UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




Form
10-K




ýANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
fiscal year ended December 31,
2008




 ̈TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
transition period from 
to _______




Commission
file number:  000-52001




Delta
Oil & Gas, Inc.


(Exact
name of registrant as specified in its charter)




Colorado
                  
                  91-210350(State
      or other jurisdiction of incorporation or organization)
                  
                  (I.R.S.
      Employer Identification No.)2600 144 4th Avenue, S.W., Calgary, Alberta,
      Canada, T2P 3N4(Address
      of principal executive
      offices)                    (Zip
      Code)Registrant’s
      telephone, including area code:   (866)
      355-3644




Securities
registered under Section 12(b) of the Exchange
Act:  None.




Securities
registered under Section 12(g) of the Exchange Act:


Common Stock, $001 par
value
                Not Applicable(Title
      of class)
                (Name
      of each exchange on which
registered)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes   ̈  No ý




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes   ̈  No ý




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.  Yes  ý  No  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein, and will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.    ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer    ̈ (Do not check if
      a smaller reporting company)
            Smaller
      reporting company ý




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes   ̈  No ý




As of
June 30, 2008, the aggregate market value of the Company’s common equity held by
non-affiliates computed by reference to the closing price $0.09 was: $4,037,292




The
number of shares of our common stock outstanding as of January 14, 2009 was:
46,840,506




Documents
Incorporated by Reference:  Parts of our definitive proxy statement to
be prepared and filed with the Securities and Exchange Commission not later than
120 days after December 31, 2008 are incorporated by reference into Part III of
this Form 10-K.


Table of Contents





FORM
10-K


DELTA
OIL & GAS, INC.


DECEMBER
31, 2008




logo







Table of Contents






PART
      I




PageItem
      1.          Business.
              4Item
      1A.       Risk
      Factors.
              11Item
      1B.       Unresolved
      Staff Comments.
              18Item
      2.          Properties.
              18Item
      3.          Legal Proceedings.
              22Item
      4.          Submission of Matters to a Vote of Security
      Holders.
              22




PART
      II




Item
      5.          Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities.
            23Item
      6.          Selected Financial Data.
            24Item
      7.          Management’s Discussion and Analysis of Financial Condition and
      Results ofOperations.
            24Item
      7A.       Quantitative
      and Qualitative Disclosures About Market Risk.
            30Item
      8.          Financial Statements and Supplementary Data.
            30Item
      9.          Changes In and Disagreements With Accountants on Accounting and
      Financial Disclosure.
            30Item
      9A.       Controls and
      Procedures.
            30Item
      9B.        Other
      Information.
            31




PART
      III




Item
      10.         Directors, Executive Officers and Corporate
      Governance.
                        32Item
      11.         Executive Compensation.
                        33Item
      12.         Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters.
                        36Item
      13.         Certain
      Relationships and Related Transactions, and Director
      Independence.
                        36Item
      14.         Principal Accounting Fees and Services.
                        37




PART
      IV




Item
      15.        Exhibits,
      Financial Statement Schedules.
            38Signature PageExhibit Index









- 2
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Note
Regarding Forward Looking Statements




This
annual report contains forward-looking statements as that term is defined in
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended.  In some cases,
you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words.  In addition, any statements that refer to
expectations, projections or other characterizations of events, circumstances or
trends and that do not relate to historical matters are forward-looking
statements.  These forward-looking statements are based largely on our
expectations or forecasts of future events, can be affected by inaccurate
assumptions, and are subject to various business risks and known and unknown
uncertainties, a number of which are beyond our control.  Therefore,
actual results could differ materially from the forward-looking statements
contained in this document, and readers are cautioned not to place undue
reliance on such forward-looking statements.  These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks in the section entitled “Risk Factors” that may
cause our or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.  You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this
report.  Except as required by law, we do not undertake to update or
revise any of the forward-looking statements to conform these statements to
actual results, whether as a result of new information, future events or
otherwise.




As used
in this annual report, “Delta Oil & Gas,” “Delta”, the “Company,” “we,”
“us,” or “our” refer to Delta Oil & Gas, Inc., unless otherwise
indicated.







- 3
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 Table of Contents





PART
I


ITEM 1. Business.




Business
Development




We were incorporated under the laws of
the State of Colorado on January 9, 2001 under the name Delta Oil & Gas,
Inc. We are engaged in the exploration, development, acquisition and operation
of oil and gas properties. Because oil and gas exploration and development
requires significant capital and our assets and resources are limited, we
participate in the oil and gas industry through the purchase of minority
interests in either producing wells or oil and gas exploration and development
projects.




Business
of Delta




We are an exploration company focused
on developing North American oil and natural gas reserves. Our current focus is
on the exploration of our land portfolio comprised of working interests in
acreage in Palmetto Point, Mississippi; Southern Saskatchewan, Canada; the
Southern Alberta Foothills area in Canada; and South Central,
Oklahoma.




Todd Creek Prospect and
Hillspring Prospect




On November 26, 2004, through our
wholly-owned Canadian subsidiary, Delta Oil & Gas (Canada), Inc., we entered
into two agreements (the "Agreements") with Win Energy Corporation, ("Win
Energy"), an Alberta based oil & gas exploration company, in order to
acquire an interest in leases owned by Win Energy. On or about January 25, 2005,
we paid Win Energy the full purchase price set forth in the Agreements and
acquired a 20% working interest in a property known as Todd Creek and a 10%
working interest in a property known as Hillspring. Both properties are located
approximately 90 miles south of Calgary, Alberta in the Southern Alberta
Foothills belt.




Todd Creek
Prospect




On January 25, 2005, we acquired a 20%
working interest in 13.75 sections of land (8,800 acres) in Todd Creek for the
purchase price of $597,263 from Win Energy.  Included in the
acquisition was a test well that has been drilled and cased. Under the terms of
this agreement, Win has assumed all costs of drilling and completing or
abandoning the test well up to gross costs of $1,330,000. Thereafter, we will
assume responsibility for 20% of all costs, risks, and expenses relating to the
test well.  During the second quarter of 2007, we paid a cash call of
$258,139 as our share of costs for the proposed drilling program.




During the second quarter of 2005, a
well located in Todd Creek property was drilled to a specifically targeted
depth. This well is located in 13-28-9-2W5 in Alberta, Canada (the “13-28 well”)
and it was evaluated and tested. The operator encountered gas reservoirs and
this well was tied into a newly constructed gas processing plant and production
commenced in September 2006.  The revenue received from this well was
$18,088 for the year ended December 31, 2007.




Our monthly costs related to our
interest in the 13-28 well exceeded the royalties we received and as a result,
we abandoned our interest in this well in the fourth quarter of
2007.




In October 2006, we completed the
drilling of a second well in the Todd Creek Prospect located in 13-33-8-2 in
Alberta, Canada (the “13-33 well”) at a cost of $314,954.  Independent
reserves reports we commissioned indicated that no economic hydrocarbons were
present.  As a result, the 13-33 well was plugged and
abandoned.




Hillspring
Prospect




On January 25, 2005, we acquired a 10%
working interest in one section of land (640 acres) in Hillspring for the
purchase price of $414,766 from Win Energy. We previously had anticipated that a
test well would have been drilled on our property interest during the second
quarter of 2008, but no date has been scheduled at the present
time.







- 4
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Strachan
Prospect




On September 23, 2005, we entered into
the Farmout Agreement with Odin Capital Inc. (“Odin Capital”), a Calgary,
Alberta corporation. A former member of our board of directors, Mr. Philipchuk,
maintains a 50% ownership interest in Odin Capital. Odin Capital had the right
to acquire an oil and gas leasehold interests in certain lands located in
Section 9, Township 38, Range 9, West of the 5th Meridian, Alberta, Canada
(“Section 9”) upon incurring expenditures for drilling and testing on the
property. In exchange for us paying 4.0% of all costs associated with drilling,
testing, and completing the test well on the property which we refer to as the
Leduc formation test well, we will have earned:




1.
            in
      the Spacing Unit for the Earning
Well:




(a)
            a
      2.0% interest in the petroleum and natural gas below the base of the
      Mannville, excluding natural gas in the Leduc formation;
    and




(b)
            a
      4.0% interest in the natural gas in the Leduc formation before payout,
      subject to payment of the Overriding Royalty which is convertible upon
      payout at royalty owners option to 50% of our
  Interest;




2.
            a
      1.6% interest in the rights below the base of the Shunda formation in
      Section 10, Township 38, Range 9W5M;
and




3.
            a
      1.289% interest in the rights below the base of the Shunda formation in
      Section 15 and 16, Township 38, Range 9W5M, down to the base of the
      deepest formation penetrated.




On October 6, 2005, drilling commenced
on the Leduc formation test well. Under the terms of the Farmout Agreement, we
advanced 110% of the anticipated costs prior to drilling. The total costs
advanced by us prior to drilling were $347,431. The well was drilled to the
targeted depth of 13,650 feet.  During the three month period ended
September 30, 2007, we paid additional drilling costs of $41,231 and have since
incurred no additional drilling costs.




Based
on results indicating the presence of a potential gas well, the operator
inserted casing into the total depth of the well in July 2006 and have committed
to perform a full testing program. During the three months ended March 31, 2008,
testing showed that no economic hydrocarbons were present, the well was
abandoned and  the costs of $388,662 was transferred to the proven
cost pool for depletion.




Palmetto Point Prospect - 12
Wells Phase - I




On February 21, 2006, we entered into
an agreement with 0743608 B.C. Ltd., (“Assignor”), a British Columbia based oil
and gas exploration company, in order to accept an assignment of the Assignor’s
10% gross working and revenue interest in a ten-well drilling program (the
“Drilling Program”) to be undertaken by Griffin & Griffin Exploration L.L.C.
(“Griffin Exploration”), a Mississippi based exploration company. Under the
terms of the agreement, we paid the Assignor $425,000 as payment for the
assignment of the Assignor’s 10% gross working and revenue interest in the
Drilling Program. We also entered into a Joint Operating Agreement directly with
Griffin Exploration on February 24, 2006.




The initial Drilling Program on ten
wells on the acquired property interest was completed by Griffin Exploration. On
August 4, 2006, we paid $70,000 to Griffin Exploration in exchange for our
participation in an additional two well program, which has also been
completed.  The prospect area owned or controlled by Griffin
Exploration on which the wells were drilled is comprised of approximately 1,273
acres in Palmetto Point, Mississippi. All twelve wells have been drilled and
currently seven wells are producing, we anticipate that three wells will be
producing and are currently waiting to be tied into the pipeline, and two wells
were not commercially viable and were plugged and abandoned. We refer to this
drilling program as Palmetto Point Phase I.  Total revenue received
from these wells for the year ended December 31, 2008 was $38,981, compared with
$70,821 in revenues for the year ended December 31, 2007.  The
decrease in revenue was caused by the ceasing of production in wells that had
higher than expected water content; however, this was partially offset by an
increase in commodity prices during the year.







- 5
-
 Table of Contents





In October 2007, as part of Palmetto
Point Phase I, we drilled a well (the "PP F-12") on the
prospect.  Subsequent testing revealed that the PP F-12 well contained
oil reserves suitable for commercial production.  The PP F-12 well
began producing on October 2, 2007.   This well is situated in
what is known as the Belmont Lake Oil Field.  Based on the positive
results from the PP F-12 well, the operator suggested drilling an additional two
development wells in the immediate vicinity in which we would
participate.  In November 2007, we participated in the drilling of a
step-out well from the PP F-12 (the “PP F-12 #2”).  This well was
drilled to total depth, logged, tested and cased.   The PP F-12
#2 encountered approximately three feet of hydrocarbon showings and as such the
operator recommended re-entering the well and directionally drilling on an angle
toward the PP F-12.  Upon completion and testing of this re-entry (the
“PP F-12 #2-3”), the operator encountered approximately 32 feet of hydrocarbon
pay and the well was connected to a nearby pipeline and is currently producing
oil.  Total revenue received from these two oil wells was $101,992 for
the year ended December 31, 2008 compared to $57,964 for the prior year ended
December 31, 2007.  The increase in revenue was caused by the addition
of a second offset well and an increase in commodity prices during the
year.  The revenue generated from, these wells has been less than we
anticipated as a result of an approximate four month halt in production of these
wells during the fiscal year ended December 31, 2008 due to the flooding of the
Mississippi basin where these wells are located.




Palmetto Point Prospect - 50
wells – Phase II




During the fiscal quarter ended
September 30, 2006, we entered into a joint venture agreement to acquire an
interest in a drilling program comprised of up to fifty natural gas and/or oil
wells. The area in which the wells are being drilled is approximately 300,000
gross acres located between Southwest Mississippi and Northeastern Louisiana.
Drilling commenced in September 2006. The site of the first twenty wells is
located within range to tie into existing pipeline infrastructure should the
wells be suitable for commercial production. The drilling program was conducted
by Griffin Exploration in its capacity as operator. We agreed to pay 10% of all
prospect fees, mineral leases, surface leases, and drilling and completion costs
to earn a net 8.0% share of all production zones to the base of a geological
formation referred to as the Frio formation and 7.5% of all production to the
base of a geological formation referred to as the Wilcox formation. The cost
during the quarter ending September 30, 2006 amounted to $100,000. During the
fourth quarter of fiscal 2006, we made additional payments of $300,000 that was
employed in the further development of prospects on lands in Mississippi and
Louisiana in accordance with the terms of the operating agreement. We did not
incur any additional payments other than drilling costs for these prospects in
2007.  We do not anticipate that we will incur any additional payments
other than drilling costs for these prospects going forward.




To
date, we have drilled seven wells of which two have been abandoned (the Dixon #1
and the Randall #1).  Our costs attributable to these two abandoned
wells was $67,523. Of the successful four wells, the Redbug #1, Redbug #2 and
the Buffalo River #1 began producing in the three months ended March 31, 2007
and the Faust #1, is awaiting connection to the nearby pipeline for production.
The revenue received from these wells for the year ended December 31, 2008 was
$79,050 as compared to $13,045 for the year ended December 31,
2007.  The increase in revenue was caused by ongoing production for
the entire year ended December 31, 2008, as opposed to partial production in
2007 as a result of production commencing during the nine months ended September
30, 2007 and an increase in commodity prices during the year.




Wordsworth
Prospect




On April 10, 2006, we entered into a
farmout, option and participation letter agreement (“FOP Agreement”) where we
acquired a 15% working interest in certain leasehold interests located in
southeast Saskatchewan, Canada referred to as the Wordsworth area for the
purchase price of $152,724. We are responsible for our proportionate share of
the costs associated with drilling, testing, and completing the first test well
on the property. In exchange for us paying our proportionate share of the costs
associated with drilling, testing, and completing the first test well on the
property, we earned a 15% working interest before payout and a 7.5% working
interest after payout on the Wordsworth prospect. Payout refers to the return of
our initial investment in the property. In addition, we also acquired an option
to participate and acquire a working interest in a vertical test well drilled to
1200 meters to test the Mississippian (Alida) formation in LSD 13 of section 24,
township 7, range 3 W2.  Our total costs as at December 31, 2007 was
$222,649.












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During June 2006, the first well was
drilled to a horizontal depth of 2033 meters in the Wordsworth prospect. The
initial drilling of this well and subsequent testing revealed that this well
contained oil reserves suitable for commercial production. In June 2006, this
initial well began producing as an oil well.  The revenue received
from this well for the year ended December 31, 2008 was $104,989, as compared to
$131,213 for the year ended December 31, 2007.  The reduction in
revenue was caused by the natural decline of reserves in the well; however, this
was partially offset by the increase in commodity prices during the
year.




The
second horizontal well was drilled in May 2007 at a cost of $198,152. Initial
logs indicated hydrocarbon showings in an oil-bearing zone estimated to be
approximately 770 feet in the horizontal section. However, due to the high water
content in fluid removed from this well, the operator determined that it was not
commercially productive and it was plugged and abandoned.




In
April 2008, the operator recommended re-entering the second horizontal well with
a view to drilling horizontally in a different direction starting at the base of
the vertical portion of that well. We elected to participate in this re-entry on
the same terms and conditions as the previous wells.  This well was
drilled at a cost of $33,812. No economic hydrocarbons were found and this well
was plugged and abandoned.




Owl Creek
Prospect




On June 1, 2006, we entered into an
Assignment Agreement with Brinx Resources, Ltd., (“Brinx Resources”), a Nevada
oil & gas exploration company, in order to acquire a working interest in
lands and leases owned by Brinx Resources. The purchase price of $300,000 for
the assignment and options to acquire future interests has been paid in full. We
paid a further $68,987 for our proportion of costs associated with the
completion of the first well. The lands are located in Garvin and McClain
counties in Oklahoma and we refer to the lands as the “Owl Creek
Prospect.”




Pursuant
to the terms of the Assignment Agreement, we acquired a 20% working interest in
an oil well drilled at the Owl Creek Prospect (the “Powell #2”).  The
Powell #2 was drilled to total depth of 5,617 feet on May 18, 2006 and underwent
testing. Based upon the positive result of the testing of the Powell #2, this
well was completed and commercial production commenced in August
2006.  Under the terms of the Assignment Agreement, we are responsible
for our proportionate share of the costs of completion and tie-in for production
of the Powell #2 which was $68,987.  Initially, the Powell #2 began
flowing oil and natural gas under its own pressure without the assistance of a
pump.  Revenue generated from the Powell #2 for the year ended
December 31, 2008 was $265,062, as compared to $481,584 for the year ended
December 31, 2007.  In July 2008, the Company disposed of its holdings
in Powell #2 and the surrounding area for $760,438.




As
part of the Assignment Agreement, we were granted an option to earn a 20%
working interest in any future wells drilled on the 1,120 acres of land, which
make up the Owl Creek Prospect. Lastly, we received an option to earn a 20%
working interest in any future wells to be drilled on any land of mutual
interest acquired by the Owl Creek participants in and around the same area. The
working interest in future wells is earned by paying 20% of the costs of
drilling and completing each additional well.  Prior to drilling, we
are provided an invoice for the anticipated costs of each proposed well and
given the option to participate.




Based upon the positive results of the
Powell #2, an additional well (the “Isbill #1-36”) was drilled and reached
targeted depth in September 2006. However, test results showed that the well was
not commercially viable and it was plugged and abandoned in September
2006.  Costs of $80,738 were transferred to proved reserves and
subsequently depleted in accordance with our accounting policy.




In
January 2007, we commenced drilling of another well (the “Isbill #2-36”). Our
20% working interest in the Isbill #2-36 cost $157,437 for both drilling and
completion. The Isbill #2-36 was drilled to approximately 5,900 feet and
encountered two potential pay zones and is a direct offset well to the Powell #2
which is currently producing.  The revenue received from the Isbill
#2-36 for the year ended December 31, 2008 was $122,969, as compared to $141,042
for the year ended December 31, 2007.  In July 2008, the Company
disposed of its holdings in Isbill #2-36 and the surrounding area for
$549,388.







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In July, 2008, we sold both the Powell
#2 and Isbill #2-36 wells and all interest in the Owl Creek Prospect for gross
proceeds of $1,309,826.  We realized a gain on sale of the property of
$1,067,447.  We decided to dispose of the property based on the
declining rates of production experienced by the operator and the reasonable
offer for both wells and the surrounding lands of 1,120 acres.




2006-3 Drilling
Program




On April 17, 2007, we entered into an
agreement with Ranken Energy Corporation (“Ranken Energy”) to participate in a
five well drilling program in Garvin and Murray counties in Oklahoma (the
“2006-3 drilling Program”).  The leases secured and/or lands to be
pooled for this drilling program total approximately 820 net acres. We agreed to
take a 10% working interest in this program. To date, we have paid the sum of
$514,619.




Three wells drilled (the "Wolf #1-7",
the "Loretta #1-22" and the “Ruggles #1-15") were deemed by the operator to not
be commercially viable and as such, were plugged and abandoned.  The
proportionate costs associated with these abandoned wells amounted to $244,989,
which were moved to the proved properties cost pool for depletion.




