 – 10,000 250

10,001 - 100,000 387

100,001 and over 51

TOTALS 3,003

Holders of less than a marketable parcel:

- fully paid shares 2060

Substantial Shareholders

The following substantial shareholders were listed in the Company’s register as at 17 September 2007

Name NumberKurana Pty Ltd <Buchhorn Unit Fund> 2,682,499

Restricted Securities

The Company has issued the following restricted securities:

Class of Equity Security Number Date Ceasing To Be Restricted Securities

Fully paid ordinary shares 18,125,000 13 December 2008

Options 22,350,000 13 December 2008

Voting Rights

Ordinary Shares

In accordance with the Company's Constitution, on a show of hands every member present in person or by proxy or attorneyor duly authorised representative has one vote. On a poll every member present in person or by proxy or attorney or dulyauthorised representative has one vote for every fully paid ordinary share held.

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Twenty Largest Shareholders

The names of the twenty largest ordinary fully paid shareholders are as follows:

Name Number of Ordinary % Held of Issued Fully Paid Shares Held Ordinary Capital

ANZ Nominees Limited <Cash Income A/C> 3,274,987 8.16

Kurana Pty Ltd <Buchhorn Unit Fund A/C> 2,682,499 6.69

Kouta Bay Pty Ltd 1,850,000 4.61

MBM Corporation Pty Ltd 1,503,484 3.75

Inco Australia Holdings Pty Ltd 1,457,517 3.63

BHP Minerals Holdings Pty Ltd 1,327,955 3.31

Mr Matthew George Gauci 1,000,000 2.49

Red Puma Pty Ltd 622,563 1.55

VP Investments Pty Ltd 500,000 1.25

Cimbrook Nominees Pty Ltd 500,000 1.25

VP Investments Pty Ltd <Vince Gauci Family A/C> 500,000 1.25

Archem Trading NZ Limited 500,000 1.25

Mr Bruce Edwin Larson 450,000 1.12

National Nominees Limited 386,278 0.96

Chaos Investments Pty Limited <Alexandrou Family A/C> 380,886 0.95

Mr Raymond Leslie Johnston and Mrs Penny Jane Johnston 310,867 0.77

Koltai Holdings Pty Ltd 304,947 0.76

Mr Michael Charles Dentith 300,000 0.75

Mr Matthew Gauci <Macondo Family A/C> 291,105 0.73

Aldersgate Street Pty Limited 288,000 0.72

TOTAL 18,431,088 45.93

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CORPORATE GOVERNANCEThe Company is committed to implementing the highest standards of corporate governance. In determining what those highstandards should involve the Company has turned to the ASX Corporate Governance Council’s Principles of Good CorporateGovernance and Best Practice Recommendations. The Company is pleased to advise that the Company’s practices arelargely consistent with those ASX guidelines. As consistency with the guidelines has been a gradual process, where theCompany did not have certain policies or committees recommended by the ASX Corporate Governance Council (the Council)in place during the reporting period, we have identified such policies or committees.

Where the Company’s corporate governance practices do not correlate with the practices recommended by the Council,the Company is working towards compliance however it does not consider that all the practices are appropriate for theCompany due to the size and scale of Company operations.

To illustrate where the Company has addressed each of the Council’s recommendations, the following table cross-referenceseach recommendation with sections of this report. The table does not provide the full text of each recommendation but ratherthe topic covered. Details of all of the recommendations can be found on the ASX Corporate Governance Council’s websiteat http://www.asx.com.au/supervision/governance/index.htm.

Recommendation SectionRecommendation 1.1 Functions of the Board and Management 1.1

Recommendation 2.1 Independent Directors 1.2

Recommendation 2.2 Independent Chairman 1.2

Recommendation 2.3 Role of the Chairman and CEO 1.2

Recommendation 2.4 Establishment of Nomination Committee 2.3

Recommendation 2.5 Reporting on Principle 2 1.2, 1.4.6, 2.3.2 and the Directors’ Report

