XSTATE RESOURCES LIMITED

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ABN 96 009 217 154

23 April 2012

ASX Limited

Electronic lodgement

DESPATCH OF 2011 ANNUAL REPORT AND NOTICE OF AGM

Attached is copy of the 2011 Annual Report together with the Notice of Annual General Meeting, Proxy Form and Explanatory Memorandum which have been despatched to shareholders today.

A copy of the Annual Report and Notice of Annual General Meeting is also available on our website www.xstate.com.au.

For and on behalf of the Board.

41 Stirling Highway, Nedlands WA 6009 Tel + 61 8 9423 3200 Fax +61 8 9389 8327 www.xstate.com.au

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ABN 96 009 217 154

NOTICE OF ANNUAL GENERAL MEETING

PROXY FORM ```````````````

AND

EXPLANATORY MEMORANDUM

Date of Meeting Thursday, 24[th] May 2012

Time of Meeting 4:00pm (WST)

Place of Meeting

208 Bagot Road Subiaco, Western Australia

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of the Shareholders of XState Resources Limited will be held at 4.00 pm on Thursday, 24 May, 2012 at 208 Bagot Road, Subiaco, Western Australia.

In order to determine voting entitlements, the register of Shareholders will be closed at 7.00 pm (Sydney time) on 22 May 2012.

An Explanatory Memorandum containing information in relation to each of the resolutions to be put to the meeting accompanies this Notice.

AGENDA

To consider and, if thought fit, to pass the following resolutions.

ORDINARY BUSINESS

2011 Accounts

To receive and consider the Directors’ report and income statement for the year ended 31 December 2011, the balance sheet at that date, the Auditors’ report and the Directors’ declaration on the accounts.

NON-BINDING ORDINARY RESOLUTION 1: Directors’ Remuneration Report

To receive and consider the Directors’ Remuneration Report for the year ended 31 December 2011 and, if thought fit, to pass, with or without amendment, the following resolution as a non-binding resolution:

“That, pursuant to and in accordance with section 250R(2) of the Corporations Act, the Directors’ Remuneration Report contained within the Directors’ Report for the financial year ended 31 December 2011 be adopted.”

Note: the vote on this Resolution is advisory only and does not bind the Directors of the Company.

Voting Prohibition Statement:

A vote on this Resolution must not be cast (in any capacity) by or on behalf of any of the following persons:

(a) a member of the Key Management Personnel, details of whose remuneration are included in the Remuneration Report; or
(b) a Closely Related Party of such a member.

However, a person described above may vote on this Resolution if:

(a) the person does so as a proxy appointed by writing that specifies how the proxy is to vote on the Resolution; and
(b) the vote is not cast on behalf of a person described in sub-paragraphs (a) or (b) above.

ORDINARY RESOLUTION 2: Re-election of Mr David Whitby as a Director of the Company

Clause 12.2 of the Company’s Constitution provides that at every Annual General Meeting of the Company one-third of the directors (other than alternate Directors and the Managing Director) shall retire from office. The Directors to retire at an Annual General Meeting are those who have been longest in office since their last election. A retiring Director is eligible for re-election.

Accordingly, pursuant to Clause 12.2 of the Company’s Constitution, David Whitby being a Director of the Company, retires by way of rotation and, being eligible, offers himself for re-election as a Director of the Company.

ORDINARY RESOLUTION 3: Approval to Issue up to 25,000,000 Shares

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

“That for the purposes of Listing Rule 7.1 of the ASX Listing Rules and for all other purposes, approval is given for the Directors to issue and allot up to 25,000,000 Shares on the terms and conditions described in the Explanatory Memorandum.

Voting Exclusion Statement:

The Company will disregard any votes cast on Resolution 3 by a person who may participate in the issue or any person who may obtain a benefit if the Resolution is passed (except a benefit solely in the capacity of a holder of ordinary securities) and any associates of those persons. However, the Company need not disregard a vote if cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form or is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

By Order of the Board

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D M McARTHUR

Company Secretary

Dated: 12 April 2012

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

EXPLANATORY MEMORANDUM

This Explanatory Memorandum is intended to provide shareholders with sufficient information to assess the merits of the Resolutions contained in the accompanying Notice of Annual General Meeting (“ Notice ”) of the Company.

The Directors of the Company (“ Directors ”) recommend shareholders read this Explanatory Memorandum in full before making any decision in relation to the resolutions.

The following information should be noted in respect of the various matters contained in the accompanying Notice:

NON-BINDING ORDINARY RESOLUTION 1: Directors’ Remuneration Report

General

The Corporations Act requires that at a listed company’s annual general meeting, a resolution that the remuneration report be adopted must be put to the shareholders. However, such a resolution is advisory only and does not bind the Directors or the Company.

Under recent changes to the Corporations Act which came into effect on 1 July 2011, if at least 25% of the votes cast on Resolution 1 are voted against adoption of the Remuneration Report at the Annual General Meeting, and then again at the Company’s financial year 2012 Annual General Meeting, the Company will be required to put to Shareholders a resolution proposing the calling of a general meeting to consider the appointment of directors of the Company (Spill Resolution).

If more than 50% of Shareholders vote in favour of the Spill Resolution, the Company must convene the general meeting (Spill Meeting) within 90 days of the Company’s financial year 2012 Annual General Meeting. All of the Directors who were in office when the Company’s 2012 Directors’ Report was approved, other than the Managing Director of the Company, will cease to hold office immediately before the end of the Spill Meeting but may stand for re-election at the Spill Meeting. Following the Spill Meeting, those persons whose election or re-election as Directors is approved will be the Directors of the Company.

The Remuneration Report sets out the Company’s remuneration arrangements for the Directors and senior management of the Company. The remuneration report is part of the Directors’ report contained in the annual financial report of the Company for the financial year ending 31 December 2011.

A reasonable opportunity will be provided for discussion of the remuneration report at the Annual General Meeting.

Proxy Restrictions

Pursuant to the Corporations Act, if you elect to appoint the Chair, or another member of Key Management Personnel or any Closely Related Party as your proxy to vote on this Resolution 1, you must direct the proxy how they are to vote . Where you do not direct the Chair, or another member of the Key Management Personnel or Closely Related Party on how to vote on this Resolution 1, the proxy is prevented by the Corporations Act from exercising your vote and your vote will not be counted in relation to this Resolution 1.

Definitions

Key Management Personnel has the same meaning as in the accounting standards and broadly includes those persons having authority and responsibility for planning and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise) of the Company.

Closely Related Party of a member of the key Management Personnel means:

(a) a spouse or child of the member;
(b) a child of the member’s spouse;
(c) a dependant of the member or the member’s spouse;
(d) anyone else who is one of the member’s family and may be expected to influence the member, or be influenced by the member, in the member’s dealing with the entity;
(e) a company the member controls; or
(f) a person prescribed by the Corporation Regulations 2001 (Cth) .

Remuneration Report means the remuneration report set out in the Directors’ Report section of the Company’s annual financial report for the year ended 31 December 2011.

ORDINARY RESOLUTION 2: Re-election of Mr David Whitby as a Director of the Company

ASX Listing Rule 14.4 and Clause 12.2 of the Company’s Constitution provide that at every Annual General Meeting of the Company one-third of the Directors (other than alternate Directors and the Managing Director) shall retire from office. The Directors to retire are those who have been longest in office since their last election. A retiring Director is eligible for re-election.

Accordingly, Mr David Whitby, being a director of the Company, retires by way of rotation and, being eligible, offers himself for re-election as a Director of the Company.

Information about Mr Whitby is set out in the Company’s 2011 Annual Report.

ORDINARY RESOLUTION 3: Approval to Issue up to 25,000,000 Shares

The Board of Directors seek shareholder approval to issue up to 25,000,000 Shares in the Company within 3 months after the date of this Annual General Meeting. Resolution 3 will enable the Company to raise additional funds throughout the 3 month period after the Annual General Meeting through the issue of 25,000,000 Shares without the need to seek further Shareholder approval.

Listing Rule 7.1 provides that a listed company must not issue or agree to issue subject to specified exceptions during any 12 month period any equity securities which, when aggregated with the number of the other securities issued within that 12 month period, exceed 15% of the number of ordinary shares on issue at the beginning of the 12 month period, unless the issue falls within one of the nominated exceptions, or the prior approval of members of the company at a general meeting is obtained.

In compliance with Listing Rule 7.3, Shareholders are advised as follows:

(a) the maximum number of shares to be issued and allotted is 25,000,000 Shares;
(b) the shares will be issued and allotted at a date no later than 3 months after the date of the Annual General Meeting (or such later date as is approved by ASX) and it is intended that the Shares will be issued and allotted progressively during that period;
(c) the issue price of the Shares will be a minimum of 80% of the volume weighted average market price of the Shares traded on the ASX over the last 5 days before the date that the offer is made;
(d) it is intended that the Shares will be issued and allotted to sophisticated investors or other parties that may be issued Shares without the need for a prospectus under Section 708 of the Corporations Act;
(e) the Shares will rank pari passu in all respects with the Company’s existing Shares;
(f) none of the allottees will be related parties of the Company; and
(g) the Shares will be issued to provide funds for pursuing ongoing project opportunities and for working capital purposes.

PROXY FORM

APPOINTMENT OF PROXY XSTATE RESOURCES LIMITED ABN 96 009 217 154

ANNUAL GENERAL MEETING

I/We of being a member of XState Resources Limited entitled to attend and vote at the Annual General Meeting, hereby Appoint Name of proxy OR the Chair of the Annual General Meeting as your proxy

or failing the person so named or, if no person is named, the Chair of the Annual General Meeting, or the Chair’s nominee, to vote in accordance with the following directions, or, if no directions have been given, as the proxy sees fit, at the Annual General Meeting to be held at 4.00 pm (WST) on 24 may 2012 at 208 Bagot Road, Subiaco, Western Australia, and at any adjournment thereof.

Important for Resolution 1: If the Chair of the Meeting or any member of the Key Management Personnel of the Company or a Closely Related Party of a member of the Key Management Personnel of the Company is your proxy and you have not directed the proxy to vote on Resolution 1, the proxy will be prevented from casting your votes on Resolution 1. If the Chair, another member of the Key Management Personnel of the Company or Closely Related Party of a member of the Key Management Personnel is your proxy, in order for your votes to be counted on Resolution 1, you must direct your proxy how to vote on Resolution 1

If no directions are given, the Chair will vote in favour of all the Resolutions in which the Chair is entitled to vote undirected proxies.

Voting on Business of the Annual General Meeting

FOR AGAINST ABSTAIN

Resolution 1 - Adoption of Remuneration Report Resolution 2 - Re-election of Director Resolution 3 - Approval to Issue up to 25,000,000 Shares

Please note : If you mark the abstain box for a particular Resolution, you are directing your proxy not to vote on that Resolution on a show of hands or on a poll and your votes will not to be counted in computing the required majority on a poll.

If two proxies are being appointed, the proportion of voting rights this proxy represents is

Signature of Member(s): Date: ____ Individual or Member 1 Member 2 Member 3 Sole Director/Company Secretary Director Director/Company Secretary Contact Name: _____ Contact Ph (daytime): _________

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

Instructions for Completing ‘Appointment of Proxy’ Form

( Changes to Proxy Voting ): New sections 250BB and 250BC of the Corporations Act came into effect on 1 August 2011 and apply to voting by proxy on or after that date. Shareholders and their proxies should be aware of these changes to the Corporations Act, as they will apply to this Annual General Meeting. Broadly, the changes mean that:
(a) if proxy holders vote, they must cast all directed proxies as directed; and
(b) any directed proxies which are not voted will automatically default to the Chair, who must vote the proxies as directed. Further details on these changes are set out below.
( Appointing a Proxy ): A member entitled to attend and vote at the Annual General Meeting is entitled to appoint not more than two proxies to attend and vote on a poll on their behalf. The appointment of a second proxy must be done on a separate copy of the Proxy Form. Where more than one proxy is appointed, such proxy must be allocated a proportion of the member’s voting rights. If a member appoints two proxies and the appointment does not specify this proportion, each proxy may exercise half the votes. A duly appointed proxy need not be a member of the Company.
( Proxy vote if appointment specifies way to vote ): Section 250BB(1) of the Corporations Act provides that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution and, if it does :
(a) the proxy need not vote on a show of hands, but if the proxy does so, the proxy must vote that way (i.e. as directed); and
(b) if the proxy has 2 or more appointments that specify different ways to vote on the resolution – the proxy must not vote on a show of hands; and
(c) if the proxy is the chair of the meeting at which the resolution is voted on – the proxy must vote on a poll, and must vote that way (i.e. as directed); and
(d) if the proxy is not the chair – the proxy need not vote on the poll, but if the proxy does so, the proxy must vote that way (i.e. as directed).
( Transfer of non-chair proxy to chair in certain circumstances ): Section 250BC of the Corporations Act provides that, if:
(a) an appointment of a proxy specifies the way the proxy is to vote on a particular resolution at a meeting of the Company's members; and
(b) the appointed proxy is not the chair of the meeting; and
(c) at the meeting, a poll is duly demanded on the resolution; and
(d) either of the following applies:
- (i) the proxy is not recorded as attending the meeting;
- (ii) the proxy does not vote on the resolution,
(e) the chair of the meeting is taken, before voting on the resolution closes, to have been appointed as the proxy for the purposes of voting on the resolution at the meeting.
( Signing Instructions ):
(a) ( Individual ): Where the holding is in one name, the member must sign.
(b) ( Joint Holding ): Where the holding is in more than one name, all of the members should sign.
(c) ( Power of Attorney ): If you have not already provided the Power of Attorney with the registry, please attach a certified photocopy of the Power of Attorney to this form when you return it.
(d) ( Companies ): Where the company has a sole director who is also the sole company secretary, that person must sign. Where the company (pursuant to Section 204A of the Corporations Act) does not have a company secretary, a sole director can also sign alone. Otherwise, a director jointly with either another director or a company secretary must sign. Please sign in the appropriate place to indicate the office held.
( Attending the Meeting ): Completion of a Proxy Form will not prevent individual members from attending the Annual General Meeting in person if they wish. Where a member completes and lodges a valid Proxy Form and attends the Annual General Meeting in person, then the proxy’s authority to speak and vote for that member is suspended while the member is present at the Annual General Meeting.
( Return of Proxy Form ): To vote by proxy, please complete and sign the enclosed Proxy Form and return by:
(a) post to PO Box 985, Nedlands WA 6009; or
(b) facsimile to the Company on facsimile number (+61 8) 9389 8327; or
(c) email to the Company at [email protected],
so that it is received not less than 48 hours prior to commencement of the Meeting.
Proxy forms received later than this time will be invalid.

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XSTATE RESOURCES LIMITED

ABN 96 009 217 154

ANNUAL REPORT

2011

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CONTENTS

Page Company Directory ................................................................................................................................. 1 Chairman’s Letter ................................................................................................................................... 2 Operations Report ................................................................................................................................... 3 Directors’ Report ........................................................................................................................... .......14 Auditor’s Independence Declaration .................................................................................................... 34 Corporate Governance Statement ......................................................................................................... 35 Consolidated Statement of Financial Position ...................................................................................... 46 Consolidated Statement of Comprehensive Income ............................................................................. 47 Consolidated Statement of Changes in Equity ...................................................................................... 48 Consolidated Statement of Cash Flows ................................................................................................ 50 Notes to the Consolidated Financial Statements ................................................................................... 51 Directors’ Declaration ........................................................................................................................... 90 Independent Audit Report ..................................................................................................................... 91 Securities Exchange Information .......................................................................................................... 93

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │COMPANY DIRECTORY

COMPANY DIRECTORY

DIRECTORS AND COMPANY SECRETARY:

David Whitby

Non-executive Chairman Appointed 11 February 2011

Ross Kestel

Non-executive director Appointed 6 September 2006

John Begg

Non-executive director Resigned 10 June 2011

Gary Jeffery

Managing Director Appointed 8 July 2010

James Brown

Non-executive director Appointed 4 April 2011

Brett Mitchell

Non-executive director Resigned 4 April 2011

David McArthur Company Secretary

REGISTERED OFFICE:

41 Stirling Highway PO Box 985 NEDLANDS NEDLANDS WA 6009 WA 6909

+61 8 9423 3200 +61 8 9389 8327

Telephone: Facsimile:

SHARE REGISTRY:

Advanced Share Registry Services 110 Stirling Highway NEDLANDS WA 6009

+61 8 9389 8033 +61 8 9389 7871

Telephone: Facsimile:

AUDITORS:

KPMG Level 8 235 St George’s Terrace PERTH WA 6000

DOMICILE AND COUNTRY OF INCORPORATION:

Australia

PRINCIPAL OFFICE:

PO Box 805 SUBIACO WA 6904

208 Bagot Road SUBIACO WA 6008

Telephone: +61 8 9381 4215 Facsimile: +61 8 9381 9386

BANKERS:

ANZ Banking Group Limited 31 Broadway NEDLANDS WA 6009

SOLICITORS:

Steinepreis Paganin Level 4, Next Building 16 Milligan Street PERTH WA 6000

WEBSITE AND EMAIL:

www.xstate.com.au [email protected]

SECURITIES EXCHANGE:

Xstate Resources Limited shares are listed on the Australian Securities Exchange (ASX) – code XST

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CHAIRMAN’S LETTER

CHAIRMAN’S LETTER

Dear Shareholder,

2011 was my first year as Chairman and I am pleased to report on a successful and eventful year for Xstate.