Three other wells drilled (the
“Elizabeth #1-25”, the “Plaster #1-1” and the “Dale #1 re-entry”) were deemed by
the operator to be commercially viable and production casing was set in
each.    The Elizabeth #1-25 located in the Meridian
Prospect cost $99,129, the Plaster #1-1 located in the Plaster Prospect cost
$116,581, and re-entry into the Dale #1 located in the Dale Prospect cost
$18,150.  Subsequent to the completion of these wells, two remain
economically viable at this time.  The Plaster #1 encountered
hydrocarbon showings and is producing natural gas with amounts of associated oil
as of January, 2008. The Dale #1 re-entry has been producing in the range of 2
to 3 barrels of oil per day. The Elizabeth #1-25 has been plugged and
abandoned.  Total revenue received from these wells for the year ended
December 31, 2008 was $46,923.  These two wells did not generate any
revenue prior to 2008.




The
operator, Ranken Energy, is reviewing the productivity levels from these wells
and may propose the drilling of additional wells in the Dale Prospect and the
Crazy Horse Prospect.  We anticipate that we would participate in
these wells to the same extent as in the original drilling program, which is a
10% working interest.




2007-1 Drilling Program - 3
Wells




On September 10, 2007, we entered into
an agreement with Ranken Energy to participate in a three well drilling program
in Garvin County, Oklahoma (the “2007-1 Drilling Program”).  We
purchased a 20% working interest in the 2007-1 Drilling Program for $77,100.
Drilling of the first and second wells (the “Pollock #1-35” and the “Hulsey #1”)
has been completed in the N.E. Anitoch Prospect and the Washington Creek
Prospect respectively.  The Pollock #1-35 did not prove to be
commercially viable but the Hulsey #1 has been producing in the range of 50 to
60 barrels of oil per day with approximately 50 Mcf of natural gas per
day.  Drilling of the third well in this drilling program (the “River
#1”) was completed during the three months ended September 30,
2008.  River #1 commenced production and the total revenue received
for the year ended December 31, 2008 was $79,897.  Hulsey #1-8 started
producing during the first quarter of 2008 and the total revenue received for
the year ended December 31, 2008 was $111,498.




Market
for Our Products and Services




Each oil and gas working interest that
we now own and those that we may later acquire a percentage of interest in will
have an operator who will be responsible for marketing production.




The availability of a ready market for
oil and gas and the prices of such oil and gas depend upon a number of factors
which are beyond our control. These include, among other things:




•           the
level of domestic production;




•           actions
taken by foreign oil and gas producing nations;




•           the
availability of pipelines with adequate capacity;




•           the
availability and marketing of other competitive fuels;




•           fluctuating
and seasonal demand for oil, gas and refined products; and




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•           the
extent of governmental regulation and taxation (under both present and future
legislation) of the production, importation, refining, transportation, pricing,
use and allocation of oil, gas, refined products and alternative
fuels.




In
view of the many uncertainties affecting the supply and demand for crude oil,
gas and refined petroleum products, it is not possible to predict accurately the
prices or marketability of the gas and oil produced for sale.




Competition




The oil and natural gas industry is
intensely competitive, and we compete with other companies that have greater
resources. Many of these companies not only explore for and produce oil and
natural gas, but also carry on midstream and refining operations and market
petroleum and other products on a regional, national or worldwide basis. These
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects or define, evaluate, bid for and purchase a greater
number of properties and prospects than our financial or human resources permit.
In addition, these companies may have a greater ability to continue exploration
activities during periods of low oil and natural gas market prices. Our larger
or integrated competitors may be able to absorb the burden of existing, and any
changes to, federal, state, local and tribal laws and regulations more easily
than we can, which would adversely affect our competitive position. Our ability
to acquire additional properties and to discover reserves in the future will be
dependent upon our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. In addition,
because we have fewer financial and human resources than many companies in our
industry, we may be at a disadvantage in bidding for exploratory prospects and
producing oil and natural gas properties.




Patents,
Licenses, Trademarks, Franchises, Concessions, Royalty Agreements, or Labor
Contracts




We do not own, either legally or
beneficially, any patent or trademark.




Research
and Development




We did not incur any research and
development expenditures in the fiscal years ended December 31, 2008 or
2007.




Existing
and Probable Governmental Regulation




We monitor and comply with current
government regulations that affect our activities, although our operations may
be adversely affected by changes in government policy, regulations or taxation.
There can be no assurance that we will be able to obtain all of the necessary
licenses and permits that may be required to carry out our exploration and
development programs. It is not expected that any of these controls or
regulations will affect our operations in a manner materially different than
they would affect other natural gas and oil companies operating in the areas in
which we operate.




United
States Government Regulation




The United States federal government
and various state and local governments have adopted laws and regulations
regarding the protection of human health and the environment. These laws and
regulations may require the acquisition of a permit by operators before drilling
commences, prohibit drilling activities on certain lands lying within wilderness
areas, wetlands, or where pollution might cause serious harm, and impose
substantial liabilities for pollution resulting from drilling operations,
particularly with respect to operations in onshore and offshore waters or on
submerged lands. These laws and regulations may increase the costs of drilling
and operating wells. Because these laws and regulations change frequently, the
costs of compliance with existing and future environmental regulations cannot be
predicted with certainty.




The transportation and certain sales of
natural gas in interstate commerce are heavily regulated by agencies of the
federal government. Production of any oil and gas by properties in which we have
an interest will be affected to some degree by state regulations. States have
statutory provisions regulating the production and sale of oil and gas,
including provisions regarding deliverability. Such statutes and the regulations
are generally intended to prevent waste of oil and gas and to protect
correlative rights to produce oil and gas between owners of a common
reservoir.







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State
regulatory authorities may also regulate the amount of oil and gas produced by
assigning allowable rates of production to each well or pro-ration
unit.




Any exploration or production on
Federal land will have to comply with the Federal Land Management Planning Act
which has the effect generally of protecting the environment. Any exploration or
production on private property whether owned or leased will have to comply with
the Endangered Species Act and the Clean Water Act. The cost of complying with
environmental concerns under any of these acts varies on a case by case basis.
In many instances the cost can be prohibitive to development. Environmental
costs associated with a particular project must be factored into the overall
cost evaluation of whether to proceed with the project.




Canadian
Government Regulation




The natural gas and oil industry is
subject to extensive controls and regulations imposed by various levels of
government. It is not expected that any of these controls or regulations will
affect our operations in a manner materially different than they would affect
other natural gas and oil companies of similar size.




Pricing
and Marketing Natural Gas




In Canada, the price of natural gas
sold in interprovincial and international trade is determined by negotiation
between buyers and sellers. Natural gas exported from Canada is subject to
regulation by the NEB and the Government of Canada. Exporters are free to
negotiate prices and other terms with purchasers, provided that the export
contracts continue to meet certain criteria prescribed by the NEB and the
Government of Canada. Natural gas exports for a term of less than two years or
for a term of two to 20 years (in quantities of not more than 30,000 m3/day)
must be made pursuant to an NEB order. Any natural gas export to be made
pursuant to a contract of longer duration (to a maximum of 25 years) or a larger
quantity requires an exporter to obtain an export license from the NEB and the
issue of such a license requires the approval of the Governor in
Council.




The government of Alberta also
regulates the volume of natural gas that may be removed from the province for
consumption elsewhere based on such factors as reserve availability,
transportation arrangements and market considerations.




Royalties
and Incentives




In
addition to federal regulation, each province has legislation and regulations
that govern land tenure, royalties, production rates, environmental protection
and other matters. The royalty regime is a significant factor in the
profitability of natural gas and oil production. Royalties payable on production
from lands other than Crown lands are determined by negotiations between the
mineral owner and the lessee. Crown royalties are determined by government
regulation and are generally calculated as a percentage of the value of the
gross production, and the rate of royalties payable generally depends in part on
prescribed reference prices, well productivity, geographical location, field
discovery date and the type or quality of the petroleum product
produced.




Land
Tenure




Crude natural gas and oil located in
the western provinces is owned predominantly by the respective provincial
governments. Provincial governments grant rights to explore for and produce
natural gas and oil pursuant to leases, licenses and permits for varying terms
from two years and on conditions set forth in provincial legislation including
requirements to perform specific work or make payments. Natural gas and oil
located in such provinces can also be privately owned and rights to explore for
and produce such natural gas and oil are granted by lease on such terms and
conditions as may be negotiated.




Compliance
with Environmental Laws




We did not incur any costs in
connection with the compliance with any federal, state, or local environmental
laws. However, costs could occur at any time through industrial accident or in
connection with a terrorist act or a new project. Costs could extend into the
millions of dollars for which we could be totally liable. In the event of
liability, we believe we would be entitled to contribution from other owners so
that our percentage share of a particular project would be the percentage share
of our liability on that project. However, other owners may not







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be
willing or able to share in the cost of the liability. Even if liability is
limited to our percentage share, any significant liability would wipe out our
assets and resources.




Employees




We have
no employees other than our Chief Executive Officer, Mr. Douglas N. Bolen, and
our Chief Financial Officer, Mr. Kulwant Sandher.




ITEM 1A.Risk Factors.




You
should carefully consider the following risk factors in evaluating our business
and us.  The factors listed below represent certain important factors
that we believe could cause our business results to differ.  These
factors are not intended to represent a complete list of the general or specific
risks that may affect us.  It should be recognized that other risks
may be significant, presently or in the future, and the risks set forth below
may affect us to a greater extent than indicated.  If any of the
following risks occur, our business, financial condition or results of
operations could be materially and adversely affected.  You should
also consider the other information included in this Annual Report and
subsequent quarterly reports filed with the SEC.




Risk
Factors




Risks
Associated With Our Business





Operational
Risks of Delta





Because we have experienced significant
losses since inception, it is uncertain when, if ever, we will have significant
operating income or cash flow from operations sufficient to sustain
operations.





We suffered net losses since our
inception, including net losses of $215,826 for the year ended December 31, 2008
and $2,249,959 for the year ended December 31, 2007. These losses are the result
of an inadequate revenue stream to compensate for our operating and overhead
costs. The volatility underlying the early stage nature of our business and our
industry prevents us from accurately predicting future operating conditions and
results, and we could continue to have losses. It is uncertain when, if ever, we
will have significant operating income or cash flow from operations sufficient
to sustain operations. If cash needs exceed available resources additional
capital may not be available through public or private equity or debt
financings. If we are unable to arrange new financing on terms that are
acceptable to us or generate sufficient revenue from our prospects, we will be
unable to continue in our current form and our business will fail.





If we are unable to obtain additional
funding, we may be unable to expand our acquisition, exploration and production
of natural oil and gas properties.





We will require additional funds to
expand our acquisition, exploration and production of natural oil and gas
properties. Our management anticipates that current cash on hand may be
insufficient to fund our operations at the current level for the next twelve
months. Additional capital will be required to effectively expand our operations
through the acquisition and drilling of new prospects and implement our overall
business strategy. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. The inability to obtain
additional capital will restrict our ability to grow and may reduce our ability
to continue to conduct current business operations. If we are unable to obtain
additional financing when sought, we will be unable to acquire additional
properties and may also be required to curtail our business plan. Any additional
equity financing may involve substantial dilution to our then existing
shareholders.





Because we cannot control activities on
our properties, we may experience a reduction or forfeiture of our interests in
some of our non-operated projects as a result of our potential failure to fund
capital expenditure requirements.





We do not operate the properties in
which we have a working interest and we have limited ability to exercise
influence over operations for these properties or their associated costs. Our
dependence on the operator and other working interest owners for these projects
and our limited ability to influence operations and associated
costs





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could
materially adversely affect the realization of our returns on capital in
drilling or acquisition activities and our targeted production growth rate. The
success and timing of drilling, development and exploitation activities on
properties operated by others depend on a number of factors that are beyond our
control, including the operator’s expertise and financial resources, approval of
other participants for drilling wells and utilization of technology. In
addition, if we are not willing or able to fund our capital expenditures
relating to such projects when required by the majority owner or operator, our
interests in these projects may be reduced or forfeited.





If we are unable to successfully
identify, execute or effectively integrate new prospects, our results of
operations may be negatively affected.





Acquisitions of working interests in
oil and gas properties have been an important element of our business, and we
will continue to pursue acquisitions of new prospects in the future. In the last
year, we have pursued and consummated the acquisition and drilling of new
prospects that have provided us opportunities to grow our production and
reserves. Although we regularly engage in discussions with, and submit proposals
to, acquisition candidates, suitable acquisitions may not be available in the
future on reasonable terms. If we do identify an appropriate acquisition
candidate, we may be unable to successfully negotiate the terms of an
acquisition, finance the acquisition or, if the acquisition occurs, effectively
integrate the acquired business into our existing business. Negotiations of
potential acquisitions and the integration of acquired business operations may
require a disproportionate amount of management’s attention and our resources.
Even if we complete additional acquisitions, continued acquisition financing may
not be available or available on reasonable terms, any new properties may not
generate revenues comparable to our existing properties, the anticipated cost
efficiencies or synergies may not be realized and these properties may not be
integrated successfully or operated profitably. The success of any acquisition
will depend on a number of factors, including the ability to estimate accurately
the recoverable volumes of reserves, rates of future production and future net
revenues attainable from the reserves and to assess possible environmental
liabilities. Our inability to successfully identify, execute or effectively
integrate future acquisitions may negatively affect our results of operations.
Even though we perform a due diligence review (including a review of title and
other records) of the properties we seek to acquire that we believe is
consistent with industry practices, these reviews are inherently incomplete.
Even an in-depth review of records and properties may not necessarily reveal
existing or potential problems or permit us to become familiar enough with the
properties to assess fully their deficiencies and potential. Even when problems
are identified, we may assume certain environmental and other risks and
liabilities in connection with the acquired properties. The discovery of any
material liabilities associated with our acquisition of Stallion could harm our
results of operations. In addition, acquisitions of working interests may
require additional debt or equity financing, resulting in additional leverage or
dilution of ownership.





Because our chief executive officer
does not have any significant training and/or experience in oil and natural gas
exploration, development, acquisition and production, our financial success
could suffer irreparable harm as a result of his decisions and
choices.





Mr. Douglas N. Bolen, our chief
executive officer, does not have any significant training or experience with oil
and natural gas exploration, development, acquisition and production. With no
direct training or experience in these areas, our chief executive officer may
not be fully aware of many of the specific requirements related to working
within this industry. Our management’s decisions and choices may fail to take
into account standard engineering or managerial approaches oil and gas companies
commonly utilize. Consequently, our operations, earnings, and ultimate financial
success could suffer irreparable harm due to management’s lack of experience in
this industry.





Because our executive officers do not
provide services on a full-time basis, they may not be able or willing to devote
a sufficient amount of time to our business operations, causing our business to
fail.





Mr. Bolen, our chief executive officer,
and Mr. Sandher, our chief financial officer, do not provide services to us on a
full-time basis. We do not maintain key man life insurance policies for our
executive officers. Currently, we do not have any employees other than our
executive officers. If the demands of our business require the full business
time of Messrs. Bolen and Sandher, it is possible that Messrs. Bolen and/or
Sandher may not be able to devote sufficient time to the management of our
business, as and when needed. If our management is unable to devote a sufficient
amount of time to manage our operations, our business will fail.





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Because our directors and officers may
serve as directors or officers of other companies, they may have a conflict of
interest in making decisions for our business.





Our directors and officers may serve as
directors or officers of other companies or have significant shareholdings in
other oil and gas companies and, to the extent that such other companies may
participate in ventures in which we may participate, our directors and officers
may have a conflict of interest in negotiating and concluding terms respecting
the extent of such participation.  In the event that such a conflict
of interest arises at a meeting of our directors, a director who has such a
conflict will abstain from voting for or against the approval of such
participation or such terms.  In determining whether or not we will
participate in a particular program and the interest therein to be acquired by
us, our directors will primarily consider the degree of risk to which we may be
exposed and our financial position at that time.





Because our auditor has raised
substantial doubt about our ability to continue as a going concern, our business
has a high risk of failure.





As noted in our financial statements,
we have only recently commenced operations. The audit report of STS Partners
LLP, Chartered Accountants issued a going concern opinion and raised substantial
doubt as to our continuance as a going concern. When an auditor issues a going
concern opinion, the auditor has substantial doubt that the company will
continue to operate indefinitely and not go out of business and liquidate its
assets. This is a significant risk to investors who purchase shares of our
common stock because there is an increased risk that we may not be able to
generate and/or raise enough resources to remain operational for an indefinite
period of time. The success of our business operations depends upon our ability
to obtain additional capital for obtaining producing oil and gas properties
through either the purchase of producing wells or successful exploration
activity. We plan to seek additional financing through debt and/or equity
financing arrangements to secure funding for our operations. There can be no
assurance that such additional financing will be available to us on acceptable
terms or at all. It is not possible at this time for us to predict with
assurance the outcome of these matters. If we are not able to successfully
complete the development of our business plan and attain sustainable profitable
operations, then our business will fail.





Because we presently do not carry
liability or title insurance on any of our properties and do not plan to secure
any in the future, we are vulnerable to excessive potential claims and loss of
title.





We do not maintain insurance against
public liability, environmental risks or title on any of our properties. The
possibility exists that title to existing properties or future prospective
properties may be lost due to an omission in the claim of title. As a result,
any claims against us may result in liabilities we will not be able to afford
resulting in the failure of our business.





The laws of the State of Colorado and
our Articles of Incorporation may protect our directors from certain types of
lawsuits.





The laws of the State of Colorado
provide that our directors will not be liable to us or our shareholders for
monetary damages for all but certain types of conduct as directors of the
company. Our articles of incorporation permit us to indemnify our directors and
officers against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing shareholders from recovering damages against our
directors caused by their negligence, poor judgment or other circumstances. The
indemnification provisions may require us to use our limited assets to defend
our directors and officers against claims, including claims arising out of their
negligence, poor judgment, or other circumstances.








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Market
Risks





Our
stock price may be volatile and as a result you could lose all or part of your
investment.





In
addition to volatility associated with over the counter securities in general,
the value of your investment could decline due to the impact of any of the
following factors upon the market price of our common stock:





•           changes
in the worldwide price for oil and gas;





•           disappointing
results from our exploration or development efforts;





•           failure
to meet our revenue or profit goals or operating budget;





•           decline
in demand for our common stock;





•           downward
revisions in securities analysts’ estimates or changes in general market
conditions;





•           technological
innovations by competitors or in competing technologies;





•           investor
perception of our industry or our prospects; and





•           general
economic trends.





In addition, stock markets generally
have experienced extreme price and volume fluctuations and the market prices of
securities generally have been highly volatile. These fluctuations are often
unrelated to operating performance of a company and may adversely affect the
market price of our common stock. As a result, investors may be unable to resell
their shares at a fair price.





In the event that we are unable to
successfully compete within our industry, we may not be able to achieve
profitable operations.





We operate in the highly competitive
areas of oil and natural gas exploration, development, acquisition and
production. Factors that affect our ability to compete successfully in the
marketplace include:





•           seeking
to acquire desirable producing properties or new leases for future
exploration;





•           the
availability of funds and information relating to a property; and





•           marketing
of oil and natural gas production.





Our competitors include major
integrated oil companies, substantial independent energy companies, and
affiliates of major interstate and intrastate pipelines and national and local
natural gas gatherers, many of which possess greater financial and other
resources than we do. If we are unable to successfully compete against our
competitors, our business, prospects, financial condition and results of
operation may be adversely affected.





Numerous factors beyond our control
could affect the marketability of oil and natural gas, so we may experience
difficulty selling any oil and natural gas.