Recommendation 3.1 Directors’ and Key Executives’ Code of Conduct 1.1

Recommendation 3.2 Company Security Trading Policy 1. 4.9

Recommendation 3.3 Reporting on Principle 3 1.1 and 1.4.9

Recommendation 4.1 Attestations by CEO and CFO 1.4.11

Recommendation 4.2 Establishment of Audit Committee 2.1

Recommendation 4.3 Structure of Audit Committee 2.1.2

Recommendation 4.4 Audit Committee Charter 2.1

Recommendation 4.5 Reporting on Principle 4 2.1

Recommendation 5.1 Policy for Compliance with Continuous Disclosure 1.4.4

Recommendation 5.2 Reporting on Principle 5 1.4.4

Recommendation 6.1 Communications Strategy 1.4.8

Recommendation 6.2 Attendance of Auditor at General Meetings 1.4.8

Recommendation 7.1 Policies on Risk Oversight and Management 2.1.3

Recommendation 7.2 Attestations by CEO and CFO 1.4.11

Recommendation 7.3 Reporting on Principle 7 2.1.3

Recommendation 8.1 Evaluation of Board, Directors and Key Executives 1.4.10

Recommendation 9.1 Remuneration Policies 2.2.4

Recommendation 9.2 Establishment of Remuneration Committee 2.2

Recommendation 9.3 Executive and Non-Executive Director Remuneration 2.2.4.1 and 2.2.4.2

Recommendation 9.4 Equity-Based Executive Remuneration 2.2.4.1

Recommendation 9.5 Reporting on Principle 9 2.2.2 and 2.2.4

Recommendation 10.1 Company Code of Conduct 3For

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1. Board of Directors

1.1 Role of the Board

The Board’s role is to govern the Company rather than to manage it. In governing the Company, the Directors must act inthe best interests of the Company as a whole. It is the role of senior management to manage the Company in accordancewith the direction and delegations of the Board and the responsibility of the Board to oversee the activities of managementin carrying out these delegated duties.

In carrying out its governance role, the main task of the Board is to drive the performance of the Company. The Board mustalso ensure that the Company complies with all of its contractual, statutory and any other legal obligations, including therequirements of any regulatory body. The Board has the final responsibility for the successful operations of the Company.

To assist the Board carry out its functions, it has developed a Code of Conduct to guide the Directors, the Chairman andother key executives in the performance of their roles.

1.2 Composition of the Board

To add value to the Company the Board has been formed so that it has effective composition, size and commitment toadequately discharge its responsibilities and duties given its current size and scale of operations. The names of the Directorsand their qualifications and experience are stated in the Directors’ Report along with the term of office held by each of theDirectors. Directors are appointed based on the specific skills required by the Company and on their decision-making andjudgment skills.

The Company recognises the importance of Non-Executive Directors and the external perspective and advice that Non-Executive Directors can offer. Mr B Larson, Mr M Dentith and Mr M Longworth Non-Executive Directors, however are notindependent directors as they do not meet the following criteria for independence adopted by the Company.

An Independent Director is a Non-Executive Director and:• is not a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial

shareholder of the Company;

• within the last three years has not been employed in an executive capacity by the Company or another group member,or been a Director after ceasing to hold any such employment;

• within the last three years has not been a principal of a material professional adviser or a material consultant to theCompany or another group member. Or an employee materially associated with the service provided;

• is not a material supplier or customer of the Company or another group member, or an officer of or otherwise associateddirectly or indirectly with a material supplier or customer;

• has no material contractual relationship with the Company or other group member other than as a Director of theCompany;

• has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere withthe Director’s ability to act in the best interests of the Company; and

• is free from any interest and any business or other relationship which could, or could reasonably be perceived to,materially interfere with the Director’s ability to act in the best interests of the Company.

Mr B Larson, Mr M Dentith and Mr M Longworth are Non-Executive Directors of the Company and do not meet theCompany’s criteria for independence. However, their experience and knowledge of the Company makes their contributionto the Board such that it is appropriate for them to remain on the Board.

Mr M Gauci is an Executive Director of the Company and does not meet the Company’s criteria for independence. However,his experience and knowledge of the Company makes his contribution to the Board such that it is appropriate for him toremain on the Board.

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1.3 Responsibilities of the Board

In general, the Board is responsible for, and has the authority to determine, all matters relating to the policies, practices,management and operations of the Company. It is required to do all things that may be necessary to be done in order tocarry out the objectives of the Company.

Without intending to limit this general role of the Board, the principal functions and responsibilities of the Board include thefollowing. • Leadership of the Organisation: overseeing the Company and establishing codes that reflect the values of the Company

and guide the conduct of the Board.

• Strategy Formulation: to set and review the overall strategy and goals for the Company and ensuring that there arepolicies in place to govern the operation of the Company.

• Overseeing Planning Activities: the development of the Company’s strategic plan.

• Shareholder Liaison: ensuring effective communications with shareholders through an appropriate communicationspolicy and promoting participation at general meetings of the Company.

• Monitoring, Compliance and Risk Management: the development of the Company’s risk management, compliance,control and accountability systems and monitoring and directing the financial and operational performance of theCompany.

