DIATREME RESOURCES LIMITED — Annual Report 2011

May 1, 2011

2010 Annual Report

CONTENTS

Chairman's Review	2
Corporate Review	3
Operations Report	4
Tenement Schedule	14
Corporate Governance Statement	16
Financial Report	28
Directors' Report	29
Auditor's Independence Declaration	36
Directors' Declaration	66
Independent Auditor's Report	67
Shareholder Information	69

CORPORATE DIRECTORY

Company

Diatreme Resources Limited ABN 33 061 267 061 and subsidiaries:

• • Lost Sands Pty Ltd
• • Regional Exploration Management Pty Ltd

• Chalcophile Resources Pty Ltd

Directors

Anthony John Fawdon David Hugh Hall George Henry White Andrew Tsang

Corporate Secretary

Leni Pia Stanley

Registered and Principle Office

Level 2 87 Wickham Terrace Spring Hill Queensland 4000 Telephone: 07 3832 5666 Facsimilie: 07 3832 5300 Email: manager@diatreme.com.au Website: www.diatreme.com.au Postal Address: PO Box 10288 Brisbane Adelaide Street Queensland 4000

Share Registry

LINK MARKET SERVICES ANZ Building Level 15, 324 Queen Street Brisbane Queensland 4000 Telephone (Call Centre): 1300 554 474 02 8280 7454 Facsimilie: 02 9287 0303 Email:registrars@linkmarketservices.com.au Postal Address: Locked Bag A14 Sydney South NSW 1235

Auditor

BDO Audit (QLD) Pty Ltd Level 18, 300 Queen Street Brisbane Queensland 4000

Dear Shareholder

During 2010, a formative year for the Company and its shareholders, steady progress has been achieved in the conduct of pre-feasibility studies over the zircon rich Cyclone Heavy Mineral ("HM") Deposit in Western Australia. Work has included infill drilling over the main resource area, further strengthening confidence in the published JORC resource, and bulk sampling programs for metallurgical testing. Exploration in the vicinity of Cyclone using the Company's own aircore drill rig has also identified a further HM resource, known as the Zephyr Deposit, approximately 3km to the east of the main resource.

2010 Annual Report 2Chairman'sChairman's Review 2010 With improving zircon and other HM prices during the year and the shortening of supply, Diatreme has embarked upon a development strategy for Cyclone. As part of this process, the Company entered into a non-binding Memorandum of Understanding ("MOU") in August with BaoTi Group Ltd ("BaoTi"), a large Chinese manufacturing company located in Baoji, Central China, to undertake equity investment in Diatreme and to seek to jointly develop the Cyclone Project. To date, BaoTi have been conducting due diligence, most recently including a visit to Australia to familiarise themselves with the Company and the project "on the ground".

Diatreme and BaoTi are now entering into negotiations for a Heads of Agreement to mine and process HM product, with such agreement to form the basis for a full agreement between the parties. The latter agreement is expected to be subject to both Chinese government and Australian government approvals to proceed.

Although the Company has maintained its main emphasis on the mineral sands sector, significant progress was made during the year in identifying highly prospective metallic targets for copper, gold and base metals in the Clermont, Anabama and Bellfield project areas. In particular, the Rosevale Porphyry Corridor and the Palm Trees Gold prospects within the Clermont Project, Queensland are providing encouraging results. Diatreme is assessing future funding requirements for the metalliferous projects to advance them in parallel with the mineral sands projects.

Early in 2011, the Company successfully completed a fully underwritten rights issue to shareholders raising \$7.1million. The rights issue gave opportunity to shareholders to increase their ordinary equity in Diatreme, whilst at the same time being provided with options to increase their equity further before September 2013. The funds raised are chiefly being directed to advancement of the Cyclone Project toward a full feasibility study to mine.

Further exploration to be conducted through 2011 will aim at locating and increasing the HM resource base in the region around Cyclone. Any further resources that increase the current proposed 10 year mining life of the Cyclone Deposit are expected to help make mining operations more efficient, with a lower cost base, through economies of scale.

The efforts of our dedicated staff and personnel over the past few years are now paying off with international interest now well established in Diatreme's Cyclone HM Deposit. The mineral sands industry is currently enjoying a resurgence with investors and advisors now turning their attention toward efficient explorers and emerging producers. Copper, gold and base metal prices are also performing strongly. The Board is encouraged by these events as it continues to seek the advancement of the Company's prospects toward future production.

Tony Fawdon Executive Chairman/CEO

Corporate Review

COMPANY BACKGROUND

Diatreme Resources Limited (Diatreme) was incorporated in 1993. As an Australian based, ASX listed, diversified mineral explorer with significant Australian projects targeting heavy mineral sands, copper, base metals and gold, the Company currently explores across four states; Western Australia, South Australia Queensland and Victoria.

CORPORATE PHILOSOPHY

Diatreme seeks to increase Shareholder value by the procurement of, and exploration over, highly targeted exploration holdings within established or newly emerging mineral belts, and the advancement of its Cyclone HM Deposit through feasibility and ultimately mining.

The Company aims to:

• Increase its current mineral sands resource inventory as it continues pre-feasibility studies over the HM Cyclone Deposit.

• Continue to explore and seek funding opportunities over its Queensland and South Australian copper, base metal and gold projects.

• Organically generate and grow new prospects in-house and successfully explore them resulting in the identification of new mineral resources.

Project Location Map

Operations Report

INTRODUCTION

During 2010, Diatreme Resources Limited (Diatreme) has focussed its Australian exploration and development activities on its mineral sand prospects in the emerging heavy mineral sands production province known as the Eucla Basin. Particular emphasis is being placed upon the future direction of the Cyclone Zircon Project in WesternAustralia, where Diatreme is currently undertaking pre-feasibility studies and over which has recently released an independent review (detailed below).

Exploratory drilling for mineral sands was conducted in both Western and South Australia and ground exploration and diamond drilling undertaken over the Clermont Copper Project in Queensland.

The Company is awaiting the grant of a number of tenements throughout Australia to allow it to further continue its efforts to locating both mineral sand and metalliferous mineralisation and prospects.

MINERAL SAND PROJECTS

Diatreme remains focussed on exploration within the highly prospective Eucla Basin in both South and Western Australia. In 2007 the Company discovered the Cyclone (Heavy Mineral) Deposit situated in the northern part of the Eucla Basin on the traditional lands of the Spinifex People. Significant exploration and resource development efforts have since been undertaken with the aim of taking the project through to mining. Infill and exploration drilling over Cyclone has resulted in a significant resource upgrade, discovery of further mineralisation within the system, and allowed development of conceptual mining options.

Additional exploration was also undertaken within the immediate Cyclone area (Wanna Lakes, Wanna East, and Wanna South) along with other Eucla Basin targets (Jubilee Lakes North, Jungooner, Marble Gum and Serpentine Lake in Western Australia and the Ooldea Range in South Australia).

Heavy mineral sands were discovered north of Cyclone within the Jungooner and Marble Gum tenements, confirming the HM potential of the Barton Shoreline feature in Western Australia. Mineralised beach sands within the Ooldea Range near Maralinga, South Australia, were confirmed during follow-up of reconnaissance drill results.

Within the Eucla Basin, Diatreme continues to actively conduct both "greenfields" and "brown-fields" exploration for heavy mineral sands. Drilling statistics for the year are shown in Table 1 below. The Company is confident that, with further drilling, significant mineralisation will be discovered in addition to the existing mineralisation associated with Cyclone.

State	Tenement Number Tenement Name		Drill holes	Total Metres
SA	EL3614	Willy Willy	190	6,039
SA	EL3615	Oak Valley	72	4,159
SA	EL3616	Maralinga	72	4,703
	SOUTH AUSTRALIA - TOTAL	3,341	4,900
WA	EL69/1919	Shell Lakes	2	79
WA	EL69/1920	Wanna Lakes	109	4,411
WA	EL69/2222	Jubilee Lakes	10	387
WA	EL69/2425	Wanna South	25	1,008
WA	EL69/2426	Serpentine Lakes	55	1,571
WA	EL69/2427	Marble Gum	58	1,841
WA	EL69/2428	Jungooner	25	954
WA	EL69/2429	Willeri	45	2,363
	WESTERN AUSTRALIA - TOTAL		4,091	5,137
GRAND TOTAL			743	30,037

Table 1: Drilling Statistics - Eucla Basin Project 2010

Eucla Basin Project – Western Australia Wanna Lakes (E69/1920) - Cyclone Deposit

A scoping study on the Cyclone Deposit completed in February 2010 showed the potential for a profitable mine producing about 280,000 tonnes of concentrate annually at a mining rate of 9 million tonnes ore per annum. The study forecast an annual average profit of \$50 million for 10 years with projected capital expenditure of \$311 million.

In April, Diatreme announced the appointment of a highly experienced mineral sands project manager to lead the study team for the prefeasibility study ("PFS"). The PFS is focussing on developing capital and operating cost information and revenue forecasts to a prefeasibility standard. This study involves additional work on mineralogy, metallurgy, and resources to more clearly define quantities of mineral product, particularly the key product zircon. Preliminary designs and arrangements for the mine plan, wet process facility, and infrastructure along with options for siting a mineral separation plant ("MSP") are being investigated. High priority work includes identifying a suitable water source

for the mining operation and evaluating alternative mineral concentrate transport options including the road transport link between the mine and rail infrastructure. A preliminary environmental study will be undertaken to obtain initial field data on flora and fauna, and develop an understanding of potential water impacts.

PFS work to date has concentrated on a revision of the resource statement based on a review of the geology and additional analysis of mineralogy and mineral products. The Cyclone JORC resource now stands at 132 million tonnes ("Mt") at 2.3% heavy minerals ("HM") at a 1% HM cut-off grade, containing 3.1Mt HM (within Diatreme tenements), of which >40% is classified as Measured. Refer Table 2 for details.

Category	HM		Percentage in HM
	cut off %	Material Mt	HM %	HM Mt	Slimes %	Oversize %	Zircon %	Rutile %	HiTi %	Alt Ilm %	Zircon Kt	Rutile Kt
MEASURED	2.0	29.5	3.4	1.02	3.7	4.4	31.4	11.9	17.7	10.2	319	121
MEASURED	1.5	40.1	3.0	1.20	4.1	4.8	31.7	12.3	17.4	10.1	381	147
MEASURED	1.0	49.7	2.7	1.32	4.5	5.3	32.2	12.7	16.8	10.0	426	169
INDICATED	2.0	30.9	3.2	0.98	3.7	5.0	32.5	13.1	17.5	12.6	319	129
INDICATED	1.5	48.8	2.6	1.29	4.0	5.5	32.3	13.0	17.8	12.9	417	168
INDICATED	1.0	72.2	2.2	1.59	4.2	6.0	32.3	12.7	18.0	12.8	513	202
INFERRED	2.0	2.2	2.4	0.05	2.9	8.4	32.7	12.8	21.5	19.5	17	7
INFERRED	1.5	6.3	2.0	0.12	3.3	9.0	33.3	11.3	22.8	21.3	41	14
INFERRED	1.0	10.2	1.7	0.17	3.6	8.9	33.6	10.9	23.0	21.4	58	19
TOTAL	2.0	62.6	3.3	2.05	3.7	4.8	32.0	12.5	17.8	11.7	655	257
TOTAL	1.5	95.1	2.7	2.61	4.0	5.5	32.1	12.6	17.9	12.3	840	329
TOTAL	1.0	132.1	2.3	3.08	4.3	5.9	32.4	12.6	17.9	12.4	998	388

Table 2: Cyclone Resource Estimate

Table Notes

A constant SG of 1.7 has been used to derive material tonnes Slimes refers to material <53um Oversize refers to material >2mm Mineral Assemblage derived from QEMSCAN analysis HiTi - Ti-Fe oxides (HiTi and leucoxene) containing 70 - 95% TiO2 Altered Ilmenite - Ti-Fe oxides containing 55 - 70% TiO2

A 500kg bulk sample was provided to an Australian laboratory to help define the characteristics of mineralisation and potential products from Cyclone. Zircon reported 98% recovery to concentrate from bulk sample through conventional "rougher" and "scavenger" spiral circuits. As zircon comprises more than 75% of the projected product value this high recovery represents a significant step in confirming the commercial potential of the project. Overall, TiO2 (rutile, leucoxene, HiTi and altered ilmenite) recovery to concentrate was 74%. The lower recovery of total TiO2 in comparison to zircon is due to rejection of light, low value, TiO2 bearing minerals to spiral tails and hence production of a higher value TiO2 concentrate.

HM concentrate has been processed through laboratory wet and dry separation circuits including a hot acid leach process to successfully produce a 5kg sample of final zircon product. A premium specification product can be expected on the basis of the product assays, and most importantly the concentrate exhibits low radioactivity levels of <350ppm U+Th - very low on comparison to other mineral sand mining operations.

Preliminary mine planning has commenced with development of a model to optimise the mining limits within the resource and minimise low grade dilution. A mining reserve is being developed as more detailed information on mine services, and capital and operating costs are established. Conceptual pit designs for Cyclone suggest around 70% conversion of resources to reserves, with a total strip ratio slightly under 1:1. The nature of the Cyclone mineralisation is favourable for bulk mining methods, as mineralisation occurs in unconsolidated sands over significant widths and thickness.

The mining method being used in the current evaluation is a standard bulldozer and trap dry mining system, with a mining rate currently set at 1250tph. Other dry mining methods are being investigated for higher mining rates and lower unit costs. There is also potential for inclusion of part of the low grade mineralised overburden to be incorporated into the mining plan.

The current processing strategy is to produce a HM concentrate at the mine site and transport such concentrate to a MSP close to a port where zircon, rutile, and other titanium mineral products would be produced for export. A combination of road and rail freight is being investigated to transport concentrate from mine to port options in Western and South Australia. There is also potential for an offshore MSP in a country seeking to secure a large portion of product offtake.

Infill drilling over the Cyclone Deposit was carried out late in the year collecting further samples for bulk sample testing to be undertaken in 2011 as part of the PFS. The samples will also be used to confirm the grade and continuity of the deposit in the likely start-up area for mining.

In August 2010, Diatreme signed a non-binding Memorandum of Understanding ("MOU") with BaoTi Group Ltd ("BaoTi") based in Shaanxi Province, central China. As a major end user of heavy mineral products, the arrangement is seen to provide an opportunity for the timely development of the Cyclone HM Project.

In September 2010, Diatreme signed an MOU with Image Resources NL (Image) to co-operate in respect of the Company's Cyclone HM Deposit and Image's HM Cyclone Extended Deposit which abut each other in Western Australia. An opportunity to jointly develop the resources could develop between the two companies.

Independent Review of Cyclone Project

An Independent Technical Review of the Cyclone HM Deposit and Valuation Report prepared by Terrence Willsteed & Associates ("TWA"), prepared in January 2011, gave important outcomes including:

• • A suggested current value range for the Cyclone Project falling between A\$142 Million and A\$170 Million, with the most likely value being A\$156 Million (this valuation would be adjusted as technical and economic criteria are further confirmed and project studies proceed to acceptable feasibility study levels).
• • Comparable values of other similar mineral sand projects were provided.
• • A financial analysis of the Cyclone Project indicated a good return on investment:

• Capital investment including predevelopment A\$201.5 million

• Average annual sales revenue A\$137 million

• Average annual cash operating cost A\$67 million

• Average annual sustaining capital cost A\$2 million

• Average annual tax payable A\$14 million

• Average annual net operating cash flow A\$54 million

• • The Cyclone Project net cash flow after tax (including CAPEX) is estimated to be \$336 Million, with capital repaid in approximately 3.5 years of operations.

