NOTE 7: RELATED PARTY TRANSACTIONS

Preferred Stock

The 100 shares of Series A Preferred Stock, issued to an officer/director as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent forty percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.

During the three and nine months ended December 31, 2013 and 2012, the Company incurred $10,000 and $30,000 respectively in Series A preferred stock dividends, and paid $4,000 and $4,000 for the three months ended December 31, 2013 and 2012 respectively and $28,300 and  $13,000 for nine month periods ending December 31, 2013 and 2012.   As of December 31, 2013 and March 31, 2013, the accrued balance due Mr. Rodriguez was $42,450 and 40,750 respectively.

The holders of the Series A Preferred Stock have the right to convert each share of preferred stock into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, and warrants. In the event that the Company does not have an adequate number of shares of Common Stock authorized, upon a conversion request, only the maximum allowable number of shares of Series A preferred stock shall convert into Common Stock and the remaining shares of Series A preferred Stock shall convert upon lapse of the applicable restrictions.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2013 and 2012

(Unaudited)

Employment Agreements

KENT RODRIGUEZ

In 2009, Mr. Rodriguez, our President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2016, pursuant to which he was compensated at an annual rate of $120,000. On April 1, 2011 Mr. Rodriguez voluntarily reduced his compensation to an annual rate of $48,000, subject to an increase by the Company’s Board of Directors.  The Company charged to operations the amount of $12,000 and $36,000 for the three month and nine periods ended December 31, 2013 and 2012, of which $9,700 and $29,500 was paid to him during the three month and nine month periods ending December 31, 2013, and $10,448 and $32,148 during the three and nine month periods ending December 31, 2012 respectively.  As of December 31, 2013, and March 31, 2013, the balances of accrued and unpaid salaries were $208,717 and $202,217.