The availability of markets and the
volatility of product prices are beyond our control and represent a significant
risk. The marketability of our production depends upon the availability and
capacity of natural gas gathering systems, pipelines and processing facilities.
The unavailability or lack of capacity of these systems and facilities could
result in the shut-in of producing wells or the delay or discontinuance of
development plans for properties. Our ability to generate revenue from oil and
natural gas sales also depends on other factors beyond our control. These
factors include:








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•           the
level of domestic production and imports of oil and natural gas;





•           the
proximity of natural gas production to natural gas pipelines;





•           the
availability of pipeline capacity;





•           the
demand for oil and natural gas by utilities and other end users;





•           the
availability of alternate fuel sources;





•           the
effect of inclement weather, such as hurricanes;





•           state
and federal regulation of oil and natural gas marketing; and





•           federal
regulation of natural gas sold or transported in interstate
commerce.





If these factors were to change
dramatically, our ability to generate revenues from oil and natural gas sales or
obtain favorable prices for our oil and natural gas could be adversely
affected.





Risks
Relating to Our Business





Because exploration, development and
drilling efforts are subject to many risks, the operation of our wells may not
be profitable or achieve our targeted returns.





Exploration, development, drilling and
production activities are subject to many risks, including the risk that
commercially productive reservoirs will not be discovered. We seek to acquire
working interests in properties which we believe will result in projects that
will add value over time. However, we cannot guarantee that all of our prospects
will result in viable projects or that we will not abandon these properties.
Additionally, we cannot guarantee that any undeveloped acreage we have an
interest in will be profitably developed, that new wells drilled will be
productive or that we will recover all or any portion of our investment in such
acreage or wells. Drilling for oil and natural gas may involve unprofitable
efforts, not only from dry wells but also from wells that are productive but do
not produce sufficient net reserves to return a profit after deducting operating
and other costs. In addition, wells that are profitable may not achieve our
targeted rate of return. Our ability to achieve our target results are dependent
upon the current and future market prices for crude oil and natural gas, costs
associated with producing oil and natural gas and our ability to add reserves at
an acceptable cost.





Because our oil and natural gas reserve
data is independently estimated, these estimates may still prove to be
inaccurate.





Our reserve estimates are generated
each year by an independent consultant. In conducting its evaluation, the
consultant evaluates our properties and independently develops proved reserve
estimates. There are numerous uncertainties and risks that are inherent in
estimating quantities of oil and natural gas reserves and projecting future
rates of production and timing of development expenditures as many factors are
beyond our control. Many factors and assumptions are incorporated into these
estimates including: expected reservoir characteristics based on geological,
geophysical and engineering assessments;





•
            future
      production rates based on historical performance and expected future
      operating and investment
activities;





•
            future
      oil and gas prices and quality and location differentials;
    and





•
            future
      development and operating costs.





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Although we believe the independent
consultant’s reserve estimates are reasonably based on the information available
to them at the time they prepare their estimates, our actual results could vary
materially from these estimated quantities of proved oil and natural gas
reserves (in the aggregate and for a particular location), production, revenues,
taxes and development and operating expenditures. In addition, these estimates
of reserves may be subject to downward or upward revision based upon production
history, results of future exploration and development, prevailing oil and
natural gas prices, operating and development costs and other
factors.





Because our business is subject to
operating hazards, our business may be adversely affected by the occurrence of
any such hazards.





Our operations are subject to risks
inherent in the oil and natural gas industry, such as:





•           unexpected
drilling conditions including blowouts and explosions;





•           uncontrollable
flows of oil, natural gas or well fluids;





•           equipment
failures, fires or accidents;





•           pollution
and other environmental risks; and





•           shortages
in experienced labor or shortages or delays in the delivery of
equipment.





These risks could result in substantial
losses to us from injury and loss of life, damage to and destruction of property
and equipment, pollution and other environmental damage and suspension of
operations. Our operations are also subject to a variety of operating risks such
as adverse weather conditions and more extensive governmental regulation. These
regulations may, in certain circumstances, impose strict liability for pollution
damage or result in the interruption or termination of operations.





Risks
Relating to our Common Stock





Trading on the over-the-counter
bulletin board may be volatile and sporadic, which could depress the market
price of our common stock and make it difficult for our stockholders to resell
their shares.




Our common stock is quoted on the
over-the-counter bulletin board service of the Financial Industry Regulatory
Authority (the “OTCBB”).  Trading in stock quoted on the OTCBB is
often thin and characterized by wide fluctuations in trading prices, due to many
factors that may have little to do with our operations or business
prospects.  This volatility could depress the market price of our
common stock for reasons unrelated to operating
performance.  Moreover, the OTCBB is not a stock exchange, and trading
of securities on the OTCBB is often more sporadic than the trading of securities
listed on a quotation system like Nasdaq or a stock exchange like
Amex.  Accordingly, shareholders may have difficulty reselling any of
the shares.




Because
our common stock is quoted and traded on the OTCBB, short selling could increase
the volatility of our stock price.




Short selling occurs when a person sells
shares of stock which the person does not yet own and promises to buy stock in
the future to cover the sale.  The general objective of the person
selling the shares short is to make a profit by buying the shares later, at a
lower price, to cover the sale.  Significant amounts of short selling,
or the perception that a significant amount of short sales could occur, could
depress the market price of our common stock. In contrast, purchases to cover a
short position may have the effect of preventing or retarding a decline in the
market price of our common stock, and together with the imposition of the
penalty bid, may stabilize, maintain or otherwise affect the market price of our
common stock.  As a result, the price of our common stock may be
higher than the price that otherwise might exist in the open
market.  If these activities are commenced, they may be discontinued
at any time.  These transactions may be effected on the OTCBB or any
other available markets or exchanges.  Such short selling if it were
to occur could impact the value of our stock in an extreme and volatile manner
to the detriment of our shareholders.





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We
may experience difficulties in the future in complying with Sarbanes-Oxley
Section 404.




We are
required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002.  Beginning with our annual report on Form
10-K for the fiscal year ending December 31, 2008, we are required to furnish a
report by our management on our internal control over financial
reporting.  Such report contains among other matters, an assessment of
the effectiveness of our internal control over financial reporting as of the end
of our fiscal year, including a statement as to whether or not our internal
control over financial reporting is effective.




If we
fail to maintain proper and effective internal controls in future periods, it
could adversely affect our operating results, financial condition and our
ability to run our business effectively and could cause investors to lose
confidence in our financial reporting.




We
have never paid dividends and have no plans to in the future.




Holders
of shares of our common stock are entitled to receive such dividends as may be
declared by our board of directors.  To date, we have paid no cash
dividends on our shares of common stock and we do not expect to pay cash
dividends on our common stock in the foreseeable future.  We intend to
retain future earnings, if any, to provide funds for operation of our
business.  Therefore, any return investors in our common stock will
have to be in the form of appreciation, if any, in the market value of their
shares of common stock.




We
have additional securities available for issuance, which, if issued, could
adversely affect the rights of the holders of our common stock.




Our Articles of Incorporation authorize
the issuance of 100,000,000 shares of our common stock and 25,000,000 shares of
preferred stock.  The common stock or preferred stock can be issued by
our board of directors, without stockholder approval.  Any future
issuances of our common stock would further dilute the percentage ownership of
our common stock held by public stockholders.




If
we issue shares of preferred stock with superior rights than our common stock,
it could result in the decrease the value of our common stock and delay or
prevent a change in control of us.





Our board of directors is authorized to
issue up to 25,000,000 shares of preferred stock. Our board of directors has the
power to establish the dividend rates, liquidation preferences, voting rights,
redemption and conversion terms and privileges with respect to any series of
preferred stock. The issuance of any shares of preferred stock having rights
superior to those of the common stock may result in a decrease in the value or
market price of the common stock. Holders of preferred stock may have the right
to receive dividends, certain preferences in liquidation and conversion rights.
The issuance of preferred stock could, under certain circumstances, have the
effect of delaying, deferring or preventing a change in control of us without
further vote or action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock.





Because
the SEC imposes additional sales practice requirements on brokers who deal in
our shares that are penny stocks, some brokers may be unwilling to trade them.
This means that you may have difficulty in reselling your shares and may cause
the price of the shares to decline.





Our stock is a penny stock. The
Securities and Exchange Commission has adopted Rule 15g-9 which generally
defines “penny stock” to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
“accredited investors”. The term “accredited investor” refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid





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and offer
quotations and the broker-dealer and salesperson compensation information must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in, and limit
the marketability of, our common stock.





In addition to the “penny stock” rules
promulgated by the Securities and Exchange Commission, FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative, low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low-priced securities
will not be suitable for at least some customers. The FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our
stock.





Indemnification
of officers and directors.




Our
articles of incorporation and the bylaws contain broad indemnification and
liability limiting provisions regarding our officers, directors and employees,
including the limitation of liability for certain violations of fiduciary
duties.  Our stockholders therefore will have only limited recourse
against such individuals.




ITEM 1B.    Unresolved Staff
Comments.




None.




ITEM
2. Properties.




Description
of Our Property





Our
principal executive offices are located at Suite 1600, 144 4th Avenue
S.W., Calgary, Alberta T2P 3N4 and we pay $243 per month for this
location.


Reported
Reserves





Below are
estimates of our net Proved Reserves and the present value of estimated future
net revenues from such Reserves based upon the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves in
accordance with the provisions of Statement of Financial Accounting Standards
No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No. 69). The
standardized measure of discounted future net cash flows is determined by using
estimated quantities of Proved Reserves and the periods in which they are
expected to be developed and produced based on period-end economic conditions.
The estimated future production is priced at period-end prices, except where
fixed and determinable price escalations are provided by contract. The resulting
estimated future cash inflows are then reduced by estimated future costs to
develop and produce reserves based on period-end cost levels. No deduction has
been made for depletion, depreciation or for indirect costs, such as general
corporate overhead. Present values were computed by discounting future net
revenues by 10% per year.





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December
      31,2008
              2007
              2006Oil
                (Bbls)
              Gas
                (Mcf)
              Gas
                (Mcf)
              Oil
                (Bbls)
              Gas
                (Mcf)
              Oil
                (Bbls)Proved
      Producing & Non-Producing Reserves
              47,133
              96,395
              165,638
              79,873
              32,721
              43,496Estimated
      future net cash flows from proved oil and gas reserves
              1,109,291
              $6,808,750
              $795,203Present
      value of net cash flows from proved oil and gas reserves
              875,897
              $4,688,087
              $611,152





Production





Production
      Data
                Year
      ended December 31,2008
                2007
                2006Production
      -Oil
      (Bbls)
                6,377
                11,514
                29,280Gas
      (Mcf)
                28,559
                18,304
                3,797Average
      Sales Price -Oil
      (Bbls)
                $90.00
                $64.00
                $58.00Gas
      (Mcf)
                $6.00
                $6.00
                $4.60Average
      Production Costs per Mcf
                $2.00
                $2.00
                $2.50





Production
costs may vary substantially among wells depending on the methods of recovery
employed and other factors, but generally include severance taxes,
administrative overhead, maintenance and repair, labor and
utilities.





Productive
Wells and Acreage





The
following table shows our producing wells and acreage as of December 31,
2008:





Producing Wells 3
                    Developed AcreageOil
                    GasGross
      1
                    Net
      2
                    Gross
      1
                    Net
      2
                    Gross
      1
                    Net
      2Alberta,
      Canada
                      (Todd
      Creek)
                    Nil
                    Nil
                    Nil
                    Nil
                    Nil
                    NilAlberta,
      Canada
                      (Hillspring)
                    Nil
                    Nil
                    Nil
                    Nil
                    Nil
                    NilPalmetto
      Point, Mississippi
                      (Palmetto)
                    2
                    0.17
                    3
                    0.255
                    1,273
                    127Saskatchewan,
      Canada
                      (Wordsworth)
                    2
                    0.15
                    Nil
                    Nil
                    160
                    12Ranken
      2006-03
                      Drilling
      Program
                    1
                    0.10
                    Nil
                    Nil
                    340
                    34Ranken
      2007-01
                      Drilling
      Program
                    2
                    0.40
                    2
                    0.40
                    300
                    60Garvin
      & McClain Counties, Oklahoma
                      (Owl
      Creek)
                    Nil
                    Nil
                    Nil
                    Nil
                    Nil
                    Nil




- 19
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1
            A
      gross well or acre is a well or acre in which a working interest is owned.
      The number of gross wells is the total number of wells in which a working
      interest is owned.2
            A
      net well or acre is deemed to exist when the sum of fractional ownership
      working interests in gross wells or
              acres
      equals one. The number of net wells or acres is the sum of the fractional
      working interest owned in gross wells or acres expressed as hole numbers
      and fractions thereof.3
            Productive
      wells are producing wells and wells capable of
  production.





Undeveloped
Acreage





The
following table set forth undeveloped acreage as of December 31,
2008:


Undeveloped
      Acreage 1
                        as
      of December 31, 2008Gross
                      NetAlberta,
      Canada
                        (Todd
      Creek)
                      Nil
                      NilAlberta,
      Canada
                        (Hillspring)
                      Nil
                      NilAlberta,
      Canada
                        (Strachan)
                      Nil
                      NilPalmetto
      Point, Mississippi
                        (Palmetto)
      – Phase I & II
                      300,000
                      30,000Saskatchewan,
      Canada
                        (Wordsworth)
                      4,800
                      720Ranken
      2006 – 03
                        Drilling
      Program
                      820
                      80Ranken
      2007 – 01
                        Drilling
      Program
                      420
                      200Garvin
      & McClain Counties, Oklahoma
                        (Owl
      Creek)
                      Nil
                      Nil





1
            "Undeveloped
      Acreage" includes leasehold interests on which wells have not been drilled
      or completed to the point that would permit the production of commercial
      quantities of natural gas and oil regardless of whether the leasehold
      interest is classified as containing proved undeveloped
      reserves.




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Drilling
Activity





The
following table sets forth, for each of the last three fiscal years by
geographic area the number of net productive and dry exploratory wells drilled
and the number of net productive and dry development wells
drilled.





Geographical
      Area
              Net
      Exploratory Wells Drilled
              Net
      Development Wells DrilledProductive
      1
              Dry
      2
              Productive
      1
              Dry
      2Alberta,
      Canada
                (Todd
      Creek)2008
              0
              0
              0
              02007
              0
              0
              0
              02006
              0.20
              0
              0
              0Alberta,
      Canada
                (Hillspring)2008
              0
              0
              0
              02007
              0
              0
              0
              02006
              0
              0
              0
              0Alberta,
      Canada
                (Strachan)2008
              0
              0
              0
              02007
              0
              0
              0
              02006
              0
              0
              0
              0Palmetto
      Point, Mississippi
                (Palmetto)2008
              1.17
              1.22
              0
              02007
              1.17
              1.22
              0
              02006
              1.44
              0.36
              0
              0Saskatchewan,
      Canada
                (Wordsworth)2008
              0.075
              0
              0
              02007
              0.075
              0.075
              0
              02006
              0.075
              0
              0
              0Ranken
      2006-3 Drilling Program2008
              0.10
              0
              0
              02007
              0.10
              0.20
              0
              02006
              0
              0
              0
              0Ranken
      2007-1 Drilling Program2008
              0.20
              0.20
              0
              02007
              0.20
              0.20
              0
              02006
              0
              0
              0
              0Garvin
      & McClain Counties, Oklahoma
                (Owl
      Creek)2008
              0
              0
              0
              02007
              0.20
              0
              0.20
              02006
              0.20
              0
              0.20
              0.20Totals





1
            A
      productive well is an exploratory or development well that is not a dry
      well.2
            A
      dry well (hole) is an exploratory or development well found to be
      incapable of producing either
              oil
      or gas in sufficient quantities to justify completion as an oil or gas
      well.





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Present
Activities





A
discussion of present activities on our property interests is included in the
description of business disclosure set forth above.


Delivery
Commitments





We are
not obligated to provide a fixed and determined quantity of oil or gas in the
future. During the last three fiscal years, we have not had, nor do we now have,
any long-term supply or similar agreement with any government or governmental
authority.


We are
not obligated to provide a fixed and determinable quantity of oil or natural gas
in the near future under existing contracts or agreements. Further, during the
last three years we had no significant delivery
commitments.




ITEM 3. Legal
Proceedings.




None.




ITEM 4. Submission
of Matters to a Vote of Security Holders.




No
matters were submitted to a vote of our shareholders during the fourth quarter
of the fiscal year ended December 31, 2008.







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PART
II




ITEM 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.




Market
Prices




Our common stock is currently quoted on
the OTCBB. The OTCBB is a network of security dealers who buy and sell
stock.  The dealers are connected by a computer network that provides
information on current "bids" and "asks", as well as volume
information.  Our shares are quoted on the OTCBB under the symbol
“DOIG.”





The following table sets forth the
range of high and low bid quotations for our common stock for each of the
periods indicated as reported by the OTCBB.  These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.




Fiscal Year Ended December 31,
      2008Fiscal Quarter Ended:
                      High Bid
                      Low BidMarch
      31, 2008
                      $0.305
                      $0.15June
      30, 2008
                      $0.18
                      $0.089September
      30, 2008
                      $0.10
                      $0.045December
      31, 2008
                      $0.065
                      $0.01Fiscal Year Ended December 31,
      2007Fiscal Quarter Ended:
                      High Bid
                      Low BidMarch
      31, 2007
                      $1.28
                      $0.71June
      30, 2007
                      $0.94
                      $0.50September
      30, 2007
                      $0.565
                      $0.155December
      31, 2007
                      $0.59
                      $0.21




Holders
of Common Stock




As of
January 31, 2008, we had approximately eighty-seven (87) shareholders of record
of our common stock and several other shareholders hold shares in street
name.





Dividend
Policy




To date,
we have not declared or paid cash dividends on our shares of common
stock.  The holders of our common stock will be entitled to
non-cumulative dividends on the shares of common stock, when and as declared by
our board of directors, in its discretion.  We intend to retain all
future earnings, if any, for our business and do not anticipate paying cash
dividends in the foreseeable future.




Any
future determination to pay cash dividends will be at the discretion of our
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business conditions and such other
factors as our board of directors may deem relevant.







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Securities
Authorized for Issuance under Equity Compensation Plans





The
following table provides information about our compensation plans under which
shares of common stock may be issued upon the exercise of options as of December
31, 2008.


Equity
Compensation Plan as of December 31, 2008


Plan
      Category
              A
                  
                  
                  
                  Number
      of securities
                  to
      be issued upon
                  exercise
      of
                  outstanding
      options,
                  warrants
      and rights
              B
                  
                  
                  
                  
                  Weighted-average
                  exercise
      price of
                  outstanding
      options,
                  warrants
      and right
              C
                  
                  Number
      of securities
                  remaining
      available
                  for
      future issuance
                  under
      equity
                  compensation
      plans
                  (excluding
      securities
                  reflected
      in column
                  (A))Equity
      compensation
                  plans
      approved by security holdersEquity
      compensation plans not approved by security holder
              0
              0
              5,249,512Total
              0
              0
              5,249,512





On
January 3, 2005, we adopted the 2005 Stock Incentive Plan, which provides for
the grant of stock options to our employees, officers, directors and
consultants. We registered the shares of our common stock issuable under the
2005 Stock Incentive Plan and reserved these shares for the granting of options
and rights.





Recent
Issuances of Unregistered Securities




There were no issuances of securities
without registration under the Securities Act of 1933 during the reporting
period which were not previously included in a Quarterly Report on Form 10-Q or
Current Report on Form 8-K.





ITEM 6.      Selected Financial
Data.




Not
applicable.




ITEM 7.   Management’s Discussion and Analysis
of Financial Condition and Results of Operation.




This
Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,”
“intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,”
“continue,” and other expressions that are predictions of or indicate future
events and trends and that do not relate to historical matters identify
forward-looking statements.  These forward-looking statements are
based largely on our expectations or forecasts of future events, can be affected
by inaccurate assumptions, and are subject to various business risks and known
and unknown uncertainties, a number of which are beyond our
control.  Therefore, actual results could differ materially from the
forward-looking statements contained in this document, and readers are cautioned
not to place undue reliance on such forward-looking statements.  We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.  A wide variety of factors could cause or contribute to
such differences and could adversely impact revenues, profitability, cash flows
and capital needs.





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There can
be no assurance that the forward-looking statements contained in this document
will, in fact, transpire or prove to be accurate.




