XSTATE RESOURCES LIMITED

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ABN 96 009 217 154

30 April 2013

ASX Limited

Electronic lodgement

DESPATCH OF 2012 ANNUAL REPORT AND NOTICE OF AGM

Attached is copy of the 2012 Annual Report together with the Notice of Annual General Meeting, Proxy Form and Explanatory Memorandum which have been despatched to shareholders today.

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

For and on behalf of the Board.

Level2, 55 Carrington Street, Nedlands WA 6009 Tel + 61 8 9423 3200 Fax +61 8 9389 8327 www.xstate.com.au

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ABN 96 009 217 154

NOTICE OF ANNUAL GENERAL MEETING

PROXY FORM

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AND

EXPLANATORY MEMORANDUM

Date of Meeting 31 May 2013

Time of Meeting 3.00 pm (WST)

Place of Meeting Level 2, 55 Carrington Street Nedlands, Western Australia

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of Xstate Resources Limited (" Company ") will be held at 3.00 pm (WST) on -31 May 2013, at Level 2, 55 Carrington Street, Nedlands, Western Australia.

In order to determine voting entitlements, the register of Shareholders will be closed at 5.00pm (Sydney time) on 29 May 2013.

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

AGENDA

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

ORDINARY BUSINESS

2012 Accounts

To receive and consider the annual financial report, the Directors’ report and the auditor's report for the financial year ended 31 December 2012 and the Directors’ declaration on the accounts.

Non-binding Ordinary Resolution 1: Directors’ Remuneration Report

To receive and consider the Directors’ Remuneration Report for the year ended 31 December 2012 and, if thought fit, to pass, with or without amendment, the following Resolution as a non-binding Resolution:

“ That, pursuant to and in accordance with section 250R(2) of the Corporations Act, the Directors’ Remuneration Report contained within the Directors’ report for the financial year ended 31 December 2012 be adopted .”

Note 1: the vote on this Resolution is advisory only and does not bind the Directors of the Company.

Note 2: If 25% or more of votes that are cast are voted against the adoption of the Remuneration Report at two consecutive annual general meetings, Shareholders will be required to vote at the second of those annual general meetings on a resolution (a "spill resolution") that another meeting be held within 90 days at which all of the Company's Directors (other than the Managing Director and CEO) must stand for re-election.

Voting Prohibition Statement:

A vote on this Resolution 1 must not be cast (in any capacity) by or on behalf of any of the following persons:

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

(collectively, a " Prohibited Voter ").

However, a Prohibited Voter may cast a vote on this Resolution 1 as a proxy if the vote is not cast on behalf of a person described above and either:

(c) the Prohibited Voter is appointed as a proxy by writing that specifies the way the proxy is to vote on the Resolution; or

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(d) the Prohibited Voter is the Chair and the appointment of the Chair as proxy:
(i) does not specify the way the proxy is to vote on this Resolution; and
(ii) expressly authorises the Chair to exercise the proxy even if the Resolution is connected directly or indirectly with the remuneration of a member of the Key Management Personnel for the Company, or if the Company is part of a consolidated entity, for the entity.

Ordinary Resolution 2: Re-election of Mr Ross Kestel as a Director of the Company

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

“That, for the purposes of clause 13.2 of the Company’s Constitution and for all other purposes, Mr Ross Kestel, a director retiring by rotation, is re-elected a director of the Company.”

Ordinary Resolution 3: Election of Director - Mr Andrew Childs

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

“That, for the purposes of clause 13.4 of the Company’s Constitution and for all other purposes, Mr Andrew Childs, who retires having been appointed a director since the last annual general meeting, be re-elected a director of the Company.”

Ordinary Resolution 4: Ratification of Issue of Shares – Placement

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

“That, for the purposes of ASX Listing Rule 7.4 and for all other purposes, the Company ratifies the allotment and issue of 10,000,000 fully paid ordinary shares on the terms set out in the Explanatory Statement accompanying this Notice of Meeting.”

Voting Exclusion Statement: The Company will disregard any votes cast on Resolution 4 by any persons who participated in the issue and any associates of those persons. However, the Company need not disregard a vote if cast by a person as proxy for a person who is entitled to vote, in accordance with the directions of the proxy form or is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

Ordinary Resolution 5: Ratification of Issue of Shares to Vendor

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

“That, for the purposes of ASX Listing Rule 7.4 and for all other purposes, the Company ratifies the allotment and issue of 1,000,000 fully paid ordinary shares on the terms set out in the Explanatory Statement accompanying this Notice of Meeting.”

Voting Exclusion Statement: The Company will disregard any votes cast on Resolution 5 by any persons who participated in the issue and any associates of those persons. However, the Company need not disregard a vote if cast by a person as proxy for a person who is entitled to vote, in accordance with the directions of the proxy form or is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

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Ordinary Resolution 6: Issue of Options to Related Party – Gary Jeffery

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

“That, for the purpose of ASX Listing Rule 10.11, sections 195(4) and 208 of the Corporations Act and for all other purposes, approval is given for the Directors to allot and issue 10,500,000 Director Options to Mr Gary Jeffery (or his nominee) on the terms and conditions set out in the Explanatory Statement.”

Voting Exclusion Statement : The Company will disregard any votes cast on this Resolution by Mr Jeffery , his nominee or any of their associates. However, the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form, or, it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

Voting Prohibition Statement:

A person appointed as a proxy must not vote, on the basis of that appointment, on this Resolution if:

(a) the proxy is either:
(i) a member of the Key Management Personnel; or
(ii) a Closely Related Party of such a member; and
(b) the appointment does not specify the way the proxy is to vote on this Resolution.

However, the above prohibition does not apply if:

(c) the proxy is the Chair of the Meeting; and
(d) the appointment expressly authorises the Chair to exercise the proxy even if the Resolution is connected directly or indirectly with remuneration of a member of the Key Management Personnel.

Ordinary Resolution 7: Issue of Options to Related Party – Andrew Childs

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

“That, for the purpose of ASX Listing Rule 10.11, sections 195(4) and 208 of the Corporations Act and for all other purposes, approval is given for the Directors to allot and issue 4,500,000 Director Options to Mr Andrew Childs (or his nominee) on the terms and conditions set out in the Explanatory Statement.”

Voting Exclusion Statement : The Company will disregard any votes cast on this Resolution by Mr Childs , his nominee or any of their associates. However, the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form, or, it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

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Voting Prohibition Statement:

A person appointed as a proxy must not vote, on the basis of that appointment, on this Resolution if:

(a) the proxy is either:
(i) a member of the Key Management Personnel; or
(ii) a Closely Related Party of such a member; and
(b) the appointment does not specify the way the proxy is to vote on this Resolution.

However, the above prohibition does not apply if:

(c) the proxy is the Chair of the Meeting; and
(d) the appointment expressly authorises the Chair to exercise the proxy even if the Resolution is connected directly or indirectly with remuneration of a member of the Key Management Personnel.

Ordinary Resolution 8: Issue of Options to Related Party – Ross Kestel

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

“That, for the purpose of ASX Listing Rule 10.11, sections 195(4) and 208 of the Corporations Act and for all other purposes, approval is given for the Directors to allot and issue 2,250,000 Director Options to Mr Ross Kestel (or his nominee) on the terms and conditions set out in the Explanatory Statement.”

Voting Exclusion Statement : The Company will disregard any votes cast on this Resolution by Mr Kestel , his nominee or any of their associates. However, the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form, or, it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

Voting Prohibition Statement:

A person appointed as a proxy must not vote, on the basis of that appointment, on this Resolution if:

(a) the proxy is either:
(i) a member of the Key Management Personnel; or
(ii) a Closely Related Party of such a member; and
(b) the appointment does not specify the way the proxy is to vote on this Resolution.

However, the above prohibition does not apply if:

(c) the proxy is the Chair of the Meeting; and
(d) the appointment expressly authorises the Chair to exercise the proxy even if the Resolution is connected directly or indirectly with remuneration of a member of the Key Management Personnel.

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Ordinary Resolution 9: Adoption of Incentive Option Plan

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

“That, for the purpose of ASX Listing Rule 7.2 (Exception 9) and for all other purposes, approval is given to adopt the Xstate Resources Limited Incentive Option Plan and for the issue securities under that plan on the terms and conditions summarised in the Explanatory Statement.”

Voting Exclusion : The Company will disregard any votes cast on this Resolution by a director of the Company (except one who is ineligible to participate in any incentive scheme of the Company) and any associate of that person. However, the Company need not disregard a vote if it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form, or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

Ordinary Resolution 10: Approval of Incentive Share Plan

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

“That, for the purposes of ASX Listing Rule 7.2 (Exception 9) and for all other purposes, approval is given for the Company to adopt an incentive scheme titled Xstate Resources Limited Incentive Share Plan and for the issue of securities under that Incentive Share Plan, on the terms and conditions set out in the Explanatory Statement.”

Voting Exclusion : The Company will disregard any votes cast on this Resolution by a Director of the Company (except one who is ineligible to participate in any incentive scheme of the Company) and any associate of that person. However, the Company need not disregard a vote if it is cast by a person as proxy for a person who is entitled to vote, in accordance with the directions on the proxy form, or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

Ordinary Resolution 11: Approval of Issue of Shares to Director under Incentive Share Plan – Mr Gary Jeffery

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

“That, subject to the passing of Resolution 10, for the purposes of ASX Listing Rule 10.14 and for all other purposes, approval is given for the Directors to issue up to 14,656,864 Plan Shares to Mr Gary Jeffery or his nominee pursuant to the Incentive Share Plan in accordance with the terms and conditions of the Incentive Share Plan, a summary of which is set out in the Explanatory Statement.”

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Voting Prohibition Statement: A person appointed as a proxy must not vote, on the basis of that appointment, on this Resolution if:

(a) the proxy is either:
(i) a member of the Key Management Personnel; or
(ii) a Closely Related Party of such a member; and
(b) the appointment does not specify the way the proxy is to vote on this Resolution.

However, the above prohibition does not apply if:

(c) the proxy is the Chair of the Meeting; and
(d) the appointment expressly authorises the Chair to exercise the proxy even if the Resolution is connected directly or indirectly with remuneration of a member of the Key Management Personnel.

Special Resolution 12: Approval of 10% Placement Capacity

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

“That, for the purpose of Listing Rule 7.1A and for all other purposes, approval is given for the issue of Equity Securities totalling up to 10% of the issued capital of the Company at the time of issue, calculated in accordance with the formula prescribed in Listing Rule 7.1A.2 and on the terms and conditions set out in the Explanatory Statement.”

Voting Exclusion : The Company will disregard any votes cast on this Resolution by any person who may participate in the issue of Equity Securities under this Resolution and a person who might obtain a benefit, except a benefit solely in the capacity of a holder of ordinary securities, if the Resolution is passed and any associates of those persons. However, the Company will not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form, or, it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

Important note: The proposed allottees of any Equity Securities under the 10% Placement Capacity are not as yet known or identified. In these circumstances (and in accordance with the note set out in ASX Listing Rule 14.11.1 relating to ASX Listing Rules 7.1 and 7.1A), for a person’s vote to be excluded, it must be known that that person will participate in the proposed issue. Where it is not known who will participate in the proposed issue (as is the case in respect of any Equity Securities issued under the 10% Placement Capacity), Shareholders must consider the proposal on the basis that they may or may not get a benefit and that it is possible that their holding will be diluted, and there is no reason to exclude their votes.

