XSTATE RESOURCES LIMITED ACN 009 217 154

PROSPECTUS

For the offer of up to 5,000,000 Shares at an issue price of $0.20 each to raise $1,000,000. For every two (2) Shares subscribed, one (1) Option will be granted for no further consideration (Offer).

The Offer includes a priority offer of up to 1,000,000 Shares for Shareholders to increase their existing holdings (on a post-Consolidation basis) to a parcel of 10,000 Shares. For every two (2) Shares subscribed, the Company will issue, for no additional consideration, a further one (1) Option under the priority offer (Priority Offer).

The Offer will be made to parties determined by the Lead Manager in consultation with the Directors. Please refer to Section 5 for further details of the allocation policy of the Company in relation to the Offer.

AND

For a pro rata non-renounceable Entitlements Issue on the basis of one (1) Option for every two (2) Shares held by Shareholders on the Entitlements Issue Record Date (on a post-Consolidation basis) at an issue price of $0.01 per Option, to raise up to approximately $91,800 (Entitlements Issue).

The Entitlements Issue is conditionally underwritten by Argonaut. Refer to Section 16.9 for details regarding the terms of the Underwriting Agreement.

AND

For an offer of up to 15,000,000 Options at an issue price of $0.01 per Option to persons as determined by the Lead Manager (Option Placement). Please refer to Section 7 for further details of the Option Placement.

This is a recompliance prospectus for the purposes of satisfying Chapters 1 and 2 of the ASX Listing Rules and to satisfy ASX requirements for re-listing following a change to the nature and scale of the Company’s activities.

The Offer and Option Placement are conditional upon certain conditions precedent to completion of the Acquisition of Bombora under the Implementation Agreement being satisfied or waived. To this end, the Offer (including the Priority Offer) and Option Placement are conditional on Shareholder approval at a General Meeting to be held on 10 June 2010. Refer to Sections 4.6 and 16.1 for further details.

All references to the Securities in this Prospectus are made on the basis that the 1:3 Consolidation for which Shareholder approval is sought at the General Meeting to be held on 10 June 2010, has taken effect.

IMPORTANT NOTICE

This document is important and should be read in its entirety. If after reading this Prospectus you have any questions about the Securities being offered under this Prospectus or any other matter, you should consult your stockbroker, accountant or other professional adviser. The Securities offered by this Prospectus should be considered as speculative.

1.	IMPORTANT NOTES ....................................................................................................... 1
2.	CORPORATE DIRECTORY .............................................................................................. 5
3.	CHAIRMAN’S LETTER ..................................................................................................... 6
4.	INVESTMENT OVERVIEW ............................................................................................... 8
5.	DETAILS OF THE OFFER ................................................................................................ 17
6.	DETAILS OF THE ENTITLEMENTS ISSUE .......................................................................... 20
7.	DETAILS OF THE OPTION PLACEMENT ........................................................................ 23
8.	COMPANY AND PROJECT OVERVIEW ....................................................................... 25
9.	DIRECTORS, PROPOSED DIRECTORS, AND CORPORATE GOVERNANCE .................. 31
10.	INDEPENDENT TECHNICAL SPECIALIST’S REPORT ....................................................... 35
11.	FINANCIAL SUMMARY ............................................................................................... 80
12.	INVESTIGATING ACCOUNTANT’S REPORT ................................................................. 86
13.	SOLICITORS’ REPORT ON PERMITS – TUNISIA ............................................................. 92
14.	SOLICITORS’ REPORT ON PERMITS - ITALY ............................................................... 102
15.	RISK FACTORS .......................................................................................................... 109
16.	MATERIAL CONTRACTS ............................................................................................ 115
17.	TERMS OF SHARES AND OPTIONS ............................................................................ 129
18.	ADDITIONAL INFORMATION .................................................................................... 133
19.	DIRECTORS’ AUTHORISATION .................................................................................. 141
20.	DEFINITIONS ............................................................................................................. 142

1. IMPORTANT NOTES

IMPORTANT NOTES

Shareholders should read this document in its entirety and, if in doubt, should consult their professional advisors.

This Prospectus is dated 26 May 2010 and a copy of this Prospectus was lodged with the ASIC on that date. The ASIC and ASX take no responsibility for the content of this Prospectus.

The Expiry Date of this Prospectus is 13 months after the date the Prospectus was lodged with the ASIC. No Securities will be allotted or issued on the basis of this Prospectus after the Expiry Date.

No person is authorised to give information or to make any representation in connection with this Prospectus which is not contained in this Prospectus. Any information or representation not so contained may not be relied on as having been authorised by the Company in connection with this Prospectus.

Applications for Securities offered pursuant to this Prospectus can only be submitted on an original Application Form which accompanies this Prospectus.

The distribution of this Prospectus in jurisdictions outside Australia or New Zealand may be restricted by law and persons who come into possession of this Prospectus should seek advice on and observe any of these restrictions. Failure to comply with these restrictions may violate securities laws. Applicants who are resident in countries other than Australia or New Zealand should consult their professional advisers as to whether any governmental or other consents are required or whether any other formalities need to be considered and followed. This Prospectus does not constitute an offer in any place in which, or to any person to whom, it would not be lawful to make such an offer. Please refer to section 4.9 for further information.

This Prospectus is a transaction specific prospectus for an offer of continuously quoted securities (as defined in the Corporations Act) and has been prepared in accordance with section 713 of the Corporations Act. It also contains all of the information required in accordance with section 710 of the Corporations Act. In making representations in this Prospectus regard has been had to the fact that the Company is a disclosing entity for the purposes of the Corporations Act and certain matters may reasonably be expected to be known to investors and professional advisers whom potential investors may consult.

RISK FACTORS

Potential investors should consider that the investment in the Company is speculative and should consult their professional advisers before deciding whether to apply for Securities pursuant to this Prospectus. For further information in relation to the risk factors of the Company please refer to Section 15 of this Prospectus.

ELECTRONIC PROSPECTUS

A copy of this Prospectus can be downloaded from the website of the Company at www.xstate.com.au. Any person accessing the electronic version of this Prospectus for the purpose of making an investment in the Company must be an Australian resident and must only access the Prospectus from within Australia.

The Corporations Act prohibits any person passing onto another person an Application Form unless it is attached to a hard copy of this Prospectus or it accompanies the

complete and unaltered version of this Prospectus. Any person may obtain a hard copy of this Prospectus free of charge by contacting the Company.

INVESTMENT HIGHLIGHTS

This information is a selective overview only. Investors should read the Prospectus in full, including the experts’ reports in Sections 10 to 14 (inclusive) before deciding whether to invest in Securities offered under this Prospectus.

Investment Highlights

XState Resources Limited has executed a conditional agreement to acquire 100% of Bombora Energy Limited (Bombora), an unlisted Australian public company which is in the process of earning 10% interests in onshore and offshore hydrocarbon permits in Tunisia and an Italian offshore permit.
Tunisia and Italy have established oil and gas industries, including a direct gas pipeline link from Tunisia into European gas markets.
Bombora holds the right to earn a 10% interest in an offshore permit containing the Dougga gas/condensate discovery, and surrounding exploration acreage that includes the large Lambouka Prospect.
The Dougga discovery has Contingent Gas and Condensate (Light Oil) Resources which will be assessed following receipt of the final processing of the recently acquired 3D seismic surveys.
Newly acquired 640 square kilometre 3D offshore seismic program is being processed over the Lambouka Prospect, the Dougga discovery and adjacent prospects and leads.
Drilling is planned to commence in late June/July 2010 on the large offshore Lambouka-1 exploration prospect, which has potential for recoverable resources of 270 million barrels of oil equivalent (mmboe). A drilling rig has been contracted and is undergoing inspection prior to being mobilised to location.
Bombora also holds an option to increase its interests in the offshore permits to 20% following completion of the 3D seismic and Lambouka-1 exploration well. This option includes the existing Dougga discovery, but excludes the Lambouka prospect area.
Bombora also has the right to earn a 10% interest in an onshore Tunisian exploration permit with multiple exploration leads and prospects in a proven hydrocarbon province. Drilling of a potential 120 mmboe recoverable resource prospect is scheduled for November 2010.
Bombora has an experienced oil and gas team to lead the Company in its future.

INVESTMENT RISKS

Subscribing for Securities that are the subject of this Prospectus involves a number of risks. Before deciding whether to invest in the Company, any intending investor is urged to consider the risk factors set out in Section 15 of this Prospectus, which include but are not limited to the risks summarised below:

Risk area	Risks Further details
Operating in Tunisia and Italy	Economic, social, political and governmental risks, exchange rate and currency risks Section 15.1
Exploration and Development Risk	Exploration and development Section 15.2
Oil and Gas Price Volatility	Oil and gas prices affected by numerous factors and events Section 15.4
Hydrocarbon
Reserves, Oil	Resource and reserve estimates may be Sections 15.5
Reserves and	inaccurate and 15.7
Resource Estimates
Environmental Risks	Impact on the environment and subject to legislation Section 15.9
Exchange rate Risks	International prices of various commodities
	and inputs are denominated in United States
	dollars and the Euro, whereas the income
	and expenditure of the Company are and
	will be taken into account in Australian currency, exposing the Company to the Section 15.8
	fluctuations and volatility of the rate of
	exchange between the United States dollar
	or the Euro and the Australian dollar as
	determined in international markets.
Title Risk	The permits described in Section 8.2 are currently held by
	Australian listed public company, AuDAX Resources Limited via
	its wholly owned subsidiaries (AuDAX). Under the Farm In
	Agreements summarised in Sections 16.3 and 16.4, Bombora has
	the right to earn a 10% interest in the Chorbane, Kerkouane and
	Pantelleria permits, and the right to earn a further 10% interest
	(being an aggregate 20% interest) in the permit area comprising
	the Kerkouane and Pantelleria permits that fall outside of the
	Lambouka prospect which also covers parts of those permit
	areas. Bombora has not satisfied its farm in obligations under the
	Farm In Agreements and therefore does not currently hold a
	registered interest in the permits. It cannot be assured that
	Bombora will satisfy these obligations and therefore earn an
	interest in the permits.
	As described in the Solicitors’ Report on Permits – Tunisia in
	Section 13, if Bombora successfully completes its farm in
	obligations in relation to the Kerkouane and Chorbane permits,
	a deed of assignment must be entered into between AuDAX
	and the Tunisian government for the assignment and assumption

Risk area Risks Further details of interests in those permits. For the assignment to become effective, the approval of the Tunisian government, the Department of Energy, and the Hydrocarbons Consultative Committee must be obtained before an order of the Minister will be gazetted to confirm the assignment. It is not certain that approval for the assignment will be obtained and to that end, Bombora’s acquisition of these respective interests in the permits cannot be assured.

The Solicitors’ Report on Permits – Italy in Section 14 states that the Pantelleria permit has been suspended since July 2008. The request for suspension was filed by the previous holder on the basis that there was not a suitable drilling system available for deep waters. In order to reactivate the Pantelleria permit, AuDAX is required to file a request for reactivation with the Italian Minister for economic development. Although, and as discussed in the Solicitors’ Report on Permits – Italy in Section 14, the reactivation would appear to be automatic upon an application which is substantiated with evidence that the cause for suspension no longer exists, there can be no complete assurance that reactivation will be successful. If it is successful, the permit may attach new conditions arising out of the reactivation. Furthermore, the reactivation process must be undertaken by AuDAX as the permit holder, and to that end is outside the control of Bombora.

Investors should be aware that an investment in the Company involves risks that may be higher than risks associated with an investment in some other companies. Careful consideration should be given to all matters raised in this Prospectus and the relative risk factors prior to applying for Securities offered for subscription under this Prospectus. Some of these risks can be mitigated by the use of appropriate safeguards and actions, but some are outside the Company’s control and cannot be mitigated. Before deciding whether to apply for Securities, investors should consider the risk factors described above, and outlined in more detail in Section 15, together with the information contained elsewhere in this Prospectus.

2. CORPORATE DIRECTORY

Directors

Mr Ross Kestel (Non Executive Chairman) Mr David McArthur (Executive Director) Mr Rhoderick Grivas (Non Executive Director) Mr Brett Mitchell (Non Executive Director)

Share Registry*

Advanced Share Registry Pty Ltd 150 Stirling Highway NEDLANDS WA 6008

Telephone: (08) 9389 8033

Company Secretary

Australian Solicitors to the Company

Mr David McArthur

Proposed Directors

Mr John Begg (Non Executive Chairman) Mr Gary Jeffery (Managing Director)

Registered Office

Level 2 45 Stirling Highway NEDLANDS WA 6009

Telephone: (08) 9423 3200 Facsimile: (08) 9389 8327

Principal Place of Business

Level 2 45 Stirling Highway NEDLANDS WA 6009

Auditor

KPMG Level 8 235 St Georges Terrace PERTH WA 6000

Investigating Accountant

KPMG Transaction Services (Australia) Pty Ltd Level 8 235 St Georges Terrace PERTH WA 6008

Telephone: (08) 9263 7171 Facsimile: (08) 9263 7129

Steinepreis Paganin Lawyers and Consultants Level 4, The Read Buildings 16 Milligan Street PERTH WA 6000

Telephone: (08) 9321 4000 Facsimile: (08) 9321 4333

Italian Solicitors to the Company – Solicitors’ Report on Italian Permit

CMS Adonnino Ascoli & Cavasola Scamoni Via Agostino Depretis, 86 00184 Rome – Italy

Telephone: (+39) 06 478151 Facsimile: (+39) 06 483755

Tunisian Solicitors to the Company – Solicitors’ Report on Tunisian Permits

CAID Essebsi & Partners 14, Avenue Alain Savary 1002 Tunnis Tunisie

Telephone: (+216) 7178 5611 Facsimile: (+216) 7178 3913

Independent Technical Specialist

ISIS Petroleum Consultants Pty Ltd 47 Colin Street WEST PERTH WA 6005

Telephone: (08) 9226 4610 Facsimile: (08) 9226 0999

Underwriter and Lead Manager

Argonaut Capital Limited Level 30 77 St Georges Terrace PERTH WA 6000

Telephone: (08) 9224 6888 Facsimile: (08) 9225 5511

These entities have not been involved in the preparation of this Prospectus and have not consented to being named in this Prospectus. Their names are included for information purposes only.

3. CHAIRMAN’S LETTER

Dear Investor

On behalf of the Directors of XState Resources Limited (Company), I am pleased to present this Prospectus and to offer you the opportunity to become a Shareholder in the Company, or to increase your shareholding (or option holding).

As recently announced to ASX, the Company has reached an agreement to acquire an unlisted Australian company, Bombora Energy Limited.

Bombora has rights to oil and gas projects located in Tunisia and Italy. Please refer to Sections 8.2, 16.3 and 16.4 of the Prospectus (for further details about Bombora and its interests in the projects), the Independent Technical Report in Section 10 and the Solicitors’ Reports on Permits in Sections 13 and 14.

By this Prospectus, the Company is offering for subscription up to 5,000,000 Shares at an issue price of $0.20 per share in order to raise $1,000,000 and for every two (2) Shares subscribed, one (1) Option will be granted for no further consideration (Offer).

The Offer includes a priority offer of up to 1,000,000 Shares (with a further 500,000 Options issued for no additional consideration on the basis of one (1) Option for every two (2) Shares subscribed) under the Offer, for Shareholders to increase their existing holdings (on a post-Consolidation basis) to a parcel of 10,000 Shares (Priority Offer).

In connection with the Acquisition, the Company is also seeking Shareholder approval to issue up to 15,000,000 Options at an issue price of $0.01 each raising $150,000 to investors as determined by the Lead Manager to raise further working capital for the Company and the projects in which it will have an interest following the Acquisition (Option Placement).

This Prospectus also provides existing Shareholders the opportunity to increase their existing holding in the Company by subscribing for their entitlement under an underwritten pro rata non-renounceable Entitlements Issue, on the basis of one (1) Option for every two (2) Shares held by Shareholders on the Entitlements Issue Record Date (on a post-Consolidation basis) at an issue price of $0.01 per Option (Entitlements Issue).

The issue of this Prospectus is also to assist the Company to meet the requirements of ASX and satisfy Chapters 1 and 2 of the ASX Listing Rules.

The funds raised through the offers made pursuant to this Prospectus plus the Company’s existing funds will be applied towards the exploration and evaluation of the Tunisian and Italian projects. Should the planned exploration programme result in discovery of oil and gas then additional funds may be required to immediately carry out testing of potentially productive zones in the wells.

The Acquisition of Bombora represents an exciting opportunity and a significant change in direction for the Company. The Directors and the Proposed Directors and Bombora unanimously recommend the Acquisition. It is the view of the Company and Bombora that the Acquisition will give the merged entity’s shareholders the opportunity to participate in a potentially significant exploration and development program in respect of oil and gas projects.

At a General Meeting of Shareholders to be held on 10 June 2010, the Company will seek approval for the Acquisition of Bombora, and associated transactions, including, but not limited to, Shareholder approval to change the nature and scale of the Company’s activities as a result of the Acquisition.

The Company will be required to re-comply with Chapters 1 and 2 of the ASX Listing Rules to be reinstated to the Official List of the ASX. As noted above, one of the purposes of this Prospectus is to assist with the re-compliance process.

Subject to successful completion of the Acquisition, there will be a change in the composition of the Board of Directors. The new management team brings a wealth of experience to the Company and possesses the necessary expertise and experience required to assist the Company in its objectives.

On behalf of the existing Board of the Company, I welcome your consideration of this opportunity to be part of an exciting new period for the Company. I recommend you read this Prospectus carefully.

The Board looks forward to welcoming you as a Shareholder, or to you increasing your holding in the Company.

Yours sincerely

MR ROSS KESTEL CHAIRMAN XSTATE RESOURCES LIMITED

4. INVESTMENT OVERVIEW

4.1 Important Notice

This Section is not intended to provide full information for existing investors or intending investors to subscribe for Securities in the Company. This Prospectus should be read and considered in its entirety.

4.2 Indicative Timetable

The indicative timetable for the proposed change is as follows:

Execution of Agreement for Acquisition and Announcement	4 May 2010
of Acquisition
Dispatch Notice of Meeting seeking approval for Acquisition	11 May 2010
Lodgement of Prospectus with the ASIC	26 May 2010
Company sends notice to shareholders of Entitlements Issue	28 May 2010
and Priority Offer
Ex date for Entitlements Issue	31 May 2010
Priority Offer Record Date	4 June 2010
Entitlements Issue Record Date	4 June 2010
Despatch Date - despatch Prospectus for Entitlements Issue to	8 June 2010
eligible Shareholders.
Opening of Offer (including Priority Offer)	10 June 2010
Opening Date for the Entitlements Issue	10 June 2010
Opening Date for the Option Placement	10 June 2010
Suspension of the Company’s securities from trading on ASX	10 June 2010
at the opening of trading
General Meeting to approve Acquisition and Change in	10 June 2010
Nature and Scale of Activities
Closing Date for the Entitlements Issue	23 June 2010
Closing Date of Offer (including Priority Offer)	23 June 2010
Closing Date for the Option Placement	23 June 2010
Despatch date for holding statements – Entitlements Issue	24 June 2010
Ex Date – Consolidation	30 June 2010
Consolidation Record Date	6 July 2010
Despatch Date – Consolidation	7 July 2010

Settlement of Acquisition and issue of Shares and Options 8 July 2010 Offer under Options under the Entitlements Issue, and other Option placements

Anticipated date the suspension of trading is lifted and 12 July 2010 XState’s securities commence trading again on ASX

No deferred trading will take place.

This timetable is subject to change and the Directors reserve the right to amend the timetable at any time. Notwithstanding this, the Company intends to use all reasonable endeavours to cooperate with all parties to ensure the transactions contemplated are completed according to the timetable.

4.3 Objectives

Introduction

While the Company has historically focused on uranium exploration, the Company has recently entered into an Implementation Agreement pursuant to which the Company has agreed to acquire a 100% interest in Bombora, an oil and gas exploration company, by making separate offers (Bombora Offers) to the shareholders of Bombora (Bombora Shareholders) to acquire all of the shares held in Bombora (Bombora Shares) (being the Acquisition).

Bombora has rights to earn interests in oil and gas projects located in Italy and Tunisia. The Acquisition, in accordance with the terms and conditions of the Implementation Agreement, will result in the Company owning all of the issued capital in, and controlling, the business of Bombora.

A summary of the material terms and conditions of the Implementation Agreement is set out in Section 16.1 of this Prospectus. The Implementation Agreement sets out the process for the Acquisition. The Bombora Offers will be made via separate share sale agreements between the Company and each Bombora Shareholder on the terms set out in Section 16.2.

This Prospectus also makes the offer under the Option Placement to raise further working capital for the Company and the projects in which it will have an interest following the Acquisition. Shareholder approval will be sought at the General Meeting for the Option Placement.

As part of the transaction, the Company has provided a working capital loan (Loan) to Bombora. The Company and Bombora have also entered into agreements with a number of parties (being the Noteholders), and the Company has agreed to pay consideration by the issue of Options (as part of the Option Placement) for the provision by the Noteholders of advances totalling A$500,000 to Bombora in exchange for the issue by Bombora, of Bombora convertible notes (Convertible Notes).

The Company has also agreed, subject to Shareholder approval and settlement of the Acquisition, to issue Shares on conversion of the Convertible Notes to the Noteholders. If all of the Convertible Notes are converted into Shares in the Company, the Company will issue an additional 2,500,000 Shares (along with a further 1,250,000 Options, issued for no additional consideration on the basis of one (1) Option for every two (2) Shares subscribed) to the Noteholders. The terms of this conversion are the same as if the Noteholder had subscribed for A$500,000 under the Offer. Please refer to Section 16.5 and 16.7 for details of these funding arrangements.

This Prospectus also makes the offers under the Entitlements Issue to all Shareholders on the Entitlements Issue Record Date. The Entitlements Issue is intended to reward current Shareholders in the Company for their investment prior to the Acquisition taking place.

The Board believes that the Acquisition of Bombora has the potential to deliver significant value to Shareholders.

Following the Acquisition, the Directors intend to focus the Company’s operations primarily on the exploration for oil and gas in Bombora’s projects (comprised of onshore and offshore permits in Tunisia and an offshore permit in Italy). As the Company has no prior involvement in this industry, the Acquisition of Bombora constitutes a significant change in the nature and scale of the Company’s activities. Therefore, the Company needs to comply with Chapters 1 and 2 of the ASX Listing Rules as if it were seeking admission to the official list of ASX.

As noted above, the Acquisition and associated transactions, including the change of nature and scale of the Company’s activities are subject to Shareholder approval. A General Meeting of Shareholders is scheduled to be held on 10 June 2010 where the Company will seek Shareholder approval for the Acquisition and for the Company to change the nature and scale of its activities (and the transactions referred to above). Re-compliance with Chapter 1 of the ASX Listing Rules requires the Company to lodge a prospectus with the ASIC and this Prospectus has been prepared, in part, for the purpose of satisfying that requirement.

In accordance with Chapter 11 of the ASX Listing Rules, trading in the Company’s Shares will be suspended from the date of the General Meeting to approve the Acquisition (being 10 June 2010), and will remain suspended until the Company has satisfied all of its obligations under the ASX Listing Rules, including complying with Chapters 1 and 2 of the ASX Listing Rules.

Purpose of this Prospectus

The purpose of this Prospectus is to:

(a) assist the Company to meet the requirements of ASX and satisfy Chapters 1 and 2 of the ASX Listing Rules;
(b) raise $1,000,000 pursuant to the Offer and satisfy the condition precedent in the Implementation Agreement that requires the Company to raise that amount. A summary of the material terms and conditions of the Implementation Agreement is set out in Section 16.1 of this Prospectus. Details of the Offer are set out in Section 5;
(c) provide the Priority Offer to existing Shareholders as at the Priority Offer Record Date to allow this to increase their shareholding to (on a postConsolidation basis) a parcel of 10,000 Shares. Details of the Priority Offer are set out in Section 5;
(d) raise $150,000 pursuant to the Option Placement and satisfy the conditions precedent in the Implementation Agreement that requires the Company to undertake the Option Placement. Details of the Option Placement are set out in Section 7; and
(e) raise $91,800 pursuant to the Entitlements Issue. Details of the Entitlements Issue are set out in Section 6.

The Company is aiming to apply the funds raised from the Offer, Entitlements Issue and Option Placement to:

(a) part funding of the acquisition of a 640 square km offshore 3D seismic survey and two exploration wells in Tunisia, one onshore and one offshore;
(b) further evaluation and exploration of current permits and potential new projects;
(c) working capital and administration expenses; and
(d) expenses of the Offer, Entitlements Issue and Option Placement.

The Board believes that funds raised from the Offer, Entitlements Issue and Option Placement will provide the Company with sufficient working capital to achieve the Company’s objectives set out above.

Details of the Offer are set out in Section 5 of this Prospectus. Details of the Entitlements Issue are set out in Section 6 of this Prospectus.

4.4 Risk Factors

Prospective investors in the Company should be aware that subscribing for Securities, which are the subject of this Prospectus, involves a number of risks. These risks are set out in Section 15 of this Prospectus. Investors are urged to consider those risks carefully (and, if necessary, consult their professional adviser) before deciding whether to invest in the Company.

The risk factors set out in Section 15 of this Prospectus, and other general risks applicable to all investments in listed securities not specifically referred to, may, in the future, affect the value of the Securities. Accordingly, an investment in the Company should be considered speculative.

4.5 Proceeds of the Offer, Entitlements Issue, Option Placement and associated transactions

The purpose of the Offer is to raise $1,000,000 (before expenses). The purpose of the Entitlements Issue is to raise approximately $91,800 (before expenses). The amount raised from the issue of all Options being issued for $0.01 (including the Option Placement, refer to Section 4.5(a)) will be $150,000. The Company will also issue Shares and Options on conversion of the Convertible Notes which have a face value of $500,000. The proceeds of the Offer and Entitlements Issue, Option Placement, Convertible Notes and the Company’s cash at bank at the date of this Prospectus of $2,900,000 (together, $4,641,800) are planned to be used in accordance with the table set out below:

Lambouka prospect – seismic and drilling	$3,000,000
Chorbane well	$600,000
Working Capital	$787,698
Expenses of the Offer	$254,102
TOTAL	$4,641,800

Should the Directors choose to seek other project opportunities or advance activities or evaluation programs beyond the scale as set out in this Prospectus, additional funds may be required. As a result, further equity issues may be undertaken which may result in dilution of Shareholder’s equity at that time.

The above table is a statement of current intentions as of the date of this Prospectus. As with any budget, intervening events and new circumstances have the potential to affect the ultimate way funds will be applied. The Board reserves the right to alter the way funds are applied on this basis.

4.6 Effect on Capital Structure

The effect of the Offer, Entitlements Issue and transactions associated with the recompliance process and Acquisition on the capital structure of the Company, assuming all Securities offered under the Prospectus are issued and no Options are exercised prior to the Closing Date, is set out below.

SHARES (post-Consolidation)
Shares currently on issue	18,359,864
Shares to be issued under the Offer and on conversion of the Convertible Notes	7,500,0001, 3
Consideration Shares to Bombora Shareholders	11,660,0001,2
TOTAL SHARES	37,519,864

Notes:

Subject to Shareholder approval at the General Meeting to be held on 10 June 2010.
Refer to Section 16.2 for further details.
Please refer to Section 16.7 for details.

OPTIONS (post-Consolidation)
Options exercisable at $0.24 on or before 21 January 2013	66,667
Options exercisable at $1.50 on or before 30 April 2012	100,000
Options exercisable at $1.95 on or before 30 April 2012	116,667
Options exercisable at $2.25 on or before 30 April 2012	116,667
Options – Entitlements Issue	9,179,9321
Options – Offer and on conversion of Convertible Notes	3,750,0001, 2, 3, 4

Option Placement	15,000,0001,3
TOTAL OPTIONS	28,329,933

Notes:

These Options will be issued for $0.01 each and otherwise on the terms set out in Section 17.2.
Options (on the basis of one (1) Option for every two (2) Shares issued under the Offer) issued for nil consideration on the terms set out in Section 16.2.
Subject to Shareholder approval at the General Meeting to be held on 10 June 2010.
Please refer to Section 16.7 for details.

4.7 Conditional Offer

The Offer Entitlements Issue and Option Placement are conditional upon satisfaction or waiver of certain conditions precedent to the Implementation Agreement, including Shareholder approval for the issue of the Securities under the Offer. The outstanding conditions precedent as at the date of this Prospectus are as follows:

(a) the Company obtaining all necessary regulatory and Shareholder approvals required to complete the Acquisition including, without limitation, Shareholder approval to:
(i) change the nature and/or scale of XState’s activities in accordance with ASX Listing Rule 11.1.2, if required by ASX);
(ii) proceed with the Consolidation;
(iii) proceed with the Offer;
(iv) grant and issue 15,000,000 Options (in accordance with the ASX Listing Rules and/or Corporations Act) at an issue price of $0.01 each (being the Option Placement (Section 7);
(v) allot and issue the Shares at settlement of the Implementation Agreement to the Bombora Shareholders under the Bombora Offers (in accordance with the ASX Listing Rules and/or Corporations Act);
(b) the Company complying with any requirements of ASX including, if necessary, the requirements of Chapters 1 and 2 of the ASX Listing Rules, including issuing this Prospectus, as if the Company were applying for admission to the official list of ASX (as required by ASX Listing Rule 11.1.3);
(c) the Company receiving sufficient applications to meet the minimum subscription under this Prospectus in relation to the Offer;
(d) the Company completing the Entitlements Issue;
(e) the Company becoming entitled to acquire 100% of the Bombora Shares as a result of each Bombora Shareholder accepting the Bombora Offer for its Bombora Shares (refer to Section 16.2);

(f) as at settlement of the Acquisition, no Material Adverse Change occurs and no Material Adverse Matter becomes known to the Company or Bombora (as applicable).

The above mentioned conditions are part of the Acquisition and recompliance process. Further information relating to the Acquisition and recompliance process is set out in the notice of meeting as released to ASX on 11 May 2010 and in this Prospectus.

In the event that Shareholders do not approve all of the conditions listed in 4.7(a) or any of the other conditions in 4.7 are not fulfilled, the Offer, Entitlements Issue and Option Placement will not proceed and the Company will refund all application monies as soon as is practicable.

4.8 Re-compliance with Chapters 1 and 2 of the ASX Listing Rules

The Company will be suspended from quotation on ASX from the date of the General Meeting of 10 June 2010 and will not be reinstated until after settlement of the Acquisition (which is subject to ASX approving the Company’s recompliance with Chapters 1 and 2 of the ASX Listing Rules).

In the event that the Company does not receive conditional approval for requotation on ASX, it will not proceed with the Offer, Entitlements Issue and Options Placement and will repay all application monies received.