Product price outlooks for 2014 (US\$ per tonne) are zircon \$1,200, rutile \$750, HiTi \$350 and altered ilmenite \$190. Zircon and titanium mineral prices are expected to escalate at a higher rate than the Cyclone Project operating costs, but this assumption has not been included in TWA's financial model.

This highly encouraging report reflects well on the contribution that development of the Cyclone Deposit could play in the global mineral sands market.

Wanna East (E69/2408)

A maiden JORC resource estimate was announced for the Zephyr HM Deposit in the Wanna East tenement situated 2km to the east of the Cyclone Deposit. Zephyr is estimated to contain 106 Mt at 1.5% HM (at a 1% HM cut-off grade) and is classified as an Inferred Resource (Table 3). The mineralisation exhibits very low slimes (clay) and oversize contents, but has up to 30m of overburden. The mineralogy of the Zephyr HM is different from that observed at Cyclone, with the HM assemblage dominated by Leucoxene (HiTi) and Altered Ilmenite, with minor Zircon.

Table 3: Zephyr Resource Estimate

Category	HM cut-off	Material	HM	HM	Slimes	Oversize
	%	Mt	%	Mt	%	%
INFERRED	1.0	106	1.5	1.54	3.1	2.4

Table Notes

A constant SG of 1.7 has been used to derive material tonnes Slimes refers to material <53um Oversize refers to material >2mm

Cyclone Deposit barrier beach system.

Mineralisation within Zephyr is low grade and relatively uniform, and is believed to have formed in a low energy sedimentary environment, interpreted as a gently sloping beach within a large estuary/lagoon developed behind the

The announcement of the Zephyr resource demonstrated the Company's exploration success within the general Cyclone area and indicated there is potential for further satellite deposits to be located in close proximity to Cyclone. While Cyclone remains the focus of the Company's attention, additional HM resources in the area strengthen the long term potential of the project. Further exploration will be carried out during 2011 to follow-up areas of anomalous mineralisation within the Cyclone area that may host additional satellite resources.

Regional Exploration

Drilling commenced in August 2010 over regional tenements, following on from previous drilling in 2009. The reconnaissance, wide spaced, drilling has been successful in defining a number of beaches along the interpreted Barton shoreline system and beach ridge systems within the general Wanna area behind the Barton shoreline. These will be explored further in 2011 to assess their economic potential.

In areas deemed unprospective, where exploration drilling failed to locate prospective sand horizons or only low grade/deep mineral intercepts, tenement surrenders and reductions were effected. The Shell Lakes, Jubilee Lakes North and Willeri tenements (E69/1919, 2222 & 2429 respectively) were surrendered with other regional tenements being reduced in size. This action allows the Company to focus on the higher priority Wanna and Cyclone areas during 2011.

Directly to the south of the Wanna tenements Diatreme have applied for five exploration licences along the Ooldea Shoreline (the shoreline which hosts the Jacinth/Ambrosia deposits to the southeast). Although these tenements fall within a nature conservation reserve and are yet to be granted, HM prospectivity is considered very high due to the presence of 140km of potential multiple beach strand systems along the interpreted shoreline feature.

Eucla Basin Project – South Australia Ooldea Range

Exploration drilling was undertaken over Diatreme's three tenements covering the Ooldea Range (ELs3614, 3615 and 3616). Thick sequences of palaeo beach sands were intersected but only minor mineralisation was encountered.

The Company's exploration programs have confirmed the Ooldea Shoreline as being prospective for mineral sands, but suggest mineralisation may be restricted to local trap sites such as embayments and channels. The southern area of the Ooldea Range within the tenements appears to be the most strongly mineralised area. The digital elevation model ("DEM") over this area reveals what appears to be normal faulting or slumping on the seaward side of the Ooldea Range, and this may be significant for formation of HM deposits due to the correlation between an oversteepened beach and concentration of heavy minerals.

The current drill hole spacing along the strike of the Ooldea Range is quite broad and potential remains for HM strand mineralisation to occur between current drill traverses. Several features have been interpreted from the DEM that will be followed up during 2011.

Arckaringa Project – South Australia

During 2009, favourable stratigraphic units for the development of heavy mineral strands were identified in the western group of tenements, on the margin of a topographic high which is recognised as a basement high (and a potential barrier system) along which mineralisation may occur. However, due to government regulations regarding access to the Tallaringa Conservation Park and Woomera Prohibited Area, Diatreme was unable to carry out further exploration during 2010. A follow-up drilling program is scheduled for mid-2011.

Interpretation of drilling results from the easternArckaringa tenements has seen EL's 4110, 4111 and 4114 relinquished together with the eastern portions of EL's 4112 and 4113. These areas were deemed unprospective for HM sand developments.

Fowlers North Project - South Australia

In 2009, Diatreme entered into a joint venture with Ellemby Resources Pty Ltd, holders of EL 4170 located some 125km west of Ceduna, South Australia. The project was deemed prospective for both Gawler Craton base metals and Eucla Basin heavy mineral sands. However, with the completion of drilling in late 2009 and the finalisation of assay results, the project was downgraded in its potential to host economic deposits and Diatreme withdrew in early 2010.

Other Mineral Sand Project Areas

Throughout Australia, Diatreme holds exploration tenement applications over areas prospective for mineral sands at Shark Bay (WA), Casterton (VIC) and Cape Bedford (QLD).

METALLIFEROUS PROJECTS

Clermont Copper Project

The Clermont Project is situated over an historic gold and copper mineral belt in central Queensland. Diatreme continues to conduct methodical exploration in the region targetting:

• a) Rosevale Porphyry Corridor (RPC) for copper, gold and molybdenum.
• b) Mesothermal gold (vein) mineralisation (Palm Trees Prospect).
• c) Regional VTEM and Banded Iron Formation (BIF) targets.
• d) Serpentinite altered greenstones for nickel mineralisation.

The source of significant gold production in the past within the region remains in question. Diatreme believes in part that sources are to be found in mineralised porphyry and undiscovered multiple quartz veining systems for which it is exploring.

a) Rosevale Porphyry Corridor ("RPC")

The RPC was originally identified by Diatreme in 2008 and in recent years has been the focus of the Company's attention in this area. Recent exploration has included:

• • A 3D offset pole-dipole induced polarization ("3DIP") survey resulting in the identification of a number of deep seated geophysical targets.
• • Deep diamond core drilling (totalling 6,300m) within the 7km x 3km corridor, identifying porphyry related copper/ molybdenum and breccia hosted silver/lead/zinc/gold mineralisation.
• • A combination of mapping, rock chip and soil sampling, RC, RAB and diamond drilling, structural analyses, and chronological age dating to help gain an understanding of the complex system.

Exploration has been successful in directly discovering mineralisation at a number of individual prospects within the RPC area and many prospects require further drill testing. There exists good potential for economic Cu-Mo porphyry mineralisation, particularly around Red Dog Prospect.

At the Red Dog Prospect, diamond drill hole Reddog 001 yielded a broad zone of mineralisation over 81m from 46m depth assaying 0.25% Cu, 70ppm Mo and 1.8g/t Ag. Higher grade intersections were also identified in the same drill hole; 3m @ 1.33% Cu, 7g/t Ag and 0.16g/t Au from 45m and 5m @ 1.33% Cu, 745ppm Mo, 6g/t Ag and 0.07g/t Au from 92m.

b) Palm Trees Prospect

In the latter part of 2009, Diatreme outlined an area with the potential to host multi-million ounce gold deposits within mesothermal reefs directly south of Clermont. To date exploration has included:

• • A Sub-Audio Magnetic ("SAM") Survey;
• • Reconnaissance mapping, incorporating general geophysical ground-truthing, reconnaissance rock chipping, magnetic susceptibility measurements, and structural analysis;
• • Field assessment and structural observations delineating the likely shoot control of high grade gold mineralisation as fold hinge hosted dilational quartz veins associated with a possible WNW-ESE shear zones;
• • Mapping which shows that these highly prospective WNW-ESE shear zones may extend to the NW and SE;
• • The identification of Fuchsite (chromium sericite) which is characteristic of mesothermal orogenic lode gold deposits.

Reconnaissance rock chip samples at Palm Trees have returned anomalous assays of between 12.7 to 51.4 g/t gold and 1.2 to 3.6 g/t silver, with elevated lead and zinc. Previous drilling in the area by Straits Resources Ltd intersected highly anomalous gold intercepts of:

• • 10m @ 24.5g/t Au from 17m in hole MFRC19 (including 1m at 233.5 g/t Au from 21m),
• • 3m @ 24.1g/t Au from 33m in hole MFRC6.

The Palm Trees Prospect remains highly prospective having the potential to host multi-million ounce gold deposits.

c) Regional VTEM and Banded Iron Formation (BIF) targets

With a large database of previous VTEM survey information covering much of the project, Diatreme is continuing its interpretation work over areas of banded iron formation, particularly in respect to the identification of zones of potential major stockworking and mesothermal reef development. Many targets that require future drill testing have been outlined by the VTEM survey.

d) Nickel Prospects

Diatreme discovered highly anomalous nickel (over 0.1% Ni) and chromium within the Palm Trees Prospect, most likely related to serpentinite/altered greenstones. This highlights potential for nickel mineralisation both in Palm Trees and the Excalibur region to the west of the RPC. Given the amount of known greenstone it is conceivable that economic Ni concentrations may exist within the latter region.

Anabama Copper Project

TheAnabama Project is located within a region of SouthAustralia highly prospective for copper and gold mineralisation. Copper mineralisation is present within several steep dipping structures at the Anabama Mine Prospect. The width of the mineralised structural corridor is at least 200m wide and contains several sub-parallel mineralised vein breccias and copper veined schists.

Previous exploration drilling by Diatreme at the Anabama Mine Prospect has encountered copper mineralisation over a strike length of 600m, confirming and extending results achieved by previous explorers. In addition, RAB drilling has confirmed that strongly anomalous bedrock copper geochemistry extends over a 3km strike length. Deeper drilling will be required to test the primary copper mineralisation comprehensively.

No drilling was conducted during the year. However, Diatreme drill results are being integrated with drilling by previous explorers, such that all geological and assay information can be reviewed in cross section and plan. Ground truthing of the geological model along with structural analyses is necessary before further drill testing is undertaken.

Bellfield Base Metal Project

Within this greenfields project, located in north Queensland, new tenements have been applied for in the eastern, more geologically exposed areas than those covered by thick Mesozoic sequences in the west, portions of which were relinquished due to a downgrade in prospectivity. This action was taken as a result of previous reconnaissance work which identified two locations of primary interest – the Gilbert River Breccia and the Twelve Mile Breccia prospects. However, government delays in the granting of the new tenements has stalled the ability of Diatreme to conduct further fieldwork.

Tick Hill Gold Project

No activities were undertaken over the project during the year. However, the process of finalising the transfer of the three mining leases to Diatreme is underway. Joint venture funding options are being addressed for further drilling and exploration over this prospective former mine site.

Dooloo Creek Gold-Copper Project

Located in southern Queensland, 60km north of Monto, this project has been heavily explored by Diatreme in previous years. However, following an assessment of the extensive database and all exploration conducted to date, the Company made the decision to withdraw from further participation.

TERM DEFINITIONS

Text term	Definition
EL / EPM	Exploration Licence / Exploration Permit for Minerals
g/t	grams per tonne
HM	Heavy minerals such as Zircon, Rutile, Ilmenite and Leucoxene
Km	kilometre
m	metre
ML	Mining Lease
ppm	parts per million
RAB	rotary air blast
RC	reverse circulation

COMPETENT PERSON STATEMENT

The information in this report, insofar as it relates to Exploration Results and Mineral Resources is based on information compiled by company personnel under the supervision of Mr David Jelley, who is a full time employee of Diatreme Resources Limited and a Member of the Australasian Institute of Mining and Metallurgy. Mr Jelley has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has undertaken to qualify as a Competent Person as defined in the 2004 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves'. Mr Jelley consents to the inclusion in the report of the matters based on the information in the form and context in which it appears.

Company Field Vehicles at Ceduna Base

Tenement Schedule

Current interests in tenements held by Diatreme Resources Limited and its subsidiaries as at 19 April 2011.

STATE	PROJECT	TENEMENT NAME	TENEMENT ID	AREA	HOLDER	%
QLD	Bellfield	Bellfield	EPM 12868	62 km2	CHAL	100
		Gilbert River	EPM 12888	392 km2	CHAL	100
		Bellfield Extended	EPM 18213	113 km2	CHAL	100
		Bellfield East	EPM 18262	13 km2	CHAL	100
		Bellfield North	EPM 18353	321 km2	CHAL	100
		Conical Hill	EPM 18547	226 km2	CHAL	100
		Mt Hogan	EPM (A) 18609	161 km2	CHAL	100
		Gilbert River Station	EPM (A) 18612	126 km2	CHAL	100
		Hanns Table	EPM (A) 19124	488 km2	CHAL	100
QLD	Cape Bedford	Cape Bedford	EPM (A) 17795	552 km2	DRX	100
QLD	Clermont	Clermont	EPM 17968	864 km2	CHAL	100
		Parapet	EPM (A) 19189	315 km2	CHAL	100
QLD	Ironhurst	Ironhurst	EPM 12976	6 km2	CHAL	100
QLD	Tick Hill	Tick Hill	ML 7094	130 ha	MIM*	100
		Tick Hill	ML 7096	130 ha	MIM*	100
		Tick Hill	ML 7097	130 ha	MIM*	100
SA	Anabama	Anabama	EL 3923	182 km2	CHAL	100
		Anabama North	EL 3548	104 km2	CHAL	100
SA	Arckaringa Basin	Oldburra	EL 4112	605 km2	DRX	100
		Marla	EL 4113	310 km2	DRX	100
		Mamalia	EL 4136	998 km2	DRX	100
		Ammaroodinna	EL 4137	712 km2	DRX	100
		Tarlina South	EL (A) 2007/418	865 km2	DRX	100
		Tarlina	EL (A) 2007/419	713 km2	DRX	100
		Wilari	EL (A) 2007/420	895 km2	DRX	100
		Narana	EL (A) 2007/428	999 km2	DRX	100
		Meramangye	EL (A) 2007/429	966 km2	DRX	100
		Ungoolya	EL (A) 2007/430	845 km2	DRX	100
		Leemurra	EL (A) 2007/431	885 km2	DRX	100
		Ammaroodinna 2	EL (A) 2008/123	246 km2	DRX	100
SA	Eucla Basin	Eucla 2	EL 3614	2235 km2	LSPL	100
		Eucla 3	EL 3615	2309 km2	LSPL	100
		Eucla 4	EL 3616	1443 km2	LSPL	100
		Eucla 5	EL (A) 2005/934	374 km2	LSPL	100
		Eucla 6	EL (A) 2005/935	1328 km2	LSPL	100
		Eucla 7	EL (A) 2005/936	924 km2	LSPL	100
		Eucla 8	EL (A) 2005/937	591 km2	LSPL	100
		Noorina 1	EL (A) 2007/391	770 km2	LSPL	100
		Noorina 2	EL (A) 2007/392	571 km2	LSPL	100
		Eucla 9	EL (A) 2008/235	972 km2	LSPL	100
		Eucla 10	EL (A) 2008/236	658 km2	LSPL	100
WA	Eucla Basin	Wanna Lakes	EL 69/1920	210 km2	LSPL	100
		Wanna Lakes East	EL 69/2408	210 km2	LSPL	100
		Wanna South	EL 69/2425	288 km2	LSPL	100
		Serpentine Lakes	EL 69/2426	178 km2	LSPL	100
		Marble Gum	EL 69/2427	295 km2	LSPL	100

STATE	PROJECT	TENEMENT NAME	TENEMENT ID	AREA	HOLDER	%
WA	Carnarvon Basin	Jungooner Ilma Boorabie West Boorabie East Forrest Lakes West Forrest Lakes East Shark Bay	EL 69/2428 EL (A) 69/2740 EL (A) 69/2741 EL (A) 69/2742 EL (A) 69/2743 EL (A) 69/2744 EL (A) 09/1518	193 km2 602 km2 602 km2 602 km2 602 km2 602 km2 575 km2	LSPL LSPL LSPL LSPL LSPL LSPL DRX	100 100 100 100 100 100 100
VIC	Casterton	Casterton	EL (A) 5034	158 km2	DRX	100

* Rights under the Tick Hill Option and Sale Agreement. An assignment request has been submitted to the Queensland Government to assign the 3 Tick Hill MLs 100% to DRX.