By Order of the Board

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D M McARTHUR Company Secretary Dated: 8 April 2013

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ENTITLEMENT TO ATTEN D AND VOTE

The Company may specify a time, not more than 48 hours before the Meeting, at which a “snap-shot” of Shareholders will be taken for the purposes of determining Shareholder entitlements to vote at the Annual General Meeting.

The Company’s Directors have determined that all Shares of the Company that are quoted on ASX at 5:00pm (Sydney Time) on 29 May 2013 shall, for the purposes of determining voting entitlements at the Annual General Meeting, be taken to be held by the persons registered as holding the Shares at that time.

PROXIES

Please note that:

(a) a member of the Company entitled to attend and vote at the Annual General Meeting is entitled to appoint a proxy;
(b) a proxy need not be a member of the Company; and
(c) a member of the Company entitled to cast two or more votes may appoint two proxies and may specify the proportion or number of votes each proxy is appointed to exercise, but where the proportion or number is not specified, each proxy may exercise half of the votes.

The enclosed Proxy Form provides further details on appointing proxies and lodging Proxy Forms.

CORPORATE REPRESENTATIVE

A Shareholder that is a corporation may appoint an individual to act as its corporate representative to vote at the Meeting in accordance with section 250D of the Corporations Act. Any corporation wishing to appoint an individual to act as its representative at the Meeting should provide that person with a certificate or letter executed in accordance with the Corporations Act authorising him or her to act as that company’s representative. The authority may be sent to the Company and/or Share Registry in advance of the Meeting or handed in at the Meeting when registering as a corporate representative. A ‘Certificate of Appointment of Corporate Representative’ is enclosed if required.

ENQUIRIES

Shareholders are invited to contact the Company Secretary, David McArthur on +61 8 9423 3200 if they have any queries in respect of the matters set out in this document.

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XSTATE RESOURCES LIMITED

ABN 96 009 217 154

EXPLANATORY MEMORANDUM

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

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

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

FINANCIAL STATEMENTS AND REPORTS

The business of the Annual General Meeting will include receipt and consideration of the annual financial report, the Directors’ report and the auditor's report for the financial year ended 31 December 2012 and the Directors’ declaration on the accounts.

A copy of the Company’s 2012 Annual Report is available on the Company’s ASX platform (ASX: XST), and on the website www.xstateresources.com.au. Alternatively, a hard copy will be made available upon request.

There is no requirement for Shareholders to approve the Annual Financial Statements.

The Company’s auditor, KPMG, will be present at the Annual General Meeting and Shareholders will have the opportunity ask the auditor questions in relation to the conduct of the audit, the auditor’s report, the Company’s accounting policies, and the independence of the auditor.

In addition to taking questions at the Meeting, written questions to the Chair about the management of the Company, or to the Company’s auditor about:

(a) the preparation and content of the auditor’s report;
(b) the conduct of the audit;
(c) accounting policies adopted by the Company in relation to the preparation of the Annual Financial Statements; and
(d) the independence of the auditor in relation to the conduct of the audit,

may be submitted no later than 5 business days before the meeting date to the Company Secretary.

NON-BINDING ORDINARY RESOLUTION 1: Directors’ Remuneration Report

General

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

The Remuneration Report sets out the Company’s remuneration arrangements for the Directors and senior management of the Company. The Remuneration Report is part of the Directors’ report contained in the annual financial report of the Company for the financial year ending 31 December 2012.

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A reasonable opportunity will be provided for discussion of the Remuneration Report at the Annual General Meeting.

Under the Corporations Act, if 25% or more of votes that are cast are voted against the adoption of the Remuneration Report at two consecutive annual general meetings, Shareholders will be required to vote at the second of those annual general meetings on a resolution (a "spill resolution") that another meeting be held within 90 days at which all of the Company's Directors (other than the Managing Director and CEO) must stand for re-election.

The Company’s Remuneration Report did not receive a “no” vote of 25% or more at the Company’s previous annual general meeting.

Proxy restrictions

Shareholders appointing a proxy for Resolution 1 should note the following:

(a) If you appoint a member of the Key Management Personnel (other than the Chair) as your proxy

If you elect to appoint a member of the Key Management Personnel (other than the Chair) whose remuneration details are included in the Remuneration Report, or a Closely Related Party of that member, you must direct the proxy how they are to vote . Undirected proxies granted to these persons will not be included in any vote on Resolution 1.

(b) If you appoint the Chair as your proxy

If you elect to appoint the Chair as your proxy, you do not need to direct the Chair how you wish them to exercise your vote on Resolution 1, however if you do not direct the Chair how to vote, you must tick the acknowledgement on the Proxy Form to acknowledge that the Chair may exercise their discretion in exercising your proxy even though Resolution 1 is connected directly or indirectly with the remuneration of Key Management Personnel .

You do not need to direct your proxy how to vote, and you do not need to tick any further acknowledgement on the Proxy Form.

ORDINARY RESOLUTION 2: Re-election of Mr Ross Kestel as a Director of the Company

Clause 13.2 of the Company’s Constitution provides that at every Annual General Meeting of the Company one-third of the Directors (other than alternate Directors and the Managing Director) shall retire from office. The Directors to retire at an Annual General Meeting are those who have been longest in office since their last election. A retiring Director is eligible for re-election.

Accordingly, pursuant to Clause 13.2 of the Company’s Constitution, Ross Kestel, being a Director of the Company longest in office since his last election, retires by way of rotation and, being eligible, offers himself for re-election as a Director of the Company.

Details in relation to Mr Kestel are contained in the Company’s 2012 annual report.

ORDINARY RESOLUTION 3: Election of Director - Mr Andrew Childs

Clause 13.4 of the Company’s Constitution provides that any Director appointed since the last Annual General Meeting shall retire from office and be elected at the next following Annual General Meeting. Mr Andrew Childs was appointed a Director of the Company on 11 February 2013.

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Accordingly, pursuant to Rule 13.4 of the Company’s Constitution, Mr Childs retires as a Director and offers himself for election as a Director of the Company.

Details in relation to Mr Childs are contained in the Company’s 2012 annual report.

ORDINARY RESOLUTION 4: Ratification of Issue of Shares- Placement

As announced to ASX on 21 March 2013, the Company issued 10,000,000 Shares at US$0.175 per Share to Blue Sky International Holdings Inc to raise US$175,000 ( Placement ).

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

Listing Rule 7.4 provides an issue made within the 15% limit will be treated as having been made with the approval of shareholders under Listing Rule 7.1 if subsequently approved by shareholders, thereby ‘refreshing’ the company’s ability to issue shares within the 15% limit, and restoring the company’s ability to make placements within that limit (if that is thought desirable) without the need for shareholder approval.

While the Shares described in this Resolution 4 have been issued within the 15% limit, the Company seeks Shareholder ratification of the issue of those Shares for the purpose of Listing Rule 7.4 so that the Company’s ability to issue securities will be refreshed and it will have the flexibility to issue further securities should the need or opportunity arise.

In accordance with the requirements of Listing Rule 7.5, the following information is provided to Shareholders to allow them to assess the ratification of the issue of the Shares the subject of this Resolution 4:

(a) the number of Shares issued and allotted by the Company was 10,000,000;
(b) the shares were issued for US$0.175 per Share;
(c) the Shares issued rank pari passu with the Company’s existing Shares;
(d) the Shares were issued to Blue Sky International Holdings Inc, who is not a related party of the Company; and
(e) the funds raised under the Placement will be used for working capital.

ORDINARY RESOLUTION 5: Ratification of Issue of Shares to Vendor

Also announced to ASX on 21 March 2013, the Company issued 1,000,000 Shares to Pyramid Petroleum Inc, the vendor of a 50% working interest in High Island Block A549 offshore Texas, in the Gulf of Mexico.

A summary of ASX Listing Rules 7.1 and 7.4 is set out in the explanatory memorandum for Resolution 4 above.

By ratifying this issue, the Company will retain the flexibility to issue equity securities in the future up to the 15% annual placement capacity set out in ASX Listing Rule 7.1 without the requirement to obtain prior Shareholder approval.

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(a) the number of Shares issued and allotted by the Company was 1,000,000;
(b) the Shares were issued in consideration for a 50% working interest in High Island Block A549;
(c) the Shares issued rank pari passu with the Company’s existing Shares;
(d) the Shares were issued to Pyramid Petroleum Inc , who is not a related party of the Company; and
(e) no funds were raised through the issue of Shares as they were issued in consideration for a 50% working interest in High Island Block A549.

ORDINARY RESOLUTIONS 6, 7 and 8: Grant of Options to Directors

On 4 April 2013 the Board of the Company resolved, subject to obtaining shareholder approval, to issue and allot a total 17,250,000 Options ( Director Options ) to its Directors as set out below:

(a) Gary Jeffery – 10,500,000 Options;
(b) Andrew Childs – 4,500,000 Options; and
(c) Ross Kestel – 2,250,000 Options,

(together, the Related Parties ) on the terms and conditions set out in Appendix 1.

For a public company to give a financial benefit to a related party of the public company, the public company or entity must:

(a) obtain the approval of the public company’s members in the manner set out in Section 217 to 227 of the Corporations Act; and
(b) give the benefit within 15 months following such approval,

unless the giving of the financial benefit falls within an exception set out in Sections 210 to 216 of the Corporations Act.

In addition, Listing Rule 10.11 also requires shareholder approval to be obtained where an entity issues, or agrees to issue, securities to a related party, or a person whose relationship with the entity or a related party is, in ASX’s opinion, such that approval should be obtained unless an exception in Listing Rule 10.12 applies.

The grant of the Director Options to the Related Parties requires the Company to obtain Shareholder approval because the grant of Director Options constitutes giving a financial benefit, and, as Directors, Messrs Jeffery, Childs and Kestel are Related Parties of the Company.

It is the view of the Directors that the exceptions set out in Sections 210 to 216 of the Corporations Act and Listing Rule 10.12 do not apply in the current circumstances. Accordingly, Shareholder approval is sought for the grant of Director Options to the Related Parties.