4.9 Restricted Securities

Subject to the Company being admitted to the Official List, certain Shares and Options issued under this Prospectus and in relation to the Acquisition, may be classified by ASX as restricted securities and will be required to be held in escrow.

4.10 Overseas investors

Before making the Offer, Entitlements Issue or Option Placement in New Zealand, the Company will have lodged with the New Zealand Securities Commission (NZSC) a written notice (in the prescribed form) of the Company’s intention to make offers in New Zealand under section 73(1)(c) of the Securities Act 1978 (New Zealand) and regulation 11 of the Securities (Mutual Recognition of Securities Offerings – Australia) Regulations 2008 (New Zealand).

This Offer, Entitlements Issue and Option Placement to New Zealand investors is a regulated offer made under Australian and New Zealand law. In Australia, this is Chapter 8 of the Corporations Act 2001 and Regulations. In New Zealand, this is Part 5 of the Securities Act 1978 and the Securities (Mutual Recognition of Securities Offerings - Australia) Regulations 2008.

The Offer, Entitlements Issue and Option Placement and the content of the offer document are principally governed by Australian rather than New Zealand law. In the main, the Corporations Act 2001 and Regulations (Australia) set out how the offer must be made.

There are differences in how securities are regulated under Australian law. For example, the disclosure of fees for collective investment schemes is different under the Australian regime.

The rights, remedies, and compensation arrangements available to New Zealand investors in Australian securities may differ from the rights, remedies, and compensation arrangements for New Zealand securities.

Both the Australian and New Zealand securities regulators have enforcement responsibilities in relation to the Offer, Entitlements Issue and the Option Placement. If you need to make a complaint about either the Offer or the Entitlements Issue, please contact the Securities Commission, Wellington, New Zealand. The Australian and New Zealand regulators will work together to settle your complaint.

The taxation treatment of Australian securities is not the same as for New Zealand securities.

If you are uncertain about whether this investment is appropriate for you, you should seek the advice of an appropriately qualified financial adviser.

The Offer, Entitlements Issue or Option Placement may involve a currency exchange risk. The currency for the securities is not New Zealand dollars. The value of the securities will go up or down according to changes in the exchange rate between that currency and New Zealand dollars. These changes may be significant. If you expect the securities to pay any amounts in a currency that is not New Zealand dollars, you may incur significant fees in having the funds credited to a bank account in New Zealand in New Zealand dollars.

If the securities are able to be traded on a securities market and you wish to trade the securities through that market, you will have to make arrangements for a participant in that market to sell the securities on your behalf. If the securities market does not operate in New Zealand, the way in which the market operates, the regulation of participants in that market, and the information available to you about the securities and trading may differ from securities markets that operate in New Zealand.

It is important that investors read this Prospectus in its entirety and seek professional advice where necessary. The Shares which are the subject of this Prospectus should be considered speculative.

4.11 Australian Securities Exchange Listing

Application for Official Quotation of the Securities offered pursuant to this Prospectus will be made within 7 days after the date of this Prospectus. If approval is not obtained from ASX before the expiration of 3 months after the date of issue of this Prospectus (or such period as varied by the ASIC), the Company will not issue any Securities and will repay all application monies for the Securities within the time prescribed under the Corporations Act, without interest.

The fact that ASX may grant Official Quotation to the Securities is not to be taken in any way as an indication of the merits of the Company or the Securities now offered for subscription.

4.12 Secondary Trading

In order to ensure that all Securities issued in accordance with the Implementation Agreement, the Bombora Offers and on conversion of the Convertible Notes can be freely traded after their issue, this Prospectus also includes an offer of one Share and one Option that will remain open until immediately after the issue of all Securities contemplated by the Implementation Agreement. No Securities will be issued under this additional offer and it is only incorporated into this Prospectus to ensure compliance with the secondary trading provisions of the Corporations Act.

4.13 Clearing House Electronic Sub-Register System (CHESS) and Issuer Sponsorship

The Company will not be issuing share certificates. The Company is a participant in CHESS for those investors who have a sponsoring stockbroker. Investors who do not wish to participate through CHESS will be issuer sponsored by the Company. Because the sub-registers are electronic, ownership of securities can be transferred without having to rely upon paper documentation.

Electronic registers mean that the Company will not be issuing certificates to investors. Instead, investors will be provided with separate statements (similar to a bank account statement) that set out the number of Shares and Options issued to them under this Prospectus. The notice will also advise holders of their Holder Identification Number or Security Holder Reference Number and explain, for future reference, the sale and purchase procedures under CHESS and issuer sponsorship.

Further monthly statements will be provided to holders if there have been any changes in their security holding in the Company during the preceding month.

4.14 Privacy Act

If you complete an application for Securities, you will be providing personal information to the Company (directly or by the Company’s share registry). The Company collects, holds and will use that information to assess your application, service your needs as a Shareholder, facilitate distribution payments and corporate communications to you as a Shareholder and carry out administration.

The information may also be used from time to time and disclosed to persons inspecting the register, bidders for your securities in the context of takeovers, regulatory bodies, including the Australian Taxation Office, authorised securities brokers, print service providers, mail houses and the Company’s share registry.

You can access, correct and update the personal information that we hold about you. Please contact the Company or its share registry if you wish to do so at the relevant contact numbers set out in this Prospectus.

Collection, maintenance and disclosure of certain personal information is governed by legislation including the Privacy Act 1988 (Cth) (as amended), the Corporations Act and certain rules such as the ASTC Settlement Rules. You should note that if you do not provide the information required on the application for Shares, the Company may not be able to accept or process your application.

5. DETAILS OF THE OFFER

5.1 Offer

By this Prospectus, the Company offers for subscription 5,000,000 Shares at an issue price of $0.20 each to raise $1,000,000. For every two (2) Shares subscribed one (1) Option will be granted for no further consideration (Offer).

The Offer consists of:

(a) a General Offer; and
(b) a Priority Offer.

The Shares offered under the Offer will be issued at the discretion of the Directors of the Company, in accordance with the following allocation policy:

(a) 1,000,000 Shares (and Options issued for no additional consideration at the rate of one (1) Option for every two (2) Shares subscribed) shall be reserved for existing Shareholders under the Priority Offer – refer below; and
(b) 4,000,000 Shares (and Options issued for no additional consideration at the rate of one (1) Option for every two (2) Shares subscribed) plus any remaining after allocation of the Priority Offer shall be allocated as determined by the Lead Manager in consultation with the Directors.

The Shares offered under the Offer will rank equally with the existing Shares on issue. Please refer to Section 17.1 for further information regarding the rights and liabilities attaching to the Shares.

The Options to be issued with the Shares subscribed for under the Offer will be issued for no additional consideration, and will be exercisable at $0.24 each on or before 30 June 2013 and otherwise on the terms set out in Section 17.2.

The purpose of the Offer and the use of funds raised are set out in Section 4 of this Prospectus.

5.2 Priority Offer and General Offer

Priority Offer

Of the 5,000,000 Shares being offered, up to 1,000,000 Shares (together with one (1) Option for every two (2) Shares subscribed for and issued) will be offered in priority to Shareholders of the Company with less than 10,000 Shares registered as at the Priority Offer Record Date (on a post-Consolidation basis). The Directors have reserved this allocation under the Offer to provide existing Shareholders the opportunity to increase their existing holdings to minimum parcels of 10,000 Shares each, with an intention to give preference on a first come first serve basis.

The priority given to Shareholders will be in respect of a round up to a minimum of 10,000 Shares (with the corresponding Options) for each applicant.

General Offer

The pool for the General Offer will be 4,000,000 Shares together with one (1) Option issued for no additional consideration for every two (2) Shares subscribed

for and issued, plus any Shares not applied for by Shareholders under the Priority Offer.

Applications

Applications for Shares under the Priority Offer must be made using the Priority Offer Application Form.

Applications for Securities under the General Offer must be made using the General Offer Application Form.

Do not apply for Securities under the General Offer unless directed to do so by the Lead Manager or the Company.

Payment for the Shares and Options must be made in full at the issue price of $0.20 per Share. Applications for Shares must be for a minimum of 10,000 Shares under the General Offer and thereafter in multiples of 1,000 Shares and in the case of the Priority Offer, that number of shares required to round Shareholdings to a minimum of 10,000 shares. Completed Application Forms and accompanying cheques must be mailed or delivered as follows.

For the General Offer;

BY MAIL TO:

Argonaut Capital Level 30 Allendale Square 77 St Georges Terrace PERTH WA 6000 Attention: Adam Santa Maria

BY HAND TO:

Argonaut Capital Level 30 Allendale Square 77 St Georges Terrace PERTH WA 6000 Attention: Adam Santa Maria

For the Priority Offer;

BY MAIL TO:

Advanced Share Registry 150 Stirling Highway, Nedlands WA 6009

Cheques should be made payable to “XState Resources Limited – Share Offer Account” for the General Offer, and “XState Resources Limited - Priority Offer Account for the Priority Offer, and crossed “Not Negotiable”. Completed Application Forms in respect of the Priority Offer must reach one of the above addresses by no later than the Priority Offer Closing Date. Completed Application Forms in respect of the General Offer must reach one of the above addresses by no later than the General Offer Closing Date.

The Company reserves the right to close the Offer early.

5.3 Minimum Subscription

The minimum subscription to be raised pursuant to the Offer is $1,000,000.

If the minimum subscription has not been raised within three (3) months after the date of this Prospectus, all applications will be dealt with in accordance with the Corporations Act.

5.4 Underwriter

The Offer is not underwritten.

5.5 Issue of Securities

The Lead Manager, in consultation with the Directors will determine the persons to whom the Securities will be issued in its sole discretion. The Lead Manager and the Directors reserve the right to reject any application or to allocate any Applicant fewer Securities than the number applied for.

The Directors have agreed to give priority to applications for Securities received from Shareholders of the Company to increase their individual shareholding (on a post-Consolidation basis) to a minimum of 10,000 fully paid ordinary shares in the capital of the Company (being the Priority Offer), on a first come first served basis.

Where the number of Securities issued is less than the number applied for, or where no allotment is made, surplus application monies will be refunded without any interest to the Applicant as soon as practicable after the Closing Date.

Pending the issue of the Securities or payment of refunds pursuant to this Prospectus, all application monies will be held by the Company in trust for the Applicants in a separate bank account as required by the Corporations Act. The Company, however, will be entitled to retain all interest that accrues on the bank account and each Applicant waives the right to claim interest.

5.6 Enquiries

Any questions concerning the Offer should be directed to the Company Secretary Mr David McArthur on (08) 9423 3200, or the Lead Manager, Mr Adam Santa Maria on (08) 9224 6821.

6. DETAILS OF THE ENTITLEMENTS ISSUE

6.1 Entitlements Issue

By this Prospectus, pursuant to a pro-rata non-renounceable Entitlements Issue, the Company offers for subscription approximately one (1) new Option for every two (2) Shares held by Shareholders on the Entitlements Issue Record Date at an issue price of $0.01 per Option. Fractional entitlements will be rounded up to the nearest whole number.

The Options issued will be exercisable at $0.24 on or before 30 June 2013 and on the terms set out in Section 17.2.

Based on the capital structure of the Company (and assuming no existing Options are exercised prior to the Entitlements Issue Record Date), the maximum number of Options to be issued pursuant to the Entitlements Issue is approximately 9,179,932 Options (on a post-Consolidation basis). The Entitlements Issue will raise approximately $91,800. The purpose of the Entitlements Issue and the use of funds raised are set out in Section 4 of this Prospectus.

Holders of existing Options will not be entitled to participate in the Entitlements Issue. The Company currently has 400,001 Options on issue as at the date of this Prospectus (on a post-Consolidation basis), which may be exercised by the Option holder prior to the Entitlements Issue Record Date in order to participate in the Entitlements Issue.

6.2 How to Accept the Entitlements Issue

Your acceptance of the Entitlements Issue must be made on the Entitlement and Acceptance Form accompanying this Prospectus. Your acceptance must not exceed your Entitlement as shown on that form. If it does, your acceptance will be deemed to be for the maximum Entitlement.

You may participate in the Entitlements Issue as follows:

(a) if you wish to accept your Entitlement in full:
(i) complete the Entitlement and Acceptance Form, filling in the details in the spaces provided; and
(ii) attach your cheque for the amount indicated on that relevant Entitlement and Acceptance Form; or
(b) if you only wish to accept part of your Entitlement:
(i) fill in the number of Securities you wish to accept in the space provided on the Entitlement and Acceptance Form; and
(ii) attach your cheque for the appropriate application monies (at $0.01 per Option); or
(c) if you do not wish to accept all or part of your Entitlement, you are not obliged to do anything.

All cheques must be drawn on an Australian bank or bank draft made payable in Australian currency to “XState Resources Limited – Entitlements Issue Account” and crossed “Not Negotiable”.

Your completed Entitlement and Acceptance Form and cheque must reach the Company’s share registry no later than 5.00pm WST on the Entitlements Issue Closing Date.

The Entitlements Issue is non-renounceable. Accordingly, a Shareholder may not sell or transfer all or part of their Entitlement.

6.3 Underwriting

The Entitlements Issue is conditionally underwritten by Argonaut.

Refer to Section 16.9 of this Prospectus for further details of the terms of the underwriting.

6.4 Shortfall

Any Entitlement not taken up pursuant to the Entitlements Issue will form the Shortfall and be dealt with in accordance with the Underwriting Agreement. Accordingly, Shareholders should not apply for the Shortfall unless directed to do so by the Underwriter. Please refer to Section 16.9 for details of the Underwriting.

6.5 Issue of Options

Options issued pursuant to the Entitlements Issue will be issued as soon as practicable after the Entitlements Issue Closing Date. The Company will issue the Options on the basis of a Shareholder’s Entitlement. Where the number of Options issued is less than the number applied for, or where no issue is made, surplus application monies will be refunded without any interest to the applicant as soon as practicable after the Entitlements Issue Closing Date.

Pending the grant and issue of the Options or payment of refunds pursuant to this Prospectus, all application monies will be held by the Company in trust for the Applicants in a separate bank account as required by the Corporations Act. The Company, however, will be entitled to retain all interest that accrues on the bank account and each Applicant waives the right to claim interest.

6.6 Restrictions on the Distribution of the Prospectus

Only Shareholders who are registered as at 5.00pm WST on the Entitlements Issue Record Date with registered addresses in Australia or New Zealand will be able to participate in the Entitlements Issue. To make the offer under the Entitlements Issue in any other jurisdiction may constitute a violation of application securities laws. The Directors believe that it is unreasonable to make the offer under the Entitlements Issue to Foreign Shareholders, having had regard to the number of Shareholders in the relevant jurisdictions, the number and value of Options those Shareholders would be offered and the cost of complying with the securities legislation of those jurisdictions.

Accordingly, the offer under the Entitlements Issue is not being made, and no Shares will be issued to, any Shareholders whose registered address is in a country other than Australia or New Zealand.

Shareholders resident in New Zealand should consult their professional advisors as to whether any government or other consents are required, or other formalities need to be observed, to enable them to exercise their Entitlements under the Entitlements Issue.

The Entitlements Issue to New Zealand investors is a regulated offer made under Australian and New Zealand law. In Australia, this is Chapter 8 of the Corporations Act and the Corporations Regulations 2001. In New Zealand, this is Part 5 of the Securities Act 1978 and the Securities (Mutual Recognition of Securities Offerings - Australia) Regulations 2008. Please refer to Section 4.10 for further details.

7. DETAILS OF THE OPTION PLACEMENT

7.1 Option Placement

By this Prospectus, the Company offers for subscription 15,000,000 Options at an issue price of $0.01 each to raise $150,000 (Option Placement).

The Options offered under the Option Placement will be granted in accordance with the following allocation policy:

(a) 2,500,000 Options shall be allocated to Mr Gary Jeffery (or his nominee), a Proposed Director of the Company;
(b) 2,500,000 Options shall be allocated to Mr John Begg (or his nominee), a Proposed Director of the Company;
(c) 10,000,000 Options shall be allocated to persons as determined by the Lead Manager. Please refer to Note 5 of Section 11.2 for further details.

The Option Placement is subject to Shareholder approval which will be sought at the General Meeting scheduled to be held on 10 June 2010. The Options issued under the Option Placement will be exercisable at $0.24 each on or before 30 June 2013 and otherwise on the terms set out in Section 17.2.

The purpose of the Option Placement and the use of funds raised are set out in Section 4 of this Prospectus.

7.2 Applications

Applications for Options under the Option Placement must be made using the Option Placement Application Form.

Do not apply for Securities under the Option Placement unless directed to do so by the Company.

Payment for Options must be made in full at the issue price of $0.01 per Option. Applications for Options must be for a minimum of 10,000 Options under the Option Placement and thereafter in multiples of 1,000 Options. Completed Application Forms and accompanying cheques must be mailed or delivered to the Lead Manager as follows.

BY MAIL OR HAND TO:

Argonaut Capital Level 30 Allendale Square 77 St Georges Terrace PERTH WA 6000 Attention: Mr Adam Santa Maria

Cheques should be made payable to “XState Resources Limited – Option Placement Account” for the Option Placement. Completed Application Forms in respect of the Option Placement must reach one of the above addresses by no later than the Option Placement Closing Date.

The Company reserves the right to close the Option Placement early.

7.3 Minimum Subscription

There is no minimum subscription of the Option Placement.

7.4 Underwriter

The Option Placement is not underwritten.

7.5 Issue of Options

The Lead Manager will determine the persons to whom all the Options will be issued in consultation with the Directors. The Directors reserve the right to reject any application or to allocate any Applicant fewer Options than the number applied for.

Where the number of Options issued is less than the number applied for, or where no issue is made, surplus application monies will be refunded without any interest to the Applicant as soon as practicable after the Closing Date.

7.6 Enquiries

Any questions concerning the Option Placement should be directed to the Company Secretary Mr David McArthur on (08) 9423 3200, or the Lead Manager, Mr Adam Santa Maria on (08) 9224 6821.

8. COMPANY AND PROJECT OVERVIEW

8.1 Background

XState Resources Limited is an Australian public company listed on the official list of ASX.

The Company and its subsidiary, XState Resources (Arizona) Inc, have predominantly operated in the uranium exploration industry in the United States of America. The Company currently has a 50% participating interest in the exploration of uranium in 3 mining leases in Arizona with its joint venture partner, Liberty Star Uranium and Metals Corp.

On 21 January 2010, the Company announced the acquisition of a substantial surface geochemical database covering the main mineral provinces of Nevada in the USA. Upon completion of the Acquisition of Bombora, the Company does not intend to actively pursue an active exploration program on this gold database and will endeavour to dispose of its rights to this database.

As recently announced to ASX, the Company has reached an agreement to acquire Bombora.

Bombora has rights to oil and gas projects located in Tunisia and Italy. Section 8.2 below sets out information relating to these projects. The following should be read in conjunction with the Independent Technical Report in Section 10 and also the Solicitors’ Reports on Permits in Sections 13 and 14.

8.2 Projects

The projects which are proposed to be acquired will provide the Company with exposure to two oil and gas exploration wells that are planned to be drilled in 2010 and a range of other exploration prospects, some of which have recently been covered by 3D seismic and an opportunity to assess the Dougga gas and condensate discovery.

In the project summaries that follow all resource estimates quote figures from project operator AuDAX Resources Limited (AuDAX).

Bombora currently holds the right to earn interests in the following project areas (Assets) in Tunisia and Italy:

Permits	% interest
Tunisia onshore-Chorbane permit	10%
Tunisia offshore- Kerkouane permit	10% (option to increase to 20%; Lambouka Prospect Area remains at 10%)
Italy offshore-G.R.15.PU (Pantelleria) permit	10% (option to increase to 20%; Lambouka Prospect Area remains at 10%)

The directors of Bombora who are proposed to join the board of the Company bring with them extensive experience in the upstream oil and gas industry.

The Company plans to actively contribute to the joint ventures exploring the project areas by undertaking its own technical and commercial evaluations. It will rely on the experience of its people to assist the respective project operators to more fully evaluate the oil and gas potential of the projects.

==> picture [425 x 319] intentionally omitted <==

Schematic Location Map of the Assets in Tunisia and Italy

Offshore Permits (Sicily Channel Blocks): Kerkouane (Tunisia) and G.R.15.PU (Pantelleria) (Italy)

These permits cover an area of over 4,500 Km[2] with water depths varying from around 20m to over 1000m.

Bombora is earning a 10% interest by part funding a 640 km[2] 3D seismic survey that has just been acquired for a cost to Bombora of US$700,000. After this survey, Bombora will contribute to future programs in proportion to its postseismic earned 10% interest in the permits

Dougga Discovery

Dougga was discovered in 1981 in approximately 300 metres of water and has estimated Contingent (recoverable) Resources of 420 Bcf gas and 29 mmbbls of condensate or light oil[1] . This discovery has been covered by a 3D seismic program and will be further evaluated by Bombora for future appraisal and development activity. The main reservoir is the carbonate Abiod Formation, from which oil and gas has been produced elsewhere onshore and offshore Tunisia. Non hydrocarbon gas content, including indicative CO2 content of approximately 30% in the gas has affected past development cost estimates and project economics.

1 All resource estimates except in Section 10 (Independent Technical Specialist’s Report) are derived from the operator of the projects, AuDAX.

Lambouka Prospect and Additional Offshore Prospects

In the offshore project areas a number of leads and prospects have been mapped, including the large Lambouka Prospect, which is planned to be drilled in late June/July 2010 using Atwood Oceanic’s Southern Cross semi-submersible drilling rig.

Lambouka has Prospective (recoverable) Resource potential of 270 mmboe in three target horizons. The Lambouka -1 will be drilled in around 625m of water to a total depth of approximately 3,000 m at a location in Tunisian waters. The mapped structural closure of the Lambouka Prospect extends into the adjacent Italian Pantelleria permit.

Bombora considers the primary objective in Lambouka-1 to be the lower of three target horizons, the Abiod Formation because it is also the hydrocarbon reservoir in the Dougga discovery.

==> picture [419 x 315] intentionally omitted <==

Schematic of Top Abiod Structure Map showing the relative size and depths of the Dougga and Lambouka Structures at the primary target reservoir.

There are a variety of follow up prospects in the two offshore project areas that are considered to be prospective for both oil and gas.

==> picture [454 x 326] intentionally omitted <==

Schematic Offshore Prospects and Leads Map showing approximate area of recently acquired 3D Seismic Survey and permit Boundaries (red); Gold and silver shapes represent mapped prospects and leads (e.g. L is Lambouka Prospect); Orange Shape represents Dougga (D) gas and condensate discovery

Dougga is close to a collection of interpreted satellite closures could add to the total hydrocarbon resource if successfully explored in the future.

Option to increase interest in Offshore Permits to 20%

Bombora holds an option to increase its equity in the projects contained within the offshore permits (includes the Dougga discovery, but excludes the Lambouka prospect area) from 10% to 20% after reviewing the results of both the 3D seismic and Lambouka-1 well.

If Bombora decided to exercise the option, Bombora will refund AuDAX for 10% of past costs (from 1 January 2010) in the permits, excluding drilling costs of Lambouka-1. Bombora will also fund an additional 15% of the next well to be drilled in the permits (outside the Lambouka prospect area). Please refer to section 16.4 for further details.

Onshore Chorbane (Tunisia) Permit:

The Chorbane permit covers 2,428 km[2] adjacent to several onshore producing oil and gas fields. There is good operational access, and proximal access to oil and gas pipeline infrastructure and support services in the regional city of Sfax.

Sidi Daher Prospect

Bombora is earning 10% in the Chorbane Permit by part funding on a promoted basis the drilling of the Sidi Daher Prospect which is expected to begin drilling in late 2010.

==> picture [381 x 285] intentionally omitted <==

Schematic Chorbane permit location map

Sidi Daher has estimated Prospective (recoverable) Resource potential of 120 mmboe hosted in three reservoirs. The prospect is characterised at the shallowest prospective level by a Flat Spot anomaly on various vintages of the crossing 2D seismic grid. This anomaly may be a direct hydrocarbon indicator (DHI). A survey has also revealed surface geochemical anomalies (hydrocarbons) that are reasonably consistent with the extent of the Flat Spot anomaly.

==> picture [395 x 226] intentionally omitted <==

Illustrative 2D seismic dip-line section showing the “flat spot” anomaly (left) and schematic related reservoir trend interpreted to cross the Sidi Daher Prospect

If gas is discovered at Sidi Daher at the scale estimated it could be marketed in Tunisia or in Europe, as Tunisia is directly connected to European gas markets by pipelines.

There are a range of additional leads and prospects in the permit area, including the possible extension of a gas discovery reported to have been made in the adjacent permit into the southwest part of the Chorbane permit.

8.3 Competent Person

The technical information provided in this Prospectus has been compiled by Mr Gary Jeffery, Executive Director of Bombora Energy Limited. He is a qualified geophysicist with over 37 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 Prospectus. Mr Jeffery consents to the inclusion in this Prospectus of the matters based on the information in the form and context in which it appears.

9. DIRECTORS, PROPOSED DIRECTORS, AND CORPORATE GOVERNANCE

9.1 Directors

Ross Kestel – Non - Executive Chairman

Mr Kestel is both a Chartered Accountant and Certified Practicing Accountant and was a founding director of the accounting practice Nissen Kestel Harford. Mr Kestel is no longer a partner of Nissen Kestel Harford.

Currently, he is a director of Jabiru Metals Limited, VDM Group Limited, Jatoil Limited, Resource Star Limited, Blackcrest Resources Limited and Regis Resources Limited.

Mr Kestel will continue as a Director of the Company on settlement of the Acquisition of Bombora however will step down as Chairman.

David McArthur – Executive Director- resigning

Mr McArthur is a Chartered Accountant, having spent four years with a major international accounting firm, and has over 30 years’ experience in the accounting profession. Mr McArthur has been actively involved in the financial and corporate management of a number of public listed companies over the past 27 years.

Mr McArthur has a Bachelor of Commerce Degree from the University of Western Australia.

Mr McArthur has substantial experience in capital raisings, company reorganisations and restructuring, mergers and takeovers, and asset acquisitions by public companies. Mr McArthur is an executive director of Lodestar Minerals Limited.

Mr McArthur will resign as a director on settlement of the Acquisition of Bombora.

Rhoderick Grivas - Non Executive Director - resigning

Mr Grivas is a geologist with over 20 years’ experience in all technical aspects of exploration from grassroots through to resource estimation and feasibility. He has held a number of director and management positions with junior resource companies.

Mr Grivas is a non-executive director of Lodestar Minerals Limited and a non executive director of Canyon Resources Limited.

Mr Grivas will resign as a director on settlement of the Acquisition of Bombora.

Brett Mitchell - Non Executive Director

Mr Mitchell has worked for both private and publicly listed entities for the past 17 years as a corporate finance executive. Mr Mitchell holds a Bachelor of Economics degree from the University of Western Australia and is a member of the Australian Institute of Company Directors, with specific experience in the financial markets and resources sectors.

Mr Mitchell is currently executive director and company secretary of Transerv Energy Limited and Wildhorse Energy Limited and a non executive director of Quest Petroleum NL and Newland Resources Limited.

Mr Mitchell will continue as a Director of the Company on settlement of the Acquisition of Bombora.

9.2 Proposed Directors

John Begg – Non-Executive Chairman

Mr Begg has over 30 years experience in the upstream oil and gas industry in Australia and internationally. Previously, Mr Begg was Managing Director of Salinas Energy overseeing that company's growth within 2 years from concept to a long term oil producer with a large exploration portfolio. Prior to that Mr Begg was the founding and Managing Director of Voyager Energy Limited which was successfully merged with ARC Energy Limited in 2005, after making 2 commercial oil discoveries with the company's first 2 wells. Mr Begg is currently an Executive Director of Solimar Energy Limited.

Mr Begg is a member of AAPG, and a past committee member of oil industry body APPEA and the Singapore - Australia Business Council.

Gary Jeffery – Managing Director

Mr Jeffery has over 37 years of experience in the oil, gas and mining and energy utilities industries working for a range of organizations 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 commercialize 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).

In addition to being a Director of Bombora, Mr Jeffery is a graduate member of the Australian Institute of Company Directors, a member of the Non-Exec Advisory Board of private company Velrada, 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.

9.3 Corporate Governance

The Directors monitor the business affairs of the Company on behalf of Shareholders and have formally adopted a corporate governance policy which is designed to encourage Directors to focus their attention on accountability, risk management and ethical conduct. The Board and management are committed to corporate governance and, to the extent applicable to the Company, have followed the “Principles of Good Corporate Governance and Best Practice Recommendations” issued by the ASX Corporate Governance Council.

Details of the composition of the Board and proposed Board (following the Acquisition) are set out above.

The Board recognises the need for the Company to operate with the highest standards of behaviour and accountability.

The members of the Board, with exception of Mr McArthur, are considered independent in terms of the ASX Corporate Governance Council’s definition of independent director.

As the Company’s activities increase in size, scope and/or nature, the Company’s corporate governance principles will be reviewed by the Board and amended as appropriate.

The Company’s corporate governance statements are available on the Company’s website at www.xstate.com.au.

The Board of Directors

The Company’s Board of Directors is responsible for the corporate governance of the Company. The Board develops strategies for the Company, reviews strategic objectives and monitors performance against those objectives. The goals of the corporate governance processes are to:

(a) maintain and increase shareholder value;
(b) ensure a prudent and ethical basis for the Company’s conduct and activities; and
(c) ensure compliance with the Company’s legal and regulatory objectives.

Consistent with these goals, the Board assumes the following responsibilities:

(a) developing initiatives for profit and asset growth;
(b) reviewing the corporate, commercial and financial performance of the Company on a regular basis;
(c) acting on behalf of, and being accountable to, the Shareholders; and
(d) identifying business risks and implementing actions to manage those risks and corporate systems to assure quality.

The Company is committed to the circulation of relevant materials to Directors in a timely manner to facilitate Directors’ participation in the Board discussions on a fully-informed basis.

Composition of the Board

Election of Board members is substantially the province of the Shareholders in general meeting. However, subject thereto, the Company is committed to the following principles:

(a) the Board is to comprise Directors with a blend of skills, experience and attributes appropriate for the Company and its business; and
(b) the principal criterion for the appointment of new Directors is their ability to add value to the Company and its business.

No formal nomination committee or procedures have been adopted for the identification, appointment and review of the Board membership, however an informal assessment process, facilitated by the Chairman in consultation with the Company’s professional advisors, has been committed to by the Board.

Independent professional advice

Subject to the Chairman’s approval (not to be unreasonably withheld), the Directors, at the Company’s expense, may obtain independent professional advice on issues arising in the course of their duties.