Abbreviations:

EPM (A)	Exploration Permit for Minerals (Application)
EL (A)	Exploration Licence (Application)
ML	Mining Lease
DRX	Diatreme Resources Limited
CHAL	Chalcophile Resources Pty Ltd
LSPL	Lost Sands Pty Ltd
MIM	Mount Isa Mines

Corporate Governance Statement

Corporate Governance practices that form the bases of a comprehensive system of control and accountability for the administration of Diatreme Resources Limited (the Company) have been adopted. The Board is committed to administering the policies and procedures with openness and integrity, pursuing the true spirit of corporate governance commensurate with the Company's needs.

To the extent they are applicable to the Company, the Board has adopted the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations. Although the Company's practices are largely consistent with the Council's principles, in certain cases they are not compliant. The following table sets out the Company's current position.

Compliant Non Compliant

PRINCIPLE
Principle 1: Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of board and management.
Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.
Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives
Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1.

The Board is responsible for the corporate governance of the Company.

The Board:

• • Guides and monitors the business and affairs of the Company on behalf of the Company's members to whom they are accountable.
• • Provides corporate strategy and guidance.
• • Reviews appropriate plans and annual budgets, including allocation of resources and capital expenditure.
• • Monitors financial performance.
• • Protects and enhances the Company's reputation.
• • Ensures compliance with regulatory and other requirements, and manages risks to the Company and its business.
• • Appoints the Managing Director and appraises his performance.

Day to day management of the Company's affairs and the implementation of the corporate strategy and policy is currently delegated to the two executive directors and to senior executives. The delegation policy is reviewed at least annually.

The Board has established the following guidelines to ensure the effective operation and discharge of its responsibilities.

The Board has adopted and discloses a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. This includes trade practices and fair dealing laws, consumer protection, respect for privacy, employment law, occupational health and safety, equal employment opportunity, superannuation and environment controls.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

PRINCIPLE
Principle 2: Structure the Board to add value Companies should have a board of effective composition, size and commitment to adequately discharge its responsibilities and duties.
Recommendation 2.1: A majority of the board should be independent directors.
Recommendation 2.2: The chair should be an independent director.
Recommendation 2.3: The roles of the chair and chief executive officer should not be exercised by the same individual.
Recommendation 2.4: The board should establish a nomination committee
Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.
Recommendation 2.6: Companies should provide the information indicated in the Guide to Reporting on Principle 2.

Board Structure

The Board currently comprises two executive directors and two non-executive directors. The Board, which meets at least quarterly, comprises directors with an appropriate blend of qualifications and expertise in:

• • Accounting and finance;
• • Marketing and sales;
• • Mineral exploration experience; and
• • CEO level experience.

The Chairperson (and Managing Director) is an executive director due to the small size of the Company, its specific needs, his particular skills set and experience and his history as founder of the Company.

The Board strives to ensure that all transactions between the Company and any related party are always conducted on arms length terms.

Where possible, the Board undertakes an annual review of the performance of the Board and the individual directors and examines the appropriate mix of skills to ensue maximum effectiveness and contribution to the results of the Company's business. Newly appointed directors are required to attend the appropriate induction.

Directors

The Company provides details of each director, such as their skills, experience and expertise relevant to their position, together with an explanation of any departures from the best practice recommendations.

In accordance with the Corporations Act and the Companys Constitution, the directors must advise the Board on an ongoing basis of any interests that might conflict with those of the Company. Where the Board believes that a conflict exists, the director concerned is not permitted to be present at the meeting when the relevant issue is considered and does not receive the relevant Board papers.

The code of conduct adopted by the Board promotes ethical and responsible decision-making and guides directors, key executives and designated officers as to:

• • the practices necessary to maintain confidence in the Company's integrity; and
• • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

Nomination Committee

The Board as a whole comprises the Nomination Committee. Responsibilities include Board succession as well as evaluation of directors' performance and competencies.

The Nomination Committee:

• Conducts an annual review of the membership of the Board having regard to the present and future perceived needs of the Company and makes recommendations as considered appropriate to be considered at a Board meeting.

• • Annually examines the independence status of each director.
• • Oversees the annual review and assessment program.

PRINCIPLE

Principle 3: Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making

Recommendation 3.1:

Companies should establish a code of conduct and disclose the code or a summary of the code as to:

• • the practices necessary to maintain confidence in the company's integrity.
• • the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders.
• • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

Recommendation 3.2:

Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy

Recommendation 3.3:

Companies should provide the information indicated in the Guide to reporting on Principle 3.

Code of Conduct

Taking into account the specific operations of the Company at this time, the Board approved the following Trading Policy on 29 December 2010 regarding the trading of its securities by directors, senior executives and employees. Company policy prohibits directors, senior executives and employees from dealing in Company shares at any time during the year whilst in possession of price sensitive information:

SECURITIES TRADING POLICY

1. Purpose

The purpose of this policy is to prevent Diatreme Resources Limited ("DRX") and its employees from breaching legislative prohibitions on insider trading by dealing in the Securities of DRX or other companies while in possession of inside information.

The policy outlines where DRX Employees may deal in DRX Securities, or the Securities of other companies.

The definition of Securities is complex but includes shares in a company and instruments such as exchange traded options and warrants.

2. Application

This Policy applies to:

• • DRX's Directors;
• • Employees of DRX and its related bodies corporate; and
• • Contractors and Consultants engaged by DRX who, in the course of their engagement with DRX, come in possession of inside information about DRX or another company.

In this policy, all of these people are referred to as DRX Employees.

Additional responsibilities apply to DRX Directors, Executive Officers and others identified

Aspects of this Policy also extend to associates of DRX Employees, such as family members or companies and other entities controlled by DRX Employees and their associates.

If you are unsure about how this policy applies to you or to any instrument you wish to deal in, you should seek assistance from the Company Secretary before you deal in the instrument.

3. The Law against Insider Trading

The Corporations Act prohibits a person from dealing, or procuring other persons to deal, in the Securities of a company if the person:

• • possesses inside information about the company; and
• • knows, or ought to reasonably know, that the information is inside information.

For DRX Employees, this prohibition applies to dealing in DRX Securities. It can also apply to dealing in Securities of another company where a DRX Employee is in possession of inside information about that other company.

3.1 What is inside information?

Inside information is information about a company that is not generally available and that, if it were to be made generally available, would reasonably be expected to have a material effect on the price or value of Securities issued by the company.

Information is generally available if:

• • it consists of readily observable matter; or
• • it has been publicly disclosed by an announcement to the ASX and a reasonable period for its dissemination among investors has elapsed; or
• • it consists of deductions, conclusions or inferences made or drawn from other generally available information.

DRX has legal obligations to immediately disclose to the market all information which would reasonably be expected to have a material effect on the price or value of its Securities. However, there are circumstances where information of this kind is not required to be disclosed, particularly if it relates to an incomplete proposal or to matters which are insufficiently definite to warrant disclosure.

Examples of information that might be inside information include information about:

• • DRX's financial performance, particularly in comparison with forecast results or market expectations;
• • a substantial transaction under consideration;
• • an actual or proposed change to capital structure, including a share issue or a debt refinancing;
• • a material claim or unexpected liability.

3.2 What is dealing in Securities?

You deal in Securities if you acquire or dispose of any economic interest in those Securities. This includes:

• • acquiring or disposing of the Securities
• • entering into an agreement to acquire or dispose of the Securities; or
• • granting, accepting, acquiring, disposing, exercising, or discharging an option or other right or obligation to acquire or dispose of the Securities.

3.3 Consequences of breaching prohibition against insider trading

Insider trading is a criminal offence and may attract substantial fines or imprisonment. Civil penalties may also apply, including the payment of compensation to any person who has suffered loss or damage because of insider trading.

DRX Employees who fail to adhere to the requirements of this Policy may face disciplinary action.

The Australian Securities Exchange (ASX), the Australian Securities and Investments Commission (ASIC), and external governance advisers all monitor DRX's compliance with this Policy. Breaches of the Policy by DRX Employees can have material adverse consequences for DRX's reputation with the ASX and ASIC, and with the investment community at large.

4. DRX's Policy Positions

4.1 Prohibited Dealing in DRX Securities

DRX Employees must not deal in DRX Securities at any time if they are in possession of inside information about DRX.

DRX Employees also must not deal in DRX Securities during either of the following blackout periods:

• • the period between 1 January and the close of business on the second day after DRX announces its Preliminary Final Results (Appendix 4E);
• • the period between 1 July and the close of business on the second day after DRX announces its Half Year Results (Appendix 4D);
• • the period between 1 April and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the March Quarter;
• • the period between 1 October and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the September Quarter;
• • the period ending at the close of the second day after DRX announces price sensitive information.

4.2 Permitted Dealing in DRX Securities

Subject to additional requirements set out below, DRX Employees may deal in DRX Securities at any other time. These additional requirements relate mainly to DRX Employees who are Designated Officers.

4.5 Dealing in Securities of other companies

From time to time, DRX will be engaged in activities which might result in inside information about another company becoming available to some DRX Employees because of their role or position with DRX. For example:

• another company may provide information about

itself, or about a third company, to DRX in the course of a proposed transaction;

• • DRX may be considering a transaction which, if implemented, may have an effect on another company and the value of that company's Securities;
• • DRX may receive information about the financial or operating performance of a company that DRX has a joint venture with or an investment in.

DRX employees must not deal in Securities of another company if they are in possession of inside information about that other company.

4.5 Short-term or speculative dealing

DRX encourages DRX Employees to be long-term investors in DRX Securities and to act in a way that promotes growth in long-term returns for all holders of DRX Securities. Speculation in short-term fluctuations in the value of DRX Securities does not promote market confidence in the integrity of DRX or DRX Employees.

DRX Employees must not deal in DRX Securities as a short-term trader or on a speculative basis. DRX Employees who acquire DRX Securities must not dispose of those Securities, or enter into arrangements (such as margin loans) which could result in those Securities being disposed of within six months of acquisition.

This prohibition does not apply to Securities acquired as a result of the exercise of an option or similar right where the option or right has been held for at least 6 months. This prohibition also does not apply to DRX shares acquired by DRX Employees under any DRX Employee Share Option Plan.

4.5 Derivatives

DRX may grant DRX shares, options or performance rights to DRX Employees as part of their remuneration entitlements. These grants will usually be subject to the satisfaction of performance hurdles before they vest in the DRX Employee.

The use of Derivatives over unvested DRX Securities has the potential to allow DRX Employees to realise value from those Securities even if the performance hurdles have not been satisfied. This would undermine the intended alignment between the performance of DRX Employees and the interests of DRX shareholders. DRX Employees are not permitted to use Derivatives in relation to any unvested DRX Securities. For this purpose, a Derivative includes any option, forward contract, swap, futures contract or warrant, or any other arrangement, which itself or in combination with one or more other Derivatives would have the effect of providing a DRX Employee with greater benefit than would otherwise have been realised in respect of the unvested DRX Securities.

DRX Employees may use Derivatives in relation to DRX Securities which have vested, provided they have the prior written approval of the Board any dealing in those Derivatives complies with the other requirements of this Policy.

5. Specific Rules for Designated Officers

5.1 Who is a Designated Officer?

Additional safeguards are necessary to avoid the potential for adverse public perceptions of DRX as a result of dealings in DRX Securities by DRX Employees in senior roles. For the purposes of this Policy, these DRX Employees are Designated Officers.

A Designated Officer is a DRX Employee who is:

• • a DRX Director; or
• • a member of DRX's Executive Team.

Other DRX Employees may also occupy a position, or perform a role, which may attract public scrutiny of dealings by those DRX Employees in DRX Securities. The Managing Director may, from time to time, designate any DRX Employee to be a Designated Office for the purpose of this Policy.

5.2 Dealings in DRX Securities by Designated Officers

Any Designated Office who proposes dealing in DRX Securities must, before the dealing occurs, notify the Company Secretary of the proposed dealing in writing (or by email) setting out the full details of the proposed dealing including:

• • Name of security holder;
• • Proposed date of dealing;
• • Type of proposed transaction (purchase, sale, etc); and
• • Number of securities involved.

The Designated Officer must not undertake the

proposed dealing until it has been approved in writing (or by email) in accordance with the following protocol:

Dealing to be undertaken by:	Dealing to be approved by:
A non-executive Director or
Company Secretary	Chairman of the Board
Chairman of the Board	Chairman of the Audit Committee
Managing Director	Chairman of the Board
Chief Financial Officer	Chairman of the Board
Member of Executive Team	Managing Director
All other Designated Officers	Managing Director

An approval to undertake the proposed dealing will be valid for two (2) weeks (but completion of the proposed dealing must not occur during a blackout period and must otherwise comply with the requirements of this Policy.

The requirements for Designated Officers to seek approval before dealing in DRX Securities do not apply to:

• • the acquisition of Securities under any DRX Employee Share or DRX Employee Share Option Plan;
• • the acquisition of shares under a DRX Dividend Reinvestment Plan;
• • participation in an offer or invitation made to all or most of the security holders, eg. Rights Issues and Share Purchase Plans.

5.3 Restrictions applicable to associates of Designated Officers

This Policy extends to associates of Designated Officers in relation to dealing in DRX Securities. A Designated Officer's associates include family members or companies and other entities controlled by the Designated Officer. This means that a Designated Officer must take all steps reasonably necessary for the Designated Officer's associates to:

• • avoid dealing in DRX Securities during a blackout period;
• • avoid dealing in DRX Securities as a short-term trader or on a speculative basis;
• • notify the Company Secretary of, and seek approval for, proposed dealings in DRX Securities.

5.4 Margin Loans

Margin loans to support an investment in Securities have the potential to compromise a DRX Employee's ability to comply with this Policy or with the legal prohibition against insider trading. This is because the terms of a margin loan may require the sale of Securities during a blackout period (in relation to DRX Securities) or at a time when the DRX Employee is in possession of inside information about DRX or another company in which the DRX Employee holds Securities.