Shareholder Approval (Chapter 2E of the Corporations Act and Listing Rule 10.11)

Pursuant to, and in accordance with, the requirements of Sections 217 to 227 of the Corporations Act and Listing Rule 10.13, the following information is provided in relation to the proposed grant of Director Options:

(a) the Related Parties are Gary Jeffery, Andrew Childs and Ross Kestel and are Related Parties by virtue of being a Directors.
(b) the maximum number of Director Options (being the nature of the financial benefit being provided) to be granted to the Related Parties in the aggregate is 17,250,000 Director Options;
(c) the Related Parties will be issued with the following Director Options:

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Gary Jeffery Andrew Childs Ross Kestel Exercisable at 4 cents on or before 31 May 2016 3,500,000 1,500,000 750,000 Exercisable at 6 cents on or before 31 May 2016 3,500,000 1,500,000 750,000 Exercisable at 8 cents on or before 31 May 2016 3,500,000 1,500,000 750,000

(d) the Director Options will otherwise be issued on the terms and conditions outlined in Appendix 1;
(e) the Director Options will be granted to the Related Parties no later than 1 month after the date of the Annual General Meeting (or such later date as permitted by any ASX waiver or modification of the ASX Listing Rules) and it is anticipated the Director Options will be issued on one date;
(f) the Director Options will be granted for nil cash consideration, accordingly no funds will be raised;
(g) the value of the Director Options is $ 63,825 and the pricing methodology is set out in Appendix 2;
(h) the relevant interest of the Related Parties in securities of the Company is set out below:
(i) Gary Jeffery – 2,336,895 Shares and 2,966,400 Options (exercisable at 24 cents on or before 30 June 2013);
(ii) Andrew Childs – 1,517,000 Shares and 2,013,254 Options (exercisable at 24 cents on or before 30 June 2013); and
(iii) Ross Kestel – Nil;
(i) the Related Parties receive remuneration as follows:
(i) Gary Jeffery $250,000 per annum
(ii) Andrew Childs $32,500 per annum
(iii) Ross Kestel $32,500 per annum

In the previous financial year, the Related Parties received the following from the Company (paid and payable):

(i) Gary Jeffery $254,231
(ii) Andrew Childs - Nil
(iii) Ross Kestel $59,850

Other than as set out in this Explanatory Statement, the Related Parties have not received any other emoluments from the Company;

(j) if the Director Options granted to the Related Parties are exercised, a total of 17,250,000 Shares would be allotted and issued. This will increase the number of Shares on issue from 111,881,351 to 129,131,351 (assuming that no other Options are exercised and no other Shares issued) with the effect that the share holding of existing shareholders would be diluted by 13.36%.

The market price for Shares during the term of the Director Options would normally determine whether or not the Director Options are exercised. If, at any time, any of the Director Options are exercised and the Shares are trading on ASX at a price that is higher than the exercise price of the Director Options, there may be a perceived cost to the Company;

(k) the trading history of the Shares on ASX in the 12 months before the date of this Notice of Annual General Meeting is set out below:

		PRICE	DATE
	HIGHEST LOWEST LATEST	$0.049 $0.015 $0.018	15 FEBRUARY 2013 4 FEBRUARY 2013 8 APRIL 2013

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(l) the primary purpose of the issue of the Director Options is to provide market linked incentive to the Directors;
(m) Mr Jeffery declines to make a recommendation to Shareholders in relation to Resolution 6 due to Mr Jeffery’s material personal interest in the outcome of the Resolution on the basis that Mr Jeffery is to be granted Director Options in the Company should Resolution 6 be passed. However, in respect of Resolutions 7 and 8, Mr Jeffery recommends that Shareholders vote in favour of those Resolutions for the following reasons:
(i) the grant of Director Options to the Related Parties will align the interests of the Related Parties with those of Shareholders;
(ii) the grant of the Director Options is a reasonable and appropriate method to provide cost effective remuneration as the non-cash form of this benefit will allow the Company to spend a greater proportion of its cash reserves on its operations than it would if alternative cash forms of remuneration were given to the Related Parties; and
(iii) it is not considered that there are any significant opportunity costs to the Company or opportunities foregone by the Company in granting the Director Options upon the terms proposed;
(n) Mr Childs declines to make a recommendation to Shareholders in relation to Resolution 7 due to Mr Childs’ material personal interest in the outcome of the Resolution on the basis that Mr Childs is to be granted Director Options in the Company should Resolution 7 be passed. However, in respect of Resolutions 6 and 8, Mr Childs recommends that Shareholders vote in favour of those Resolutions for the reasons set out in paragraph (m);
(o) Mr Kestel declines to make a recommendation to Shareholders in relation to Resolution 8 due to Mr Kestel’s material personal interest in the outcome of the Resolution on the basis that Mr Kestel is to be granted Director Options in the Company should Resolution 8 be passed. However, in respect of Resolutions 6 and 7, Mr Kestel recommends that Shareholders vote in favour of those Resolutions for the reasons set out in paragraph (m);
(p) in forming their recommendations, each Director considered the experience of each other Related Party, the current market price of Shares, the current market practices when determining the number of Director Options to be granted as well as the exercise prices and expiry dates of those Director Options; and
(q) the Board is not aware of any other information that would be reasonably required by Shareholders to allow them to make a decision whether it is in the best interests of the Company to pass the Resolutions.

Approval pursuant to Listing Rule 7.1 is not required in order to issue the Director Options to the Related Parties as approval is being obtained under Listing Rule 10.11. Accordingly, the issue of Director Options to the Related Parties will not be included in the 15% calculation of the Company’s annual placement capacity pursuant to Listing Rule 7.1.

ORDINARY RESOLUTION 9 - Adoption of Incentive Option Plan

To ensure that the Company has appropriate mechanisms to continue to attract and retain the services of executive directors, employees and consultants of a high calibre, the Company has established the “Xstate Resources Limited Incentive Option Plan” ( Plan ).

Resolution 9 seeks Shareholder approval under exception 9(b) of ASX Listing Rule 7.2 to allow the grant of Options under the Plan ( Incentive Options ), and the issue of Shares on exercise of the Incentive Options, as an exception to ASX Listing Rule 7.1.

The grant of Incentive Options will only fall within exception 9(b) of ASX Listing Rule 7.2 if the Incentive Options are issued under an employee incentive option plan approved by shareholders within three years before the date of issue.

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If Resolution 9 is passed, the Company will have the ability to issue Incentive Options to eligible participants under the Plan over a period of three years without impacting on the Company’s 15% placement capacity under ASX Listing Rule 7.1.

The Directors, employees and consultants of the Company have been, and will continue to be, instrumental in the growth of the Company. The Directors consider that the Plan is an appropriate method to:

(a) reward employees for their past performance;
(b) provide long term incentives for participation in the Company’s future growth;
(c) motivate Directors and generate loyalty from senior employees; and
(d) assist to retain the services of valuable Directors and employees.

The Plan will be used as part of the remuneration planning for executive Directors and employees. The Corporate Governance Council Guidelines recommend that executive remuneration packages involve a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the company’ circumstances and goals.

No Incentive Options have yet been issued under the Plan.

The key terms of the Plan are summarised below. A full copy of the Plan is available for inspection at the Company’s registered office until the date of the Meeting.

Material terms and conditions of the Plan

On 4 April 2012 the Board adopted an Employee Incentive Option Plan to allow eligible participants to be granted Incentive Options to acquire Shares in the Company, the principle terms of which are summarised below.

(a) Eligibility and Grant of Incentive Options : The Board may grant Incentive Options to any full or part time employee, executive Director or consultant of the Company or an associated body corporate. Incentive Options may be granted by the Board at any time.
(b) Consideration : Each Incentive Option issued under the Plan will be issued for nil cash consideration.
(c) Conversion : Each Incentive Option is exercisable into one Share in the Company ranking equally in all respect with the existing issued Shares in the Company.
(d) Exercise Price and Expiry Date : The exercise price and expiry date for Incentive Options granted under the Plan will be determined by the Board prior to the grant of the Incentive Options.
(e) Exercise Restrictions : The Incentive Options granted under the Plan may be subject to conditions on exercise as may be fixed by the Directors prior to grant of the Incentive Options ( Exercise Conditions ). Any restrictions imposed by the Directors must be set out in the offer for the Incentive Options.
(f) Lapsing of Incentive Options : An unexercised Incentive Option will lapse:
(i) on its Expiry Date;
(ii) if any Exercise Condition is unable to be met; and
(iii) subject to certain exceptions, on the eligible participant ceasing employment with the Company.
(g) Share Restriction Period: Shares issued on the exercise of Incentive Options may be subject to a restriction that they may not be transferred or otherwise dealt with until a Restriction Period has expired, as specified in the offer for the Incentive Options.
(h) Disposal of Options: Incentive Options will not be transferable and will not be quoted on the ASX, unless the offer provides otherwise or the Board in its absolute discretion approves.

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(i) Trigger Events: The Company may permit Incentive Options to be exercised in certain circumstances where there is a change in control of the Company (including by takeover) or entry into a scheme of arrangement.
(j) Participation in Rights Issues and Bonus Issues:
(i) There are no participating rights or entitlements inherent in the Incentive Options and holders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Incentive Options.
(ii) The Company will ensure that for the purposes of determining entitlements to any such issue, the record date will be at least six (6) Business Days after the issue is announced. This will give Option holders the opportunity to exercise their Incentive Options prior to the date for determining entitlements to participate in any such issue.
(iii) If the Company makes a pro rata issue of securities (except a bonus issue) to the holders of Shares (other than an issue in lieu or in satisfaction of dividends or by way of dividend reinvestment) the Option Exercise Price shall be reduced according to the formula specified in the Listing Rules.
(iv) In the event of a bonus issue of Shares being made pro-rata to Shareholders, (other than an issue in lieu of dividends), the number of Shares issued on exercise of each Option will include the number of bonus Shares that would have been issued if the Option had been exercised prior to the record date for the bonus issue. No adjustment will be made to the exercise price per Share of the Option.
(k) Reorganisation: The terms upon which Incentive Options will be granted will not prevent the Incentive Options being re-organised as required by the Listing Rules on the re-organisation of the capital of the Company.
(l) Limitations on Offers: The Company must take reasonable steps to ensure that the number of Shares to be received on exercise of Incentive Options offered under an offer when aggregated with:
(i) the number of Shares that would be issued if each outstanding offer for Shares, units of Shares or options to acquire Shares under the Plan or any other employee share scheme of the Company were to be exercised or accepted; and
(ii) the number of Shares issued during the previous 5 years from the exercise of Incentive Options issued under the Plan (or any other employee share plan of the Company extended only to Eligible Participants),

does not exceed 5% of the total number of Shares on issue at the time of an offer (but disregarding any offer of Shares or option to acquire Shares that can be disregarded in accordance with ASIC Class Order 03/184.

ORDINARY RESOLUTION 10 - Approval of Incentive Share Plan

Resolution 10 seeks Shareholders approval for the adoption of the incentive scheme titled Xstate Resources Limited Incentive Share Plan ( Share Plan ) in accordance with ASX Listing Rule 7.2 (Exception 9(b)).

A summary of ASX Listing Rule 7.1 and 7.2 (Exception 9) is set out in the explanatory statement for Resolution 9 above.

If Resolution 10 is passed, the Company will be able to issue Shares under the Share Plan ( Plan Shares ) to eligible participants over a period of 3 years without impacting on the Company’s ability to issue up to 15% of its total ordinary securities without Shareholder approval in any 12 month period.

Shareholders should note that no Shares have previously been issued under the Share Plan. However, Resolution 11 seeks Shareholder approval to issue 14,656,883 Shares to Gary Jeffery under the Share Plan.

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The objective of the Share Plan is to attract, motivate and retain key employees and consultants and it is considered by the Company that the adoption of the Share Plan and the future issue of Plan Shares will provide selected employees with the opportunity to participate in the future growth of the Company.

A material feature of the Share Plan is the issue of Plan Shares may be undertaken by way of provision of a non-recourse, interest free loan to be used for the purposes of subscribing for the Plan Shares based on a price that will be not less than the volume weighted average price at which Shares were traded on the ASX over the 10 trading days up to and including the date of acceptance of the offer.

