XSTATE RESOURCES LIMITED — Interim / Quarterly Report 2010

Jan 30, 2011

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ABN 9 6 009 217 154

31 January 2011 ASX Limited

Electronic lodgement

Decem ber 2010 Quarterly Activity Report

Highlights

• 300+ MILLION BARREL POTENTIAL ONSHORE SIDI DHAHER PROSPECT SET TO COMMENCE DRILLING IN LATE FEBRUARY 2011

• HIGHLY PROSPECTIVE OFFSHORE KERKOUANE LICENCE RENEWED FOR 3 MORE YEARS

• • DEVELOPMENT REVIEW AND RESOURCE ASSESSMENT STUDY COMMENCED ON DOUGGA GAS AND CONDENSATE DISCOVERY

• • SUCCESSFUL COMPLETION OF $3M CAPITAL RAISING WITH HIGH TAKE‐UP BY SHAREHOLDERS

EXPLORATION ACTIVITY

Preparations Advanced to Commence Drilling on the large Sidi Dhaher Prospect

The Sidi D haher drill s i te preparati o ns, includin g civil works, commenced during the quarter and are continuing in readiness for the spudding of the Sidi Dhaher 1 well. The o perator also signed a lett e r of intent f or the use of the Challen g er 37 rig fo r the well, w h ich is curren t ly expected to spud duri n g February 2011. The Si d i Dhaher 1 w ell will be drilled to a ta r get depth o f 2150 metre s depth on t h e large Sidi Daher Prosp e ct, in the 2428 square kil o metre Chor b ane Block o n shore Tunis i a.

XState will earn a 10% working int e rest in Sidi D haher by fu n ding 20% of t he Sidi Dha h er 1 well co s ts up to US $ 5m and 10% of the costs t hereafter.

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Figure 1: Sidi Dhaher Prospect Map (Top Metlaoui Structure)

XState Resources Limited

The key attributes of the Sidi Dhaher prospect (illustrated below) are:

• Potential for over 300 Million barrels of recoverable prospective oil resource in just the two primary reservoir zones, with a chance of geologic success independently estimated at 30%.

• Resource estimates are based on mapping by Isis Petroleum Consultants, the independent expert who completed the geological report for the XState Prospectus dated 26 May 2010.

• The well is anticipated to intersect 4 additional prospective, but secondary reservoir zones.

• All of the primary and secondary reservoir zones produce oil and gas from fields within 50 kilometres of Sidi Dhaher.

• The estimated cost to drill the well is approximately $6 million and the well is planned to take around 30 days to drill.

• The prospectivity of Sidi Dhaher is supported by the presence of coincident hydrocarbon indicator anomalies, namely:

• Seismic Flat Spots, on all 2D seismic lines crossing the crest of the prospect at the shallowest reservoir level; these flat spots are interpreted to be potential Direct Hydrocarbon Indicators (“DHI”). Seismic flat spots are often the seismic expression of the interface between hydrocarbons and underlying water zones in good reservoir rocks; and

• Surface Petroleum Geochemical “Microseepage” Anomalies across the prospect area. Such anomalies are often present above oil and gas accumulations.

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----- Start of picture text -----

Location of Flat Event ‐
interpreted Direct Hydrocarbon
Indicator (DHI)
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Figure2: Sidi Dhaher Prospect Summary – Cross Section

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Figure 3: Sidi Dhaher Prospect Summary – Map and Seismic

• 41 Stirling Highway, Nedlands WA 6009

• Tel + 61 8 9423 3200 Fax +61 8 9389 8327

• www.xstate.com.au

XState Resources Limited

Kerkouane Licence: 3 More Years Granted

During the quarter an application was made to the Tunisian authorities for the renewal of the offshore Kerkouane Permit. The government of Tunisia approved a three year extension of the offshore Kerkouane PSC as announced to the ASX on 18 January 2011.

XState have earned a 10% interest in the Kerkouane Permit via drilling of the Lambouka 1 discovery well. The 3 year forward work program commitment is detailed below:

• Well test the Lambouka discovery;

• Drill a well to a minimum of 2500 meters or drill to the Jurassic reservoir levels in case such a target is a viable economic prospect and can be identified on the newly acquired dual sensor 3D seismic;

• Relinquish 772 km[2] of the licence area. The remaining new Kerkouane permit comprises an area of 3,080 km[2] .