Factors
that could cause or contribute to our actual results differing materially from
those discussed herein or for our stock price to be adversely affected include,
but are not limited to: (i) changes in our business strategy; (ii) the
uncertainty of reserve estimates and timing of development expenditures; (iii)
access and availability of materials, equipment, supplies, labor and
supervision, power and water; (iv) results of current and future exploration
activities; (v) results of pending and future feasibility studies; (vi)
accidents and labor disputes; (vii)  disappointing results from our
exploration or development efforts; (viii) failure to meet our revenue or profit
goals or operating budget; (ix) decline in demand for our common stock; (x)
downward revisions in securities analysts’ estimates or changes in general
market conditions; (xi) investor perception of our industry or our prospects;
(xii) technological changes in the oil and gas exploration industry, including
technological innovations by competitors or in competing technologies; (xiii)
the proximity of natural gas production to natural gas pipelines; (xiv) the
availability of pipeline capacity; (xv) the demand for oil and natural gas by
utilities and other end users; (xvi) the availability of alternate fuel sources;
(xvii) the effect of inclement weather, such as hurricanes; (xviii) changes in
oil and gas exploration, processing and overhead costs;  (xix)
unexpected changes in business and economic conditions; (xx) changes in interest
rates and currency exchange rates;  (xxi) commodity price fluctuations,
including changes in the worldwide price for oil and gas; (xxii) state and
federal regulation of oil and natural gas marketing; and (xxiii) federal
regulation of natural gas sold or transported in interstate commerce; (xxiv)
local and community impacts and issues;





For the Years Ended December
31, 2008 and 2007




Revenues





We
generated total revenue of $1,927,539 for the year ended December 31, 2008, an
increase of approximately 111% from revenues of $913,808 for the year ended
December 31, 2007.  During the year ended December 31, 2008, $860,092
of the revenue we generated was attributable to natural gas and oil sales and
$1,067,447 was attributable to a gain on the disposition of our working interest
in the Owl Creek Prospect during the three months ended September 30,
2008.  During the year ended December 31, 2007, our revenue generated
was entirely attributable to natural gas and oil sales.  The increase
in total revenue for the year ended December 31, 2008, when compared to the year
ended December 31, 2007, is attributable revenue of $1,067,447, which was
recognized from the sale of our working interest in the Owl Creek Prospect
during the nine months ended September 30, 2008.  The decrease in
revenue generated from natural gas and oil sales for the year ended December 31,
2008, when compared to the year ended December 31, 2007, is primarily
attributable our inability to recognize revenue for the entire 2008 fiscal year
from the Owl Creek Prospect resulting from the sale of our working interest in
this property during the nine months ended September 30, 2008.





Costs
and Expenses





We
incurred costs and expenses in the amount of $2,141,979 for the year ended
December 31, 2008, a 32% decrease from costs and expenses of $3,185,239 for year
ended December 31, 2007.





The
decrease in costs and expenses for the year ended December 31, 2008, when
compared the year ended December 31, 2007, is primarily attributable to the
following factors:





·
            General
      and administrative costs for the year ended December 31, 2008 decreased
      to$222,269 from $1,375,933 for the year ended December 31, 2007, a
      decreaseof
      78%.  The decrease in general and administrative costs was
      caused by a reduction in stock based compensation expense attributable to
      the issuances of stock options and shares of common
      stock.  Stock based compensation expense for the year ended
      December 31, 2008 was $47,700 as compared to $680,397 for the year ended
      December 31, 2007.  Further reductions in administrative costs
      was due to foreign exchange gains increasing to $181,370 (December 31,
      2007: $(184,136)) as the Canadian dollar weakened against the US
      dollar.





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·
            Natural
      gas and oil operating costs for the year ended December 31, 2008 increased
      to $222,269 from $199,062 for the year ended December 31, 2007, an
      increase of 12%. The increase in natural gas and oil operating costs is
      attributable to an increase in the number of new producing wells for the
      year ended December 31, 2008, as compared to the year ended December 31,
      2007.





·
            Depreciation
      and depletion expensefor the year ended
      December 31, 2008 decreased to $265,942 from $667,513 for the year ended
      December 31, 2007, a decrease of 60%. The decrease in depreciation and
      depletion expense is attributable to the disposal of two wells and was
      partially offset by additional uneconomic wells that were moved to the
      proved property pool for depletion;
and





·
            Impairment
      of natural gas and oil properties expense for the year ended December 31,
      2008 increased to $1,393,687 from $936,584 for the year ended December 31,
      2007, an increase of 49%.  The substantial increase in
      impairment of natural gas and oil properties expense for the year ended
      December 31, 2008, as compared to the year ended December 31, 2007, is
      attributable to the impairment of our working interests in the Company’s
      prospects resulting from our third party evaluation that the costs
      associated with these prospects are highly unlikely to be recovered based
      on the commodity price prevalent at December 31,
  2008.





Net
Operating Loss





The net
operating loss for the year ended December 31, 2008 was $214,440, compared to a
net operating loss of $2,271,431 for the year ended December 31,
2007.





Other
Income and Expense





We
reported other net income of $2,009 for the year ended December 31,
2008, as compared to other income of $37,052 in the year ended December 31,
2007. Other expenses were attributable to interest expenses for a note payable
which was paid in full during the reporting period.





Net
Loss





Net loss
for the year ended December 31, 2008 was $215,826, compared to a net loss of
$2,249,959 for the year ended December 31, 2007. The reduction in loss for the
year ended December 31, 2008 was attributable to an increase in revenues from
new and existing wells, a reduction in operating expenses and the sale of the
Owl Creek Prospect.





There are
material events and uncertainties which could cause our reported financial
information to not to be indicative of future operating results or financial
condition.  Our inability to successfully identify, execute or
effectively integrate future acquisitions may negatively affect our results of
operations.  The success of any acquisition depends on a number of
factors beyond our control, including the ability to estimate accurately the
recoverable volumes of reserves, rates of future production and future net
revenues attainable from the reserves and to assess possible environmental
liabilities.  Drilling for oil and natural gas may also involve
unprofitable efforts, not only from dry wells but also from wells that are
productive but do not produce sufficient net reserves to return a profit after
deducting operating and other costs. In addition, wells that are profitable may
not achieve our targeted rate of return.  Our ability to achieve our
target results are also dependent upon the current and future market prices for
crude oil and natural gas, costs associated with producing oil and natural gas
and our ability to add reserves at an acceptable cost.  We do not
operate the properties in which we have an interest and we have limited ability
to exercise influence over operations for these properties or their associated
costs.  Our dependence on the operator and other working interest
owners for these projects and our limited ability to influence operations and
associated costs could materially adversely affect the realization of our
returns on capital in drilling or acquisition activities and our targeted
production growth rate. As a result, our historical results should not be
indicative of future operations.








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Liquidity
and Capital Resources





As of
December 31, 2008, we had total current assets of $1,057,369 and total current
liabilities in the amount of $50,157.  As a result, we had working
capital of $1,007,212 as of December 31, 2008.





The
revenue we currently generate from natural gas and oil sales does not exceed our
operating expenses.  As such, we will require additional financing
activities including issuance of our equity or debt securities to fund our
operations and proposed drilling activities beyond the year ended December 31,
2008.  During the three months March 31, 2008, we received $90,000
from financing activities involving loan issuance.  We repaid this
loan during the quarter ended September 30, 2008, including interest charges of
$5,016.  We received $0 from financing activities involving share
issuances for the year ended December 31, 2008, compared to $45,000 for the year
ended December 31, 2007.





We will
require additional funds to expand our acquisition, exploration and production
of natural oil and gas properties.  Our management also anticipates
that the current cash on hand may not be sufficient to fund our continued
operations at the current level for the next twelve
months.  Additional capital will be required to effectively expand our
operations through the acquisition and drilling of new prospects and to
implement our overall business strategy.  It is uncertain whether we
will be able to obtain financing when sought or obtain it on terms acceptable to
us.  If we are unable to obtain additional financing, the full
implementation of our ability to expand our operations will be
impaired.  Any additional equity financing may involve substantial
dilution to our then existing shareholders.





Cash
Used in Operating Activities





Operating
activities generated $445,122 in cash for the year ending December 31, 2008,
compared to $90,830 in cash used for operating activities for the year ended
December 31, 2007.  Our positive cash flow for the year ending
December 31, 2008 was caused by the redemption of certain cash
equivalents.





Cash
Used in Investing Activities





Cash
flows provided by investing activities for the year ending December 31, 2008 was
$596,614, compared to $1,551,813 cash used in investing activities for the year
ended December 31, 2007.  Our positive cash flow for the year ending
December 31, 2008 was primarily caused by sale proceeds of natural gas and oil
working interests in the amount of $1,309,826.





Cash
from Financing Activities





Cash
flows provided by financing activities for the year ending December 31, 2008
primarily consisted of $(132,289) related to the cost of registration of shares
under Form S-4, compared to $45,000 in cash received from financing activities
for the year ended December 31, 2007.





The
underlying drivers that resulted in material changes and the specific inflows
and outflows of cash for the year ending December 31, 2008 are as
follows:





·
            Revenue
      received as a result of royalties from natural gas and oil producing
      properties;




·
            Property
      acquisition costs; and




·
            Sale
      of the Owl Creek Prospect.





Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet debt nor did we have any transactions, arrangements,
obligations (including contingent obligations) or other relationships with any
unconsolidated entities or other persons that may have material current or
future effect on financial conditions, changes in the financial conditions,
results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses..







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Going
Concern





As shown
in the accompanying financial statements, we have incurred a net loss of
$3,573,762 since inception.  To achieve profitable operations, we
require additional capital for obtaining producing oil and gas properties
through either the purchase of producing wells or successful exploration
activity.  We believe that we will be able to obtain sufficient
funding to meet our business objectives, including anticipated cash needs for
working capital and are currently evaluating several financing
options.  However, there can be no assurances offered in this
regard.  As a result of the foregoing, there exists substantial doubt
about our ability to continue as a going concern.





Critical
Accounting Policies





In
December 2001, the SEC requested that all registrants list their most “critical
accounting polices” in the Management Discussion and Analysis.  The
SEC indicated that a “critical accounting policy” is one which is both important
to the portrayal of a company’s financial condition and results, and requires
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. We believe that the following accounting policies fit this
definition.




Oil and
GasJoint
Ventures





All
exploration and production activities are conducted jointly with others and,
accordingly, the accounts reflect only our proportionate interest in such
activities.





Natural
Gas and Oil Properties





We
account for our oil and gas producing activities using the full cost method of
accounting as prescribed by the United States Securities and Exchange Commission
(“SEC”).  Accordingly, all costs associated with the acquisition of
properties and exploration with the intent of finding proved oil and gas
reserves contribute to the discovery of proved reserves, including the costs of
abandoned properties, dry holes, geophysical costs, and annual lease rentals are
capitalized.  All general corporate costs are expensed as incurred. In
general, sales or other dispositions of oil and gas properties are accounted for
as adjustments to capitalized costs, with no gain or loss
recorded.  Amortization of evaluated oil and gas properties is
computed on the units of production method based on all proved reserves on a
country-by-country basis.  Unevaluated oil and gas properties are
assessed at least annually for impairment either individually or on an aggregate
basis.  The net capitalized costs of evaluated oil and gas properties
(full cost ceiling limitation) are not to exceed their related estimated future
net revenues from proved reserves discounted at 10%, and the lower of cost or
estimated fair value of unproved properties, net of tax
considerations.  These properties are included in the amortization
pool immediately upon the determination that the well is dry.





Unproved
properties consist of lease acquisition costs and costs on well currently being
drilled on the properties.  The recorded costs of the investment in
unproved properties are not amortized until proved reserves associated with the
projects can be determined or until they are impaired.





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Revenue
Recognition
 
 Revenue
from sales of crude oil, natural gas and refined petroleum products are recorded
when deliveries have occurred and legal ownership of the commodity transfers to
the customers. Title transfers for crude oil, natural gas and bulk refined
products generally occur at pipeline custody points or when a tanker lifting has
occurred.  Revenues from the production of oil and natural gas
properties in which we share an undivided interest with other producers are
recognized based on the actual volumes sold by us during the
period.  Gas imbalances occur when our actual sales differ from its
entitlement under existing working interests.  We record a liability
for gas imbalances when we have sold more than our working interest of gas
production and the estimated remaining reserves make it doubtful that the
partners can recoup their share of production from the field.  At
December 31, 2008 and 2007, we had no overproduced imbalances.


Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141R, “Business Combinations”. This statement replaces SFAS 141 and defines the
acquirer in a business combination as the entity that obtains control of one or
more businesses in a business combination and establishes the acquisition date
as the date that the acquirer achieves control. SFAS 141R requires an acquirer
to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date. SFAS 141R also requires the acquirer to
recognize contingent consideration at the acquisition date, measured at its fair
value at that date. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008, and
earlier adoption is prohibited. The adoption of this statement is not expected
to have a material effect on our financial statements.





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
160, “Non-controlling Interests in Consolidated Financial Statements Liabilities
–an Amendment of ARB No. 51”. This statement amends ARB 51 to establish
accounting and reporting standards for the Non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, and earlier adoption is prohibited. The
adoption of this statement is not expected to have a material effect on our
future financial statements.





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which is effective January 1,
2009.  SFAS 161 requires enhanced disclosures about derivative
instruments and hedging activities to allow for a better understanding of their
effects on an entity’s financial position, financial performance, and cash
flows.  Among other things, SFAS 161 requires disclosures of the fair
values of derivative instruments and associated gains and losses in a tabular
formant.  SFAS 161 is not currently applicable to us since we do not
have derivative instruments or hedging activity.





In May 8,
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally
Accepted Accounting Principles, which will provide framework for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities.  With the issuance of SFAS No.
162, the GAAP hierarchy for nongovernmental entities will move from auditing
literature to accounting literature.  The adoption of this statement
is not expected to have a material effect on our financial
statements.




In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task
Force (EITF) No. 03-6-1, determining whether instruments granted in
share-based payment transactions are participating securities (“FSP EITF No.
03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive non-forfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years,
and is not expected to have a significant impact on our financial
statements.











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ITEM 7A.     Quantitative and Qualitative
Disclosures About Market Risk.




Not
applicable




ITEM 8. Financial
Statements and Supplementary Data.




The
financial statements are listed in Part IV Item 15 of this Annual
Report on Form 10-K and are incorporated by reference in this
Item 8.




ITEM 9. Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.




None.




ITEM 9A.     Controls and
Procedures.




Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures




Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934.  Based on their evaluation as of
December 31, 2008, the end of the period covered by this Annual Report on
Form 10-K, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were
effective at a reasonable assurance level to ensure that the information
required to be disclosed in reports filed or submitted under the Securities
Exchange Act of 1934, including this Annual Report, were recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and was accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required
disclosure.




Management’s
Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:




·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




·
            Provide
      reasonable assurance that the transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally
      accepted accounting principles, and that receipts and expenditures of the
      Company are being made only in accordance with authorizations of
      management and directors of the Company;
and




·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.  Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.




In
connection with the filing of our Annual Report on Form 10-K, our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008.  In making this assessment,
our management used the criteria set forth by Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated
Framework.  Based on our assessment using those criteria,
management believes that, as of December 31, 2008, our internal control
over financial reporting is effective based on those criteria.







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This
annual report does not include an attestation report of our Company's registered
public accounting firm regarding internal control over financial
reporting.  Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.




Changes
in Internal Control Over Financial Reporting




There
have been no changes in our internal controls over financial reporting during
the quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.




ITEM 9B.      Other
Information.




None.







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PART
III




ITEM 10. Directors,
Executive Officers and Corporate Governance.




The following information sets forth
the names of our current directors and executive officers, their ages and their
present positions.





Name
      of Nominee
                Age
                Position
                Director
      SinceDouglas
      N. Bolen
                43
                Chief
      Executive Officer, Principal Executive Officer, Director
                2004Kulwant
      Sandher
                47
                Chief
      Financial Officer, Secretary, Principal Financial Officer,Principal
      Accounting Officer, Director
                2007





Douglas N.
Bolen.  Mr. Douglas Bolenhas been our Chief
Executive Officer and Director since April 15, 2004. Mr. Bolen received a
Bachelor of Arts from the University of Regina, Saskatchewan in 1991 and his
Bachelor of Laws from the University of Saskatchewan in 1995. Mr. Bolen is a
member in good standing of the Law Society of Saskatchewan, the Regina Bar
Association and the Canadian Bar Association. From 1995 to 1999, Mr. Bolen
articled and practiced law at Balfour Moss, Barristers and Solicitors, a large
Regina, Canada based law firm with a practice concentration in the area of
Corporate Commercial law. From 1999 to the present, Mr. Bolen has been providing
consulting services to small to medium sized US based businesses.





Kulwant
Sandher.  Mr. Sandher is a Chartered Accountant in both England
and Canadian jurisdictions. Mr. Sandher was appointed as President and Chief
Financial Officer of Turner Valley Oil & Gas Inc. on August 2004 and
continues in serve in these positions. From April 17, 2006 to October 3, 2008,
Mr. Sandher acted as Chief Financial Officer and as a member of the board of
directors of The Stallion Group. From May 2004 to March 2006, Mr. Sandher served
as Chief Operating Officer and Chief Financial Officer of Marketrend Interactive
Inc. Mr. Sandher acted as Chief Financial Officer of Serebra Learning
Corporation, a public company on the TSX VE, from September 1999 to October
2002.





Our Directors are elected annually
and hold office until the next annual meeting of our stockholders or until their
successors are elected and qualified. Officers are elected annually and
serve at the discretion of the Board of Directors. Board vacancies are
filled by a majority vote of the Board.  There are no family
relationship between any of our directors, director nominees and executive
officers.





Audit
Committee




We do not have a
separately-designated standing audit committee.  The entire Board of
Directors performs the functions of an audit committee, but no written charter
governs the actions of the Board when performing the functions of that would
generally be performed by an audit committee.  The Board approves the
selection of our independent accountants and meets and interacts with the
independent accountants to discuss issues related to financial
reporting.  In addition, the Board reviews the scope and results of
the audit with the independent accountants, reviews with management and the
independent accountants our annual operating results, considers the adequacy of
our internal accounting procedures and considers other auditing and accounting
matters including fees to be paid to the independent auditor and the performance
of the independent auditor.




For the fiscal year ending December
31, 2008, the Board:




·
            Reviewed
      and discussed the audited financial statements with management,
      and




·
            Reviewed
      and discussed the written disclosures and the letter from our independent
      auditors on the matters relating to the auditor's
      independence.




Based upon the Board’s review and
discussion of the matters above, the Board authorized inclusion of the audited
financial statements for the year ended December 31, 2008 to be included in the
Annual Report on Form 10-K and filed with the Securities and Exchange
Commission.





The Board
of Directors determined that Mr. Sandher qualifies as an “audit committee
financial expert,” as defined under the rules and regulations of the Securities
and Exchange Commission.





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Director
Independence





Our board
of directors has determined that none of our directors are “independent” as such
term is defined by NASDAQ Rule 4200(a)(15).




Section 16(a)
Beneficial Ownership Reporting




Section 16(a) of the Securities
Act of 1934, as amended, requires our executive officers and directors, and
persons who own more than ten percent (10%) of our common stock, to file
with the Securities and Exchange Commission reports of ownership of, and
transactions in, our securities and to provide us with copies of those filings.
To our knowledge, based solely on our review of the copies of such forms
received by us, or written representations from certain reporting persons, we
believe that during the year ended December 31, 2008, all filing
requirements applicable to our officers, directors and greater than ten percent
beneficial owners were complied with, with the following exceptions: Messrs.
Bolen and Sandher each failed to file a Form 4 in a timely fashion during fiscal
year 2008.