Any future issues of Plan Shares to a related party or a person whose relation with the Company or the related party is, in ASX’s opinion, such that approval should be obtained will require additional Shareholder approval under ASX Listing Rule 10.14 at the relevant time. For this reason, the Company is also seeking approval under Resolution 11 for the issue of Plan Shares to Mr Jeffery.

A summary of the key terms and conditions of the Plan is set out below. In addition, a copy of the Share Plan is available for review by Shareholders at the registered office of the Company until the date of the Meeting. A copy of the Share Plan can also be sent to Shareholders upon request to the Company Secretary (Mr David McArthur). Shareholders are invited to contact the Company if they have any queries or concerns.

Material terms and conditions of the Share Plan

The key terms of the Share Plan are as follows:

(a) Eligibility : Participants in the Scheme may be Directors, full-time and part-time employees or consultants of the Company or any of its subsidiaries ( Participants ).
(b) Administration of Plan : The Board is responsible for the operation of the Share Plan and has a broad discretion to determine which Participants will be offered Shares under the Share Plan.
(c) Offer : The Board may issue an offer to a Participant to participate in the Share Plan. The offer:
(i) will invite application for the number of Shares specified in the offer;
(ii) will specify the issue price for the Shares or the manner in which the Issue Price is to be calculated;
(iii) may invite applications for a loan up to the amount payable in respect of the Shares accepted by the Participant in accordance with the offer;
(iv) will specify any restriction conditions applying to the Shares;
(v) will specify an acceptance period; and
(vi) specify any other terms and conditions attaching to the Shares.
(d) Issue price : the issue price of each Plan Share will be not less the volume weighted average price at which Shares were traded on the ASX over the 10 trading days up to and including the actual date of acceptance of the Plan Shares offered under the offer.
(e) Restriction Conditions : Plan Shares may be subject to restriction conditions (such as a period of employment) which must be satisfied before the Plan Shares can be sold, transferred, or encumbered. Shares cannot be sold, transferred or encumbered until any loan in relation to the Shares has been repaid or otherwise discharged under the Share Plan.
(f) Loan : A Participant who is invited to subscribe for Plan Shares may also be invited to apply for a loan up to the amount payable in respect of the Shares accepted by the Participant ( Loan ), on the following terms:
(i) the Loan will be interest free;
(ii) the Loan made available to a Participant shall be applied by the Company directly toward payment of the issue price of the Plan Shares;

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(iii) the Loan repayment date and the manner for making such payments shall be determined by the Board and set out in the offer;
(iv) a Participant must repay the Loan in full by the loan repayment date but may elect to repay the Loan amount in respect of any or all of the Shares at any time prior to the loan repayment date;
(v) the Company shall have a lien over the Plan Shares in respect of which a Loan is outstanding and the Company shall be entitled to sell those Plan Shares in accordance with the terms of the Share Plan;
(vi) a Loan will be non-recourse except against the Shares held by the Participant to which the Loan relates; and
(vii) the Board may, in its absolute discretion, agree to forgive a Loan made to a Participant.
(g) Unfulfilled Restriction Condition : Where a restriction condition in relation to Plan Shares is not satisfied by the due date, or becomes incapable of satisfaction in the opinion of the Board, the Company must, unless the restriction condition is waived by the Board, either:
(i) buy back and cancel the relevant Shares within 12 months of the date the restriction condition was not satisfied (or became incapable of satisfaction) under Part 2J.1 of the Corporations Act at a price equal to the cash consideration paid by the Participant for the Plan Shares (with any Loan not being treated as cash consideration but any Loan Amount repayments by the Participant being treated as cash consideration); or
(ii) arrange to sell the Plan Shares as soon as reasonably practicable either on the ASX or to an investor who falls within an exemption under section 708 of the Corporations Act provided that the sale must be at a price that is no less than 80% of the volume weighted average price at which Shares were traded on the ASX on the 10 trading days before the sale date and apply the sale proceeds ( Sale Proceeds ) in the following priority:
- (A) first, to pay the Company any outstanding Loan Amount (if any) in relation to the Shares and the Company’s reasonable costs in selling the Shares;
- (B) second, to the extent the Sale Proceeds are sufficient, to repay the Participant any cash consideration paid by the Participant or Loan Amount repayments (including any cash dividends applied to the Loan Amount) made by or on behalf of the Participant; and
- (C) lastly, any remainder to the Company to cover its costs of managing the Share Plan.
(h) Sale of Shares to repay Loan:
(i) A Loan shall become repayable in full where:
- (A) the Participant (or, where the Participant is an Associate of an Eligible Employee, the Eligible Employee) ceases to be an Eligible Employee for any reason (including death);
- (B) the Participant suffers an event of insolvency;
- (C) the Participant breaches any condition of the Loan or the Share Plan; or
- (D) a Restriction Condition in relation to Shares subject to the Loan is not satisfied by the due date, or becomes incapable of satisfaction in the opinion of the Board (and is not waived).
(ii) Where a Loan becomes repayable and at that time a Restriction Condition in relation to Plan Shares subject to the Loan is not satisfied, or is incapable of being satisfied in the opinion of the Board (and is not waived), the Plan Shares must be sold and the Sale Proceeds applied to repay the Loan in accordance the Share Plan.
(iii) Where a Loan in relation to Plan Shares becomes repayable and at that time Restriction Conditions in relation to the Plan Shares have either been satisfied or are waived, the Company must give the Participant a 30 day period to repay the Loan, failing which the

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Company must sell the Plan Shares and apply the Sale Proceeds in accordance with the Share Plan.

(i) Power of Attorney : The Participant irrevocably appoints each of the Company and each director of the Company severally as his or her attorney to do all things necessary to give effect to the sale of the Participant’s Shares in accordance with the Share Plan.
(j) Plan limit : The Company must take reasonable steps to ensure that the number of Plan Shares offered by the Company under the Share Plan when aggregated with:
(i) the number of Shares issued during the previous 5 years under the Share Plan (or any other employee share plan extended only to Eligible Employees); and
(ii) the number of Shares that would be issued if each outstanding offer for Shares (including options to acquire unissued Shares) under any employee incentive scheme of the Company were to be exercised or accepted,

(k) Restriction on transfer : Participants may not sell or otherwise deal with a Plan Share until the Loan Amount in respect of that Plan Share has been repaid and any restriction conditions in relation to the Plan Shares have been satisfied or waived. The Company is authorised to impose a holding lock on the Plan Shares to implement this restriction.
(l) Quotation on ASX : The Company will apply for each Plan Share to be admitted to trading on ASX upon issue of the Plan Share. Quotation will be subject to the ASX Listing Rules and any holding lock applying to the Plan Shares.
(m) Rights attaching to Shares : Each Plan Share shall be issued on the same terms and conditions as the Company’s issued Shares (other than in respect of transfer restrictions imposed by the Share Plan) and it will rank equally with all other issued Shares from the issue date except for entitlements which have a record date before the issue date.

ORDINARY RESOLUTION 11- Approval to Issue Shares to Mr Gary Jeffery under the Share Plan

ASX Listing Rule 10.11 requires Shareholder approval to be obtained where an entity issues, or agrees to issue, securities to a related party, or person whose relationship with the entity or a related party is, in ASX’s opinion, such that approval should be obtained unless an exception in ASX Listing Rule 10.12 applies.

An exception to ASX Rule 10.11 is set out in ASX Listing Rule 10.12 (exception 4) which provides that ASX Listing Rule 10.11 does not apply to issue made with the approval of Shareholders under ASX Listing Rule 10.14.

ASX Listing Rule 10.14 provides that an entity must only allow a Director or their associates to acquire securities under an employee incentive plan with approval of Shareholders and provided the Notice of Meeting complies with ASX Listing Rules 10.15 or 10.15A.

Mr Jeffery has been deferring payment of 52% of his fees since 1 July 2012 in an attempt to preserve the Company’s cash position. As at 31 May 2013 Mr Jeffery will be owed $119,167 in deferred fees. It is proposed to issue Shares under the Share Plan to Mr Jeffery in lieu of payment of the outstanding fees.

Mr Jeffery has also advised he would be prepared to apply for Shares under the Share Plan in lieu of payment for 52% of his fees over the next 12 months commencing 1 June 2013. An invitation will be made on a quarterly basis for services that have been provided to the Company during the previous quarter (in arrears). In this way the Share Plan can be used to reduce the cash cost to the Company by allowing Mr Jeffery to take a portion of his remuneration in equity. As a consequence, a greater proportion of the Company’s cash reserves can be allocated to advancing the Company’s projects.

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Resolution 11 seeks Shareholder approval for the issue of up to 14,656,883 Shares to Mr Jeffery under the Share Plan as follows:

Fees deferred as at 31 May 2013: $119,167- Fees foregone Qtr ended 31 August 2103: $32,500- Fees foregone Qtr ended 30 November 2013: $32,500- Fees foregone Qtr ended 28 February 2014: $32,500- Fees foregone Qtr ended 31 May 2014: $32,500- Maximum number of Plan Shares.	7,009,804 Plan Shares 1,911,765 Plan Shares 1,911,765 Plan Shares 1,911,765 Plan Shares 1,911,765 Plan Shares 14,656,864

The number of Shares to be issued will be equal to the amount of fees owing based on a deemed price for the Shares fixed at $0.017, being the closing share price on the date the Board resolved to propose the issue of Shares.

The Directors consider that Shareholder approval pursuant to Chapter 2E of the Corporations Act is not required as the issue of Plan Shares forms part of the reasonable remuneration of Mr Jeffery.

For the purposes of ASX Listing Rule 10.15, the following information is provided to Shareholders:

(a) The Shares will be granted to Mr Gary Jeffery, the Managing Director of the Company, or his nominee.
(b) The maximum number of Shares that may be acquired by Mr Jeffery is 14,656,864
(c) The Shares will be issued to Mr Jeffery (or his nominee) on a quarterly basis no later than 12 months after the date of the Annual General Meeting.
(d) The Shares will be issued in lieu of cash remuneration that the Director is entitled to be paid and, accordingly, no funds will be raised.
(e) The Shares will be issued at a deemed price of $ 0.017 each.
(f) No Shares have been issued under the Share Plan to date.
(g) There are no loans provided to Directors in relation to the acquisition of Shares under the Share Plan.
(h) The Shares will be issued on the same terms as the fully paid ordinary shares of the Company and will rank equally with all of the Company’s existing shares. The Company will apply for quotation on ASX for any Shares issued under the Share Plan.

SPECIAL RESOLUTION 12: Approval of 10% Placement Capacity – Shares

General

ASX Listing Rule 7.1A provides that an Eligible Entity may seek Shareholder approval at its annual general meeting to allow it to issue Equity Securities up to 10% of its issued capital over a period up to 12 months after the annual general meeting ( 10% Placement Capacity ).

The Company is an Eligible Entity.

If Shareholders approve Resolution 12, the number of Equity Securities the Eligible Entity may issue under the 10% Placement Capacity will be determined in accordance with the formula prescribed in ASX Listing Rule 7.1A.2 (as set out below).