During the year, the Chorbane Joint Venture safely and successfully drilled the Sidi Dhaher-1 oil discovery well. This well was an exciting development for us as the Sidi Dhaher discovery has demonstrated the prospectivity of the Chorbane Permit, and has the potential to provide substantial value to shareholders. I look forward to sharing with shareholders the Sidi Dhaher flow test results after completion of the testing program.

All of Xstate’s assets are in the underexplored, but proven Pelagian hydrocarbon basin, with open access to substantial gas processing and transportation infrastructure. We are on the doorstep of the energy hungry EU market and we have great partners and mega-major neighbours.

I continue to be excited about the potential value of our three offshore discoveries in the Kerkouane Permit, along with the potential of the many highly prospective targets in the Prospects and Leads inventory offshore and onshore Tunisia. However, exploration in offshore waters is a high cost activity that, without early success, can prove to be impractical for small companies like Xstate to maintain.

Xstate’s goal has therefore been modified over the past year to focus on maximising the potential of the onshore Tunisian assets while seeking ways to realise value in the company’s extensive portfolio of discovered and prospective resources in the offshore acreage.

I would like to thank shareholders for their contributions of capital during the year to enable Xstate to continue its exploration and well testing program. We recognise that this has been a challenging year financially for many and the faith exhibited by these contributions is sincerely appreciated. I can assure you the Board and management of Xstate is working diligently to leverage these funds for shareholder benefit.

Finally, I would like to welcome James Brown to the Board, and thank the current board and management, and past board members, for their contributions to the transformation of Xstate to an exciting and well positioned international oil and gas company.

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David Whitby Chairman Xstate Resources Limited

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

OPERATIONS REPORT

INVESTMENT AND ASSET STRATEGY

The Company has adopted a strategic focus to develop its existing oil and gas assets in the proven Pelagian Oil and Gas Basin and to evaluate new opportunities in this hydrocarbon rich Mediterranean region and other similarly underexplored prospective areas.

As noted in the Chairman’s letter to shareholders, the Board has reset the goal of the Company:

Xstate is to become an onshore oriented oil and gas explorer and producer to increase the efficiency of shareholder funds going into the ground, and to increase shareholder leverage.

Having assets proximal to existing infrastructure that allows access to the energy hungry and high priced European Union oil and gas markets is a significant competitive advantage for Xstate.

OPERATIONS REPORT

In 2010, Xstate Resources Limited transformed itself into an active oil and gas exploration company, and in the space of two years has achieved the majority of the significant milestones set out in the May 2010 prospectus:


Xstate Activity and Key Achievements
May 2010	3D seismic acquired, processed and interpreted offshore blocks (770 km2)
August 2010	Lambouka-1 well drilled and discovered gas and condensate
January 2011	Renewal of Kerkouane Permit for three years
March 2011	Release of AGR-TRACS Contingent Resources Assessment for Dougga Discovery
October 2011	Shell acquired 2D seismic near Kerkouane Discovery in Kerkouane Permit (104 km2)
August-October 2011	Drilling at Sidi Dhaher-1 in onshore Chorbane Permit
October 2011	Discovery of oil at Sidi Dhaher.
November 2011	50 million barrels of oil in place Mean Resource Estimate at Sidi Dhaher
January 2012	Rig contracted for flow testing of Sidi Dhaher-1
April 2012	Flow testing expected to commence

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

Assets

Xstate, via its 100% owned subsidiary Xstate Mediterranean Pty Ltd, holds equity interests in oil and gas projects in Tunisia and Italy:

Permits % Interest Tunisia onshore-Chorbane 10% Tunisia offshore- Kerkouane 10% (option to increase to 20%; but Tunisian part of Lambouka Prospect Area (Sub Area 150 km[2] ) remains at 10%) Kerkouane covers 3,080 km[2] Italy offshore-G.R.15.PU (Pantelleria) 10% (option to increase to 20%; but Italian part of Lambouka Prospect Area (Sub Area 150 km[2] ) remains at 10%) Pantelleria covers 645 km[2]

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Transmed Gas Pipelines
to Italy and the EU
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Figure 1: Xstate Project Location Map

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

Xstate’s Net Oil and Gas Resources Summary

The following tabulation of currently interpreted net recoverable Contingent (discovered) and Prospective Resources amply demonstrates the resources and inherent value associated with the company’s assets in Tunisia:

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Onshore Exploration - Chorbane:

The Sidi Dhaher discovery is located onshore Tunisia in the 2428 km[2 ] Chorbane Permit Area.

The Tunisian Authorities approved the extension of the current exploration period for the Chorbane Permit by one year to the 12th of July 2012. At that time the exploration licence can be renewed for a further three years.

Sidi Dhaher Oil Discovery

Xstate earned a 10% interest in the Chorbane Permit by part funding the Sidi Dhaher well. The Sidi Dhaher 1 oil discovery well was drilled in September and October 2011, and after logging and recovering oil samples, the well was cased to make it safe for temporary plugging and future re-entry for flow testing.

The Operator of Chorbane has assessed that there is 51 million barrels mean oil in place at Sidi Dhaher based on standard oilfield probabilistic resource and reserve estimation methodology. Recoverable Reserves will be estimated following completion of the planned flow test program.

Currently preparations are being made to flow test the well. The testing program is expected to be conducted during April 2012. A successful flow test will result in the JV deciding on appraising the discovery and seeking approval for a development of the oil field.

The Sidi Dhaher well is some 50 kilometres from the oil industry support centre at Sfax, and is conveniently located relative to a major oil export facility (66 km by road) and connecting oil pipelines with spare capacity, and also gas transmission pipelines which provide connections to European gas markets. This infrastructure could facilitate early development of the Sidi Dhaher discovery.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

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Figure 2: Increased Prospectivity in Chorbane Acreage

Chorbane Exploration Potential Enhanced

The discovery at Sidi Dhaher has enhanced the prospectivity of almost the entire permit area (shown by the “New Oilfield Fairway” area between the thick green lines on the map above).

In addition, part of the Chaal gas discovery is mapped to extend onto the Chorbane permit. There are also a number of exploration prospects mapped in the Chorbane Permit. Being located in the Pelagian Basin, these prospects have multiple reservoir targets.

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Figure 3: Challenger Rig drilling Sidi Dhaher 1 well

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

Offshore Exploration - Kerkouane:

The contiguous Kerkouane and Pantelleria Permits are located offshore Tunisia and Italy respectively. They cover approximately 3,725 km[2] in water depths ranging from a few metres to over 1,000 metres.

During 2011, renewal of the Kerkouane Permit was approved and three more years have been granted for exploration and appraisal activities until 22 February 2014. The exploration licence can at that time be renewed for a further three years until 22 February 2017.

The Permits therefore provide the opportunity to explore an extensive inventory of attractive, mapped targets over the next six years.

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Figure 4: Kerkouane and Pantelleria Permit Discoveries

Dougga Gas Condensate Field Development

The Dougga-1 well tested gas and condensate from Abiod and Allam Limestone reservoirs. The Abiod is the producing reservoir in many fields in the Pelagian Basin. A column of over 200 metres of gas saturated limestone reservoirs was seen in Dougga-1. Mapping of the 3D data acquired in March 2010, shows potential for an appraisal well to intersect the Dougga reservoir rocks some 300 metres higher than in Dougga-1, which implies a potential gross gas and condensate column of over 500 metres.

The discovery was not evaluated further at the time of discovery due to low gas prices and lack of pipeline connections to gas markets.

Since then gas and condensate prices are significantly higher, and there are now gas pipelines capable of delivering gas from Tunisia to attractive European markets.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

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Figure 5: Dougga Cross Section with Top Abiod Structure map and logs showing 200+metres-gas column with updip potential.

A detailed independent review and resource assessment study by TRACS-AGR was initiated by the joint venture. The studies confirmed the technical and overall commercial feasibility of the Dougga discovery made by Shell in 1981 in 330 metres of water, and resulted in independently certified Contingent Resources as an asset of the Company.

These studies were based on the revised interpretation of the Dougga discovery using the results of the 3D seismic acquired over Dougga in 2010.

A resource assessment from this review was released to the ASX by the Operator in March 2011. The release advised that:

Mean recoverable Contingent Resources are 41 million barrels of liquids (condensate and LPG) and 240 bcf of
sales gas (equivalent to 79 million barrels of oil);
Development of Dougga can be undertaken with proven off-the-shelf technology; despite elevated carbon
dioxide levels in the gas; and
There is upside potential in recovering gas from gas saturated, underlying Allam Carbonates.

Based on more detailed interpretation of the 3D seismic velocity information, and subsequent depth conversion of the seismic time maps, the Contingent Resources in Dougga have been upgraded significantly by the Operator since the TRACS assessment. The most likely recoverable Contingent Resources are now assessed to be 173 million barrels of oil equivalent, before any contribution from the Allam reservoir that contained gas in Dougga-1.

A further well is anticipated to be necessary to enable the joint venture to book reserves at Dougga.

Key objectives of the next well on the Dougga structure are:

Confirm the Dougga structural interpretation;
Confirm a hydrocarbon column in excess of 500 metres;
Demonstrate commercial gas and condensate flow rates via well test;
Confirm LPG and condensate yields; and
Assess production enhancing reservoir fracturing on the crest of the structure

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

This well is being planned for drilling in 2013, along with a re-entry of the Lambouka discovery well (see below) and a possible exploration well. A multi-well drilling program would simplify and facilitate rig contracting.

Xstate has an option to increase its equity to 20% in the Dougga discovery and all areas of the Kerkouane Permit and Pantelleria Permit outside the Lambouka Prospect Area, which covers only 150 Square Kilometres. This option is exercisable by Xstate when the Operator proposes an additional well in the Kerkouane Permit.

Kerkouane Gas Discovery

The Kerkouane gas discovery by Shell in 1981 in 110 metres of water in the Kerkouane Permit is assessed by ISIS Petroleum Consultants to have a hydrocarbon column of some 600 metres and additional Prospective Resource Potential in the deeper Abiod and Allam Formations. Mean Contingent and Prospective Resources are estimated to be 194 Bcf gas and 70 million barrels of oil with additional, yet unquantified, associated LPG and condensate recoverable from the gas.

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Figure 6: Kerkouane Cross Section

Additional 2D seismic data was acquired for the Kerkouane Joint Venture over the Kerkouane discovery in September 2011 by Shell which has the exploration rights on the adjacent Permit area. These data are currently being interpreted.

A successful exploration / appraisal well would be required to allow the company to book reserves at the Kerkouane oil and gas field.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

Lambouka Gas Discovery

The Lambouka-1 well in 640 metres of water is interpreted to have discovered gas and condensate in September 2010. The well, which was the deepest water exploration well ever drilled in Tunisia, was drilled without significant safety or environmental incidents. This was a significant achievement for Xstate and its Joint Venture partners.

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Figure 7: Lambouka Cross Section with Top Abiod Structure map and logs showing part of 200+metresgas column

Due to well bore deterioration, testing of the well was not practical and the well was suspended for future re-entry and side-tracking.

The Lambouka-1 well is interpreted to have discovered a gross gas and condensate column of up to 230 metres. There is potential for a further 250 metres up-dip on the Lambouka structure in Italian waters resulting in a potential gross gas / condensate column of up to 480 metres.

There is also potential for deeper reservoirs to contain commercial oil and gas in the Lambouka structure.

Various technical studies continue on Lambouka. Initial results indicate significant Contingent Resources of recoverable gas and condensate along with the upside potential of deeper Prospective Resources on the Lambouka Discovery. The JV will review that potential and decide on further action at Lambouka when the results of all studies are completed.

Additional drilling and testing would be more practically achieved at Lambouka in conjunction with other offshore drilling activity, such as the drilling of a Dougga appraisal well or other exploration drilling.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

Associated Condensate enhances development potential

All of these gas discoveries are interpreted to contain quantities of associated condensate and LPG, which are high value products in today’s markets, and consequently the three discoveries are now seen as foundation assets in the Kerkouane and Pantelleria Permits to be appraised and evaluated for development.

Pantelleria Acreage

Pantelleria Permit in Italy is in suspension, with the suspension able to be lifted at the request of the JV.

Exploration and Appraisal Potential - Oil and Gas

The current licence areas contain a number of large appraisal and exploration targets such as:

Dougga gas / condensate field (covered by 3D seismic);
Lambouka gas discovery (covered by 3D seismic);
Dougga West prospect (an anticlinal closure covered by 3D seismic);
Kerkouane gas discovery (covered by 2D seismic);
Newly identified structural – stratigraphic prospects in the Pliocene section (partly covered by 3D,
analogous to the very large discoveries recently made by Eni and Edison offshore Sicily); and
Several very large structural prospects typical for the over thrust area in the northern part of the
licence (covered by 2D seismic).

This considerable exploration potential is expected to attract the attention of other oil and gas companies seeking opportunities in the region. This may lead to asset sale or farm-out opportunities for Xstate.

While the discoveries in Xstate’s acreage have been on the gaseous end of the hydrocarbon range, there has been oil produced to the north of the permits at Nilde Field in Italy and to the south of the Kerkouane Permit at Tazerka Field in Tunisia, pointing to local oil source rocks, and the potential for oil to be sourced from sub basins within the Kerkouane acreage.

The Dougga West structure mapped on 3D seismic acquired in 2010 in the Kerkouane Permit has potential for gross recoverable oil reserves in excess of 200 million barrels in the Birsa reservoirs only. Other reservoirs would be intersected by an exploration well on this prospect, providing significant upside potential.

The Pelagian Basin – an attractive exploration area

The attraction of the Pelagian Basin, in which the company’s assets lie, is in its geological characteristics. These characteristics provide up to 10 reservoir / seal pairs in any exploration drilling well, proven source rocks and demonstrated migration and trapping mechanisms for oil and gas. The low exploration well drilling density shows that the basin is still underexplored.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

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Figure 8: Petroleum Systems Diagram for Pelagian Basin

Moreover, Xstate’s offshore Permits have seen only three wells drilled, all of which have resulted in discoveries. There are additional oil discoveries on trend and adjacent to the permits which enhance the interpreted prospectivity.

In the onshore the drilling density is low and prospectivity for oil and gas has been enhanced by the recent Sidi Dhaher oil discovery and surface hydrocarbon anomalies.

In summary, Xstate has many opportunities to find commercial oil and gas in its Permit.

TUNISIA – Fostering Investment

The events in Tunisia associated with the change from a long term dictatorship to a fledgling democracy, known as the Jasmine Revolution, was a precursor to the broader set of political change in the region.

With these changes came a period of uncertainty for operations in Tunisia as bureaucrats operated under an interim government and the people of Tunisia adapted to a major change in expectations and operational processes.

Despite this, the Chorbane Joint Venture was able to safely and successfully drill the Sidi Dhaher well and recover oil. This was the first well drilled in post-revolution Tunisia.

Tunisia continues to make progress under a newly elected coalition government. The coalition has confirmed its intentions to foster an open business environment to stimulate economic growth. This includes planned infrastructure improvement to attract foreign investment.

International governments and agencies have offered funds to assist in this development process.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │OPERATIONS REPORT

CORPORATE

Board

On February 11[th] 2011 David Whitby joined the Board as Chairman.

Shortly afterwards, on 4[th] April 2011, James Brown joined the Board as Non-Executive Director to replace Brett Mitchell after he tendered his resignation.

John Begg advised the Board of his resignation on 10[th] June 2011.

The current members of the Board of Directors are:

David Whitby - Non-Executive Chairman Gary Jeffery - Managing Director James Brown - Non-Executive Director Ross Kestel - Non-Executive Director

The current Company Secretary is David McArthur.

Capital Raisings

In February 2011 the company raised $1.25 million through the placement of 10,000,000 shares with sophisticated investors.

In November and December 2011 the Company made a share placement to sophisticated investors of 11,630,488 shares to raise $733,000. In conjunction with this placement existing shareholders were able to purchase shares under a Share Purchase Plan (SPP). This raised a further $738,000 from the issue of 11,714,275 shares.