DRX Employees are prohibited from entering into margin loan arrangements to fund the acquisition of DRX Securities or in relation to which DRX Securities may be used as a security against repayment of the loan.

The following requirements will apply to margin loans proposed to be obtained by a Designated Officer to acquire Securities of any other company in relation to which it is reasonably foreseeable that the Designated Officer could come into possession of inside information as a consequence of being a DRX Employee:

• • The Designated Officer must provide notice of, and obtain approval for, the proposed margin lending arrangements following the process outlined in paragraph 5.2 above. Approval must be obtained before the margin lending arrangements are entered into.
• • Similarly, the Designated Officer must ensure that the terms of the margin lending arrangements do not require, or allow for, Securities of any company to be disposed of at a time when the Designated Officer is in possession of inside information in relation to that company.
• • The Designated Office must promptly inform the Company Secretary in writing (or by email) of any margin call that is made under the margin lending arrangements, and of the terms of that margin call.

5.5 Notification by Directors of Dealing in DRX Securities

DRX is required to notify the ASX within 5 business days of any dealings by DRX Directors in DRX Securities. To allow DRX to meet its ASX obligations, DRX Directors must notify the Company Secretary as soon as practicable (and, in any case, no later than 2 business days) after the dealing occurs.

The Company Secretary will notify the ASX of the Director's dealing in DRX Securities using Appendix 3Y as required by the ASX Listing Rules. The Company Secretary will promptly provide all Directors with a copy of each Appendix 3Y sent to the ASX.

6. Exceptional Circumstances

6.1 Exemption to allow dealings during blackout periods

The Company Secretary has the discretion to give approval to a DRX Employee to dispose of DRX Securities during a blackout period if both of the following conditions are satisfied:

• • the DRX Employee is experiencing genuine financial hardship or there are other exceptional circumstances; and
• • the DRX Employee is not actually in possession of inside information about DRX.

A DRX Employee seeking approval to dispose of DRX Securities during a blackout period should do so in accordance with procedures set out in 5.2 of this Policy. Full details of why the DRX Employee considers that exceptional circumstances exist should be included.

The Company Secretary must maintain a record of all approvals given to sell DRX Securities during a blackout period.

The Company Secretary must promptly inform the Board of all instances where approval has been given to a DRX employee to sell DRX Securities during a blackout period.

7. Other Matters

7.1 Date of effect

This Policy has been approved by DRX's Board and has effect from 29 December 2010.

7.2 Further Information about this Policy

If you have any questions about the application of this Policy to you, please contact the Company Secretary.

8. Glossary

Terms used in this Policy have the meaning set out below:

DRX means DRX Limited (ABN 33 061 267 061)

DRX Board means the board of directors of DRX

DRX Employees means each director, officer and employee of DRX or its related bodies corporate (within the meaning of section 50 of the Corporations Act), and each contractor and consultant to DRX or its related bodies corporate who are contractually bound to comply with this policy

DRX Executive Team means DRX Employees who hold a senior management role and who directly reports to the DRX Managing Director.

associate in relation to a DRX Employee means:

• • a member of the DRX Employee's immediate family; and
• • a company or other entity controlled by the DRX Employee or a member of their immediate family.

blackout period means each of the following periods:

• • the period between 1 July and the close of business on the second day after DRX announces its Preliminary Final Results (Appendix 4E)/Financial Results;
• • the period between 1 July and the close of business on the second day after DRX announces its Half Year Results (Appendix 4D);

• • the period between 1 April and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the March Quarter;

• • the period between 1 October and the close of business on the second day after DRX announces its Quarterly Activities Report and Cash Flow for the September Quarter;

• • the period ending at the close of the second day after DRX announces price sensitive information.

Company Secretary means the Company Secretary of DRX from time to time.

Corporations Act means the Corporations Act 2001 (Cth).

deal or dealing in relation to Securities means to acquire or dispose of any economic interest in those Securities. The term is intended to be interpreted broadly and includes:

• • acquiring or disposing of the Securities;
• • entering into an agreement to acquire or dispose of the Securities; or
• • granting, accepting, acquiring, disposing, exercising, or discharging an option or other right or obligation to acquire or dispose of the Securities.

Derivatives has the meaning given in Section 761D of the Corporations Act and includes options, forward contracts, swaps, future contracts and warrants and

PRINCIPLE
Principle 4: Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.
Recommendation 4.1: The board should establish an audit committee.
Recommendation 4.2: The audit committee should be structured so that it: consists only of non-executive directors consists of a majority of independent directors is chaired by an independent chair, who is not chair of the board has at least three members.
Recommendation 4.3: The audit committee should have a formal charter.
Recommendation 4.4: Companies should provide the information indicated in the Guide to reporting on Principal 4.

any combination of one or more of these things.

Designated Person means a DRX Employee who is:

• • a DRX Director
• • a member of DRX's Executive Team; or
• • any person designated by the Managing Director as a Designated Officer in accordance with paragraph 5.1 of this Policy.

inside information in relation to a company means information about the company that is not generally available and that, if it were to be made generally available, would reasonably be expected to have a material effect on the price or value of Securities issued by the company.

Securities include shares, options, rights, debentures, interests in a managed investment scheme, Derivatives, and financial products covered by section 1042A of the Corporations Act.

Integrity in Financial Reporting

The Managing Director and the CFO (or equivalent) are required to make the following certifications to the Board:

• • That the Company's financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with the relevant accounting standards.
• • That the above statement is based on a sound system of risk management and internal compliance and control and which implements the policies adopted by the Board and that the Company's risk management and internal compliance and control is operating efficiently and effectively in all material respects.

Audit Committee

The Board has established an Audit Committee which operates under a charter approved by the Board. It is the Board's responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes such as the safeguarding of assets, maintenance of proper accounting records, the reliability of financial information and non-financial considerations such as the benchmarking of operational key performance indicators. The Audit Committee provides a forum for effective communication between the Board and the external auditor. The Audit Committee also provides the Board with additional assurance regarding the reliability of financial information for inclusion in the financial report.

Taking into account the specific operations of the Company, the Audit Committee meets at least twice a year with the auditors without the presence of any executive directors. Because of the size of the Board, the current audit committee comprises only two members (two non-executive directors) and the chairman of the committee is not the Chairman of the Board.

The Audit Committee operates under the following charter approved by the Board:

The board as a whole is responsible for the accuracy and relevance of the financial statements. However, the Audit Committee provides an additional and more specialised oversight of the financial reporting process. The Audit Committee shall, if possible, comprise a majority of non-executive directors and an independent chairman who is not the Chairman of the Board. The Audit Committee shall consist of at least two members.

The finance director and other executive directors may be present during Audit Committee deliberations but will not be members of the committee.

The Audit Committee will meet at least two times a year and will meet independently of the executive management of the Company with the external auditors at least once a year.

The Audit Committee reports to the Board and copies of Audit Committee minutes should be tabled at the first Board meeting at which it is practicable to do so.

During the majority of 2010 the Company only had two executive and three non-executive directors. The Company's Audit Committee is comprised of two nonexecutive directors.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

25

PRINCIPLE

Principle 5: Make timely and balanced disclosure

Companies should promote timely and balanced disclosure of all material matters concerning the company.

Recommendation 5.1:

Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

Recommendation 5.2:

Companies should provide the information indicated in the Guide to reporting on Principle 5.

Continuous Disclosure

The Company has a continuous disclosure program in place designed to ensure the factual presentation of the Company's financial position.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

PRINCIPLE

Principle 6: Respect the rights of shareholders

Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

Recommendation 6.1:

Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

Recommendation 6.2:

Companies should provide the information indicated in the Guide to reporting on Principle 6.

Shareholders Information

The Board aims to ensure that shareholders and other stakeholders have equal and timely access to material information concerning the Company. Information is communicated through:

• • The annual report which is distributed to the Australian Securities Exchange and to all shareholders who have elected to receive such report.
• • Notices of the Annual General Meeting and other meetings of members called as required to obtain approval for Board action.
• • Timely announcements through the Australian Securities Exchange company announcements platform, including Quarterly Activity Reports as required for mineral exploration companies.
• • The half-year report containing summarised financial information and a review of operations for that period.

The Board encourages full participation of shareholders at the Annual General Meeting and at other general meetings as may be called.

The Company requests the external auditor to attend all annual general meetings of the Company to answer shareholder questions about the conduct of the audit and the preparation and content of the auditors report.

Recognising the Rights of Shareholders

Directors bear individual responsibilities for the performance of their duties before the law, and collective responsibility for the behaviour of the Board.

The code of conduct, as pronounced by the Australian Institute of Company Directors in September 2005, encompasses the legislative and common law requirement of directors, as well as specific behaviour that the Company expects of directors. The Company has adopted this code of conduct, which provides that:

• • A director must act honestly, in good faith and in the best interests of the Company as a whole.
• • A director has a duty to use due care and diligence in fulfilling the functions of office and exercising the powers attached to that office.

• • A director must use the powers of office for a proper purpose, in the best interests of the Company as a whole.

• • A director must recognise that the primary responsibility is to the Company's shareholders as a whole but should, where appropriate, have regard for the interests of all stakeholders of the Company.

• • A director must not make improper use of information acquired as a director.
• • A director must not take improper advantage of the position of director.
• • A director must not allow personal interests, or the interests of any associated person, to conflict with the interests of the Company.
• • A director has an obligation to be independent in judgment and actions and to take all reasonable steps to be satisfied as to the soundness of all decisions taken by the Board.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

PRINCIPLE

Principle 7: Recognise and Manage risk

Companies should establish a sound system of risk oversight and management and internal control.

Recommendation 7.1:

Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.

Recommendation 7.2:

The board should require management to design and implement the risk management and internal control system to manage the company's material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company's management of its material business risks.

Recommendation 7.3:

The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

Recommendation 7.4:

Companies should provide the information indicated in the Guide to reporting on Principle 7.

Risk Management

The Board has established a Risk Management Committee. The prime purpose of the Risk Management Committee is to identify those areas of risk which are most likely to cause major disruption and damage to the business of the Company and to implement, with Board approval, plans and procedures which will mitigate any damage.

The Risk Management Committee will meet as often as considered necessary but not less than twice per year.

Certifications to the Board

The Managing Director and the CFO (or equivalent) is required to make the following certifications to the Board:

• • That the Company's financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with the relevant accounting standards.
• • That the above statement is based on a sound system ofrisk management and internal compliance and control and which implements the policies adopted by the Board and that the Company's risk management and internal compliance and control is operating efficiently and effectively in all material respects.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

Enhanced Performance PRINCIPLE Principle 8: Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear. Recommendation 8.1: The board should establish a remuneration committee. Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors' remuneration from that of executive directors and senior executives. Recommendation 8.3: Companies should provide the information indicated in the Guide to reporting on Principle 8

The Board encourages enhanced performance and has adopted a program that enables directors to gain an understanding of:

• • the Company's financial, strategic, operational and risk management position;
• • their rights, duties and responsibilities; and
• • the role of the Board's committees.

The Board undertakes an annual review of the performance of the Board and the individual directors and examines the appropriate mix of skills to ensue maximum effectiveness and contribution to the results of the Company's business.

Remuneration Policy

The Company has a formal remuneration policy.

The Company will disclose the quantum of remuneration paid to directors and senior executives in its annual reports. Any links between the remuneration paid to directors and key executives and corporate performance will be fully disclosed.

The Board is responsible for determining and reviewing remuneration arrangements for the directors and the executive team. The Board has established a Remuneration Committee consisting of two nonexecutive directors.

The Company's constitution provides that the total remuneration of all non-executive directors will not be more than the aggregate fixed sum determined by a general meeting. The aggregate remuneration has been set at an amount of \$150,000 per annum.

The Company will seek shareholder approval for the future grant of equity based remuneration to directors.

The Company will provide an explanation of any departures from best practice recommendations (if any) in its future annual reports.

FINANCIAL REPORT For the year ended 31 December 2010

2010 Annual Report 28 2010

Directors' Report

The Directors present their report on Diatreme Resources Limited ("the Company") and its subsidiaries (the "Group") for the year ended 31 December 2010.

DIRECTORS

The following persons were Directors of Diatreme Resources Limited during the whole of the financial year and up to the date of this report unless otherwise stated:

Anthony John Fawdon FAICD, FAusIMM.

(Executive Chairman/CEO)

Experience

Board member since 12 January 2001, Mr Fawdon has been active in the Australian mining and exploration industry for 36 years, working until 1982 in various management levels for multinational companies. He then became founder and director of several listed mineral explorers, including the Queensland based gold and base metal explorer Strike Mining NL in 1994 for which he was Managing Director/CEO until mid 2000.

Other current directorships (listed entities) - None Former directorships in last 3 years (listed entities) - None

David Hugh Hall BAppSc (Geol), G.Dip.ESc., MAICD.

(Executive Director – Operations)

Experience

Board member since 12 January 2001, Mr Hall is a geologist with over 30 years experience in the mining industry. After spending the early part of his career in both coal and mineral exploration, in 1990 he branched into developing specialist experience in tenement administration and stakeholder liaison within a private consultancy group. Between 1994 and 2000 he was the exploration administrator with Strike Mining NL. He joined Diatreme as an executive director in early 2001.

Other current directorships (listed entities) - None Former directorships in last 3 years (listed entities) – None

George H White BSc.Hons., FAICD.

(Non-executive Director)

Experience

Mr White was appointed Director in April 2006. He has over 30 years experience in the mineral and energy industries and has held senior environmental and mining management positions in Alcoa, Chief Executive positions in Doral Resources NL and Doral Mineral Industries Ltd.

Mr White has been instrumental in the establishment of a number of greenfield resource projects in mineral sands, gold, magnetite, natural gas production and the downstream processing of mineral sands to zirconia and zirconium chemicals.

Other current directorships (listed entities) - None Former directorships in last 3 years (listed entities) – None

Andrew Tsang

(Non-executive Director)

Experience

Mr Tsang is a naturalisedAustralian citizen who was born and educated in China and who has successfully established and run construction, engineering and property development businesses both in China and Australia as well as establishing successful import agencies for Australian manufactured goods into China.

Other current directorships (listed entities) – Mindax Limited (Director since 28 March 2008) Former directorships in last 3 years (listed entities) – None

On 30 November 2010 Lawrence James Litzow resigned from both his Joint Company Secretary position and Nonexecutive Director position on the Board.

Directors' Interests

The following table sets out each Director's relevant interest in shares or options in shares of the Company as at 31 December 2010.

Directors	Fully Paid Ordinary Shares Number	Share Options Number
A J Fawdon	3,281,821	5,000,000
D H Hall	2,550,000	4,100,000
G H White	50,000	2,500,000
A Tsang	41,344,618	-
	47,226,439	11,600,000

COMPANY SECRETARY

The Company Secretary is Ms Leni Stanley CA, B.Com. Ms Stanley was appointed to the position of joint Company Secretary in October 2009. Ms Stanley currently is a partner with a Chartered Accounting firm and holds the office of Company Secretary with other companies.

The previous joint Company Secretary was Mr L J Litzow who resigned from his position on 30 November 2010.

PRINCIPAL ACTIVITIES

The principal activity of the Group during the course of the financial year was exploration for heavy mineral sands, copper, gold and base metals in Australia. There were no significant changes in the nature of the Group's principal activities during the year.