The effect of Resolution 12 will be to allow the Directors to issue Equity Securities up to 10% of the Company’s fully paid ordinary securities on issue under the 10% Placement Capacity during the period up to

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12 months after the Meeting, without subsequent Shareholder approval and without using the Company’s 15% annual placement capacity granted under Listing Rule 7.1.

Resolution 12 is a special resolution. Accordingly, at least 75% of votes cast by Shareholders present and eligible to vote at the Meeting must be in favour of Resolution 12 for it to be passed.

ASX Listing Rule 7.1A

ASX Listing Rule 7.1A came into effect on 1 August 2012 and enables an Eligible Entity to seek shareholder approval at its annual general meeting to issue Equity Securities in addition to those under the Eligible Entity’s 15% annual placement capacity.

An Eligible Entity is one that, as at the date of the relevant annual general meeting:

(a) is not included in the S&P/ASX 300 Index; and
(b) has a maximum market capitalisation (excluding restricted securities and securities quoted on a deferred settlement basis) of $300,000,000.

The Company is an Eligible Entity as it is not included in the S&P/ASX 300 Index and has a current market capitalisation of approximately $1.9 million.

Any Equity Securities issued must be in the same class as an existing class of quoted Equity Securities. The Company currently has one class of quoted Equity Securities on issue, being the Shares (ASX Code XST),

The exact number of Equity Securities that the Company may issue under an approval under Listing Rule 7.1A will be calculated according to the following formula:

(A x B) – C

Where:

A is the number of Shares on issue 12 months before the date of issue or agreement:
(i) plus the number of Shares issued in the previous 12 months under an exception in ASX Listing Rule 7.2;
(ii) plus the number of partly paid shares that became fully paid in the previous 12 months;
(iii) plus the number of Shares issued in the previous 12 months with approval of holders of Shares under this rule; and
(iv) less the number of Shares cancelled in the previous 12 months.
B is 10%.
C is the number of Equity Securities issued or agreed to be issued under ASX Listing Rule 7.1A.2 in the 12 months before the date of issue or agreement to issue that are not issued with the approval of holders of Ordinary Securities under ASX Listing Rule 7.1 or 7.4.

11.3 Technical information required by ASX Listing Rule 7.1A

Pursuant to and in accordance with ASX Listing Rule 7.3A, the information below is provided in relation to this Resolution 12:

(a) Minimum Price

The minimum price at which the Equity Securities may be issued is 75% of the volume weighted average price of Equity Securities in that class, calculated over the 15 ASX trading days on which trades in that class were recorded immediately before:

(i) the date on which the price at which the Equity Securities are to be issued is agreed; or
(ii) if the Equity Securities are not issued within 5 ASX trading days of the date above, the date on which the Equity Securities are issued.

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(b) Date of Issue

The Equity Securities may be issued under the 10% Placement Capacity commencing on the date of the Meeting and expiring on the first to occur of the following:

(i) 12 months after the date of this Meeting; and
(ii) the date of approval by Shareholders of any transaction under ASX Listing Rules 11.1.2 (a significant change to the nature or scale of the Company’s activities) or 11.2 (disposal of the Company’s main undertaking).

(c) Risk of voting dilution

Any issue of Equity Securities under the 10% Placement Capacity will dilute the interests of Shareholders who do not receive any Shares under the issue.

If Resolution 12 is approved by Shareholders and the Company issues the maximum number of Equity Securities available under the 10% Placement Capacity, the economic and voting dilution of existing Shares would be as shown in the table below.

The table below shows the dilution of existing Shareholders calculated on the basis of the current market price of Shares and the current number of Equity Securities on issue as at the date of this Notice.

The table also shows the voting dilution impact where the number of Shares on issue (variable A in the formula) changes and the economic dilution where there are changes in the issue price of Shares issued under the 10% Placement Capacity.

DILUTION Variable”A” $0.0085 $0.017 $0.034 50% decrease in Issue price 100% Increase in Issue Price Issue Price Current Variable A 10% Voting 111,881,351 Shares Dilution 11,188,135 Shares 11,188,135 Shares 11,188,135 Shares Funds Raised $ 95,099 $ 190,198 $ 380,396 50% Increase In Current Variable A 10% Voting 167,822,026 Shares Dilution 16,782,203 Shares 16,782,203 Shares 16,782,203 Shares Funds Raised $ 142,649 $ 285,297 $ 570,595 100% Increase In Current Variable A 10% Voting 223,762,702 Shares Dilution 22,376,270 Shares 22,376,270 Shares 22,376,270 Shares Funds Raised $ 190,198 $ 380,396 $ 760,793

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The number of Shares on issue (variable A in the formula) could increase as a result of the issue of Shares that do not require Shareholder approval (such as under a pro-rata rights issue or scrip issued under a takeover offer) or that are issued with Shareholder approval under Listing Rule 7.1.

The table above uses the following assumptions:

(a) The current shares on issue are the Shares on issue as at 4 April 2013.
(b) No options are exercised into Shares before the date of issue of the Equity Securities.
(c) The 10% voting dilution reflects the aggregate percentage dilution against the issued share capital at the time of issue. That is why the voting dilution is shown in each example as 10%.
(d) The issue price set out above is the closing price of the Shares on the ASX on 4 April 2013.
(e) The Company issues the maximum possible number of Equity Securities under the 10% Placement Capacity.
(f) The Company has not issued any Equity Securities in the 12 months prior to the Meeting that were not issued under an exception in ASX Listing Rule 7.2 or with approval under ASX Listing Rule 7.1.
(g) The calculations above do not show the dilution that any one particular Shareholder will be subject to. All Shareholders should consider the dilution caused to their own shareholding depending on their specific circumstances.
(h) This table does not set out any dilution pursuant to approvals under ASX Listing Rule 7.1.

Shareholders should note that there is a risk that:

(i) the market price for the Company’s Shares may be significantly lower on the issue date than on the date of the Meeting; and
(ii) the Shares may be issued at a price that is at a discount to the market price for those Shares on the date of issue.
(d)

Purpose of Issue under 10% Placement Capacity

The Company may issue Equity Securities under the 10% Placement Capacity for the following purposes:

(i) as cash consideration in which case the Company may use funds raised for [insert eg the acquisition of new resources, assets and investments (including expenses associated with such an acquisition), continued exploration expenditure on the Company’s current assets and general working capital]
(ii) as non-cash consideration for [insert eg the acquisition of new resources assets and investments], in such circumstances the Company will provide a valuation of the noncash consideration as required by listing Rule 7.1A.3.

(e)

Allocation under the 10% Placement Capacity

The allottees of the Equity Securities to be issued under the 10% Placement Capacity have not yet been determined. However, the allottees of Equity Securities could consist of current Shareholders or new investors (or both), none of whom will be related parties of the Company.

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The Company will determine the allottees at the time of the issue under the 10% Placement Capacity, having regard to the following factors:

(i) the purpose of the issue;
(ii) alternative methods for raising funds available to the Company at that time, including, but not limited to, an entitlement issue or other offer where existing Shareholders may participate;
(iii) the effect of the issue of the Equity Securities on the control of the Company;
(iv) the circumstances of the Company, including, but not limited to, the financial position and solvency of the Company;
(v) prevailing market conditions; and
(vi) advice from corporate, financial and broking advisers (if applicable).

(f) Previous Approval under ASX Listing Rule 7.1A

The Company has not previously obtained approval under ASX Listing Rule 7.1A and accordingly has not issued any Equity Securities pursuant to Listing Rule 7.1A in the 12 months preceding the date of the Annual General Meeting.

Voting Exclusion

A voting exclusion statement is included in this Notice. As at the date of this Notice, the Company has not invited any existing Shareholder to participate in an issue of Equity Securities under ASX Listing Rule 7.1A. Therefore, no existing Shareholders will be excluded from voting on Resolution 12.

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GLOSSARY

$ means Australian dollars.

10% Placement Capacity has the meaning given in section 11.1 of this Notice.

Annual General Meeting or Meeting means the meeting convened by this Notice.

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 ASX.

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

(a) a spouse or child of the member;
(b) a child of the member’s spouse;
(c) a dependent of the member or the member’s spouse;
(d) anyone else who is one of the member’s family and may be expected to influence the member, or be influenced by the member, in the member’s dealing with the entity;
(e) a company the member controls; or
(f) a person prescribed by the Corporations Regulations 2001 (Cth) for the purposes of the definition of ‘closely related party’ in the Corporations Act.

Company means Xstate Resources Limited - ABN 96 009 217 154

Directors means the current directors of the Company.

Eligible Entity has the meaning given in Section 11.2 of this Notice.

Equity Securities includes a Share, a right to a Share or Option, an Option, a convertible security and any security that ASX decides to classify as an Equity Security.

Explanatory Statement means the explanatory statement accompanying the Notice.

Key Management Personnel has the same meaning as in the accounting standards issued by the Australian Accounting Standards Board and means those persons having authority and responsibility for planning, directing and controlling the activities of the Company, or if the Company is part of a consolidated entity, of the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the Company, or if the Company is part of a consolidated entity, of an entity within the consolidated group.

Notice or Notice of Meeting or Notice of Annual General Meeting means this notice of Annual General Meeting including the Explanatory Statement and the Proxy Form.

Ordinary Securities has the meaning set out in the ASX Listing Rules.

Remuneration Report means the remuneration report set out in the Director’s report section of the Company’s annual financial report for the year ended 31 December 2012.

Resolutions means the resolutions set out in the Notice of Meeting, or any one of them, as the context requires.

Share means a fully paid ordinary share in the capital of the Company.

Shareholder means a holder of a Share.

WST means Australian Western Standard Time (Perth, Western Australia).

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Instructions for Completing ‘Appointment of Proxy’ Form

( Changes to Proxy Voting ): Sections 250BB and 250BC of the Corporations Act came into effect on 1 August 2011 and apply to voting by proxy on or after that date. Section 250R(5) of the Corporations Act came into effect on 28 June 2012 and will affect the Chair's votes on undirected proxies. Shareholders and their proxies should be aware of these changes to the Corporations Act, as they will apply to this Annual General Meeting. Broadly, the changes mean that:
(a) if proxy holders vote, they must cast all directed proxies as directed;
(b) any directed proxies which are not voted will automatically default to the Chair, who must vote the proxies as directed; and
(c) the Chair is able to vote undirected proxies in the non-binding vote on the Remuneration Report where the Shareholder provides express authorisation for the Chair to exercise the proxy.

Further details on these changes are set out below.

( Appointing a Proxy ): A member with two or more votes entitled to attend and vote at the Annual General Meeting is entitled to appoint not more than two proxies to attend and vote on a poll on their behalf. The appointment of a second proxy must be done on a separate copy of the Proxy Form. Where more than one proxy is appointed, such proxy must be allocated a proportion of the member’s voting rights. If a member appoints two proxies and the appointment does not specify this proportion, each proxy may exercise half the votes. A duly appointed proxy need not be a member of the Company.
( Proxy vote if appointment specifies way to vote ): Section 250BB(1) of the Corporations Act provides that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution and, if it does :
(a) the proxy need not vote on a show of hands, but if the proxy does so, the proxy must vote that way (i.e. as directed);
(b) if the proxy has 2 or more appointments that specify different ways to vote on the resolution – the proxy must not vote on a show of hands;
(c) if the proxy is the chair of the meeting at which the resolution is voted on – the proxy must vote on a poll, and must vote that way (i.e. as directed); and
(d) if the proxy is not the chair – the proxy need not vote on the poll, but if the proxy does so, the proxy must vote that way (i.e. as directed).
( Transfer of non-chair proxy to chair in certain circumstances ): Section 250BC of the Corporations Act provides that, if:
(a) an appointment of a proxy specifies the way the proxy is to vote on a particular resolution at a meeting of the Company's members;
(b) the appointed proxy is not the chair of the meeting;
(c) at the meeting, a poll is duly demanded on the resolution; and
(d) either of the following applies:
- (i) the proxy is not recorded as attending the meeting;
- (ii) the proxy does not vote on the resolution,

the chair of the meeting is taken, before voting on the resolution closes, to have been appointed as the proxy for the purposes of voting on the resolution at the meeting.