Capital Structure

The current capital structure of the company is:

Common Shares (ASX:XST) 100.9 million Listed Options (ASX : XSTO) (24 Cents June 30 , 2013) 48.4 million Unlisted Options at strike prices from 24 to 225 cents 0.4 million

Competent Persons Statement

The technical information provided has been compiled by Mr Gary Jeffery, Managing Director of Xstate Resources Limited. He is a qualified geophysicist with over 39 years technical, commercial and management experience in exploration for, appraisal and development, and transportation of oil and gas and mineral and energy resources. Mr Jeffery has reviewed the results, procedures and data contained in this report. Mr Jeffery consents to the inclusion in this report of the information in the form and context in which it appears.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

DIRECTORS’ REPORT

The Directors present their report together with the financial report of Xstate Resources Limited for the financial year ended 31 December 2011 and the auditor’s report thereon.

1. DIRECTORS

The directors of the Company at any time during or since the end of the financial year are:

David Whitby Gary Jeffery Ross Kestel James Brown John Begg Brett Mitchell

Brett Mitchell was a director from the beginning of the financial year until his resignation on 4 April 2011.

John Begg was a director from the beginning of the financial year until his resignation on 10 June 2011.

David Whitby

Non-Executive Chairman Appointed: 11 February 2011

Experience and expertise

Mr Whitby has a Bachelor of Mechanical Engineering Degree from the Royal Military College, Canada. David has been Managing Director of Nido Petroleum and his wealth of international experience included appointments as Project Director of the West Java Gas Project with Conoco-Phillips in Jakarta, Vice President of Corporate Development for Gulf Indonesia, Jakarta, President of Gulf (Australia) Resources Limited in Perth and Vice President of Heavy Oil for Husky Oil in Canada. Prior to entering the oil and gas industry, David was an officer in the Canadian Armed Forces military engineering branch.

Other current directorships

Executive Director Nido Petroleum Non-executive Director Nido Petroleum

21 July 2004 to 18 May 2009 19 May 2009 to current

Former directorships in the past three years

None

Special responsibilities

Member of the Audit and Risk Management Committee Member of the Nominations and Remuneration Committee

Interest in shares and options

185,000 ordinary shares

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

Gary Jeffery

Managing Director Appointed: 8 July 2010

Experience and expertise

Mr Jeffery has over 38 years of experience in the oil, gas and mining and energy utilities industries working for a range of organisations in over 30 countries worldwide. He has broad project development, production operations and exploration management experience in resources and has demonstrated in his career the ability to find and commercialise oil and gas fields. Mr Jeffery has held management positions at AWE Limited, ARC Energy Limited, Tap Oil Limited, Griffin Energy Limited, Normandy Mining, Hadson Energy (now Apache), WAPET, Oxoco International and Texaco (now Chevron).

Mr Jeffery is a graduate member of the Australian Institute of Company Directors, a fellow of the Australian Institute of Energy, and a member of WA Energy Research Alliance (WAERA) Industry Advisory Group, Petroleum Club WA and SEAPEX.

Other current directorships

None

Former directorships in the past three years

Executive Director Arc Energy Limited

July 2007 to August 2008

Special responsibilities

None

Interest in shares and options

2,336,895 ordinary shares 2,966,400 options

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

Ross Kestel

Non-Executive Director Appointed: 6 September 2006

Experience and expertise

Mr Kestel is a Chartered Accountant and was a director of a mid tier accounting practice for over 25 years. He has acted as a director and company secretary of a number of public companies involved in mineral exploration, mining, mine services, property development, manufacturing and technology industries. Mr Kestel is a member of the Australian Institute of Company Directors.

Other current directorships

Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director

Resource Star Limited Jatenergy Limited Regis Resources Limited Equator Resources Limited Beadell Resources Limited

22 August 2006 to current 19 September 2007 to current 29 June 2009 to current 14 June 2011 to current 29 February 2012 to current

Former directorships in the past three years

Non-executive Director Jabiru Metals Limited Non-executive Director VDM Group Limited Non-executive Director Dioro Exploration NL

August 2003 to May 2011 1 September 2005 to 28 March 2011 April 2008 to 16 February 2010

Special responsibilities

Chair of the Audit and Risk Management Committee Member of the Nominations and Remuneration Committee

Interest in shares and options

None

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

James Brown

Non-Executive Director Appointed: 4 April 2011

Experience and expertise

Mr Brown has a Bachelor of Civil Engineering Degree from the University of Adelaide. Mr Brown has extensive finance industry experience, having been a First Vice President and head of Asia-Pacific Energy Research for Merrill Lynch, based in Singapore. Mr Brown also held various positions with Morgan Stanley Australia and other firms in the Australian finance industry. Prior to entering the finance industry, Mr Brown assumed an engineering role with Esso Australia Limited. Mr Brown is a member of the South East Asia Petroleum Exploration Society (SEAPEX) and the Australian Institute of Company Directors.

Other current directorships

None

Former directorships in the past three years

Non-executive Director Nido Petroleum None

21 July 2004 to 15 May 2009

Special responsibilities

Chair of the Nominations and Remuneration Committee Member of the Audit and Risk Management Committee

Interest in shares and options

None

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

John Begg

Non-Executive Director Appointed: 8 July 2010 Resigned: 10 June 2011

Experience and expertise

Mr Begg is a petroleum geologist with over 31 years experience in the upstream oil and gas industry and is a noted oil finder. He has been a member and leader of teams that have discovered large reserves of oil and gas leading to commercial developments in Australia, Asia and the USA. Mr Begg was Managing Director of Salinas Energy Limited (now Neon Energy Limited) now an established oil producer in California after commencing operations under his direction in 2006. He was also the founding Managing Director of Voyager Energy Limited which listed on the ASX in 2001 and after participating in two commercial oil discoveries, merged with Arc Energy Limited in 2005.

Other current directorships

Executive director Solimar Energy Limited

Appointed November 2009

Former directorships in the past three years

None

Special responsibilities

Chair of the Nominations and Remuneration Committee Member of the Audit and Risk Management Committee

Interest in shares and options

2,032,400 ordinary shares 2,350,000 options

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

Brett Mitchell

Non-Executive Director Appointed: 27 August 2009 Resigned: 4 April 2011

Experience and expertise

Mr Mitchell has worked for both private and publicly listed entities for the past 19 years as a corporate finance executive. Mr Mitchell holds a Bachelor of Economics degree from the University of Western Australia and has specific experience in the financial markets and resources sectors and is a member of the Australian Institute of Company Directors (ACID).

Other current directorships

Executive director and company secretary Transerv Energy Limited Non-executive director Quest Petroleum NL Executive director and company secretary Wildhorse Energy Limited

Appointed July 2006 Appointed May 2007 Appointed April 2009

Former directorships in the past three years

Executive director Energy Ventures Limited Non-executive director Newland Resources Limited

September 2004 to May 2009 October 2009 to November 2010

Special responsibilities

Member of the Audit and Risk Management Committee Member of the Nominations and Remuneration Committee

Interest in shares and options

494,713 ordinary shares 247,357 options

All directors held their positions as a director throughout the entire financial year unless otherwise stated.

2. COMPANY SECRETARY

David McArthur is a chartered accountant and was appointed to the position of company secretary on 29 October 1999. Mr McArthur has 30 years experience in the corporate management of publicly listed companies.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

3. DIRECTORS’ MEETINGS

The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 31 December 2011, and the numbers of meetings attended by each director were:

Director	Full meetings of directors	Meetings of audit and risk management committee	Meetings of remuneration and nominations committee
	No. of meetings attended No. of meetings held whilst a director	No. of meetings attended No. of meetings held whilst a director	No. of meetings attended No. of meetings held whilst a director
David Whitby Gary Jeffery Ross Kestel James Brown John Begg	6 6 9 9 9 9 5 5 4 4	1 1 - - 2 2 1 1 1 1	1 1 1 1 2 2 1 1 1 1 - 1
Brett Mitchell	4 4	- 1

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT - AUDITED

Principles of Compensation

Remuneration is referred to as compensation throughout this report.

Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company and the Group. Key management personnel comprise the directors of the Company and senior executives for the Company and the Group including the five most highly remunerated Company and Group executives.

The Group has a Remuneration Policy that aims to provide remuneration that is fair and equitable in terms of external competitiveness. The policy is determined by the Board and administered by management at its discretion.

The policy relates individual remuneration to individual performance, the individual’s position in the relevant salary market and the need for the organisation to retain and motivate the individual. No remuneration is directly linked with the overall financial performance of the Group.

To give effect to this policy the Group reviews available information that measures the remuneration levels in the various labour markets in which it competes.

The expectation of the Group is that, for a particular grade of employee, the total fixed compensation will be at the median level of the relevant market.

Other than the ability to issue options, the directors do not currently receive performance related compensation, short or long term incentives, nor any other benefits.

Fixed compensation

Fixed compensation consists of base compensation, as well as employer contributions to superannuation funds.

Compensation levels are reviewed annually by the Board through a process that considers individual performance. In addition, external consultants provide analysis and advice to ensure the director’s compensation is competitive in the market place.

Short-term incentive

Directors may receive short-term incentives for the successful implementation of specific Board approved projects. No such projects or incentives were approved by the Board during the financial year.

Long-term incentive

Subject to shareholder approval, directors may receive options at various times for their ongoing commitment and contribution to the Group.

The Board approved a success bonus pool in relation to any oil or gas discovery from tenements acquired from Bombora Energy Pty Ltd in 2010. This bonus pool is available for a 2 year period, and will only be payable on the discovery of a commercially viable oil / gas reserve. To date, no bonus has been approved and has had no impact on the Group financials during the reporting period. The bonus pool expires on 20 July 2012.

Consequences of performance on shareholder wealth

The overall level of key management personnel compensation takes into account the performance of the Company over a number of years.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Principles of Compensation (continued)

Consequences of performance on shareholder wealth (continued)

Performance in respect of the current financial year and the previous four financial years is detailed below:

Shareholder returns	2011	2010	2009	2008	2007
Net loss attributable to equity holders	(1,760,648)	(1,141,560)	(372,643)	(1,975,847)	(815,346)
Basic EPS (cents)	(2.26)	(3.53)	(0.68)	(3.59)	(1.49)
Closing share price (cents)	7	15	4	2	10

During the financial years noted above, there were no dividends paid or other returns of capital made by the Company to its shareholders. The measures of performance of the Company set out in the table above have been taken into consideration in determining appropriate levels of remuneration.

Service contracts

On 19 May 2011, a deed of executive services was entered into with Mr Gary Jeffery, whereby Mr Jeffery is paid a total remuneration package of $250,000 per annum for 75% of his time, effective 1 April 2011. The agreement has a condition that if it is terminated (other than by Mr Jeffery or for certain specified events) Mr Jeffery shall receive a once only payment equivalent to 6 month’s remuneration. This replaces the agreement entered into on 20 July 2010.

On 20 July 2010, an employment service agreement was entered into with Mr David McArthur for the provision of corporate and secretarial services to the Company. The agreement was for $50,000 plus superannuation and was effective from 8 July 2010 following Mr McArthur’s resignation as a director. On 19 May 2011, the remuneration committee of the Board approved an amendment to Mr McArthur’s employment service agreement removing annual leave provision, effective 1 April 2011. The agreement may be terminated by the Company or Mr McArthur with three months’ notice.

At the annual general meeting of shareholders on 19 May 2011, total non-executive directors’ remuneration was increased from $200,000 to $400,000.

On 19 May 2011, the Board approved an increase in non-executive director fees from $45,000 p.a. to $60,000 p.a. per director following review and approval by the Remuneration and Nomination committee members. At the same meeting, it was resolved that the non-executive Chair of the Board would receive an additional $30,000 per annum and the Chair of the Audit Committee and Remuneration and Nomination Committee would receive an additional $10,000 and $5,000 per annum, respectively, effective 1 April 2011.

Executive and non executive directors

Non executive directors may receive performance related compensation. Directors’ fees cover all main Board activities and include statutory superannuation (where appropriate).

Presently, Mr Kestel receives non-executive directors’ fees of $70,000 per annum, recognising his role as Chairman of the Audit and Risk Management Committee. Mr Brown receives non-executive directors’ fees of $65,000 per annum, recognising his role as Chairman of the Remuneration and Nomination Committee.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Principles of Compensation (continued)

Executive and non executive directors (continued)

Mr Whitby receives total remuneration of $90,000 per annum as non executive Chairman. Mr Whitby resides in The Netherlands. A significant portion of his time as non-executive Chairman of the Company involves work carried out whilst in The Netherlands. On occasions, Mr Whitby may be required to provide additional consultancy work for Board approved projects.

Mr Jeffery’s directors fees are included as part of his service contract as Managing Director of the Company.

Services from remuneration consultants

The remuneration committee engaged Gerard Daniels Australia Pty Ltd (the consultant) as remuneration consultant to the Board to review the amount and elements of the key management personnel (KMP) remuneration and provide recommendations in relation thereto.

In addition to the remuneration recommendations, the consultant provided non-executive director search services.

The consultant was paid $12,245 for the remuneration recommendations in respect of reviewing the amount and elements of the KMP remuneration.

The consultant was paid $17,500 for non-executive search services.

The Board is satisfied that the remuneration recommendations were made by the consultant free from undue influence by members of the KMP about whom the recommendations may relate.

The Board undertook its own inquiries and review of the processes and procedures followed by the consultant during the course of its assignment and is satisfied that its remuneration recommendations were made free from undue influence.

These inquiries included arrangements under which the consultant was required to provide the Board with a summary of the way in which it carried out its work, details of its interaction with KMP in relation to the assignment and other services, and respond to questioning by members of the Board after the completion of the assignment.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Directors’ and senior executives remuneration - audited

Details of the nature and amount of each element of the compensation of each of the directors and key management personnel of the Company and the Group are shown below:

		Short-term employee benefits	Short-term employee benefits	Post employment benefits	Share based payments
Name		Cash salary and fees Non-monetary	Total	Super- annuation	Options	Total	Options as % of re-
		Annual Leave Director’s insurance					muneration
		$ $ $	$	$	$	$	%
Non-executive directors David Whitby(1) Ross Kestel James Brown(2) Sub-total non-executive directors remuneration Executive directors Gary Jeffery(3)
	2011	112,000 - 2,811	114,811	-	-	114,811	-
	2010	- - -	-	-	-	-	-
	2011	60,780 - 3,177	63,957	5,470	-	69,427	-
	2010	53,484 - 2,884	56,368	1,514	-	57,882	-
	2011	54,028 - 2,350	56,378	-	-	56,378	-
	2010	- - -	-	-	-	-	-
	2011	226,808 - 8,338	235,146	5,470	-	240,616	-
	2010	53,484 - 2,884	56,368	1,514	-	57,882	-

	2011	237,500 - 3,518	241,018	-	-	241,018	-
	2010	96,237 - 2,414	98,651	-	-	98,651	-
Total current directors remuneration	2011	464,308 - 11,856	476,164	5,470	-	481,634	-
	2010	149,721 - 5,298	155,019	1,514	-	156,533

(1) Appointed 11 February 2011
(2) Appointed 4 April 2011
(3) Appointed 8 July 2010

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

		Short-term employee benefits		Post employment benefits	Share based payments
Name		Cash salary and fees Non-monetary	Total	Super- annuation	Options	Total	Options as % of re-
		Annual Leave Director’s insurance					muneration
		$ $ $	$	$	$	$	%
Former directors John Begg(4) Brett Mitchell(5) Rhod Grivas(6) David McArthur(7) Sub-total former directors remuneration
	2011	41,292 - 1,743	43,035	-	-	43,035	-
	2010	34,645 - 2,414	37,059	-	-	37,059	-
	2011	70,000 - 827	70,827	-	-	70,827	-
	2010	83,000 - 2,884	85,884	-	-	85,884	-
	2011	- - -	-	-	-	-	-
	2010	23,471 - 1,493	24,964	2,112	-	27,076	-
	2011	- - -	-	-	-	-	-
	2010	41,725 - 1,725	43,450	3,755	-	47,205	-
	2011	111,292 - 2,570	113,862	-	-	113,862	-
	2010	182,841 - 8,516	191,357	5,867	-	197,224	-

Total directors remuneration	2011	575,600 - 14,426	590,026	5,470	-	595,496	-
	2010	332,562 - 13,814	346,376	7,381	-	353,757	-

(4) Appointed 8 July 2010 and resigned 10 June 2011

(5) Resigned 4 April 2011

(6) Resigned 8 July 2010

(7) Resigned as director 8 July 2010

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

		Short-term employee benefits	Short-term employee benefits	Post employment benefits	Share based payments
Name		Cash salary and fees Non-monetary	Total	Super- annuation	Options	Total	Options as % of re-
		Annual Leave Director’s insurance					muneration
		$ $ $	$	$	$	$	%
Senior executives David McArthur(7) Sub-total senior executives remuneration
	2011	54,500 999 3,518	59,017	5,059	-	64,076	-
	2010 2011 2010	23,925 - 2,183 54,500 999 3,518 23,925 - 2,183	26,108 59,017 26,108	2,153 5,059 2,153	- - -	28,261 64,076 28,261	- - -
Total directors and executive officer remuneration	2011	630,100 999 17,944	649,043	10,529	-	659,572	-
	2010	356,487 - 15,997	372,484	9,534	-	382,018

(7) Resigned as director 8 July 2010

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Directors’ remuneration – audited (continued)

Notes in relation to the table of directors’ remuneration – audited

a) the Company does not employ any executive officers other than the directors;
b) the fair value of options granted was determined using the Black and Scholes option pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options recognised in this reporting period;
c) directors fees for Mr John Begg are paid to Rock Doc Pty Ltd, a company associated with Mr Begg;
d) directors fees for Mr Gary Jeffery are paid to Dungay Resources Pty Ltd, a company associated with Mr Jeffery;
e) directors fees for Mr Brett Mitchell are paid to Sibella Capital Pty Ltd, a company associated with Mr Mitchell;
f) the directors of the Company may receive performance related remuneration; and
g) the directors did not receive remuneration linked to performance during the year.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Equity instruments – audited

All options refer to options over ordinary shares of Xstate Resources Limited, which are exercisable on a one-forone basis.