Remuneration arrangements

The remuneration of an executive director will be decided by the Board.

The total maximum remuneration of non-executive Directors is the subject of a Shareholder resolution in accordance with the Company’s Constitution, the Corporations Act and the ASX Listing Rules, as applicable. The determination of non-executive Directors’ remuneration within that maximum will be made by the Board having regard to the inputs and value to the Company of the respective contributions by each non-executive Director.

The Board may award additional remuneration to non-executive Directors called upon to perform extra services or make special exertions on behalf of the Company.

External audit

The Company in general meetings is responsible for the appointment of the external auditors of the Company, and the Board from time to time will review the scope, performance and fees of those external auditors.

Audit committee

The Company does not have a separately constituted audit committee.

Identification and management of risk

The Board’s collective experience will enable accurate identification of the principal risks that may affect the Company’s business. Key operational risks and their management will be recurring items for deliberation at Board Meetings.

Ethical standards

The Board is committed to the establishment and maintenance of appropriate ethical standards

10. INDEPENDENT TECHNICAL SPECIALIST’S REPORT

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Independent Expert’s Report

Exploration Assets

Kerkouane & Chorbane Permits Tunisia

G.R15.PU (Pantelleria) Permit Italy

Prepared for

Xstate Resources Limited

May 2010

Isis Petroleum Consultants Pty Ltd Ground Floor 47 Colin Street West Perth 6005 Australia Ph: +61 (8) 9226 4610 Fax: +61 (8) 9226 0999 Email: [email protected]

Declaration

Xstate Resources Limited (“Xstate”) commissioned Isis Petroleum Consultants Pty Ltd (“Isis”) to prepare an Independent Technical Expert’s Report on the petroleum exploration assets currently held by Bombora Energy Limited in the Tunisian Kerkouane and Chorbane Permits plus the Italian G.R15.PU (Pantelleria) Permit.

The evaluation of petroleum assets is subject to uncertainty because it involves judgments on many parameters that cannot be precisely assessed and which may change as new information becomes available.

The statements and opinions attributed to Isis are given in good faith and in the belief that such statements are neither false nor misleading. In carrying out its tasks, Isis has considered and relied upon data and information provided by Xstate. Consequently Isis and its servants do not accept any liability for its accuracy, nor do we warrant that our enquiries have revealed all of the matters that a more extensive examination may disclose.

Neither Isis nor its subcontractors have any pecuniary interest or any other interest in Xstate, or the assets evaluated other than for professional fees received for carrying out this project.

Isis Petroleum Consultants Pty Ltd Ground Floor, 47 Colin Street West Perth Western Australia 6005 AUSTRALIA

Tel: +61 8 9226 4610 Fax: +61 8 9226 0999 Email: [email protected]

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1.0	Executive Summary .......................................................................... 41	Executive Summary .......................................................................... 41
2.0	Introduction ....................................................................................... 44
3.0	Technical Evaluation......................................................................... 48
	3.1	Introduction ...................................................................................... 48
	3.2	Data Base ........................................................................................ 48
		3.2.1 Kerkouane Permit and Pantelleria Permit ........................................ 48
		3.2.2 Chorbane Permit............................................................................... 49
	3.3	Regional Petroleum System ............................................................. 50
		3.3.1 Reservoir .......................................................................................... 52
		3.3.2 Source .............................................................................................. 53
		3.3.3 Seal ................................................................................................... 53
		3.3.4 Traps ................................................................................................. 53
	3.5	Leads and Prospects........................................................................ 54
		3.5.1 Prospects and Leads Inventory Kerkouane and Pantelleria Permits 54
		3.5.1.1 Lambouka Prospect ........................................................... 55
		3.5.1.2 Dougga-2 Appraisal Well ................................................... 60
		3.5.1.3 Dougga North Prospect ..................................................... 63
		3.5.2 Prospects and Leads Inventory for the Chorbane Permit ................ 66
		3.5.2.1 Sidi Daher Prospect ........................................................... 67
4.0	Resumes ............................................................................................ 71
5.0	Signatures .......................................................................................... 72
6.0	Glossary of Abbreviations ................................................................ 73
7.0	Glossary of Geological Terms ......................................................... 77

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List of Figures

Figure 1 : Location Map ........................................................................................................... 44 Figure 2 : Tunisian Hydrocarbon Fields and Infrastructure ..................................................... 45 Figure 3 : Location Map Kerkouane and Pantelleria Permits .................................................. 46 Figure 4 : Location Map Chorbane Permit............................................................................... 46 Figure 5 : Well and Seismic Data Base - Kerkouane and Pantelleria permits ........................ 49 Figure 6 : Well and Seismic Data Base - Chorbane Permit .................................................... 49 Figure 7 : Western Mediterranean Plate Tectonic Setting ....................................................... 50 Figure 8 : Lambouka Prospect & Dougga Gas Discovery - Dip Line ...................................... 51 Figure 9 : Sidi Daher Prospect - Dip Line ................................................................................ 51 Figure 10 : Chronostratigraphic Chart ..................................................................................... 52 Figure 11 : AuDAX Leads and Prospects - Kerkouane and Pantelleria Permits .................... 54 Figure 12 : Lambouka Prospect Isis Upper Birsa Fm Depth Structure Map ........................... 55 Figure 13 : Dip Line - Lambouka Prospect .............................................................................. 56 Figure 14 : Strike Line - Lambouka Prospect .......................................................................... 56 Figure 15 : Lambouka Prospect Isis Abiod Chalk Depth Structure Map ................................. 57 Figure 16 : Regional Seismic Line - Lambouka Prospect & Dougga Gas Discovery .............. 57 Figure 17 : Bou Dabbous Source Rock Interval Depth of Burial Map ..................................... 58 Figure 18 : Lambouka Prospect Summary – Upper Birsa Fm ................................................ 59 Figure 19 : Lambouka Prospect Summary – Abiod Chalk ...................................................... 59 Figure 20 : Dougga-2 Appraisal Well – Abiod Chalk Depth Structure Map............................. 60 Figure 21 : Dougga-2 Appraisal Well – Dip Line ..................................................................... 60 Figure 22 : Dougga-2 Appraisal Well – Strike Line ................................................................. 61 Figure 23 : Dougga-2 Appraisal Well Summary – Abiod Chalk .............................................. 62 Figure 24 : Dougga North Prospect – Abiod Chalk Depth Structure Map ............................... 63 Figure 25 : Dougga North Prospect – Dip Line ....................................................................... 63 Figure 26 : Dougga North Prospect – Strike Line .................................................................... 64 Figure 27 : Dougga North Prospect Summary – Abiod Chalk ................................................. 65 Figure 28 : Dougga North Prospect Summary – Birsa Sandstone .......................................... 65 Figure 29 : AuDAX Prospects and Leads Map - Chorbane Permit ......................................... 66 Figure 30 : Sidi Daher Prospect Isis Abiod Chalk Depth Map ................................................. 67 Figure 31 : Sidi Daher Prospect – Dip Line ............................................................................. 68 Figure 32 : Sidi Daher Prospect – Strike Line ......................................................................... 68 Figure 33 : Sidi Daher Prospect Isis Eocene Limestone Depth Structure Map....................... 69 Figure 34 : Sidi Daher Prospect Isis Nara Limestone Depth Structure Map ........................... 69 Figure 35 : Sidi Daher Prospect Summary – Abiod Chalk ...................................................... 70

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List of Tables

Table 1 : Prospective Volumetrics Kerkouane and Pantelleria Permits .................................. 42 Table 2 : Contingent Volumetrics – Dougga-2 Appraisal Well – Kerkouane Permit ............... 42 Table 3 : Prospective Volumetrics Sidi Daher Prospect .......................................................... 43 Table 4 : AuDAX: Leads and Prospects Volumes - Kerkouane and Pantelleria Permits ........ 55 Table 5 : Prospective Volumetrics Lambouka Prospect .......................................................... 58 Table 6 : Contingent Volumetrics – Dougga-2 Appraisal Well ................................................ 62 Table 7 : Prospective Volumetrics Dougga North Prospect .................................................... 64 Table 8 : AuDAX Leads and Prospects Volumes - Chorbane Permit ..................................... 67 Table 9 : Prospective Volumetrics Sidi Daher Prospect .......................................................... 70

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1.0 EXECUTIVE SUMMARY

Xstate Resources Limited (“Xstate”) commissioned Isis Petroleum Consultants Pty Ltd (“Isis”) to prepare an Independent Expert’s Report on the petroleum exploration assets of Xstate. Xstate has secured the right to participate in the drilling of an offshore well on the gas and condensate Lambouka Prospect in the Kerkouane and Pantelleria permits and also the right to participate in the drilling of an onshore well in the Chorbane Permit. Isis has prepared an Independent Expert’s Report that details the analysis, findings and conclusions of the evaluation.

The permits are currently held by Alpine Oil and Gas (“Alpine”), a wholly owned subsidiary of AuDAX Resources Limited (“AuDAX”) which is farming out part of their interest to Xstate.

The scope of this report is an independent technical assessment of the prospectivity of the Kerkouane, Pantelleria and Chorbane permits with a particular focus on the Lambouka Prospect in the offshore permits and the Sidi Daher Prospect in the onshore permit.

The data and information used in the preparation of this report were provided by Xstate and supplemented by public domain information. Isis has relied upon the information provided and has undertaken the evaluation on the basis of a review and audit of existing interpretations and assessments, as supplied by Xstate. Xstate was able to make available two Kingdom projects containing 2D seismic data and well information for the two areas.

Isis was therefore able to conduct an independent seismic interpretation of the primary prospects and leads across the permits and calculate independent probabilistic volumetric estimates for the prospects.

The primary objective of the review was to form an independent expert’s opinion on the hydrocarbon potential of the prospects, the volumes calculated for the structures and the geological risks associated with each prospect.

The three permits are located in offshore Tunisia and Italy and onshore Tunisia in the Pelagian Basin which contains a world class proven hydrocarbon system with oil, condensate and gas production from proven commercial offshore and onshore fields.

This report has been completed according to the requirements of the Society of Petroleum Engineers / World Petroleum Council / American Association of Petroleum Geologists (SPE / WPC / AAPG) guidelines and standards as published in March 2007 and the guidelines from the Valmin Code.

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Isis has estimated the following unrisked and risked mean recoverable prospective resources and chance of geological success (“POS”) for the following prospects and leads in the Kerkouane and Pantelleria permits (Table 1).

Prospects	Target	Mean GIIP / STOOIP	POS	Mean Unrisked Prospective Resource	Mean Risked Prospective Resource
Lambouka Prospect :	Birsa Fm	589 MMbbl	30%	158 MMbbl	47 MMbbl
Lambouka Prospect	Ain Grab Fm	111 MMbbl	30%	73 MMbbl	22 MMbbl
Lambouka Prospect :	Abiod Fm	528 Bcf	30%	353 Bcf 24.7 MMbbl condensate	106 Bcf 7.4 MMbbl condensate
Dougga North Prospect	Birsa Fm	227 Bcf	20%	158 Bcf 11 MMbbl condensate	32 Bcf 2.2 MMbbl condensate
Dougga North Prospect	Abiod Fm	263 Bcf	20%	184 Bcf 12.8 MMbbl condensate	37 Bcf 2.6 MMbbl condensate

Table 1: Prospective Volumetrics Kerkouane and Pantelleria Permits

Isis has estimated the following unrisked and risked mean recoverable contingent resources and the POS for the following Dougga-2 appraisal well in the Kerkouane Permit. It should be noted that the Dougga-1 well tested high levels of CO2 and the Dougga-2 Appraisal Well is therefore also likely to contain significant amounts of CO2 (Table 2).

Appraisal Well	Target	Mean GIIP (Bcf)	POS	Mean Unrisked Contingent Resource (Bcf)	Mean Risked Contingent Resource (Bcf)
Dougga-2 Appraisal Well	Abiod Fm	551 Bcf	68%	405Bcf 28 MMbbl condensate	277 Bcf 19 MMbbl condensate

Table 2: Contingent Volumetrics – Dougga-2 Appraisal Well – Kerkouane Permit

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Isis has estimated the following unrisked and risked mean recoverable prospective resources and the POS for the following Sidi Daher Prospect in the Chorbane Permit (Table 3).

Prospect	Target	Mean GIIP / STOOIP	POS	Mean Unrisked Prospective Resource	Mean Risked Prospective Resource
Sidi Daher Prospect	Eocene Lst “DHI”gas cap	70 Bcf	32%	42 Bcf	13 Bcf
Sidi Daher Prospect:	Eocene Lst Below”DHI”	670 MMbbl	29%	167 MMbbl	48 MMbbl
Sidi Daher Prospect:	Abiod Fm	533 MMbbl	29%	143 MMbbl	41 MMbbl
Sidi Daher Prospect:	Nara Fm	957 Bcf	20%	488 Bcf	98 Bcf

Table 3: Prospective Volumetrics Sidi Daher Prospect

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2.0 INTRODUCTION

The Kerkouane Permit is located offshore Tunisia and 100 km from the capital of Tunis. The Pantelleria Permit is located in offshore Italy and is 95 km from the island of Sicily and 55 km from the Tunisian coast (Figure 1). The two permits cover an area of approximately 4,500 sq km and are located in the highly prospective Pelagian Basin.

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Figure 1: Location Map

The Chorbane Permit is located both onshore and the very southern part of the block lies offshore Tunisia. The permit is 140 km from the capital of Tunis and covers an area of 2,428 sq km with less than 15 % of the acreage in the offshore location.

The Pelagian Basin contains a proven hydrocarbon system with a number of oil fields having being produced in the past and a number currently coming into production. Several gas condensate fields have also been discovered and are in production (Figure 2). The Ashtart Oil Field is the largest oil field discovered in the Pelagian Basin with reserves of 350 MMbbl reservoired in Eocene limestone. The Miskar Gas Field is the largest gas field discovered in the Pelagian Basin with reserves of 1.5 Tcf reservoired in Abiod Chalk. The Miskar Gas Field currently produces 80% of Tunisian domestic gas.

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Figure 2: Tunisian Hydrocarbon Fields and Infrastructure

Infrastructure has been developed to a moderate level with the Transmed Gas Lines from Algeria to Italy running through the Kerkouane Permit.

The current operator of the permits is Alpine.

The Chorbane Permit has been granted a one year extension to the current exploration period to the 12[th] July 2011 with a one exploration well commitment. The most likely candidate for this well is the drilling of the Sidi Daher Prospect.

The Kerkouane Permit is in the final year of the current exploration period with a one exploration well commitment to be drilled by 22[nd] February 2011. The candidate for this well is the drilling of the Lambouka Prospect.

Previous petroleum exploration in the Kerkouane and Pantelleria permits has been limited to regional and semi detailed 2D seismic surveys and the drilling of two wells. The Dougga-1 well was drilled by Shell in 1981 and reached a total depth of 3,992 mKB. In a mechanically curtailed test the well flowed 2.4 MMscfd and associated condensate from the Late Cretaceous Abiod Chalk with 30% CO2. The well also recovered gas on RFT from the Miocene Birsa Formation sandstones. The operator is proposing a Dougga-2 appraisal well location to be drilled updip from the discovery well.

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The Kerkouane-1 well was also drilled by Shell in 1982 and discovered a sub commercial gas field that on RFT recovered gas with 27% CO2.

The exploration success in the area for finding hydrocarbons has been high with a number of oil fields adjacent to the permits and a wide range of gas / condensate fields have also been discovered (Figure 3).

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Figure 3: Location Map Kerkouane and Pantelleria Permits

Previous petroleum exploration in the Chorbane Permit has seen regional to semi detail pre 1988 2D seismic surveys and the drilling of eight wells with two of the wells recording gas shows (Figure 4).

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Figure 4: Location Map Chorbane Permit

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The adjacent Chaal Gas Field was drilled in 2006 and tested 5.9 MMscfd from Late Jurassic Nara Formation and has an estimated reserve potential of 854 Bcf of high quality gas.

Isis’s scope of work was to provide an independent evaluation of the prospective resources in the offshore Kerkouane and Pantelleria permits in Tunisia and Italy and the onshore Chorbane Permit in the Pelagian Basin, Tunisia.

A site visit was not carried out by Isis as there are as yet no surface facilities to inspect within the permits.

Isis has carried out its assessment of the prospective resources for the prospects in accordance with the Society of Petroleum Engineers / World Petroleum Council / American Association of Petroleum Geologists (SPE / WPC / AAPG) guidelines and standards as published in March 2007

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3.0 TECHNICAL EVALUATION

3.1 Introduction

The data and information used in the preparation of this report were provided by Xstate and supplemented by public domain information. Isis has relied upon the information provided and has undertaken the evaluation on the basis of a review and audit of existing interpretations and assessments as supplied by Xstate. Isis has also completed an independent seismic interpretation over the primary leads and prospects in each block.

Xstate made available to Isis the seismic and well data bases for the two blocks in a Kingdom format. Formation tops were picked from well log data by the operator AuDAX and these were also made available. Time depth data was available for a small number of wells and these were used to supplement the well data base.

Isis has carried out an independent resource estimate and risk assessment of the following leads and prospects which are discussed in Section 3.5:

Kerkouane Permit Lambouka Prospect Dougga-2 Appraisal Well Dougga North Prospect

Chorbane Permit Sidi Daher Prospect

3.2 Data Base

3.2.1 Kerkouane Permit and Pantelleria Permit

The well and seismic data base in the offshore Kerkouane and Pantelleria permits plus the surrounding area consists of approximately 5,000 km of 2D seismic data and over 20 wells. Two wells have been drilled in the Kerkouane Permit, Kerkouane-1 and the gas discovery Dougga-1 (Figure 5).

The majority of the 2D seismic data is pre 1985 vintage and is of poor to fair quality and creates a regional to semi detail grid across the acreage. The 2004 GEO04 seismic data is of good quality and creates a detail grid over the Pantelleria Permit and ties Dougga-1.

The PGS2010 3D seismic data set has been recently acquired and is currently being processed. Isis has not had the opportunity to review the 3D seismic data.

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Figure 5: Well and Seismic Data Base - Kerkouane and Pantelleria permits

3.2.2 Chorbane Permit

The well and seismic data base in the onshore Chorbane Permit consists of approximately 3,500 km of 2D seismic data and over 30 wells. Eight wells have been drilled in the block with two of the wells recording gas shows (Figure 6). The majority of the 2D seismic data is pre 1988 vintage and is of poor to fair quality and creates a regional to semi detail grid across the acreage. The 2007 Grove Seismic Survey data is of good quality and creates a semi detail grid over the Sidi Daher Prospect. In the very southern part of the block there is no seismic grid due to the block extending offshore into shallow water.

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Figure 6: Well and Seismic Data Base - Chorbane Permit

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3.3 Regional Petroleum System

The offshore Kerkouane Permit, the Pantelleria Permit and the Chorbane Permit lie in the northern Pelagian Basin, onshore and northeast of Tunisia and southwest of Sicily, at the northern margin of the African plate and are part of the foreland basin in front of the Numidian Thrust Zone to the north (Figure 7).

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Figure 7: Western Mediterranean Plate Tectonic Setting

The proximity of the Kerkouane Permit to the thrust front in the northeast has resulted in spectacular and very recent fault reactivation. Most of the reactivated normal faults of the identified tilted horst block prospects are now transpressional. This partly explains why fault bounded structures such as Dougga, a gas-condensate discovery; 18km to the southwest of the Lambouka Prospect can hold large gas columns (Figure 8).

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Figure 8: Lambouka Prospect & Dougga Gas Discovery - Dip Line

The Chorbane Permit is further south of the thrust and doesn’t have the same complex wrench structures as the northern blocks and large fault blocks of a less complex nature are still evident as seen in the Sidi Daher Prospect (Figure 9).

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Figure 9: Sidi Daher Prospect - Dip Line

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3.3.1 Reservoir

The most productive reservoir for the Kerkouane Permit is the Late Miocene Birsa Sandstone, with test rates of up to 7,000 BOPD (Figure 10). Single horizontal well rates of 25,000 BOPD have recently been reported from the Lundin operated Oudna Oil Field. The Tazerka Oil Field is located adjacent to the southern boundary of the Kerkouane Permit and produced 12 MMbbl within the first two years out of a total production of 22 MMbbl, before it was abandoned in 1999.

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Figure 10: Chronostratigraphic Chart

Other prominent and proven reservoirs include the Tortonian Oum Doill reservoir, up to 15 MMscf/d on test, the Serravallian Birsa / Nilde reservoirs, up to 7,000 BOPD on test, the Langhian Ain Grab / El Gueria carbonates, up to 2,800 BOPD upon test and the Maastrichtian Abiod carbonates, up to 5,000 BOPD upon test.

The Birsa Sandstone reservoir is the primary oil target for the Lambouka Prospect with a secondary target being oil in the Middle Miocene Ain Garb Limestone. Gascondensate in the Late Cretaceous Abiod Chalk is another primary target in the Lambouka Prospect. The latter is the main gas-condensate pay interval in the nearby Dougga-1 discovery.

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The primary reservoirs for the Chorbane Permit are the Late Cretaceous Abiod Chalk and the Eocene Reineche/Metlouai carbonates with a secondary reservoir target in the proven reservoir of the Jurassic Nara Limestone as drilled in the adjacent Chaal Gas Field (Figure 10).

The geological risk on the presence of reservoir in both blocks is low, however the risk on the effective quality of the carbonate reservoirs in the Abiod Formation and the Nara Limestone are moderate. The risk on the quality of the sandstone reservoirs of the Birsa Formation is considered low.

3.3.2 Source

Key source rocks in the Kerkouane Permit are dark pelagic marls of the Albian Fahdene Formation and mudstones and bituminous marls of the Early Eocene Bou Dabbous Formation. The Bou Dabbous Formation is in the present day mature oil window while the Fahdene Formation is in the early mature wet gas phase.

Key source rocks in the Chorbane Permit are shales of the Cretaceous Fahedene Formation which are currently in the oil window throughout the eastern part of the block. Jurassic age source rocks of the Staa Formation are in the gas/condensate window west of the block as proven by the Chaal Gas Field and the ABK wells.

The geological risk on source for the prospects in both blocks is very low as a large number of gas/condensate fields and oil fields lie in the adjacent acreage. The presence of CO2 in the Dougga-1 discovery well is an important factor when risking the prospects.

3.3.3 Seal

Cretaceous and Tertiary shales form proven lateral and top seals for the primary reservoir targets.

Many of the existing fields are controlled by faults and they therefore have demonstrated the effectiveness of the regional seals. A critical risk for the fault traps is fault reactivation which may cause breaching of the trap after it has been charged with oil and or gas. It should be noted that many of the gas and oil fields are tilted fault blocks that have undergone fault reactivation and have still retained an effective fault seal.

3.3.4 Traps

A range of structural traps exist throughout the region due to the complex tectonic history of the basin. The majority of fields in the area are fault dependent anticlines with both compressional and extensional character. Salt tectonic features have been interpreted in the Chorbane Permit at the Chaker-1 structure however this type of trap is not seen in the Kerkouane Permit.

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3.5 Leads and Prospects

3.5.1 Prospects and Leads Inventory Kerkouane and Pantelleria Permits

Isis was provided with a set of prospects and leads mapped by AuDAX for review and assessment (Figure 11). In the time available Isis was unable to review all the leads and prospects, however Isis was able to give a detailed assessment of the following primary prospects:

Lambouka Prospect Dougga-2 Appraisal Well Dougga North Prospect

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Figure 11: AuDAX Leads and Prospects - Kerkouane and Pantelleria Permits

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AuDAX has estimated the following unrisked mean recoverable prospective resources for the following prospects and leads in the Kerkouane and Pantelleria permits (Table 4).

Prospects and Leads	Target	Mean Unrisked Prospective Gas Resource	Mean Unrisked Prospective Oil Resource
Tazerka North Prospect	Birsa Fm		24 MMbbl
Galliano Prospect	Birsa Fm, Ain Grab Fm, Abiod Chalk	257 Bcf	79 MMbbl
East Galliano Prospect	Birsa Fm, Ain Grab Fm, Abiod Chalk		146 MMbbl
North Zibibbo Prospect	Ain Grab Fm		20 MMbbl
Cap Bon Mare Lead	Abiod Chalk	198Bcf	44 MMbbl
Carthage Lead	Abiod Chalk	204 Bcf	45 MMbbl
Menzel Termine Lead	Abiod Chalk, Bou Dabbous Fm	149 Bcf	32 MMbbl

Table 4: AuDAX: Leads and Prospects Volumes - Kerkouane and Pantelleria Permits

3.5.1.1 Lambouka Prospect

The Lambouka Prospect is the primary prospect for the permits and is scheduled for drilling in 2010. The prospect is located on the boundary between Tunisia and Italy with approximately 60% of the structure in the northwestern part of the Pantelleria Permit. The Isis interpretation and mapping at the Upper Birsa Fm shows the prospect is a fault dependent anticline with an area of 61 sq km and 475 m of relief (Figure 12, Figure 13 and Figure 14). The drilling location is in approximately 625 m of water.

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Figure 12: Lambouka Prospect Isis Upper Birsa Fm Depth Structure Map

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Figure 13: Dip Line - Lambouka Prospect

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Figure 14: Strike Line - Lambouka Prospect

The Isis interpretation and mapping at the Abiod Chalk shows the prospect is a fault dependent anticline with an area of 50 sq km and 600 m of relief (Figure 15).

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Figure 15: Lambouka Prospect Isis Abiod Chalk Depth Structure Map

The seismic calibration for the horizon interpretation over the Lambouka Prospect is provided by Dougga-1 (Figure 16).

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Figure 16: Regional Seismic Line - Lambouka Prospect & Dougga Gas Discovery

The primary reservoirs for the Lambouka Prospect are the Upper Birsa Sandstone and the Abiod Chalk. The Upper Birsa is well developed in Dougga-1 and is reported to have flowed more than 25,000 BOPD from a horizontal well in the Oudna Oil Field.

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The Abiod Chalk was drilled in Dougga-1 and on a mechanically curtailed test flowed 2.4 MMscfd and 70 bbl/Mscfd of condensate. A secondary reservoir is the Ain Grab Limestone.

The key risk for the prospect at the Upper Birsa Sandstone oil target is gas flushing and the presence of CO2 from the kitchen due west of the prospect (Figure 17).

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Figure 17: Bou Dabbous Source Rock Interval Depth of Burial Map

Isis has estimated the following unrisked and risked mean recoverable prospective resources and chance of geological success (“POS”) for the Lambouka Prospect (Table 5).

Prospect	Target	Mean GIIP / STOOIP	POS	Mean Unrisked Prospective Resource	Mean Risked Prospective Resource
Lambouka Prospect	Birsa Fm	589 MMbbl	30%	158 MMbbl	47 MMbbl
Lambouka Prospect	Ain Grab Fm	111 MMbbl	30%	73 MMbbl	22 MMbbl
Lambouka Prospect	Abiod Fm	528 Bcf	30%	353 Bcf 24.7 MMbbl condensate	106 Bcf 7.4 MMbbl condensate

Table 5: Prospective Volumetrics Lambouka Prospect

The play elements, geological risk analysis and prospective recoverable resource for the Lambouka Prospect are summarised in Figure 18 and Figure 19.

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Figure 18: Lambouka Prospect Summary – Upper Birsa Fm

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Figure 19: Lambouka Prospect Summary – Abiod Chalk

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3.5.1.2 Dougga-2 Appraisal Well

The Dougga-2 Appraisal Well is located in the southern part of the Kerkouane Permit and 1.4 km updip and on the same structural feature from the Dougga-1 gas / condensate discovery. A mechanically curtailed production test in the Abiod Chalk in the Dougga-1 well flowed 2.4 MMscfd and recorded 30% CO2. RFTs in the Birsa Formation sands recovered gas with high levels of CO2. The Isis interpretation and mapping at the Abiod Limestone Fm shows the prospect is a faulted anticline with an area of 34 sq km and 300 m of relief (Figure 20, Figure 21 & Figure 22). The prospect location is in 300 m of water and reduced risk on seal due to its anticlinal structure.

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Figure 20: Dougga-2 Appraisal Well – Abiod Chalk Depth Structure Map

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Figure 21: Dougga-2 Appraisal Well – Dip Line

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Figure 22: Dougga-2 Appraisal Well – Strike Line

The primary reservoir for the Dougga-2 Appraisal Well is the Abiod Limestone which is developed in Dougga-1 and is reported to have flowed a mechanically curtailed 2.4 MMscfd and associated condensate with 30% CO2. The well also recovered high level of CO2 gas on RFT from the Birsa Formation sandstones which are a secondary target for the appraisal well. The presence of CO2 is a significant risk for the appraisal well; however it is noteworthy that oil has been discovered in Zibibbo-1 under a pure CO2 gas cap at the Birsa Formation Level.

The Isis petrophysical interpretation of the Dougga-1 well at the Abiod Chalk reservoir shows that there is a 5 to 6 m porosity zone of 9% average porosity, 7m below the top of the Abiod Chalk. The remaining deeper section has porosities of less than 1% with probable fractures. The review of the mudlog for Dougga-1 indicates a fracture beneath the porosity zone at 3,150 mss. The mudlog only indicates background gas levels below 3,150 mss and so we have interpreted a lowest known gas in the well at 3,150 mss.

The Dougga-2 Appraisal Well is a low risk prospect with the closure element being the highest risk due to the 2D seismic grid. The acquisition of the 2010 3D seismic data set will reduce this risk and more accurately image the field. The 3D data set will also reduce the risk on closure for other leads and prospects in the permit covered by the 3D survey, particularly those located close to the Dougga-1 discovery.

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Isis has estimated the following unrisked and risked mean recoverable contingent resources and the POS for the Dougga-2 appraisal well in the Kerkouane Permit. It should be noted that the Dougga-1 well tested high levels of CO2 and the Dougga-2 Appraisal Well is therefore also likely to contain significant amounts of CO2 (Table 6).

Appraisal Well	Target	Mean GIIP (Bcf)	POS	Mean Unrisked Contingent Resource (Bcf)	Mean Risked Contingent Resource (Bcf)
Dougga-2 Appraisal Well	Abiod Fm	551 Bcf	68%	405Bcf 28 MMbbl condensate	277 Bcf 19 MMbbl condensate

Table 6: Contingent Volumetrics – Dougga-2 Appraisal Well

The play elements, geological risk analysis and prospective recoverable resource for the Dougga-2 Appraisal Well are summarised in Figure 23.

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Figure 23: Dougga-2 Appraisal Well Summary – Abiod Chalk

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3.5.1.3 Dougga North Prospect

The Dougga North Prospect is located in the southern part of the Kerkouane Permit and 8 km northwest from the Dougga-1 gas/condensate discovery. The Isis interpretation and mapping at the Abiod Limestone Fm shows the prospect is a thrust anticline with an area of 20 sq km and 420 m of relief (Figure 24, Figure 25 & Figure 26). The prospect location is in 380 m of water.