REVIEW OF OPERATIONS

During the year, exploration concentrated on the flagship Eucla Basin and Arckaringa mineral sand projects, with particular emphasis being placed on the advancement of the Cyclone Heavy Mineral (HM) Deposit located in Western Australia.

Highlights for the year were:

• • Pre-feasibility studies at the Cyclone HM Deposit commenced following a positive scoping study.
• • Air core drilling in both the South Australian and Western Australian mineral sand tenements, leading to the discovery of additional mineral sand mineralisation including the Zyphyr HM Deposit.

OPERATING RESULTS

The net loss of the Group for the financial year ended 31 December 2010 was \$4,000,451 (2009: loss of \$2,759,416).

During the year the Group utilised its cash resources to undertake exploration and evaluation activities within its tenement portfolio. The Group monitors cash flow requirements for operational, exploration and evaluation expenditure and will continue to use capital market issues to satisfy anticipated funding requirements.

DIVIDENDS

No dividend has been paid since the end of the previous year and the Directors do not recommend the payment of any dividend for the year ended 31 December 2010.

SIGNIFICANT CHANGES IN STATE OF AFFAIRS

During the year there was an increase in contributed equity of \$4,596,575 (from \$28,724,912 to \$33,321,487) from the issue of 63,756,175 ordinary shares.

EVENTS SUBSEQUENT TO REPORTING DATE

On 18 January 2011 the Company announced the result of an independent technical review of the Cyclone Heavy Mineral Deposit and Valuation Report. One of the outcomes from the independent report included a suggested current value range for the Cyclone Project of between \$142 million and \$170 million, with the most likely value being \$156 million.

On 23 February 2011 the Company announced a nown-renounceable Rights Issue to shareholders on a 1 for 3 basis, with 1 free attaching option per share exercisable on or before 30 September 2013. The total amount expected to be raised from the Rights Issue is approximately \$7.1 million. The funds will be applied towards working capital, prefeasibility study and exploration of the Cyclone Heavy Mineral Sand Deposit, and exploration on other Heavy Mineral Sands and Metalliferous projects.

No other matter or circumstance has arisen since the end of the year that has significantly affected, or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in years subsequent to 31 December 2010.

LIKELY DEVELOPMENTS

Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual financial report because the directors believe it would be likely to result in unreasonable prejudice of the Group.

REMUNERATION REPORT - AUDITED

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

• A Principles used to determine the nature and amount of remuneration
• B Relationship of remuneration with company performance
• C Details of remuneration
• D Share-based compensation
• E Service agreements

A Principles used to determine the nature and amount of remuneration

The board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.

(i) Executive Directors

The combination of Directors' fees, salary, non-cash benefits and superannuation make up the Executive Directors' total remuneration. The salary component of Executive Directors' remuneration packages is reviewed annually to ensure the Executives' pay is competitive with the market. Executive Directors' pay is not directly linked to the financial performance of the Group.

(ii) Non-executive Directors

Fees and payments to Non-executive Directors reflect the demands which are made on, and the responsibilities of, the Director. Non-executive Directors' fees and payments are reviewed annually by the Remuneration Committee.

(iii) Directors' fees

Non-executive Directors' fees are determined within an aggregate Directors' fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at \$150,000 per annum plus statutory superannuation.

B Relationship of remuneration with company performance

The Directors consider that, as the Group is in an exploration phase of its development, it is not appropriate that remuneration for employees and directors be linked to the financial performance of the Group. Once the Group enters a sustained production phase, this assessment may change accordingly.

		2006	2007	2008	2009	2010
Share price at year end	\$/share	0.32	0.19	0.08	0.13	0.07
Market capitalisation	\$ million	26	27	12	26	19
Revenue	\$'000	203	446	601	251	41
Total assets	\$ million	10	20	18	22	23
Net profit/(loss) after tax	\$'000	(932)	704	(2,513)	(2,759)	(4,000)

C Details of remuneration

The key management personnel includes the Directors as per the "Directors" section above and the following executive officer who has authority and responsibility for planning, directing and controlling the activities of the entity:

2010 and 2009

D A Jelley – Exploration Manager

Details of the remuneration of the Directors and the key management personnel (as defined in AASB 124 Related Party Disclosures) of the Group are set out in the following table:

			Short-term employee benefits				Long-term benefits	Share based payments
		Salary & fees \$	Bonus \$	Non monetary \$	Other \$	Super annuation \$	Long service leave \$	Options \$	Total \$
Non-executive directors
L J Litzow ^	2010	99,583	-	-	-	-	-	-	99,583
G H White	2009 2010	65,000 40,000	- -	- -	- -	- 3,600	- -	- -	65,000 43,600
	2009	30,000	-	-	-	2,700	-	-	32,700
A Tsang	2010	40,000	-	-	-	3,600	-	-	43,600
	2009	27,089	-	-	-	2,438	-	-	29,527
Executive directors
A J Fawdon #	2010 2009	248,000 225,000	- -	- -	- -	22,320 20,250	4,557 6,506	- -	274,877 251,756

D H Hall #	2010 2009	225,000 205,000	- -	- -	- -	20,250 18,450	3,996 5,927	- -	249,246 229,377
Other key management personnel/ executives
D A Jelley #	2010	155,592	-	-	-	-	-	-	155,592
	2009	162,699	-	-	-	-	-	-	162,699
L Stanley	2010	35,000	-	-	-	-	-	-	35,000
	2009	35,000	-	-	-	-	-	-	35,000
Total	2010	843,175	-	-	-	49,770	8,553	-	901,498
Total	2009	749,788	-	-	-	43,838	12,433	-	806,059

Included as one of the five highest paid executives of the Group and Company; there are no other executives. ^ Resigned on 30 November 2010

D Share-based compensation

There was no share-based compensation to key management personnel or executive in 2010.

E Service agreements

A J Fawdon, Executive Chairman/CEO

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$277,078.
• • Termination benefit six months salary plus two weeks for every year, or part thereof, for service to the Company since appointment (1 August 2000).

D H Hall, Executive Director - Operations

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$251,381
• • Termination benefit six months salary plus two weeks for every year, or part thereof, for service to the Company since appointment (1 August 2000).

G H White, Non-executive Director

• • Term of agreement no fixed term
• • Base salary inclusive of superannuation, of \$49,050.
• • No termination benefit is specified in the agreement.

A Tsang, Non-executive Director

• • Term of agreement no fixed term.
• • Base salary, inclusive of superannuation, of \$49,050.
• • No termination benefit is specified in the agreement.

D Jelly, Exploration Manager

• • Term of agreement no fixed term.
• • Consulting daily rate \$900.
• • No termination benefit is specified in the agreement.

L Stanley, Company Secretary

• • Term of agreement no fixed term.
• • Fixed monthly fee \$2,500.
• • No termination benefit is specified in the agreement

The salary package amounts disclosed above are the amounts as at the date of this report.

END OF AUDITED REMUNERATION REPORT

MEETINGS OF DIRECTORS

The number of meetings of the board of Directors held during the year ended 31 December 2010, and the number of meetings attended by each Director were:

	Board		Audit Committee		Remuneration Committee
Name	Held	Attended	Held	Attended	Held	Attended
A J Fawdon	6	5	-	-	-	-
D H Hall	6	6	-	-	1	1
L J Litzow	6	4	-	-	-	-
G H White	6	5	2	2	1	1
A Tsang	6	3	-	-	-	-

SHARES UNDER OPTION

Unissued ordinary shares of Diatreme Resources Limited under option at the date of this report are as follows:

Date options granted	Expiry date	Issue price of shares	Number under option
July 2006	30/06/2011	\$0.47	6,500,000
August 2006	30/06/2011	\$0.47	100,000
June 2007	30/06/2011	\$0.47	4,300,000
July 2007	31/07/2011	\$0.47	3,000,000
June 2008	30/06/2011	\$0.47	5,900,000
			19,800,000

No option holder has any right under the options to participate in any other share issue of the Company or any other entity.

Share options are unlisted options, carrying no rights to dividends and no voting rights.

ENVIRONMENTAL REGULATION

The Group is not subject to any significant environmental regulation (apart from normal requirements under its mineral tenements) in respect of its operations.

INDEMNIFICATION OF OFFICERS AND AUDITORS

During the financial year, Diatreme Resources Limited paid a premium in respect of a contract insuring Directors and executive officers of the Company and its controlled entities against a liability incurred as Director or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer of the Company or any of its controlled entities against a liability incurred as such an officer or auditor.

PROCEEDINGS ON BEHALF OF THE COMPANY

No person has applied to the Court under Section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings.

No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under Section 237 of the Corporations Act 2001.

AUDITOR

BDO Audit (QLD) Pty Ltd was appointed as the Company's auditor at the 2010 Annual General Meeting held on 27 May 2010. The Company's former auditor, Hacketts DFK, resigned as the Company's auditor in May 2010.

Non-audit services

Hacketts DFK, the Company's former auditor, and BDO Audit (QLD) Pty Ltd, the Company's current auditor did not perform any other services in addition to their statutory audit duties.

AUDITOR'S INDEPENDENCE DECLARATION

The auditor's independence declaration is set out on page 36.

This report is made in accordance with a resolution of the directors.

AJ Fawdon Executive Chairman/CEO Brisbane, 25 March 2011

Auditor's Independence Declaration

Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au

Level 18, 300 Queen St Brisbane QLD 4000, GPO Box 457, Brisbane QLD 4001 Australia

DECLARATION OF INDEPENDENCE BY CHRIS SKELTON TO THE DIRECTORS OF DIATREME RESOURCES LIMITED

As lead auditor for the audit of Diatreme Resources Limited for the year ended 31 December 2010, I declare that to the best of my knowledge and belief, there have been:

• • no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
• • no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Diatreme Resources Limited and the entities it controlled during the year.

CJ Skelton Director BDO Audit (QLD) Pty Ltd

Brisbane: 25 March 2011

BDO Audit (QLD) Pty Ltd ABN 33 134 022 870

BDO is the brand name for the BDO International network and for each of the BDO Member Firms. BDO in Australia is a national association of separate entities. Liability of each entity is limited by a scheme approved under the Professional Standards Legislation other than for acts or omissions of financial services licensees.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2010

			Consolidated
		2010	2009
	Note	\$	\$
Revenue	6	240,809	251,141
Employee benefits expenses Depreciation expense Exploration expenditure written off Other expenses Finance costs	11 12 6	(796,841) (281,605) (2,037,694) (1,422,778) (17,945)	(1,364,553) (247,570) (279,586) (1,097,300) (21,548)
Loss before income tax		(4,316,054)	(2,759,416)
Income tax benefit	7	315,603	-
Loss after income tax		(4,000,451)	(2,759,416)
Other comprehensive income		-	-
Total comprehensive loss for the year		(4,000,451)	(2,759,416)
Loss is attributable to: Non-controlling interest Owners of Diatreme Resources Limited		- (4,000,451) (4,000,451)	(19,871) (2,739,545) (2,759,416)
Total comprehensive loss for the year is attributable to: Non-controlling interest Owners of Diatreme Resources Limited		- (4,000,451)	(19,871) (2,739,545)
		(4,000,451)	(2,759,416)
		Cents	Cents
Basic earnings per share Diluted earnings per share	28 28	(1.8) (1.8)	(1.6) (1.6)

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

CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2010

		Consolidated
		2010	2009
	Note	\$	\$
Current Assets
Cash and cash equivalents	8	1,602,313	1,916,742
Trade and other receivables	9	164,370	274,677
Current tax asset		315,603	-
Total Current Assets		2,082,286	2,191,419
Non-current Assets
Available-for-sale financial assets	10	162,586	162,586
Property, plant and equipment	11	938,513	1,202,100
Exploration and evaluation	12	18,791,274	17,820,255
Other assets	13	683,113	663,741
Total Non-current Assets		20,575,486	19,848,682
Total Assets		22,657,772	22,040,101
Current Liabilities
Trade and other payables	14	255,914	203,045
Interest-bearing liabilities	15	45,107	42,083
Total Current Liabilities		301,021	245,128
Non-current Liabilities
Interest-bearing liabilities	15	130,050	175,157
Provisions	16	89,519	78,758
Total Non-current Liabilities		219,569	253,915
Total Liabilities		520,590	499,043
Net Assets		22,137,182	21,541,058
Equity
Contributed equity	17	33,321,487	28,724,912
Reserve	18	87,670	87,670
Accumulated losses	19	(11,271,975)	(7,271,524)
Parent entity interest Non-controlling interest		22,137,182 -	21,541,058 -
Total Equity		22,137,182	21,541,058

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2010

	Contributed Equity \$	Share option Reserve \$	Accumulated Losses \$	Total \$	Non-controlling Interest \$	Total Equity \$
At 1 January 2009	21,259,642	87,670	(4,816,089) 16,531,223		1,023,981	17,555,204
Loss for the year Other comprehensive income	- -	- -	(2,739,545) (2,739,545) -	-	(19,871) -	(2,759,416) -
Total comprehensive income/(loss) for the year	-	-	(2,739,545) (2,739,545)		(19,871)	(2,759,416)
Transactions with owners in their capacity as owners:
Shares issued	6,993,500	-	-	6,993,500	-	6,993,500
Share issue costs	(248,230)	-	-	(248,230)	-	(248,230)
Acquisition of non-controlling interest	720,000	-	284,110	1,004,110	(1,004,110)	-
At 31 December 2009	28,724,912	87,670	(7,271,524) 21,541,058		-	21,541,058
At 1 January 2010	28,724,912	87,670	(7,271,524) 21,541,058		-	21,541,058
Loss for the year	-	-	(4,000,451) (4,000,451)		-	(4,000,451)
Other comprehensive income	-	-	-	-	-	-
Total comprehensive income/(loss) for the year	-	-	(4,000,451) (4,000,451)		-	(4,000,451)
Transactions with owners in their capacity as owners:
Shares issued	5,179,535	-	-	5,179,535	-	5,179,535
Share issue costs	(582,960)	-	-	(582,960)	-	(582,960)
At 31 December 2010	33,321,487	87,670	(11,271,975) 22,137,182		-	22,137,182

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

CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2010

			Consolidated
		2010	2009
	Note	\$	\$
Cash flows from operating activities
Sundry receipts		182,039	96,223
Payments to suppliers/employees		(2,032,276)	(2,368,507)
Interest received		58,769	100,130
Finance costs		(17,945)	(21,548)
Net cash inflow/(outflow) from operating activities	27	(1,809,413)	(2,193,702)
Cash flows from investing activities
Payments for property, plant and equipment		(23,823)	(554,435)
Payments for exploration and evaluation assets		(3,019,312)	(5,192,617)
Proceeds from sale of property, plant and equipment		3,000	132,000
Payments for security deposits		(93,573)	(119,092)
Refund of security deposits		74,200	28,180
Net cash inflow/(outflow) from investing activities		(3,059,508)	(5,705,964)
Cash flows from financing activities
Proceeds from issue of shares		5,179,535	6,993,500
Payments for share issue costs		(582,960)	(248,230)
Repayment of interest-bearing liabilities		(42,083)	(38,483)
Net cash inflow/(outflow) from financing activities		4,554,492	6,706,787
Net decrease in cash and cash equivalents		(314,429)	(1,192,879)
Cash and cash equivalents at the beginning of the year		1,916,742	3,109,621
Cash and cash equivalents at the end of the year	8	1,602,313	1,916,742

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

Diatreme Resources Limited

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2010

Contents of the notes to the consolidated financial statements

• 1 Reporting entity
• 2 Basis of preparation
• 3 Significant accounting policies
• 4 Use of estimates and judgments
• 5 Segment information
• 6 Revenue and expenses
• 7 Income tax
• 8 Current assets cash and cash equivalents
• 9 Current assets trade and other receivables
• 10 Non-current assets available-for-sale financial assets
• 11 Non-current assets property, plant and equipment
• 12 Non-current assets exploration and evaluation
• 13 Non-current assets other
• 14 Current liabilities trade and other payables
• 15 Interest-bearing liabilities
• 16 Non-current liabilities provisions
• 17 Contributed equity
• 18 Reserve
• 19 Accumulated losses
• 20 Financial instruments
• 21 Key management personnel disclosures
• 22 Remuneration of auditors
• 23 Contingencies
• 24 Commitments
• 25 Related party transactions
• 26 Group entities
• 27 Reconciliation of net profit/(loss) to net cash flow from operating activities
• 28 Earnings per share
• 29 Share-based payments
• 30 Parent entity information
• 31 Events subsequent to reporting date
• 32 New accounting standards and interpretations

1. REPORTING ENTITY

Diatreme Resources Limited (the "Company") is a public company listed on the Australian Securities Exchange (trading under the code DRX), and is incorporated and domiciled in Australia. The Group financial statements as at and for the year ended 31 December 2010 comprise the Company and its subsidiaries (together referred to as the "Group").