( Chair's votes on undirected proxies for Remuneration Reports ): Section 250R(5) of the Corporations Act provides:

A member of the Key Management Personnel or a Closely Related Party of such a member (the voter ) may cast a vote on an advisory resolution to adopt a remuneration report as a proxy if the vote is not cast on their behalf and either:

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(a) the voter is appointed as a proxy by writing that specifies the way the proxy is to vote on the resolution; or
(b) the voter is the Chair and the appointment of the Chair as proxy:
- (1) does not specify the way the proxy is to vote on the resolution; and
- (2) expressly authorises the Chair to exercise the proxy even if the resolution is connected directly or indirectly with the remuneration of a member of the Key Management Personnel for the Company, or if the Company is part of a consolidated entity, for the entity.

( Signing Instructions ):

(a) ( Individual ): Where the holding is in one name, the member must sign.
(b) ( Joint Holding ): Where the holding is in more than one name, all of the members should sign.
(c) ( Power of Attorney ): If you have not already provided the Power of Attorney with the registry, please attach a certified photocopy of the Power of Attorney to this form when you return it.
(d) ( Companies ): Where the company has a sole director who is also the sole company secretary, that person must sign. Where the company (pursuant to Section 204A of the Corporations Act) does not have a company secretary, a sole director can also sign alone. Otherwise, a director jointly with either another director or a company secretary must sign. Please sign in the appropriate place to indicate the office held.
( Attending the Meeting ): Completion of a Proxy Form will not prevent individual members from attending the Annual General Meeting in person if they wish. Where a member completes and lodges a valid Proxy Form and attends the Annual General Meeting in person, then the proxy’s authority to speak and vote for that member is suspended while the member is present at the Annual General Meeting.

8. ( Voting in person ):

(a) A Shareholder that is an individual may attend and vote in person at the Meeting. If you wish to attend the Meeting, please bring the attached proxy form to the Meeting to assist in registering your attendance and number of votes. Please arrive 15 minutes prior to the start of the Meeting to facilitate this registration process.
(b) A Shareholder that is a corporation may appoint an individual to act as its representative to vote at the Meeting in accordance with Section 250D of the Corporations Act. The appropriate “Certificate of Appointment of Corporate Representative” should be produced prior to admission. A form of the Certificate is enclosed with this Notice of Meeting
( Return of Proxy Form ): To vote by proxy, please complete and sign the enclosed Proxy Form and return the Proxy Form (and any Power of Attorney under which it is signed):
- (a) In person to Level 2, 55 Carrington Street, Nedlands, Perth, WA;
- (b) By mail to PO Box 985, Nedlands, WA, 6909.
- (c) By Facsimile to +61 8 9389 8327;
- (d) By scan and email to [email protected]

so that it is received at least 48 hours prior to commencement of the Annual General Meeting. Proxy Forms received later than this time will be invalid.

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XSTATE RESOURCES LIMITED

ABN 96 009 217 154

APPENDIX 1

The materials terms and condition of the Options referred to in Resolutions 6, 7 and 8 are as follows:

(a) The Options will be unlisted.
(b) The Options will be issued in 3 tranches on a proportionate basis to each of the Related Parties with exercise prices as follows (“Exercise Price”):
(i) 5.75 million options 4 cents;
(ii) 5.75 million options 6 cents; and
(iii) 5.75 million options 8 cents.
(c) The Options are exercisable at any time on or before 3 years from the date of issue (“Expiry Date”).
(d) Each Option exercised will entitle the holder to one Share in the capital of the Company.
(e) The notice attached to the certificate has to be completed when exercising the Options (“Notice of Exercise”).
(f) Options may be exercised by the holder completing and forwarding to the Company a Notice of Exercise and payment of the exercise price for each Option being exercised prior to the Expiry Date.
(g) All Shares issued upon exercise of the Options will rank pari passu in all respects with the Company’s then existing Shares.
(h) Shares allotted and issued pursuant to the exercise of Options will be allotted and issued not more than 15 business days after the receipt of a properly executed Notice of Exercise and payment for the Exercise Price of each Option being exercised. The Company will apply for official quotation on ASX of Shares issued pursuant to the exercise of Options.
(i) The holder of Options cannot participate in new issues of securities to holders of Shares unless the Options have been exercised and the Shares have been allotted and registered in respect of the Options before the record date for determining entitlements to the issue. The Company must give notice to the holder of the Options of any new issue before the record date for determining entitlements to the issue in accordance with the ASX Listing Rules. Options can only be exercised in accordance with these terms and conditions.
(j) If the Company makes a pro rata bonus issue of Shares to holders of Shares (other than an issue in lieu or in satisfaction of dividends or by way of dividend reinvestment) and no Shares have been allotted and registered in respect of the exercise of Options before the record date for determining entitlements to the bonus issue, then the number of Shares or other securities for which the holder of the Options is entitled to subscribe on exercise of the Options is increased by the number of Shares or other securities that the holder of the Options would have received if the Options had been exercised before the record date for the bonus issue. No change will be made to the Exercise Price.
(k) If at any time the capital of the Company is reconstructed, all rights of an Option holder are to be changed in a manner consistent with the Corporations Act and the ASX Listing Rules at the time of the reconstruction.

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XSTATE RESOURCES LIMITED ABN 96 009 217 154

APPENDIX 2 Valuation of Options to be issued to Directors

The Company has valued the Options to be issued to Directors (“Director Options”) using the Black-Scholes option model and based on the assumptions as set out in the table below, with the Director Options ascribed a value range as follows:

Assumptions:

Value date	5/4/13	5/4/13	5/4/13
Share price	$0.017	$0.017	$0.017
Exercise price	$0.04	$0.06	$0.08
Term	3 years	3 years	3 years
Volatility	75%	75%	75%
Risk free interest rate	2.93%	2.93%	2.93%
Indicative value per Option
(cents)	$0.005	$0.0035	$0.0026

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CERTIFICATE OF APPOINTMENT OF CORPORATE REPRESENTATIVE

Shareholder Details

This is to certify that by a resolution of the directors of:

………………………………………………………………………….…….….………... Insert name of Shareholder Company

( Company ),

the Company has appointed:

……………………..……………………………………………………………………….……….…, Insert name of corporate representative

in accordance with the provisions of section 250D of the Corporations Act 2001, to act as the body corporate representative of that Company at the annual general meeting of the members of XState Resources Limited to be held on 31 May 2013 commencing at 3.00 pm (WST) and at any adjournments of that annual general meeting.

DATED ………………………………………………………. 2013

Please sign here

Executed by the Company ) in accordance with its constituent documents ) ) ............................................….………….….….. .................................................…………………….... Signed by authorised representative Signed by authorised representative ............................................................……...….. .................................................………………….…... Name of authorised representative (print) Name of authorised representative (print) .....................................................…….…..….. ............................................….………………..…….. Position of authorised representative (print) Position of authorised representative (print)

Instructions for Completion

Insert name of appointing Shareholder Company and the name or position of the appointee corporate representative (eg “John Smith” or “each director of the Company”).
Execute the Certificate following the procedure required by your Constitution or other constituent documents.
Print the name and position (eg director) of each authorised company officer who signs this Certificate on behalf of the Company.
Insert the date of execution where indicated.
Prior to the Meeting, send or deliver the Certificate to the registered office of Xstate Resources Limited at Level 2, 55 Carrington Street, Nedlands WA 6009 or fax the Certificate to the registered office at +61 8 9389 8327

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PROXY FORM

APPOINTMENT OF PROXY

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

ANNUAL GENERAL MEETING

I/We

Address

being a Member of Xstate Resources Limited entitled to attend and vote at the Annual General Meeting, hereby

Appoint

Name of proxy ( Please note : Leave blank if you have selected the Chair of the Annual General Meeting as your proxy.)

OR the Chair of the Annual General Meeting as your proxy

or failing the person so named or, if no person is named, the Chair of the Annual General Meeting, or the Chair’s nominee, to vote in accordance with the following directions or if no directions have been given, as the proxy sees fit (except for Resolutions 1 and 6 to 11 which require the below express authorisation), at the Annual General Meeting to be held at 3.00 pm (WST) on 31 May 2013 at Level 2, 55 Carrington Street, Nedlands, Western Australia, and at any adjournment of that meeting.

* Important for Resolutions 1 and 6 - 11

If you have not directed your proxy how to vote as your proxy in respect of Resolutions 1 and 6 to 11 and the Chair is, or may by default be, appointed your proxy, you must mark the box below.

I/we direct the Chair to vote in accordance with his/her voting intentions (as set out above) on Resolutions 1 and 6 to 11 (except where I/we have indicated a different voting intention above) and expressly authorise that the Chair may exercise my/our proxy even though Resolutions 1 and 6 to 11 are connected directly or indirectly with the remuneration of a member of the Key Management Personnel and acknowledge that the Chair may exercise my/our proxy even if the Chair has an interest in the outcome of Resolutions 1 and 6 to 11 and that votes cast by the Chair for Resolutions 1 and 6 to 11, other than as proxy holder, will be disregarded because of that interest.

If the Chair is, or may by default be, appointed your proxy and you do not mark this box and you have not directed the Chair how to vote, the Chair will not cast your votes on Resolutions 1 and 6 to 11 and your votes will not be counted in calculating the required majority if a poll is called on Resolutions 1 and 6 to 11.

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The Chair intends to vote undirected proxies in favour of all Resolutions in which the Chair is entitled to vote.