Code
of Ethics and Conduct




Our Board
of Directors has adopted a Code of Ethics and Conductthat is applicable to all of our employees, officers and directors. Our
Code of Ethics and Conductis intended to ensure that our employees act in accordance with the
highest ethical standards. The Code of Ethics and Conductis
available on the Investor Relations page of our website at http://www.deltaoilandgas.com.
and the Code of Ethics and
Conductwas filed as an exhibit to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2003.





ITEM 11.  Executive
Compensation.


Summary
Compensation Table





The
following table presents information concerning the total compensation of our
Chief Executive Officer and Chief Financial Officer during the last fiscal year
(the “Named Executive Officers”) for services rendered to the Company in all
capacities for the years ended December 31, 2008 and 2007:




Name
      (a)
                  Year
                  Salary
                    ($)
                  Bonus
                    ($)
                  Stock
                    Awards
                    ($)
      (1)
                  Option
                    Awards
                    ($)
      (1)
                  All
      Other
                    Compensation
                    ($)
                  Total
                    ($)Douglas
      N. Bolen
                    CEO
      and President
                  2008
                    2007
                  89,947
                    66,000
                  -
                    -
                  26,500
                    460,000
                  -
                    -
                  -
                    -
                  116,447
                    526,000Kulwant
      Sandher
                    CFO,
      Secretary, Treasurer
                  2008
                    2007
                  89,946
                    66,000
                  -
                    -
                  21,200
                    137,500
                  -
                    -
                  -
                    -
                  111,146
                    203,500





(1)
            Represents
      the expense for stock options, as indicated, recognized by the Company in
      accordance with Financial Accounting Standard No. 123(R) (“FAS 123(R)”),
      which requires that compensation cost relating to share-based awards be
      recognized in the financial statements.  The cost is measured
      based on the fair value of the awards.  The values set forth in
      this column represent the dollar amounts recognized in accordance with FAS
      123(R), disregarding the estimate of forfeitures for service-based vesting
      conditions.  The expense recognized by the employer in
      accordance with FAS 123(R) may differ from the value that will eventually
      be realized by the named executive officers, which will be based on the
      market value of the common stock at the time of vesting of restricted
      shares or at the time of the exercise of stock options.  The
      named executive officers will realize value in connection with the stock
      options only if and to the extent the price of the common stock exceeds
      the exercise price of the stock options at such time as the officers
      exercise the stock options.  The assumptions used to determine
      the FAS 123(R) values are described in Note 2to the Notes to
      the Consolidated Financial Statements of Delta Oil & Gas,
      Inc.  No stock options were granted to named executive officers
      in 2008.





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Compensation
Components.




Base
Salary. At this time, we compensate our executive officers by the
indirect payment of salaries to companies controlled by our executive
officers.




We
did not directly compensate Mr. Douglas Bolen, our Chief Executive Officer, or
Mr. Kulwant Sandher, our Chief Financial Officer, during the fiscal years ended
December 31, 2008 and 2007. Mr. Bolen and Mr. Sandher each received remuneration
for services rendered during the fiscal years ended December 31, 2008 and 2007
indirectly through compensation paid to a company under their exclusive
control.




On March 1, 2006, we entered into a Consulting Agreement with Last Mountain
Management, Inc. (“LMM”) to provide consulting services to us. Mr. Bolen is the
sole shareholder, officer, and director of LMM. The Consulting Agreement is
effective for a period of one (1) year commencing March 1, 2006 and we have a
right to cancellation anytime within any six month term. Under the terms of the
Consulting Agreement, LMM is paid monthly compensation of $7,000 Canadian
dollars plus applicable Canadian Good and Services Tax. The total cash
compensation paid to LMM during the fiscal year ended December 31, 2008 was
$89,947.  This compensation is ncluded in the summary compensation
table above in “Salary.” Under the terms of the Consulting Agreement, LMM was
issued 500,000 shares of our common stock during the year ended December 31,
2008. The aggregate fair value of these shares was computed in accordance with
FAS 123R and is reported in the summary compensation table above in the column
titled “Stock Awards.”




On January 1, 2008, we entered into a Consulting Agreement with Hurricane
Corporate Services Ltd. (“Hurricane”) to provide consulting services to us. Mr.
Sandher is the sole shareholder, officer, and director of Hurricane. The
Consulting Agreement is effective for a period of one (1) year and automatically
renews for additional one year periods unless notice of termination is provided
under the Consulting Agreement. Under the terms of the Consulting Agreement,
Hurricane is paid monthly compensation of $7,000 plus applicable Canadian Good
and Services Tax and issue 400,000 shares of our common stock for each
annual period that this Consulting Agreement is in good standing. The total cash
compensation paid to Hurricane during the fiscal year ended December 31, 2008
was $89,946.  This compensation is included in the summary
compensation table above in “Salary.” Under the terms of the Consulting
Agreement, Hurricane was issued 400,000 shares of our common stock during the
year ended December 31, 2008. The aggregate fair value of these shares was
computed in accordance with FAS 123R and is reported in the summary compensation
table above in the column titled “Stock Awards.”




Bonuses. At this time, we do not compensate our executive officers by the
payment of bonus compensation.




Stock
Options. Stock option awards are determined by the Board of Directors
based on numerous factors, some of which include responsibilities incumbent with
the role of each executive to the Company and tenure with the
Company.  We did not grant any stock options to our executive officers
during 2008.




At no
time during the last fiscal year was any outstanding option repriced or
otherwise modified. There was no tandem feature, reload feature, or
tax-reimbursement feature associated with any of the stock options we granted to
our executive officers or otherwise.




Other. At
this time, we have no profit sharing plan in place.





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Outstanding
Equity Awards at Fiscal Year-End




Option
      AwardsName
      (a)
                      Number
      of
                        Securities
                        Underlying
                        Unexercised
                        Options
      (#)
                        Exercisable
                        (b)
                      Number
      of
                        Securities
                        Underlying
                        Unexercised
                        Options
      (#)
                        Unexercisable
                        (c)
                      Equity Incentive
                        Plan
      Awards:
                        Number
      of
                        Securities
                        Underlying
                        Unexercised
                        Unearned
                        Options (#)
      (d)
                      Option
                        Exercise
                        Price
                        ($)
      (e)
                      Option
                        Expiration
                        Date
                        (f)Douglas
      N. Bolen
                        CEO
      and President
                      -
                      -
                      -
                      -
                      -Kulwant
      Sandher
                        CFO,
      Secretary, Treasurer
                      -
                      -
                      -
                      -
                      -




Stock
Option Plans




On
January 3, 2005, our Board adopted the 2005 Stock Incentive Plan (the “Stock
Incentive Plan”). The Stock Incentive Plan authorizes us to reserve shares for
future grants under it, of which 5,249,512 shares remain available for
issuance.




The Stock
Incentive Plan authorizes us to grant (i) to the key employees incentive
stock options to purchase shares of common stock and non-qualified stock options
to purchase shares of common stock and restricted stock awards, and (ii) to
non-employee directors and consultants’ non-qualified stock options and
restricted stock. The Plan Administrator will administer the Plan by making
recommendations to the board or determinations regarding the persons to whom
options or restricted stock should be granted and the amount, terms, conditions
and restrictions of the awards.




Incentive
stock options granted under the Stock Incentive Plan must have an exercise price
at least equal to 100% of the fair market value of the common stock as of the
date of grant. Incentive stock options granted to any person who owns,
immediately after the grant, stock possessing more than 10% of the combined
voting power of all classes of our stock, or of any parent or subsidiary
corporation, must have an exercise price at least equal to 110% of the fair
market value of the common stock on the date of grant. Non-statutory stock
options may have exercise prices as determined by the Plan
Administrator.




The Plan
Administrator is also authorized to grant restricted stock awards under the
Stock Incentive Plan. A restricted stock award is a grant of shares of the
common stock that is subject to restrictions on transferability, risk of
forfeiture and other restrictions and that may be forfeited in the event of
certain terminations of employment or service prior to the end of a restricted
period specified by the Plan Administrator




Compensation
of Directors




Our
executive officers who also serve as members of our board of directors do not
receive any compensation for serving on the board of directors.  In
2008, our board of directors was comprised of Mr. Douglas Bolen and Mr. Kulwant
Sandher, each of whom also serve as executive officers   The
compensation arrangements for Messrs. Bolen and Sandher is discussed under
“Executive Compensation” in this annual report.





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ITEM 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.




The following table sets forth, as of
March 15, 2009, the number and percentage of outstanding shares of common stock
beneficially owned by (a) each person known by us to beneficially own more
than five percent of such stock, (b) each director of the Company,
(c) each named officer of the Company, and (d) all our directors and
executive officers as a group. We have no other class of capital stock
outstanding.





Amount
      and Nature of Beneficial OwnershipName
      and Address of Beneficial Owner(1)
                                            Shares
      Owned (2)
                                            Options
      Exercisable
                                              Within
      60 Days (3)
                                            Percent
      of
                                              ClassDirectors
      and Executive OfficersDouglas
      N. Bolen
                                            1,430,000
                                            -
                                            3.05%Kulwant
      Sandher
                                            551,710
                                            -
                                            1.18%All
      current directors and executive officers as a group (six
      persons)
                                            1,981,710
                                            -
                                            4.23%More
      Than 5% Beneficial OwnersNone
                                            
                                            -




*
            Represents
      less than 1% of the class.





(1)
            Unless
      otherwise provided, the address of each person is c/o 2600 144 4th Avenue
      S.W., Calgary, Alberta T2P3N4,
Canada





(2)
            Except
      as otherwise indicated, all shares shown in the table are owned with sole
      voting and investment power.





(3)
            This
      column represents shares not included in “Shares Owned” that may be
      acquired by the exercise of options within 60 days of March 15,
      2009.





The above
beneficial ownership information is based on information furnished by the
specified persons and is determined in accordance with Rule 13d-3 under the
Exchange Act, as required for purposes of this Annual Report; accordingly, it
includes shares of our common stock that are issuable upon the exercise of stock
options exercisable within 60 days of March 15, 2009. Such information is not
necessarily to be construed as an admission of beneficial ownership for other
purposes.





ITEM 13. Certain
Relationships and Related Transactions, and Director
Independence.




Except as set forth below, none of
our directors or executive officers, nor any proposed nominee for election as a
director, nor any person who beneficially owns, directly or indirectly, shares
carrying more than 5% of the voting rights attached to all of our outstanding
shares, nor any members of the immediate family (including spouse, parents,
children, siblings, and in-laws) of any of the foregoing persons has any
material interest, direct or indirect, in any transaction since the beginning of
our last fiscal year on January 1, 2008 or in any presently proposed transaction
which, in either case, has or will materially affect us.





On March 1, 2006, we entered into a
Consulting Agreement with Last Mountain Management, Inc. (“LMM”) to provide
consulting services to us. Mr. Bolen is the sole shareholder, officer, and
director of LMM. The Consulting Agreement is effective for a period of one (1)
year commencing March 1, 2006 and automatically renews for additional one month
periods unless notice of termination is provided under the Consulting Agreement.
Under the terms of the Consulting Agreement, LMM is paid monthly compensation of
$5,000 plus applicable Canadian Good and Services Tax. Following the execution
of the Consulting Agreement, LMM has been issued 1,000,000 shares of our common
stock.





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On January 1, 2008, we entered into a
Consulting Agreement with Hurricane Corporate Services Ltd. (“Hurricane”) to
provide consulting services to us. Mr. Sandher is the sole shareholder, officer,
and director of Hurricane. The Consulting Agreement is effective for a period of
one (1) year and automatically renews for additional one year periods unless
notice of termination is provided under the Consulting Agreement. Under the
terms of the Consulting Agreement, Hurricane is paid monthly compensation of
$7,000 plus applicable Canadian Good and Services Tax plus  issued
400,000 shares of our common stock for each annual period that this Consulting
Agreement is in good standing.





ITEM 14. Principal
Accounting Fees and Services.




The
following table is a summary of the fees billed to us by STS Partners LLP,
Chartered Accountants for professional services for the fiscal years ended
December 31, 2008 and December 31, 2007:


Fiscal 2008
      Fees
                                
                                
                                Fiscal 2007
      FeesFee
      CategoryAudit
      Fees
                                
                                $
                                33,800
                                
                                
                                $
                                25,000Audit-Related
      Fees
                                
                                
                                -
                                
                                
                                
                                -Tax
      Fees
                                
                                
                                -
                                
                                
                                
                                -All
      Other Fees
                                
                                
                                -
                                
                                
                                
                                -Total
      Fees
                                
                                $
                                33,800
                                
                                
                                $
                                25,000




Audit
Fees. Consists of fees
billed for professional services rendered for the audit of our consolidated
financial statements and review of the interim consolidated financial statements
included in quarterly reports and services that are normally provided by our
independent registered public accounting firms in connection with statutory and
regulatory filings or engagements.




Audit-Related
Fees. Consists of fees
billed for assurance and related services that are reasonably related to the
performance of the audit or review of our consolidated financial statements and
are not reported under “Audit Fees.” These services include employee benefit
plan audits, accounting consultations in connection with acquisitions, attest
services that are not required by statute or regulation, and consultations
concerning financial accounting and reporting standards.




Tax
Fees. Consists of fees
billed for professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal, state and
international tax compliance, tax audit defense, customs and duties, mergers and
acquisitions, and international tax planning.




All Other
Fees. Consists of fees for
products and services other than the services reported above. In fiscal 2008 and
2007, these services included administrative services.




Our
practice is to consider and approve in advance all proposed audit and non-audit
services to be provided by our independent registered public accounting
firm.




The audit
report of STS Partners LLP, Chartered Accountants on the financial statements of
the Company for the year ended December 31, 2008 did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles, except that the audit reports
on the financial statements of the Company for the fiscal years ended December
31, 2008 and December 31, 2007 contained an uncertainty about the Company’s
ability to continue as a going concern.





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During
our fiscal years ended December 31, 2008 and 2007, there were no
disagreements with STS Partners LLP, Chartered Accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to STS Partners LLP,
Chartered Accountants’ satisfaction would have caused it to make reference to
the subject matter of such disagreements in connection with its reports on the
financial statements for such periods.




During
our fiscal years ended December 31, 2008 and 2007, there were no reportable
events (as described in Item 304(a)(1)(v) of
Regulation S-K).




PART
IV


ITEM 15. Exhibits,
Financial Statement Schedules.




(a)(1)





Index
      to Financial Statements
              
              Page (s)Report
      of Independent Registered Public Accounting Firm
              
              F-1Financial
      Statements:Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              
              F-2Consolidated
      Statements of Operations – Years Ended December 31, 2008 and December 31,
      2007 and Cumulative period from inception January 9, 2001 to December 31,
      2008
              
              F-3Consolidated
      Statement of Stockholders’ Equity (Deficiency) and from inception January
      9, 2001 to December 31, 2008
              
              F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      December 31, 2007 and Cumulative period from inception January 9, 2001 to
      December 31, 2008
              
              F-5Notes
      to Consolidated Financial Statements
              
              F-6





(a)(2)           Not
Applicable.





(a)(3)           Exhibits.





See
(b) below.




(b)            Exhibits.





See the
Exhibit Index following the signature page of this report, which is
incorporated herein by reference.





(c)            Financial
Statements Excluded From Annual Report to Shareholders





Not
Applicable.





- 38
-
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 To the
Board of Directors and Stockholders of
 Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 
 
 We have
audited the accompanying consolidated balance sheets of Delta Oil & Gas, Inc.(the
“Company”) (a Development Stage Company) as at December 31, 2008 and 2007, the
related consolidated statements of operations and comprehensive income (loss),
changes in stockholders’ equity and cash flows for the years then ended, and for
the period from inception on January 9, 2001 through to December 31,
2008.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.
 
 We
conducted our audits in accordance with Standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.
 
 An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Delta Oil & Gas, Inc.
(A Development Stage Company) as at December 31, 2008 and 2007, and the
results of its operations and its cash flows for the years then ended, and for
the period from inception on January 9, 2001 through to December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As discussed in Note 1(b)
to the consolidated financial statements, the Company has suffered recurring
losses from operations since inception.  These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans in regard to these matters are also
described in Note 1(b).  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
 
  /s/STS
PARTNERS
LLP
 STS
PARTNERS LLP
 CHARTERED
ACCOUNTANTS
  Vancouver,
British Columbia, Canada
 March 23,
2009




F
-1
 Table of Contents


DELTA
      OIL & GAS, INC.(A
      Development Stage Company)Consolidated
      Balance Sheets(Stated
      in U.S. Dollars)December
      31,
                                        
                                        
                                        December
      31,2008
                                        
                                        
                                        2007ASSETSCurrentCash
      and cash equivalents
                                        
                                        $
                                        980,562
                                        
                                        
                                        $
                                        71,115GIC
      receivable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        236,112Accounts
      receivable
                                        
                                        
                                        65,614
                                        
                                        
                                        
                                        153,990Franchise
      tax prepaid
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6,912Prepaid
      expenses
                                        
                                        
                                        11,193
                                        
                                        
                                        
                                        19,3641,057,369
                                        
                                        
                                        
                                        487,493Natural
      Gas And Oil PropertiesProved
      property
                                        
                                        
                                        892,096
                                        
                                        
                                        
                                        1,432,776Unproved
      property
                                        
                                        
                                        630,376
                                        
                                        
                                        
                                        1,368,2601,522,472
                                        
                                        
                                        
                                        2,801,036Other
      EquipmentComputer
      equipment
                                        
                                        
                                        4,483
                                        
                                        
                                        
                                        4,483Less:
      accumulated depreciation
                                        
                                        
                                        (4,311
                                        )
                                        
                                        
                                        (3,351
                                        )172
                                        
                                        
                                        
                                        1,132$
                                        2,580,013
                                        
                                        
                                        $
                                        3,289,661LIABILITIES AND STOCKHOLDERS'
      EQUITYLIABILITIESCurrentAccounts
      payable and accrued liabilities
                                        
                                        $
                                        26,553
                                        
                                        
                                        $
                                        166,217Long
      TermAsset
      retirement obligation
                                        
                                        
                                        23,604
                                        
                                        
                                        
                                        111,80350,157
                                        
                                        
                                        
                                        278,020STOCKHOLDERS'
      EQUITYShare
      CapitalPreferred
      Shares, 25,000,000 shares authorized of $0.001par
      value of which none have been issuedCommon
      stock, 100,000,000 shares authorized of $0.001par
      value, 46,840,506 and 45,940,506 shares issuedand
      outstanding, respectively
                                        
                                        
                                        46,841
                                        
                                        
                                        
                                        45,941Additional
      paid-in capital
                                        
                                        
                                        6,050,799
                                        
                                        
                                        
                                        6,136,288Cumulative
      Other Comprehensive Income
                                        
                                        
                                        5,978
                                        
                                        
                                        
                                        187,348Deficit
      Accumulated During The Development Stage
                                        
                                        
                                        (3,573,762
                                        )
                                        
                                        
                                        (3,357,936
                                        )2,529,856
                                        
                                        
                                        
                                        3,011,641$
                                        2,580,013
                                        
                                        
                                        $
                                        3,289,661The
      accompanying notes are an integral part of these consolidated financial
      statements
  
 F
-2
 Table of Contents
 
 DELTA
      OIL & GAS, INC.(A
      Development Stage Company)Consolidated
      Statements Of Operations(Stated
      in U.S. Dollars)CUMULATIVE
      PERIODFROM
      INCEPTIONJANUARY
      9, 2001YEAR
      ENDED
                                            
                                            
                                            TODECEMBER
      31,
                                            
                                            
                                            DECEMBER
      31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2008RevenueNatural
      gas and oil sales
                                            
                                            $
                                            860,092
                                            
                                            
                                            $
                                            913,808
                                            
                                            
                                            $
                                            2,385,030Gain
      on sale of natural gas and oil properties
                                            
                                            
                                            1,067,447
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,128,6061,927,539
                                            
                                            
                                            
                                            913,808
                                            
                                            
                                            
                                            4,513,636Costs
      And ExpensesNatural
      gas and oil operating costs
                                            
                                            
                                            222,269
                                            
                                            
                                            
                                            199,062
                                            
                                            
                                            