Options and rights over equity instruments granted as compensation – audited

No options have been granted as compensation during or since the end of the financial year.

No options were forfeited during the reporting period.

No options were vested during the reporting period.

Modification of terms of equity-settled share-based payment transactions – audited

No terms of equity-settled share-based payment transactions (including options granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period.

Exercise of options granted as compensation – audited

During the reporting period, no shares were issued on the exercise of options previously granted as compensation.

Analysis of options and rights over equity instruments granted as compensation- audited

Details of vesting profiles of the options granted as remuneration to each key management person of the Group and each of the five named Company executives are detailed below.

Options granted
Number Date % vested in year (A)	% forfeited in year (B) Financial years in which grant vests
Non executive director
Rhod Grivas(1) 100,000 30-May-07 -	- 2007
116,667 30-May -07 -	- 2008
116,667 30-May-07 -	- 2009

(1) Resigned on 8 July 2010 but has retained his options.

(A) The amount vested in the year represents the expense recognised in accordance with the accounting standards.
(B) The percentage forfeited in the year represents the reduction from the maximum number of options available to vest due to the highest level performance criteria not being achieved.

Analysis of movements in options - audited

There was no movement during the reporting period of options over ordinary shares in the Company.

This is the end of the Remuneration Report – Audited.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

5. PRINCIPAL ACTIVITIES

The principal activity of the Group during the course of the financial year was interests in oil and natural gas exploration.

6. OPERATING AND FINANCIAL REVIEW

Shareholder returns	2011	2010	2009	2008	2007
Net loss attributable to equity holders	(1,760,648)	(1,141,560)	(372,643)	(1,975,847)	(815,346)
Basic EPS (cents)	(2.26)	(3.53)	(0.68)	(3.59)	(1.49)
Closing share price (cents)	7	15	4	2	10

During the financial years noted above, there were no dividends paid or other returns of capital made by the Company to its shareholders.

Net loss amounts for 2007 to 2011 have been calculated in accordance with Australian Accounting Standards (AASBs).

Significant changes in the state of affairs

In the opinion of the directors there were no matters that significantly affected the state of affairs of the Group during the financial year in review, other than those matters referred to in the operations report.

7. DIVIDENDS

The directors recommend that no dividend be provided for the year ended 31 December 2011.

8. EVENTS SUBSEQUENT TO REPORTING DATE

There has not arisen, in the interval between the end of the financial year and the date of this report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

9. LIKELY DEVELOPMENTS

The Group will continue exploration activities over its oil and gas interests in Tunisia.

10. DIRECTORS’ INTERESTS

The relevant interest of each director in the shares, debentures, interests in registered schemes and rights or options over such instruments issued by the Company, as notified by the directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows:

	Ordinary	Options over
Director	Shares	ordinary shares
David Whitby	185,000	-
Gary Jeffery	2,336,895	2,966,400
Ross Kestel	-	-
James Brown	-	-

11. SHARE OPTIONS

Options granted to directors of the Company

During or since the end of the financial year, the Company has not granted options over unissued ordinary shares in the Company.

Unissued shares under options

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

Expiry date Exercise price cents Number of Shares	Expiry date Exercise price cents Number of Shares
31-Apr-12 150 30-Apr-12 195 30-Apr-12 225 21-Jan-13 24 30-Jun-13 24	100,000 116,667 116,667 66,667 48,438,061
	48,838,062

All options expire on the earlier of their expiry date or termination of the employee’s employment (if applicable).

These options do not entitle the holder to participate in any share issue of the Company.

Shares issued on exercise of options

During or since the end of the financial year, no shares were issued as a result of the exercise of options.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

12. INDEMNIFICATION AND INSURANCE OF OFFICERS AND AUDITORS

During the financial year, Xstate Resources Limited paid a premium of $16,921 (excluding GST) to insure the Directors and Secretary of the Company and the current directors of its controlled entity.

The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against officers in their capacity of the entity and other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities.

The Group has agreed to indemnify each of the directors, the company secretary of the Company and the current directors of its controlled entity, against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as directors of the company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses.

No agreements have been entered into to indemnify the Company’s current auditors against any claims by third parties arising from their report on the Annual Financial Report.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ REPORT

13. NON-AUDIT SERVICES

During the year KPMG, the Company’s auditor, has performed certain other services in addition to their statutory duties.

The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of these non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:

all non-audit services were subject to the corporate governance procedures adopted by the Company; and
the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants , as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards.

Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are set out below:

	2011 $ 2010 $
Audit services: *Auditors of the Company* Audit and review of financial reports (KPMG Australia) Services other than statutory audit: *Other assurance services* Investigating accountants report *Other services* Taxation compliance services (KPMG Australia) Taxation compliance services (KPMG Australia) * Taxation compliance services (Overseas KPMG firms) **	52,540 56,259
	52,540 56,259
	- 19,477 26,450 6,500 - 6,500 35,325 -
	61,775 32,477

Re: acquisition of Xstate Mediterranean Pty Ltd (formerly Bombora Energy Limited)
** Re: USA tax compliance and dissolution of Xstate Arizona Inc.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │LEAD AUDITOR’S INDEPENDENCE DECLARATION

14. LEAD AUDITOR’S INDEPENDENCE DECLARATION

The lead auditor’s independence declaration forms part of the directors’ report for the financial year ended 31 December 2011.

This Directors’ report is made with a resolution of the directors.

==> picture [82 x 72] intentionally omitted <==

GARY JEFFERY

Director

Dated at Perth, Western Australia this 29[th] day of March 2012.

==> picture [75 x 30] intentionally omitted <==

Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001

To: the directors of Xstate Resources Limited

I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2011 there have been:

(i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and
(ii) no contraventions of any applicable code of professional conduct in relation to the audit.

==> picture [81 x 35] intentionally omitted <==

KPMG

==> picture [122 x 47] intentionally omitted <==

Graham Hogg Partner

Perth 29 March 2012

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

CORPORATE GOVERNANCE STATEMENT

The Board of Directors of Xstate Resources Limited (the Board) is responsible for the corporate governance of the Group. The Board guides and monitors the business and affairs of Xstate Resources Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. This statement outlines the main corporate governance practices in place throughout the financial year, which comply with the Australia Securities Exchange (ASX) Corporate Governance Council June 2010 amendments to the August 2007 “Corporate Governance Principles and Recommendations (Second Edition)” (“the Recommendations”), unless otherwise stated.

As required under ASX Listing Rule 4.10.3, the Group makes the following disclosures in relation to each of the Recommendations. A checklist, cross referencing the ASX Principles to the relevant section of this Statement, the Remuneration Report or Financial Report, follows these disclosures.

1. BOARD OF DIRECTORS

(a) Role of the Board and responsibilities

The primary role of the Board is to oversee and approve the Group’s strategic direction, to oversee the Group’s management and business activities and to report to shareholders. The roles and responsibilities of the Board are formalised in written policies. All documents can be accessed on the Company’s website at www.xstate.com.au under the Corporate Governance section.

The Board evaluates these policies on an ongoing basis.

In addition to matters required by law to be approved by the Board, the following responsibilities include, but are not limited to:

the establishment of the long term goals of the Company and strategic plans to achieve those goals;
monitoring the achievement of these goals;
the review of management accounts and reports to monitor the progress of the Company;
the review and adoption of budgets for the financial performance of the Company and monitoring the results on a regular basis to assess performance;
the review and approval of the annual and half-year financial reports;
nominating and monitoring the external auditor;
approving all significant business transactions;
appointing and monitoring senior management;
all remuneration, development and succession issues; and
ensuring that the Company has implemented adequate systems of risk management and internal control together with appropriate monitoring of compliance activities.

Responsibility for management of Xstate’s day to day business activities is delegated to the Managing Director who is accountable to the Board.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

1. BOARD OF DIRECTORS (continued)

(b) Board composition and expertise

The names of the directors of the Company in office at the date of the statement are set out in the directors’ report. The directors’ report also contains details of each director’s skill, experience and education. The Board seeks to establish a Board that consists of directors with an appropriate range of experience, skill, knowledge and vision to enable it to operate the Company’s business with excellence.

The Board currently comprises four directors - one independent non-executive Chairman, one executive director and two independent non-executive directors.

The Board reviews its composition as required to ensure that the Board has the appropriate mix of commercial and financial skills, technical expertise, industry experience, and diversity (including, but not limited to gender and age) for which the Board is looking to achieve in its membership. The Board is primarily responsible for identifying potential new directors but has the option to use an external consulting firm to identify and approach possible new candidates for directorship. When a vacancy exists, or where it is considered that the Board would benefit from the services of a new director with particular skills, candidates with the appropriate experience, expertise and diversity are considered. Each incumbent director is given the opportunity to meet with each candidate on a one to one basis. The full Board then appoints the most suitable candidate who must stand for election at the next annual general meeting of shareholders.

(c) Retirement and re-election of directors

The Constitution of the Company requires one third of directors, other than the Managing Director, to retire from office at each Annual General Meeting. Directors who have been appointed by the Board since the last Annual General Meeting are required to retire from office at the next Annual General Meeting and are not taken into account in determining the number of directors to retire at that Annual General Meeting. Retiring directors are eligible for re-election by shareholders.

(d) Independence of directors

The Board has reviewed the position and association of each of the four directors in office at the date of this report and considers that three directors, including the Chairperson, are independent. In considering whether a director is independent, the Board has regard to the independence criteria in ASX Corporate Governance Principles and Recommendations Principle 2 and other facts, information and circumstances that the Board considers relevant. The Board assesses the independence of new directors upon appointment and reviews their independence, and the independence of the other directors, as appropriate.

The Board considers that, Messrs Whitby, Kestel and Brown meet the criteria in Principle 2. They have no material business or contractual relationship with the Company, other than as a director, and no conflicts of interest which could interfere with the exercise of independent judgement. Accordingly, they are considered to be independent.

(e) Director education

The non-executive directors are given every opportunity to gain a better understanding of the business, the industry, and the environment within which the Group operates, and are given access to continuing education opportunities to update and enhance their skills and knowledge.

(f) Independent professional advice

Each director has the right of access to all relevant Company information and to the Company’s executives and, subject to prior approval of the Chairperson, each director has the right to seek independent legal and other professional advice at the Company’s expense concerning any aspect of the Company’s operations or undertakings in order to fulfil their duties and responsibilities as directors.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

1. BOARD OF DIRECTORS (continued)

(g) Board Performance Review

There is no formal appraisal system in place for Board performance on a director by director basis. The performance of all directors is assessed through review by the Board as a whole of a director’s attendance at, and involvement in, Board meetings, his performance and other matters identified by the Board or other directors. Significant issues are actioned by the Board. Due to the Board’s assessment of the effectiveness of these processes, the Board has not otherwise formalised measures of a director’s performance.

The Company has not conducted a performance evaluation of the members of the Board during the reporting period. However, the Board conducts a review of the performance of the Company against budgeted targets on an ongoing basis.

(h) Conflict of Interest

Directors must keep the Board advised of any interest that could potentially conflict with those of the Company.

(i) Directors’ remuneration

Details of the Company’s remuneration policies are included in the “Remuneration Report” section of the Directors’ Report.

2. BOARD COMMITTEES

(a) Board committees and membership

The Board currently has two standing committees to assist in the discharge of its responsibilities. These are the:

Audit and Risk Management Committee; and
Remuneration and Nomination Committee.

To facilitate the execution of its responsibilities, the Board’s Committees provide a forum for a more detailed analysis of key issues. Each Committee is entitled to the resources and information it requires to carry out its duties, including direct access to advisors and employees. Current membership of the committee’s of the Xstate Resources Board, are set out below:

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

2. BOARD COMMITTEES (continued)

(b) Audit And Risk Management Committee

The audit and risk management committee consists of all non-executive directors. The role of the audit and risk management committee is documented in a Charter which is approved by the Board of Directors. The Chairperson may not be the Chairperson of the Board. The role of the committee is to advise on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Group.

It also gives the Board of Directors additional assurance regarding the quality and reliability of financial information prepared for use by the Board in determining policies or for inclusion in the financial report.

The members of the audit and risk management committee for the Company at the date of this report were:

Mr Ross Kestel – independent non-executive director (Chair of audit and risk management committee);
Mr David Whitby – independent non-executive Chairman
Mr James Brown – independent non-executive director.

The external auditors and the managing director are invited to audit committee meetings at the discretion of the committee. The committee met twice during the year and committee members’ attendance record is disclosed in the table of directors’ meetings.

The external auditor met with the audit committee and the Board of directors twice during the year.

The responsibilities of the audit and risk management committee include:

to review the financial report and other financial information distributed externally;
to monitor corporate risk assessment processes;
to review any new accounting policies to ensuring compliance with Australian Accounting Standards and generally accepted accounting principles;
to review audit reports ensuring that where major deficiencies or breakdowns in controls or procedures have been identified, appropriate and prompt remedial action is taken by management;
to review the nomination and performance of the auditor;
to liaise with the external auditors ensuring that the annual and half-year statutory audits are conducted in an effective manner;
to monitor the establishment of an appropriate internal control framework and consider enhancements;
to monitor the establishment of appropriate ethical standards;
to monitor the procedures in place ensuring compliance with the Corporations Act 2001, the Australian Securities Exchange Listing Rules and all other regulatory requirements;
to address any matters outstanding with auditors, the Australian Taxation Office, the Australian Securities and Investments Commission, the Australian Securities Exchange and other financial institutions; and
to improve the quality of the accounting function.

The audit and risk management committee reviews the performance of the external auditors on an annual basis and meets with them during the year.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

2. BOARD COMMITTEES (continued)

(c) Remuneration And Nomination Committee

The remuneration and nomination committee consists of all non-executive directors.

Mr James Brown – independent non-executive director (Chair of remuneration and nomination committee);
Mr David Whitby – independent non-executive Chairman;
Mr Ross Kestel – independent non-executive director;

Details of directors’ attendance at remuneration and nomination committee meetings are set out in the directors’ report.

The remuneration and nomination committee operates in accordance with its Charter. The main responsibilities of the committee are:

to review the size and composition of the Board;
to review and advise the Board on the range of skills available on the Board and appropriate balance of skills for future Board membership;
to review and consider succession planning for the managing director, the chairman and other directors;
to develop criteria and procedures for the identification of candidates for appointment as directors and apply the criteria and procedures to identify prospective candidates for appointment as a director and make recommendations to the Board;
to make recommendations to the Board regarding any directors who should not continue in office;
to nominate for approval by the Board external experts;
to determine remuneration policies and remuneration of directors;
to determine the Company recruitment, retention and termination policies and procedures for senior management;
to determine and review incentive schemes;
to determine and review superannuation arrangements of the Company; and
to determine and review professional indemnity and liability insurance for directors.

From 1 July 2011, there is increased transparency and accountability in remuneration matters as required in the Improving Accountability on Director and Executive Remuneration Bill 2011. There are new rules for engaging remuneration consultants and on reporting specific information about remuneration consultants in the audited Remuneration Report in the Directors’ Report. The Group’s audited Remuneration Report will include these new reporting obligations.

Further details of remuneration arrangements in place for the directors and executives are set out in the Directors’ Report.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

3. MANAGING BUSINESS RISK

The Board believes that risk management and compliance are fundamental to sound management and that oversight of such matters is an important responsibility to the Board. The Group maintains policies and practices designed to identify and manage significant business risks, including:

regular budgeting and financial reporting;
procedures and controls to manage financial exposures and operational risks;
the Company’s business plan;
corporate strategy guidelines and procedures to review and approve the Company’s strategic plans; and
insurance and risk management programmes which are reviewed by the Board.