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Figure 24: Dougga North Prospect – Abiod Chalk Depth Structure Map

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Figure 25: Dougga North Prospect – Dip Line

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Figure 26: Dougga North Prospect – Strike Line

The primary reservoir for the Dougga North Prospect is the Abiod Chalk which is well developed in Dougga-1.

The key risk for the prospect at the Abiod Limestone target is the closure due to a semi detail seismic grid and fair data quality. The 2010 PGS 3D data set will address this risk on the eastern part of the lead. The presence of CO2 is a significant risk factor when evaluating prospects in the greater Dougga-1 area.

Isis has estimated the following unrisked and risked mean recoverable prospective resources and chance of geological success (“POS”) for the Lambouka Prospect (Table 7).

Lead	Target	Mean GIIP /	POS	Mean Unrisked Prospective Resource	Mean Risked Prospective Resource
Dougga North Prospect	Birsa Fm	227 Bcf	20%	158 Bcf 11 MMbbl condensate	31 Bcf 2 MMbbl condensate
Dougga North Prospect	Abiod Fm	263 Bcf	20%	184 Bcf 12.8 MMbbl condensate	37 Bcf 2.6 MMbbl condensate

Table 7: Prospective Volumetrics Dougga North Prospect

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The play elements, geological risk analysis and prospective recoverable resource for the Dougga North Prospect are summarised in Figure 27 and Figure 28

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Figure 27: Dougga North Prospect Summary – Abiod Chalk

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Figure 28: Dougga North Prospect Summary – Birsa Sandstone

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3.5.2 Prospects and Leads Inventory for the Chorbane Permit

Isis was provided with a set of prospects and leads mapped by AuDAX for review and assessment. In the time available Isis was unable to review all the leads and prospects, however Isis was able to give a detailed assessment of the following primary prospect (Figure 29):

Sidi Daher Prospect

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Figure 29: AuDAX Prospects and Leads Map - Chorbane Permit

AuDAX has estimated the unrisked mean recoverable prospective resources for the following prospects and leads in the Chorbane Permit (Table 8).

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Prospects and Leads	Target	Mean Unrisked Prospective Gas Resource	Mean Unrisked Prospective Oil Resource
NW Lead:	BirsaFm		20- 100MMbbl
East CH Lead	Birsa Fm, Ain Grab Fm,Abiod Chalk		10 - 25 MMbbl
Hmid Prospect :	Birsa Fm, Ain Grab Fm,Abiod Chalk		10 - 20 MMbbl
Knani Prospect	Ain Grab Fm		10-30 MMbbl
SW Lead	Abiod Chalk	100- 200Bcf
East Chaal Lead	Abiod Chalk	200-300Bcf

Table 8: AuDAX Leads and Prospects Volumes - Chorbane Permit

3.5.2.1 Sidi Daher Prospect

The Sidi Daher Prospect is located in the central part of the Chorbane Permit and 10 km northeast of the Chaal-1 gas / condensate discovery which lies in the adjacent permit. The Isis interpretation and mapping at the Abiod Chalk Fm shows the prospect is a fault dependent anticline with an area of 239 sq km and 300 m of vertical relief (Figure 30, Figure 31 and Figure 32 ).

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Figure 30: Sidi Daher Prospect Isis Abiod Chalk Depth Map

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Figure 31: Sidi Daher Prospect – Dip Line

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Figure 32: Sidi Daher Prospect – Strike Line

The primary reservoirs for the Sidi Daher Prospect are the Abiod Chalk which is developed in the Chaal-1 to the south and the Chaker-1 well to the east and the Eocene limestone. Several dip lines across the prospect show a possible direct hydrocarbon indicator (“DHI”) on the crest of the structure at the Eocene limestone level (Figure 31).

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The Isis interpretation and mapping at the Eocene Limestone shows the prospect is a fault dependent anticline with an area of 78 sq km and 250 m of vertical relief (Figure 33).

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Figure 33: Sidi Daher Prospect Isis Eocene Limestone Depth Structure Map

A secondary potential reservoir for the prospect is the gas bearing Nara Formation as drilled in the Chaal-1 gas discovery (Figure 34).

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Figure 34: Sidi Daher Prospect Isis Nara Limestone Depth Structure Map

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Isis has estimated the following unrisked and risked mean recoverable prospective resources and the POS for the following Sidi Daher Prospect in the Chorbane Permit (Table 9).

Prospect	Target	Mean GIIP / STOOIP	POS	Mean Unrisked Prospective Resource	Mean Risked Prospective Resource
Sidi Daher Prospect	Eocene Lst “DHI”gas cap	70 Bcf	32%	42 Bcf	13 Bcf
Sidi Daher Prospect:	Eocene Lst Below” DHI”	670 MMbbl	29%	167 MMbbl	48 MMbbl
Sidi Daher Prospect:	Abiod Fm	533 MMbbl	29%	143 MMbbl	41 MMbbl
Sidi Daher Prospect:	Nara Fm	957 Bcf	20%	488 Bcf	98 Bcf

Table 9: Prospective Volumetrics Sidi Daher Prospect

The key risks for the prospect at the Abiod Chalk target is source and the closure due to a semi detail seismic grid and fair data quality.

The play elements, geological risk analysis and prospective recoverable resource for the Sidi Daher Prospect are summarised in Figure 35.

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Figure 35: Sidi Daher Prospect Summary – Abiod Chalk

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4.0 RESUMES

Eric Tucker

Eric Tucker holds a Fellowship Diploma in Geology from the Royal Melbourne Institute of Technology. He has over 30 years of oil and gas exploration, appraisal and development experience.

He worked with BHP / Woodside for seven years, Hudson Bay Oil & Gas for five years, Trans Canada Pipelines for seven years, as an international consultant for ten years and for Command Petroleum / Cairn Energy for eight years. He has held a wide variety of technical positions in successful oil & gas exploration, appraisal and development teams.

Eric established and developed Cairn’s geology and geophysics function in Chennai. He was a key member of the subsurface team that made the initial oil discovery in Rajasthan, the Lakshmi and Gauri Gas Fields; the five deepwater discoveries in the Krishna Godavari Basin; and the ongoing upgrade of the reserves for the Ravva Oil & Gas Field.

He held the positions of Exploration Manager, Subsurface Manager, Asset Manager, and New Ventures Manager, for Cairn Energy in Sydney -Australia, Chennai – India, and Edinburgh - Scotland from 1997 to 2002.

In late 2002, Eric left Cairn and returned to work as an independent, international oil & gas consultant. He completed the geological and seismic interpretation of the Cabinda South Block, Angola, together with geological evaluations of several operated and gazetted areas in shallow and deep waters in Indonesia, West Africa, India and the North West Shelf.

Paul Carter

Paul Carter holds a B App Sc (Geophysics), from Curtin University, Perth, WA. He has 30 years of oil and gas exploration, appraisal and development experience.

Paul worked for Hudson Bay Oil & Gas for three years, Minora Resources for ten years, WMC for three years, Novus Petroleum Limited for two years, GSI for two years and as an independent international consultant at Isis Petroleum Consultants for ten years.

He has worked on a wide range of Tertiary Basins in Southeast Asia, West Africa, South Asia and Australia.

He has worked in several major Tertiary oil and gas provinces in Australia, Indonesia and India. He is very experienced in interpreting both shallow and deepwater depositional environments. He has successfully completed seismic stratigraphic interpretations in frontier deepwater areas.

Paul is very experienced in interpreting seismic data from a wide variety of structural and depositional settings and is ideally suited to working in both small scale and large technical teams.

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5.0 SIGNATURES

Signed: Name: Eric Tucker Principal Explorationist

Signed: Name: Paul Carter Principal Geophysicist

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6.0 GLOSSARY OF ABBREVIATIONS

Abbreviation	Definition
1P	Taken to be equivalent to Proved Reserves; denotes low estimate scenario of Reserves
1Q	1stquarter
2P	Taken to be equivalent to the sum of Proved plus Probable Reserves; denotes best estimate scenario of
	Reserves
2Q	2ndquarter
2D	Two dimensional
3D	Three dimensional
3P	Taken to be equivalent to the sum of Proved plus Probable plus Possible Reserves; denotes high estimate
	scenario of Reserves
3Q	3rdquarter
4Q	4thquarter
ACQ	Annual contract quantity
A$	Australian dollars
A$ MM	Million Australian dollars
Bg	Gas formation volume factor unit reservoir volume per volume at standard conditions
Bo	Oil formation volume factor reservoir volume per volume at standard conditions
BOE	US barrels of oil equivalent
bbl	US barrel
bbl/d	US barrels per day
BBTU	Billion (109) British Thermal Units
Bcf	Billion (109) cubic feet
BCPD	Barrels of condensate per day
BFPD	Barrels of fluid per day
BML	Below mud line
BOPD	Barrels of oil per day
BRF	Batu Raja Formation
BTU	British Thermal Units
BWPD	Barrels of water per day
C	Celsius
Capex	Capital expenditure
CGR	Condensate Gas Ratio – usually expressed as bbl/MMscf
CIIP	Condensate initially in-place
Contingent	Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known
Resources	accumulations by application of development projects, but which are not currently considered to be
	commercially recoverable due to one or more contingencies
CO2	Carbon dioxide
Cp	Centipoise (measure of viscosity)
CPI	Consumer Price Index
CPF	Central processing facilities
DCF	Discounted cashflow
DCQ	Daily contract quantity
deg	Degrees
DHI	Direct hydrocarbon indicator
Discount Rate	The interest rate used to discount future cash flows into a dollars of a reference date
DST	Drill stem test
Eg	Gas expansion factor. Gas volume at standard (surface) conditions / gas volume at reservoir conditions
	(pressure & temperature)
EIA	US Energy Information Administration

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Abbreviation	Definition
EMV	Expected monetary value
EOR	Enhanced oil recovery
ESP	Electric submersible pump
EUR	Estimated ultimate recovery
Expectation	The mean of a probability distribution
F	Degrees Fahrenheit
FDP	Field Development Plan
FEED	Front end engineering design
FID	Final investment decision
Fm	Formation
FPSO	Floating offshore production and storage unit
FS	Flooding surface
FWL	Free water level
FVF	Formation volume factor
G&G	Geological and Geophysical
GIIP	Gas initially in-place
GJ	Giga (109) joules
GOC	Gas-oil contact
GRV	Gross rock volume
GSA	Gas sales agreement
GWC	Gas water contact
H2S	Hydrogen sulphide
HHV	Higher heating value
HI	Hydrocarbon Index
ID	Internal diameter
IRR	Internal Rate of Return is the discount rate that results in the NPV being equal to zero.
JV(P)	Joint Venture (Partners)
KB	Kelly Bushing
Kh	Horizontal permeability
krg	Relative permeability to gas
kro	Relative permeability to oil
krw	Relative permeability to water
kv	Vertical permeability
km	Kilometres
kPa	Kilo (thousand) pascal (measurement of pressure)
LCC	Lowest closing contour
Lead	A project associated with a potential accumulation that is currently poorly defined and requires more data
	acquisition and/or evaluation in order to be classified as a prospect
LKG	Lowest known gas
LKO	Lowest known oil
LNG	Liquefied natural gas
LPG	Liquefied petroleum gas, predominantly propane and butane
m	Metres
Ma	Millions of years
MDT	Modular dynamic formation tester
MDQ	Maximum daily quantity
Mean	Arithmetic average of a series of values
mD	Millidarcies (permeability)
MFS	Maximum flooding surface

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Abbreviation		Definition
Mgal	Milligal. A unit of acceleration used with gravity measurements (1.0+5Mgal = 1.0 m/sec2)
MJ	Mega (106) Joules
mKB	Metres below Kelly Bushing
Mm3	Million cubic metres
MMbbl	Million US barrels
MMBOE	Million US barrels of oil equivalent
MMBTU	Million British Thermal Units
MMscf	Million standard cubic feet
MMscfd	Million standard cubic feet per day
MMstb	Million US stock tank barrels
MOD	Money of the Day (nominal dollars) as opposed to money in real terms
Mscf	Thousands standard cubic feet
Mstb	Thousand US stock tank barrels
Mstb/d	Thousand US stock tank barrels per day
MPa	Mega (106) pascal (measurement of pressure)
mss	Metres subsea
Mtpa	Million metric tonnes per annum
mTVDss	Metres true vertical depth subsea
NPV	Net Present Value (of a series of cash flows)
NTG	Net to Gross (ratio)
NZ$	New Zealand dollars
NZ$ MM	Million New Zealand dollars
Opex	Operating expenditure
OWC	Oil-water contact
P10 / high estimate	There should be at least a 10% probability that	the quantities actually recovered will equal or exceed the
	high estimate
P50 / best estimate	There should be at least a 50% probability that	the quantities actually recovered will equal or exceed the
	best estimate
P90 / low estimate	There should be at least a 90% probability that	the quantities actually recovered will equal or exceed the
	low estimate
PBU	Pressure build-up
PHIE	Effective porosity
PHIT	Total porosity
PJ	Peta (1015) Joules
Prospect	A project associated with a potential accumulation that is sufficiently well defined to represent viable
	drilling target
Prospective	Those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from
Resources	undiscovered accumulations according to the definitions of the Society of Petroleum Engineers, World
	Petroleum Council and American Association of Petroleum Geologists.
P&L	Prospects and leads
PSC	Production Sharing Contract
POS	Probability of success
PSDM	Pre-stack depth migration
psi(a)	Pounds per square inch pressure (absolute)
p.u.	Porosity unit e.g. porosity of 20% +/- 2 p.u. equals a porosity range of 18% to 22%
PVT	Pressure, volume & temperature
QA	Quality assurance
QC	Quality control
rb/Mscf	Reservoir barrels per thousand standard cubic feet under standard conditions
rb/stb	Reservoir barrels per stock tank barrel under standard conditions

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Abbreviation	Definition
Real Terms (RT)	Real Terms (in the reference date dollars) as opposed to Nominal Terms of Money of the Day
Reserves	Reserves are those quantities of petroleum anticipated to be commercially recoverable by application of
	development projects to known accumulations from a given date forward under defined conditions
RT	Measured from Rotary Table or Real Terms, depending on context
SB	Sequence boundary
SC	Service Contract
scf	Standard cubic feet (measured at 60 degrees F and 14.7 psia)
Sg	Gas saturation
Sgr	Residual gas saturation
Sh	Hydrocarbon saturation
SPE	Society of Petroleum Engineers
sq km	Square kilometres
ss	Subsea
STB	Stock tank barrels
STEO	Short term energy outlook
STOIIP	Stock tank oil initially in-place
s.u.	Fluid saturation unit. e.g. saturation of 80% +/- 10 s.u. equals a saturation range of 70% to 90%
Sw	Water saturation
TAC	Technical assistance contract
TBTU	One trillion (1012) British thermal units
Tcf	Trillion (1012) cubic feet
TJ	Tera (1012) Joules
TOC	Total organic carbon
tpa	Tonnes (metric) per annum
tpd	Tonnes (metric) per day
TS	Transgressive surface
TVD	True vertical depth
Unc.	Unconformity
US$	United States dollar
US$ MM	Million United States dollars
VR	Vitrinite Reflectance
WACC	Weighted average cost of capital
WHFP	Well Head Flowing Pressure
Working interest	A company’s equity interest in a project before reduction for royalties or production share owed to others
	under the applicable fiscal terms.
WP&B	Work programme and budget
WPC	World Petroleum Council
WTI	West Texas Intermediate Crude Oil

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7.0 GLOSSARY OF GEOLOGICAL TERMS

(modified after (1) Dictionary of Geological Terms, American Geological Institute, 1962 and (2) Glossary of Geology; Bates R. L. & Jackson J. A. (eds), American Geological Institute, 1980

Geological Term Definition alluvial fans A cone-shaped deposit of alluvium made by a stream where it runs from hills onto a level plain anticline A fold, generally convex upward, whose core contains older rocks; forms basis of many hydrocarbon traps basement depth A map which illustrates the depth to the top of the basement surface; contour lines are drawn to link points structure maps of equal basement depth; basement usually consists of non-sedimentary rocks, but the term is often used to indicate the base of the prospective section basement highs Elevated structures at the basement level; significant because related structures may exist in the overlying prospective sedimentary section bouguer gravity A map showing the variations in Bouguer gravity over an area; Bouguer gravity is the gravity measurement map corrected for the altitude of the station & the attraction of the rock mass between the station & sea-level braided Refers to a stream where branches form and rejoin producing a braided or net-like pattern; caused by stream dumping some of its sediment load and being forced to create new branches burial modelling Describing the infilling of a sedimentary trough as a function of time and space; used to predict the time of generation, migration and expulsion of oil & gas chronostratigraphy The organisation of rock strata in an area into units on the basis of their age or time of origin; usually includes information on periods of non-deposition or erosion & the lithology and environments of deposition of the sediments clastic Refers to rock or sediment composed mainly of broken fragments which are derived from pre-existing rocks & have been transported some distance from their place of origin; the commonest clastics are sand and shale conglomerate Coarse grained clastic sedimentary rock composed of rounded to subangular fragments larger than 2 mm in diameter set in a fine grained matrix of sand or silt continuously cored An interval where that is cored over the entire interval of interest or in some cases the entire well; the recovered core is invaluable for directly analysing rock properties cratonic fill Refers to sediments deposited in basins or troughs within an area of the earth’s crust which has been stable and relatively undeformed for a prolonged period depth structure map Refers to a map which shows the varying depths to a specific geological horizon or unit; contour lines are drawn to link points with equal depth depth to basement See above for basement depth structure map map EMV Expected monetary value; refers to the computed value of a business opportunity taking into consideration cost, benefit and chance of success; allows different opportunities to be compared fault lineaments A fault is a fracture or fracture zone where there has been displacement of the sides relative to each other parallel to the fracture; the displacement may range from a few cm to several km; faults appear in map view as lineaments or lines feldspars The most widespread mineral group, comprising 60% of the earth’s crust; decompose to form most of the clay in soils, including kaolinite; may be significant in reducing reservoir porosities in sandstones fluvial channel A channel produced by the erosional action of a river or a stream fluvio deltaics Sediments which are deposited in river channels and deltas where the river is close to or reaches a lake or the sea formation volume The conversion factor required to convert a barrel of gas-free oil in a stock tank at the surface into an factor equivalent amount of oil in the reservoir G&G studies Geological and geophysical studies which are conducted to understand some or all of the components of a petroleum system, e.g. source, maturation, migration, reservoir, seal, play, structure, trap graben An elongated tough bounded by faults on its longer sides gravity & magnetic A field operation and the results thereof, in which the earth’s magnetic field or gravity field are measured survey on the surface in some form of regular grid HI Hydrogen index; the ratio of hydrogen atoms in a unit volume of rock to the number of hydrogen atoms in a unit volume of pure water at surface conditions horst A structurally high block generally elongated and bounded by faults on its two longer sides

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Geological Term	Definition
hydrocarbon system	A term which describes the total environment in which oil and gas has been generated, migrated and
	trapped; it can refer to a proven system such as the Viking Graben in the North Sea hydrocarbon system or
	it can be used to describe an unproven system
isochron mapping	Mapping in which the interpreted seismic time interval between mapped geological horizons is shown;
	contour lines are drawn to link points of equal time interval
lacustrine	Pertaining to, produced by or formed in a lake; e.g. lacustrine sediments are deposited in lakes
LCC	Lowest Closing Contour defines the extent of the closure on each Prospect/Lead
lead	A potential trap for hydrocarbons which is not mature for drilling; additional information could make it
	mature it to prospect status e.g. a structure which has sparse seismic control
lenticular	Shaped like a lens; e.g. a lenticular sand body refers to the cross-sectional shape of a sand deposit
metamorphics	Types of rocks which have been altered from their original state by marked changes in temperature,
	pressure or chemical environment, usually at depth within the Earth’s crust
misties	Mismatches in seismic travel times to a specific horizon at two intersecting seismic lines; if large and not
	properly corrected they can throw doubt on the validity of potential hydrocarbon traps
net to gross	The proportion of “pure” or net reservoir section over a defined gross interval
permeability	The capacity of a rock for transmitting a fluid; the unit is the Darcy
play types	The types of traps that may be present to entrap hydrocarbons in an area
pore-clogging	During the drilling of a well, the invasion of drilling fluids can either result in clays being forced into the
	reservoir section or cause clays in reservoir pore spaces to swell or to be altered, resulting in pore-clogging
	and damaging the formation
post-rift	Refers to the ongoing infilling of a sedimentary depression at the end of a rifting phase; post rifting, a more
sedimentary fill	quiescent period usually follows, with more widespread deposition
porosity	The percentage of the volume of a given rock mass which is not made up of solid rock, but of interstices or
	voids between the rock material
probabilistic	A method of calculating the potential distribution of hydrocarbon volumes in a trap using probability
volumetrics	distributions of the key parameters such as gross rock volume, porosity, net to gross etc.; assumes
	lognormal distribution functions
prograding	A seaward advance or building outwards of the shore line into the ocean or a lake
prospect	An undrilled potential trap for hydrocarbons which is mature or close to mature for drilling
rotated fault block	A fault block that has been rotated and tilted so that the beds within the block are now tilted
S2	During the rock-e-val process sediments are heated in the laboratory. The proportion of hydrocarbons that
	can be liberated as the temperature rises are defined as S1, S2 and S3. S1 is the initial amount of
	hydrocarbons that lies with in the pore spaces; S2 is amount of hydrocarbons generated after S1 has been
	released and is the latent potential of the rocks prior to the generation of CO2
seal	An impermeable layer of rocks which does not allow transmission of fluids
seismic	A geophysical technique in which the generation of sound waves near the ground surface or in the ocean
	and the recording of reflected signals from rock interfaces allows a picture of the subsurface structure of the
	earth to be generated
shale	A fine-grained laminated fissile sedimentary rock formed by the consolidation of clay
source rock	A map which shows for a specific source rock the level of maturity of the organic material in the rocks over
maturity maps	an area; contour lines are drawn linking points of equal maturity
spill point	A point on a hydrocarbon trap where if the structure is filled to that level with hydrocarbons, any additional
	hydrocarbons which move to the structure will spill out of the trap
stratigraphy	The science of rock strata; the original succession of strata, their age relations, form, distribution, lithologic
	composition, fossil content, geophysical & geochemical properties; their interpretation in terms of
	environment, mode of origin, geologic history.
syn-rift fill	The sediments deposited during a period of active rifting; sediment type and distribution is profoundly
	affected by the horsts and grabens which develop during the rifting
tectonic elements	Tectonics- a branch of geology dealing with the broad architecture of the outer part of the earth, i.e. the
	regional assembling of structural or deformational features, a study of their mutual relations, origin and
	historical evolution
	Tectonic elements- The key features that define the architecture of the outer part of the earth; including but
	not limited to faults, basins and structural highs
tectonic evolution	The development through geological time of an area in regard to the large-scale architecture of its crustal
	blocks
tectonic setting	The large scale architecture of crustal blocks in an area which provides a context for the development and
	history of sedimentary basins or troughs

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Geological Term	Definition
thermal gradient	The rate of change of temperature with distance; for the earth, it is referred to as geothermal gradient, i.e.
	rate of change of temperature with depth below the surface of the earth
time structure maps	Refers to a map which shows the varying seismic travel-time to a specific geological horizon or unit;
	contour lines are drawn to link points with equal depth
time thickness maps	See isochron maps above
TOC	Total organic carbon- percentage of rock which comprises organic carbon
transtensional	Structuring which combines the two elements of extension and strike-slip motion
structuring
trap	Trap- any barrier to the upward movement of oil and or gas allowing either or both to accumulate; it
	includes both the reservoir rocks and the overlying or updip impermeable sealing rocks
	Structural trap- in this case the trap or “container” is formed entirely by folding or faulting of beds to create
	the impermeable barriers to further migration
	Stratigraphic trap- at least in part. the trap is formed by a lateral change in the reservoir permeability, e.g. a
	reservoir sand being replaced by a shale
unconformity	A surface of erosion or no-deposition that separates younger strata from older rocks
velocity surveys	Measurements of seismic travel-time recorded at various depths in a well to allow seismic reflectors to be
	associated with specific geological boundaries in the rock sequence

Technical Expert’s Report Xstate Tunisian & Italian Exploration Assets

Page 79

11. FINANCIAL SUMMARY

11.1 Introduction

This section sets out the Historical and Pro Forma Historical Financial Information of the Company.

The Historical and Pro Forma Historical Financial Information has been prepared by the Company. The Directors are responsible for the inclusion of all Historical and Pro Forma Historical Financial Information in this Prospectus.

KPMG Transaction Services has prepared an Investigating Accountant’s Report in respect of the Pro Forma Historical Financial Information. A copy of this report is set out in Section 12.

The Historical Financial Information comprises:

(a) the summary balance sheet of XState at 31 December 2009 set out in Section 11.3 below; and
(b) the summary income statements and statements of cash flows of XState for the years ended 31 December 2008 and 2009 set out in Section 11.4 below.

The Historical Financial Information has been extracted from the audited annual financial statements of XState for the year ended 31 December 2009. The audit opinion on those financial statements was unqualified.

The Pro Forma Historical Financial Information comprises the summary Pro Forma Historical Balance Sheet of XState at 31 December 2009 and has been prepared to show the effect on the summary balance sheet at 31 December 2009 of acquiring Bombora and subsequent capital raisings and use of proceeds, as if they had occurred on that date. Information relating to Bombora is at 31 March 2010, as the majority of Bombora financial transactions occurred in the March quarter.

The Historical and Pro Forma Historical Financial Information has been prepared in accordance with Australian Accounting Standards (including Australian Accounting Interpretation) adopted by the Australian Accounting Standards Board (AASB). The Historical and Pro Forma Historical Financial Information is presented in an abbreviated form insofar as it does not include all the disclosures and notes required in an annual financial report prepared in accordance with AASBs and the Corporations Act.

11.2 Pro Forma Adjustments

The Company is proposing to acquire 100% of Bombora (subject to approval by Shareholders at the General Meeting to be held on 10 June 2010). Bombora has rights to oil and gas projects located in Italy and Tunisia. Details of these projects are contained in Section 8.2 of this Prospectus. An Independent Technical Report is contained in Section 10, and Solicitor’s Reports on the permits are contained in Sections 13 and 14 of this Prospectus.

On the basis that Shareholder approval of the Acquisition is obtained, the following transactions will occur (all which are subject to Shareholder approval) which will directly impact on the financial statements of the Company. These are displayed as Notes to the Pro Forma Balance Sheet set out in Section 11.3.

Note 1

The Company will issue 11,660,000 Shares (on a post-Consolidation basis) at $0.20 each to acquire 100% of the Bombora Shares. This reflects a total consideration of $2,442,000.

Note 2

The Company will issue 5,000,000 Shares at $0.20 each plus 2,500,000 Options issued with the subscription of Shares under the Offer for no additional consideration to raise $1,000,000 in working capital. The Options will be listed and, exercisable at $0.24 each on or before 30 June 2013. The Company will issue 2,500,000 Shares at a deemed issue price of $0.20 each together with 1,250,000 Options for conversion of the Convertible Notes (being Note 3). The Options will be listed and exercisable at $0.24 each on or before 30 June 2013.

Note 3

Bombora will issue Convertible Notes in exchange for a total of $500,000 for working capital. If the Company successfully completes the Acquisition, the Convertible Notes will convert into 2,500,000 Shares and 1,250,000 Options on the same terms referred to in Note 2 above

Note 4

The Company will reward existing Shareholders via the Entitlements Issue of one (1) Option for every two (2) Shares held on the Entitlements Issue Record Date, such Options to be issued for $0.01 each, and to otherwise have the same terms as the Options in Notes 2 and 3 and as set out in Section 17.2 of this Prospectus. The Entitlement Issue will be underwritten, and will raise $91,800 in working capital.

Note 5

The Option Placement will consist of 15,000,000 Options which will be issued to certain persons as directed by the Lead Manager at $0.01 each to raise $150,000 in working capital including:

(a) 5,000,000 Options under the Option Placement (on the terms set out in section 17.2 of this Prospectus) will be issued to Mr Gary Jeffery (2,500,000) and Mr John Begg (2,500,000) (or their nominees) at $0.01 each to raise $50,000. Messrs Begg and Jeffery are Directors and shareholders of Bombora. Subject to the Acquisition taking place, Mr Begg will assume the role of Non Executive Chairman of the Company, and Mr Jeffery will assume the role of Managing Director of the Company;
(b) Noteholders (refer 3 above) shall have the right to apply and subscribe for 2,500,000 Options at $0.01 each to raise $25,000 (as part of the Option Placement) as consideration (and in lieu of interest payments) under the Convertible Note;
(c) Argonaut shall have the right to apply and subscribe for 2,500,000 Options as consideration for the provision of interim finance at $0.01 per Option to raise $25,000;
(d) 5,000,000 Options shall be allocated to persons as determined by the Lead Manager.

Note 6

The estimated costs associated with the Acquisition of Bombora and related transactions are approximately $260,000.

The pro forma adjustments to reflect these transactions are shown in the table below.