                                            557,381General
      and administrative
                                            
                                            
                                            257,552
                                            
                                            
                                            
                                            1,375,933
                                            
                                            
                                            
                                            3,040,677Accretion
                                            
                                            
                                            2,529
                                            
                                            
                                            
                                            4,876
                                            
                                            
                                            
                                            7,405Depreciation
      and depletion
                                            
                                            
                                            265,942
                                            
                                            
                                            
                                            667,513
                                            
                                            
                                            
                                            1,438,958Impairment
      of natural gas and oil properties
                                            
                                            
                                            1,393,687
                                            
                                            
                                            
                                            936,584
                                            
                                            
                                            
                                            3,007,152Dry
      well costs written off
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,271
                                            
                                            
                                            
                                            119,9612,141,979
                                            
                                            
                                            
                                            3,185,239
                                            
                                            
                                            
                                            8,171,534Net
      Operating Loss
                                            
                                            
                                            (214,440
                                            )
                                            
                                            
                                            (2,271,431
                                            )
                                            
                                            
                                            (3,657,898
                                            )Other
      Income And ExpenseForgiveness
      of debt
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            39,933Interest
      income
                                            
                                            
                                            7,025
                                            
                                            
                                            
                                            37,052
                                            
                                            
                                            
                                            68,194Interest
      expense
                                            
                                            
                                            (5,016
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (5,016
                                            )2,009
                                            
                                            
                                            
                                            37,052
                                            
                                            
                                            
                                            103,111Loss
      Before Income Taxes
                                            
                                            $
                                            (212,431
                                            )
                                            
                                            $
                                            (2,234,379
                                            )
                                            
                                            $
                                            (3,554,787
                                            )Income
      taxes
                                            
                                            
                                            3,395
                                            
                                            
                                            
                                            15,580
                                            
                                            
                                            
                                            18,975Net
      Loss
                                            
                                            $
                                            (215,826
                                            )
                                            
                                            $
                                            (2,249,959
                                            )
                                            
                                            $
                                            (3,573,762
                                            )Basic
      And Diluted Loss Per Common Share
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (0.05
                                            )Weighted
      Average Number OfCommon
      Shares Outstanding
                                            
                                            
                                            46,284,768
                                            
                                            
                                            
                                            45,705,191Consolidated
      Statement of Comprehensive Income/(Loss)Comprehensive
      (Loss)Net
      Loss
                                            
                                            $
                                            (215,826
                                            )
                                            
                                            $
                                            (2,249,959
                                            )
                                            
                                            $
                                            (3,573,762
                                            )Other
      Comprehensive Income/(Loss)Foreign
      Currency Translation
                                            
                                            
                                            (181,370
                                            )
                                            
                                            
                                            187,348
                                            
                                            
                                            
                                            5,978Comprehensive
      (Loss)
                                            
                                            $
                                            (397,196
                                            )
                                            
                                            $
                                            (2,062,611
                                            )
                                            
                                            $
                                            (3,567,784
                                            )The
      accompanying notes are an integral part of these consolidated financial
      statements


F
-3
 Table of Contents




Consolidated
      Statement Of Changes In Stockholders' EquityPeriod
      From Inception, January 9, 2001, to December 31, 2008(Stated
      in U.S. Dollars)DEFICITCOMMON
      STOCK
                                        
                                        
                                        ACCUMULATEDNUMBER
                                        
                                        
                                        
                                        
                                        
                                        SHARE
                                        
                                        
                                        SHARE
                                        
                                        
                                        DURING
      THE
                                        
                                        
                                        CUMULATIVEOF
      COMMON
                                        
                                        PAR
                                        
                                        ADDITIONAL
                                        
                                        
                                        SUBSCRIPTIONS
                                        
                                        
                                        SUBSCRIPTIONS
                                        
                                        
                                        DEVELOPMENT
                                        
                                        
                                        COMPREHENSIVESHARES
      VALUE
                                        
                                        VALUE
                                        
                                        PAID-IN
      CAPITAL
                                        
                                        
                                        RECEIVED
                                        
                                        
                                        RECEIVABLE
                                        
                                        
                                        STAGE
                                        
                                        
                                        INCOME
                                        
                                        
                                        TOTALShares
      issued for cash at $0.00018
                                        
                                        
                                        13,750,000
                                        
                                        
                                        $
                                        13,750
                                        
                                        
                                        $
                                        (11,250
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,500Shares
      issued for cash at $0.0036
                                        
                                        
                                        27,500,000
                                        
                                        
                                        
                                        27,500
                                        
                                        
                                        
                                        72,500
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        100,000Shares
      issued for cash at $0.045
                                        
                                        
                                        46,750
                                        
                                        
                                        
                                        47
                                        
                                        
                                        
                                        2,078
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,125Net
      (loss) for the period ended
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (184,407
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (184,407
                                        )Balance,
      December 31, 2001
                                        
                                        
                                        41,296,750
                                        
                                        
                                        
                                        41,297
                                        
                                        
                                        
                                        63,328
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (184,407
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (79,782
                                        )Net
      (loss) for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (62,760
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (62,760
                                        )Balance,
      December 31, 2002
                                        
                                        
                                        41,296,750
                                        
                                        
                                        
                                        41,297
                                        
                                        
                                        
                                        63,328
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (247,167
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (142,542
                                        )Net
      (loss) for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (24,423
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (24,423
                                        )Balance,
      December 31, 2003
                                        
                                        
                                        41,296,750
                                        
                                        
                                        
                                        41,297
                                        
                                        
                                        
                                        63,328
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (271,590
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (166,965
                                        )Share
      subscriptions received
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        160,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        160,000Net
      (loss) for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (31,574
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (31,574
                                        )Balance,
      December 31, 2004
                                        
                                        
                                        41,296,750
                                        
                                        
                                        
                                        41,297
                                        
                                        
                                        
                                        63,328
                                        
                                        
                                        
                                        160,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (303,164
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (38,539
                                        )Units
      issued for cash at $1.00,
                                        
                                        
                                        2,483,985
                                        
                                        
                                        
                                        2,484
                                        
                                        
                                        
                                        2,481,241
                                        
                                        
                                        
                                        (160,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,323,725net of share issuance costOptions
      exercised for cash at $0.8
                                        
                                        
                                        245,000
                                        
                                        
                                        
                                        245
                                        
                                        
                                        
                                        195,755
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (16,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        180,000Stock-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        370,267
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        370,267Net
      (loss) for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (570,050
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (570,050
                                        )Balance,
      December 31, 2005
                                        
                                        
                                        44,025,735
                                        
                                        
                                        
                                        44,026
                                        
                                        
                                        
                                        3,110,591
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (16,000
                                        )
                                        
                                        
                                        (873,214
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,265,403Subscriptions
      receivable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        16,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        16,000Options
      exercised for cash at $0.8
                                        
                                        
                                        305,000
                                        
                                        
                                        
                                        305
                                        
                                        
                                        
                                        243,695
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        244,000Options
      exercised for cash at $1.00
                                        
                                        
                                        12,500
                                        
                                        
                                        
                                        13
                                        
                                        
                                        
                                        12,488
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,501Shares
      issued for cash at $2.75,
                                        
                                        
                                        727,271
                                        
                                        
                                        
                                        727
                                        
                                        
                                        
                                        1,849,268
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,849,995net
      of finders feeStock-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        195,719
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        195,719Net
      (loss) for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (234,763
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (234,763
                                        )Balance,
      December 31, 2006
                                        
                                        
                                        45,070,506
                                        
                                        
                                        
                                        45,071
                                        
                                        
                                        
                                        5,411,761
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,107,977
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4,348,855Options
      exercised for cash at $0.75
                                        
                                        
                                        60,000
                                        
                                        
                                        
                                        60
                                        
                                        
                                        
                                        44,940
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        45,000Shares
      issued to President & CEO as
                                        
                                        
                                        500,000
                                        
                                        
                                        
                                        500
                                        
                                        
                                        
                                        459,500
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        460,000part of his compensation package at $0.92Shares
      issued to Investor Relations
                                        
                                        
                                        60,000
                                        
                                        
                                        
                                        60
                                        
                                        
                                        
                                        40,740
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        40,800Services, Inc. as part of the agreementShares
      issued to CFO for services rendered
                                        
                                        
                                        250,000
                                        
                                        
                                        
                                        250
                                        
                                        
                                        
                                        137,250
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        137,500Stock-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        42,097
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        42,097Comprehensive
      Income/(loss):Cumulative
      translation adjustment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        187,348
                                        
                                        
                                        
                                        187,348Net
      (loss) for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,249,959
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,249,959
                                        )Comprehensive
      (loss)
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (2,062,611
                                        )Balance,
      December 31, 2007
                                        
                                        
                                        45,940,506
                                        
                                        
                                        $
                                        45,941
                                        
                                        
                                        $
                                        6,136,288
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (3,357,936
                                        )
                                        
                                        $
                                        187,348
                                        
                                        
                                        $
                                        3,011,641Shares
      issued to President & CEO & CFO as
                                        
                                        
                                        900,000
                                        
                                        
                                        
                                        900
                                        
                                        
                                        
                                        46,800
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        47,700part of their compensation package at $0.053Registration
      of shares under Form S-4
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (132,289
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (132,289
                                        )Comprehensive
      Income/(Loss):Cumulative
      translation adjustment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (181,370
                                        )
                                        
                                        
                                        (181,370
                                        )Net loss
      for the year
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (215,826
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (215,826
                                        )Comprehensive
      income
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (397,196
                                        )Balance,
      December 31, 2008
                                        
                                        
                                        46,840,506
                                        
                                        
                                        $
                                        46,841
                                        
                                        
                                        $
                                        6,050,799
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (3,573,762
                                        )
                                        
                                        $
                                        5,978
                                        
                                        
                                        $
                                        2,529,856The
      accompanying notes are an integral part of these consolidated financial
      statements


F
-4
 Table of Contents


DELTA
      OIL & GAS, INC.(A
      Development Stage Company)Consolidated
      Statements Of Cash Flows(Stated
      in U.S. Dollars)CUMULATIVE
      PERIODFROM
      INCEPTIONJANUARY
      9, 2001YEAR
      ENDED
                                  
                                  
                                  TODECEMBER
      31,
                                  
                                  
                                  DECEMBER
      31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008Cash
      Flows From Operating Activities:Net
      loss for the period
                                  
                                  $
                                  (215,826
                                  )
                                  
                                  $
                                  (2,249,959
                                  )
                                  
                                  $
                                  (3,573,762
                                  )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Gain
      on sale of property
                                  
                                  
                                  (1,067,447
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,128,606
                                  )Accretion
                                  
                                  
                                  2,529
                                  
                                  
                                  
                                  4,876
                                  
                                  
                                  
                                  7,405Depreciation
      and depletion
                                  
                                  
                                  265,942
                                  
                                  
                                  
                                  667,513
                                  
                                  
                                  
                                  1,438,958Impairment
      of natural gas and oil properties
                                  
                                  
                                  1,393,687
                                  
                                  
                                  
                                  936,584
                                  
                                  
                                  
                                  3,007,152Dry
      well costs written off
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,271
                                  
                                  
                                  
                                  119,961Stock-based
      compensation expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  42,097
                                  
                                  
                                  
                                  608,083Shares
      issued to President & CEO for servicess rendered
                                  
                                  
                                  26,500
                                  
                                  
                                  
                                  460,000
                                  
                                  
                                  
                                  486,500Shares
      issued to CFO for services rendered
                                  
                                  
                                  21,200
                                  
                                  
                                  
                                  137,500
                                  
                                  
                                  
                                  158,700Shares
      issued to Investor Relations Services Inc for services
      rendered
                                  
                                  
                                  -
                                  
                                  
                                  
                                  40,800
                                  
                                  
                                  
                                  40,800Realized
      foreign exchange loss
                                  
                                  
                                  (181,370
                                  )
                                  
                                  
                                  184,136
                                  
                                  
                                  
                                  2,766Changes
      in operating assets and liabilities:GIC
                                  
                                  
                                  236,112
                                  
                                  
                                  
                                  (236,112
                                  )
                                  
                                  
                                  -Accounts
      receivable
                                  
                                  
                                  88,376
                                  
                                  
                                  
                                  (65,539
                                  )
                                  
                                  
                                  (65,614
                                  )Accounts
      payable and accrued liabilities
                                  
                                  
                                  (139,664
                                  )
                                  
                                  
                                  10,668
                                  
                                  
                                  
                                  (89,470
                                  )Tax
      Prepaid
                                  
                                  
                                  6,912
                                  
                                  
                                  
                                  (6,912
                                  )
                                  
                                  
                                  -Prepaid
      expenses
                                  
                                  
                                  8,171
                                  
                                  
                                  
                                  (17,753
                                  )
                                  
                                  
                                  (11,193
                                  )Net
      Cash Generated/(Used) In Operating Activities
                                  
                                  
                                  445,122
                                  
                                  
                                  
                                  (90,830
                                  )
                                  
                                  
                                  1,680Cash
      Flows From Investing Activities:Purchase
      of other equipment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (991
                                  )
                                  
                                  
                                  (4,483
                                  )Sale
      proceeds of natural gas and oil working interests
                                  
                                  
                                  1,309,826
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,809,826Investment
      in natural gas and oil working interests
                                  
                                  
                                  (713,212
                                  )
                                  
                                  
                                  (1,550,822
                                  )
                                  
                                  
                                  (6,630,019
                                  )Net
      Cash Generated /(Used) In Investing Activities
                                  
                                  
                                  596,614
                                  
                                  
                                  
                                  (1,551,813
                                  )
                                  
                                  
                                  (3,824,676
                                  )Cash
      Flows From Financing Activities:Registration
      of shares under Form S-4
                                  
                                  
                                  (132,289
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (132,289
                                  )Proceeds
      from issuance of common stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  45,000
                                  
                                  
                                  
                                  4,935,847Net
      Cash Provided/(Used) By Financing Activities
                                  
                                  
                                  (132,289
                                  )
                                  
                                  
                                  45,000
                                  
                                  
                                  
                                  4,803,558Net
      Increase/(Decrease) In Cash And Cash Equivalents
                                  
                                  
                                  909,447
                                  
                                  
                                  
                                  (1,597,643
                                  )
                                  
                                  
                                  980,562Cash
      And Cash Equivalents At Beginning Of Period(Excess
      Of Deposits Over Checks Issued)
                                  
                                  
                                  71,115
                                  
                                  
                                  
                                  1,668,758
                                  
                                  
                                  
                                  -Cash
      And Cash Equivalents At End Of Period
                                  
                                  $
                                  980,562
                                  
                                  
                                  $
                                  71,115
                                  
                                  
                                  $
                                  980,562Supplemental
      Disclosures Of Non-Cash, Investing and Financing
      Activities500,000
      shares issued to the President & CEO as part of his
                                  
                                  $
                                  26,500
                                  
                                  
                                  $
                                  460,000
                                  
                                  
                                  $
                                  486,500compensation
      package400,000
      shares issued to the CFO for services rendered
                                  
                                  $
                                  21,200
                                  
                                  
                                  $
                                  137,500
                                  
                                  
                                  $
                                  158,70060,000
      shares issued to Investor Relations Services Inc.,for
      services rendered.
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  40,800
                                  
                                  
                                  $
                                  40,800Supplemental
      Disclosures Of Non-Cash TransactionsIncome
      taxes paid
                                  
                                  $
                                  3,395
                                  
                                  
                                  $
                                  6,109
                                  
                                  
                                  $
                                  18,975Investment
      in natural gas and oil working interests included in
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  116,023
                                  
                                  
                                  $
                                  116,023accounts
      payableThe
      accompanying notes are an integral part of these consolidated financial
      statements
  F
-5
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
  1. OPERATIONS
 
 a) Organization
 
 Delta Oil
& Gas, Inc. (“the Company”) was incorporated as a Colorado corporation on
January 9, 2001.
 
 The
Company is a development stage, independent natural gas and oil company engaged
in the exploration, development and acquisition of natural gas and oil
properties in the United States and Canada.  The Company’s entry into
the natural gas and oil business began on February 8, 2001.
 
 The
Company is subject to several categories of risk associated with its development
stage activities.  Natural gas and oil exploration and production is a
speculative business, and involves a high degree of risk.  Among the
factors that have a direct bearing on the Company’s prospects are uncertainties
inherent estimating  natural gas and oil reserves, future hydrocarbon
production, and cash flows, particularly with respect to wells that have not
been fully tested and with wells having limited production histories; access to
additional capital; changes in the price of natural gas and oil; availability
and cost of services and equipment; and the presence of competitors with greater
financial resources and capacity.
 
 The oil
and gas industry is subject, by its nature, to environmental hazards and
clean-up costs.  At this time, management knows of no substantial
costs from environmental accidents or events for which the Company may be
currently liable.  In addition, the Company’s oil and gas business
makes it vulnerable to changes in prices of crude oil and natural
gas.  Such prices have been volatile in the past and can be expected
to be volatile in the future.  By definition, proved reserves are
based on current oil and gas prices and estimated reserves.  Price
declines reduce the estimated quantity of proved reserves and increase annual
depletion expense (which is based on proved reserves).
 
 b) Going
Concern
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.
 
 As shown
in the accompanying consolidated financial statements, the Company has incurred
a net loss of $3,573,762 since inception.  To achieve profitable
operations, the Company requires additional capital for obtaining producing oil
and gas properties through either the purchase of producing wells or successful
exploration activity.  Management believes that sufficient funding
will be available to meet its business objectives including anticipated cash
needs for working capital and is currently evaluating several financing
options.  However, there can be no assurance that the Company will be
able to obtain sufficient funds to continue the development of its properties
and, if successful, to commence the sale of its projects under
development.  As a result of the foregoing, there exists substantial
doubt the Company’s ability to continue as a going concern.  These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 2.           SIGNIFICANT
ACCOUNTING POLICIES
 
 a) Basis of
Consolidation
 
 The
consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States and include the financial
statements of the Company and its wholly-owned subsidiary, Delta Oil & Gas
(Canada) Inc.  All significant inter-company balances and transactions
have been eliminated.
  F
-6
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 2.           SIGNIFICANT
ACCOUNTING POLICIES (Continued)
 
 b) Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods.  Actual results could differ from those
estimates.  Significant estimates with regard to these financial
statements include the estimate of proved natural gas and oil reserve quantities
and the related present value of estimated future net cash flows there
from.
 
 c) Natural
Gas and Oil Properties
 
 The
Company accounts for its oil and gas producing activities using the full cost
method of accounting as prescribed by the United States Securities and Exchange
Commission (“SEC”).  Accordingly, all costs associated with the
acquisition of properties and exploration with the intent of finding proved oil
and gas reserves contribute to the discovery of proved reserves, including the
costs of abandoned properties, dry holes, geophysical costs, and annual lease
rentals are capitalized.  All general corporate costs are expensed as
incurred.  In general, sales or other dispositions of oil and gas
properties are accounted for as adjustments to capitalized costs, with no gain
or loss recorded.  Amortization of evaluated oil and gas properties is
computed on the units of production method based on all proved reserves on a
country-by-country basis.  The net capitalized costs of evaluated oil
and gas properties (full cost ceiling limitation) are not to exceed their
related estimated future net revenues from proved reserves discounted at 10%,
and the lower of cost or estimated fair value of unproved properties, net of tax
considerations.  These properties are included in the amortization
pool immediately upon the determination that the well is dry.
 