The Board reviews these systems and the effectiveness of their implementation annually and considers the management of risk at its meetings. The Company’s risk profile is reviewed annually. The Board may consult with the Company’s external auditors on external risk matters or other appropriately qualified external consultants on risk generally, as required.

(a) Internal controls

Procedures have been established at the Board and executive management levels that are designed to safeguard the assets and interests of the Company, and to ensure the integrity of reporting. These include accounting, financial reporting and internal control policies and procedures. To achieve this, the executive directors perform the following procedures:

ensure appropriate follow-up of significant audit findings and risk areas identified;
review the scope of the external audit to align it with Board requirements; and
conduct a detailed review of published accounts.

(b) CEO and CFO assurance on corporate reporting

The Board receives monthly management reports about the financial condition and operational results of the consolidated group. The Chief Executive Officer (or equivalent) and Chief Financial Officer (or equivalent) annually provide a formal statement, in accordance with section 295A of the Corporations Act, to the Board that in all material respects and to the best of their knowledge and belief:

the Company’s financial reports present a true and fair view of the Company’s financial condition and operational results and are in accordance with relevant accounting standards; and
the Company’s risk management and internal control systems are sound, appropriate and operating efficiently and effectively.

(c) Environmental regulation

The Company has a policy of at least complying, but in most cases exceeding, its environmental performance obligations. No environmental breaches have been notified by any Government agency during the year ended 31 December 2011.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

4. ETHICAL STANDARDS

All directors and executives are expected to act with the utmost integrity and objectivity, striving at all times to enhance the performance and reputation of the Company and its controlled entities.

(a) Code of Conduct

In pursuit of the highest ethical standards, the Company has adopted a Code of Conduct which establishes the standards of behaviour required of directors and employees in the conduct of the Company’s affairs. This Code is provided to all directors and employees. The Board monitors implementation of this Code. Unethical behaviour is to be reported to the Chairman as soon as practicable.

The Code of Conduct is based on respect for the law, and acting accordingly, dealing with conflicts of interest appropriately, using the consolidated entity’s assets responsibly and in the best interests of the Company, acting with integrity, being fair and honest in dealings, treating other people with dignity and being responsible for actions and accountable for the consequences.

The Group has advised each director, manager and employee that they must comply with the Group’s Ethical Standards.

(b) Diversity Policy

The Company has recently established a Diversity Policy which provides the written framework and objectives for achieving a work environment that values and utilises the contributions to employees’ backgrounds, experiences, and perspectives, irrespective of gender, age, ethnicity and cultural background. The Board is responsible for developing, where possible, measurable objectives and strategies to support the framework and objectives of the Diversity Policy. The Remuneration and Nomination Committee is responsible for monitoring the progress of the measurable objectives through various monitoring, evaluation and reporting mechanisms. Currently, there are no vacant Board positions. Should a Board position become vacant, the Board will seek applicants in accordance with its Diversity Policy.

Pursuant to Recommendation 3.3 of the Recommendations, the Company discloses the following information as at the date of this report:

	Women	Men
Percentage of women and men employed within the Group	29%	71%
Percentage of women and men employed at the senior management level	0%	100%
Percentage of women and men employed at the Board level	0%	100%

The Diversity Policy can be accessed on the Company’s website at www.xstate.com.au under the Corporate Governance section.

(c) Trading in Company securities by directors and employees

The Board has adopted a policy in relation to dealings in the securities of the Company which applies to all directors and employees. Under the policy, directors are prohibited from short term or “active” trading in the Company’s securities and directors and employees are prohibited from dealing in the Company’s securities whilst in possession of price sensitive information. The Chairman (or in his place the Managing Director) must also be notified of any proposed transaction.

This policy is provided to all directors and employees. Compliance with it is reviewed on an ongoing basis in accordance with the Company’s risk management systems.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

5. COMMUNICATION WITH SHAREHOLDERS

The Board aims to ensure that shareholders are kept informed of all major developments affecting the Company. Information is communicated to shareholders as follows:

as the Company is a disclosing entity, regular announcements are made to the Australian Securities Exchange in accordance with the Company’s continuous disclosure policy, including quarterly cash flow reports, half-year reviewed accounts, year-end audited accounts and an annual report;
the Board ensures the annual report includes relevant information about the operations of the Company during the year, changes in the state of affairs and details of future developments;
shareholders are advised in writing of key issues affecting the Company;
any proposed major changes in the Company’s affairs are submitted to a vote of shareholders, as required by the Corporations Act 2001;
the Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification of the Company’s strategies and goals. All shareholders who are unable to attend these meetings are encouraged to communicate or ask questions by writing to the Company; and
the external auditor is required to attend the annual general meetings to answer any questions concerning the audit and the content of the auditor’s report.

The Board reviews this policy and compliance with it on an ongoing basis.

(a) Continuous Disclosure

The Company has in place a continuous disclosure policy, a copy of which is provided to all Company officers and employees who may from time to time be in the possession of undisclosed information that may be material to the price or value of the Company’s securities.

The continuous disclosure policy aims to ensure timely compliance with the Company’s continuous disclosure obligations under the Corporations Act 2001 (Cth) and ASX Listing Rules and ensures officers and employees of the Company understand these obligations.

The procedure adopted by the Company is essentially that any information which may need to be disclosed must be brought to the attention of the Chairperson, who in consultation with the Board (where practicable) and any other appropriate personnel, will consider the information and whether disclosure is required and prepare an appropriate announcement.

At least once in every 12 month period, the Board will review the Company’s compliance with this continuous disclosure policy and update it from time to time, if necessary.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

ASX PRINCIPLES COMPLIANCE STATEMENT

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations	Reference Compliance
Principle 1 – Lay solid foundations for management and oversight
1.1 Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions	1a Comply
1.2 Companies should disclose the process for evaluating the performance of senior executives	Remuneration report Comply
1.3 Companies should provide the information indicated in the Guide to reporting on Principle 1.	1a, Remuneration report Comply
Principle 2 – Structure the Board to add value
2.1 A majority of the Board should be independent directors	1b, 1d Comply
2.2 The chair should be an independent director	1d Comply
2.3 The roles of the chair and chief executive officer should not be exercised by the same individual	1d, Directors’ report Comply
2.4 The Board should establish a nomination committee	2c Comply
2.5 Companies should disclose the process for evaluating the performance of the Board, its committees and individual directors	1g, 2a Comply
2.6 Companies should provide the information indicated in the Guide to reporting Principle 2.	1b, 1f, 1g, 2a, Directors’ report Comply
Principle 3 – Promote ethical and responsible decision-making
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 reasonability and accountability of individuals for reporting and investigating reports of unethical practices.	4a Comply
3.2 Companies should establish a policy concerning diversity and disclose the policy or summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity for the Board to assess annually both the objectives and progress in achieving them.	4b Comply
3.3 Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress towards achieving them.	4b Comply
3.4 Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the Board.	4b Comply
3.5 Companies should provide the information indicated in the Guide to reporting on Principle 3	4a, 4b, 4c, 4d Comply

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

ASX PRINCIPLES COMPLIANCE STATEMENT (continued)

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations	Reference Compliance
Principle 4 – Safeguard integrity in financial reporting
4.1 The Board should establish an audit committee	2b Comply
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	2b 2b 2b 2b Comply Comply Comply Comply
4.3 The audit committee should have a formal charter	2a Comply
4.4 Companies should provide the information indicated in the Guide to reporting on Principle 4.	2a, 2b, Directors’ report Comply
Principle 5 – Making timely and balanced disclosure
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.	5, 5a Comply
5.2 Companies should provide the information indicated in the Guide to reporting on Principle 5.	5a Comply
Principle 6 – Respect the rights of shareholders
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.	5 Comply
6.2 Companies should provide the information indicated in the Guide to reporting on Principle 6.	5 Comply
Principle 7 – Recognise and manage risk
7.1 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.	2b, 3, 3a Comply
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.	3, 3b Comply
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 they system is operating effectively in all material respects in relation to financial reporting risks.	3b Comply
7.4 Companies should provide the information indicated in the Guide to reporting on Principle 7.	2b, 3, 3a, 3b, Directors’ report Comply

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │CORPORATE GOVERNANCE STATEMENT

ASX PRINCIPLES COMPLIANCE STATEMENT (continued)

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations	Reference Compliance
Principle 8 – Remunerate fairly and responsibly
8.1 The Board should establish a remuneration committee	2a, 2c, Remuneration report Comply
8.2 The remuneration committee should be structured so that it: • consists of a majority of independent directors • is chaired by an independent chair • has at least three members.	2c 2c 2c Comply Comply Comply
8.3 Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.	Remuneration report Comply
8.4 Companies should provide the information indicated in the Guide to reporting on Principle 8.	2a, 2c, Remuneration report Comply

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2011

		2011 2010
	Note	$ $

Assets
Cash and cash equivalents	19a	1,400,137 1,416,717 37,663 61,239
Trade and other receivables	17
Prepayments	18	27,624 68,336
Total current assets		1,465,424 1,546,292
		8,616,144 7,245,018 25,125 30,194 18,333 3,333
Exploration and evaluation expenditure	15
Property, plant and equipment Trade and other receivables Total non-current assets Total assets Liabilities	14 17
		8,659,602 7,278,545
		10,125,026 8,824,837
		84,672 82,450 - 2,435
Trade and other payables	24
Employee benefits Total current liabilities Total liabilities Net assets Equity	22
		84,672 84,885
		84,672 84,885
		10,040,354 8,739,952
		41,092,627 38,517,929 415,549 (70,803) (31,467,822) (29,707,174)
Share capital	20
Reserves Retained earnings Total equity attributable to equity holders of the Company	20
		10,040,354 8,739,952

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2011

	2011 2010
Note	$ $
Continuing operations Other income 8 Administrative expenses 10 Other expenses 11 Results from operating activities Finance income 12 Finance expenses 12 Net finance (expense) / income Loss before income tax Income tax benefit / (expense) 13 Loss from continuing operations Loss on dissolution of subsidiary 7	21,361 1,500 (1,034,902) (585,976) (273,833) (308,015)
	(1,287,374) (892,491)
	39,307 66,803 (26,342) (315,872)
	12,965 (249,069)
	(1,274,409) (1,141,560)
	113 -
	(1,274,296) (1,141,560) (486,352) -
Loss for the period	(1,760,648) (1,141,560)
Other comprehensive income Reversal of foreign currency translation reserve 7 Other comprehensive income for the period, net of income tax	486,352 -
	486,352 -
	(1,274,296) (1,141,560)
Total comprehensive loss for the period
Loss attributable to owners of the Company Total comprehensive loss attributable to owners of the Company Loss per share Basic and diluted (cents per share) 21	(1,760,648) (1,141,560)
	(1,274,296) (1,141,560)
	(2.26) (3.53)

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2011

	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company
Note	Share capital $ Translation Reserve $	Equity-based benefits reserve $	Accumulated losses $	Total $
Balance at 1 January 2011 Total comprehensive expense for the year	38,517,929 (486,352)	415,549	(29,707,174)	8,739,952

Loss for the year	- -	-	(1,760,648)	(1,760,648)
Other comprehensive income Reversal of foreign currency translation reserve 7 Total comprehensive income / (expense) for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of ordinary shares Capital raising costs Total contributions by and distributions to owners Total changes in ownership interests in subsidiaries Total transactions with owners Balance at 31 December 2011	- 486,352		-
		-		486,352
	- 486,352	-	(1,760,648)	(1,274,296)
	2,720,721 - (146,023) -		- -

		-		2,720,721
		-		(146,023)
	2,574,698 -	-	-	2,574,698
	- -	-	-	-
	2,574,698 -	-	-	2,574,698
	41,092,627 -	415,549	(31,467,822)	10,040,354

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010

	Attributable to equity holders of the Company	Attributable to equity holders of the Company
Note	Share capital $ Translation Reserve $	Equity-based benefits reserve $ Accumulated losses $	Total $
Balance at 1 January 2010 Total comprehensive expense for the period Loss for the year Total other comprehensive expense Total comprehensive expense for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners	31,884,265 (486,352)	136,400 (28,565,614)	2,968,699
	- -	- (1,141,560)
			(1,141,560)
	- -	- -	-
	- -	- (1,141,560)	(1,141,560)


Issue of ordinary shares	6,833,626 -	- -	6,833,626
Issue of options Capital raising costs Share-based payment transactions 23 Total contributions by and distributions to owners Total changes in ownership interests in subsidiaries Total transactions with owners Balance at 31 December 2010	241,799 - (441,761) - - -	- - - - 279,149 -	241,799
			(441,761)
			279,149
	6,633,664 -	279,149 -	6,912,813
	- -	- -	-
	6,633,664 -	279,149 -	6,912,813
	38,517,929 (486,352)	415,549 (29,707,174)	8,739,952

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2011

	2011 2010
Note	$ $
Cash flows from operating activities Receipts from customers Cash paid to suppliers and employees Income taxes received Net cash used in operating activities 19b Cash flows from investing activities Interest received Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Payments for exploration, evaluation and development Acquisition of subsidiary, net of cash Net cash from / (used in) investing activities Cash flows from financing activities Payment of transaction costs related to loans Proceeds from issue of shares and options 20 Capital raising costs 20 Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate fluctuations on cash held Cash and cash equivalents at 31 December 19a	13,073 - (1,245,738) (839,062) 113 -
	(1,232,552) (839,062)
	40,310 71,568 (3,297) (31,252) 2,012 - (1,371,409) (4,496,069) - (30,004)
	(1,332,384) (4,485,757)
	- (39,009) 2,720,721 4,068,344 (146,023) (291,680)
	2,574,698 3,737,655
	9,762 (1,587,164) 1,416,717 3,021,991 (26,342) (18,110)
	1,400,137 1,416,717

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011

1. REPORTING ENTITY

Xstate Resources Limited (the “Company”) is a company domiciled in Australia. The address of the Company’s registered office is 41 Stirling Highway, Nedlands, Western Australia, 6009. The consolidated financial statements of the Company as at and for the year ended 31 December 2011 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group Entities”). The Group primarily is involved in the exploration of oil and gas in the Mediterranean and Tunisia.

2. BASIS OF PREPARATION

(a) Statement of compliance

The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (“AASBs”) adopted by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRS’s) and interpretations adopted by the International Accounting Standards Board (IASB).

The consolidated financial statements were authorised for issue by the Board of the Directors on 29 March 2012.

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except share-based payments which are measured at fair value.

(c) Going concern

The financial report has been prepared on a going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the normal course of business.

The ability of the Group to continue funding its oil and gas exploration activities and retain its rights in the corresponding farm-in arrangements, is dependent on the Group securing further working capital by the issue of additional equity or financing facilities. The timing of raising additional capital will depend on current and future planned drilling programs.

The Board is aware that additional funds would need to be sourced from one or more of the following alternatives:

Capital market raising
Private placement
Entitlements Issue – preferably underwritten
Share purchase plan

Whilst there is uncertainty regarding the outcomes of the funding alternatives set out above, the Company has a history of successfully raising capital to fund its exploration activities. In addition, the Company has the capacity to delay or cancel a number of expenses that are discretionary in nature, including administrative costs and exploration programs that are not contractually binding.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PREPARATION (continued)

(c) Going concern (continued)

In the event that the Company is unable to secure sources of funding, the Company may not be able to continue as a going concern. Accordingly, the Company may be required to realise assets and extinguish liabilities other than in the normal course of business and at amounts different to those stated in this financial report.

The directors have reviewed the business outlook and are of the opinion that the use of the going concern basis of accounting is appropriate as they believe the Group will achieve the matters set out above.

(d) Functional and presentation currency

The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency.

(e) Use of estimates and judgements

The preparation of the consolidated financial statements in conformity with IFRSs 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.

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 as follows:

Critical judgements

(i) Going concern

A key assumption underlying the preparation of the financial statements is that the entity will continue as a going concern. An entity is a going concern when it is considered to be able to pay its debts as and when they are due, and to continue in operation without any intention or necessity to liquidate or otherwise wind up its operations. A significant amount of judgement has been required in assessing whether the entity is a going concern as set out in note 2(c).