This relinquishment was accomplished without losing any areas of significant prospectivity. In the remaining Kerkouane permit area only 3 wells have been drilled, and all 3 wells (Dougga 1, Lambouka 1, Kerkouane 1) have found gas and condensate or gas. Numerous other prospects and leads have been mapped on the extensive 3D and 2D seismic covering the area.

Dougga Development Review

A detailed review and resource assessment study was initiated by the joint venture in the quarter and is continuing. The objective of the studies is to establish the technical and commercial feasibility of the Dougga discovery made in 1981. The Dougga 1 well tested gas and condensate from an Abiod Limestone reservoir which is the producing reservoir in many fields in Tunisia. The discovery was not evaluated further at the time due to low gas prices and lack of pipeline connections to gas markets. Since then gas and condensate prices are significantly higher, and there are now gas pipelines capable of delivering gas from Tunisia to Europe.

These studies are being based on the revised interpretation of the Dougga discovery using the results of the dual sensor 3D seismic acquired over Dougga in 2010. A further well is anticipated to be necessary to enable the joint venture to book reserves at Dougga. This well is being planned for drilling in late 2011.

XState has an option to increase its equity to 20% in the Dougga discovery and all areas of the Kerkouane PSC and Pantelleria Permit outside the Lambouka discovery structure.

Tunisia Political Update

The demise of the President of Tunisia following protests about unemployment and escalating costs of basic living materials has resulted in widely reported political instability. The situation is currently reported to be returning to a safer and more stable status under an interim government and parliamentary elections are being planned.

The Chorbane permit operator has advised via the ASX platform on 28 January 2011 that road works and site preparations at Sidi Dhaher are continuing. The operator has been liaising closely with ETAP (Enterprise Tunisienne d’Activities Petrolieres) the government agency responsible for the management of Oil and Gas activities in Tunisia and ETAP confirmed their office is running normally and are encouraged by the advanced well site preparation.

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

XState Resources Limited

CORPORATE

The Company undertook the following corporate activities during the quarter:

• The company successfully raised $3 million via a non‐renounceable entitlement issue that was fully underwritten. Some 67% of shareholders took up their entitlements. Following the completion of the Entitlement Issue new shares (ASX ‐ XST) and listed options (ASX ‐ XSTO) commenced trading on the ASX on 9 November 2010;

• A General Meeting of shareholders was held on 9 December 2010, and all resolutions were passed unanimously by shareholders on a show of hands;

• Prior to the end of the quarter a General Meeting was requisitioned by a group of shareholders owning 8.2% of the shares of XState, and the meeting has been organised for 14 February 2011. The resolution to be considered at the meeting is for the removal of John Begg as Chairman.

The Company continues to actively seek and evaluate opportunities that fit its strategy of exploring for oil and gas and evaluating known oil and gas discoveries for the benefit of its shareholders.

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 38 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 . Mr Jeffery consents to the inclusion of the above information in the form and context in which it appears.

.

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

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, 30/9/01, 01/06/10, 17/12/10

Name of entity

	XSTATE RESOURCES LIMITED	XSTATE RESOURCES LIMITED
	ABN 96 009 217 154 Consolidated statement of cash flows
			31 December 2010
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 (provide details if material) Net Operating Cash Flows		Current quarter $A’000		Year to date (12 months) $A’000
		- (380) - - (360) - 8 (39) - -		- (4,491) - - (846) - 72 (39) - -
		(771)		(5,304)
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)		- - (24) - - - - - -		- - (24) - - - (1,003) 1,003 (30)
		(24)		(54)
		(795)		(5,358)

• See chapter 19 for defined terms.

