XSTATE RESOURCES LIMITED — Interim / Quarterly Report 2010

Oct 28, 2010

XState Resources Limited

ABN 96 009 217 154

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Registered office 41 Stirling Highway Nedlands WA 6009 Tel: +61 8 9423 3200 Fax: +61 8 9389 8327

Postal address PO Box 985 Nedlands WA 6909 Website www.xstate.com.au

29 October 2010

SEPTEMBER 2010 QUARTERLY ACTIVITY REPORT

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ASX Code: XST

Highlights

• PREPARING FOR DRILLING LARGE ONSHORE SIDI DAHER PROSPECT IN 2010

• OFFSHORE LAMBOUKA DISCOVERY WELL DRILLED AND SUSPENDED FOR RE‐ENTRY, PRELIMINARY GAS AND CONDENSATE RESOURCE ESTIMATE RELEASED

• COMPANY RESTRUCTURE COMPLETED ‐ TUNISIAN & ITALIAN OIL AND GAS FOCUS

• ENTITLEMENTS ISSUE ANNOUNCED TO RAISE CAPITAL FOR DRILLING SIDI DAHER

EXPLORATION ACTIVITY

Drilling of the Sidi Daher Prospect (300 MMBOE recoverable Prospective Resource)

Exploration plans have commenced with rig contracting and well site permitting underway to be ready to drill the large Sidi Daher Prospect in the Chorbane Block onshore Tunisia in late 2010. The Sidi Daher prospect has the potential for recoverable Prospective Resources of over 300 million barrels of oil equivalent (MMBOE) from up to 6 reservoirs.

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Flatspot
(DHI) covers
2
16 Km
Sidi Daher
well location
Structural
Closure
2
covers 73 Km
Scale: 10 km
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Figure 1: Sidi Daher Prospect Map (Top Metlaoui Structure)

XState will earn a 10% equity interest in Sidi Daher by part funding the drilling of the Sidi Daher well.

Lambouka‐1 Drilling Resulted in Gas and Condensate Discovery

During August and September 2010 XState participated in the drilling of the Lambouka‐1 well offshore Tunisia through its 10% working interest.

After Lambouka‐1 reached a total measured depth of 2,786 metre, the Joint Venture announced that hydrocarbon bearing zones had been discovered. Analysis of the final suite of wire line logs supported earlier results from logging while drilling, and at least two hydro‐ carbon bearing zones were interpreted to be present in the Abiod Limestone Formation. The nature of the hydrocarbons is likely to be comprised of gas and condensate based on the hydrocarbon shows recorded from the cuttings. A net pay of approximately 23 metres is interpreted within these two reservoir units. Additional zones of interest remain to be investigated further.

The Company announced on 8 September 2010 that the participants in Lambouka‐1 had agreed to suspend the well in a manner suitable for future re‐entry. After detailed analysis this suspension is expected to provide the opportunity to obtain additional hydrocarbon and reservoir information in a cost effective manner.

Lambouka Resource Estimate (75 MMBOE recoverable Contingent Resource)

A preliminary resource estimate for the Lambouka discovery was released on 23 September 2010. ADX Energy Ltd, the Operator of the Lambouka well, released a preliminary volumetric estimate of the potential hydrocarbon resource associated with the Lambouka gas discovery. XState considers the Operator’s estimates to reflect Contingent Resources as they have been made without the benefit of a detailed field development plan or analysis of other factors of economic relevance, e.g. development in conjunction with the Dougga discovery.

In summary, the Contingent recoverable Resources estimates for the Lambouka discovery are as follows:‐

	P90	P50	Mean	P10
Gas Resource(BCF)	145	277	309	528
Condensate(mmbbls)	11	21	24	41
Oil Equivalent(mmboe)*	35	67	75	129

*Million barrels of oil equivalent

This estimate incorporated information from the newly acquired 3D seismic data as well as drilling and petrophysical log data from the Lambouka‐1 well. These estimates were made without the benefit of recovering hydrocarbons to surface through either fluid sample recovery via wire‐line methods, or hydrocarbon flow during a drill‐stem test, neither of which activities could be performed during drilling operations primarily due to down hole well conditions.

Industry standard stochastic methods were utilized to generate this resource estimate. The estimate incorporates a similar "gas to condensate ratio" as was identified in the nearby Dougga gas condensate field, supported by the Lambouka‐1 well site gas chromatography data which also indicated a condensate rich gas. No carbon dioxide was detected in the well. Carbon dioxide is common in the area and if present in high proportions in the gas reduces the commercial potential.

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These estimates relate to two Abiod and Allam carbonate reservoirs interpreted as hydrocarbon bearing at the Lambouka‐1 well location and do not at this preliminary stage include potential volumes from fractures within the reservoirs.

These estimates provide a reasonable basis for the further evaluation of the Lambouka discovery, including the extraction of all available information from the existing data and comparison with off‐set well interpretation. This will support planning for the next phase of data acquisition, which may include re‐entry into the original well‐bore, drilling, flow testing and wire‐line log acquisition.