Separate financial statements for Diatreme Resources Limited as an individual entity are no longer presented as the consequence of a change to the Corporations Act 2001, however, limited financial information for the Company as an individual entity is included Note 30.

The principal activity of the Group during the course of the financial year was the exploration for heavy mineral sands, copper, gold and base metals in Australia.

2. BASIS OF PREPARATION

(a) Statement of compliance

The financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001.

The consolidated financial statements of Diatreme Resources Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

The financial statements were approved by the Board of Directors on 25 March 2011.

(b) Basis of measurement

The Group financial statements have been prepared on the historical cost basis.

(c) Functional and presentation currency

These Group financial statements are presented in Australian dollars, which is the Company's functional currency and the functional currency of the Group.

(d) Adoption of new and revised accounting standards with no effect on financial statements

The following new and revised Standards and Interpretations have been adopted in these financial statements. Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements.

AASB 3 Business Combinations (2008), and AASB 127 Consolidated and Separate Financial Statements (2008)	The revised standards alter the manner in which business combinations and changes in ownership interests in subsidiaries are accounted for.
ASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions	These amendments clarify the accounting for group cash settled share-based payment transactions. An entity receiving goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash.
AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project	These amendments are largely technical.
AASB 2009-4 Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 2 and AASB 138 and AASB Interpretations 9 & 16]	These amendments are largely technical.

AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project.	These amendments are largely technical.
AASB Interpretation 17 Distributions of Non-cash Assets to Owners	The amendments are in respect of the classification, presentation and measurement of non-current assets held for distribution to owners in their capacity as owners and the disclosure requirements for dividends that are declared after the reporting period but before the financial statements are authorised for issue, respectively

(e) Uncertainty regarding going concern and recoverability of exploration and evaluation expenditure.

The financial statements have been prepared on a going concern basis which contemplates the continuity of the normal business activities and the realization of assets and discharge of liabilities in the ordinary course of business. This includes the realisation of capitalized exploration expenditure of \$18,791,274 (31 December 2009: \$17,820,255).

The ability of the company and economic entity to maintain continuity of normal business activities, to pay its debts as and when they fall due and to recover the carrying value of exploration and evaluation expenditure, is dependent on the ability of the economic entity to the successfully raise additional capital and/or successful exploration and subsequent exploitation of areas of interest through sale or development.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.

(a) Basis of consolidation

The consolidated financial statements comprise the financial statements of Diatreme Resources Limited and its subsidiaries at 31 December 2010. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income and statement of financial position respectively. Total comprehensive income is attributable to owners of Diatreme Resources Limited and non-controlling interests even if this results in the con-controlling interest having a debit balance.

(b) Revenue

Revenue is recognised at the fair value of the consideration received or receivable, and recognised when the service is provided, or ownership of the product has passed to the customer.

Interest revenue is recognised on a time proportion basis using the effective interest method.

(c) Income tax

The income tax expense or revenue for the year is the tax payable on the taxable income based upon the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Current and deferred tax balances attributable to amounts recognised directly in other comprehensive income are also recognised directly in other comprehensive income.

Tax consolidation legislation

The Company and its wholly-owned Australian subsidiaries have implemented the tax consolidation legislation as of 1 January 2004. During the year ended 31 December 2009, Lost Sands Pty Ltd joined the Diatreme Resources Limited tax consolidated group, as it became a wholly-owned subsidiary of Diatreme Resources Limited.

Where applicable, each entity in the Group recognises its own current and deferred tax assets and liabilities. Amounts resulting from unused tax losses and tax credits are then immediately assumed by the parent entity. The current tax liability of each subsidiary entity is then also assumed by the parent entity.

The entities have also entered into a tax sharing and funding arrangement. Under the terms of this agreement, the wholly-owned entities reimburse the Company for any current income tax payable by the Company arising in respect of their activities. The reimbursements are payable at the same time as the associated income tax liability falls due.

In the opinion of the Directors, the tax sharing agreement is also a valid agreement under the tax consolidation legislation and limits the joint and several liability of the wholly-owned entities in the case of a default by the Company.

(d) Impairment of assets

At the end of each reporting period the Group assesses whether there is any indication that individual assets are impaired. Where impairment indicators exist, recoverable amount is determined and impairment losses are recognised in profit or loss where the asset's carrying value exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Where it is not possible to estimate recoverable amount for an individual asset, recoverable amount is determined for the cash-generating unit to which the asset belongs.

(e) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held at call, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value and bank overdrafts. Bank overdrafts are shown in interest-bearing liabilities in the statement of financial position.

(f) Trade and other receivable

Trade and other receivables are recognised at nominal amount less an allowance for uncollectible amounts and have repayment terms between 30 and 90 days. Collectability of receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off. An allowance is made for doubtful debts where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Objective evidence of impairment include financial difficulties of the debtor, default

payments or debts more than 120 days overdue. On confirmation that the receivable will not be collectible the gross carrying value of the asset is written off against the associated provision.

(g) Available-for-sale financial assets

Available-for-sale financial assets comprise investments in listed and unlisted entities and any non-derivatives that are not classified as any other category of financial asset, and are classified as non-current assets (unless management intends to dispose of the investments within 12 months of the end of the reporting period).

(h) Property, plant and equipmen

Plant and equipment is stated at historical cost, including costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, less depreciation and any impairments.

Depreciation is calculated on a diminishing value basis. Estimates of remaining useful lives are made on a regular basis for all assets.

The depreciation rates used for each class of assets are as follows:
Furniture and fittings	40%
Motor vehicles	20%
Plant and equipment	40%
Leased motor vehicles	20%

(i) Leases

(i) Finance leases

Assets acquired under finance leases which result in the Group receiving substantially all the risks and rewards of ownership of the asset are capitalised at the lease's inception at the lower of the fair value of the leased property or the estimated present value of the minimum lease payments. The corresponding finance lease obligation, net of finance charges, is included within interest bearing liabilities. The interest element is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the liability for each accounting period. The leased asset is included in property, plant and equipment and is depreciated over the shorter of the estimated useful life of the asset or the lease term.

(ii) Operating leases

Leases where the lessor retains substantially all the risks and rewards of ownership of the net asset are classified as operating leases. Payments made under operating leases (net of incentives received from the lessor) are charged to the profit or loss on a straightline basis over the period of the lease.

(j) Exploration and Evaluation

Exploration and evaluation costs, including the costs of acquiring licences, are capitalised as exploration and evaluation assets on an area of interest basis. Costs incurred before the Group has obtained the legal rights to explore an area are recognised in the profit or loss.

Exploration and evaluation assets are only recognised if the rights of the area of interest are current and either:

the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or

activities in the area of interest have not, at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

(k) Impairment of assets

The Group conducts an annual review for indicators of impairment. The carrying values of capitalised exploration and evaluation expenditure and property, plant and equipment are assessed for impairment when indicators of such impairment exist. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset's recoverable amount is calculated.

An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units).

Non-financial assets that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. Impairment losses are recognised in the statement of comprehensive income in those expense categories consistent with the function

of the impaired asset, except for property previously revalued where the revaluation was taken to other comprehensive income. In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous revaluation.

(l) Trade and Other Payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of the reporting period and which remain unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.

(m) Employee Benefits

(i) Wages and Salaries and Annual Leave

Liabilities for wages and salaries, including nonmonetary benefits and annual leave expected to be settled within 12 months of the end of the reporting period are recognised in other liabilities in respect of employees' services rendered up to the end of the reporting period and are measured at amounts expected to be paid when the liabilities are settled.

(ii) Long Service Leave

Liabilities for long service leave are recognised as part of the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees to the end of the reporting period. Consideration is given to expected future salaries and wages levels, experience of employee departures and periods of service. Expected future payments are discounted using national government bond rates at the end of the reporting period with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.

(n) Contributed equity

Ordinary shares are classified as equity.

Costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

(o) Earnings per share

(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit or loss attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

(p) Goods and services tax (GST)

Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows.

4. USE OF ESTIMATES AND JUDGMENTS

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below:

(i) Carrying value of exploration and evaluation assets

The Group performed a detailed review of its exploration tenements at period end to determine whether the

related expenditure should continue to be capitalised under AASB 6 Exploration for and Evaluation of Mineral Resources or written off. As a result of this review, management has determined that \$2,037,694 (2009: \$2,795,586) be written off in the year ended 31 December 2010.

The ultimate recoupment of cost carried forward for the exploration and evaluation assets is dependent upon the successful development and commercial exploitation or sale of the respective areas of interest. Ultimate exploitation through the development of mines will depend on raising necessary funding.

5. SEGMENT INFORMATION

Operating segments are now reported in a manner that is consistent with the internal reporting to the chief operating decision maker ("CDM"), which has been identified by the Group as the Chairman and other members of the Board of directors.

(i) Identification of reportable segments

The Group has identified that it operates in only one segment based on the internal reports that are reviewed and used by the CDM in assessing performance and determining the allocation of resources. The Group operates in one business segment as an explorer for heavy mineral sands, copper, gold and base metals in Australia.

(ii) Revenue and assets by geographical region The Group's revenue is received from sources and assets that are located wholly within Australia.

(iii) Financial information

Reportable items required to be disclosed in this note are consistent with the information disclosed in the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position and are not duplicated here.

6. REVENUE AND EXPENSES

		Consolidated
	2010	2009
	\$	\$
(a) Revenue
Interest	58,769	91,449
Management fees	6,201	70,393
Other	175,839	89,299
	240,809	251,141
(b) Other expenses
Professional fees	312,294	280,507
Rental expenses on operating leases	291,039	272,317
Listing and share registry expenses	78,436	81,028
Forgiveness of loans	-	15,022
Superannuation expenses	126,034	162,685
Write-off rent prepayments from relinquished exploration tenements	126,719	-
Loss on disposal of non-current assets	2,804	5,824
Administration costs	485,452	279,917
	1,422,778	1,097,300

7. INCOME TAX

		Consolidated
	2010	2009
(a) The prima facie tax on accounting loss differs from the income tax provided in the financial statements. The difference is reconciled as follows:	\$	\$
Loss before income tax	(4,316,054)	(2,759,416)
Prima facie income tax benefit at 30% (2009: 30%)	(1,294,816)	(827,825)
Tax effect of amounts which are not deductible in calculating taxable income: Effect of transactions eliminated on consolidation that are not exempt from taxation Other	- -	130,953 4,507
	(1,294,816)	(692,365)
Deferred tax assets not recognised Recognition of research & development tax claim	1,294,816 (315,603)	692,365 -
Total income tax benefit	(315,603)	-
(b) The components of income tax benefit: Current tax Deferred tax Adjustments for research & development	- - (315,603)	- - -
Total income tax benefit	(315,603)	-
(c) Deferred tax Deferred tax assets Unused tax losses Unused capital losses Temporary differences: Accruals Employee entitlements Capital raising costs	16,274,277 15,022 25,927 131,020 797,576	16,017,301 - 39,692 142,898 532,148
	17,243,822	16,732,039
Deferred tax liabilities Temporary differences: Property, plant and equipment Exploration expenditure Prepayments Other	(17,938) (17,225,040) - (844) (17,243,822)	36,326 (16,751,035) (18,919) 1,589 (16,732,039)

		Consolidated
	2010	2009
	\$	\$
Unrecognised deferred tax assets
Unused tax losses	40,140,347	34,031,390
Unused capital losses	15,022	-
Temporary differences:
Property, plant and equipment	(17,938)	36,326
Accruals	25,927	39,692
Employee entitlements	131,020	142,898
Capital raising costs	797,576	532,148
Exploration expenditure	(17,225,040)	(16,751,035)
Prepayments	-	(18,919)
Other	(844)	1,589
	23,866,070	18,014,089
Potential tax effect at 30%	7,159,821	5,407,227

8. CURRENT ASSETS – CASH AND CASH EQUIVALENTS

		Consolidated
	2010	2009
	\$	\$
Cash at bank and in hand	1,602,313	1,916,742

9. CURRENT ASSETS – TRADE & OTHER RECEIVABLES

		Consolidated
	2010	2009
	\$	\$
Trade receivables	1,319	19,285
Other receivables	79,905	47,868
Prepayments	83,146	207,524
	164,370	274,677

Trade and other receivables do not contain impaired assets and are not past due.

10. NON CURRENT ASSETS – AVAILABLE-FOR-SALE FINANCIAL ASSETS

	Consolidated
	2010	2009
	\$	\$
Shares in an unlisted company – at cost	162,586	162,586

Unlisted shares comprise an investment in Opal Horizon Limited.

11. NON CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT

Consolidated	Furniture and fittings	Motor Vehicles	Leased Motor Vehicles	Plant and Equipment	Total
	\$	\$	\$	\$	\$
Year ended 31 December 2009 Opening net book amount Additions Disposals Depreciation charge	63,923 20,245 - (26,684)	114,013 91,142 - (34,172)	243,959 - - (45,991)	606,061 448,152 (137,825) (140,723)	1,027,956 559,539 (137,825) (247,570)
Closing net book amount	57,484	170,984	197,967	775,665	1,202,100
At 31 December 2009 Cost Accumulated depreciation	135,198 (77,714)	244,857 (73,873)	287,346 (89,379)	1,088,279 (312,614)	1,755,680 (553,580)
Net book amount	57,484	170,984	197,967	775,665	1,202,100
Year ended 31 December 2010 Opening net book amount Additions Disposals Depreciation charge	57,484 - - (16,422)	170,984 444 - (34,266)	197,967 - - (39,593)	775,665 23,379 (5,805) (191,324)	1,202,100 23,823 5,805) (281,605)
Closing net book amount	41,062	137,162	158,374	601,915	938,513
At 31 December 2010 Cost Accumulated depreciation	135,198 (94,136)	245,301 (108,139)	287,346 (128,972)	1,104,136 (502,221)	1,771,981 (833,468)
Net book amount	41,062	137,162	158,374	601,915	938,513

12. NON-CURRENT ASSETS – EXPLORATION AND EVALUATION

	Consolidated
	2010	2009
	\$	\$
Exploration and evaluation – at cost less impairment	18,791,274	17,820,255
Opening balance	17,820,255	12,492,294
Costs capitalised during the year	3,008,713	5,607,547
Costs written off during the year	(2,037,694)	(279,586)
Closing balance	18,791,274	17,820,255

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

At balance date the carrying amount of exploration and evaluation expenditure was \$18,791,274 of which \$3,618,196 is attributable to the significant exploration of the Group's Cyclone Heavy Mineral Project.