 Unproved
properties consist of lease acquisition costs and costs on wells currently being
drilled on the properties.  The recorded costs of the investment in
unproved properties are not amortized until proved reserves associated with the
projects can be determined or until they are impaired.  Unevaluated
oil and gas properties are assessed at least annually for impairment either
individually or on an aggregate basis.
 
 d) Asset
Retirement Obligations
 
 The
Company has adopted Statement of Financial Accounting Standards No. 143 (“SFAS
143”), “Accounting for Asset Retirement Obligations”, which requires that asset
retirement obligations (“ARO”) associated with the retirement of a tangible
long-lived asset, including natural gas and oil properties, be recognized as
liabilities in the period in which it is incurred and becomes determinable, with
an offsetting increase in the carrying amount of the associated assets. The cost
of tangible long-lived assets, including the initially recognized ARO, is
depleted, such that the cost of the ARO is recognized over the useful life of
the assets. The ARO is recorded at fair value, and accretion expense is
recognized over time as the discounted cash flows are accreted to the expected
settlement value. The fair value of the ARO is measured using expected future
cash flow, discounted at the Company’s credit-adjusted risk-free interest
rate.
  F
-7
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 2. SIGNIFICANT
ACCOUNTING POLICIES (Continued)
 
 e) Oil and
Gas Joint Ventures
 
 All
exploration and production activities are conducted jointly with others and,
accordingly, the accounts reflect only the Company’s proportionate interest in
such activities.
 
 f) Revenue
Recognition
 
 Revenue
from sales of crude oil, natural gas and refined petroleum products are recorded
when deliveries have occurred and legal ownership of the commodity transfers to
the customers.  Title transfers for crude oil, natural gas and bulk
refined products generally occur at pipeline custody points or when a tanker
lifting has occurred.  Revenues from the production of oil and natural
gas properties in which the Company shares an undivided interest with other
producers are recognized based on the actual volumes sold by the Company during
the period.  Gas imbalances occur when the Company’s actual sales
differ from its entitlement under existing working interests.  The
Company records a liability for gas imbalances when it has sold more than its
working interest of gas production and the estimated remaining reserves make it
doubtful that the partners can recoup their share of production from the field.
At December 31, 2008 and 2007, the Company had no overproduced
imbalances.
 
 g) Cash and
Cash Equivalent
 
 Cash
consists of cash on deposit with high quality major financial institutions, and
to date has not experienced losses on any of its balances.  The
carrying amounts approximated fair market value due to the liquidity of these
deposits.  For purposes of the balance sheet and statements of cash
flows, the Company considers all highly liquid instruments with maturity of
three months or less at the time of issuance to be cash
equivalents.
 
 h)    GIC Receivable
 
 GIC
Receivable is non-redeemable until April 24, 2008 and bears an interest rate of
3.80 % and was redeemed during the year.
 
 i)    Concentration
of Credit Risk
 
 Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and
cash equivalents and accounts receivable.  The Company
maintains cash at one financial institution.  The Company periodically
evaluates the credit worthiness of financial institutions, and maintains cash
accounts only in large high quality financial institutions, thereby minimizing
exposure for deposits in excess of federally insured amounts.  The
Company believes credit risk associated with cash and cash equivalents to be
minimal.  Deposits are insured up to $82,102, the amount that may be
subject to credit risk for the year ended December 31, 2008 is
$898,560.
 
 The
Company has recorded trade accounts receivable from the business operations.
Management periodically evaluates the collectability of the trade receivables
and believes that the Company’s receivables are fully collectable and that the
risk of loss is minimal.
 
 j) Environmental
Protection and Reclamation Costs
 
 The
operations of the Company have been, and may be in the future be affected from
time to time in varying degrees by changes in environmental regulations,
including those for future removal and site restorations costs.  Both
the likelihood of new regulations and their overall effect upon the Company may
vary from region to region and are not predictable.
  F
-8
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 2.
                SIGNIFICANT
      ACCOUNTING POLICIES (Continued)
 
 The
Company’s policy is to meet or, if possible, surpass standards set by relevant
legislation, by application of technically proven and economically feasible
measures.  Environmental expenditures that relate to ongoing
environmental and reclamation programs will be charged against statements of
operations as incurred or  capitalized and amortized depending upon
their future economic benefits.  The Company does not currently
anticipate any material capital expenditures for environmental control
facilities because all property holdings are at early stages of
exploration.  Therefore, estimated future removal and site restoration
costs are presently considered minimal.
 
 k) Foreign
Currency Translation
 
 United
States funds are considered the Company’s functional
currency.  Transaction amounts denominated in foreign currencies are
translated into their United States dollar equivalents at exchange rates
prevailing at the transaction date.  Monetary assets and liabilities
are adjusted at each balance sheet date to reflect exchange rates prevailing at
that date, and non-monetary assets and liabilities are translated at the
historical rate of exchange.  Gains and losses arising from
restatement of foreign currency monetary assets and liabilities at each year-end
are included in other comprehensive income.
 
 l) Other
Equipment
 
 Computer
equipment is stated at cost.  Provision for depreciation on computer
equipment is calculated using the straight-line method over the estimated useful
life of three years.
 
 m) Impairment
of Long-Lived Assets
 
 In the
event that facts and circumstances indicate that the costs of long-lived assets,
other than oil and gas properties, may be impaired, and evaluation of
recoverability would be performed.  If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset’s carrying amount to determine if a write-down to market
value or discounted cash flow value is required.  Impairment of oil
and gas properties is evaluated subject to the full cost ceiling as described
under Natural Oil and Gas Properties.
 
 n) Loss Per
Share
 
 In
February 1997, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS
128”).  Under SFAS 128, basic and diluted earnings per share are to be
presented.  Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding in the period.  Diluted earnings per share takes into
consideration common shares outstanding (computed under basic earnings per
share) and potentially dilutive common shares.
 
 o) Income
Taxes
 
 The
Company follows the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of (i) temporary differences between the tax bases of assets and
liabilities, and their reported amounts in the financial statements, and (ii)
operating loss and tax credit carryforwards for tax
purposes.  Deferred tax assets are reduced by a valuation allowance
when, based upon management’s estimates, it is more likely than not that a
portion of the deferred tax assets will not be realized in a future
period.
 
 p) Financial
Instruments
 
 The
Company’s financial instruments consist of cash and cash equivalents, GIC
receivable, accounts receivable, franchise tax prepaid, accounts payable,
accrued liabilities and loan payable.
  F
-9
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 2.
                SIGNIFICANT
      ACCOUNTING POLICIES (Continued)
 
 It is
management’s opinion that the Company is not exposed to significant interest or
credit risks arising from these financial instruments.  The fair value
of these financial instruments is approximated to their carrying
values.
 
 q)      Comprehensive
Loss
 
 SFAS No.
130, “Reporting Comprehensive Income,” establishes standards for the reporting
and display of comprehensive loss and its components in the financial
statements. The Company is disclosing this information on its Consolidated
Statements of Changes in Stockholders’ Equity and Consolidated Statement of
Operations.
 
 r)      Stock-Based
Compensation
 
 The
Company records stock-based compensation in accordance with SFAS 123(R), “Share-Based Payments,” which
requires the measurement and recognition of compensation expense based on
estimated fair values for all share-based awards made to employees and
directors, including stock options. In March 2005, the Securities and Exchange
Commission issued SAB 107 relating to SFAS 123(R). The Company applied the
provisions of SAB 107 in its adoption of SFAS 123(R).
 
 SFAS
123(R) requires companies to estimate the fair value of share-based awards on
the date of grant using an option-pricing model. The Company uses the
Black-Scholes option-pricing model as its method of determining fair value. This
model is affected by the Company’s stock price as well as assumptions regarding
a number of subjective variables. These subjective variables include, but are
not limited to the Company’s expected stock price volatility over the term of
the awards, and actual and projected employee stock option exercise behaviors.
The value of the portion of the award that is ultimately expected to vest is
recognized as an expense in the statement of operations over the requisite
service period.
 
 All
transactions in which goods or services are the consideration received for the
issuance of equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.
 
 3.
                RECENT
      ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141R, “Business Combinations”. This statement replaces SFAS 141 and defines the
acquirer in a business combination as the entity that obtains control of one or
more businesses in a business combination and establishes the acquisition date
as the date that the acquirer achieves control. SFAS 141R requires an acquirer
to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date. SFAS 141R also requires the acquirer to
recognize contingent consideration at the acquisition date, measured at its fair
value at that date. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008, and
earlier adoption is prohibited. The adoption of this statement is not expected
to have a material effect on the Company's financial statements.
 
 In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
160, “Non-controlling Interests in Consolidated Financial Statements Liabilities
–an Amendment of ARB No. 51”. This statement amends ARB 51 to establish
accounting and reporting standards for the Non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, and earlier adoption is prohibited. The
adoption of this statement is not expected to have a material effect on the
Company's future financial statements.
 
 In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which is effective January 1,
2009.  SFAS 161 requires enhanced disclosures about derivative
instruments and hedging activities to allow for a better understanding of their
effects on an entity’s
  F
-10
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 3.
                RECENT
      ACCOUNTING PRONOUNCEMENTS
(continued)
 
 financial
position, financial performance, and cash flows.  Among other things,
SFAS 161 requires disclosures of the fair values of derivative instruments and
associated gains and losses in a tabular formant.
 SFAS 161
is not currently applicable to the Company since the Company does not have
derivative instruments or hedging activity.
 
 In May 8,
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally
Accepted Accounting Principles, which will provide framework for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles
(GAAP) for nongovernmental entities.  With the issuance of SFAS No.
162, the GAAP hierarchy for nongovernmental entities will move from auditing
literature to accounting literature.  The adoption of this statement
is not expected to have a material effect on the Company’s financial
statements.
 
 In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task
Force (EITF) No. 03-6-1, determining whether instruments granted in
share-based payment transactions are participating securities (“FSP EITF No.
03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive non-forfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years,
and is not expected to have a significant impact on the Company’s financial
statements.
 
 4.           NATURAL
GAS AND OIL PROPERTIES
 
 a)      Proved
Properties
 Properties
                    
                    December
      31, 2007
                    
                    
                    Additions
                    
                    
                    Disposals
                    
                    
                    Depletion
      for the year
                    
                    
                    Impairment
                    
                    
                    December
      31, 2008USA
      properties
                    
                    $
                    1,197,630
                    
                    
                    $
                    1,375,949
                    
                    
                    $
                    (754,647
                    )
                    
                    $
                    (191,522
                    )
                    
                    $
                    (760,629
                    )
                    
                    $
                    866,781Canada
      properties
                    
                    
                    235,146
                    
                    
                    
                    496,688
                    
                    
                    
                    -
                    
                    
                    
                    (73,461
                    )
                    
                    
                    (633,058
                    )
                    
                    
                    25,315Total
                    
                    $
                    1,432,776
                    
                    
                    $
                    1,872,637
                    
                    
                    $
                    (754,647
                    )
                    
                    $
                    (264,983
                    )
                    
                    $
                    (1,393,687
                    )
                    
                    $
                    892,096
 
  F
-11
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 4.           NATURAL
GAS AND OIL PROPERTIES
 
 a)      Proved Properties
 
 Properties in
U.S.A.
 
 i. Oklahoma,
USA
 
 In June
2006, the Company entered into an agreement to accept the assignment of an
undivided 20% working interest in a potential oil well known as the Powell#2 and
an option to purchase a 20% interest in all future wells drilled on the land
surrounding Powell#2.  In addition the Company has an option to
participate in any lands of mutual interest that may be acquired in the future
by the Owl Creek participating partners.  On June 30, 2008, the cost
to the Company for this assignment was $394,499.  On August 20, 2008,
the Company assigned all of its interest in exchange for a cash amount of
$760,438.
 
 In July
2006, the Company also elected to participate in Isbill #1-36, which was
abandoned during the year.  Its costs amounted to $80,738 was moved to
the proven cost pool for depletion.
 
 In
January 2007, the Company elected to participate in Isbill #2-36
well.  The Company paid $187,559 for its 20% of working
interest.  Isbill #2-36 started production from April
2007.  On July 31, 2008, the Company expended $196,181 on Isbill
#2-36.  On August 20, 2008, the Company assigned all of its interest
in exchange for a cash amount of $549,388.
 
 In April
2007, the Company entered into the 2006-3 Drilling Program for a buy-in cost of
$113,700 which will provide 12.5% Before Casing Point (“BCP”) working interest
and After Casing Point (“ACP”) working interest of 10%.  In September
2007, Wolf#1-7 was abandoned. Its costs amount to $68,118 was moved to the
proven cost pool for depletion.  In October 2007, Ruggles #1-15 was
also abandoned and the cost of $84,328 was moved to the proven cost pool for
depletion.
 
 In
October 2007, the Company elected to participate in Powell #3-25 and paid
$112,319 for the estimated drilling costs.  Powell #3-25 was abandoned
on November 9, 2007.  Its costs amounted to $81,998 was moved to the
proven cost pool for depletion.  The unused estimated drilling costs
were applied to operating costs of other wells.
 
 In the
2006-3 Drilling Program, Elizabeth #1-25 was plugged abandoned on February 7,
2008.  Its cost amounted to $127,421 was moved to the proven cost pool
for depletion.  Plaster #1-11 and Dale #1-15 started producing in
January and February 2008, respectively, total cost of $205,064 was moved to the
proven cost pool.
 
 In the
2007-1 Drilling Program, Pollack #1-35 was plugged and abandoned on January 19,
2008.  Its cost amounted to $150,841 was moved to the proven cost pool
for depletion.  Hulsey #1-8 started producing in February 2008; the
cost of $161,039 was moved to the proven cost pool.  River #1-28
started producing in June 2008; the cost of $150,582 was moved to the proven
cost pool.
 
 ii. Palmetto
Point Prospect, Mississippi, USA
 
 On
February 21, 2006, the Company entered into an agreement (the “Agreement”) with
0743608 B.C. Ltd., (“Assignor”) a British Columbia, Canada based oil and gas
exploration company, in order to accept an assignment of the Assignor’s ten
percent (10%) gross working and revenue interest in a ten-well drilling program
(the “Drilling Program”) to be undertaken by Griffin & Griffin Exploration
L.L.C., (“Griffin”) a Mississippi based exploration company.  Under
the terms of the Agreement, the Company paid the Assignor $425,000 as payment
for the assignment of the Assignor’s 10% gross working and revenue interest in
the Drilling Program.  The Company also entered into a joint Operating
Agreement directly with Griffin on February 24, 2006.
  F
-12
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 4.           NATURAL
GAS AND OIL PROPERTIES (Continued)
 
 a) Proved
Properties - Descriptions
 
 Properties
in U.S.A.
 
 The
Drilling Program on the acquired property interests was initiated by Griffin in
May 2006 and was substantially completed by Griffin by December 31,
2006.  The prospect area owned or controlled by Griffin on which the
ten wells were drilled, is comprised of approximately 1,273 acres in Palmetto
Point, Mississippi.
 
 During
the year ended of December 31, 2007, eight wells were found to be proved wells,
and two wells, PP F-7 and PP F-121 were abandoned due to no apparent gas or oil
shows present.  The costs of abandoned properties were added to the
capitalized cost in determination of the depletion expense.
  On August
4, 2006, the Company elected to participate in an additional two well program in
Mississippi owned by Griffin & Griffin Exploration and paid
$70,000.  As of December 31, 2008, both wells were found to be proved
wells.
  On
October 10, 2007, the Company elected to participate in the drilling of PP F-12
and PP F-12-3 in Mississippi operated by Griffin & Griffin
Exploration.  The Company’s 10% of the estimated drilling costs was
$88,783. PP F-12 started production from October 2007, and PP F-12-3 started
production from November 2007.  An additional AFE in the amount of
$36,498 for workovers on the PP F-12, PP F-12-3 was paid on January 31,
2008.
  On
January 11, 2008, the Company paid $11,030 for PP F-41salt water disposal
well.
  iii. Mississippi
II, Mississippi, USA
 
 In August
2006, the Company entered into a joint venture agreement with Griffin &
Griffin Exploration, LLC. to acquire an interest in a drilling program comprised
of up to 50 natural gas and/or oil wells.  The area in which the wells are
to be drilled is comprised of approximately 300,000 gross acres of land located
between Southwest Mississippi and North East Louisiana. The wells are targeting
the Frio and Wilcox Geological formations. The Company has agreed to pay
10% of all prospect fees, mineral leases, surface leases and drilling and
completion costs to earn a net 8% share of all production zones to the base of
the Frio formation and 7.5% of all production to the base of the Wilcox
formation.  In January 2007, the well CMR USA 39-14 was found to be
proved.  The cost of $35,126 was added to the proven cost
pool.  Dixon#1 was abandoned in January 2007, its costs amounted to
$40,605 was moved to the proven cost pool for depletion.  Randall#1
was abandoned in June 2007, its costs amounted to $26,918 was moved to the
proven cost pool for depletion.  BR F-24 was abandoned and its cost
amounted to $41,999 was moved to the proven cost pool for
depletion.  Faust #1, USA 1-37 and BR F-33 were found to be proven and
the total cost of $129,360 was added to the proven cost pool.
 
 iv. Mississippi
III, Mississippi, USA
 
 During
August to December 2007, five additional wells, PP F-90, PP F-100, PP F-111, PP
F-6A, and PP F-83 were drilled in the area.  These wells were
abandoned due to modest gas shows and a total drilling cost of $110,729 was
added to the capitalized costs in determination of depletion
expense.
  F
-13
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 4.           NATURAL
GAS AND OIL PROPERTIES (Continued)
 
 a) Proved
Properties - Descriptions
 
 Properties
in Canada
 
 v.         Wordsworth
Prospect, Saskatchewan, Canada
 
 On April
10, 2006, the Company entered into an agreement (the “Agreement”) with Petrex
Energy Ltd., for a participation and Farmout agreement where the Company will
participate for 15% gross working interest before payout (BPO) and 7.5% gross
working interest after pay out (APO) in a proposed four well horizontal drilling
program in the Wordsworth area in Southeast Saskatchewan, Canada. The well, HZ
1C2-23 was drilled in September 2008 also started production from November
2008.  As at December 31, 2008, the Company had advanced $338,557 as
its share of the costs in this Agreement.  Currently, there are two
producing wells on this prospect.
 
 vi.       Todd
Creek, Alberta, Canada
 
 In
January 2005, the Company acquired a 20% working interest in 13.75 sections
(8,800 acres) of land in Todd Creek, Alberta, Canada, at a cost of
$597,263.  One of the wells, 13-28-9-2W5M, has had production since
October 2006.
 
 The
Company paid $314,959 (CDN$352,376) on October 27, 2006 for well
13-33-8-2W5M.  It was abandoned and the cost was moved to the proved
properties cost pool for depletion.  During the year ended of December
31, 2007, the remaining wells at Todd Creek were abandoned and the cost was
moved to the proven cost pool for depletion.
  vii.     
 Hillspring, Alberta, Canada
 
 In
January 2005, the Company acquired a 10% working interest in 1 section (64
acres) of land in Hillspring, Alberta, Canada, at a cost of
$414,766.   During the year ended of December 31, 2007, it was
abandoned and the cost was moved to proven cost pool for depletion.
  viii.     
Strachan Prospect, Alberta, Canada
 
 In
September 2005, the Company entered into a participation and farm-out agreement
with Odin Capital Inc. (“Odin”) where the Company will participate for 4% share
of the costs of drilling a test well in certain lands located in the Leduc
formation, Alberta, Canada.  In exchange for the participation costs,
the Company will earn interests in certain petroleum and natural gas wells
ranging from 1.289% to 4.0%.  The Company has advanced $388,662 as its
share of the costs in the Leduc formation property.  The well was
abandoned in the three month ended of March 31, 2008; the cost of $388,662 was
moved to the proven cost pool for depletion.
  F
-14
 Table of Contents
  
 Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 4.           NATURAL
GAS AND OIL PROPERTIES (continued
 
 b)   Unproved
Properties
 
 Properties
                      
                      December
      31, 2007
                      
                      
                      Addition
                      
                      
                      Transfer
      to proved properties
                      
                      
                      December
      31, 2008USA
      properties
                      
                      $
                      781,446
                      
                      
                      $
                      454,842
                      
                      
                      $
                      (805,977
                      )
                      
                      $
                      430,311Canada
      properties
                      
                      
                      586,814
                      
                      
                      
                      111,235
                      
                      
                      
                      (497,984
                      )
                      
                      
                      200,065Total
                      
                      $
                      1,368,260
                      
                      
                      $
                      566,077
                      
                      
                      $
                      (1,303,961
                      )
                      
                      $
                      630,376
 
 Properties
in U.S.A.
  i.
   Oklahoma, USA
 
 In April
2007, the Company entered into the 2006-3 Drilling Program for a buy-in cost of
$113,700 which will provide 12.5% Before Casing Point (“BCP”) working interest
and After Casing Point (“ACP”) working interest of 10%.
 