• Company Finances: approving expenses and approving and monitoring acquisitions, divestitures and financial andother reporting.

• Ensuring the Health, Safety and Well-Being of Employees: in conjunction with the senior management team,developing, overseeing and reviewing the effectiveness of the Company’s occupational health and safety systems toensure the well-being of all employees.

• Delegation of Authority: delegating appropriate powers to the CEO to ensure the effective day-to-day managementof the Company and establishing and determining the powers and functions of the Committees of the Board.

Full details of the Board’s role and responsibilities are contained in the Board Charter, a copy of which is available forinspection at the Company’s registered office.

1.4 Board Policies1.4.1 Conflicts of Interest

Directors must:• disclose to the Board actual or potential conflicts of interest that may or might reasonably be thought to exist between

the interests of the Director and the interests of any other parties in carrying out the activities of the Company; and

• if requested by the Board, within seven days or such further period as may be permitted, take such necessary andreasonable steps to remove any conflict of interest.

If a Director cannot or is unwilling to remove a conflict of interest then the Director must, as per the Corporations Act, absenthimself or herself from the room when discussion and/or voting occurs on matters about which the conflict relates.

1.4.2 CommitmentsEach member of the Board is committed to spending sufficient time to enable them to carry out their duties as a Director ofthe Company.

1.4.3 ConfidentialityIn accordance with legal requirements and agreed ethical standards, Directors and key executives of the Company haveagreed to keep confidential, information received in the course of the exercise of their duties and will not disclose non-publicinformation except where disclosure is authorised or legally mandated.

1.4.4 Continuous Disclosure The Board has designated the Company Secretary as the person responsible for overseeing and coordinating disclosure ofinformation to the ASX as well as communicating with the ASX. In accordance with the ASX Listing Rules the Companyimmediately notifies the ASX of information:• concerning the Company that a reasonable person would expect to have a material effect on the price or value of the

Company’s securities; and

• that would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquireor dispose of the Company’s securities.

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1.4.5 Education and InductionIt is the policy of the Company that new Directors undergo an induction process in which they are given a full briefing on theCompany. Where possible this includes meetings with key executives, tours of the premises, an induction package andpresentations. Information conveyed to new Directors include:• details of the roles and responsibilities of a Director;

• formal policies on Director appointment as well as conduct and contribution expectations;

• access to a copy of the Board Charter;

• guidelines on how the Board processes function;

• details of past, recent and likely future developments relating to the Board;

• background information on and contact information for key people in the organisation;

• an analysis of the Company;

• a synopsis of the current strategic direction of the Company; and

• a copy of the Constitution of the Company.

In order to achieve continuing improvement in Board performance, all Directors are encouraged to undergo continualprofessional development. Specifically, Directors are provided with the resources and training to address skills gaps wherethey are identified.

1.4.6 Independent Professional AdviceThe Board collectively and each Director has the right to seek independent professional advice at the Company’s expense,up to specified limits, to assist them to carry out their responsibilities.

1.4.7 Related Party TransactionsRelated party transactions include any financial transaction between a Director and the Company. Unless there is anexemption under the Corporations Act from the requirement to obtain shareholder approval for the related party transaction,the Board cannot approve the transaction.

1.4.8 Shareholder CommunicationThe Company respects the rights of its shareholders and to facilitate the effective exercise of those rights the Company iscommitted to:• communicating effectively with shareholders through releases to the market via ASX, information mailed to shareholders

and the general meetings of the Company;

• giving shareholders ready access to balanced and understandable information about the Company and corporateproposals;

• making it easy for shareholders to participate in general meetings of the Company; and

• requesting the external auditor to attend the annual general meeting and be available to answer shareholder questionsabout the conduct of the audit and the preparation and content of the auditor’s report.

The Company also makes available a telephone number and email address for shareholders to make enquiries of theCompany.

1.4.9 Trading in Company SharesDue to the size of the Company, the Board does not consider it appropriate to implement a Share Trading Policy. Rather, itreminds directors, officers and employees of the prohibition in the Corporations Act 2001 concerning trading in theCompany’s securities when in possession of “inside information”.

1.4.10 Performance Review/EvaluationIt is the policy of the Board to conduct evaluation of its performance. The evaluation process was introduced via the BoardCharter adopted on 2 September 2005 and will be implemented for the financial period ended 30 June 2007. The objectiveof this evaluation will be to provide best practice corporate governance to the Company.