17/12/2010 - Appendix 5B

Page 1

Appendix 5B Mining exploration entity quarterly report

1.13 Total operating and investing cash flows (brought forward)	(795)	(5,358)
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 – capital raising costs Net financing cash flows	2,326 - - (801) - (129)	4,068 - 801 (801) - (292)
	1,396	3,776
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	601 836 (20)	(1,582) 3,022 (23)
	1,417	1,417

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
		113
		-
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 June quarter XState advanced funds to Bombora Energy Limited to enable Bombora to meet cash call obligations as part of the terms of the Xstate acquisition of Bombora. Now as a wholly owned subsidiary of Xstate, these funds are offset on consolidation of the Group’s cash flow movements. 1.16 and 1.17 – During the September quarter Xstate obtained a short term financing facility to enable the company to meet its cash obligations prior to completing the entitlements issue to shareholders. These loans were repaid as an immediate priority out of the funds raised from the entitlements issue, that was completed during theDecemberquarter.

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
	N/A
	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.

17/12/2010 - Appendix 5B

Page 2

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 used $A’000
		-
		-

Estimated cash outflows for next quarter

4.1 Exploration and evaluation 4.2 Development 4.3 Production 4.4 Administration	$A’000
	800
	-
	-
	245
Total	1,045

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.	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)	1,417	836
	-	-
	-	-
	-	-
Total: cash at end of quarter(item 1.22)	1,417	836

Changes in interests in mining tenements

ts in mining	tenements
Tenement reference	Nature of interest (note (2))	Interest at beginning of quarter	Interest at end of quarter

• See chapter 19 for defined terms.

17/12/2010 - Appendix 5B

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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 (description) 7.2 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy-backs, redemptions
7.3 +Ordinary securities ** 7.4 Changes during quarter (a) Increases through issues (b) Decreases through returns of capital, buy-backs	67,536,588	67,536,588	N/A	N/A
	30,016,261	30,016,261	10 cents	10 cents
7.5 +Convertible debt securities (description) 7.6 Changes during quarter (a) Increases through issues (b) Decreases through securities matured, converted
7.7 Options (description and conversion factor) 7.8 Issued during quarter 7.9 Exercised during quarter 7.10 Expired during quarter	48,838,062	48,838,062	Exercise price 24 cents	Expiry date 30 June 2013
	20,508,130	20,508,130	24 cents	30 June 2013
7.11 Debentures (totals only)
7.12 Unsecured notes (totals only)

• See chapter 19 for defined terms.

17/12/2010 - Appendix 5B

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Appendix 5B Mining exploration entity quarterly report

Compliance statement

• 1 This statement ha s been prep a red under a ccounting p o licies whic h comply w i th accou n ting standar d s as defined in the Corpo r ations Act or other stand a rds accepta b le to AS X (see note 5).

• 2 This statement does give a true and fair view o f the matter s disclosed.

Sig n here:

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Date: 31 J anuary 2011

Director

Pri n t name: David Mc A rthur

Notes

• 1 The q u arterly rep o rt provides a basis for i nforming t h e market h o w the entit y ’s activit i es have bee n financed fo r the past quarter and the effect on it s cash positi o n. An en t ity wanting to disclose a d ditional info r mation is en c ouraged to d o so, in a n o te or not e s attached to this report.

• 2 The “ N ature of int e rest” (items 6 .1 and 6.2) i ncludes opti o ns in respec t of interests in minin g tenements a cquired, ex e rcised or la p sed during t h e reporting period. If t h e entity is involved i n a joint v e nture agree m ent and the r e are condi t ions preced e nt which will change i ts percentag e interest in a mining ten e ment, it sho u ld disclose t h e chang e of percenta g e interest a n d condition s precedent i n the list req u ired for ite m s 6.1 an d 6.2.

• 3 Issued and quoted securities T he issue pri c e and amou n t paid up is not required in items 7 .1 and 7.3 f o r fully paid s e curities .

• 4 The d e finitions in, and provisi o ns of, AAS B 6: Explor a tion for an d Evaluation of Miner a l Resources a nd AASB 107: Statement of Cash Flo w s apply to this report.

• 5 Accounting Standards ASX w ill accept, for exampl e , the use o f Internatio n al Financial Reportin g Standards for foreign entities. If the standar d s used do n ot addres s a topic, the Australian st a ndard on th a t topic (if an y ) must be c o mplied with.

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• See c h apter 19 for de f ined terms.