11.3 Summary Historical and Pro Forma Historical Balance Sheet of XState at 31 December 2009

ASSETS Cash and cash equivalents Trade and other receivables Total Current Assets Acquisition, Exploration and Evaluation Expenditure Total Assets Liabilities Bank Overdrafts Trade and other payables Employee benefits Convertible Notes Total Current Liabilities Total Liabilities Net Assets Equity Share Capital Reserves Retained Earnings Total Equity		HISTORICAL 31 DECEMBER 2009 (AUDITED) 3,021,991 25,147	BOMBORA 31 MARCH 2010 (UNAUDITED) OTHER PRO FORMA ADJUSTMENTS (REFER ABOVE) 150,000 (5) 1,000,000 (2) 91,800 (4) (260,000) (6) 500,000 (3) 5,200 - 5,200 553,952 (553,952) () 2,332,463 (1) 559,152 5,663 - - 500,000 (3) (500,000) (2) 5,663 5,663 553,489 601,000 (601,000) () 2,332,000 (1) 1,500,000 (2) - 91,800 (4) 150,000 (5) (47,511) (260,000) (6) 47,511 (*) 553,489	PRO FORMA 31 DECEMBER 2009 (UNAUDITED) 4,503,791 30,347
		3,047,138		4,534,138
		-		2,332,463
		3,047,138		6,866,601
		77,151 1,288 -		5663 77,151 1,288 -
		78,439		84,102
		78,439		84,102
		2,968,699		6,782,499
		31,884,265 (349,952) (28,565,614)		35,716,265 (108,152) (28,825,614)
		2,968,699		6,782,499

Consolidation Adjustment to reflect 100% acquisition of Bombora
11.4 Summary Historical Income Statements and Statements of Cash Flows of XState for the year ended 31 December 2009

(a) Summary Historical Income Statements

Continuing operations Other income Administrative expenses Other expenses Impairment of exploration expenditure Results from operating activities Finance income Finance expenses Net finance income Loss before income tax Income tax expense Loss from continuing operations Loss for the period Other comprehensive (expense) / income Foreign currency translation difference of foreign operations Other comprehensive (expense) / income for the period, net of income tax Total comprehensive expense for the period Loss attributable to owners of the Company Total comprehensive expense attributable to owners of the Company	12 Months 12 Months 31 December 2008 31 December 2009 (AUDITED) (AUDITED) - 289 (332,547) (258,917) (541,356) (169,964) (1,984,424) -
	(2,858,327) (428,592)
	882,480 84,763 - (28,814)
	882,480 55,949
	(1,975,847) (372,643) - -
	(1,975,847) (372,643)
	(1,975,847) (372,643)
	(506,350) -
	(506,350) -
	(2,482,197) (372,643)
	(1,975,847) (372,643)
	(2,482,197) (372,643)

(b) Summary Historical Statements of Cash Flows

Cash flows from operating activities Cash paid to suppliers and employees Net cash used in operating activities Cash flows from investing activities Interest received Payments for exploration, evaluation and development Net cash (used in) / from investing activities Cash flows from financing activities Receipts from environmental bonds 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	12 Months 12 Months 31 December 2008 31 December 2009 (AUDITED) (AUDITED) (835,808) (382,163)
	(835,808) (382,163)
	156,238 85,078 (996,754) -
	(840,516) 85,078 117,324 -
	117,324 -
	(1,559,000) (297,085) 4,684,429 3,347,890 222,461 (28,814)
	3,347,890 3,021,991

12. INVESTIGATING ACCOUNTANT’S REPORT

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KPMG Transaction Services (Australia) Pty Limited Australian Financial Services Licence No. 245402 235 St Georges Terrace Perth WA 6000

ABN: 65 003 891 718 Telephone: +61 8 9263 7171 Facsimile: +61 8 9263 7129 www.kpmg.com.au

GPO Box A29 Perth WA 6837 Australia

The Directors XState Resources Limited Level 2, 45 Stirling Highway Nedlands WA 6009

26 May 2010

Dear Sirs

Investigating Accountant’s Report and Financial Services Guide

Investigating Accountant’s Report

Introduction

KPMG Transaction Services (Australia) Pty Limited (“KPMG Transaction Services”) has been engaged by XState Resources Limited (“XState”) to prepare this report for inclusion in the prospectus to be dated 26 May 2010 (“Prospectus”), and to be issued by XState, in respect of the proposed issue of 5 million Shares in XState at $0.20 per share, plus 2.5 million additional Options and the acquisition of 100% of Bombora Energy Limited.

Expressions defined in the Prospectus have the same meaning in this report.

Scope

KPMG Transaction Services has been requested to prepare a report covering the pro forma historical financial information described below and disclosed in the Prospectus.

The pro forma financial information is presented in an abbreviated form in the Prospectus insofar as it does not include all of the disclosures required by the Australian Accounting Standards applicable to annual financial reports prepared in accordance with the Corporations Act 2001.

Review of Pro Forma Historical Financial Information

The pro forma historical financial information comprises the pro forma unaudited balance sheet of XState as at 31 December 2009, as set out in section 11.3 of the Prospectus (the “Pro Forma Historical Financial Information”).

The Pro Forma Historical Financial Information has been derived from the historical balance sheet of XState extracted from the audited financial statements for the year ended 31 December 2009 (the “Historical Financial Information”), after adjusting for the pro forma transactions and/or adjustments described in section 11.2 of the Prospectus.

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

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XState Resources Limited Investigating Accountant’s Report and Financial Services Guide 26 May 2010

The financial statements of XState for the year ended 31 December 2009 were audited by KPMG in accordance with Australian Auditing Standards. The audit opinions issued to the members of XState relating to those financial statements were unqualified

For the purposes of preparing this report we have reviewed the Pro Forma Historical Financial Information in order to state whether, on the basis of the procedures described, anything has come to our attention that causes us to believe that the Pro Forma Historical Financial Information is not prepared or presented fairly, in all material respects, on the basis of the pro forma transactions and/or adjustments described in section 11.2 of the Prospectus, and in accordance with the recognition and measurement principles prescribed in Australian Accounting Standards (including the Australian Accounting Interpretations), and accounting policies adopted by XState.

We have conducted our review in accordance with Australian Auditing Standards applicable to review engagements. We made such enquiries and performed such procedures as we, in our professional judgement, considered reasonable in the circumstances, including:

a review of the extraction of Historical Financial Information of XState from the audited financial statements of XState for the year ended 31 December 2009;
analytical procedures on the Pro Forma Historical Financial Information of XState;
a review of the pro forma transactions and/or adjustments made to the Historical Financial Information of XState;
a review of XState’s work papers, accounting records and other documents;
a comparison of consistency in application of the recognition and measurement principles in Australian Accounting Standards (including the Australian Accounting Interpretations), and the accounting policies adopted by XState; and
enquiry of directors, management and others.

The procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Directors’ responsibilities

The directors of XState are responsible for the preparation and presentation of the Pro Forma Historical Financial Information, including the determination of the pro forma transactions and/or adjustments.

The directors’ responsibility includes establishing and maintaining internal controls relevant to the preparation of the financial information in the Prospectus that is free from material misstatement, whether due to fraud or error.

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XState Resources Limited Investigating Accountant’s Report and Financial Services Guide 26 May 2010

Review statements

Review statement on the Pro Forma Historical Financial Information

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the Pro Forma Historical Financial Information comprising the pro forma historical balance sheet of XState as at 31 December 2009, as set out in section 11.3 of the Prospectus, is not prepared or presented fairly, in all material respects, on the basis of the pro forma transactions and/or adjustments described in section 11.2 of the Prospectus, and in accordance with the recognition and measurement principles prescribed in Australian Accounting Standards (including the Australian Accounting Interpretations), and accounting policies adopted by XState.

Independence

KPMG Transaction Services does not have any interest in the outcome of this issue, other than in connection with the preparation of this report and participation in due diligence procedures for which normal professional fees will be received. KPMG is the auditor of XState and from time to time, KPMG provides XState with certain other professional services for which normal professional fees are received.

General advice warning

This report has been prepared, and included in the Prospectus, to provide investors with general information only and does not take into account the objectives, financial situation or needs of any specific investor. It is not intended to take the place of professional advice and investors should not make specific investment decisions in reliance on the information contained in this report. Before acting or relying on any information, an investor should consider whether it is appropriate for their circumstances having regard to their objectives, financial situation or needs.

KPMG Transaction Services has consented to the inclusion of this Investigating Accountant’s Report in the Prospectus in the form and context in which it is so included, but has not authorised the issue of the Prospectus. Accordingly, KPMG Transaction Services makes no representation regarding, and takes no responsibility for, any other statements, or material in, or omissions from, the Prospectus.

Yours faithfully

==> picture [123 x 46] intentionally omitted <==

Matt Kelly Director

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KPMG Transaction Services (Australia) Pty Limited Australian Financial Services Licence No. 245402 235 St Georges Terrace Perth WA 6000 GPO Box A29 Perth WA 6837 Australia

ABN: 65 003 891 718 Telephone: +61 8 9263 7171 Facsimile: +61 8 9263 7129 www.kpmg.com.au

Financial Services Guide

Dated 26 May 2010

KPMG Transaction Services (Australia) Pty Limited

ABN 65 003 891 718, Australian Financial Services Licence Number 245402 ( KPMG or we or us or our as appropriate) has been engaged by XState Resources Limited ( Company ) to provide an Investigating Accountant’s Report ( Report ) in relation to their capital raising ( Transaction ) for inclusion in the Prospectus dated 26 May 2010 ( Document ) prepared by the Company.

Purpose of this Guide

This Guide is designed to help retail clients to decide how to use our Report. It includes information about:

who we are and how we can be contacted
the services we are authorised to provide under our licence
how we and our staff are paid
any relevant associations or relationships we have

Our responsibility to you

We provide financial product advice when engaged to prepare a report in relation to a transaction relating to one of these types of financial products. You have not engaged us directly but have received a copy of the Report because of your connection to the Transaction.

We are responsible and accountable to you for ensuring that there is a reasonable basis for the conclusions in our Report.

General Advice

Our report only contains general advice, because it has been prepared without taking into account your personal objectives, financial situation or needs.

You should consider the appropriateness of the general advice in our Report having regard to your circumstances before you act on our Report.

how complaints are dealt with; and
the compensation arrangements we have in place.

The Document contains information about significant benefits, risks, fees and other charges and other information about the Transaction.

Financial services we are licensed to provide

We hold an Australian Financial Services Licence, which authorises us to provide financial product advice in relation to:

Interests in managed investments schemes (excluding investor directed portfolio services)
Securities (such as shares and debentures).

You should also consider the other parts of the Document before making any decision in relation to the Transaction.

Fees we may receive

We charge fees for preparing reports. These fees will usually be agreed with, and paid by, the financial product issuer. Fees are agreed on either a fixed fee or a time cost basis. In this instance, XState Resources Limited has agreed to pay us approximately $19,000 for preparing the Report.

KPMG and its officers, employees, representatives, related entities and associates will not receive any other fee or benefit in connection with the provision of the Report.

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Xstate Resources Limited Investigating Accountant’s Report and Financial Services Guide 26 May 2010

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Referrals

We do not pay commissions or provide any other benefits to any person for referring customers to us in connection with the reports that we are licensed to provide.

Associations and relationships

Through a variety of corporate and trust structures KPMG is controlled by and operates as part of KPMG’s Australian professional advisory and accounting practice (the KPMG Partnership ). Our directors may be partners in the KPMG Partnership.

From time to time KPMG, the KPMG Partnership and related entities ( KPMG entities ) may provide professional services, including audit and tax services, to companies and issuers of financial products in the ordinary course of their businesses.

KPMG entities have, over the past two years, provided a range of audit and tax services to XState Resources Limited for which professional fees have been received. No KPMG entity has any interest in the Company or any other interested party to the Transaction.

Remuneration or other benefits received by our representatives

KPMG officers, employees and representatives receive a salary or a partnership distribution from the KPMG Partnership. Our employees are eligible for bonuses based on overall productivity but not directly in connection with any engagement for the provision of a report.

written complaint, we will advise you in writing of our response to your complaint.

External complaints resolution process

If we cannot resolve your complaint to your satisfaction within 45 days, you can refer the matter to the Financial Ombudsman Service (FOS) of which we are a member. FOS is an independent company that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial services industry.

Further details about FOS are available at the FOS website www.fos.org.au or by contacting them directly at:

Address: Financial Ombudsman Service Limited, GPO Box 3, Melbourne Victoria 3001 Telephone: 1300 78 08 08 Facsimile: (03) 9613 6399 Email: [email protected].

The Australian Securities and Investment Commission also has a freecall infoline on 1300 300 630 which you may use to obtain information about your rights.

Compensation arrangements

KPMG has professional indemnity insurance cover as required by the Corporations Act.

Contact details

You may contact us using the contact details set out at the top of the letterhead on the first page of this Guide.

Complaints resolution

Internal complaints resolution process

If you have a complaint, please let us know. Formal complaints should be sent in writing to The Complaints Officer, KPMG, PO Box H67, Australia Square, Sydney NSW 1213.

When we receive a written complaint we will record the complaint, acknowledge receipt of the complaint within 5 days and investigate the issues raised. As soon as practical, and not more than 45 days after receiving the

13. SOLICITORS’ REPORT ON PERMITS – TUNISIA

CAID ESSEBSI & PARTNERS

Law Firm

Established since 1961

14, Avenue Alain Savary - 1002 Tunis, Tunisie

Tel: (+216) 71 78 56 11 Fax: (+216) 71 78 39 13

Email : [email protected] Web site : www.ceplaw.com.tn

To:

The Board of Directors

XState Resources Limited

Level 2, 45 Stirling Highway, Nedlands, Western Australia 6009

Australia

Our Ref: G140 13 May 2010

DearSirs

Solicitors’ report on Tunisian petroleum permits

1. SCOPE

We, Caid Essebsi and Partners Law Firm - Tunisia, have been requested to prepare this report ( “Report” ) on the following two Tunisian petroleum permits in which Bombora Energy Limited ( “Bombora” ) has entered into a farm in agreement to acquire an interest:

(a) the Chorbane exploration permit and production sharing contract ( “Chorbane Permit” ); and
(b) the Kerkouane exploration permit and production sharing contract ( “Kerkouane Permit” );

(together, “Permits” ).

The area covered by the Chorbane Permit is located onshore central Tunisia.

The area covered by the Kerkouane Permit is located offshore northeast Tunisia and is

contiguous to the Italian Pantelleria Permit which is located offshore southern Italy.

We understand that Bombora’s interests in the Permits will be acquired through the performance of obligations in two farm in agreements between Bombora and Alpine Oil & Gas Pty Limited ( “AOG” ), a wholly owned subsidiary of AuDAX Resources Ltd, an Australian company (“ AuDAX ”). As the farm in agreements are both governed by the laws of Western Australia, a legal opinion in respect of these agreements falls outside the scope of our Report.

2. SEARCHES

For the purposes of giving this Report we have examined the following documents for each Permit as follows:

A. Chorbane Permit

(a) a “Convention related to the exploration and exploitation works of hydrocarbons deposits” in respect of the Chorbane Permit and its annexes concluded between the Tunisian State, Entreprise Tunisienne d’activités Petrolières ( “ETAP” ) and AOG as contractor;
(b) a Production Sharing Contract ( “PSC” ) concluded between ETAP and AOG as contractor

(the two documents listed in (a) and (b) above were duly signed on 18 September 2009 (and registered before the Tax Office));

(c) a letter dated 18 September 2009 addressed from the Minister of Industry to AOG approving the PSC concluded between ETAP and AOG as contractor;
(d) Decree No. 2009-3790 dated 21 December 2009, approving the Convention related to the Chorbane hydrocarbons exploration permit and its annexes;
(e) an order ( “Arrêté” ) of the Minister of Industry and Technology ( “Minister” ) dated 3 March 2010 granting the Chorbane hydrocarbons permit to ETAP as titleholder and AOG as contractor and published in the Official Gazette N° 20 dated 9 March 2010);
(f) an executed version of the Chorbane Farm in Agreement between AOG and Bombora; and
(g) a facsimile from the Department of Energy ( “DGE” ) dated 17 February 2010, addressed to AOG, approving the extension of the initial period of the permit for one year, after having obtained the favourable advice of the Hydrocarbons Consultative Committee, to 12 July 2011. An Order of the Minister of Industry is expected to be published in the Official Gazette to confirm the extension period.

B. Kerkouane Permit

(a) a Convention and Annexes granting authorization for exploration for and exploitation of hydrocarbon deposits dated 9 May 2002 between the Tunisian State (Granting Authority) ( “G.A.” ), ETAP and Anschutz Overseas Tunisia Corporation as contractor;
(b) a PSC in relation to the Kerkouane Permit executed on 9 May 2002 by ETAP and Anschutz Overseas Tunisia Corporation as contractor;
(c) an Arrêté of the Minister dated 10 August 2002, published in the Official Gazette N° 68 dated 20 August 2002 granting the Kerkouane Permit to ETAP as titleholder and Anschutz Overseas Tunisia Corporation as contractor;
(d) Decree N° 2002-1877 dated 12 August 2002 published in the Official Gazette N° 69 dated 23 August 2002 approving the Convention related to the Kerkouane Permit and the annexes thereto;
(e) Amendment No. 2 to the Convention and its annexes governing the “Kerkouane” Permit executed on 29 March 2010 by the Tunisian State, ETAP and AOG, duly signed and registered before the Tax Office. This Amendment shall be ratified by law;
(f) an executed version of the Kerkouane Farm in Agreement between AOG and Bombora;
(g) a facsimile from the DGE dated 28 October 2009, addressed to AOG, approving the extension of the initial period of the permit, after having obtained the favourable advice of the Hydrocarbons Consultative Committee, to 22 February 2011. An Order of the Minister of Industry is expected to be published in the Official Gazette to confirm the extension period

(the abovementioned documents listed in Sections (A) and (B) are hereinafter referred to as “Material Contracts” ).

As mentioned above, we have reviewed a farm in agreement in respect of the Chorbane Permit and a farm in agreement in respect of the Kerkouane Permit (each of which has been executed by AOG and Bombora) but, as these are governed by the laws of Western Australia, we are unable to comment upon the validity of these documents.

Except as mentioned above, we have not examined any agreements, instruments, records or other documents whatsoever relating to AOG or any of its affiliates and have not made any other enquiries or investigations concerning AOG, Bombora or any other party in connection with the giving of this Report.

3. OPINION

As a result of our searches and enquiries, we are of the view that, as at the date of this Report:

(a) ( Good standing ): the Permits are in good standing;
(b) ( Company’s Interest ): AOG interests in the Permits arise pursuant to the Material Contracts summarised in Section 2 above;
(c) ( Third Party Interests ): Except in respect of ETAP as titleholder and AOG as contractor, there are no third party interests, including encumbrances, in relation to the Permits;
(d) ( Transfer of Interest ): a transfer of interest in the Permits to Bombora will depend upon Bombora complying with the applicable terms of the farm in agreements referred to in Section 5 below and on the granting of all necessary consents and/or waivers of and/or releases by any state, governmental, regulatory or other body having or lawfully claiming jurisdiction over the subject matter of the relevant Permit(s) in respect of the transfer of the interest in the relevant Permit(s) to Bombora (including those set out in Section 4.D below).
(e) ( Hydrocarbon authority consent ): we express no opinion as to whether the state, governmental, regulatory or other body having or lawfully claiming jurisdiction over the

subject matter of the relevant Permit(s) (or the relevant individual authorised to make decisions on behalf of such body) will grant the necessary consents and/or waivers and/or releases in respect of the transfer of the interests in the Permits, or on whether XState Resources Limited will ultimately acquire any interest in the Permits (or any thereof).

4. DESCRIPTION OF THE PERMITS

A. Location and Regulation

The Chorbane Permit is located onshore central Tunisia and the Kerkouane Permit is located offshore northeast Tunisia in the southern Mediterranean Sea. Each of these areas is regulated by:

a) the Hydrocarbons Code as promulgated by Law No. 99-93 of 17 August 1999, as modified and completed by law No. 2002-23 of 14 February 2002, Law No. 2004-61 dated 27 July 2004 and law no. 2008-15 dated 18 February 2008 (as well as all subsequent laws and decrees passed for the application of the Hydrocarbons Code) (the “H.C.” ); and
b) a Convention related to the Chorbane Permit and Kerkouane Permit, as applicable, as indicated in Section 2 (A) and (B) above.

B. Duration and Work Obligations

(i) General principles

(a) Exploration permits are issued by the Minister with an initial maximum duration of 5 years (article 17.2 of the H.C) from their effective date. The Chorbane and Kerkouane Permits were each originally approved with a three year initial term (but see below in respect of the Kerkouane Permit).

In the event that the work obligations required under the relevant permit are not wholly completed by the end of such initial period, the titleholder of the permit may apply to the DGE for a further two year extension of the permit term to allow such work obligations to be completed if approved by the Tunisian Consultative Committee of Hydrocarbons and by an Arrêté of the Minister to be published in the Official Gazette. This application process may be repeated once more (articles 30.1 and 30.2 of the H.C).

The Kerkouane Permit is an exception to the above rule. The contractor obtained the approval of the G.A. to extend the initial three year period of validity of the permit twice, each time for three (3) additional years, resulting in an initial term lasting from 2002 to 2011 (Amendment N° 1 dated 26 July 2006 and Amendment N° 2 dated 29 March 2010).

(b) As set out above, each period of the Permit is capable of three extensions of one year each or one extension of two years plus one year.

An application for a further extension of the Permit period of one year must be filed with DGE by both ETAP and AOG (titleholder and contractor respectively). Generally, the application process lasts three months. Applicants must provide, among other things, documents evidencing and justifying the works already accomplished, the reason for extension and the works proposed to be done during the extension. The DGE will then make a determination on the application at its sole discretion based on the documents and evidence presented.

(c) During the period of validity of the Permit, the contractor shall carry out the agreed minimum work programme. If the contractor (being AOG in relation to the Permit), at the end of period of validity of the Permit, has not completed its commitments related to the works for the period under consideration, it shall be required to pay to the G.A. the amount necessary to complete or achieve such exploration work commitments. Such amount as well as the condition of its payment will be notified by the G.A. to the contractor or determined on a lump sum basis by the Specifications Book attached to the Convention.
(d) Articles 39 to 59 of the H.C. describe the conditions and the procedures to obtain an Exploitation Concession. If the titleholder makes an economic exploitable discovery, then he must file an application and carry out an Assessment Program. The typical work to be performed under an Assessment Program includes, among other things, completion of seismic works, drilling an appraisal well and the performance of studies. Once the assessment works under such Assessment Program are completed, if the titleholder (i.e. ETAP, in respect of the Permits) assumes that the discovery is economically exploitable, then it will have right to an Exploitation Concession.

If the titleholders intend to convert the permit into an Exploitation Concession, then it should be noted that a fee in the order of one dinar two hundred and twenty nine millimes (1,229.00 TND) must be paid per elementary perimeter unit of four square kilometres (as set out in article 13 of the H.C.) ( “Elementary Perimeter” ).

The titleholder must file a request for an Exploitation Concession at least two months before the expiry of the Permit (including, without limitation, in such request a development plan, an economic study, a detailed estimation of the costs). Finally, an Exploitation Concession will be granted and established by an Order of the Minister of Industry published in the Official Gazette.

Pursuant to Article 48 of the Hydrocarbons Code, the Exploitation Concession is granted by Arrêté of the Minister and published in the Tunisian Official Gazette ( “JORT” ). The Exploitation Concession is granted for a period of thirty (30) years from the date of publication in the JORT of the Arrêté establishing such concession.

(e) If the work obligations are performed and there is no commercial discovery, the contractor will have the opportunity to seek a further extension by renewing the validity period of the Permit.

By application of the H.C and the Particulars attached to each Convention (articles 5 and 9), ETAP and AOG as contractor may renew the Permits twice, for three years each time, with a work obligation of one (1) exploration well in each three year period.

(ii) Chorbane

(a) Term

Pursuant to the Convention and its annexes, duly signed on 18 September 2009, the original duration of Chorbane Permit has been fixed at 3 years.

According to Article 1 of the Order of the Minister dated 3 March 2010 and published at the Official Gazette dated 9 March 2010, the Chorbane Exploration Permit was granted for a period of 3 years, starting the day following the expiry of the prospecting permit; i.e. as of 13 July 2007 with an acreage of 2428 km² (607 Elementary Perimeters).

The validity of the initial period of the Permit expires on 13 July 2010. AOG received a facsimile from DGE dated 17 February 2010 approving the extension of the initial period of the permit by one year, after having obtained the favourable advice of the Hydrocarbons Consultative Committee, to 12 July 2011. As explained, an Order of the Minister of Industry is expected to be published in the Official Gazette to confirm the extension period.

The validity of the initial period of the Permit may be extended for two (2) more years subject to the approval of the Hydrocarbons Consultative Committee and an order of the Minister confirming the extension.

(b) Work Obligations

Article 3 of the Particulars annexed to the Convention, establishes the minimum work commitments to be carried out during the validity period of the Permit, that is by 12 July 2011 (subject to any further extension that is duly approved). It provides that during the first period of the validity of the Permit, which is fixed at 3 years, the contractor agrees to carry out the following minimum work program consisting of the drilling of one exploration well to a minimum depth of 2,000 metres at an estimated cost of US$3.5 million.

We have not seen evidence of the current status of these work obligations to date because this is a recent permit and because an application for an extension of the validity period of the Permit (to 12 July 2011) has been filed with and accepted by the Hydrocarbons Consultative Committee and DGE.

In the case of a first renewal of the Permit, Article 5 of the Particulars requires the drilling of one exploration well to a minimum depth of 2,500 metres at an estimated cost of US$3.8 million.

For a second renewal of the Permit, there is the same requirement as the first renewal with an equivalent estimated cost.

(iii) Kerkouane

(a) Term

Pursuant to the Convention and its annexes, duly signed on 9 May 2002, the original duration of the Kerkouane Permit was fixed at 3 years. As set out in 4.B(i) above, this term has since been extended several times for further, successive three year periods.

According to the Order of the Minister of Industry dated 10 August 2002, granting institution of the Kerkouane exploration permit, the duration of 3 years commenced on the day following the expiry of the prospecting permit (i.e. from 23 August 2000 until 22 August 2003).

In 2003, the initial validity period of the Permit was extended for 18 months to 22 February 2005 (pursuant to an Order of the Minister of Industry dated 5 September 2003).

An Amendment No. 1 to the convention was executed relating to an acquisition and extension of the duration for 3 years. We do not have a copy of the aforesaid Amendment No. 1, which was ratified by Decree No. 2006-3060, dated 20 November 2006 and published in the Official Gazette dated 24 November 2006.

Following a request for a new extension of the validity period, an Order of the Minister dated 19 February 2007 extended the first period of validity of the Permit for a further 3 years (from 23 February 2005 to 22 February 2008).

The parties to the Permit then concluded Amendment No.2 to the Kerkouane Convention, in order, among other matters detailed below, to approve the extension of the validity period of the Permit for a period of 3 years from 23 February 2008 to 22 February 2011 and to modify the work program to be performed during the extension period. This Amendment N° 2 must be ratified by law, and to this end, an order of the Minister is expected to be published in the Gazette to confirm the extension period.

The process of ratification by law of the aforesaid Amendment N° 2 by publication in the Gazette may take several months. If the company intends to begin the works before the publication of the law and of the Order, it is customary to obtain a letter from the Minister of Industry authorizing AOG to undertake the works and confirming that the realisation of these works will be considered as a realisation of the works program as established in the Amendment No. 2 and that the costs invested will be admitted to the account of the company.

(b) Work Obligations

Article 3 of Amendment No.2 to the Convention provides for the variation of the works program to be carried out by AOG before 22 February 2011. AOG is required to complete 450 Km² of 3D seismic acquisition and to drill an exploration well to the shallower of the Jurassic or a depth of 3000 m with an estimated cost of US$ 10,800,000.

In the case of a first renewal of the Permit, Article 5 of the Particulars annexed to the Convention requires the drilling of one exploration well to a minimum depth of 2500m at an estimated cost of US$4,000,000. An equivalent obligation exists on a second renewal of the Permit.

AOG has provided to the G.A a bank guarantee of US$ 1,500,000.

C. Interests under the Permits

The Tunisian Hydrocarbons Code provides for two systems:

(a) either a Production Sharing Agreement system; or
(b) a Joint Venture Agreement system.

Operations pursuant to each of the Chorbane and Kerkouane Permits are governed by Production Sharing Agreements, in which ETAP (which is a 100% State-owned company) is the titleholder and AOG is the contractor.

With regard to the Kerkouane Permit, Anschutz Overseas Tunisia Corporation was the initial contractor under the Permit and PSC. Anschutz Overseas Tunisia Corporation was subsequently re-named Grove Energy Limited and Grove Energy Limited assigned its entire interest as contractor under the Kerkouane Permit and PSC to AOG by way of deed of assignment (as set out below, the operative document for the transfer of interests under a Permit) on 30 April 2008, duly approved by the Hydrocarbons Consultative Committee.

We have been advised by the DGE that a deed of assignment has been concluded on 29 March 2010 between AOG, as assignor, and AuDAX, as assignee, and that the aforementioned deed

has been lodged with DGE. We did not examine such deed or the acknowledgment of its receipt by DGE.

D. Transfer of interests under the Permits

If Bombora intends to acquire interests in the said Permits, a deed of assignment must be concluded between ETAP (as titleholder), AOG (as assignor) and Bombora (as assignee), by virtue of which AOG assigns and Bombora accepts the specified rights, obligations and interests in the Permits and the applicable PSA.

In order that the assignment becomes effective, the approval of ETAP, DGE and positive confirmation from the Hydrocarbons Consultative Committee must be obtained before an Order of the Minister will be published in the Official Gazette to confirm the assignment.

There are no signs that the Tunisian government will nationalize and/or expropriate any private properties and ownership in hydrocarbon permits. The Tunisian government has been moving towards the liberalization of the Tunisian economy. However, if it decides to nationalize and/or expropriate, the government may indemnify the harmed entity.

5. BOMBORA’S INTEREST IN THE PERMITS

(a) Bombora does not currently hold any registered legal title under either the Chorbane Permit or the Kerkouane Permit.
(b) The Chorbane Permit is currently held in the name of AOG and we believe is the subject of the farm in agreement between AOG and Bombora, pursuant to which Bombora may earn a 10% interest in and under the Chorbane Permit.
(c) The Kerkouane Permit is currently held in the name of AOG and we believe is subject to a farm in agreement between AOG and Bombora, pursuant to which Bombora may earn a 10% interest in and under the Kerkouane Permit. Subject to the acquisition of such 10% interest in the Kerkouane Permit, Bombora will have the option to acquire a further 10% in that part of the permit area which falls outside the Lambouka prospect.
(d) It is noted that, under each of the farm in agreements set out above, AOG and Bombora agreed that AOG may assign an interest in the relevant Permit to one or more third parties to the extent that such interest is not the subject of the relevant farm-in agreements set out above.
(e) As noted in Section 4.C above, it is understood that an assignment of interests under the Kerkouane Permit by AOG to AuDAX may be ongoing or have been completed.

6. SCOPE OF THE REPORT AND CONSENT

This Report:

(a) is confined to and given on the basis of Tunisian law as currently applied by the Tunisian courts and we have made no investigation of the laws of any country or jurisdiction other than Tunisia and we do not express or imply any opinion thereon. Furthermore, we express no opinion as to matters of fact and our opinion is to be construed in accordance with and is governed by Tunisian law;
(b) is limited to the legal aspects of those particular matters which are included within this Report; and
(c) has been prepared exclusively for XState Resources Limited and none of the information contained in this Report may be disclosed to or relied upon by any other person or used for any other purpose, save with our express written prior consent.