The joint venture partners will continue to interpret the data obtained from the Lambouka‐1 well and use the results to provide further assessments of the potential of the Lambouka discovery.

Dougga Discovery (96 MMBOE recoverable Contingent Resource)

The final fully processed version of the 3D seismic which was acquired in April 2010 was received and interpretation of the area surrounding Dougga and Lambouka structures commenced in the reporting quarter and continues.

CORPORATE

The Company undertook the following corporate activities during the quarter:

• Recommenced trading on the ASX on 13 July 2010 after completing the acquisition of Bombora Energy Limited to focus on oil and gas exploration and development.

• In January 2010, the Company took out an option to acquire a geological database in Nevada, USA. This option has now expired and was not exercised by the Company due to the Company’s focus on oil and gas opportunities.

• As part of the Bombora transaction, Mr Gary Jeffery was appointed to the Board as the new Managing Director, with Mr John Begg appointed as Non‐Executive Chairman.

• The Company announced the issue of 1,000,000 new options to continuing Non‐Executive Director Brett Mitchell, subject to approval at the next shareholder meeting.

• The Company also announced an underwritten non‐renounceable entitlement issue to shareholders, to raise up to $3million. The pro‐rata offer is for 4 new shares for every 5 shares held at 10 cents each, with 1 attaching free listed option (trading as XSTO) for every 2 new shares subscribed for. The listed options are to be the same class as the current listed XSTO, exercisable at $0.24 cents each, on or before 30 June 2013. The offer closed on October 27 with the new shares and options expected to commence trading in early November.

• The Entitlements Issue will result in the issue of 30,016,261 new Shares in XState and 15,008,130 new listed XSTO options, following which the capital structure will be as follows:

	Shares	Options
Currentlyon Issue	37,520,326	33,829,932
Entitlement Offer	30,106,261	15,008,130
New Totals, post Entitlement	67,536,587	48,838,062

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For and on behalf of the Board of XState Resources Limited

Gary Jeffery Managing Director

Competent Person

The technical information provided has been compiled by Mr Gary Jeffery, Managing Director of XState Resources 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 release and consents to the inclusion of the information in the form and context in which it appears.

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Appendix 5B Mining exploration entity quarterly report

Rule 5.3

Appendix 5B

Mining exploration entity quarterly report

Introduced 1/7/96. Origin: Appendix 8. Amended 1/7/97, 1/7/98.

Name of entity

XSTATE RESOURCES LIMITED

ACN or ARBN 009 217 154	Quarter ended (“current quarter”)
009 217 154	30 September 2010

Consolidated statement of cash flows

Cash flows related to operating activities 1.1 Receipts from product sales and related debtors 1.2 Payments for (a) exploration and evaluation (b) development (c) production (d) administration 1.3 Dividends received 1.4 Interest and other items of a similar nature received 1.5 Interest and other costs of finance paid 1.6 Income taxes paid 1.7 Other – Net Operating Cash Flows	Current quarter $A’000	Year to date (9 months) $A’000
	- (3,902) - - (299) - 15 - - -	- (4,111) - - (486) - 64 - - -
	(4,186)	(4,533)
Cash flows related to investing activities 1.8 Payment for purchases of: (a) prospects (b) equity investments (c) other fixed assets 1.9 Proceeds from sale of: (a) prospects (b) equity investments (c) other fixed assets 1.10 Loans to other entities 1.11 Loans repaid by other entities 1.12 Other – acquisition of subsidiary Net investing cash flows 1.13 Total operating and investing cash flows (carried forward)	- - - - - - - 1,003 (30)	- - - - - - (1,003) 1,003 (30)
	973	(30)
	(3,213)	(4,563)

• See chapter 19 for defined terms.

Appendix 5B Page 1

1/7/2000

Appendix 5B Mining exploration entity quarterly report

1.13 Total operating and investing cash flows (brought forward)	(3,213)	(4,563)
Cash flows related to financing activities 1.14 Proceeds from issues of shares, options, etc. 1.15 Proceeds from sale of forfeited shares 1.16 Proceeds from borrowings 1.17 Repayment of borrowings 1.18 Dividends paid 1.19 Other – see below Net financing cash flows	1,742 - 801 - - (313)	1,742 - 801 - - (163)
	2,230	2,380
Net increase (decrease) in cash held 1.20 Cash at beginning of quarter/year to date 1.21 Exchange rate adjustments to item 1.20 1.22 Cash at end ofquarter	(983) 1,821 (2)	(2,183) 3,022 (3)
	* 836	836

• An underwritten entitlements issue to raise $3,001,626 closed on 27 October 2010.

Payments to directors of the entity and associates of the directors Payments to related entities of the entity and associates of the related entities

1.23 1.24	Aggregate amount of payments to the parties included in item 1.2 Aggregate amount of loans to the parties included in item 1.10	Current quarter $A'000
		142
		-
1.25	Explanation necessaryforanunderstanding ofthe transactions
	1.23 – Includes salaries and fees paid to directors, as well as superannuation paid on behalf of directors. 1.10 and 1.11 - During the previous quarter XState advanced funds to Bombora Energy Limited to enable Bombora to meet cash call obligations. As a subsidiary these funds are offset on consolidation of the Group’s cash flow movements.