Estimates and assumptions

(ii) Exploration and evaluation assets

Determining the recoverability of exploration and evaluation expenditure capitalised in accordance with the Group’s accounting policy (refer note 3(e)), requires estimates and assumptions as to future events and circumstances, in particular, whether successful development and commercial exploitation, or alternatively sale, of the respective areas of interest will be achieved. Critical to this assessment is estimates and assumptions as to the timing of expected cash flows, exchange rates, commodity prices and future capital requirements. Changes in these estimates and assumptions as new information about the presence or recoverability of an ore reserve becomes available, may impact the assessment of the recoverable amount of exploration and evaluation assets. If, after having capitalised the expenditure under accounting policy 3(e), a judgment is made that recovery of the expenditure is unlikely, an impairment loss is recorded in the income statement in accordance with accounting policy 3(f). The carrying amounts of exploration and evaluation assets are set out in note 15.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PREPARATION (continued)

(e) Use of estimates and judgements (continued)

Estimates and assumptions (continued)

(iii) Recognition of tax losses

In accordance with the Group’s accounting policies for deferred taxes (refer note 3(k)), a deferred tax asset is recognised for unused tax losses only if it is probably that future taxable profits will be available to utilise those losses. Determination of future taxable profits requires estimates and assumptions as to future events and circumstances, in particular, whether successful development and commercial exploitation, or alternatively judgements about commodity prices, exchange rates, future capital requirements, future operational performance and the timing of estimated cash flows. Changes in these estimates and assumptions could impact on the amount and probability of estimated taxable profits and accordingly the recoverability of deferred tax assets. The Group currently does not recognise deferred tax assets.

(iv) Share-based payments

As set out in note 23, share-based payments have been calculated at fair value using the Black & Scholes method and have been recognised as either an employee or professional expense, according to its nature.

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

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases.

In the Company’s financial statements, investments in subsidiaries are carried at cost.

(ii) Transactions eliminated on consolidation

Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Gains and losses are recognised when the contributed assets are consumed or sold by the equity accounted investees or, if not consumed or sold by the equity accounted investee, when the Group’s interest in such entities is disposed of.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the year.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss.

(ii) Foreign operations

The assets and liabilities of foreign operations, and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. Income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions.

Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is reclassified to profit or loss as part of the gain or loss on disposal.

(c) Financial instruments

(i) Non-derivative financial assets

The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group has the following non-derivative financial assets: cash and other receivables.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Financial instruments (continued)

(i) Non-derivative financial assets (continued)

Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise other receivables.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

Accounting for finance income and expense is discussed in note 3(j).

(ii) Non-derivative financial liabilities

The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group has the following non-derivative financial liabilities: trade and other payables.

Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest rate method.

(iii) Share capital

Ordinary Shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.

Dividends

Dividends are recognised as a liability in the period in which they are declared.

(d) Property, plant and equipment

(i) Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Property, plant and equipment (continued)

(ii) Depreciation

Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term.

The estimated useful lives for the current and comparative periods are as follows:

	Method	2011	2010
Office equipment	Straight line	20%	20%
Computer equipment	Straight line	20%	20%
Fixtures & Fittings	Straight line	20%	20%

Depreciation methods, useful lives and residual values are reviewed at each reporting date.

(e) Exploration and evaluation

Exploration for and evaluation of mineral resources is the search for mineral resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource. Accordingly, exploration and evaluation expenditures are those expenditures incurred by the Group in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Accounting for exploration and evaluation expenditures is assessed separately for each ‘area of interest’. An ‘area of interest’ is an individual geological area which is considered to constitute a favourable environment for the presence of a mineral deposit or has been proved to contain such a deposit. With respect to the treatment of cash calls from venture parties, all cash calls are capitalised as exploration and evaluation expenditure in the consolidated statement of financial position when paid.

Expenditure incurred on activities that precede exploration and evaluation of mineral resources, including all expenditure incurred prior to securing legal rights to explore an area, is expensed as incurred. For each area of interest the expenditure is recognised as an exploration and evaluation asset where the following conditions are satisfied:

(a) The rights to tenure of the area of interest are current; and

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Exploration and evaluation (continued)

(b) At least one of the following conditions is also met:
(i) The expenditure is expected to be recouped through successful development and commercial exploitation of an area of interest, or alternatively by its sale; and
(ii) Exploration and evaluation activities in the area of interest have not, at 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. Economically recoverable reserves are the estimated quantity of product in an area of interest that can be expected to be profitably extracted, processed and sold under current and foreseeable conditions.

Exploration and evaluation assets include:

Acquisition of rights to explore;
Topographical, geological, geochemical and geophysical studies;
Exploratory drilling, trenching and sampling; and
Activities in relation to evaluating the technical feasibility and commercial viability of extracting the mineral resource.

General and administrative costs are allocated to, and included in, the cost of exploration and evaluation assets, only to the extent that those costs can be related directly to the operational activities in the area of interest to which the exploration and evaluation assets relate. In all other instances, these costs are expensed as incurred.

Exploration and evaluation assets are classified as tangible or intangible according to the nature of the assets. As the assets are not yet ready for use, they are not depreciated. Assets that are classified as tangible assets include:

Piping and pumps;
Tanks; and
Exploration vehicles and drilling equipment.

Assets that are classified as intangible include:

Drilling rights;
Acquired rights to explore;
Exploratory drilling costs; and
Trenching and sampling costs.

Borrowing costs incurred in connection with the financing of exploration and evaluation activities are expensed as incurred.

Exploration and evaluation assets are transferred to Development Assets once technical feasibility and commercial viability of an area of interest is demonstrable. Exploration and evaluation assets are assessed for impairment, and any impairment loss is recognised, prior to being classified.

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Exploration and evaluation (continued)

Impairment testing of exploration and evaluation assets

Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technical feasibility and commercial viability or facts and circumstances suggest that the carrying amount exceeds the recoverable amount.

Exploration and evaluation assets are tested for impairment when any of the following facts and circumstances exist:

The term of exploration license in the specific area of interest has expired during the reporting period or will expire in the near future, and is not expected to be renewed;
Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area are not budgeted nor planned;
Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the decision was made to discontinue such activities in the specified area; or
Sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development by sale.

Where a potential impairment is indicated, an assessment is performed for each CGU which is no larger than the area of interest. The Group performs impairment testing in accordance with accounting policy 3(f)(ii).

(f) Impairment

(i) Financial assets (including receivables)

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more loss event has had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

The Group considers evidence of impairment for receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant receivables and held-to-maturity investment securities are assessed for specific impairment. All individually significant receivables and heldto-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together receivables and held-to-maturity investment securities with similar risk characteristics.

In assessing collective impairment, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(f) Impairment (continued)

(i) Financial assets (including receivables) (continued)

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.

(ii) Non-financial assets

The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In 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.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss.

(g) Employee benefits

(i) Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contributions plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that is due more than 12 months after the end of the period in which the employees render the service are discounted to their present value.

(ii) Share-based payment transactions

The share option programme allows Group employees to acquire shares of the Company. The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do not meet the related service and nonmarket performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

The fair value of the options granted is measured using the Black & Scholes formula, taking into account, the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except for those that fail to vest due to market conditions not being met.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(h) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the true value of money and the risks specific to the liability.

Site Restoration

In accordance with the Group’s published environment policy and applicable legal requirements, a provision for site restoration in respect of contaminated and disturbed land, and the related expense, is recognised when the land is contaminated or disturbed.

(i) Revenue

Rental income

Rental income from office leases is recognised on a straight line basis over the term of the lease.

(j) Finance income and finance costs

Finance income comprises interest income on funds invested and foreign exchange gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method.

Finance costs comprise interest expense on borrowings, share-based payments and foreign exchange losses on borrowings. All borrowing costs are recognised in profit or loss using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

(k) Tax

Income tax expense comprises current and deferred tax. Current and deferred tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on laws that have been enacted or substantively enacted by reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity but they intend to settle current tax assets and liabilities on a net basis or their tax assets and liabilities will be realised simultaneously.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(k) Tax (continued)

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(l) Segment reporting

Determination and presentation of operating segments

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Company’s headquarters), head office expenses, and income tax assets and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment.

4. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

The following standards, amendments to standards and interpretations have been identified as those which may impact the Group in the period of initial application. They are available for early adoption at 31 December 2011, but have not been applied in preparing this financial report:

AASB 9 Financial Instruments (December 2010) (includes financial assets and liability requirements), AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010), AASB 9 Financial Instruments (December 2009) (Financial asset requirements only) and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 amends the requirements for classification and measurement of financial assets and liabilities. The amendments to AASB 9 will be mandatory for the Group’s 31 December 2013 year end, with retrospective application. The Group has not yet determined the potential impact of these amendments.
AASB 10 Consolidated Financial Statements introduces a new approach to determining which investees should be consolidated. The amendments to AASB 10 will be mandatory for the Group’s 31 December 2013 year end, with retrospective application. The Group has not yet determined the potential impact of these amendments.
AASB 11 Joint Arrangements and AASB 128 Investments in Associates and Joint Ventures (2011) introduces a change in the approach of determining the rights to and obligations for underlying assets and liabilities, identifying the existence of a joint operation or joint venture. The amendments to AASB 11 and AASB 128 will be mandatory for the Group’s 31 December 2013 year end, with retrospective application. The Group has not yet determined the potential impact of these amendments.
AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 introduces a new approach to measure fair value when required to by other AASBs. The amendments to AASB 13 will be mandatory for the Group’s 31 December 2013 year end. The Group has not yet determined the potential impact of these amendments.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED (continued)

AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income introduces the separate classification of those items that would be reclassified to profit and loss in the future and those that would never be reclassified to profit or loss and the impact on those items. The amendments to AASB 2011-9 will be mandatory for the Group’s December 2013 year end. The Group has not yet determined the potential impact of this amendment.

5. DETERMINATION OF FAIR VALUES

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

Trade and other receivables

Trade and other receivables are short-term in nature. As a result, the fair value of these instruments is considered to approximate its carrying value.

Non-derivative financial liabilities

Trade and other payables are short term in nature. As a result, the fair value of these instruments is considered to approximate its carrying value.

Share-based payment transactions

The fair value of stock options is based on market value, if available. If market value is not available, then the fair value of stock options is measured using the Black and Scholes model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility, weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the riskfree interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6. OPERATING SEGMENTS

The Group has one reportable segment, being oil and gas exploration and evaluation in the Mediterranean.

Comparative segment information has been represented in conformity with the requirement of AASB 8 Operating Segments.

	Oil and Gas	Oil and Gas
For the year ended 31 December	2011	2010
	$	$
Reportable segment loss before income tax	-	-
Reportable segment assets	8,616,144	7,245,018
Other materials items:
Impairment loss on exploration and evaluation	-	-
Capitalised exploration and evaluation expenditure – acquired	-	1,897,282
Capitalised exploration and evaluation expenditure – additions	1,371,126	5,347,736

Reconciliation of reportable segment loss, assets and liabilities and other material items

	2011 2010
	$ $
Loss Total loss for reportable segments Unallocated amounts: other corporate expenses Finance expense (including foreign currency translation) Finance income Consolidated loss before income tax Assets Total assets for reportable segments Other assets Liabilities Total liabilities for reportable segments Other liabilities	- - (1,287,374) (892,491) (26,342) (315,872) 39,307 66,803
	(1,274,409) (1,141,560)
	8,616,144 7,245,018 1,508,882 1,579,819
	10,125,026 8,824,837
	- (283) (84,672) (84,602)
	(84,672) (84,885)

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6. OPERATING SEGMENTS (continued)

Reconciliation of reportable segment loss, assets and liabilities and other material items (continued)

	Reportable		Consolidated
	segment totals	Adjustments	totals
	$	$	$
Other material items 2011
Capitalised exploration and evaluation
expenditure - acquired
Capitalised exploration and evaluation
expenditure - additions	1,371,126	-	1,371,126
Other material items 2010
Capitalised exploration and evaluation
expenditure - acquired	1,897,282	-	1,897,282
Capitalised exploration and evaluation
expenditure - additions	5,347,736	-	5,347,736

7. DISPOSAL OF SUBSIDIARY

In December 2011, a subsidiary company, Xstate Arizona Inc. was officially dissolved by the Arizona Corporations Commission. This subsidiary had an unincorporated joint venture with Liberty Star until it was cancelled in February 2009.

	2011 2010
	$ $
Loss on dissolution of subsidiary Basic loss per share (cents)	(486,352) -
	(0.48) -

The loss on disposal of the subsidiary is attributable to the dissolution of the foreign operation in December 2011 and the resulting reversal of foreign currency translation reserve carried forward from prior years.

8. OTHER INCOME

	2011 2010
	$ $
Office rent and amenities	21,361 1,500

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9. PERSONNEL EXPENSES

	2011 2010
Notes	$ $
Wages and salaries Directors and executives remuneration Contributions to defined contribution plans (excl. directors) Increase / (decrease) in liability for annual leave (excl. directors) Fringe benefits tax Other associated personnel expenses	78,205 20,913 659,572 382,018 7,039 1,882 (1,725) 2,085 84 - 42,585 40
	785,760 406,938

10. ADMINISTRATIVE EXPENSES

Personnel expenses	785,760	406,938
Advertising and publicity	98,044	33,200
Communication and information services	10,962	7,094
Motor vehicle expenses	64	1,225
Office administration	100,039	44,188
Bank charges	1,552	696
Share registry and statutory fees	38,481	92,635
	1,034,902	585,976

11. OTHER EXPENSES

Professional fees	267,478	306,957
Depreciation and amortisation	6,422	1,058
(Gain) / loss on disposal of fixed assets	(67)	-
	273,833	308,015

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12. FINANCE INCOME AND EXPENSE

	2011 2010
Notes	$ $
Interest income on bank deposits Other interest income Finance income Interest expense on financial liabilities measured at amortised cost Share-based payments 23 Other borrowing costs Net foreign exchange loss Finance expense Net finance (expense) / income recognised in profit or loss	39,160 66,803 147 -
	39,307 66,803
	- (9,759) - (275,000) - (29,250) (26,342) (1,863)
	(26,342) (315,872)
	12,965 (249,069)

13. INCOME TAX EXPENSE

Current tax benefit
Current period	(159,215)	(253,968)
Adjustment for prior period	(113)	-
	(159,328)	(253,968)
Deferred tax benefit
Origination and reversal of temporary differences	159,215	253,968
Total income tax benefit	(113)	-

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13. INCOME TAX EXPENSE (CONTINUED)

Numerical reconciliation between tax expense and pre-tax accounting loss

	2011 2010
	$ $
Loss for the period Total income tax benefit Loss excluding income tax Income tax using the Company’s domestic tax rate of 30% (2010: 30%) Adjustment for prior period Non-deductible expenses Current year tax losses not brought to account Change in unrecognised temporary differences Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% (2010: 30%)	(1,760,648) (1,141,560) (113) -
	(1,760,761) (1,141,560)
	(528,228) (342,468) (113) - 373,073 87,191 159,215 253,968 (4,060) 1,309
	(113) -
	1,163,758 907,689
	349,127 272,307

All unused tax losses were incurred by Australian entities.

Potential future income tax benefits of $349,127 (2010: $272,307) attributable to tax losses have not been brought to account because the directors do not believe it is appropriate to regard realisation of the future income tax benefits as probable.

The benefit of these tax losses will only be obtained if:

i) future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised;
ii) the conditions for deductibility imposed by tax legislation continue to be complied with;
iii) no changes in tax legislation adversely affect the Company in realising the benefit; and
iv) satisfaction of either the continuity of ownership or the same business test.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14. PROPERTY, PLANT AND EQUIPMENT

	Fixtures and fittings	Computer equipment	Total
	$	$	$
Gross carrying amount Balance at 1 January 2010 Additions Balance at 31 December 2010 Balance at 1 January 2011 Additions Disposals Balance at 31 December 2011 Depreciation and impairment losses Balance at 1 January 2010 Depreciation for the year Balance at 31 December 2010 Balance at 1 January 2011 Depreciation for the year Disposals Balance at 31 December 2011 Carrying amounts Balance at 31 December 2010 Balance at 31 December 2011		- 27,053

	-		-
	4,199		31,252
	4,199	27,053	31,252
		27,053 - (2,011)
	4,199		31,252
	3,297		3,297
	-		(2,011)
	7,496	25,042	32,538
		- 916

	-		-
	142		1,058
	142	916	1,058
		916 5,008 (67)
	142		1,058
	1,414		6,422
	-		(67)
	1,556	5,857	7,413
		26,137

	4,057		30,194
	5,940	19,185	25,125

15. EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE

In the June 2011 interim financial report, the Directors took the decision to fully impair the carrying value amount of $4,329,868 expended on Lambouka 1. At the time of reporting, and due to drill-hole damage, the Directors considered it unlikely that Lambouka 1 would have significant value for evaluating or producing an accumulation of oil and gas.

As a consequence of the receipt of an independent valuation of the Lambouka interests post the period of impairment, such value supported the full carrying value of the Lambouka tenements. Accordingly, the Directors deemed it appropriate to reverse the impairment of the Lambouka 1 drilling costs.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15. EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE (continued)

	2011 2010
	$ $
Costs carried forward in respect of areas of interest: Exploration phase Opening balance Acquisitions Additions	8,616,144 7,245,018
	7,245,018 - - 1,897,282 1,371,126 5,347,736
	8,616,144 7,245,018

The permit participation agreements, require the company to contribute its share of the exploration activities in US dollars and, as a result, is subject to foreign currency exchange gains and losses.