As disclosed in the above Directors' Report, "Events Subsequent to Reporting Date", in January 2011 the Directors commissioned an independent valuation of the Cyclone Heavy Mineral Project. The indicative value for the Project was estimated to be between \$142 million to \$170 million, with the most likely value being \$156 million.

13. NON CURRENT ASSETS – OTHER

		Consolidated
	2010	2009 \$
	\$
Rent guarantee deposit	105,669	105,669
Security deposits	577,444	558,072
	683,113	663,741

14. CURRENT LIABILITIES – TRADE & OTHER PAYABLES

		Consolidated
	2010	2009
	\$
Unsecured		\$
Trade payables	145,782	70,294
Other payables and accruals	68,631	68,611
Employee benefits	41,501	64,140
	255,914	203,045

Trade payables are non-interest bearing and are normally settled on 30 day terms.

15. INTEREST BEARING LIABILITIES

	Consolidated
	2010	2009
	\$	\$
Secured
Finance lease liabilities - current	45,107	42,083
Finance lease liabilities – non-current	130,050	175,157
	175,157	217,240

Lease liabilities are secured over the rights to the leased assets recognised in the Consolidated Statement of Financial Position which will revert to the lessor if the Group defaults.

16. NON-CURRENT LIABILITIES – PROVISIONS

	Consolidated
	2010	2009
	\$	\$
Employee benefits	89,519	78,758

17. CONTRIBUTED EQUITY

	2010	2009	2010	2009
	\$	\$	No.	No.
(a) Share capital Fully paid ordinary shares	33,321,487	28,724,912	265,947,384	202,191,209

(b) Movements in ordinary share capital

Date	Details	Number of shares	Issue price \$	\$
1 January 2009 April May June August October November December	Opening balance Shares issued Shares issued Shares issued Shares issued Shares issued Shares issued Shares issued Share issue costs	144,999,921 14,333,333 11,000,000 2,259,996 4,500,000 17,900,000 3,300,000 3,897,959 -	0.1423 0.1400 0.1500 0.1600 0.1225 0.1225 0.1225	21,259,642 2,040,000 1,540,000 339,000 720,000 2,192,750 404,250 477,500 (248,230)
31 December 2009	Balance	202,191,209		28,724,912

Date	Details	Number of shares	Issue price \$	\$
1 January 2010	Opening balance	202,191,209		28,724,912
March April	Shares issued Shares issued	3,300,000 20,350,000	0.1225 0.0900	404,250 1,831,500
June August	Shares issued Shares issued	200,000 8,823,525	0.0900 0.0850	18,000 749,999
November	Shares issued	25,082,650	0.0700	1,755,786
December	Shares issued Share issue costs	6,000,000 -	0.0700	420,000 (582,960)
31 December 2010	Balance	265,947,384		33,321,487

Ordinary shares

Holders of ordinary shares are entitled to receive dividends that may be declared from time to time and are entitled to one vote per share at shareholders' meetings.

In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds from liquidation.

Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares.

(c) Share Options

		Number at end of year
Expiry date	Exercise Price	2010	2009
30 June 2011 (unlisted) 31 July 2011 (unlisted)	\$0.47 \$0.47	16,800,000 3,000,000	17,550,000 3,000,000
		19,800,000	20,550,000

During the year 750,000 options with an expiry date of 30 June 2011 have been cancelled in accordance with the provisions of the Employee and Officers Option Plan 2006.

No share options were exercised during the financial year (2009: nil).

Share options

Share options issued by the Company carry no rights to dividends and no voting rights. All options are exercisable for cash on a 1:1 basis.

18. RESERVE

	Consolidated
	2010	2009
	\$	\$
Share-based payment - option reserve	87,670	87,670

Nature and purpose of share-based payment – option reserve

The share-based payment - option reserve is used to recognise the fair value of options issued under the employee share option plan.

19. ACCUMULATED LOSSES

		Consolidated
	2010	2009
	\$	\$
Accumulated losses at the beginning of the year Loss attributable to owners of Diatreme Resources Limited Accumulated profit transferred on acquisition of non	(7,271,524) (4,000,451)	(4,816,089) (2,739,545)
controlling interest during the year	-	284,110
Accumulated losses at the end of the year	(11,271,975)	(7,271,524)

20. FINANCIAL INSTRUMENTS

The Group's principal financial instruments comprise cash and short-term deposits. The main purpose of these financial instruments is to fund the Group's operations.

The Group does not use any form of derivatives as it is not at a level of exposure that requires the use of derivatives to hedge its exposure. Exposure limits are reviewed by management on a continuous basis. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

(a) Categories of financial instruments

	Consolidated
	2010	2009
	\$	\$
Financial assets
Cash and cash equivalents	1,602,313	1,916,742
Trade and other receivables	1,163,086	938,418
Available-for-sale financial assets	162,586	162,586
Total financial assets	2,927,985	3,017,746

	Consolidated
	2010 \$
Financial liabilities
Trade and other payables	255,914	203,045
Interest-bearing liabilities	175,157	217,240
Total financial liabilities	431,071	420,285

The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework which is summarised below:

(b) Capital risk

The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. As an emerging explorer, the Group does not establish a return on capital. Capital management requires the maintenance of strong cash balance to support ongoing exploration. There were no changes in the Group's approach to capital management during the year. The Group is not subject to externally imposed capital requirements.

(c) Market risk

(i) Interest rate risk

Exposure to interest rate risk arises on financial assets and financial liabilities recognised at the end of reporting period whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instrument. The Group is also exposed to earning volatility on floating rate instruments. The Group does not have a formal policy in place to mitigate interest rate risks as the Group's income and operating cash flows are not materially exposed to changes in market interest rates.

At balance date, the Group had the following financial assets which are interest bearing:

		Consolidated
	2010 2009
	\$	\$
Cash and cash equivalents (variable interest rates) Security deposits (fixed interest rates)	1,602,313 577,444	1,916,742 558,072
	2,179,757	2,474,814

(ii) Interest rate sensitivity analysis

An increase of 80 basis points in interest rates at the reporting date, with all other variables held constant, would have decreased the Group's loss and increased equity by \$17,416 (2009: \$19,799). Where interest rates decreased, there would be an equal and opposite impact on the loss and equity.

(iii) Price risk

The Group is exposed to equity securities price risk. This arises from an investment held by the Group and classified on the consolidated statement of financial position as an available-for-sale financial asset.

The price risk for unlisted securities is immaterial in terms of the possible impact on profit or loss or total equity. A sensitivity analysis has therefore not been performed.

The Group is not exposed to commodity price risk or currency risk.

(d) Credit risk

Credit risk is the risk that a contracting entity will not complete its obligation under a financial instrument that will result in a financial loss to the Group. The carrying amount of financial assets represents the maximum credit exposure.

The Group manages any credit risk associated with its funds on deposit by ensuring that it only invests its funds with reputable financial institutions.

At 31 December 2010, trade and other receivables are mostly receivable within 30 days.

(e) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.

The Group manages liquidity risk by maintaining adequate cash reserves from funds raised in the market and by continuously monitoring forecast and actual cash flows.

The following are the contractual maturities of financial liabilities:

Consolidated	amount	Carrying Contractual Cash Flow	< 6 Months	6-12 Months	1-3 Years	> 3 Years
	\$	\$	\$	\$	\$	\$
31 Dec 2010
Trade and other payables	255,914	(255,914)	(255,914)	-	-	-
Interest bearing liabilities	175,157	(192,083)	(29,953)	(28,898)	(133,232)	-
	431,071	(447,997)	(285,867)	(28,898)	(133,232)	-
31 Dec 2009
Trade and other payables	203,045	(203,045)	(203,045)	-	-	-
Interest bearing liabilities	217,240	(251,990)	(29,953)	(29,953)	(192,084)	-
	420,285	(455,035)	(232,998)	(29,953)	(192,084)

(f) Fair values

The carrying amount of financial assets and financial liabilities recorded in the financial statements approximate their respective net fair values, other than as noted below.

The fair value of the non current asset comprising available-for-sale financial assets has been valued at cost. As disclosed in the above Note 10, the assets are shares in an unlisted company Opal Horizon Limited and as such their fair value can not be determined reliably. This is because there is not an active market for the issued shares of the company as the investment is not listed. The intention at this stage is to not dispose of the shares.

21. KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) Key management personnel compensation

	Consolidated
	2010	2009
	\$	\$
Short-term employee benefits	843,175	804,788
Post-employment benefits	49,770	43,838
Long-term benefits	8,553	12,433
Share-based payments	-	-
	901,498	861,059

Detailed remuneration disclosures are provided in sections A and B of the remuneration report in the Directors' Report.

(b) Key management personnel equity holdings

Options

	Balance at 1	Granted as Jan No. Compensation No.	Exercised No.	Changes No.	Other Balance at 31 Dec No.	Vested & Exercisable No.
2010
A J Fawdon	5,000,000	-	-		5,000,000	5,000,000
D H Hall	4,100,000	-	-	-	4,100,000	4,100,000
L J Litzow #	2,500,000	-	-	(2,500,000)	-	-
G H White	2,500,000	-	-	-	2,500,000	2,500,000
A Tsang	-	-	-	-	-	-
D A Jelley	1,500,000	-	-	-	1,500,000	1,500,000
	15,600,000				13,100,000	13,100,000
Total				(2,500,000)
2009
A J Fawdon	5,000,000	-	-	-	5,000,000	5,000,000
D H Hall	4,100,000	-	-	-	4,100,000	4,100,000
L J Litzow	2,500,000	-	-	-	2,500,000	2,500,000
G H White	2,500,000	-	-	-	2,500,000	2,500,000
A Tsang	-	-	-	-	-	-
D A Jelley	1,500,000	-	-	-	1,500,000	1,500,000

# Net other changes relates to holdings at date of resignation 30 November 2010.

Ordinary Shares

	Balance at the	Received on start of the year exercising options	Net purchased / (sold)	Other changes	Balance at the end of the year
2010
A J Fawdon D H Hall	3,231,398 2,513,667	- -	50,000 36,333	423 -	3,281,821 2,550,000
L J Litzow (1)	4,461,785	-	-	(4,461,785)	-
G H White	-	-	50,000	-	50,000
A Tsang	34,802,428	-	6,542,190	-	41,344,618
D A Jelley	-	-	-	-	-
Total	45,009,278	-	6,678,523	(4,461,362)	47,226,439
2009
A J Fawdon	3,231,398	-	-	-	3,231,398
D H Hall	2,492,000	-	21,667	-	2,513,667
L J Litzow	4,461,785	-	-	-	4,461,785
G H White	-	-	-	-	-
A Tsang (2)	17,599,700	-	4,604,769	12,597,959	34,802,428
D A Jelley	-	-	-	-	-
Total	27,784,883	-	4,626,436	12,597,959	45,009,278

(1) Resigned from Board 30 November 2010

(2) Appointed to Board 23 January 2009

22. REMUNERATION OF AUDITORS

		Consolidated
	2010	2009
	\$	\$
Amounts received by the Company's former auditor – Hacketts DFK: Audit and review of the financial statements	4,135	25,105
Amounts received, or due and receivable, by the Company's current auditor - BDO Audit (QLD) Pty Ltd:
Audit and review of the financial statements	31,000	-
	35,135	25,105

23. CONTINGENCIES

• (a) The Group has possible exposure to a contingent liability totalling \$54,000 relating to an unresolved stamp duty matter in Western Australia.
• (b) On transfer of the Tick Hill mining tenements to the Group there will be a requirement to pay \$100,000 option exercise fee.
• (c) The Group has exposure to meet costs associated with the remediation of contaminated soil resulting from a field camp diesel spill at one of its exploration sites. It is not practical to estimate the total liability at this stage, and the level of provision is dependent on the outcome of investigations.

24. COMMITMENTS

(a) Tenement expenditure commitments

So as to maintain current rights to tenure of exploration tenements, the Group will be required to outlay amounts in respect of tenement rent to the relevant governing authorities and to meet certain annual exploration expenditure commitments. These outlays (exploration expenditure and rent), which arise in relation to granted tenements, inclusive of tenement applications are as follows:

	Consolidated
	2010	2009
	\$	\$
Payable within 1 year Payable between one and five years	809,603 1,824,976	1,544,999 6,302,736
	2,634,579	7,847,735

The outlays may be varied from time to time, subject to approval of the relevant government departments, and may be relieved if a tenement is relinquished. Cash security bonds totalling \$577,444 (2009: \$558,072) are currently held by the relevant governing authorities to ensure compliance with granted tenement conditions.

(b) Operating lease commitments

	Consolidated
	2010	2009
	\$	\$
Payable within 1 year	285,225	236,421
Payable between one and five years	1,362,222	132,496
	1,647,447	368,917

Leasing arrangements for the rental of office space expiring on 31 July 2016.

(c) Finance leases commitments

		Consolidated
	2010	2009
	\$	\$
Payable within 1 year	58,851	59,906
Payable between one and five years	133,232	192,084
Payable later than five years	-	-
Minimum lease payments	192,083	251,990
Future finance charges	(16,926)	(34,750)
Recognised as a liability	175,157	217,240
Representing interest-bearing liabilities (Note 15): Current Non-current	45,107 130,050	42,083 175,157
	175,157	217,240

The Group leases five motor vehicles under finance lease agreements.

25. RELATED PARTY TRANSACTIONS

(a) Parent entity

The ultimate parent entity in the Group is Diatreme Resources Limited.

(b) Subsidiaries

Interests in subsidiaries are set out in Note 26.

(c) Key management personnel

Disclosures relating to key management personnel are set out in Note 21.

(d) Transactions with related parties

The following transactions occurred with related parties:

		Consolidated
	2010	2009
	\$	\$
Management fee charged to Director related entities (Opal Horizon Ltd, Superior Resources Ltd, and Xtreme Resources Ltd)	6,201	64,355
Reimbursement of employee benefits and on-cost from Director related entities	-	6,038

(e) Loans to related parties

		Consolidated
	2010	2009
	\$	\$
Loan to Xtreme Resources Limited (Director related entity) #
Beginning of the year	-	403,306
Loan repayment	-	(400,000)
Loans forgiven	-	(3,306)
End of the year	-	-

A J Fawdon was Non-executive Chairman of Xtreme Resources Limited from 2006 to 2009, and D H Hall was Non-executive Director of Xtreme Resources Limited from 2006 to 2009.

26. GROUP ENTITIES

		Ownership Interest
Subsidiaries	Country of Incorporation	2010	2009
Regional Exploration Management Pty Ltd	Australia	100%	100%
Chalcophile Resources Pty Ltd *	Australia	100%	100%
Lost Sands Pty Ltd	Australia	100%	100%

* This entity is 100% owned by Regional Exploration Management Pty Ltd.