 In
September 2007, the Company entered into the 2007-1 Drilling Program for a
buy-in cost of $77,100 which will provide 25% Before Casing Point (“BCP”)
working interest and 20% After Casing Point (“ACP”) working
interest.  During August to September 2008, the Company paid estimated
drilling costs of $82,830 and estimated completion costs of $80,905 for the
well, Hulsey #2-8.
 
 ii.    Mississippi
II, Mississippi, USA
 
 In
August, 2006, the Company entered into a joint venture agreement with
Griffin & Griffin Exploration, LLC. to acquire an interest in a drilling
program comprised of up to 50 natural gas and/or oil wells.  The area in
which the wells are to be drilled is comprised of approximately 300,000 gross
acres of land located between Southwest Mississippi and North East Louisiana.
The wells are targeting the Frio and Wilcox Geological formations. The
Company has agreed to pay 10% of all prospect fees, mineral leases, surface
leases and drilling and completion costs to earn a net 8% share of all
production zones to the base of the Frio formation and 7.5% of all production to
the base of the Wilcox formation.
 
 Properties
in Canada
 
 iii.   Wordsworth
Prospect, Saskatchewan, Canada
 
 In April
2007, the Company entered into an agreement (the “Agreement”) with Petrex Energy
Ltd., for a participation and Farmout agreement whereby the Company will
participate in a 15% gross working interest before payout (BPO) and 7.5% gross
working interest after pay out (APO) in a proposed four well horizontal drilling
program in the Wordsworth area in Southeast Saskatchewan, Canada.  As
at December 31, 2008, the Company had expended $162,996 on the well
3B9-23/3A11.  In March 2008, the Company joined the drilling of a new
well, 2 HZ 3B9 LEG.  As at December 31, 2008, the Company had expended
$37,070 on this well.
 
  F
-15
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 5. NATURAL
GAS AND OIL EXPLORATION RISK
 
 a)  Exploration
Risk
 
 The
Company’s future financial condition and results of operations will depend upon
prices received for its natural gas and oil production and the cost of finding,
acquiring, developing and producing reserves.  Substantially all of
its production is sold under various terms and arrangements at prevailing market
prices.  Prices for natural gas and oil are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of other factors
beyond its control.  Other factors that have a direct bearing on the
Company’s prospects are uncertainties inherent in estimating natural gas and oil
reserves and future hydrocarbon production and cash flows, particularly with
respect to wells that have not been fully tested and with wells having limited
production histories; access to additional capital; changes in the price of
natural gas and oil; availability and cost of services and equipment; and the
presence of competitors with greater financial resources and
capacity.
 
 b)    Distribution
Risk
 
 The
Company is dependent on the operator to market any oil production from its wells
and any subsequent production which may be received from other wells which may
be successfully drilled on the Prospect.  It relies on the operator’s
ability and expertise in the industry to successfully market the
same.  Prices at which the operator sells gas/oil both in intrastate
and interstate commerce; will be subject to the availability of pipe lines,
demand and other factors beyond the control of the operator.  The
Company and the operator believe any oil produced can be readily sold to a
number of buyers.
 
 c) Credit
Risk
 
 A
substantial portion of the Corporation’s accounts receivable is with joint
venture partners in the oil and gas industry and is subject to normal industry
credit risks.
 
 d) Foreign
Operations Risk
 
 The
Company is exposed to foreign currency fluctuations, political risks, price
controls and varying forms of fiscal regimes or changes thereto which may impair
its ability to conduct profitable operations as it operates internationally and
holds foreign denominated cash and other assets.
 
 6. INCOME
TAXES PAYABLE
 
 Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred
taxes.  Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss, tax credit carry-forwards, and for taxable temporary
differences.  Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax will not be realized.  Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
 
 The
effective income tax rate for years ended December 31, 2008 and the year ended
December 31, 2007 differs from the U.S. Federal statutory income tax rate due to
the following:
 
 2008
                          
                          
                          2007Federal
      statutory income tax rate
                          
                          
                          (34.0
                          %)
                          
                          
                          (34.0
                          %)State
      income taxes, net of federal benefit
                          
                          
                          (3.77
                          %)
                          
                          
                          (3.77
                          %)Permanent
      differences in debt
                          
                          
                          0
                          %
                          
                          
                          0.00
                          %Increase in valuation allowance
                          
                          
                          37.77
                          %
                          
                          
                          37.77
                          %Net
      income tax provision (benefit)
                          
                          
                          —
                          
                          
                          
                          —
 
  F
-16
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 6. INCOME
TAXES PAYABLE (continued)
 
 The
Canadian corporate tax rate for 2008 is 25%. The effective weighted average tax
rate for the years ended December 31, 2008 and December 31, 2007 is
34%.
 
 A
reconciliation of income taxes at statutory rates with the reported taxes is as
follows:
 
 2008
                      
                      
                      2007Loss
      before income taxes
                      
                      $
                      (212,431
                      )
                      
                      $
                      (2,234,379
                      )Income
      tax recovery at 34% (estimated)
                      
                      
                      72,227
                      
                      
                      
                      759,689Unrecognized
      benefit of operating loss carry forwards
                      
                      
                      (72,227
                      )
                      
                      
                      (759,689
                      )Franchise
      tax
                      
                      
                      3,395
                      
                      
                      
                      15,5803,395
                      
                      
                      
                      15,580
 
 Significant
components of the Company’s deferred income tax assets are as
follows:
 
 2008
                      
                      
                      2007Operating
      loss carry forwards
                      
                      $
                      3,457,724
                      
                      
                      $
                      3,248,398Natural
      gas and oil properties
                      
                      
                      1,610,527
                      
                      
                      
                      2,578,0865,068,251
                      
                      
                      
                      5,826,484Statutory
      tax rate
                      
                      
                      34
                      %
                      
                      
                      34
                      %Deferred
      income tax asset
                      
                      
                      1,723,205
                      
                      
                      
                      1,981,005Valuation
      allowance
                      
                      
                      (1,723,205
                      )
                      
                      
                      (1,981,005
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -
 
 The
Company has approximately $3,457,724 (2007 - $3,248,398) of operating loss carry
forwards which expire beginning in 2025.  The Company has natural gas
and oil properties available to further reduce taxable income of
$1,610,527.
 
 The
company has provided a valuation allowance against its deferred tax assets given
that it is in the development stage and it is more likely than not that these
benefits will not be realized.
 
 7. ASSET
RETIREMENT OBLIGATIONS
 
 The
Company follows SFAS 143 “Accounting for asset retirement
obligations”.  SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs.  SFAS 143 requires recognition
of the present value of obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred.  As of
December 31, 2008 and December 31, 2007, we recognized the future cost to plug
and abandon the gas wells over the estimated useful lives of the wells in
accordance with SFAS No. 143.  The liability for the fair value of an
asset retirement obligation with a corresponding increase in the carrying value
of the related long-lived asset is recorded at the time a well is completed and
ready for production.  The Company amortizes the amount added to the
oil and gas properties and recognizes accretion expense in connection with the
discounted liability over the remaining life of the respective
well.  The estimated liability is based on historical experience in
plugging and abandoning wells, estimated useful lives based on engineering
studies, external estimates as to the cost to plug and abandon wells in the
future, and federal and state regulatory requirements.  The liability
is a discounted liability using a credit-adjusted risk-free rate of
12%.
 
 Revisions
to the liability could occur due to changes in plugging and abandonment costs,
well useful lives or if federal or state regulators enact new guidance on the
plugging and abandonment of wells.
 
 The
Company amortizes the amount added to oil and gas properties and recognizes
accretion expense in connection with the discounted liability over the remaining
useful lives of the respective wells.
  F
-17
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 7. ASSET
RETIREMENT OBLIGATIONS (continued)
 
 The
information below reflects the change in the asset retirement obligations during
the years ended December 31, 2008 and 2007:
 
 December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Balance,
      beginning of year
                      
                      $
                      111,803
                      
                      
                      $
                      40,635Liabilities
      assumed
                      
                      
                      8,898
                      
                      
                      
                      66,292Revisions
                      
                      
                      (99,626
                      )
                      
                      
                      -Accretion
      expense
                      
                      
                      2,529
                      
                      
                      
                      4,876Balance,
      end of year
                      
                      $
                      23,604
                      
                      
                      $
                      111,803
 
 8. SHARE
CAPITAL
 
 i. Common
Stock
 
 On
January 11, 2006, the Company issued 75,000 common shares for exercise of stock
options at $0.80 per share.
 
 On
January 24, 2006, the Company issued 230,000 common shares for exercise of stock
options at $0.80 per share.
 
 On
January 25, 2006, the Company issued 12,500 common shares for exercise of stock
options at $1.00 per share.
 
 On April
25, 2006, the Company issued 727,271 common shares pursuant to a private
placement at $2.75 per share.
 
 On
January 23, 2007, the Company issued 60,000 common shares for exercise of stock
options at $0.75 per share.
 
 On March
1, 2007, the Company issued 500,000 common shares to the President and CEO as
part of his compensation package.  The price of the share as of March
1, 2007 was $0.92.
 
 On May 1,
2007, the Company issued 60,000 common shares to Investor Relations Services,
Inc. as part of the investor relation services and consulting
agreement.  The price of the share as of May 1, 2007 was
$0.68.
 
 On July
8, 2007, the Company issued 250,000 common shares to its Chief Financial Officer
as compensation for his services rendered and in lieu of cancellation of stock
options.  The price of the share was $0.55, being the average of the
share price of July 6 and July 9, 2007.
 
 On August
13, 2008, the Company issued 900,000 common shares to the Officers of the
Company as part of their compensation package.  The price of the share
as of August 13, 2008 was $0.053.
 
 Preferred
Stock
 
 The
Company did not issue any preferred stock during the period ended December 31,
2008 (December 31, 2007 - $ Nil).
  F
-18
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 8. SHARE
CAPITAL (continued)
 
 ii. Stock
Options
 
 Compensation
expense related to stock options granted is recorded at their fair value as
calculated by the Black-Scholes option pricing model.  Options
exercised for the year ended December 31, 2008 was nil (Year ended December 31,
2007 - $42,097, related to options granted during the year ended December 31,
2007).  The changes in stock options are as follows:
 
 Number
                    
                    
                    Weighted
      average
                      exercise
      priceBalance
      outstanding, December 31 2007
                    
                    
                    240,000
                    
                    
                    $
                    0.75Granted
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Balance
      outstanding, December 31 2008
                    
                    
                    240,000
                    
                    
                    $
                    0.75
 
 The
weighted average assumptions used in calculating the fair value of stock options
granted and vested     using the Black-Scholes option
pricing model are as follows:
 
 Year
      ended December 31, 2008
                      
                      
                      Year
      ended December 31, 2007Risk-fee
      interest rate
                      
                      
                      0.00
                      %
                      
                      
                      3.77
                      %Expected
      life of the option
                      
                      0
      years
                      
                      
                      3
      yearsExpected
      volatility
                      
                      
                      0.00
                      %
                      
                      
                      69.03
                      %Expected
      dividend yield
                      
                      
                      -
                      
                      
                      
                      -
 
 
 The
following table summarized information about the stock options outstanding as at
December 31, 2008:
 
 Options
      outstanding
                    
                    Options
      exercisableExercise
      price
                    Number
      of shares
                    Remaining
      contractual life (years)
                    
                    Number
      of shares$
      0.75
                    240,000
                    0.22
                    
                    240,000
 
 iii.   Common
      Stock Share Purchase Warrants
 
 As at
December 31, 2008, share purchase warrants outstanding for the purchase of
common shares as follows:
  Warrants
outstanding
 Exercise
      price
                  Number
      of shares
                  Expiry
      date$
      1.50
                    $
      3.00
                  2,483,985
                    727,271
                  February
      1, 2010
                    April
      30, 2009
 
 No
warrants were issued during the years ended December 31, 2008 and December 31,
2007.
  F
-19
 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 10. RELATED
PARTIES
 
 During
the year ended December 31, 2008, the Company paid $179,893 (December 31, 2007 -
$122,814) for consulting fees and $39,750 for accounting services to Companies
controlled by directors and officers of the Company.  Amounts paid to
related parties are in the normal course of business and are based on exchange
amounts agreed upon by those related parties.
 
 On August
13, 2008, the Company issued 900,000 shares of common stock in consideration for
services rendered to Officers of the Company.  The price of the
Company’s shares as of August 13, 2008 was $0.053.  The total cost of
$47,700 was recorded in the compensation expense for shares granted and was
included in the general and administration expense.
 
 These
shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
 
 11. COMMITMENT
AND CONTRACTURAL OBLIGATIONS
 
 A lease
agreement for the Vancouver, Canada office commenced June 1, 2008 and terminates
on May 31, 2009.  The lease agreement provides a fixed rental fee of
$1,425 per month plus additional charges for services supplied by the landlord
or incurred on behalf of the Company in the previous month.
 
 The
Company also rents an office in Calgary, Canada on a month to month basis for
$295 per month.
  12. SEGMENTED
INFORMATION
  In
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, the Company has identified only one operating segment,
which is the exploration and production of oil and natural gas.  All
of the Company’s oil and gas properties are located in the United States and
Canada (refer to note 4), and all revenues are attributable to United States and
Canada as follows:
 
 December
      31, 2008
                        
                        
                        December
      31, 2007RevenueUnited
      States
                        
                        $
                        1,816,335
                        
                        
                        $
                        764,507Canada
                        
                        
                        111,204
                        
                        
                        
                        149,301Total
      Revenue
                        
                        $
                        1,927,539
                        
                        
                        $
                        913,808
 
 AssetsUnited
      States
                          
                          $
                          1,346,373
                          
                          
                          $
                          2,140,338Canada
                          
                          
                          1,233,640
                          
                          
                          
                          1,149,323Total
      Assets
                          
                          $
                          2,580,013
                          
                          
                          $
                          3,289,661
 
 LiabilitiesUnited
      States
                        
                        $
                        46,508
                        
                        
                        $
                        216,629Canada
                        
                        
                        3,649
                        
                        
                        
                        61,391Total
      Liabilities
                        
                        $
                        50,157
                        
                        
                        $
                        278,020
 
  F
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 Table of Contents
  Delta
Oil & Gas, Inc.
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008
 (Stated
in U.S. Dollars)
 
 13. SUBSEQUENT
EVENT
 
 On
February 9, 2009, the Company’s S-4 Registration statement was approved by the
SEC for the acquisition of The Stallion Group (“Stallion”) by way of an offer to
purchase all the outstanding shares of Stallion in exchange for 0.333333 shares
of the Company and $0.0008 cash.  The offer expired on March 26, 2009
at 5.00pm Eastern Standard Time,  and the Company will issue
19,545,026 common shares and $46,908.10 in cash to the holders of The Stallion’s
Group’s common stock that were tendered.
 
  F
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 Table of Contents


Signatures
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, this 30th day of
March, 2009.
  DELTA OIL & GAS,
INC.,
 a Colorado corporation
  By:           /s/Douglas
N.Bolen
 Douglas N. Bolen
 Chief Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
  Signature
      and Title
                  
                  Date/s/
      Douglas N.
      Bolen
                  
                  March
      30, 2009Douglas
      N. Bolen, Chief Executive Officer/s/
      Kulwant
      Sandher
                  
                  March  30,
      2009Kulwant
      Sandher, Chief Financial Officer








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 Table of Contents
 
 DELTA OIL & GAS,
INC.
  EXHIBIT INDEX
 TO
 2008 ANNUAL REPORT ON
FORM 10-K
 
 Exhibit
                Number
              Description
              Incorporated by Reference
    to:
              Filed
      Herewith3.1
              Amended
      and Restated Articles of Incorporation of Delta.
              Exhibit
      3 of Delta’s Form SB-2 filed on February 13, 20023.2
              By-laws
      of Delta, as amended.
              Exhibit
      3 of Delta’s Form SB-2 filed on February 13, 2002.10.1
              Letter
      Agreement by and between Delta and Ranken Energy Corporation dated
      September 10, 2007.
              Exhibit
      10.1 of Delta’s Form 10QSB dated November 7, 2007, File
      No.  000-5200110.2
              Assignment
      Agreement by and between Delta and Production Specialties Company dated
      November 8, 2006.
              Exhibit
      10.1 of Delta’s Form 10QSB dated November 20, 2006, File No.
      000-52001.10.3
              Assignment
      Agreement by and between Brinx Resources Ltd. and Delta.
              Exhibit
      10.1 of Delta’s Form 8-K dated June 2, 2006, File No.
      000-5200.10.4
              Drilling
      Program Agreement by and between Griffin & Griffin Exploration, L.L.C.
      and 0743608 B.C. Ltd. dated December 21, 2005.
              Exhibit
      10.1 of Delta’s Form 8-K dated February 27, 2006, File No.
      333-82636.10.5
              Strachan
      Participation and Farmout Agreement by and between Odin Capital Inc. and
      Delta dated September 23, 2005.
              Exhibit
      10.1 of Delta’s Form 8-K dated September 29, 2005, File No.
      333-82636.10.6
              Farmout
      Agreement by and between Production Specialties Company and Delta dated
      May 25, 2005.
              Exhibit
      10.1 of Delta’s Form 8-K dated September 29, 2005, File No.
      333-82636.10.7
              Participation
      Proposal by and between Win Energy Corporation and Delta dated November
      26, 2004
              Exhibit
      10.1 of Delta’s Form 8-K dated February 15, 2005, File No.
      333-82636.10.8
              Assignment
      Agreement with 0743608 B.C. Ltd dated February 21, 2006.
              Exhibit
      10.2 of Delta’s Form 8-K dated February 27, 2006, File No.
      333-8263610.9
              Participation
      Proposal with Win Energy Corporation dated November 26,
    2004.
              Exhibit
      10.2 of Delta’s Form 8-K dated February 15, 2005, File No.
      333-82636.10.10
              Letter
      Agreement by and between Win Energy Corporation and Delta dated December
      26, 2004.
              Exhibit
      10.3 of Delta’s Form 8-K dated February 15, 2005, File No.
      333-82636.10.11
              Farmout
      and Option Participation Letter Agreement by and between Petrex Energy
      Ltd., Texalta Petroleum Ltd., Odin Capital Inc., Delta Oil and Gas
      (Canada) Inc., Last Mountain Investments Inc., 264646 Alberta Ltd., LL
      & S Holdings Ltd. and 0743608 B.C. Ltd. dated April 10,
      2006.
              Exhibit
      10.7 of Delta’s Form 10SB12G dated May 12, 2006, File No.
      000-52001.10.12
              Consulting
      Agreement by and between Delta and Last Mountain Investments, Inc. dated
      March 1, 2006.
              Exhibit
      10.10 of Delta’s Form 10SB12G/A dated February 27, 2007, File No.
      000-52001.10.13
              Consulting
      Agreement by and between Delta and Hurricane Corporate Services Ltd. dated
      January 1, 2008.
              Exhibit
      10.13 of Delta's Registration Statement, Form S-4 filed January 23, 2009,
      File No. 000-52001.
  
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 Table of Contents
 
 
 Exhibit
                Number
              Description
              Incorporated by Reference
    to:
              Filed
      Herewith21.1
              Subsidiaries of Delta.
              
              X31.1
              Certificate of Douglas N. Bolen, Chief Executive Officer,
      pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.
              
              X31.2
              Certificate of Kulwant Sandher, Chief Finance Officer,
      pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.
              
              X32.1
              Certificate of Douglas N. Bolen, Chief Executive Officer,
      pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.
              
              X32.2
              Certificate of Kulwant Sandher, Chief Finance Officer,
      pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002
              
              X
 
 
 
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