Voting on Business of the Annual General Meeting

FOR AGAINST ABSTAIN Resolution 1 – Adoption of Remuneration Report Resolution 2 – Re Election of Director- Ross Kestel Resolution 3 – Election of Director- Andrew Childs Resolution 4 – Ratification of prior Share issue – Placement Resolution 5 – Ratification of prior Share issue to Vendor Resolution 6 – Grant of Options to Gary Jeffery Resolution 7 – Grant of Options to Andrew Childs Resolution 8 – Grant of Options to Ross Kestel Resolution 9 – Adoption of Incentive Option Plan Resolution 10 – Adoption of Incentive Share Plan Resolution 11 – Issue of Shares to Gary Jeffery Resolution 12 – Approval of 10% placement capacity

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

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

Signature of Member(s)

_______

Date: ____

Individual or Member 1 Sole Director/Company Secretary Contact Name: ________	Member 2 Director *_ Contact Ph (daytime):* _____	Member 3

		Director/Company Secretary __ Date: ______

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XSTATE RESOURCES LIMITED

ABN 96 009 217 154

ANNUAL REPORT

2012

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CONTENTS

Page Company Directory .................................................................................................. 1 Review of Operations ............................................................................................... 2 Directors’ Report .................................................................................................... 7 Auditor’s Independence Declaration ........................................................................... 25 Corporate Governance Statement .............................................................................. 26 Consolidated Statement of Financial Position ................................................................ 37 Consolidated Statement of Comprehensive Income ......................................................... 38 Consolidated Statement of Changes in Equity ................................................................ 39 Consolidated Statement of Cash Flows ........................................................................ 41 Notes to the Consolidated Financial Statements ............................................................. 42 Directors’ Declaration ............................................................................................ 80 Independent Audit Report ....................................................................................... 81 Securities Exchange Information ............................................................................... 83

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │COMPANY DIRECTORY

COMPANY DIRECTORY

DIRECTORS AND COMPANY SECRETARY:

Gary Jeffery

Managing Director Appointed 8 July 2010

Ross Kestel

Non-executive Director – Acting Chairman Appointed 6 September 2006

Andrew Childs

Non-executive Director Appointed 11 February 2013

David McArthur

Company Secretary

REGISTERED OFFICE:

Level 2 PO Box 985 55 Carrington Street NEDLANDS Nedlands WA 6909 WA 6009 Telephone: +61 8 9423 3200 Facsimile: +61 8 9389 8327

PRINCIPAL OFFICE:

208 Bagot Road Subiaco WA 6008

Telephone: Facsimile:

PO Box 805 Subiaco WA 6904

+61 8 9381 4215 +61 8 9381 9386

SHARE REGISTRY:

Advanced Share Registry Services 110 Stirling Highway Nedlands WA 6009

BANKERS:

ANZ Banking Group Limited Business Relationship Banking Level 6, 77 St Georges Terrace Perth WA 6000

Telephone: +61 8 9389 8033 Facsimile: +61 8 9389 7871

AUDITORS:

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

SOLICITORS:

Steinepreis Paganin Level 4, The Read Buildings 16 Milligan Street Perth WA 6000

DOMICILE AND COUNTRY OF INCORPORATION:

Australia

WEBSITE AND EMAIL:

www.xstate.com.au [email protected]

SECURITIES EXCHANGE:

Xstate Resources Limited shares are listed on the Australian Securities Exchange (ASX) – code XST Xstate Resources Limited options (exercisable at 24 cents before June 30, 2013) are listed on the ASX – code XSTO

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │REVIEW OF OPERATIONS

REVIEW OF OPERATIONS

INVESTMENT AND ASSET STRATEGY

During 2012 Xstate’s primary exploration activities were focussed on evaluating the prospects and leads inventory in the Pelagian Basin of Tunisia and Italy.

In the offshore permits, the company concentrated on seeking to improve the fiscal terms to enable appraisal of the Dougga Gas discovery.

Onshore, testing was carried out on the Sidi Dhaher oil discovery, however this testing was unsuccessful.

Subsequently, based on feedback from shareholders, the Company decided to sell the Tunisian assets and to seek new assets as a base for rejuvenating and recapitalizing the Company.

The Company is focussed on assets that can be evaluated by drilling in the near term, and assets in areas where discovered oil and gas can be connected to local production and sales infrastructure for early cash flow.

Xstate’s strategy is also to seek material equity in assets, and to acquire assets with prospects of a size that could materially impact on the Company’s market capitalization.

Subsequent to year end the Company has entered into a farmout onshore California to participate in early drilling activity, and also acquired interest in an offshore Gulf of Mexico Block with prospects that can be readied for early drilling.

While these initial opportunities are in the USA, the Company will continue to seek additional assets worldwide that fit the above strategic needs.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │REVIEW OF OPERATIONS

OPERATIONS REPORT

The table below summarizes the key achievements in 2012 and 2013 to date:

Date		2012 Xstate Activity and Key Achievements
Jan - June 2012	Preparations for Sidi Dhaher Testing
Jan - June 2012	Discussions and reviews of Offshore Resources and Fiscal Terms
June 2012	Sidi Dhaher 1 – Well Testing
July 2012	Chorbane Permit Renewal (Onshore Tunisia)
September 2012	Sale of Tunisian Assets Announced
November 2012	Shareholders Approve Sale of Assets
Jan - December 2012	Numerous New Opportunities Screened and Reviewed
Date	Post Year End Activities:
Jan - Mar 2013	Reviews of Opportunities Continues
February 2013	Xstate Signed Conditional MOU for Acquisition of Producing Oil Field
March 2013	Xstate Announced Acquisition of Exploration Opportunities in USA

Chorbane Permit: (Xstate 10% - Tunisia)

The onshore Sidi Dhaher 1 exploration well was drilled in the Chorbane Permit in September and October 2011 and after logging and recovering oil samples, the well was cased to make it safe for temporary plugging and future re-entry for flow testing.

Flow testing was carried out in June 2012.

Despite the indications of oil noted above, the well flowed only water due to low oil saturation, and the well was plugged and abandoned.

Kerkouane Permit: (Xstate 10% Tunisia)

No physical operations were conducted in the Kerkouane Permit area in 2012. The joint venture was focussed on evaluation of the resources of the permit and in particular evaluation of the fiscal terms applying to the permit and how they might be improved to facilitate the appraisal drilling of the Dougga Gas and Condensate Discovery.

As part of this process, there was an increase in the Contingent Resources, along with enhanced prospectivity in the Kerkouane and Pantelleria Permit.

Pantelleria Permit: (Xstate 10% Italy)

No physical operations were conducted in the Pantelleria Permit area in 2012. The joint venture was focussed on evaluation of the resources of the permit.

Asset Sale:

In September 2012 Xstate executed sale and purchase agreements for the sale of its interests in its Tunisian and Italian permits to Gulfsands Petroleum Plc.

This asset sale was approved by Xstate shareholders at a General meeting held on 27 November 2012.

The sale was for a total cash consideration of US$890,000, plus a contingent US$500,000 cash bonus from the next discovery well on the Kerkouane Permit if the discovery was developed for production.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │REVIEW OF OPERATIONS

Asset Sale (continued)

A cash adv a nce has be e n paid and the balanc e will be paid upon Tunisian regula t ory approvals. The fina l regulatory a pprovals are currently a waited.

Activity subsequent to December 2012 Year End:

In March 2013, Xstate entered in t o an agre e ment to acquire a 16. 6 67% worki n g interest in the Wes t Brentwood onshore pr o spects in n o rthern Cali f ornia, and a 50% working interest i n the High Island Bloc k A549, offshore Texas, i n the Gulf o f Mexico.

The new acquisitions a llow parti c ipation in n ear-term exploration d rilling to p rovide sign i ficant earl y production upside.

West Brentwood Prospect (Xstate earning 16.667%)

The West B rentwood P r ospect Are a is located 5 0km east of San Francisco and jus t west of th e Brentwoo d oil and gas field which has produc e d over 8 mi l lion barrels (MMbbl) of oil and 60 billion cubic f eet (Bcf) o f gas, and a d jacent to t h e West Bre n twood fiel d s which ha v e produced approximat e ly 3 MMbbl of oil and 9 Bcf of gas.

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The initial e xploration well to be d rilled in Ap r il 2013 will be directio n ally drilled to a true v e rtical dept h of 1,220m f rom a cent r al drilling a rea. The hi g hly produc t ive Anderson Sandstone will be tar g eted in thi s well, and t w o other pr o spective lo c ations are a lso permitt e d to be rea d y for drilling from the s ame centra l location.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │REVIEW OF OPERATIONS

West Brentwood Prospect (continued)

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Each of th e three pros p ects is esti m ated to contain up to 500,000 barrels of reco v erable oil, w ith natura l flow rates ( without sti m ulation) of 200-500 bar r els of oil p e r day per well.

Review of available 3 D seismic d a ta within t h e farmin A rea of Mut u al Interest (AMI) has i d entified 1 0 undrilled p r ospects geologically si m ilar to the p roducing fi e lds to the e a st.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │REVIEW OF OPERATIONS

High Island Block A549 (Xstate 50%- Operator)

The 5,760 a cres Block H IA549 is lo c ated in US F ederal wat e rs of the G u lf of Mexic o , approxim a tely 160 k m offshore fr o m High Isl a nd, Texas. The block lies in wat e r depths o f around 80 metres, is located in a prolific oil and gas pr o ducing tre n d, and is w ithin 5 kilo m etres of oil and gas p roduction f a cilities an d pipelines. Two prospects have a lready been identifie d on 3D seismic data a nd a tech n ical revie w estimated r ecoverable resources b e tween 100 a nd 300 Bcf of gas, and 7 to 22 mill i on barrels o f associate d condensate.

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Location o f HIGH ISL A ND BLOCK A 549, OFFSH O RE TEXAS

Xstate’s current plans include the reprocessi n g of 3D sei s mic data o v er the blo c k and preparation of a prospects a nd lead inv e ntory with a view to pu r suing a far m -out of an e xploration w ell in late 2 013. Ther e are discov e red gas and condensate resources i n HIA549 in a number o f shallow sa n dstones at around 130 0 metres, an d a well to t e st the expl o ration upsi d e at 3400 m etres woul d likely be d e signed to i n tersect an d allow development of some of thes e sands to r e duce the ri s k associate d with the e x ploration w ell.

Xstate will pursue othe r asset acquisitions duri n g 2013.

Competent Persons Statement

The techni c al informa t ion provided has been compiled b y Mr Gary J e ffery, Man a ging Director of Xstat e Resources Limited. H e is a qu a lified geo p hysicist with over 40 years tec h nical, com m ercial an d manageme n t experien c e in explor a tion for, a p praisal and developme n t, and tran s portation of oil and ga s and miner a l and energ y resources. Mr Jeffery h as reviewed the result s , procedur e s and data c ontained i n this report . Mr Jeffery consents to the inclusi o n in this re p ort of the information in the form and contex t in which it appears.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

DIRECTORS’ REPORT

The Directors present their report together with the financial report of Xstate Resources Limited for the financial year ended 31 December 2012 and the auditor’s report thereon.

1. DIRECTORS

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

Gary Jeffery Ross Kestel Andrew Childs David Whitby James Brown

David Whitby was a director from the beginning of the financial year until his resignation on 27 June 2012. James Brown was a director from the beginning of the financial year until his resignation on 11 February 2013.

Gary Jeffery

Managing Director Appointed: 8 July 2010

Experience and expertise

Mr Jeffery has over 40 years of experience in the oil, gas and mining and energy utilities industries working for a range of organisations in over 30 countries worldwide. He has broad project development, production operations and exploration management experience in resources and has demonstrated in his career the ability to find and commercialise oil and gas fields. Mr Jeffery has held management positions at AWE Limited, ARC Energy Limited, Tap Oil Limited, Griffin Energy Limited, Normandy Mining, Hadson Energy (now Apache), WAPET, Oxoco International and Texaco (now Chevron).

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

Other current directorships

None

Former directorships in the past three years

None

Special responsibilities

None

Interest in shares and options

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

Ross Kestel

Non-executive Director Appointed: 6 September 2006

Experience and expertise

Mr Kestel is a Chartered Accountant and was a director of a mid tier accounting practice for over 25 years and has a strong corporate finance background.