Yours sincerely

Salaheddine Caid Essebsi Lawyer at the Supreme Court – Senior Partner

14. SOLICITORS’ REPORT ON PERMITS - ITALY

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CMS Adonnino Ascoli & Cavasola Scamoni

The Board of Directors

XState Resources Limited

Level 2, 45 Stirling Highway, Nedlands, Western Australia 6009

Australia

Via email

Via Agostino Depretis, 86 00184 Rome - Italy T +39 06 478151 F +39 06 483755

Via M. Buonarroti, 39 20145 Milan - Italy T +39 02 4801 1171 F +39 02 4801 2914

www.cms-aacs.com

Our ref.: 12659

May 14, 2010

Dear Sirs,

Report on “Pantelleria” exploration permit (G.R. 15 PU)

Upon the instructions of XState Resources Limited, we hereby provide a general overview of Italian legislation on hydrocarbons as well as on the current status of the exploration permit named “ Pantelleria ” (licence G.R15.PU - off-shore exploration permit).

For the purpose of carrying out our analysis we perused the data made available by the client, XState Resources Limited, and the information published in the Official Gazette of Hydrocarbons (“ Bollettino Ufficiale degli Idrocarburi e delle Georisorse” B.U.I.G. ) edited by the Italian Ministry of Economic Development ( “Ministero dello Sviluppo Economico” ) (for the purposes of this report, “Ministry” ).

This letter is not at all intended to be a comprehensive review of all potentially relevant legal issues relating to the Pantelleria permit and it should be stressed that based upon the documentation made available to us, we cannot give any assessment or evaluation with regard to information that was not made public by the Ministry or provided to us by the client.

We have no reasons to believe that the information provided in the Official Gazette of Hydrocarbons (“ Bollettino Ufficiale degli Idrocarburi e delle Georisorse” ) is false or incorrect, however CMS Adonnino Ascoli & Cavasola Scamoni does not accept any responsibility for any information or documents edited by the Ministry which proves to be false, incorrect or misleading.

This letter is confidential and may contain legally privileged information. You should not disclose its contents to any other person. If you are not the intended recipient, please notify the sender named above immediately.

CMS Adonnino Ascoli & Cavasola Scamoni is a member of CMS, the alliance of major independent European law firms providing businesses with legal and tax services across Europe and beyond. Operating in 47 business centres around the world, CMS has over 595 partners, more than 2,000 legal and tax advisers and a total complement of over 4,200 staff.

CMS offices and associated offices worldwide: Berlin, Brussels, London, Madrid, Paris, Rome, Utrecht, Vienna, Zurich, Aberdeen, Amsterdam, Antwerp, Arnhem, Beijing, Belgrade, Bratislava, Bristol, Bucharest, Budapest, Buenos Aires, Casablanca, Chemnitz, Cologne, Dresden, Dusseldorf, Edinburgh, Frankfurt, Hamburg, Hilversum, Hong Kong, Leipzig, Lyon, Marbella, Milan, Montevideo, Moscow, Munich, New York, Prague, Sao Paulo, Seville, Shanghai, Sofia, Strasbourg, Stuttgart, Warsaw and Zagreb

CMS Adonnino Ascoli & Cavasola Scamoni – Professional Association – C.F. 0 2 6 1 6 2 3 0 5 8 3 – P.I. 0 1 0 8 8 0 7 1 0 0 4

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On some specific topics, lacking express detailed provisions in relevant applicable law, we have relied directly on the advice of the Ministry which was based on ordinary and customary practice. In this light, prior to taking any action, it would be advisable for the relevant party to liaise with the Ministry in order to facilitate the administrative process (e.g. reactivation, extension or transfer of the permit) to the extent possible.

In conclusion, this letter shall not serve as a conclusive basis to deal with all matters which may be relevant and critical with respect to the above mentioned exploration permit.

1. Brief overview of Italian legislation

As a general overview of hydrocarbons regulation in Italy, please note that the milestone of the legislation on exploration and exploitation was introduced in 1957 and it was substantially modified by Law No. 613/1967 and Law No. 9/1991. It was then implemented with specific regulations (Presidential Decree no. 484/1994) taking into account onshore and offshore activities in the context of a new domestic energy plan and a more competitive Italian market.

The above statutory provisions set out the rules which upstream operators must comply with for the purpose of carrying out activities regarding the “ prospecting ” and “ exploration ” for and “ production ” of hydrocarbons and the requirements for granting the relevant permits.

Italian law provides that all mineral resources are to be considered state property so that both research and production of hydrocarbons are subject to the strict control of the Ministry. Upstream industry operators may exercise activities related to the hydrocarbons only if they are previously authorized by the said Ministry. The range of temporary permits and concessions which may be granted by the Ministry to upstream operators having the suitable technical and financial capabilities and subject to the payment of pre-determined rents and royalties are as follows:

(a) Prospecting permit (“ Permesso di prospezione ”): it is a non-exclusive permit (i.e. more than one operator can be granted this permit for the same area and simultaneously carry out research activities), usually granted by the Ministry for offshore research activities, having a very short duration (one year) and allowing the permit holder to carry out geophysical research only (mainly seismic studies). The geophysical research was liberalized in 2000, this meaning that the prospecting permit cannot be denied by the Ministry if the applicant has the technical and economic capabilities to perform prospecting activities.
(b) Exploration permit (“ Permesso di ricerca ”): it is an exclusive permit (both for onshore and offshore explorations), issued by the Ministry to a single operator (sometimes after a specific competition among different applicants), through which the permit holder undertakes to perform works for the purpose of finding mineral resources in the permitted area. Exploration permits have a duration of 6 years and they may be extended twice for consecutive periods of 3 years each (so that an exploration permit may last up to 12 years). Such extension is not automatic and it is granted only if the permit holder has complied with the obligations set out in the permit and with the work programme. Therefore, the Ministry will certainly have to check whether the obligations set out in the permit and the work programme have been complied with by the permit holder and only if such check has a positive outcome will the extension be granted. The permit may cover a geographical area of up to 750 square kilometres. Operators awarded with this permit must follow a specific work programme approved by the Ministry at the time of issuance of the permit.
(c) Production concession (“ Concessione di coltivazione ”): it is an exclusive concession, usually following the finding of hydrocarbons by an exploration permit holder, therefore this is not subject to any competitive tender. The permit holder is given the right to produce and exploit the mineral resource according to a specific programme approved by the Ministry at the moment the concession is granted. An exploration concession, which is granted for a 20-year period, is usually extended for further 10 years. Pursuant to art. 13 of D.P.R. No 484/1994, the steps needed in order to apply for and obtain a production concession are as follows:
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(i) the permit holder shall submit to the Ministry an application within 1 year from the Ministry’s acknowledgment of the discovery of hydrocarbons. The application shall be submitted along with a work programme;
(ii) the Ministry shall process the application (with the involvement of its competent local department and the Technical Committee);
(iii) upon request of the Ministry of Economic Development, the Ministry of Environment shall release its environmental impact assessment;
(iv) within 250 days from the date of the application, the process shall come to an end with the grant of the concession. In our experience however the Ministry of Economic Development usually takes longer than the above mentioned 250 day period in order to grant the concession.

2. The “Pantelleria” permit

2.1 Background

The “Pantelleria permit” ("G. R15. PU") is located offshore southern Italy near Sicily and the Italian island of Pantelleria.

The request for the Pantelleria exploration permit was originally submitted by the company Puma Petroleum Limited on 21 December 1998 and such permit was finally awarded by the Ministry by Ministerial Decree dated 12 November 2002. On the basis of the information made public on the web site of the Official Gazette of Hydrocarbons, we are aware of the following transfers of the permit:

With effect as of 28 March 2003, Puma Petroleum Limited transferred the permit to WPN Resources Ltd (with registered office in Canada and with a branch in Italy);
With effect as of 30 March 2004, WPN Resources Ltd transferred the permit to Grove Energy Ltd. This does not appear to be an actual transfer but rather a simple change of the name of the permit holder (WPN Resources Ltd appears to be the same company as Grove Energy Ltd);
With effect as of 28 July 2008, Grove Energy Ltd transferred the permit to Audax Energy S.r.l..

In view of the above, Audax Energy S.r.l. is currently the sole permit holder of the Pantelleria permit "G. R15. PU".

With respect to possible encumbrances, liens or charges over the exploration permits, please note that, considering that the exploration permit has the nature of an administrative authorization whereby the State has consented on a temporary basis to allow private operators to carry out exploration activities, it is not possible to envisage any lien or charge thereon similar to those applicable to movable or immovable assets.

2.2 The current status of the permit

The Pantelleria permit was due to expire on 12 November 2008. However, as evidenced in Ministerial Decree of 17 November 2008, from 2 July 2008 such permit has been suspended until a suitable off-shore drilling system becomes available. Also the payment of the annual rent has been suspended.

The request for suspension was filed by the previous permit holder (Grove Energy Ltd) due to the alleged lack of a drilling system suitable for deep waters. The final suspension term is yet to be formally determined by way of published Ministerial Decree. So far such decree has not been released yet by the Ministry.

In order to reactivate the Pantelleria Permit, the permit holder will have to file a request for reactivation with the Ministry, which, on the basis of the information provided to it by the permit holder, may then elect to reactivate the permit. To this end, the permit holder will have to provide the Ministry with sufficient comfort that the reasons for the suspension no longer exist (for present purposes, the permit holder has equipped itself with a suitable drilling system or has entered into a contract with a drilling company having the technical capabilities to perform drilling activities in deep waters). The Ministry will

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then reactivate the permit provided also that the permit holder does not amend the original work programme.

With respect to the suspension and reactivation of the permit, we would like to specify the following:

in order to request the reactivation of the suspended permit, the permit holder must file an application to the Ministry and provide evidence that the cause for suspension has been removed (e.g. providing details of a contract executed with a drilling company). In principle there is no further mandatory documentation to be submitted to the Ministry as a condition to reactivate the permit, however, we cannot exclude that the Ministry may require evidence also that the new drilling system complies with the statutory law provisions (environmental and safety). The application for the reactivation of the permit is subject to duty (however, this is not a significant amount);
the reactivation procedure timeframe is not expressly set out in applicable law. The Ministry however, has no interest in delaying the reactivation. We have been informed by the Ministry that usually the Ministerial decree of reactivation is released within 30 days from the date of the relevant application. However, please consider the 30 day period only as indicative;
with respect to the reactivation application, in principle, the Ministry has no discretionary power, as long as the permit holder has provided evidence that the cause for suspension no longer exists. In the reactivation process the permit holder is not required to demonstrate again its technical and economic capabilities. Additionally it should be stressed that in principle in case of a successful reactivation application, the entire area covered by the exploration permit will be reactivated, except in case of specific significant events which may lead to a reduction of the originally permitted area (e,g, supervening archeological or environmental interests and national security);
if the original work programme is not amended and the Ministry acknowledges that the cause for suspension has been removed, the reactivation procedure will certainly be successful;
the reactivation process will not be affected by the Ministerial decree determining the final suspension term, so that even if such decree will be released, the permit holder will still be entitled – pending the finally determined suspension period – to submit an application to reactivate the permit;
in no event will the application for reactivation of the permit entitle the Ministry to put the permit out to the market for competitive tender;
if there is no successful reactivation by the permit holder to the permit before the end of the finally determined suspension period, the exploration permit will revert to the permit holder (Audax);
the Ministry may attach conditions to the grant of the reactivation order only if during the suspension period significant events have occurred that justify the attachments of such conditions, however this should be checked case by case;
if there is a successful reactivation of the permit, the permit will continue up to the completion of the natural 6 year duration period (i.e. 4 months reflecting the remaining Jul-Nov 2008 permit term);
according to art. 6 of Law No. 9/1991 the permit holder has the right to obtain an extension of the permit term provided that it has duly complied with its obligations set out in the permit and the work programme attached thereto. Pursuant to art. 11 of D.P.R. No 484/1994, in order to request an extension of the permit, the following steps are needed:
permit holder shall submit an application to the Ministry;
in specific circumstances (to be checked case by case), the Ministry may request the opinion of the Technical Committee;
the Ministry shall consent to an extension of the permit at the latest within a period of 220 days (within this period the permit holder is required to obtain a new environmental
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impact assessment). In our experience the 220 day period is only indicative as the Ministry normally takes longer to release the decree of extension.

In addition to the extension of the permit, given that Audax Energy S.r.l. has not performed the work programme yet, it shall also file an application pursuant to art. 6 paragraph 9 of Law. No. 9/1991 in order to obtain an extension up to 24 months (starting from the natural expiration date of the permit) of the period within which to perform those drilling activities which so far have not started yet;

As stated in the Ministerial Decree of 17 November 2008 the suspension is due to the difficulty of finding in the Mediterranean area a drilling system suitable for operation in particularly deep waters such as those identified in the permit. This has consequently hindered the performance of the drilling works and, according to the Ministry, qualifies as a case of “force majeure” which justifies the granting of such an extension;

if there is a successful reactivation of the permit, no annual rent will be due by the permit holder for the period during which the permit was suspended;
applicable law does not expressly sets out any continuing obligations throughout the suspension period. The Ministry confirmed that until expiration of the suspension period, there are no obligations to comply with as all relevant obligations and rights deriving from the permit are “frozen”.

2.3 Obligations of the permit holder

The Ministerial Decree of 12 November 2002 sets out the obligations to which the original permit holder was bound and consequently to which Audax Energy S.r.l. (as current permit holder) is bound. According to such Ministerial decree the permit holder is bound to:

initiate geological investigations within 12 months from 12 November 2002;
initiate drilling activities within 36 months from the start of the geological investigations referred to above;
comply with all applicable law provisions relating to safety;
comply with the provisions of the Italian Navigation Code, applicable marine environment protection provisions, fishing, state marine property;
comply with the environmental impact assessment;
comply with specific provisions on the time and methodologies used to obtain seismic data;
perform all necessary checks on the seabed and sea mud;
comply with applicable provisions relating to the disposal of waste material;
restore any area damaged by the drilling activities;
report to the competent authority on safety and emergency issues;
discharge the public authority from any third parties' claim.

The client made available to us the document "GR 15 PU Istanza Puma" which appears to be the work programme attached to the Pantelleria application originally submitted to the Ministry by Puma Petroleum Limited in December 1998 and accepted by the Ministry.

According to such programme, Puma Petroleum Limited committed to carry out the following activities: (i) geological studies and investigations on hydrocarbons (and their potential discovery in the sea). Such studies were due to be performed through satellite images. The expected total cost was Italian Liras (ITL) 30 MIO (approx. Euro 15,000);
(ii) review of seismic data (Km 150). The expected total cost was ITL 50 MIO (approx. Euro 25,000);
(iii) new seismic assessment (Km 160). The expected total cost was ITL 300 MIO (approx. Euro 150,000).

The above works were envisaged to start within 12 months from the granting of the permit. If the above activities would have been successful, the company was expected to proceed with the drilling works within 36 months from the start of the activities under (i), (ii) and (iii). The expected depth of the well was approximately 2.800 metres and the estimated total cost for such drilling works was ITL 7 Billion (approx. Euro 3.5 MIO).

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Also, the client made available to us a document named "GR 15 PU oggetto ministry Grove" which appears to be a communication sent by the Ministry to Grove Energy Ltd (the previous permit holder) on 18 November 2004 whereby the Ministry notified such company of the need to extend the area for new seismic assessment (originally equal to km 160, see point (iii) above) to approx. 370 Km. We have no elements to ascertain whether such extension was requested by the then permit holder and finally granted by the Ministry.

2.4 Transfer of the permit

With respect to the process needed in order to transfer the permit or a quota thereof to another company, please note that the relevant request shall be submitted by the permit holder to the Ministry which will issue its prior authorization to the transfer (the Ministry will issue the prior authorization after verifying that the acquiring company has the technical and economic capabilities required by applicable law. Once the prior ministerial authorization has been obtained (such authorization will have to be published in the Official Gazette of Hydrocarbons), the permit holder and the third party company will have to execute a notarial deed of transfer which will then be notified to the Ministry.

That said, it should be pointed out that under Italian applicable law it is not possible for the Ministry to “force” the transfer or the assignment of a mining title from the permit holder to a third party and in general terms there are no restrictions on transfer of a mining title, provided that the prior ministerial authorization has been obtained. Lacking such prior ministerial authorization, any transfer of permit shall be null and void.

In case of change of control of the permit holder, the Ministry is not entitled to apply any restrictions, provided that such permit holder continues to have all economic and technical requisites required by applicable law[1] .

2.5 Causes for revocation of the permit

For the sake of completeness it is worth noting that pursuant to art. 41 of Law n. 613/67 the permit holder loses the title to the permit and thus the Ministry may revoke the permit if the former:

(i) no longer has the technical and economic requisites required by the law;
(ii) does not start the works within the envisaged timeframe;
(iii) carries on the works differently from the work programme;
(iv) does not request the production concession within 1 year from the date the Ministry has acknowledged the finding of hydrocarbons;
(v) does not pay the annual rent;
(vi) suspends the works without any prior authorization;

We trust this is useful.

Kind regards

Pietro Cavasola

Matteo Ciminelli

1 Economic requisites : i) Corporate capital of Euro 10 million or alternatively; ii) Corporate capital of Euro 120,000 plus a guarantee from a controlling company or a sister company having a corporate capital of at least Euro 10 million or from a bank.

Technical requisites: i) Details of the company and its internal bodies and staff; ii) Report on the main works carried out in the last 3 years either directly or, in case of a newco, through a controlling company (this is a non exhaustive list of technical requirements);

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15. RISK FACTORS

Potential investors in the Company should be aware that subscribing for Securities involves a number of risks. The risk factors outlined in this Section and elsewhere in this Prospectus should be carefully considered by investors when evaluating an investment in the Company. In addition, investors should appreciate that the value of Securities on ASX may rise or fall depending on a range of factors beyond the control of the Company. This is especially the case with companies undertaking petroleum exploration activities.

Any of the factors set out in this Section or any other factors identified in this Prospectus may materially affect the financial performance of the Company and the market price of the Securities. To that extent the Securities carry no guarantee with respect to the payment of dividends, return on capital or in the case of all Securities, the price at which those Securities will trade on ASX.

While the Company plans to take prudent measures to safeguard from, or mitigate its exposure to, these risks, many of the risks are outside the Company's control.

There are a number of risk factors that investors should consider before deciding whether or not to invest in the offers made pursuant to this Prospectus. The principal risk factors include, but are not limited to, the following:

Risks relating to the Kerkouane, Chorbane and Pantelleria Projects

15.1 Risks Associated with operating in Tunisia and Italy

The Kerkouane (offshore) and Chorbane (onshore) projects are located in Tunisia and the Pantelleria project (offshore) is located in Italy. The Company will be subject to the risks associated with operating in both Tunisia and Italy. Such risks can include economic, social or political change, changes of law affecting foreign ownership, taxation, working conditions, rates of exchange, exchange control, exploration licensing, export duties, repatriation of income or return of capital, environmental protection, mine safety, labour relations as well as government control over mineral properties or government regulations.

Changes to Tunisia’s and Italy’s mining or investment policies and legislation or a shift in political attitude may adversely affect the Company’s operations and profitability.

15.2 Exploration and Development Risks

The business of oil and gas exploration, project development and production, by its nature, contains elements of significant risk with no guarantee of success. Ultimate and continuous success of these activities is dependent on many factors such as:

(a) the discovery and/or acquisition of economically recoverable reserves;
(b) access to adequate capital for project development;
(c) design and construction of efficient development and production infrastructure within capital expenditure budgets;
(d) securing and maintaining title to interests;
(e) obtaining consents and approvals necessary for the conduct of oil and gas exploration, development and production; and

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(f) access to competent operational management and prudent financial administration, including the availability and reliability of appropriately skilled and experienced employees, contractors and consultants.

Whether or not income will result from projects undergoing exploration and development programs depends on successful exploration and establishment of production facilities. Factors including costs, actual hydrocarbons and formations, flow consistency and reliability and commodity prices affect successful project development and operations.

Drilling activities carry risk and as such, activities may be curtailed, delayed or cancelled as a result of weather conditions, mechanical difficulties, shortages or delays in the delivery of drill rigs or other equipment. In addition, drilling and operations include reservoir risk such as the presence of shale laminations in the otherwise homogeneous sandstone porosity.

Industry operating risks include fire, explosions, unanticipated reservoir problems which may affect field production performance, industrial disputes, unexpected shortages or increases in the costs of consumables, spare parts, plant and equipment, mechanical failure or breakdown, blow outs, pipe failures and environmental hazards such as accidental spills or leakage of liquids, gas leaks, ruptures, discharges of toxic gases or geological uncertainty (such as lack of sufficient sub-surface data from correlative well logs and/or formation core analyses). The occurrence of any of these risks could result in legal proceedings against the Company and substantial losses to the Company due to injury or loss of life, damage to or destruction of property, natural resources or equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation, and penalties or suspension of operations. Damage occurring to third parties as a result of such risks may give rise to claims against the Company.

There is no assurance that any exploration on current or future interests will result in the discovery of an economic deposit of oil or gas. Even if an apparently viable deposit is identified, there is no guarantee that it can be economically developed.

15.3 Title Risk

The permits described in Section 8.2 are currently held by Australian listed public company, AuDAX Resources Limited via its wholly owned subsidiaries (AuDAX). Under the Farm In Agreements summarised in Sections 16.3 and 16.4, Bombora has the right to earn a 10% interest in the Chorbane, Kerkouane and Pantelleria permits, and the right to earn a further 10% interest (being an aggregate 20% interest) in the permit area comprising the Kerkouane and Pantelleria permits that fall outside of the Lambouka prospect which also covers parts of those permit areas. Bombora has not satisfied its farm in obligations under the Farm In Agreements and therefore does not currently hold a registered interest in the permits. It cannot be assured that Bombora will satisfy these obligations and therefore earn an interest in the permits.

As described in the Solicitors’ Report on Permits – Tunisia in Section 13, if Bombora successfully completes its farm in obligations in relation to the Kerkouane and Chorbane permits, a deed of assignment must be entered into between AuDAX and the Tunisian government for the assignment and assumption of interests in those permits. For the assignment to become effective, the approval of the Tunisian government, the Department of Energy, and the Hydrocarbons Consultative Committee must be obtained before an order of the Minister will be gazetted to confirm the assignment. It is not certain that approval for the

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assignment will be obtained and to that end, Bombora’s acquisition of these respective interests in the permits cannot be assured.

Furthermore, if Bombora successfully earns in to the permits, (and assuming that the Acquisition is successful), the ability of the Company, via Bombora, to develop and exploit oil and gas reserves in Italy and Tunisia depends on Bombora, and its joint venture partners’ continued compliance with the obligations of its current exploration and development licences and their ability to convert these licences into production licences.

The continuing validity of the licences and their renewal depends on the steps taken by the joint venturers, and AuDAX Limited (as the holder of the permits). The continued good standing and, where appropriate, renewal of these approvals, permits and licences cannot be assured. In addition, exploration and development licences held by Bombora, AuDAX and other relevant joint venturers may not be converted into production licences.

Specifically, the Solicitors’ Report on Permit – Italy in Section 14 states that the Pantelleria permit has been suspended since July 2008. The request for suspension was filed by the previous holder on the basis that there was not a suitable drilling system available for deep waters. In order to reactivate the Pantelleria permit, AuDAX is required to file a request for reactivation with the Italian Minister for economic development. Although, and as discussed in the Solicitors’ Report on Permits – Italy in Section 14, the reactivation would appear to be automatic upon an application which is substantiated with evidence that the cause for suspension no longer exists, there can be no complete assurance that reactivation will be successful. If it is successful, the permit may attach new conditions arising out of the reactivation. Furthermore, the reactivation process must be undertaken by AuDAX as the permit holder, and to that end is outside the control of Bombora.

15.4 Oil and Gas Price Volatility

The demand for, and price of, oil and natural gas is highly dependent on a variety of factors, including international supply and demand, the level of consumer product demand, weather conditions, the price and availability of alternative fuels, actions taken by governments and international cartels, and global economic and political developments.

International oil and gas prices have fluctuated widely in recent years and may continue to fluctuate significantly in the future. Fluctuations in oil and gas prices and, in particular, a material decline in the price of oil or gas may have a material adverse effect on the Company's business, financial condition and results of operations.

15.5 Hydrocarbon Reserves and Resource Estimates

Hydrocarbon reserve and resource estimates are expressions of judgement based on knowledge, experience and industry practice. Estimates that were valid when originally calculated may alter significantly when new information or techniques become available. In addition, by their very nature, resource and reserve estimates are imprecise and depend to some extent on interpretations, which may prove to be inaccurate. As further information becomes available through additional drilling and analysis the estimates are likely to change. This may result in alterations to development and production plans which may in turn, adversely affect the Company’s operations.

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15.6 General Economic and Political Risks

Changes in the general economic and political climate in Italy, Tunisia, Australia and on a global basis that could impact on economic growth, the oil and gas prices, interest rates, the rate of inflation, taxation and tariff laws, domestic security which may affect the value and viability of any oil and gas activity that may be conducted by the Company.

15.7 Oil Reserves and Commercial Oil Flow

Oil reserves are expressions of judgement based on knowledge, experience and industry practice. Estimates which were valid when originally calculated may alter significantly when new information or techniques become available. In addition, by their very nature, oil reserves are imprecise and depend to some extent on interpretations, which may prove to be inaccurate. As further information becomes available through additional fieldwork and analysis, the estimates are likely to change. This may result in alterations to development and commercial oil flow plans which may, in turn, adversely affect the Company’s operations.

15.8 Commodity Price Volatility and Exchange Rate Risks

If the Company achieves success leading to hydrocarbon production, the revenue it will derive through the sale of commodities exposes the potential income of the Company to commodity price and exchange rate risks. Commodity prices fluctuate and are affected by many factors beyond the control of the Company. Such factors include supply and demand fluctuations for oil and gas, technological advancements, forward selling activities and other macro-economic factors.

Furthermore, international prices of various commodities are denominated in United States dollars, or the Euro whereas the income and expenditure of the Company are and will be taken into account in Australian currency, exposing the Company to the fluctuations and volatility of the rate of exchange between the United States dollar or the Euro and the Australian dollar as determined in international markets. Similarly, a major risk is a decreasing value of the Australian dollar vis-a-vis input costs. Typically, oil and gas input costs are denominated in US dollars.

15.9 Environmental Risks

The Company will be subject to environmental laws and regulations in connection with operations it may pursue in the oil and gas industry, which operations are currently in Italy and Tunisia. The Company intends to conduct its activities in an environmentally responsible manner and in accordance with all applicable laws. However, the Company may be the subject of accidents or unforeseen circumstances that could subject the Company to extensive liability.

Further, the Company may require approval from the relevant authorities before it can undertake activities that are likely to impact the environment. Failure to obtain such approvals will prevent the Company from undertaking its desired activities. The Company is unable to predict the effect of additional environmental laws and regulations that may be adopted in the future, including whether any such laws or regulations would materially increase the Company's cost of doing business or affect its operations in any area.

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15.10 Competition

The Company will compete with other companies, including major oil and gas companies. Some of these companies have greater financial and other resources than the Company and, as a result, may be in a better position to compete for future business opportunities. Many of the Company's competitors not only explore for and produce oil and gas, but also carry out downstream operations on these and other products on a worldwide basis. There can be no assurance that the Company can compete effectively with these companies.

15.11 Regulatory

Changes in relevant taxes, legal and administration regimes, accounting practice and government policies may adversely affect the financial performance of the Company.

15.12 Insurance

Insurance against all risks associated with oil and gas production is not always available or affordable. The Company will maintain insurance where it is considered appropriate for its needs however it will not be insured against all risks either because appropriate cover is not available or because the Directors consider the required premiums to be excessive having regard to the benefits that would accrue.

15.13 Operating Risks

The operations of the Company may be affected by various factors, including failure to locate or identify oil reserves, failure to achieve predicted well production flow rates, operational and technical difficulties encountered in production, difficulties in commissioning and operating plant and equipment, mechanical failure or plant breakdown, unanticipated reservoir problems which may affect field production performance, adverse weather conditions, industrial and environmental accidents, industrial disputes and unexpected shortages or increases in the costs of consumables, spare parts, plant and equipment.

General Risks

15.14 Additional Requirements for Capital

The Company’s capital requirements depend on numerous factors. Depending on the Company’s ability to generate income from its operations, the Company may require further financing in the future. Any additional equity financing will dilute shareholdings, and debt financing, if available, may involve restrictions on financing and operating activities. If the Company is unable to obtain additional financing as needed, it may be required to reduce the scope of its operations and scale back its exploration programmes as the case may be.

15.15 Potential Acquisitions

As part of its business strategy, the Company may make acquisitions of, or significant investments in, complementary companies or prospects although no such acquisitions or investments are currently planned. Any such transactions will be accompanied by risks commonly encountered in making such acquisitions.

15.16 Economic Risks

General economic conditions, movements in interest and inflation rates and currency exchange rates may have an adverse effect on the Company’s

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exploration, development and production activities, as well as on its ability to fund those activities.

15.17 Market Conditions

Share market conditions may affect the value of the Company’s quoted securities regardless of the Company’s operating performance. Share market conditions are affected by many factors such as:

(a) general economic outlook;
(b) interest rates and inflation rates;
(c) currency fluctuations;
(d) changes in investor sentiment toward particular market sectors;
(e) the demand for, and supply of, capital; and
(f) terrorism or other hostilities.

The market price of securities can fall as well as rise and may be subject to varied and unpredictable influences on the market for equities in general and resource exploration stocks in particular. Neither the Company nor the Directors warrant the future performance of the Company or any return on an investment in the Company.

15.18 Reliance on Key Management

The responsibility of overseeing the day-to-day operations and the strategic management of the Company depends substantially on its senior management and its key personnel. There can be no assurance given that there will be no detrimental impact on the Company if one or more of these employees cease their employment.

Investment Speculative

The above list of risk factors ought not to be taken as exhaustive of the risks faced by the Company or by investors in the Company. The above factors, and others not specifically referred to above may, in the future, materially affect the financial performance of the Company and the value of the Company’s securities.

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16. MATERIAL CONTRACTS

16.1 Implementation Agreement

The Company has entered into an Implementation Agreement with Bombora and John Begg, Andrew Childs, Peter Collins and Gary Jeffery (Major Shareholders) under which the Company has agreed to make the Bombora Offers to acquire 100% of the issued capital of Bombora (Implementation Agreement).

(Conditions Precedent): Settlement of the Implementation Agreement is subject to satisfaction or waiver of certain conditions precedent as set out in Section 4.6 of this Prospectus;

(Consideration): The consideration for the acquisition of 100% of the issued capital in Bombora will be the issue of a total of 11,660,000 Shares (on a postConsolidation basis), to be issued to the Bombora Shareholders in proportion to their holdings in the Bombora Shares.

(Appointment of Directors & Management Team): At the time of, or prior to settlement of the Acquisition, the Company will appoint Mr Gary Jeffery and Mr John Begg as Directors of the Company and procure the resignation of Mr Rhoderick Grivas and Mr David McArthur as Directors of the Company.