Exploration and evaluation activities have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves. The ultimate recovery of exploration and evaluation phase expenditure is primarily dependent upon the successful development and commercial exploitation, or alternatively, sale of the areas of interest.

16. DEFERRED TAX ASSETS AND LIABILITIES

(a) Unrecognised deferred tax assets and liabilities

Unrecognised deferred tax assets and liabilities are attributable to the following:

	Assets	Liabilities	Net
	2011 2010	2011 2010	2011 2010
	$ $	$ $	$ $
Property, plant and equipment Trade and other receivables Black hole deductible costs Trade and other payables Employee benefits Carry forward tax losses	- - - - 46,690 3,561 10,965 10,200 - 731 349,127 272,307	- (468) (983) (1,328) - - - - - - - -	- (468) (983) (1,328) 46,690 3,561 10,965 10,200 - 731 349,127 272,307
	406,782 286,799	(983) (1,796)	405,799 285,003

The Group does not recognise deferred tax assets as it is not probable that sufficient taxable amounts will be available in future periods in which to be offset.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

17. OTHER RECEIVABLES

	2011 2010
	$ $
Bank interest income Office rental income ANZ security deposit Rental bond Other receivables GST and PAYG receivable Non-current Current	3,277 4,428 - 1,500 15,000 - 3,333 3,333 122 - 34,264 55,311
	55,996 64,572
	18,333 3,333 37,663 61,239
	55,996 64,572

18. PREPAYMENTS

	2011 2010
	$ $
Insurance Australian Securities Exchange Rent and outgoings Subscriptions and conference registrations Exploration cash call	6,321 5,964 7,838 6,668 - 4,161 13,465 16,185 - 35,358
	27,624 68,336

19. CASH AND CASH EQUIVALENTS

(a) Reconciliation of cash and cash equivalents

The Company’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 25.

	2011	2010
	$	$
Cash and cash equivalents in the statement of cash flows	1,400,137	1,416,717

The perceived credit risk is low as cash and cash equivalents are with authorised deposit taking institutions.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

19. CASH AND CASH EQUIVALENTS (continued)

(b) Reconciliation of cash flows from operating activities

Notes	2011 2010
	$ $
Cash flows from operating activities Loss for the period Adjustments for: Net finance expense / (income) 12 Depreciation 14 Profit / (loss) on sale of property, plant and equipment 14 Equity-settled share-based payment transactions Annual leave expense provision movement 9 Net (gain) / loss on foreign exchange translations 12 Loss on disposal of subsidiary 7 Change in other receivables Change in trade and other payables Change in prepayments Change in provisions and employee benefits Net cash used in operating activities	(1,760,648) (1,141,560) (39,160) 247,206 6,422 1,058 (67) - - 4,150 (726) 2,084 26,342 1,863 486,352 -
	(1,281,485) (885,199) 7,425 (48,899) 2,505 114,740 40,713 (18,766) (1,710) (938)
	(1,232,552) (839,062)

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. CAPITAL AND RESERVES

(a) Share capital issued for cash

	Ordinary shares
	Number Amount
	2011 2010 2011 2010
	shares shares $ $
On issue at 1 January 01-Jan-10 A 1:3 consolidation of shares 08-Jul-10 Placement of 5 million 20 cent shares (plus 1:2 free attaching options as below) 08-Jul-10 Placement of 2.5 million 20 cent shares in lieu of convertible note (plus 1:2 free attaching options as below) 08-Jul-10 Issue of 11,660,000 20 cent shares in consideration of the acquisition of Bombora Energy Limited 05-Nov-10 Issue of 30,016,261 10 cent entitlements issue shares 28-Feb-11 Placement of 10 million 12.5 cent shares 16-Nov-11 Placement of 11,630,488 6.3 cent shares 16-Dec-11 Placement of 11,714,275 6.3 cent shares Capital raising costs On issue at 31 December	67,536,588 55,079,593 38,276,130 31,884,265 - (36,719,266) - - - 5,000,000 - 1,000,000 - 2,500,000 - 500,000 - 11,660,000 - 2,332,000 - 30,016,261 - 3,001,626 10,000,000 - 1,250,000 - 11,630,488 - 732,721 - 11,714,275 - 738,000 - - - (146,023) (441,761)
	100,881,351 67,536,588 40,850,828 38,276,130

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. CAPITAL AND RESERVES (continued)

(b) Share options issued for cash

	Options issued for cash	Options issued for cash
	Number	Amount
	2011 2010	2011 2010
	Options Options	$ $
On issue at 1 January 08-Jul-10 Issue of options in lieu of underwriting fee for share issue 08-Jul-10 Non-renounceable rights issue On issue at 31 December Share capital and options issued for cash at 31 December	24,179,932 - - 15,000,000 - 9,179,932	241,799 - - 150,000 - 91,799
	24,179,932 24,179,932	241,799 241,799

		41,092,627 38,517,929

(c) Share options issued through equity benefit reserve

	Options issued through equity benefit reserve	Options issued through equity benefit reserve
	Number	Amount
	2011 2010	2011 2010
	Options Options	$ $
On issue at 1 January 21-Jan-10 Issue of 200,000 options in lieu of Nevada Geochemical Database 21-Jan-10 A 1:3 consolidation of options 08-Jul-10 Free-attaching options 30-Sep-10 Issue of options in consideration for shareholder loans 05-Nov-10 Entitlements issue On issue at 31 December*	24,658,130 1,000,000 - 200,000 - (800,000) - 3,750,000 - 5,500,000 - 15,008,130	415,549 136,400 - 4,149 - - - - - 275,000 - -
	24,658,130 24,658,130	415,549 415,549

These options were calculated at market value on the date the options were issued, being 30 September 2010.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. CAPITAL AND RESERVES (continued)

(d) Issuance of ordinary shares

All issued shares are fully paid.

(e) Ordinary shares

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. Option holders cannot participate in any new share issues by the Company without exercising their options.

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

All issued shares are fully paid.

The Company has also issued share options (see note 23).

(f) Reserves

Equity-based benefits reserve

The equity-based benefits reserve represents the cost of options that have been granted as share-based payments but not exercised. This reserve will be transferred to capital should these options be exercised or reversed through profit and loss should certain vesting conditions not be met.

Foreign currency translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. LOSS PER SHARE

(a) Basic loss per share

The calculation of basic loss per share at 31 December 2011 was based on the loss attributable to ordinary shareholders of $1,760,648 (2010: $1,141,560) and a weighted average number of ordinary shares outstanding of 77,926,810 (2010: 32,339,086) calculated as follows:

Loss attributable to ordinary shareholders

	2011 2010
	$ $
Loss for the period	(1,760,648) (1,141,560)

Weighted average number of ordinary shares (basic)

	2011 2010
	Number Number
Issued ordinary shares at 1 January Effect of 1:3 reconstruction of share capital Effect of shares issued during the period	67,536,588 55,079,593 - (36,719,266) 10,390,222 13,978,759
	77,926,810 32,339,086

(b) Diluted loss per share

The Company does not have any potential ordinary shares whose conversion to ordinary shares would have a dilutive effect on basic loss per share and as such diluted loss per share is equal to basic loss per share.

In accordance with AASB 133 ‘Earnings per Share’ share options issued as share based payments have been excluded from the calculation of diluted loss per share due to their anti-dilutive effect.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22. EMPLOYEE BENEFITS

	2011 2010
	$ $
Current Liability for annual leave	- 2,435
	- 2,435

23. SHARE-BASED PAYMENT PLANS

(a) Description of the share-based payment arrangements

At 31 December 2011 the Group has the following share-based payment arrangements.

Equity-settled share option programme

An employee option plan has been established which enables the Group to issue key management personnel options over the ordinary shares of the Company. The options, issued for nil consideration, are issued in accordance with guidelines established by the directors of the Group. The options cannot be transferred and will not be quoted on the ASX. There are no voting rights attached to the options unless converted into ordinary shares. All options to date are granted at the discretion of the directors.

On 25 February 2010 the Group issued 66,667 options exercisable at 24 cents each, for no consideration, in lieu of consulting fees. The resultant expense of $4,150 is included as part of professional fees within other expenses.

On 8 July 2010:-

The Company issued 15,000,000 options at 1 cent each to raise $150,000 in working capital (the options are exercisable at 24 cents on or before 30 June 2013);
The Company issued 7,500,000 fully paid ordinary shares (and 3,750,000 attaching options for nil consideration, at 20 cents each with the same terms as the options referred to above), to raise $1.5 million in working capital;
The Company issued 9,179,932 options at 1 cent each to raise $91,799 in working capital. The options were issued on the same terms as those referred to above;

On 30 September 2010 the Group issued 5,500,000 options exercisable at 24 cents, for no consideration, in lieu of borrowing costs. The resultant expense of $275,000 (based on market price of 5 cents per share) is included as part of finance expenses.

On 5 November 2010 an entitlements issue included the issuance of 15,008,130 free-attaching options.

The fair value of services received for share options granted is based on the fair value of options granted, measured using the Black-Scholes formula.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

23. SHARE-BASED PAYMENT PLANS (continued)

(b) Terms and conditions of share-option programme

The terms and conditions relating to the grant of existing share options are as follows:

Tranche	Grant date Number of Vesting conditions Contractual
	instruments life of options
1 2 3 4	30-May-2007 100,000 Vested upon granting 4.92 years 30-May-2007 116,667 10 months 4.92 years 30-May-2007 116,667 22 months 4.92 years 25-Feb-2010 66,667 Vested upongranting 2.91 years 400,001

(c) Disclosure of share option programme

The number and weighted average exercise prices of share options are as follows:

	Weighted		Weighted
	average	Number of	average Number of
	exercise price	options	exercise price Options
	2011	2011	2010 2010
			$1.92 333,334 - - - - $0.24 66,667
Outstanding at 1 January	$1.64	400,001
Forfeited during period Exercised during the period	-	- -
	-
Granted during the period	-	-
Outstanding at 31 December	$1.64	400,001	$1.64 400,001
Exercisable at 31 December	$1.64	400,001	$1.64 400,001

The options outstanding at 31 December 2011 have an exercise price in the range of 24 cents to $2.25 and a weighted average contractual life of 0.45 years (2010: 1.45 years).

No options were granted during the year (2010: 66,667 options granted).

No options were exercised or forfeited during the year (2010: no options exercised or forfeited).

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

23. SHARE-BASED PAYMENT PLANS (continued)

(d) Inputs for measurement of grant date fair values

The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using the Black Scholes options pricing model. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair values at grant date of the share-based payment plans are the following:

Fair value of share options	Tranche 1	Tranche 1	Tranche 2	Tranche 2	Tranche 3	Tranche 3	Tranche 4	Tranche 4
and assumptions
Fair value at grant date	14.9	cents	13.5	cents	12.7	cents	2.1	cents
Share price	26.5	cents	26.5	cents	26.5	cents	15.0	cents
Exercise price	150	cents	195	cents	225	cents	24.0	cents
Expected volatility	80%		80%		80%		80%
Option life	4.92	years	4.92	years	4.92	years	2.91	years
Vesting period	-	years	0.83	years	1.83	years	-	years
Risk free rate	6.14%		6.14%		6.14%		3.75%

All options remain unexercised at 31 December 2011.

24. TRADE AND OTHER PAYABLES

	2011 2010
	$ $
Current	21,760 20,452 62,912 61,998
Trade payables
Non-trade payables and accrued expenses
	84,672 82,450

The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 25.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. FINANCIAL INSTRUMENTS

(a) Financial Risk Management

Overview

The Group has exposure to the following risks from their use of financial instruments:

credit risk
liquidity risk
• market risk

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these financial statements.

Risk Management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities.

The Group Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group.

(b) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. For the Company it arises from receivables due from subsidiaries.

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

	Carrying amount
	2011 2010
	$ $
Other receivables Cash and cash equivalents	55,996 64,572 1,400,137 1,416,717
	1,456,133 1,481,289

None of the Group’s receivables are past due.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. FINANCIAL INSTRUMENTS (continued)

(b) Credit risk (continued)

The Group undertook exploration and evaluation activities in the Mediterranean Sea. At the balance sheet date there were no significant concentrations of credit risk.

Cash and cash equivalents

The Group limits its exposure to credit risk by only depositing with authorised banking institutions and only with counterparties that have an acceptable credit rating.

Trade and other receivables

The Group operates primarily in exploration activities and therefore is not exposed to credit risk in relation to trade receivables with the exception of the sub-lease of an office.

The maximum exposure to credit risk for trade and other receivables at the reporting date by geographic region was:

	Carrying Amount
	2011 2010
Australia	55,996 64,572

The maximum exposure to credit risk for trade and other receivables at the reporting date by type of counterparty was:

	Carrying Amount
	2011 2010
Authorised banking institutions and government agencies Sub-tenant Rental bond Other receivables	52,541 59,739 - 1,500 3,333 3,333 122 -
	55,996 64,572

Management does not expect any counterparty to fail to meet its future obligations and therefore the Company and Group have not established an allowance for impairment that represents their estimate of incurred losses in respect of intercompany loans and receivables and investments.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. FINANCIAL INSTRUMENTS (continued)

(c) 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 ensures that it has sufficient cash on demand to meet expected operational expenses. This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters.

Refer to note 2(c) for basis of going concern.

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting arrangements:

	Carrying	Contractual	6 months
	amount	cash flows	or less
	$	$	$
31 December 2011 Non-derivative financial liabilities Trade and other payables 31 December 2010 Non-derivative financial liabilities Trade and other payables		(84,672)


	84,672		(84,672)
	84,672	(84,672)	(84,672)
		(82,450)


	82,450		(82,450)
	82,450	(82,450)	(82,450)

(d) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, commodity prices and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group is exposed to currency and interest rate risk as detailed below.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. FINANCIAL INSTRUMENTS (continued)

(d) Market risk (continued)

Currency risk management

The Group is exposed to currency risks on exploration cash calls that are denominated in a currency other than the respective functional currencies of Group entities, which is primarily the Australian dollar (AUD). The currencies in which these transactions will primarily be denominated are AUD and USD.

The Group’s exposure to foreign currency risk was as follows:

	31 December 2011	31 December 2010
	AUD USD	AUD USD
Cash and cash receivables Net exposure	1,400,137 -	924,734 491,983
	1,400,137 -	924,734 491,983

The following significant exchange rates applied during the year:

			Reporting date	Reporting date
	Average rate			spot rate
AUD	2011	2010	2011	2010
US Dollar (USD)	1.0336	0.8940	1.0174	1.0163

The Group was exposed to US dollars (USD). The following table details the Group’s sensitivity to a 10% increase and decrease in the Australian dollar against the relevant foreign currencies and represents management’s assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number indicates an increase in profit or loss where the Australian dollar strengthens against the respective currency.

	Impact on profit and loss
	and equity
	2011 2010
If AUD strengthens by 10%
USD	- (44,726)
If AUD weakens by 10%
USD	- 54,664

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. FINANCIAL INSTRUMENTS (continued)

(d) Market risk (continued)

Interest rate risk

The Group only has interest rate risk relating to its funds on deposit with banking institutions. Accordingly, the Group does not hedge its interest rate risk exposure.

Profile

At the reporting date the interest rate profile of the Group’s interest bearing financial instruments was:

	Carrying amount
	2011 2010
	$ $
Variable rate instruments Financial assets	1,400,137 1,416,717
	1,400,137 1,416,717

Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore a change in interest rates at the reporting date would not affect profit or loss.

Cash flow sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rates at the reporting date would have increased / (decreased) profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2010.

	Profit or loss
	100bp 100bp
	increase decrease
	$ $
31 December 2011 Variable rate instruments Cash flow sensitivity	14,001 (14,001)
	14,001 (14,001)
31 December 2010 Variable rate instruments Cash flow sensitivity	14,165 (14,165)
	14,165 (14,165)

At the reporting date the Group did not hold any variable rate financial liabilities.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. FINANCIAL INSTRUMENTS (continued)

(e) Capital Management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so as to maintain a strong capital base sufficient to maintain future exploration and development of its projects. In order to maintain or adjust the capital structure, the Group may return capital to shareholders or issue new shares. The Group’s focus has been to raise sufficient funds through equity to fund exploration and evaluation activities.

There were no changes in the Group’s approach to capital management during the year.

Neither the Company nor its subsidiary is subject to externally imposed capital requirements.

(f) Fair values of financial assets and liabilities

The fair values of the financial assets and liabilities at balance date of the Group approximate the carrying amounts in the financial statements.