Non-cash financing and investing activities

2.1 2.2	Details of financing and investing transactions which have had a material effect on consolidated assets and liabilities but did not involve cash flows
	Issue of 11,660,000 ordinary shares for the acquisition of Bombora Energy Limited;
	Details of outlays made by other entities to establish or increase their share in projects in which the reporting entityhas an interest
	N/A

• See chapter 19 for defined terms.

Appendix 5B Page 2

1/7/2000

Appendix 5B Mining exploration entity quarterly report

Financing facilities available

Add notes as necessary for an understanding of the position.

3.1 Loan facilities 3.2 Credit standby arrangements	Amount available $A’000	Amount available $A’000	Amount used $A’000
		-	-
		-	-
Estimated cash outflows for next quarter
4.1 Exploration and evaluation paid via JV investment 4.2 Development 4.3 Production 4.4 Administration		$A’000
			1,127
			-
			-
			184
Total			1,311

Reconciliation of cash

Reconciliation of cash
Reconciliation of cash at the end of the quarter (as shown in the consolidated statement of cash flows) to the related items in the accounts is as follows.2	Current quarter $A’000	Previous quarter $A’000
5.1 Cash on hand and at bank 5.2 Deposits at call 5.3 Bank overdraft 5.4 Other (provide details)	836	1,821
	-	-
	-	-
	-	-
Total: cash at end of quarter(item 1.22)	836	1,821

Changes in interests in mining tenements

6.1 Interests in mining tenements relinquished, reduced or lapsed 6.2 Interests in mining tenements acquired or increased	Tenement reference	Nature of interest (note (2))	Interest at beginning of quarter	Interest at end of quarter
	Tunisia onshore Tunisia offshore Italy offshore	Chorbane permit Kerkuoane permit Pantelleria permit	0% 0% 0%	10% 10% * 10% *

• During the quarter the Company earned the option to increase its interest in the Kerkouane and Pantelleria (excluding the Lamouka prospect area) from 10% to 20%.

• See chapter 19 for defined terms.

Appendix 5B Page 3

1/7/2000

Appendix 5B Mining exploration entity quarterly report

• Issued and quoted securities at end of current quarter

Description includes rate of interest and any redemption or conversion rights together with prices and dates.

	Total number	Number quoted	Issue price per security (see note 3) (cents)	Amount paid up per security (see note 3) (cents)
7.1 Preference +securities 7.2 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy-backs, redemptions	Nil	N/A	N/A	N/A
	N/A	N/A	N/A	N/A
7.3 +Ordinary securities ** 7.4 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy-backs	37,520,326	37,520,326	N/A	N/A
	19,160,462	19,160,462	20 cents	20 cents
7.5 +Convertible debt securities 7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted	Nil	N/A	N/A	N/A
	N/A	N/A	N/A	N/A
7.7 Options Listed options 7.8 Issued during quarter 7.9 Exercised during quarter 7.10 Expired during quarter	27,929,932	27,932,932	Exercise price 24 cents	Expiry date 30 June 2013
	27,932,932	27,932,932	24 cents	30 June 2013
	0	0	N/A	N/A
	Nil	N/A	N/A	N/A
7.11 Debentures (totals only)	Nil	N/A
7.12 Unsecured notes (totals only)	Nil	N/A

• See chapter 19 for defined terms.

Appendix 5B Page 4

1/7/2000

Appendix 5B Mining exploration entity quarterly report

Compliance statement

• 1 This statement has been prepared under accounting policies which comply with accounting standards as defined in the Corporations Law or other standards acceptable to ASX (see note 4).

• 2 This statement does give a true and fair view of the matters disclosed.

Sign here: Company Secretary

Date: 29 October 2010

Print name: David McArthur

Notes

• 1 The quarterly report provides a basis for informing the market how the entity’s activities have been financed for the past quarter and the effect on its cash position. An entity wanting to disclose additional information is encouraged to do so, in a note or notes attached to this report.

• 2 The “Nature of interest” (items 6.1 and 6.2) includes options in respect of interests in mining tenements acquired, exercised or lapsed during the reporting period. If the entity is involved in a joint venture agreement and there are conditions precedent which will change its percentage interest in a mining tenement, it should disclose the change of percentage interest and conditions precedent in the list required for items 6.1 and 6.2.

• 3 Issued and quoted securities The issue price and amount paid up is not required in items 7.1 and 7.3 for fully paid securities .

• 4 The definitions in, and provisions of, AASB 1022: Accounting for Extractive Industries and AASB 1026: Statement of Cash Flows apply to this report.

• 5 Accounting Standards ASX will accept, for example, the use of International Accounting Standards for foreign entities. If the standards used do not address a topic, the Australian standard on that topic (if any) must be complied with.

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• See chapter 19 for defined terms.