(Loan by the Company): Under the Implementation Agreement the Company agreed to provide a loan to Bombora with a facility limit of $1,000,000. The terms of the loan are set out in Section 16.5.

(Convertible Note): The parties also agreed to terms of convertible notes to be provided by Bombora in exchange for the provision $500,000 to Bombora by Argonaut and certain co-investors (Noteholders). The terms of the Convertible Note are set out at Section 16.7.

16.2 Bombora Offers

The Company has made separate offers to all of the Bombora Shareholders for the acquisition of their Bombora Shares (being the Bombora Offers).

The issue of the Consideration Shares (referred to in the Implementation Agreement) and transfer of the Bombora Shares is conditional on settlement of the Acquisition taking place (and therefore all of the conditions to the Implementation Agreement being satisfied).

Each Bombora Shareholder must accept their respective Bombora Offer by the Closing Date.

16.3 Chorbane Farmin Agreement

Alpine Oil & Gas Pty Ltd (AOG) is the holder of an onshore oil and gas exploration permit located in Tunisia, over an area is known as Chorbane (Chorbane Permit). AOG is a wholly owned subsidiary of AuDAX. Bombora has entered into an agreement with AOG to acquire a 10% interest in the Chorbane Permit (Chorbane Farmin Interest) on the following terms and conditions (Chorbane Farmin Agreement).

(Consideration): The consideration for the Chorbane Farmin Interest is:

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(a) a non refundable deposit of US$100,000 which has been paid by Bombora;
(b) payment of US$500,000 in cash (less the deposit already paid) within 10 days of the date of the Chorbane Farmin Agreement which has been paid by Bombora;
(c) payment of an amount representing 10% for all costs incurred by AOG in connection with Chorbane from 1 January 2010 until the date of the Chorbane Farmin Agreement (being 26 January 2010) within 10 days of the date of the Chorbane Farmin Agreement;
(d) payment of an amount representing 10% of all costs incurred by AOG in relation to Chorbane (including 10% of all costs incurred with the drilling of the Sidi Daher well (Well Costs) that are in excess of US$5,000,000 (in aggregate) between the date of the Chorbane Farmin Agreement and 5 business days after receipt of the Approvals (defined below); and
(e) payment of US$500,000 in cash within 10 days of the presentation of a final approved authority for expenditure pursuant to the Joint Operating Agreement (refer below) with confirmation of a contracted rig to drill a well on the Sidi Daher prospect.

The date of satisfaction of the payments listed above is referred to as the Farmin

Obligations Satisfaction Date.

(Approval): As soon as possible following the Farmin Obligations Satisfaction Date, AOG must use all reasonable endeavours to obtain all governmental approvals to assign and transfer the Chorbane Farmin Interest to Bombora, including submission of a transfer agreement in accordance with the Chorbane Permit and laws of Tunisia. If the approval is not obtained by 31 January 2011, the parties will endeavour to agree to an alternative structure to achieve the intention of the Chorbane Farm In Agreement. Either party may terminate the Chorbane Farm In Agreement by notice to the other party if Approval is not received by 31 March 2011, with no further obligation to the other party. The date that the Approvals are received will be the Approval Date.

(Joint Operating Agreement): The parties agree to enter, with any third party farminee (if applicable) a joint operating agreement in respect of the Chorbane Permit (Chorbane JOA) on the within 5 days of the Approval Date. AOG will be the operator under the Chorbane JOA.

Bombora has consented to AOG transferring up to a further 60% interest in the Chorbane Permit pursuant to any agreement entered into by AOG before 31 October 2010.

(Termination): If Bombora defaults on any of the payments listed above and that default continues for 14 days after a notice to remedy default has been given by AOG to Bombora, then the Chorbane Farmin Agreement may be terminated by AOG on 14 days notice by serving a further notice on Bombora.

16.4 Kerkouane Farmin Agreement

AOG is the holder of an offshore oil and gas exploration permit located in Tunisia, over an area known as Kerkouane (Kerkouane Permit).

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AuDAX Energy Srl (a wholly owned subsidiary of AuDAX) is the holder of an offshore oil and gas exploration permit located in Sicily, Italy, over an area known as Pantelleria (Pantelleria Permit).

The Lambouka prospect (referred to in Section 7.2) partly covers areas within the Kerkouane Permit Pantelleria Permit (these areas being referred to as Kerkouane Lambouka and Pantelleria Lambouka respectively). The areas within those Permits that fall out outside of the Lambouka Prospect, are referred to as Kerkouane Remainder and Pantelleria Remainder respectively.

Bombora has entered into an agreement with AOG to acquire a 10% interest in the Kerkouane Permit (Kerkouane Farmin Interest) on the following terms and conditions:

(Kerkouane Consideration): The consideration for the Kerkouane Farmin Interest is:

(a) an amount representing 15% of all costs and expenses in connection with:
(i) a 3D seismic programme to be carried out by PGS Egypt in the Kerkouane Permit and extends into the Pantelleria Permit,
- (these expenses being collectively referred to as Seismic Costs), that arise from 1 January 2010 until the earlier of:
(ii) completion of the Seismic Programme; and
(iii) the Seismic Costs reaching, on a 100% basis, US$5,200,000 (Seismic Costs Cap); and
(b) an amount representing 10% of all costs incurred by AOG in connection with Kerkouane between 1 January 2010 and the date on which Bombora’s payment obligations under paragraph (a) as to Seismic Costs are satisfied This amount must be paid by the later of:
(i) 10 days after following request by AOG; or
(ii) 30 days after execution of the Kerkouane Farmin Agreement.

(The date on which all the payments made under paragraphs (a) and (b) will be Farmin Obligations Satisfaction Date).

(Approval): As soon as possible following the Farmin Obligations Satisfaction Date, AOG must use all reasonable endeavours to obtain all governmental approvals to assign and transfer the Kerkouane Farmin Interest to Bombora, including submission of a transfer agreement in accordance with the relevant Production Sharing Contract (refer to Section 16.5), the Kerkouane Permit and laws of Tunisia. If the Approval is not obtained within 9 months of the Farmin Obligations Satisfaction Date, the Parties will endeavour to agree to an alternative structure to achieve the intention of the Kerkouane Farm In Agreement. Either party may terminate the Kerkouane Farm In Agreement by notice to the other party if Approval is not received within 12 months of the Farmin Obligations Satisfaction Date with no further obligation to the other party. The date that the Approvals are received will be the Approval Date.

(Joint Operating Agreement): The parties agree to enter, with any third party farminee (if applicable), a joint operating agreement in respect of the

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Kerkouane Permit (Kerkouane JOA) on the Approval Date. AOG will be the operator under the Kerkouane JOA.

Bombora has consented to AOG transferring up to a further 60% interest in the Kerkouane Permit (or a separate 60% interest in either Kerkouane Lambouka or Kerkouane Remainder) pursuant to any agreement entered into by AOG before 31 October 2010.

Upon request by AOG, Bombora agrees to enter into any documents necessary to effect two separate joint operating agreements (Kerkouane Remainder JOA and Kerkouane Lambouka JOA) provided that such joint operating agreements are on the same terms as the Kerkouane JOA.

(Co-ordination): The Kerkouane Farmin Agreement also contemplates entering into a co-ordination agreement between Kerkouane Lambouka joint venturers and Pantelleria Lambouka joint venturers in respect of the Lambouka prospect (Lambouka Co-Ordination Agreement). Similarly, there is provision for the execution of a co-ordination agreement between Kerkouane Lambouka joint venturers and Kerkouane Remainder joint venturers relating to the Kerkouane Permit (Kerkouane Co-Ordination Agreement).

(Option): Following a formal proposal being made by AOG as the operator of the Kerkouane Remainder JOA, AOG has granted Bombora the option to acquire an additional 10% interest in Kerkouane Remainder for the following consideration:

(a) payment to AOG of cash representing 25% (which includes 10% attributable to Bombora’s Kerkouane Farmin Interest) of all costs and expenses in connection with the Kerkouane Remainder Well (Well Costs) that arise from 26 January 2010 (less any of these costs already paid as Seismic Costs (above));
(b) payment to AOG of an additional 10% of all costs incurred by AOG in connection with Kerkouane Remainder from 1 January 2010 to the date that the Option is exercised (Back Costs attributable to the optional 10% interest to be earned);
(c) payment to AOG of 20% of all costs (other than Well Costs in (a) above) incurred by AOG from the date that the Option is exercised until Approval for the transfer of the Option interest is received; following which Bombora will pay costs attributable to its 10% interest;

Bombora must exercise the Option either:

(a) within 3 months after the proposal is made; or
(b) 90 days prior to the date that is set out in the formal proposal as the intended spud-date of the Kerkouane Remainder Well.

If the Option is exercised, Bombora will hold a 10% interest in Kerkouane Lambouka and 20% interest in Kerkouane Remainder. The terms of the Kerkouane Farm In Agreement would apply as necessary to reflect that the Option relates to Kerkouane Remainder only.

(Pantelleria): At any time before 30 June 2011, either Bombora or AOG may request (Pantelleria Request) the other party (if applicable, AOG shall procure AuDAX Energy Srl) to execute all documentation necessary (on substantially the same terms as the Kerkouane Farmin Agreement):

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(a) to enable Bombora (or its nominee) to acquire a 10% interest in the Pantelleria Permit; and
(b) if the Option has been exercised, to enable Bombora (or its nominee) to acquire a further 10% interest in Pantelleria Remainder,

(Pantelleria Farmin Interest).

(Pantelleria Consideration): The consideration payable by Bombora to acquire the Pantelleria Farmin Interest is as follows:

(a) an amount representing 10% of all costs incurred by AOG in connection with the Pantelleria Permit (plus, where the Option has been exercised, an additional 10% of costs in connection with Pantelleria Remainder) between 1 January 2010 and the date that the Pantelleria Request is made; and
(b) an amount representing 10% of all costs incurred by AOG in connection with the Pantelleria Permit (plus, where the Option has been exercised, an additional 10% of costs in connection with Pantelleria Remainder) (less Seismic Costs already paid) between 1 January 2010 and the date that the Pantelleria Request is made and until government approval for the transfer of the Pantelleria Farmin Interest is received.

(Termination): If Bombora defaults on any of the payments listed above and that default continues for 14 days after a notice to remedy default has been given by AOG to Bombora, then the Kerkouane Farmin Agreement may be terminated by AOG on 14 days notice by serving a further notice on Bombora.

16.5 Production Sharing Contracts

All of the permits described above attach production sharing obligations between the holder of the permits and the respective state governments in the jurisdictions where the permit areas are located. In the event that the permits produce oil and gas, the terms of the production sharing contracts require the profits of production to be shared between the holder (Contractor) and the state.

Tunisian PSCs – Kerkouane and Chorbane

Production Sharing Contracts (PSC) of the type that apply to the Kerkouane and Chorbane permits in Tunisia are a common type of contract signed between a government and a resource company (or group of companies) (the Contractor), defining, among other matters, how much of the hydrocarbon resource (oil and gas) extracted from a permit area each will receive after the Contractor has recovered a specified (capped) amount of exploration, appraisal and development costs and operating expenses (including, in Tunisia, interest charges on capital cost loans up to 70% maximum loan), and abandonment costs at the end of production, through an allocation of oil to the Contractor, called Cost Oil.

The Contractor takes all of the exploration and appraisal risk, but recovers a part or all of these costs, subject to annual caps from any oil or gas production in the case of a commercial development.

Oil production in excess of the allowed Cost Oil, is called Profit Oil and is shared between the Government, or its representative company (ETAP in Tunisia), and the Contractor on a sliding scale based on production or production and

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expenditure based formulae.

PSC are complex documents and the outcomes with respect to oil or gas for the benefit of a Contractor company, such as the Company, are based on many factors including exploration and development costs, production rates, operating and transportation expenses, local taxes, commodity prices among others.

Since the process for calculating the proportions to be allocated between the parties to the PSC are complex, a quantifying exercise has not been attempted for the purposes of the Prospectus.

The following summary of the PSC governing the Company’s projects are to give a high level understanding of the rights to oil and gas that may be produced from the Company’s investments in Tunisia.

The Chorbane PSC was entered into on 18 September 2009. The Kerkouane PSC was entered into on 9 May 2002.

Further details of the petroleum regime and permit tenure are included in the Solicitor’s Report on Permits – Tunisia, in Section 13.

In Tunisia, costs and product prices are converted to US Dollars for all calculations and allocation.

In Tunisia, the recovery of costs from liquid hydrocarbon production (Cost Oil) is capped for each year at 40%, while the recovery of costs from gaseous hydrocarbon production (Cost Gas) is capped for each year at 45%.

In the Kerkouane and Chorbane PSC the sliding scale allocation of Profit Oil or Profit Gas is based on a calculated ratio called the ‘R factor’. The ‘R Factor’ is the ratio of the ‘net value of produced oil or gas less the Government (ETAP) share of Profit Oil or Gas’ to the ‘total capital expenditure and operating costs’.

In the Chorbane PSC the allocation of Profit Oil to the Contractor ranges in discrete increments from 35% to 15%, while the allocation of Profit Oil to ETAP (Tunisian Government) ranges in the same discrete increments from 65% to 85%, as the R factor ranges from ‘less than 1’ to ‘greater than 2’.

In the Kerkouane PSC the allocation of Profit Oil to the Contractor ranges in discrete increments from 35% to 15%, while the allocation of Profit Oil to ETAP (Tunisian Government) ranges in the same discrete increments from 65% to 85%, as the R factor ranges from ‘less than 1’ to ‘greater than 2.3’.

Italy PSC - Pantelleria

The Pantelleria permit was awarded on 12 November 2002.

Further details are include in the Solicitor’s Report on Permits – Italy in Section 14/

In the event of a commercial discovery in the Pantelleria Permit, the Company can apply for a Production Concession which has a royalty arrangement rather than any production sharing. The permit holders pay a royalty on the value of production and retain and sell all oil and gas production. The royalty rate is 7%.

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16.6 Loan Agreement

On 17 May 1010, the Company entered into a Loan Agreement with Bombora under which the Company has advanced to Bombora the sum of $1,000,000 to be used to provide working capital requirements prior to completion of the Acquisition (Loan). The Loan has been secured by an equal ranking fixed and floating charge over Bombora’s assets. This charge also ranks equally with the charge over the Convertible Notes (refer to section 16.7). The charge becomes enforceable in an Event of Default under the Loan (below).

(Principal Repayment): The Loan will be paid in accordance with the following

(Repayment – Completion of the Acquisition): Upon settlement of the Acquisition, the Loan (together with all other outstanding monies) will be repayable upon demand by the Company;

(Repayment – No Completion of the Acquisition (Company Default)): If the Acquisition is not completed because the Company is in default of its obligations under the Implementation Agreement, Bombora may give written notice of the default to the Company and all outstanding amounts under the Loan will automatically convert to Bombora Shares at a deemed issue price of the lower of:

(a) $0.08 per Bombora Share; or
(b) the price at which Bombora issues Bombora Shares (or some form of hybrid or debt instrument) to fund its share in the Lambouka-1 well. If this price is not known at the time of conversion, the deemed issued price of the Bombora Shares will be $0.08.

(Repayment – No Completion of the Acquisition (Borrower Default)): If the Acquisition is not completed because Bombora is in default of its obligations under the Implementation Agreement the Company may give written notice of the default (Notice of Default) to Bombora and all outstanding amounts under the Loan must be repaid by Bombora to the Company within 90 days of the service of that Notice of Default on Bombora.

(Repayment – End Date lapses): If the Acquisition is not completed by 31 July 2010 (End Date), the Company may give written notice of the passing of the End Date to Bombora (Notice of End Date) and all outstanding amounts under the Loan must be repaid by Bombora to the Company within 90 days of the service of the Notice of End Date on Bombora.

(Interest): No interest will be payable on the Loan unless any of the following takes place:

(a) the Company serves a Notice of Default on Bombora;
(b) the Company serves a Notice of End Date; or
(c) an Event of Default (below) takes place.

In the event that a Notice of Default or a Notice of End Date is served on Bombora or an Event of Default takes place, Bombora must pay an interest rate of 10% per annum on any part of the Loan that is outstanding.

(Event of Default): The following acts, omissions or events are agreed to be a default of the Loan Agreement, upon the occurrence of which all outstanding

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amounts of the Loan shall become immediately due and payable to the Company at the Company’s option:

(a) non-payment: Bombora fails to repay the Loan by the relevant repayment date;
(b) misrepresentation: any warranty, representation or statement by Bombora is or becomes false, misleading or incorrect in a material respect when made or regarded as made by Bombora;
(c) judgment: a judgment in an amount exceeding $20,000 is obtained against Bombora and is not set aside or satisfied within 7 days;
(d) receiver: a receiver, receiver and manager, official manager, trustee, administrator or similar official is appointed, or steps taken for such appointment, over any of the assets or undertaking of Bombora;
(e) insolvency: Bombora is or becomes unable to pay its debts when they are due or is or becomes unable to pay its debts within the meaning of the Corporations Act or is presumed to be insolvent under the Corporations Act;
(f) arrangements: Bombora enters into or resolves to enter into any arrangement, composition or compromise with, or assignment for the benefit of, its creditors or any class of them otherwise than while solvent and with the prior written consent of the Company;
(g) administrator: an administrator is appointed or a resolution is passed or any steps are taken to appoint, or to pass a resolution to appoint, an administrator to Bombora;
(h) winding up: an application or order is made for the winding up or dissolution of Bombora or a resolution is passed or any steps are taken to pass a resolution for the winding up or dissolution of Bombora otherwise than for the purpose of an amalgamation or reconstruction which has the prior written consent of the Company;
(i) suspends payment: Bombora suspends payment of its debts generally;
(j) approved purposes: the Loan is not applied Bombora’s share of seismic costs, Lambouka-1 well (located offshore Tunisia) forward costs, and general expenditure in accordance with budgeted expenditure of the Bombora as approved by the Company;
(k) vitiation of the transaction documents in relation to the Loan (Transaction Document):
(i) all or any part of any provision of any Transaction Document is or becomes illegal, void, voidable, unenforceable or otherwise of limited force or effect; or
(ii) any person other than the Company becomes entitled to terminate, rescind or avoid all or any material part or material provision of any Transaction Document; or
(l) cross default: any financial indebtedness of Bombora in an amount in excess of $20,000:

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(i) becomes due and payable, or becomes capable of being declared due and payable, before the scheduled date for payment; or
(ii) is not paid when due (after taking into account any applicable grace period).

16.7 Convertible Note Deeds

Bombora has entered into separate convertible note deeds with Argonaut and certain co-investors (each a Noteholder) to secure advances to Bombora of an aggregate amount of $500,000 (Subscription Sum) (Convertible Note). The convertible Notes have been secured by an equal ranking fixed and floating charge over Bombora’s assets. This charge ranks equally with the charge over the Loan. The charge becomes enforceable in an Event of Default under the Convertible Note Agreements (below).

Conversion or repayment of the Convertible Note is as follows:

(Conversion – Settlement of Implementation Agreement): upon settlement of the Acquisition under the Implementation Agreement, the Company has agreed to issue to the Noteholders a total of:

(a) 2,500,000 Shares at a deemed issue price of $0.20 each; and
(b) 1,250,000 Options (for nil cash consideration),

in proportion to the amounts of the Subscription Sum advanced to Bombora by each Noteholder.

(Conversion – No Completion of the Acquisition (Company Default)): If the Acquisition is not completed because the Company is in default of its obligations under the Implementation Agreement, Bombora must give written notice of that default to the Noteholders and Bombora must allot and issue to the Noteholders the amount of Bombora Shares to which the Noteholder is entitled upon conversion of the Convertible Note at a deemed issue price of the lower of:

(a) $0.08 per Bombora Share; or
(b) the price at which Bombora issues Bombora Shares (or some form of hybrid or debt instrument) to fund its share in the Lambouka-1 well (located offshore Tunisia). If this price is not known at the time of conversion, the deemed issued price of the Bombora Shares will be $0.08.

(Conversion – No Completion of the Acquisition (Bombora Default or End Date Lapses)): If the Acquisition is not completed because Bombora is in default of its obligations under the Implementation Agreement or the End Date (31 July 2010) lapses then the Noteholders are entitled to either convert the Convertible Note in whole (not in part) into Bombora Shares or redeem the Convertible Note for that part of the Subscription Sum which they each advanced.

(Interest): In the event of Bombora Default or the End Date lapsing and the Noteholder redeeming the Convertible Note, the Convertible Note will bear a 10% per annum interest rate on the outstanding proportion of the Subscription Sum owing. If the Convertible Note converts to Shares in the Company, then, in lieu of interest, the Company has agreed to grant the Noteholders the right to

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apply and subscribe for a total of 2,500,000 Options (on a post-Consolidation basis) at an issue price of $0.01 per Option.

(Fee): In consideration of entering into Convertible Note Deed and advancing the Subscription Sum, the Company has agreed to issue to the Noteholders a total of 2,500,000 Options (on a post-Consolidation basis) for an issue price of $0.01 per Option.

(Event of Default): An Event of Default under the Convertible Note Deed are the same as those summarised under the Loan Agreement in Section 0. If an Event of Default occurs, the Noteholder may then or at any time subsequently by notice to Bombora:

(a) declare all money owing under any of the Transaction Documents to be immediately due and payable, and Bombora must immediately pay that money (including accrued interest and fees) and cash cover for the full amount of any money contingently owing under any of the Transaction Documents; and/or
(b) cancel its obligations (if any) under any of the Transaction Documents.

16.8 Argonaut Mandate

By an agreement between Argonaut Capital Limited (Argonaut) and the Company dated 6 May 2010 (Mandate Agreement), Argonaut has agreed to act as Underwriter in connection with the Entitlements Issue and Lead Manager in relation to the other transactions in connection with the Acquisition, including the Offer and the Option Placement.

The Company will pay to Argonaut a total fee of $60,000 (plus GST if applicable) for all of the Company’s capital raisings in connection with the Acquisition. Of that amount, $5,000 shall be payable as an underwriting fee under the Underwriting Agreement (refer to section 16.9). Subject to the successful completion of the Acquisition and after the successful readmission to quotation on the Official List of ASX, Argonaut or its nominee is also entitled to subscribe for 2,500,000 Options at an issue price of $0.01 per Option (on the same terms as the Option Placement).

Argonaut is also entitled to out of pocket expenses related to services rendered under the Mandate Agreement, including legal expenses, marketing and promotional expenses and travel and accommodation costs. Such costs and expenses (excluding legal costs) are not to exceed $3,000 without the prior approval of the Company.

The Mandate Agreement is conditional upon, certain conditions as follows:

(Conditions):

(a) Argonaut’s role pursuant to its engagement being on an exclusive basis;
(b) the Company and Argonaut entering into a binding Underwriting Agreement with respect to the Entitlements Issue, after a satisfactory review of the Company being completed by Argonaut with the full cooperation of the Company and its representatives (refer to Section 16.9 for a Summary of the Underwriting Agreement); and

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(c) Argonaut has first right of refusal to act as lead manager or underwriter to the Company on any capital raisings undertaken by it within 18 months after the completion of the Acquisition.

(Termination): The Mandate Agreement is subject to certain termination events, including but not limited to if:

(a) the S&P/ASX All Ordinaries Index (ASX Code: XAO) or S&P/ASX Small Resources Index (ASX Code: XSR) falls more than 10% from the date of this the Mandate Agreement over a period of three (3) continuous business days;
(b) Argonaut is unable to receive sub-underwriting commitments to its satisfaction;
(c) ASX does not give approval for the new Shares or Options to be listed for official quotation or if approval is granted, the approval is subsequently withdrawn, qualified or withheld, or approval is given conditionally and the conditions are not acceptable to Argonaut;
(d) the Company fails to comply with any of the following:
(i) a provision of its Constitution;
(ii) any Australian statute by which it is bound;
(iii) a requirement, order or request made by or on behalf of ASIC, ASX or any governmental agency; or
(iv) any material agreement entered into by the Company;
(e) ASIC holds, or gives notice of intention to hold, a hearing or investigation under section 739(2) of the Corporations Act or makes an interim order under section 739(3) of the Corporations Act;
(f) the Acquisition does not proceed to completion to the satisfaction of Argonaut;
(g) ASIC:
(i) prosecutes or gives notice of an intention to prosecute; or
(ii) commences proceedings against, or gives notice of an intention to commence proceedings against, the Company or any of its directors, officers, employees or agents in relation to the transactions in connection with the Mandate Agreement;
(h) any calamity or crisis occurs or there is any change in financial, political or economic conditions or currency exchange rates or controls in Australia or any restriction or limitation on the nature/basis of trading of equities on the ASX that in the circumstances would make it reasonable for Argonaut to terminate the Mandate Agreement;
(i) any director or officer of the Company is charged with an indictable offence;
(ii) hostilities not presently existing commence (whether war has been declared or not) or a major escalation in existing hostilities

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occurs (whether war has been declared or not) involving any one or more of Australia, New Zealand, the United States of America, any member of the European Union, Russia, Japan or the Peoples Republic of China, or a terrorist act is perpetrated on any of those countries or any diplomatic, military, commercial or political establishment of any of these countries elsewhere in the world such as would have a material effect on the transactions in connection with the Mandate Agreement or the value of the new Shares or Options;

(iii) the Company (or one of its material subsidiaries) becomes (or due to an act or omission is likely to become) insolvent, has a receiver, administrative receiver or manager or administrator (or other similar form of official manager) appointed over the whole of or any of its assets, enters into any composition with creditors generally or has an order made or resolution passed for it to be wound up; or
(iv) any other material adverse event or change occurs that in the circumstances that would make it reasonable for Argonaut to terminate the Mandate Agreement.

16.9 Underwriting Agreement

By an agreement between Argonaut and the Company (Underwriting Agreement), the Underwriter has agreed to fully underwrite the issue of Options pursuant to the Entitlements Issue.

The Company has agreed to pay Argonaut a fee of $5,000 plus GST if applicable in respect of the services provided under the Underwriting Agreement. This fee is not in addition to the Fee payable under the Mandate Agreement, but forms part of it.

Argonaut is also entitled to out of pocket expenses related to the underwriting of the Entitlements Issue and the provision of its broking services, any costs and expenses (excluding legal costs) are not to exceed $3,000 without the prior approval of the Company.

The Underwriting Agreement is conditional upon the resolutions put to members in the General Meeting being approved.

The obligation of Argonaut to underwrite the Entitlements Issue is subject to certain events of termination. Argonaut may terminate its obligations under the Underwriting Agreement if:

Prospectus: any of the following occurs in relation to the Prospectus:

(a) Argonaut reasonably forms the view that there is a material omission, it contains a material statement which is misleading or deceptive, or a material statement has become misleading or deceptive;
(b) Argonaut reasonably forms the view that any projection or forecast in the Prospectus becomes, to a material extent, incapable of being met or unlikely to be met in the projected time;
(c) ASIC gives notice of intention to hold a hearing under section 739(2) of the Corporations Act or makes an interim order under section 739(3) of the Corporations Act; or

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(d) any person other than Argonaut who consented to being named in the Prospectus withdraws that consent;

Supplementary prospectus: Argonaut reasonably forms the view that a supplementary or replacement document (as appropriate) must be lodged with ASIC under section 719 or section 724 of the Corporations Act and the Company does not lodge a supplementary or replacement document (as the case may be) in the form and content and within the time reasonably required by Argonaut;

ASX listing: ASX does not give approval for the Underwritten Securities to be listed for official quotation, or if approval is granted, the approval is subsequently withdrawn, qualified or withheld;

Index changes: the S&P/ASX All Ordinaries Index (ASX Code: XAO) or S&P/ASX Small Resources Index (ASX Code: XSR) falls more than 10% from the date of the Underwriting Agreement for a period of 3 continuous Business Days;

Indictable offence: a director of the Company or any Related Corporation is charged with an indictable offence;

Return of capital or financial assistance: the Company or a Related Corporation takes any steps to undertake a proposal contemplated under section 257A of the Corporations Act or passes or takes any steps to pass a resolution under section 260B of the Corporations Act, without the prior written consent of Argonaut;

Banking facilities: the Company’s bankers terminating or issuing any demand or penalty notice or amending the terms of any existing facility or claiming repayment or accelerated repayment of any facility or requiring additional security for any existing facility;

Change in laws: any of the following occurs:

(a) the introduction of legislation into the Parliament of the Commonwealth of Australia or of any State or Territory of Australia; or
(b) the public announcement of prospective legislation or policy by the Federal Government, or the Government of any State or Territory; or
(c) the adoption by the ASIC, its delegates, ASX, the Reserve Bank of Australia or any other regulatory authority of any regulations or policy, which does or is likely to prohibit, restrict or regulate the principal business of the Company, the Entitlements Issue or the operation of stock markets generally;
(d) failure to comply: the Company or any Related Corporation fails to comply with any of the following:
(e) a provision of its constitution;
(f)
any statute;
(g) a requirement, order or request, made by or on behalf of the ASIC or any Governmental Agency; or
(h) any material agreement entered into by it;

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(i) alteration of capital structure or constitution: except as described in the Prospectus, the Company alters its capital structure or its constitution without the prior written consent of Argonaut;

Hostilities: there is an outbreak of hostilities or a material escalation of hostilities (whether or not war has been declared) after the date of the Underwriting Agreement involving one or more of Australia, Indonesia, Japan, Russia, the United Kingdom, the United States of America, or the Peoples Republic of China, other than hostilities involving Afghanistan or Iraq, any country bordering Afghanistan or Iraq or any Arab country (being a country the majority of whose inhabitants are of Arab ethnicity);

Extended Force Majeure: a Force Majeure, which prevents or delays an obligation under the Underwriting Agreement, lasting in excess of 2 weeks occurs;

Default: the Company is in default of any of the terms and conditions of the Underwriting Agreement or breaches any warranty or covenant given or made by it under the Underwriting Agreement;

Adverse change: any adverse change occurs which materially impacts or is likely to impact the assets, operational or financial position of the Company or a Related Corporation (including but not limited to an administrator, receiver, receiver and manager, trustee or similar official being appointed over any of the assets or undertaking of the Company or a Related Corporation);

Investigation: any person is appointed under any legislation in respect of companies to investigate the affairs of the Company or a Related Corporation;

Due diligence: there is a material omission from the results of the due diligence investigation performed in respect of the Entitlements Issue or the results of the investigation or the verification material are false or misleading;

Prescribed occurrence: certain prescribed occurrences occur, other than as disclosed in the Prospectus;

Suspension of debt payments: the Company suspends payment of its debts generally;

Sub-underwriters: any Company introduced sub-underwriters fail to enter into acceptable sub-underwriting agreements or subsequently withdraw or attempt to terminate their sub-underwriting obligations;

Event of insolvency: an event of insolvency (as it is defined in the Underwriting Agreement) occurs in respect of a Related Corporation; or

Judgment against a related corporation: a judgment in an amount exceeding $50,000 is obtained against the Company or a Related Corporation and is not set aside or satisfied within 7 days.