26. COMMITMENTS

	2011 2010
	$ $
*Office rent* Less than one year	10,360 33,333

27. RELATED PARTIES

(a) Key management personnel compensation

The key management personnel compensation included in ‘personnel expenses’ (see note 9) is as follows:

	2011 2010
	$ $
Short term employee benefits Post-employment benefits	649,043 372,484 10,529 9,534
	659,572 382,018

David McArthur resigned as a director on 8 July 2010 but continues as Company Secretary with no key management responsibilities.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. RELATED PARTIES (continued)

(b) Individual directors and executives compensation

Information regarding individual directors’ and executives’ compensation and equity instruments disclosures as required by Corporations Regulation 2M.3.03 is provided in the remuneration report section of the directors’ report.

Apart from the details disclosed in this note, no director has entered into a material contract with the Company since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year end.

(c) Key management personnel and director transactions

A number of key management personnel and directors, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities.

A number of these entities (as detailed below) transacted with the Company in the reporting period. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might be reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis.

The aggregate value of transactions and outstanding balances relating to key management personnel and entities over which they have control or significant influence were as follows:

	Transactions value	Balance outstanding
	year ended 31 December	as at 31 December
	2011 2010	2011 2010
Note	$ $	$ $
*Key management Transaction* *person* David Whitby Consulting fees (i) Gary Jeffery Office rent (ii) James Brown Consulting fees (iii) David McArthur Management fees (iv) Total and current liabilities	34,000 - 6,000 - 6,000 - - 37,250	- - 4,400 - - - - -
		4,400 -

(i) During the year the Group paid $34,000 to Mr Whitby representing additional consulting services over and above his duties as non-executive Chairperson. This amount has been disclosed in the remuneration report as part of Mr Whitby’s total remuneration package.
(ii) During the year, Bombora Pty Ltd, a private company associated with Mr Jeffery, sublet office space from Xstate Resources Limited between July 2011 and December 2011.
(iii) During the year the Group paid $6,000 to Mr Brown representing additional consulting services over and above his duties as non-executive director. This amount has been disclosed in the remuneration report as part of Mr Brown’s total remuneration package.
(iv) The Group paid a management fee for the period 1 January 2010 to 8 July 2010 to Broadway Management Pty Ltd, a company associated with Mr McArthur.

(d) Other related parties

Contributions to superannuation funds on behalf of employees are disclosed in note 9.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. RELATED PARTIES (continued)

(e) Options and rights over equity instruments

The movement during the reporting period in the number of options over ordinary shares in Xstate Resources Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

	Held at 1 January 2011	Granted as com- pensation Exercised *Other changes Held at 31 December 2011 Vested during the year Vested and exercisable at 31 December 2011
Directors
Gary Jeffery(1)	2,966,400	- - - 2,966,400 - 2,966,400
John Begg(2)	2,350,000	- - - 2,350,000 - 2,350,000
Brett Mitchell(3)	247,357	- - - 247,357 - 247,357
	Held at 1 January 2010	Granted as com- pensation Exercised *Other changes Held at 31 December 2010 Vested during the year Vested and exercisable at 31 December 2010
Directors
John Begg(2)	-	- - 2,350,000 2,350,000 2,350,000 2,350,000
Gary Jeffery(1)	-	- - 2,966,400 2,966,400 2,966,400 2,966,400
Brett Mitchell(3)	-	- - 247,357 247,357 247,357 247,357
David McArthur(4)	-	- - 635,781 635,781 635,781 635,781
Rhod Grivas(5)	333,334	- - 25,000 358,334 25,000 358,334

Other changes represent options acquired through entitlements and free attaching issues during the year
** Or date of appointment
* Or date of resignation

(1) Appointed 8 July 2010

(3) Resigned 4 April 2011

(5) Resigned 8 July 2010

(2) Appointed 8 July 2010 and resigned 10 June 2011

(4) Resigned as director 8 July 2010

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. RELATED PARTIES (continued)

(f) Movements in shares

The movement during the reporting period in the number of ordinary shares in Xstate Resources Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

	* Held at 1 January 2011	Purchases Received on exercise of options Sales * Held at* 31 December 2011**
Directors
David Whitby	-	185,000 - - 185,000
Gary Jeffery	2,098,800	238,095 - - 2,336,895
John Begg	2,032,400	- - - 2,032,400
Brett Mitchell	494,713	- - 494,713
	* Held at* 1 January 2010**	Purchases Received on exercise of options Sales * Held at* 31 December 2010**
Directors
John Begg	-	2,032,400 - - 2,032,400
Gary Jeffery	-	2,098,800 - - 2,098,800
Brett Mitchell	-	494,713 - - 494,713
David McArthur	901,843	359,719 - - 1,261,562
Rhod Grivas	43,334	6,666 - - 50,000

Or date of appointment
** Or date of resignation

(1) Appointed 8 July 2010

(3) Resigned 4 April 2011

(5) Resigned 8 July 2010

(2)

Appointed 8 July 2010 and resigned 10 June 2011 (4) Resigned as director 8 July 2010

No shares were granted to key management personnel during the reporting period as compensation in 2011 or 2010.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28. GROUP ENTITIES

	Place of	Financial	2011	2010
Name	incorporation	Year end	%	%
*Parent entity*
Xstate Resources Limited	Australia	31 December
*Subsidiary*
Xstate Mediterranean Pty Ltd (formerly
Bombora Energy Pty Ltd, formerly	Australia	31 December	100	100
Bombora Energy Limited)
Xstate Resources (Arizona Inc)	USA	31 December	-	100

On 10 February 2012, a Certificate of Compliance for Dissolution or Withdrawal of Xstate Arizona Inc. was issued backdated to the date of dissolution being 1 December 2011.

29. AUDITORS’ REMUNERATION

	2011 2010
	$ $
Audit Services: *Auditors of the Company* Audit and review of financial reports (KPMG Australia) Services other than statutory audit *Other assurance services* Investigating accountant’s report *Other services* Taxation compliance services (KPMG Australia) Taxation compliance services (KPMG Australia) Taxation compliance services (Overseas KPMG)*	52,540 56,259
	52,540 56,259
	- 19,477 26,450 6,500 - 6,500 35,325 -
	61,775 32,477

Re: acquisition of Xstate Mediterranean Pty Ltd (formerly Bombora Energy Limited): and ** Re: USA tax compliance and dissolution of Xstate Arizona Inc.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30. PARENT COMPANY DISCLOSURES

As at, and throughout the financial year ended 31 December 2011, the parent entity of the Group was Xstate Resources Limited.

	2011 2010
	$ $
Result of the parent entity Loss for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Equity-settled benefits reserve Accumulated losses Total equity Commitments *Office rent* Less than one year	(3,177,917) (1,036,433) - -
	(3,177,917) (1,036,433)
	1,465,424 1,509,910 8,326,660 8,930,092 84,672 84,885 84,672 84,885 41,092,627 38,517,929 415,549 415,549 (33,266,188) (30,088,271)
	8,241,988 8,845,207
	10,360 33,333

31. SUBSEQUENT EVENTS

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │DIRECTORS’ DECLARATION

DIRECTORS’ DECLARATION

1 In the opinion of the directors of Xstate Resources Limited (the “Company”):
(a) the consolidated financial statements and notes, and the Remuneration report set out in section 4 in the Directors’ Report, are in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the Group’s financial position as at 31 December 2011 and of its performance for the financial year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
2 The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 31 December 2011.
3 The directors draw attention to note 2(a) to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards.

Signed in accordance with a resolution of the directors:

Dated at Perth this 29[th] day of March 2012.

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GARY JEFFERY Director

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Independent auditor’s report to the members of Xstate Resources Limited

Report on the financial report

We have audited the accompanying financial report of Xstate Resources Limited (the company), which comprises the consolidated statement of financial position as at 31 December 2011, and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 31 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group 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 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements , that the financial statements of the Group 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. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance 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 performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance.

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 .

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

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Auditor’s opinion

In our opinion:

(a) the financial report of the Group is in accordance with the Corporations Act 2001 including:
(i) giving a true and fair view of the Group’s financial position as at 31 December 2011 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 2(a).

Inherent uncertainty regarding continuation as a going concern

Without modifying our opinion expressed above, attention is drawn to Note 2(c) in the financial report. The matters set forth in Note 2(c) indicate the existence of a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern and therefore, the company may be unable to realise its assets and discharge its liabilities in the normal course of business.

Report on the remuneration report

We have audited the remuneration report included in section 4 of the directors’ report for the year ended 31 December 2011. 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 auditing standards.

Auditor’s opinion

In our opinion, the remuneration report of Xstate Resources Limited for the year ended 31 December 2011, complies with Section 300A of the Corporations Act 2001 .

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KPMG

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Graham Hogg Partner

Perth 29 March 2012

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │SECURITIES EXCHANGE INFORMATION

SECURITIES EXCHANGE INFORMATION

Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below.

1. SHAREHOLDER INFORMATION

(a) Distribution of fully paid ordinary shares at 8 March 2012

Category	Number of Shareholders Shares held
1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over	716 86,300 118 335,064 92 765,684 259 10,040,773 168 89,653,530
	1,353 100,881,351

(b) Distribution of options at 8 March 2012

Category	Number of Optionholders Options held
1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over	29 6,975 85 362,417 72 592,718 103 4,723,224 75 42,752,745
	364 48,438,079

(c) Marketable Parcel

The number of shareholders holding less than a marketable parcel of ordinary shares is 838.

(d) Voting rights

Ordinary shares

There are no restrictions on voting rights attached to the ordinary shares. On a show of hands every member present in person shall have one vote and upon a poll, every member present or by proxy shall have one vote for every share held.

Options

There are no voting rights attached to the options.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │SECURITIES EXCHANGE INFORMATION

1. SHAREHOLDER INFORMATION (continued)

(d) Substantial shareholders

The number of shares held by substantial shareholders and their associates are set out below:

	Ordinary shares
Name	Number of Shares
BT Portfolio Services Limited	6,028,766
Argonaut Equity Partners Pty Ltd	5,285,117
HSBC Custody Nominees	5,046,478

(e) Unlisted 30 April 2012 Options

There are 333,334 options held by 1 holder on issue that are exercisable between $1.50 and $2.25 on or before 30 April 2012.

(f) Unlisted 21 January 2013 Options

There are 66,667 options held by 2 holders on issue that are exercisable at $0.24 on or before 30 April 2012.

(g) Shareholders

The twenty largest shareholders hold 44.10% of the total issued ordinary shares in the Company as at 8 March 2012.

(h) Listed Option holders

The twenty largest 30 June 2013 option holders hold 65.65% of the total issued 30 June 2013 options in the Company as at 8 March 2012.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │SECURITIES EXCHANGE INFORMATION

2. TOP TWENTY SHAREHOLDERS AS AT 8 MARCH 2012

	Ordinary shares
Name	Number of Shares Percentage of issued shares
	6,028,766 5.98
1 BT Portfolio Services Limited
2 Argonaut Equity Partners Pty Ltd	5,285,117 5.24
3 HSBC Custody Nominees (Australia) Limited	5,046,478 5.00 4,517,000 4.48
4 Suburban Holdings Pty Ltd
5 Aviemore Pty Ltd	4,200,000 4.16
6 PATA Nominees Pty Ltd	2,288,095 2.27 2,032,400 2.01
7 Rock Doc Pty Ltd
8 Dasmac (WA) Pty Ltd	1,866,393 1.85
9 Bond Street Custodians Limited	1,320,920 1.31 1,277,000 1.27 1,264,644 1.25 1,250,000 1.24 1,216,667 1.21 1,094,712 1.09 1,015,975 1.01 1,000,000 0.99 1,000,000 0.99 964,097 0.96 919,696 0.91 900,000 0.89
10 Andrew Ross Childs
11 Mr Errol Bome and Mrs Melanie Bome
12 Bond Street Custodians Limited 13 Genteel Nominees Pty Ltd
14 Prospero Capital Pty Ltd
15 Mr Gary John Jeffery & Mrs Jane Elizabeth Jeffery
16 I E Properties Pty Ltd
17 Mr Lindsay Reed & Mrs Jennie Reed 18 Mrs Susan Jane McArthur 19 Mr Michael Denis Lee
20 Mr Warwick Barnett Bowden
	44,487,960 44.11

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2011 │SECURITIES EXCHANGE INFORMATION

3. TOP TWENTY 30 JUNE 2013 OPTION HOLDERS AS AT 8 MARCH 2012

	Ordinary shares
Name	Number of Shares Percentage of issued shares
	6,210,475 12.82
1 Craig Ian Burton (CI Burton Family A/C)
2 Argonaut Equity Partners Pty Limited	5,372,011 11.09
3 Suburban Holdings Pty Ltd	3,567,354 7.37 2,500,000 5.16
4 Mr Gary John Jeffery & Mrs Jane Elizabeth Jeffery
5 Mr Andrew Ross Childs	2,013,254 4.16
6 BT Portfolio Services Limited	1,618,079 3.34 1,250,000 2.58 1,000,000 2.06 1,000,000 2.06 900,000 1.86 888,334 1.83 800,000 1.65
7 Argonaut Investments Pty Limited
8 Rock Doc Pty Ltd 9 Lake Garda Pty Ltd 10 AFM Perseus Fund Limited
11 Dasmac (WA) Pty Ltd
12 Dreampt Pty Ltd 13 Mr John Douglas Begg and Mrs Adrienne Stacey Begg
	750,000 1.55
14 Mr Craig Burton	720,000 1.49 639,666 1.32 603,834 1.25 570,001 1.18 500,000 1.03 466,400 0.96 430,000 0.89
15 Mr George Sim 16 Far East Capital Limited
17 Bond Street Custodians Limited
18 Mooney & Partners Pty Ltd 19 Bond Street Custodians Limited
20 Mr Brendon Chevely Deshon
	31,799,408 65.65

AI assistant

XSTATE RESOURCES LIMITED — AGM Information 2012

66107_rns_2012-04-22_390bdc89-9c19-4018-9550-fd48ec44f204.pdf

ASX Limited

DESPATCH OF 2011 ANNUAL REPORT AND NOTICE OF AGM

XSTATE RESOURCES LIMITED

NOTICE OF ANNUAL GENERAL MEETING

AND

EXPLANATORY MEMORANDUM

NOTICE OF ANNUAL GENERAL MEETING

AGENDA

ORDINARY BUSINESS

2011 Accounts

NON-BINDING ORDINARY RESOLUTION 1: Directors’ Remuneration Report

Note: the vote on this Resolution is advisory only and does not bind the Directors of the Company.

Voting Prohibition Statement:

ORDINARY RESOLUTION 2: Re-election of Mr David Whitby as a Director of the Company

ORDINARY RESOLUTION 3: Approval to Issue up to 25,000,000 Shares

Voting Exclusion Statement:

By Order of the Board

D M McARTHUR

EXPLANATORY MEMORANDUM

NON-BINDING ORDINARY RESOLUTION 1: Directors’ Remuneration Report

General

Proxy Restrictions

Definitions

ORDINARY RESOLUTION 2: Re-election of Mr David Whitby as a Director of the Company

ORDINARY RESOLUTION 3: Approval to Issue up to 25,000,000 Shares

ANNUAL GENERAL MEETING

Voting on Business of the Annual General Meeting

Instructions for Completing ‘Appointment of Proxy’ Form

XSTATE RESOURCES LIMITED

ANNUAL REPORT

CONTENTS

COMPANY DIRECTORY

DIRECTORS AND COMPANY SECRETARY:

David Whitby

Ross Kestel

John Begg

Gary Jeffery

James Brown

Brett Mitchell

REGISTERED OFFICE:

SHARE REGISTRY:

AUDITORS:

DOMICILE AND COUNTRY OF INCORPORATION:

PRINCIPAL OFFICE:

BANKERS:

SOLICITORS:

WEBSITE AND EMAIL:

SECURITIES EXCHANGE:

CHAIRMAN’S LETTER

OPERATIONS REPORT

INVESTMENT AND ASSET STRATEGY

OPERATIONS REPORT

Assets

Xstate’s Net Oil and Gas Resources Summary

Onshore Exploration - Chorbane:

Sidi Dhaher Oil Discovery

Chorbane Exploration Potential Enhanced

Offshore Exploration - Kerkouane:

Dougga Gas Condensate Field Development

Kerkouane Gas Discovery

Lambouka Gas Discovery

Associated Condensate enhances development potential

Pantelleria Acreage

Exploration and Appraisal Potential - Oil and Gas

The Pelagian Basin – an attractive exploration area

TUNISIA – Fostering Investment

CORPORATE

Board

Capital Raisings

Capital Structure

Competent Persons Statement

DIRECTORS’ REPORT

1. DIRECTORS

David Whitby

Experience and expertise

Other current directorships

Former directorships in the past three years

XSTATE RESOURCES LIMITED AGM Information 2012