1.4.11 Attestations by CEO and CFOIt is the Board’s policy, that the CEO and the CFO make the attestations recommended by the ASX Corporate GovernanceCouncil as to the Company’s financial condition prior to the Board signing the Annual Report. However, as at the date of thisreport the Company does not have a designated CEO or CFO. Due to the size and scale of operations of the Company theseroles are performed by the Board as a whole.


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2. Board Committees

2.1 Audit Committee

Due to the size and scale of operations of the Company the full Board undertakes the role of the Audit Committee. Belowis a summary of the role and responsibilities of an Audit Committee.

2.1.1 Role The Audit Committee is responsible for reviewing the integrity of the Company’s financial reporting and overseeing theindependence of the external auditors.

As the whole Board only consists of four (4) members, the Company does not have an audit committee because it wouldnot be a more efficient mechanism than the full Board for focusing the Company on specific issues and an audit committeecannot be justified based on a cost-benefit analysis. However, in accordance with the ASX Listing Rules, the Company ismoving towards establishing an audit committee consisting primarily of Independent Directors.

In the absence of an audit committee, the Board sets aside time to deal with issues and responsibilities usually delegatedto the audit committee to ensure the integrity of the financial statements of the Company and the independence of theexternal auditor.

2.1.2 ResponsibilitiesThe Audit Committee or as at the date of this report the full Board of the Company reviews the audited annual and half-yearlyfinancial statements and any reports which accompany published financial statements and recommends their approval tothe members.

The Audit Committee or as at the date of this report the full Board of the Company each year reviews the appointment ofthe external auditor, their independence, the audit fee, and any questions of resignation or dismissal.

The Audit Committee or as at the date of this report the full Board of the Company is also responsible for establishing policieson risk oversight and management.

2.1.3 Risk Management PoliciesThe Board’s Charter clearly establishes that it is responsible for ensuring there is a good sound system for overseeing andmanaging risk. Due to the size and scale of operations, risk management issues are considered by the Board as a whole.On 30 August 2007 Mr M Gauci (Managing Director) and Mr K Hunter (Company Secretary) provided the Board with writtenassurance that the financial statements are founded on a sound system of risk management and internal compliance. Theirstatement assured the Board that the risk management and internal compliance and control system is operating efficientlyand effectively in all material respects.

2.2 Remuneration Committee

2.2.1 RoleThe role of a Remuneration Committee is to assist the Board in fulfilling its responsibilities in respect of establishing appropriateremuneration levels and incentive policies for employees.

As the whole Board only consists of four (4) members, the Company does not have a remuneration committee because itwould not be a more efficient mechanism than the full Board for focusing the Company on specific issues.

2.2.2 ResponsibilitiesThe responsibilities of a Remuneration Committee, or the full Board include setting policies for senior officers’ remuneration,setting the terms and conditions of employment for the Chief Executive Officer, reviewing and making recommendations tothe Board on the Company’s incentive schemes and superannuation arrangements, reviewing the remuneration of bothExecutive and Non-Executive Directors and making recommendations on any proposed changes and undertaking reviewsof the Chief Executive Officer’s performance, including, setting with the Chief Executive Officer goals and reviewing progressin achieving those goals.

2.2.3 Remuneration Policy Directors’ Remuneration was approved by resolution of the Board on 21 February 2005.

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2.2.3.1 Senior Executive Remuneration PolicyThe Company is committed to remunerating its senior executives in a manner that is market-competitive and consistent withbest practice as well as supporting the interests of shareholders. Consequently, under the Senior Executive RemunerationPolicy the remuneration of senior executive may be comprised of the following:• fixed salary that is determined from a review of the market and reflects core performance requirements and

expectations;

• a performance bonus designed to reward actual achievement by the individual of performance objectives and formaterially improved Company performance;

• participation in any share/option scheme with thresholds approved by shareholders;

• statutory superannuation.

By remunerating senior executives through performance and long-term incentive plans in addition to their fixed remunerationthe Company aims to align the interests of senior executives with those of shareholders and increase Company performance.During the year there were no Non-Director Executives.

The value of shares and options were they to be granted to senior executives would be calculated using the Black andScholes method.

The objective behind using this remuneration structure is to drive improved Company performance and thereby increaseshareholder value as well as aligning the interests of executives and shareholders.

The Board may use its discretion with respect to the payment of bonuses, stock options and other incentive payments.

2.2.3.2 Non-Executive Director Remuneration PolicyNon-Executive Directors are to be paid their fees out of the maximum aggregate amount approved by shareholders for theremuneration of Non-Executive Directors. Non-Executive Directors do not receive performance based bonuses and do notparticipate in equity schemes of the Company.

