13.	STOCK OPTIONS

On November 28, 2005, the Board of Deep Well adopted the Deep Well Oil & Gas, Inc. Stock Option Plan (the “Plan”). The Plan was approved by the majority of shareholders at the February 24, 2010 general meeting of shareholders. The Plan is administered by the Board, permits options to acquire shares of the Company’s common stock (the “Common Shares”) to be granted to directors, senior officers, and employees of the Company and its subsidiaries, as well as certain consultants and other persons providing services to the Company or its subsidiaries.

The maximum number of shares, which may be reserved for issuance under the Plan, may not exceed 10% of the Company’s issued and outstanding Common Shares, subject to adjustment as contemplated by the Plan. The aggregate number of Common Shares with respect to which options may be vested to any one person (together with their associates) in any one year, together with all other incentive plans of the Company, may not exceed 500,000 Common Shares, and in total may not exceed 2% of the total number of Common Shares outstanding.

On November 28, 2010, all of the stock options granted to Dr. Horst A. Schmid, Portwest Investments Ltd., Mr. Curtis James Sparrow, Concorde Consulting, Trebax Projects Ltd., Mr. Cyrus Spaulding, Mr. Donald E.H. Jones and Mr. Moses Ling, expired unexercised. In total 2,727,500 options granted to directors and former directors and their controlled companies expired and no further options were granted.

On March 23, 2011, the Board approved to decrease the exercise price of the stock options to purchase 36,000 shares of common stock of Deep Well previously granted to an employee of the Company on September 20, 2007. The exercise price of the stock option is reduced from $0.47 per common share to $0.14 per common share, effective immediately. All other terms and conditions of the option agreement will remain unchanged. The options expire on September 20, 2012.

On March 23, 2011, the Company granted its directors, Dr. Horst A. Schmid, Mr. Said Arrata, Mr. Satya Das, Mr. David Roff, Mr. Curtis Sparrow and Mr. Malik Youyou, options to purchase 450,000 shares each of common stock at an exercise price of $0.14 per common share, 150,000 vesting immediately and the remaining vesting one-third on March 23, 2012, and one-third on March 23, 2013, with a five-year life.

For the period ended September 30, 2011, the Company recorded share based compensation expense related to stock options in the amount of $199,081 (September 30, 2010 - $nil) as 2,700,000 new stock options have been issued. No options were exercised during the year ended September 30, 2011, therefore, the intrinsic value of the options exercised during the year ended September 30, 2011 is $nil. As of September 30, 2011, there was remaining unrecognized compensation cost of $134,615 related to the non-vested portion of these unit option awards. Compensation expense is based upon straight-line depreciation of the grant-date fair value over the vesting period of the underlying unit option.

	Shares Underlying Options Outstanding						Shares Underlying Options Exercisable
Range of Exercise Prices	Shares Underlying Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Shares Underlying Options Exercisable		Weighted Average Exercise Price
$0.47 at September 30, 2011		240,000		0.97	$	0.47		240,000	$	0.47
$0.14 at September 30, 2011		2,736,000		4.68		0.14		936,000		0.14
$0.71 at September 30, 2011		375,000		0.07		0.71		375,000		0.71

		3,351,000		3.90	$	0.23		1,551,000	$	0.23

The aggregate intrinsic value of exercisable options as of September 30, 2011, was $nil (September 30, 2010 – $nil).

The following is a summary of stock option activity as at September 30, 2011:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Fair Market Value
Balance, September 30, 2010		3,378,500		$	0.69	$	0.27
Options forfeited November 28, 2010		(2,727,500	)		0.71		0.27
Options issued March 23, 2011		2,700,000			0.14		0.12
Balance, September 30, 2011		3,351,000		$	0.23	$	0.15
Exercisable, September 30, 2011		3,351,000		$	0.23	$	0.15

The following table summarizes the activity of the Company’s non-vested stock options since September 30, 2009:

	Non-Vested Options
	Number of Shares			Weighted Average Exercise Price
Non-vested at September 30, 2010 and 2009		–		$	–
Options issued March 23, 2011		2,700,000			0.14
Options vested at September 30, 2011		(900,000	)		0.14

Non-vested at September 30, 2011		1,800,000		$	0.14

Measurement Uncertainty

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Stock options and the warrants attached to the units issued by the Company are non-transferable. Option pricing models require the input of subjective assumptions including expected share price volatility. The fair value estimate can vary materially as a result of changes in the assumptions. The following assumptions are used in the Black-Scholes option-pricing model:

Expected Term – Expected term of 5 years represents the period the Company’s stock-based awards are expected to be outstanding.

Expected Volatility – Expected volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual and non-representative stock price activity not expected to recur. The expected volatility used was 116%.

Expected Dividend – The Black-Scholes valuation model calls for a single expected dividend yield as an input. The company currently pays no dividends and do not expect to pay dividends in the foreseeable future.

Risk-Free Interest rate – The Company bases the risk-free rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The risk-free rate used was 2.07%.