Effects of change in ownership of Lost Sands Pty Ltd

In August 2009 Diatreme Resources Limited issued 4,500,000 shares to Zircon Resources Limited for the sum of \$720,000 to acquire the 25% equity position in Lost Sands Pty Ltd held by Zircon Resources Limited. The impact of the increase in interests in Lost Sands Pty Ltd has been recognised in equity (Refer Statement of Changes in Equity).

27. RECONCILIATION OF NET PROFIT/(LOSS) TO NET CASH FLOW FROM OPERATING ACTIVITIES

		Consolidated
	2010	2009
	\$	\$
Loss for the year	(4,000,451)	(2,759,476)
Non-cash items
Depreciation	281,605	247,570
Capitalised exploration expenditure written-off	2,037,694	279,585
Loss / (profit) on sale of fixed assets	2,804	5,824

		Consolidated
	2010	2009
	\$	\$
Movements in operating assets and liabilities
Decrease / (increase) in receivables	110,309	82,827
Decrease / (increase) in current tax asset	(315,603)	-
Decrease / (increase) in other assets	-	(35,794)
Increase / (decrease) in payables	63,468	(10,653)
Increase / (decrease) in provisions	10,761	(3,645)
Net cash outflow from operating activities	(1,809,413)	(2,193,702)

28. EARNINGS PER SHARE

	Consolidated
	2010 Cents	2009 Cents
Basic earnings per share (loss) Diluted earnings per share (loss)	(1.8) (1.8)	(1.6) (1.6)

Weighted average number of shares used as the denominator

	2010 Number	2009 Number
Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share	227,551,989	172,890,874
Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share	227,551,989	172,890,874

Information concerning earnings per share

Earnings for the purpose of the calculation of basic earnings per share and also diluted earnings per share, is the loss attributable to owners of Diatreme Resources Limited of \$4,000,451 (2009: loss \$2,739,545).

Options granted are usually considered to be potential ordinary shares and taken into account in the determination of diluted earnings per share and are not included in the determination of basic earnings per share. In the circumstances of the Group, the options are not dilutive and are therefore not used in the calculation of diluted earnings per share. Details of the options are set out in Note 17(c).

29. SHARE-BASED PAYMENTS

Share-based payments are granted at the discretion of the Board and provide long term incentives for Directors and employees of the Group.

Each option issued converts to one ordinary share of Diatreme Resources Limited on exercise. No amounts are paid or payable by the recipient on receipt of the option. Options neither carry rights or dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry.

Set out below are summaries of the share-based payment arrangements:

Options grant date	Expiry date	Exercise price	Balance at start of the year	Granted during the year	Exercised during the year	Forfeited during the year	Balance at end of the year	Exercisable at end of the year
July 2006	30 Jun 2011	\$0.47	6,500,000	-	-	-	6,500,000	6,500,000
August 2006	30 Jun 2011	\$0.47	100,000	-	-	-	100,000	100,000
June 2007	30 Jun 2011	\$0.47	4,300,000	-	-	-	4,300,000	4,300,000
June 2008	30 Jun 2011	\$0.47	6,400,000	-	-	(500,000)	5,900,000	5,900,000
August 2008	30 Jun 2011	\$0.47	250,000	-	-	(250,000)	-	-
Total			17,550,000			(750,000)	16,800,000	16,800,000

In accordance with the terms of the share-based arrangements all options issued vested prior to 1 January 2009.

(a) Expenses arising from share-based payment transactions

Total expense arising from share-based payment transactions recognised during the year was nil (2009: nil).

30. PARENT ENTITY INFORMATION

	2010	2009
Financial position	\$	\$
Current assets Non-current assets	1,719,211 22,958,819	1,817,998 20,599,221
Total assets	24,678,030	22,417,219
Current liabilities Non-current liabilities Total liabilities	171,606 89,519 261,125	174,670 78,758 253,428
Net assets	24,416,905	22,163,791
Shareholders' equity Contributed equity Option reserve Accumulated losses	33,321,487 87,670 (8,992,253)	28,724,912 87,670 (6,648,791)
Total equity	24,416,905	22,163,791

	2010	2009
	\$	\$
Loss for the year	(2,343,462)	(1,774,710)
Total comprehensive loss for the year	(2,343,462)	(1,774,710)
Tenement expenditure commitments
Payable within 1 year Payable between one and five years	243,396 150,000	113,864 -
	393,396	13,864
Operating lease commitments
Payable within 1 year Payable between one and five years	271,853 1,362,222	222,040 132,496
	1,634,075	354,536

31. EVENTS SUBSEQUENT TO REPORTING DATE

On 23 February 2011 the Company announced a non-renounceable Rights Issue to shareholders on a 1 for 3 basis, with 1 free attaching option per share exercisable on or before 30 September 2013. The total amount expected to be raised from the Rights Issue is approximately \$7.1 million.

No other matter or circumstance has arisen since the end of the financial year that has significantly affected, or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in financial years subsequent to 31 December 2010.

32. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS

At the date of authorisation of the financial report, certain Standards and Interpretations were on issue but not yet effective. These Standards and Interpretations have not been adopted in the preparation of the financial report for the year ended 31 December 2010. None of these Standards and Interpretations is expected to have significant effect on the consolidated financial statements of the Group, except for AASB 9 Financial Instruments, which becomes mandatory for the Group's 2013 consolidated financial statements and could change the classification and measurement of financial assets.

The Group does not plan to adopt this Standard early and the extent of the impact has not been determined.

The Group expects to first apply these Standards and Interpretations in the financial report of the Group relating to the annual reporting period beginning after the effective date of each pronouncement.

Directors' Declaration

The Directors declare that the financial statements and notes set out on pages 37 to 65 are in accordance with the Corporations Act 2001 and:

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

(b) give a true and fair view of the consolidated entity's financial position as at 31 December 2010 and of its performance for the year ended on that date.

The consolidated entity has included in the notes to the financial statements an explicit and unreserved statement of compliance with International Financial Reporting Standards.

In the Directors' opinion, given reasonable assumptions in regards to the Company's ability to raise additional funds and/or scale back activities, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

The remuneration disclosures included in pages 31 to 34 of the Directors' Report (as part of the audited Remuneration Report), for the year ended 31 December 2010 comply with Section 300A of the Corporations Act 2001.

The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by Section 295A.

This declaration is made in accordance with a resolution of the Directors.

A J Fawdon Executive Chairman/CEO

Brisbane, 25 March 2011

Independent Auditor's Report to the members of Diatreme Resources Limited

Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au

Level 18, 300 Queen St Brisbane QLD 4000, GPO Box 457, Brisbane QLD 4001 Australia

Report on the Financial Report

We have audited the accompanying financial report of Diatreme Resources Limited, which comprises the consolidated statement of financial position as at 31 December 2010, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year.

Directors' Responsibility for the Financial Report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statement comply with International Financial Reporting Standards.

Auditor's Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

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

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Diatreme Resources Limited, would be in the same terms if given to the directors as at the time of this auditor's report.

BDO Audit (QLD) Pty Ltd ABN 33 134 022 870

BDO is the brand name for the BDO International network and for each of the BDO Member Firms. BDO in Australia is a national association of separate entities. Liability of each entity is limited by a scheme approved under the Professional Standards Legislation other than for acts or omissions of financial services licensees.

Opinion

In our opinion:

(a) the financial report of Diatreme Resources Limited is in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the consolidated entity's financial position as at 31 December 2010 and of its performance for the year ended on that date; and
• (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001.

(b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Emphasis of Matters on Going Concern and Carrying Value of Exploration Expenditure

Without qualification to the opinion expressed above, we draw attention to the matters set out in Note 1. The financial statements have been prepared on a going concern basis which contemplates the continuity of normal business activities and the realisation of assets and discharge of liabilities in the ordinary course of business. This includes the realisation of capitalised exploration and evaluation expenditure of \$18,791,274 (31 December 2009: \$17,820,255). The ability of the consolidated entity to maintain continuity of normal business activities, to pay their debts as and when they fall due and to recover the carrying value of their areas of interest, is dependent upon the ability of the consolidated entity to successfully raise additional capital and/or the successful exploration and subsequent exploitation of their areas of interest through sale or development. As a result of these factors, there exists material uncertainty regarding the ability of the consolidated entity to continue as a going concern.

No adjustments have been made to the carrying value of assets or recorded amount of liabilities should the consolidated entity plans not eventuate.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 31 to 34 of the directors' report for the year ended 31 December 2010. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Opinion

In our opinion, the Remuneration Report of Diatreme Resources Limited for the year ended 31 December 2010 complies with section 300A of the Corporations Act 2001.

BDO Audit (QLD) Pty Ltd

C J Skelton Director Brisbane: 25 March 2011

BDO Audit (QLD) Pty Ltd ABN 33 134 022 870 BDO is the brand name for the BDO International network and for each of the BDO Member Firms. BDO in Australia is a national association of separate entities. Liability of each entity is limited by a scheme approved under the Professional Standards Legislation other than for acts or omissions of financial services licensees.

Shareholder Information

2010

Shareholder Information

The information set out below was applicable at 20 April 2011.

A DISTRIBUTION OF ASX QUOTED EQUITY SECURITIES

Analysis of numbers of equity security holders by size of holding:

Ordinary Shares

Range	Holders	%	Shares	%
1 to 1,000	669	24.24	159,787	0.05
1,001 to 5,000	317	11.49	885,150	0.25
5001 to 10,000	305	11.05	2,559,574	0.72
10,001 to 50,000	831	30.11	22,714,986	6.41
50,001 to 100,000	247	8.95	19,771,044	5.58
100,001 and Over	391	14.17	308,506,882	87.00
Total	2,760	100.00	354,597,423	100.00

The number of security investors holding less than a marketable parcel of 5,000 securities on 20/04/2011 was 937 and they held 806,359 securities.

15 cent Options exercisable on or before 30 September 2013.

Range	Holders	%	Options	%
1 to 1,000	21	4.15	9,228	0.01
1,001 to 5,000	99 1	9.57	292,977	0.33
5001 to 10,000	74	14.62	597,021	0.67
10,001 to 50,000	155	30.63	4,065,672	4.59
50,001 to 100,000	49	9.68	3,850,702	4.34
100,001 and Over	108	21.34	79,834,439	90.06
Total	506	100.00	88,650,039	100.00

B ASX QUOTED EQUITY SECURITY HOLDERS

The names of the twenty largest holders of ASX listed ordinary shares ("DRX") are listed below:

Rank	Name	Number of Shares	%IC
1	MR ANDREW TSANG	38,295,600	10.80%
2	DORAL MINERAL INDUSTRIES LIMITED	23,500,000	6.63%
3	MS LEI YOU	22,051,393	6.22%
4	ZHANGXI ZENG	16,306,638	4.60%
5	MR CHAOHUI ZHANG	10,068,668	2.84%
6	XIANG RONG (AUSTRALIA) CONSTRUCTION GROUP PTY LTD
		8,574,304	2.42%
7	HUNTLEY CUSTODIANS LIMITED	6,842,860	1.93%
8	MR GUOZHONG YU	5,133,333	1.45%
9	MS LEI YOU	4,256,254	1.20%
10	MR GUOZHAN ZENG	4,120,000	1.16%

Diatreme Resources Limited

11	MS CHUNXIANG ZENG	4,000,000	1.13%
12	COMSEC NOMINEES PTY LIMITED	3,478,933	0.98%
13	TERRA SEARCH PTY LTD	3,444,340	0.97%
14	HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED	3,410,500	0.96%
15	MR CHAOHUI ZHANG	3,143,641	0.89%
16	DR RICHARD KENNETH HART & MS LYNETTE MARY HART
		3,000,000	0.85%
17	LAWRENCE JAMES LITZOW	2,925,526	0.83%
18	IMAGE RESOURCES NL	2,777,617	0.78%
19	IMAGE RESOURCES NL	2,700,000	0.76%
20	MR JUNYONG CHEN	2,580,000	0.73%
TOTAL		170,609,607	48.11%
Balance of Register		183,987,816	51.89%
	Total Ordinary Shares on issue (20-04-2011)	354,597,423	100.00%

The names of the twenty largest holders of ASX listed options ("DRXO") are listed below:

Rank	Name	Number of Listed Options	%IC
1	MS LEI YOU	22,051,393	24.87%
2	MR ANDREW TSANG	9,573,900	10.80%
3	MR CHAOHUI ZHANG	3,143,641	3.55%
4	MR CHAOHUI ZHANG	2,517,167	2.84%
5	ZHANGXI ZENG	2,250,000	2.54%
6	XIANG RONG (AUSTRALIA) CONSTRUCTION GROUP
	PTY LTD	2,143,576	2.42%
7	LAWRENCE CROWE CONSULTING PTY LTD
		2,000,000	2.26%
8	MR MATTHEW DAVID BURFORD	1,500,000	1.69%
9	ABN AMRO CLEARING SYDNEY NOMINEES PTY LTD
		1,451,294	1.64%
10	MS LEI YOU	1,064,064	1.20%
11	MS CHUNXIANG ZENG	1,000,000	1.13%
12	GOFFACAN PTY LTD	1,000,000	1.13%
13	MR GIOVANNI SPAGNOLO	1,000,000	1.13%
14	PRIVATE EQUITY SERVICES PTY LTD	1,000,000	1.13%
15	BUTLER GIBPAT LTD	923,371	1.04%
16	FW HOLST & CO PTY LTD	800,000	0.90%
17	MR SIMON ROBERT EVANS	750,000	0.85%
18	MR ROBERT PROE	740,599	0.84%
19	NAIL BITER PTY LTD	700,000	0.79%
20	MRS WENZHEN ZHANG	666,956	0.75%
TOTAL		56,275,961	63.48%
	Balance of Register	32,374,078	36.52%
	Total Listed Options on issue (20-04-2011)	88,650,039	100.00%

C UNQUOTED OPTIONS

Description	Number on issue	Number of holders
Options expiring 30/06/2011 ex 47 cents	16,800,000	11
Options expiring 30/07/2011 ex 47 cents	3,000,000	1

Holders of greater than 10% of unquoted options (in the class) are set out below:

Name	Number held	%IC
Options expiring 30/06/2011 ex 47 cents
Anthony John Fawdon	5,000,000	25.25%
David Hugh Hall	2,500,000	12.63%
Elizabeth Valerie Litzow	2,000,000	11.90%
Cristo Pty Ltd George White Family	2,000,000	11.90%
Options expiring 30/07/2011 ex 47 cents Doral Mineral Industries Limited	3,000,000	100.00%

D SUBSTANTIAL HOLDERS

Substantial holders of ordinary shares in the Company are set out below:

Name	Number held	%IC
Andrew Tsang (and related parties)	77,177,551	21.76%
Doral Mineral Industries Limited	23,500,000	6.63%

E VOTING RIGHTS

The voting rights attaching to each class of equity securities are set out below:

Ordinary Shares

On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote.

Options

No voting rights.

ABN 33 061 267 061

Registered and Principle Office Level 2, 87 Wickham Terrace, Spring Hill, Qld 4000 PO Box 10288, Brisbane Adelaide Street, Qld 4000

Telephone: 07 3832 5666 Facsimile: 07 3832 5300 Email: manager@diatreme.com.au Website: www.diatreme.com.au