Non-Executive Directors are entitled to but not necessarily paid statutory superannuation.

2.2.4 Current Director RemunerationFull details regarding the remuneration of Directors, is included in the Directors’ Report.

2.3 Nomination Committee

2.3.1 RoleThe role of a Nomination Committee is to help achieve a structured Board that adds value to the Company by ensuring anappropriate mix of skills are present in Directors on the Board at all times.

As the whole Board only consists of four (4) members, the Company does not have a nomination committee because it wouldnot be a more efficient mechanism than the full Board for focusing the Company on specific issues.

2.3.2 ResponsibilitiesThe responsibilities of a Nomination Committee would include devising criteria for Board membership, regularly reviewing theneed for various skills and experience on the Board and identifying specific individuals for nomination as Directors for reviewby the Board. The Nomination Committee would also oversee management succession plans including the CEO and his/herdirect reports and evaluate the Board’s performance and make recommendations for the appointment and removal ofDirectors. Currently the Board as a whole performs this role.

2.3.3 Criteria for selection of DirectorsDirectors are appointed based on the specific governance skills required by the Company. Given the size of the Companyand the business that it operates, the Company aims at all times to have at least one Director with experience appropriateto the Company’s target market. In addition, Directors should have the relevant blend of personal experience in accountingand financial management and Director-level business experience.

3. Company Code Of Conduct

The Board has decided against the implementation of a code of conduct as it does not believe that it is in the best interestsof its employees or other stakeholders to have what purports to be an exhaustive code of conduct. The Board feels that sucha code may be too prescriptive and not allow the employees the discretion they need to best serve the Company’sstakeholders.


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SCHEDULE OF MINERAL TENEMENTSAS AT 21 AUGUST 2007

Project Tenement Interest held by Epsilon Energy Limited

Balladonia E39/01178 100% Uranium RightsBalladonia E63/00707 100% Uranium RightsBalladonia E63/00708 100% Uranium RightsBalladonia E63/00711 100% Uranium RightsBalladonia E63/00968 100% Uranium RightsBalladonia E63/01016 100% Uranium RightsBalladonia E63/01167 100% Uranium RightsBalladonia E69/01473 100% Uranium RightsBalladonia E69/01474 100% Uranium RightsBalladonia E69/01475 100% Uranium RightsBalladonia E69/01476 100% Uranium RightsBalladonia E69/01477 100% Uranium RightsBalladonia E69/01478 100% Uranium RightsBalladonia E69/01479 100% Uranium RightsBalladonia E69/01480 100% Uranium RightsBalladonia E69/01481 100% Uranium RightsBalladonia E69/01482 100% Uranium RightsBalladonia E69/01492 100% Uranium RightsBalladonia E69/01493 100% Uranium RightsBalladonia E69/01495 100% Uranium RightsBalladonia E69/01499 100% Uranium RightsBalladonia E69/01500 100% Uranium RightsBalladonia E69/01717 100% Uranium RightsBalladonia E69/01742 100% Uranium RightsBalladonia E69/01743 100% Uranium RightsBalladonia E69/02075 100% Uranium RightsBalladonia E69/02076 100% Uranium RightsBalladonia E69/02077 100% Uranium RightsBalladonia E69/02078 100% Uranium RightsBalladonia E69/02079 100% Uranium RightsBalladonia E69/02080 100% Uranium RightsBalladonia E15/00656 100% Uranium RightsBalladonia E28/01673 100% Uranium RightsBalladonia E28/01674 100% Uranium RightsBalladonia E28/01678 100% Uranium RightsBalladonia E63/00720 100% Uranium RightsBalladonia E63/00736 100% Uranium RightsBalladonia E63/00944 100% Uranium RightsBalladonia E69/02291 100% Uranium RightsBalladonia E69/02292 100% Uranium RightsBalladonia E74/00278 100% Uranium Rights

Emu Point E28/1735 100%Emu Point E28/1736 100%

Mt Phillips E09/01195 100%Mt Phillips E09/01196 100%

Ida Valley E29/00582 100%Ida Valley E29/00618 100%

Red Mud E70/03044 100%Red Mud E70/03052 100%

Georgetown EPM15041 100%

West Frome Basin E383/06 100%West Frome Basin E384/06 100%

Mt Denison 24622 100%

P Prospecting LicenceE Exploration LicenceM Mining Licence

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Documents

or personal use only - ASX · Bruce Larson Managing Director Matthew Gauci Non-Executive Director Michael Dentith Mathew Longworth COMPANY SECRETARY Kent Hunter REGISTERED OFFICE