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17. TERMS OF SHARES AND OPTIONS

17.1 Rights and Liabilities attaching to Shares

The following is a summary of the more significant rights and liabilities attaching to Shares to be issued pursuant to this Prospectus. This summary is not exhaustive and does not constitute a definitive statement of the rights and liabilities of Shareholders. To obtain such a statement, persons should seek independent legal advice.

Full details of the rights and liabilities attaching to Shares are set out in the Constitution, a copy of which is available for inspection at the Company’s registered office during normal business hours.

General Meetings

The ASX and each Shareholder and Director is entitled to receive notice of, and to attend, any general meeting of the Company. Two Shareholders must be present to constitute a quorum for a general meeting. The Company is obliged to convene and hold an annual general meeting.

Shareholders may requisition meetings in accordance with Section 249D of the Corporations Act and the Constitution of the Company.

Voting Rights

Subject to restrictions on voting from time to time affecting any class of shares in the Company, and any restrictions imposed by the Corporations Act, the shares in the Company carry the right to cast one vote on a show of hands and, on a poll, one vote for each fully paid share held, and for each partly paid share held, a vote having the same proportionate value as the proportion to which the shares have been paid up. Voting may be in person or by proxy, attorney or representative.

Dividend Rights

At this early stage of the Company’s growth there are no plans to pay dividends. However, if the Board determines that a dividend is payable, it will be paid on all shares proportionate to the total amount for the time being paid on each share. Such dividend payment is subject to the rights and restrictions on the holders of shares created or raised under any special dividend arrangements.

The Board may establish and maintain one or more dividend plans, to which Shareholders may elect to take up with some or all their shares subject to the rules of the plan.

Subject to the ASX Listing Rules, the Board has the power to capitalise and distribute the whole or part of the undivided profits of the Company or standing to the credit of any reserve or other account and which is available for distribution. Such capitalisation and distribution must be in the same proportions which the Shareholders would be entitled to receive if distributed by way of dividend or in accordance with the terms of issue of any shares or terms of any plan for the issue of securities for the benefit of officers or employees.

The Board has the power to decide whether to pay shareholders an interim

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dividend on account of the next forthcoming dividend. Any distribution may be paid otherwise than in cash as specified in the constitution.

No dividend is payable except out of Company profits and no dividend or other monies paid in relation to a share will carry interest as against the Company.

Winding-Up

If the Company is wound up, whether voluntary or otherwise, the liquidator may divide among all or any of the contributories as the liquidator thinks fit in specie or in kind any part of the assets of the Company, and may vest any part of the assets of the Company in trustees upon any trusts for the benefit of all or any of the contributories as the liquidator thinks fit.

If thought expedient, any division may be otherwise than in accordance with the legal rights of the contributories and, in particular, any class may be given preferential or special rights or may be excluded altogether or in part, but in case any division otherwise than in accordance with the legal rights of the contributories is determined, any contributory who would be prejudiced by the division has the right to dissent and ancillary rights as if the determination were a special resolution passed pursuant to the Corporations Act relating to the sale or transfer of the Company’s assets by a liquidator in a voluntary winding up.

Transfer of Shares

Shares may be transferred in any manner required or permitted by the ASX Listing Rules or the ASTC Settlement Rules and by any instrument in writing in any usual or common form or in any other form that the Board approves. The Board may only refuse to register a transfer of securities of the Company as permitted by the ASX Listing Rules or the ASTC Settlement Rules.

Future Increase in Capital

The allotment and issue of any new Shares is under the control of the Directors of the Company. Subject to restrictions on the issue or grant of securities contained in the ASX Listing Rules, the Constitution and the Corporations Act (and without affecting any special right previously conferred on the holder of an existing share or class of shares), the Directors may issue Shares as they shall, in their absolute discretion, determine.

Variation of Rights

Under Section 246B of the Corporations Act, the Company may, with the sanction of a special resolution passed at a meeting of Shareholders vary or abrogate the rights attaching to Shares.

The rights and restrictions attaching to any class of shares (unless provided by the terms of issue of the shares of that class), can only be varied with the consent in writing of Shareholders with at least three-quarters of the votes in that class, or with the sanction of a special resolution passed at a separate meeting of the holders of shares of that class.

17.2 Terms of Options

As at the date of this Prospectus, the Company has 400,001 Options on issue (on a post-Consolidation basis), with the exercise prices and expiry dates set out in Section 4.5(a).

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The Company also intends to issue (subject to the Company receiving conditional approval for admission to the Official List of ASX) a total of:

(a) 2,500,000 Options (as part of the Offer) for nil additional consideration;
(b) 15,000,000 Options under the Option Placement for $0.01 each;
(c) 1,250,000 Options on conversion of the Convertible Notes for nil additional consideration;
(d) 9,179,932 Options for the Entitlements Issue for $0.01 each.

Subject to Shareholder approval at the General Meeting for their issue, and ASX approval for their quotation, these Options will be listed Options issued on the terms set out below;

(a) each Option gives the Optionholder the right to subscribe for one Share. To obtain the right given by each Option, the Optionholder must exercise the Options in accordance with the terms and conditions of the Options;
(b) the Options will expire at 5:00 pm (WST) on 30 June 2013 (Expiry Date). Any Option not exercised before the Expiry Date will automatically lapse on the Expiry Date;
(c) the amount payable upon exercise of each Option will be $0.24 (Exercise Price);
(d) the Options held by each Optionholder may be exercised in whole or in part, and if exercised in part, multiples of 1,000 must be exercised on each occasion;
(e) an Optionholder may exercise their Options by lodging with the Company, before the Expiry Date:
(i) a written notice of exercise of Options specifying the number of Options being exercised; and
(ii) a cheque or electronic funds transfer for the Exercise Price for the number of Options being exercised (Exercise Notice);
(f) an Exercise Notice is only effective when the Company has received the full amount of the Exercise Price in cleared funds;
(g) within 10 Business Days of receipt of the Exercise Notice accompanied by the Exercise Price, the Company will allot the number of Shares required under these terms and conditions in respect of the number of Options specified in the Exercise Notice;
(h) all Shares allotted upon the exercise of Options will upon allotment rank pari passu in all respects with other Shares;
(i) the Company will apply for quotation of the Options on ASX. The Company will apply for quotation of all Shares allotted pursuant to the exercise of Options on ASX within 10 Business Days after the date of allotment of those Shares;

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(j) if at any time the issued capital of the Company is reconstructed, all rights of an Optionholder are to be changed in a manner consistent with the Corporations Act and the ASX Listing Rules at the time of the reconstruction;
(k) there are no participating rights or entitlements inherent in the Options and Optionholders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Options. However, the Company will ensure that for the purposes of determining entitlements to any such issue, the record date will be at least 6 Business Days after the issue is announced. This will give Optionholders the opportunity to exercise their Options prior to the date for determining entitlements to participate in any such issue;
(l) an Option does not confer the right to a change in exercise price or a change in the number of underlying securities over which the Option can be exercised.

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18. ADDITIONAL INFORMATION

18.1 Continuous Disclosure Obligations

The Company is a “disclosing entity” (as defined in Section 111AC of the Corporations Act) for the purposes of Section 713 of the Corporations Act and, as such, is subject to regular reporting and disclosure obligations. Specifically, like all listed companies, the Company is required to continuously disclose any information it has to the market which a reasonable person would expect to have a material effect on the price or the value of the Company’s securities.

This Prospectus is a “transaction specific prospectus” in accordance with section 713 of the Corporations Act. In general terms a “transaction specific prospectus” is only required to contain information in relation to the effect of the issue of securities on the Company and the rights attaching to the securities. It is not necessary to include general information in relation to all of the assets and liabilities, financial position, profits and losses or prospects of the issuing company. However, the company has included much of this information so as to adequately disclose all information in relation to the Acquisition. This Prospectus contains all of the information required under section 710 of the Corporations Act.

This Prospectus is intended to be read in conjunction with the publicly available information in relation to the Company which has been notified to ASX and does not include all of the information that would be included in a prospectus for an initial public offering of securities in an entity that is not already listed on a stock exchange. Investors should therefore have regard to the other publicly available information in relation to the Company before making a decision whether or not to invest.

Having taken such precautions and having made such enquires as are reasonable, the Company believes that it has complied with the general and specific requirements of ASX as applicable from time to time throughout the 3 months before the issue of this Prospectus which required the Company to notify ASX of information about specified events or matters as they arise for the purpose of ASX making that information available to the stock market conducted by ASX.

Information that is already in the public domain has not been reported in this Prospectus other than that which is considered necessary to make this Prospectus complete.

The Company, as a disclosing entity under the Corporations Act states that:

(a) it is subject to regular reporting and disclosure obligations;
(b) copies of documents lodged with the ASIC in relation to the Company (not being documents referred to in Section 1274(2)(a) of the Corporations Act) may be obtained from, or inspected at, the offices of the ASIC; and
(c) it will provide a copy of each of the following documents, free of charge, to any person on request between the date of issue of this Prospectus and the Closing Date:
(i) the annual financial report most recently lodged by the Company with the ASIC;

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(ii) any half-year financial report lodged by the Company with the ASIC after the lodgement of the annual financial report referred to in (i) and before the lodgement of this Prospectus with the ASIC; and
(iii) any continuous disclosure documents given by the Company to ASX in accordance with the ASX Listing Rules as referred to in Section 674(1) of the Corporations Act after the lodgement of the annual financial report referred to in (i) and before the lodgement of this Prospectus with the ASIC.

Copies of all documents lodged with the ASIC in relation to the Company can be inspected at the registered office of the Company during normal office hours.

Details of documents lodged with ASX since the date of lodgement of the Company’s latest annual financial report and before the lodgement of this Prospectus with the ASIC are set out in the table below.

Date	Description of Announcement
21 May 2010	Change of timetable
13 May 2010	Progress Report
11 May 2010	Notice of General Meeting/Proxy Form
5 May 2010	Reinstatement to Official Quotation
4 May 2010	Clearer copy of Acquisition
4 May 2010	Suspension from Official Quotation
4 May 2010	XState to acquire Advanced Tunisian Oil and Assets
30 April 2010	Quarterly Report
29 April 2010	Trading Halt
7 April 2010	Notice of AGM and 2009 Annual Report

ASX maintains files containing publicly available information for all listed companies. The Company’s file is available for inspection at ASX during normal office hours.

18.2 Directors’ Interests

Other than as set out below or elsewhere in this Prospectus, no Director nor any firm in which such a Director is a partner, has or had within 2 years before the lodgement of this Prospectus with the ASIC, any interest in:

(a) the formation or promotion of the Company;
(b) property acquired or proposed to be acquired by the Company in connection with its formation or promotion or the Offer pursuant to this Prospectus; or

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(c) the Offer,

and no amounts have been paid or agreed to be paid (in cash or Shares or otherwise) to any Director or to any firm in which any such Director is a partner or director, either to induce him to become, or to qualify him as, a Director or otherwise for services rendered by him or by the firm in connection with the formation or promotion of the Company or the Offer.

Directors’ relevant interests in securities of the Company at the date of this Prospectus are set out below.

18.3 Disclosure of Interests – Directors and Proposed Directors

Directors are not required under the Company’s Constitution to hold any Shares. As at the date of this Prospectus, the current Directors of the Company have relevant interests in Securities (on a post-Consolidation basis) as set out in the table below:

Director	Shares	Options
Ross Kestel	Nil	Nil
Rhoderick Grivas	43,333	333,333
David McArthur	901,841	Nil
Brett Mitchell	Nil	Nil

The Proposed Directors of the Company have relevant interests in Shares as set out in the table below. These figures include Securities to be issued to the Proposed Directors under the terms of the Option Placement and Acquisition:

Proposed Director	Shares	Options
Gary Jeffery	1,165,800	2,500,000
John Begg	1,748,700	2,500,000

18.4 Remuneration

The Company’s Constitution provides that the remuneration of non-executive Directors will be not more than the aggregate fixed sum determined by a general meeting. The aggregate remuneration for non-executive Directors has been set at an amount not to exceed $200,000 per annum.

The remuneration of executive Directors will be fixed by the Directors and may be paid by way of fixed salary or consultancy fee.

The remuneration of the current Directors of the last two (2) years is set out as follows:

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Director	Current Financial Year	Previous Financial Year
Ross Kestel	$50,000	$50,000
Rhoderick Grivas	$45,000	$45,000
David McArthur	$80,000	$79,2451
Brett Mitchell	$45,000	$15,000

NOTES:

An entity associated with Mr McArthur is engaged to provide corporate and office services for a fee of $7,000 per month.

If the Proposed Directors are appointed as Directors of the Company, the Board will review the remuneration arrangements of the Company and seek any necessary Shareholder approvals for increased remuneration in accordance with the Constitution, and any necessary Shareholder approvals for the grant of equity based incentive remuneration.

18.5 Deeds of Indemnity, Insurance and Access

The Company has entered into (or proposes to enter into) a deed of indemnity, insurance and access with each of its Directors (including the Proposed Directors). Under these deeds, the Company agrees to indemnify each Director to the extent permitted by the Corporations Act against any liability arising as a result of the Director acting in the capacity as a director of the Company. The Company is also required to maintain insurance policies for the benefit of the Director and must also allow the Directors to inspect Company documents in certain circumstances.

18.6 Fees and Benefits

Other than as set out below or elsewhere in this Prospectus, no:

(a) Director or Proposed Director of the Company;
(b) person named in this Prospectus as performing a function in a professional advisory or other capacity in connection with the preparation or distribution of this Prospectus;
(c) promoter of the Company; or
(d) underwriter (but not a sub-underwriter) to the issue or a financial services licencee named in the Prospectus as a financial services licencee involved in the issue,

has, or had within two (2) years before lodgement of this Prospectus with the ASIC, any interest in:

(e) the formation or promotion of the Company;
(f) any property acquired or proposed to be acquired by the Company in connection with its formation or promotion or in connection with the offer of Shares under this Prospectus; or

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(g) the offer of Shares under this Prospectus,

and no amounts have been paid or agreed to be paid and no benefits have been given or agreed to be given to any of those persons as an inducement to become, or to qualify as, a Director of the Company or for services rendered in connection with the formation or promotion of the Company or the offer of Shares under this Prospectus other than the Remuneration set out in Section 18.4.

ISIS Petroleum Consultants Pty Ltd has acted as the Independent Technical Specialist and has prepared the Independent Technical Specialist’s Report set out in Section 10 of this Prospectus. The Company estimates that it will pay ISIS Petroleum Consultants Pty Ltd a total of $35,000 for these services.

KPMG Transaction Services (Australia) Pty Ltd has acted as Investigating Accountant and has prepared an Investigating Accountant’s Report which has been included in Section 11 of this Prospectus. The Company estimates it will pay KPMG Transaction Services (Australia) Pty Ltd a total of $19,000 for these services.

Steinepreis Paganin has acted as the Australian solicitors to the Company in relation to this Prospectus, has been involved in due diligence enquiries on Australian legal matters. The Company estimates it will pay Steinepreis Paganin $25,000 in relation to the Prospectus and an additional $20,000 for services relating to the Acquisition up to the date of lodgement of this Prospectus with the ASIC. Subsequently, fees will be charged in accordance with normal charge out rates.

CAID Essebsi & Partners has acted as the Tunisian solicitors to the Company in relation to this Prospectus, has been involved in and has prepared the Solicitors’ Report on Tunisian Permits set out in Section 13 of this Prospectus. The Company estimates it will pay CAID Essebsi & Partners approximately $12,049 for these services (based on an exchange rate of 1 USD = 1.20488 AUD on 21 May 2010).

CMS Adonnino Ascoli & Cavasola Scamoni has acted as the Italian solicitors to the Company in relation to this Prospectus, has been involved in and has prepared the Solicitors’ Report on Italian Permits set out in Section 14 of this Prospectus. The Company estimates it will pay CMS Adonnino Ascoli & Cavasola Scamoni approximately 10,646 for these services (based on an exchange rate of 1 EUR = 1.52081 AUD on 21 May 2010).

Argonaut is acting as Lead Manager to the Offer and Underwriting to the Entitlements Issue in relation to this Prospectus. The Company estimates it will pay Argonaut approximately $60,000 (plus GST if applicable) in relation to the Capital Raising. Argonaut, or its nominee, will also be entitled to subscribe for up to 5,000,000 Options in the Company. Please refer to Section 16.8 for a summary of the Mandate Agreement entered into between Argonaut and the Company and Section 16.9 for a summary of the Underwriting Agreement.

18.7 Consents

Each of the parties referred to in this Section:

(a) do not make, or purport to make, any statement in this Prospectus other than those referred to in this Section; and
(b) to the maximum extent permitted by law, expressly disclaim and take no responsibility for any part of this Prospectus other than a reference to

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its name and a statement included in this Prospectus with the consent of that party as specified in this Section.

ISIS Petroleum Consultants Pty Ltd has given its written consent to being named as the Independent Technical Specialist to the Company in this Prospectus and to the inclusion of the Independent Technical Specialist’s Report in Section 10 in the form and context in which the report is included. ISIS Petroleum Consultants Pty Ltd has not withdrawn its consent prior to the lodgement of this Prospectus with the ASIC.

KPMG Transaction Services (Australia) Pty Ltd has given their written consent to being named as Investigating Accountant in this Prospectus and to the inclusion of the Investigating Accountant’s Report in Section 12 in the form and context in which the report is included. KPMG Transaction Services (Australia) Pty Ltd has not withdrawn its consent prior to lodgement of this Prospectus with the ASIC.

KPMG has given its written consent to being named as Auditor to the Company in this Prospectus in the form and context in which it is so named. KPMG has not withdrawn its consent prior to lodgement of this Prospectus with the ASIC.

Steinepreis Paganin has given its written consent to being named as the Australian solicitor to the Company in this Prospectus. Steinepreis Paganin has not withdrawn its consent prior to the lodgement of this Prospectus with the ASIC.

CAID Essebsi & Partners has given its written consent to be named as the Tunisian solicitor to the Company in this Prospectus and to the inclusion of the Solicitors’ Report on Tunisian Permits in Section 13 in the form and context in which the report is included. CAID Essebsi & Partners has not withdrawn its consent prior to lodgement of this Prospectus with the ASIC.

CMS Adonnino Ascoli & Cavasola Scamoni has given its written consent to be named as the Italian solicitor to the Company in this Prospectus and to the inclusion of the Solicitors’ Report on Italian Permits in Section 14 in the form and context in which the report is included. CMS Adonnino Ascoli & Cavasola Scamoni has not withdrawn its consent prior to lodgement of this Prospectus with the ASIC.

Argonaut has given its written consent to being named as Underwriter to the Entitlements Issue and Lead Manager to the Offer and Option Placement in this Prospectus, and has not withdrawn its consent prior to the lodgement of this Prospectus with the ASIC.

AuDAX has given its written consent to being named in the Prospectus and to the inclusion of statements attributed to it in this Prospectus and the Independent Technical Specialist’s Report in Section 10, in the form and context in which they appear and has not withdrawn its consent prior to the lodgement of this Prospectus with the ASIC.

Bombora has given its written consent to be named in the Prospectus and the inclusion of statements attributed to it in this Prospectus in the form and context in which they appear. Bombora has not withdrawn its consent prior to the lodgement of this Prospectus with the ASIC.

18.8 Litigation

As at the date of this Prospectus, the Company is not involved in any legal proceedings and the Directors are not aware of any legal proceedings pending or threatened against the Company.

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18.9 Estimated Expenses of Offer

The cash expenses of the Offer and Entitlements Issue are estimated to be approximately $254,102 and are expected to be applied towards the items set out in the table below:

Item of Expenditure	Amount ($)
ASIC fees	$2,010
ASX fees	$51,962
Printing	$7,500
Legal Fees – Steinepreis Paganin	$25,000
Legal Fees – CAIDEssebsi & Partners	$12,049
Legal Fees – CMS Adonnino Ascoli Cavasola Scamoni	$10,6462
Legal Fees – Other	$30,935
Broking or Corporate Advisory Fees	$55,000
Underwriting Fees	$5,000
Investigating Accountant’s Fees	$19,000
Independent Technical Specialist’s Fees	$35,000
TOTAL	$254,102

1 Based on an exchange rate of 1 USD = 1.20488 AUD on 21 May 2010

2 Based on an exchange rate of 1 EUR = 1.52081 AUD on 21 May 2010

3 Based on an exchange rate of 1 GBP = 1.73793 AUD on 21 May 2010

18.10 Market Price of Shares

The Company is a disclosing entity for the purposes of the Corporations Act and its Shares are enhanced disclosure Shares quoted on ASX.

The latest available closing sale price of the Company’s Shares on ASX prior to lodgement of this Prospectus was $0.095 on 25 May 2010 (a post-Consolidation price of $0.285).

18.11 Electronic Prospectus

Pursuant to Class Order 00/044, the ASIC has exempted compliance with certain provisions of the Corporations Act to allow distribution of an electronic prospectus and electronic application form on the basis of a paper prospectus lodged with the ASIC, and the publication of notices referring to an electronic

139

prospectus or electronic application form, subject to compliance with certain conditions.

If you have received this Prospectus as an electronic Prospectus, please ensure that you have received the entire Prospectus accompanied by the Application Forms. If you have not, please phone the Company on (08) 9423 3200 and the Company will send you, for free, either a hard copy or a further electronic copy of the Prospectus, or both. Alternatively, you may obtain a copy of this Prospectus from the Company’s website at www.xstate.com.au.

The Company reserves the right not to accept an Application Form from a person if it has reason to believe that when that person was given access to the electronic Application Form, it was not provided together with the electronic Prospectus and any relevant supplementary or replacement prospectus or any of those documents were incomplete or altered.

18.12 Taxation

The acquisition and disposal of Shares in the Company will have tax consequences, which will differ depending on the individual financial affairs of each investor. All potential investors in the Company are urged to obtain independent financial advice about the consequences of acquiring Shares from a taxation viewpoint and generally.

To the maximum extent permitted by law, the Company, its officers and each of their respective advisors accept no liability and responsibility with respect to the taxation consequences of subscribing for Shares under this Prospectus.

18.13 Financial Forecasts

The Directors have considered the matter set out in ASIC Regulatory Guide 170 and believe that they do not have a reasonable basis to forecast future earnings on the basis that the operations of the Company are inherently uncertain. Accordingly, any forecast or projection information would contain such a broad range of potential outcomes and possibilities that it is not possible to prepare a reliable best estimate forecast or projection.

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19. DIRECTORS’ AUTHORISATION

This Prospectus is issued by the Company and its issue has been authorised by a resolution of the Directors.

In accordance with Section 720 of the Corporations Act, each Director and Proposed Director has consented to the lodgement of this Prospectus with the ASIC.

_______ MR BRETT MITCHELL DIRECTOR Signed for and on behalf of XSTATE RESOURCES LIMITED

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20. DEFINITIONS

$ means Australian dollars.

Acquisition means the proposed acquisition of 100% of the Bombora Shares by the Company, in accordance with the terms of the Implementation Agreement.

Applicant means an investor who applies for Shares pursuant to the Offer.

Application Form means either the Offer Application Form, Priority Offer Application Form or Entitlements Issue Application Form either attached to or accompanying this Prospectus.

Argonaut means Argonaut Capital Limited (ACN 099 761 547) or its associated entities as the case may be.

ASIC means the Australian Securities and Investments Commission.

ASTC Settlement Rules means the settlement rules of the securities clearing house which operates CHESS.

ASX means ASX Limited (ACN 008 624 691) or the Australian Securities Exchange (as the context requires).

ASX Listing Rules means the Listing Rules of the ASX.

AuDAX means AuDAX Resources Limited (ACN 009 058 646).

Board means the board of Directors unless the context indicates otherwise.

Bombora means Bombora Energy Limited (ACN 139 389 326).

Bombora Share means a fully paid ordinary share in Bombora.

Bombora Shareholder means the holder of a Bombora Share.

Bombora Offer means the offer to acquire all of the share capital in Bombora, made to each Bombora Shareholders on the terms set out in clause 16.2.

Business Day means a day on which trading takes place on the stock market of ASX.

Closing Date means the date specified in Section 4.2 (unless extended or closed earlier).

Company means XState Resources Limited (ACN 009 217 154).

Consolidation means the proposed consolidation of the Company’s existing Securities (prior to the issue of Securities offered under this Prospectus) on the basis of one (1) Security for every three (3) Securities held.

Constitution means the constitution of the Company as at the date of this Prospectus.

Convertible Note means a convertible note issued under the agreement described in clause 16.7.

Corporations Act means the Corporations Act 2001 (Cth).

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Director's means the directors of the Company as at the date of this Prospectus.

Entitlements Issue means a pro rata non-renounceable Entitlements Issue on the basis of one (1) Option for every two (2) Shares held by Shareholders on the Entitlements Issue Records Date (on a post-Consolidation basis) at an issue price of $0.01 per Option, to raise up to approximately $91,800 on the terms set out in Section 6.

ETAP means Enterprise Tunisienne D’Activities Petrolieres.

Foreign Shareholder means a person registered as a Shareholder as at the Entitlements Issue Record Date whose registered address is outside Australia or New Zealand.

General Meeting means the meeting of Shareholders to be held on 10 June 2010 to seek approval for, amongst other things, the transactions set out in Section4.6.

General Offer means 4,000,000 Shares (and additional Options) plus any remaining after allocation of the Priority Offer on the terms set out in Section 5.

Lead Manager means Argonaut Capital Limited, in respect of the Offer and Option Placement.

Material Adverse Change means one or more occurrences or matters individually or in aggregate that are within the control of Bombora and that:

(a) have a material adverse effect on the business, properties, financial condition, results, operations or prospects of the Company, Bombora or their subsidiaries, taken as a whole, and without limiting the generality of the foregoing creates or could reasonably be expected to create liabilities, or results or could reasonably be expected to result in a diminution of the value of the Company or Bombora assets, which in aggregate exceed $250,000; or
(b) prevent the Company or Bombora from performing its obligations under the Agreement.

Material Adverse Matter means any matter which has occurred but is not in the public domain at the date of the Agreement and has not been disclosed to the Company or Bombora (by the other party) prior to the date of this Agreement and which:

(a) had it occurred after the date of the Agreement would have been a Material Adverse Change; and
(b) had it been known prior to the date of the Agreement, the other party’s Board would not have resolved to execute the Agreement (acting reasonably).

Noteholder means a holder of a Convertible Note on the terms set out in clause 16.7.

Offer means the offer of 5,000,000 Shares at an issue price of $0.20 per Share, to raise $1,000,000. For every two (2) Shares subscribed, one (1) Option will be granted for no further consideration.

Official Quotation means official quotation on ASX.

Option means an option to acquire a Share.

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Option Placement means the proposed placement of 15,000,000 Options to certain Bombora Shareholders to provide working capital, as described in Section 7.

Proposed Director means Messrs Gary Jeffery and John Begg whom it is intended will be appointed as Directors of the Company if Shareholder approved is obtained for their appointment, the Acquisition is successful and otherwise as referred to in this Prospectus.

Priority Offer means the offer of 1,000,000 Shares and 500,000 Options to shareholders of the Company on the Priority Offer Record Date, on the terms set out in Section 5.2 of this Prospectus.

Priority Offer Record Date means the record date for determining entitlements to participate in the Priority Offer.

Prospectus means this prospectus.

Related Corporation means a “related body corporate” of the Company as that expression is defined in the Corporations Act.

Resolutions means the resolutions referred to in Section 4.6 proposed for the General Meeting.

Security means a Share or an Option.

Share means a fully paid ordinary share in the capital of the Company.

Shareholder means a shareholder of the Company.

Underwriter means Argonaut Capital Limited, in respect of the Entitlements Issue.

WST means Western Standard Time as observed in Perth, Western Australia.

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AI assistant

XSTATE RESOURCES LIMITED — Capital/Financing Update 2010

66107_rns_2010-05-25_42b956b0-23fe-4755-bd65-410b411fa466.pdf

XSTATE RESOURCES LIMITED ACN 009 217 154

PROSPECTUS

AND

AND

IMPORTANT NOTICE

TABLE OF CONTENTS

1. IMPORTANT NOTES

IMPORTANT NOTES

RISK FACTORS

ELECTRONIC PROSPECTUS

INVESTMENT HIGHLIGHTS

Investment Highlights

INVESTMENT RISKS

2. CORPORATE DIRECTORY

Directors

Share Registry*

Company Secretary

Australian Solicitors to the Company

Proposed Directors

Registered Office

Principal Place of Business

Auditor

Investigating Accountant

Italian Solicitors to the Company – Solicitors’ Report on Italian Permit

Tunisian Solicitors to the Company – Solicitors’ Report on Tunisian Permits

Independent Technical Specialist

Underwriter and Lead Manager

3. CHAIRMAN’S LETTER

4. INVESTMENT OVERVIEW

4.1 Important Notice

4.2 Indicative Timetable

No deferred trading will take place.

4.3 Objectives

Introduction

Purpose of this Prospectus

4.4 Risk Factors

4.5 Proceeds of the Offer, Entitlements Issue, Option Placement and associated transactions

4.6 Effect on Capital Structure

Shares

Notes:

Notes:

4.7 Conditional Offer

4.8 Re-compliance with Chapters 1 and 2 of the ASX Listing Rules

4.9 Restricted Securities

4.10 Overseas investors

4.11 Australian Securities Exchange Listing

4.12 Secondary Trading

4.13 Clearing House Electronic Sub-Register System (CHESS) and Issuer Sponsorship

4.14 Privacy Act

5. DETAILS OF THE OFFER

5.1 Offer

5.2 Priority Offer and General Offer

Priority Offer

General Offer

Applications

Do not apply for Securities under the General Offer unless directed to do so by the Lead Manager or the Company.

For the General Offer;

For the Priority Offer;

5.3 Minimum Subscription

5.4 Underwriter

5.5 Issue of Securities

5.6 Enquiries

6. DETAILS OF THE ENTITLEMENTS ISSUE

6.1 Entitlements Issue

6.2 How to Accept the Entitlements Issue

6.3 Underwriting

6.4 Shortfall

6.5 Issue of Options

6.6 Restrictions on the Distribution of the Prospectus

7. DETAILS OF THE OPTION PLACEMENT

7.1 Option Placement

7.2 Applications

Do not apply for Securities under the Option Placement unless directed to do so by the Company.

7.3 Minimum Subscription

7.4 Underwriter

7.5 Issue of Options

7.6 Enquiries

XSTATE RESOURCES LIMITED Capital/Financing Update 2010