He has acted as a director and company secretary of a number of public companies involved in mineral exploration, mining, mine services, property development, manufacturing and technology industries.

Mr Kestel is a member of the Australian Institute of Company Directors.

Other current directorships

Non-executive Director Non-executive Director

Regis Resources Limited Beadell Resources Limited

29 June 2009 to current 29 February 2012 to current

Former directorships in the past three years

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

Jabiru Metals Limited VDM Group Limited Dioro Exploration NL Jatenergy Limited Resource Star Limited Equator Resources Limited

August 2003 to May 2011 August 2005 to March 2011 April 2008 to February 2010 September 2007 to May 2012 August 2006 to November 2012 June 2011 to December 2012

Special responsibilities

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

Interest in shares and options

None

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

Andrew Childs

Non-Executive Director Appointed: 11 February 2013

Experience and expertise

Mr Childs graduated from the University of Otago, New Zealand in 1980 with a Bachelor of Science in Geology and Zoology. Having started his professional career as an Exploration Geologist in the Easter Goldfields of Western Australia, Mr Childs moved to petroleum geology and geophysics with Perth-based Ranger Oil Australia (later renamed Petroz NL). He gained technical experience with Petroz as a Geoscientist and later commercial experience as the Commercial Assistant to the Managing Director. He is also Principal of Resource Recruitment and Managing Director of International Recruitment Services Pty Ltd.

Other current directorships

Executive Chairman Australian Oil Company Limited Non-executive Director ADX Energy Limited Non-executive Director Riedel Resources Limited

25 November 2008 to current 11 November 2009 to current 9 April 2010 to current

Former directorships in the past three years

None

Special responsibilities

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

Interest in shares and options

1,277,000 ordinary shares 2,013,254 options

David Whitby

Non-executive Chairman Appointed: 11 February 2011 Resigned: 27 June 2012

Experience and expertise

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

Other current directorships

None

Former directorships in the past three years

Non-executive Director Nido Petroleum

19 May 2009 to 1 June 2012

Special responsibilities

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

Interest in shares and options

185,000 ordinary shares

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

1. DIRECTORS (continued)

James Brown

Non-Executive Director Appointed: 5 April 2011 Resigned: 11 February 2013

Experience and expertise

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

Other current directorships

None

Former directorships in the past three years

None

Special responsibilities

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

Interest in shares and options

None

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

2. COMPANY SECRETARY

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

3. DIRECTORS’ MEETINGS

The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 31 December 2012, and the numbers of meetings attended by each director were:

Director	Full meetings of directors	Meetings of audit and risk management committee	Meetings of remuneration and nominations committee
	No. of meetings attended No. of meetings held whilst a director	No. of meetings attended No. of meetings held whilst a director	No. of meetings attended No. of meetings held whilst a director
David Whitby Gary Jeffery Ross Kestel James Brown	2 2 6 6 6 6 6 6	1 1 - - 2 2 2 2	- - - - 1 1 1 1 - -
Andrew Childs	- -	- -

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT - AUDITED

Principles of Compensation

Remuneration is referred to as compensation throughout this report.

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

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

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

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

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

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

Fixed compensation

Fixed compensation consists of base compensation (which is calculated on a total cost basis), as well as employer contributions to superannuation funds.

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

Short-term incentive

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

Long-term incentive

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

Consequences of performance on shareholder wealth

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Principles of Compensation (continued)

Consequences of performance on shareholder wealth (continued)

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

Shareholder returns 2012 2011	2010	2009 2008
Net loss attributable to equity holders (9,281,180) (1,760,648) Basic EPS (cents) (9.20) (2.26) Closing share price (cents) 1.5 7	(1,141,560) (3.53) 15	(372,643) (1,975,847) (0.68) (3.59) 4 2

During the financial years noted above, there were no dividends paid or other returns of capital made by the Company to its shareholders. The measures of performance of the Company set out in the table above have not been taken into consideration in determining appropriate levels of remuneration.

Service contracts

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

Having regard to the cash balance at 30 June 2012, with effect from 1 July 2012 the payment to Gary Jeffery was reduced from $250,000 per annum to $120,000 per annum for 75% of his time. This reduction represents a deferral of cash payments, and the balance owing will only be paid as and when the company is in a financial position to do so.

On 20 July 2010, an employment service agreement was entered into with Mr David McArthur for the provision of corporate and secretarial services to the Company. The agreement is for $50,000 plus superannuation and was effective from 8 July 2010. The agreement may be terminated by the Company or Mr McArthur with three months’ notice.

Having regard to the cash balance at 30 June 2012, with effect from 1 July 2012 the payment to David McArthur was reduced from $50,000 to $30,000. This reduction represents a deferral of cash payments, and the balance owing will only be paid as and when the company is in a financial position to do so.

Non-executive directors

Total compensation for all non-executive directors, last voted upon by Shareholders at the 2011 AGM, is not to exceed $400,000 per annum. Non-executive directors’ fees are presently $32,500 per annum each.

On 19 May 2011, the Board approved an increase in non-executive director fees from $45,000 p.a. to $60,000 p.a. per director, plus $5,000 p.a. for the chair of any committee, following review and approval by the Remuneration and Nomination committee members.

Having regard to the cash balance at 30 June 2012, with effect from 1 July 2012 the payment to non-executive directors was reduced to $35,000 per annum, per director. The reduction represents a deferral of cash payments, and the balance owing will only be paid as and when the company is in a financial position to do so.

The payment to non-executive directors was further reduced to $32,500 p.a., per director, effective 1 October 2012 and does not represent a deferral of cash payments and includes representation on the board committees.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Principles of Compensation (continued)

Executive and non-executive directors

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

Mr Whitby received total remuneration of $90,000 per annum as non-executive Chairman. Mr Whitby resides in The Netherlands. A significant portion of his time as non-executive Chairman of the Company involved work carried out whilst in The Netherlands. Mr Whitby resigned from the Board on 27 June 2012.

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

Services from remuneration consultants

No remuneration consultants provided services during the year.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Directors’ and senior executives remuneration - audited

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

		Short-term employee benefits	Short-term employee benefits	Post	Share
				Employment	Based
				benefits	payments
							% of	Value of
Name		Cash salary and fees* Non- Monetary benefits	Total	Super- annuation	Options	Total	remuneration performance based	Options as % of remuneration
		$ $	$	$	$	$	%	%
Non-executive directors Ross Kestel Sub-total non-executive directors remuneration Executive directors Gary Jeffery
	2012	55,619 4,231	59,850	5,006	-	64,856	-	-
	2011	60,780 3,177	63,957	5,470	-	69,427	-	-


	2012	55,619 4,231	59,850	5,006	-	64,856	-	-
	2011	60,780 3,177	63,957	5,470	-	69,427	-	-

	2012	250,000 4,231	254,231	-	-	254,231	-	-
	2011	237,500 3,518	241,018	-	-	241,018	-	-
Total current directors remuneration	2012	305,619 8,462	314,081	5,006	-	319,087	-	-
	2011	298,280 6,695	304,975	5,470	-	310,445	-	-

2012 Fees include deferred fees – refer note 10

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

		Short-term employee benefits	Short-term employee benefits	Post	Share
				Employment	Based
				benefits	payments
							% of	Value of
Name		Cash salary and fees Non- Monetary benefits	Total	Super- annuation	Options	Total	remuneration performance based	Options as % of remuneration
		$ $	$	$	$	$	%	%
Former directors David Whitby(1) James Brown(2) John Begg(3) Brett Mitchell(4) Sub-total former directors remuneration
	2012	45,000 2,081	47,081	-	-	47,081	-	-
	2011	112,000 2,811	114,811	-	-	114,811	-	-
	2012	56,875 4,231	61,106	-	-	61,106	-	-
	2011	54,028 2,350	56,378	-	-	56,378	-	-
	2012	- -	-	-	-	-	-	-
	2011	41,292 1,743	43,035	-	-	43,035	-	-
	2012	- -	-	-	-	-	-	-
	2011	70,000 827	70,827	-	-	70,827	-	-
	2012	101,875 6,312	108,187	-	-	108,187	-	-
	2011	277,320 7,731	285,051	-	-	285,051	-	-

Total directors remuneration	2012	407,494 14,774	422,268	5,006	-	427,274	-	-
	2011	575,600 14,426	590,026	5,470	-	595,496	-	-

(1) Appointed 11 February 2011 and resigned 10 June 2012

(2) Appointed 4 April 2011 and resigned 11 February 2013

(3) Resigned 10 June 2011

(4) Resigned 4 April 2011

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

		Short-term employee benefits	Short-term employee benefits	Post	Share
				Employment	Based
				benefits	payments
							% of	Value of
Name		Cash salary and fees Non- Monetary benefits	Total	Super- annuation	Options	Total	remuneration performance based	Options as % of remuneration
		$ $	$	$	$	$	%	%
Senior executive David McArthur Sub-total senior executive remuneration
	2012	50,000 4,231	54,231	4,500	-	58,731	-	-
	2011	55,499 3,518	59,017	5,059	-	64,076	-	-
	2012	50,000 4,231	54,231	4,500	-	58,731	-	-
	2011	55,499 3,518	59,017	5,059	-	64,076	-	-
Total directors and executive officer remuneration	2012	457,494 19,005	476,499	9,506	-	486,005	-	-
	2011	631,099 17,944	649,043	10,529	-	659,572	-	-

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

(a) directors fees for Mr Gary Jeffery are paid to Dungay Resources Pty Ltd, a company associated with Mr Jeffery;
(b) directors fees for Mr John Begg were paid to Roc Dock Pty Ltd, a company associated with Mr Begg;
(c) directors fees for Mr Brett Mitchell were paid to Sibella Capital Pty Ltd, a company associated with Mr Mitchell;
(d) cash salary and fees includes $36,000 (2011: $34,000) paid to Mr David Whitby representing additional consulting services; and
(e) cash salary and fees includes $nil (2011: $6,000) paid to Mr James Brown representing additional consulting services.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Analysis of bonuses included in remuneration.

No short-term incentive cash bonuses have been awarded as remuneration to Directors of the Group or to Group Executives.

Equity instruments

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

Options and rights over equity instruments granted as compensation

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

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

(1) Resigned on 8 July 2010

No options were granted during the reporting period.

Exercise of options granted as compensation

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

Analysis of movements in options

The movement during the reporting period, by value, of options over ordinary shares in the Company, held by each key management person is detailed below:

	Granted in year	Value of options	Lapsed in year
	$	exercised in year
	(A)	$ (B)	$ (C)
Non-executive director
Rhod Grivas	-	-	333,334

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

4. REMUNERATION REPORT – AUDITED (continued)

Directors’ and executive officers’ remuneration - audited (continued)

Analysis of movements in options – audited (continued)

Notes in relation to the table on analysis of movements in options - audited

(A) The value of options granted in the year is the fair value of the options calculated at grant date using the Black Scholes option-pricing model.
(B) The value of options exercised during the year is calculated as the market price of shares of the Company as at close of trading on the date the options were exercised after deducting the price paid to exercise the option.
(C) The value of the options that lapsed during the year represents the benefit foregone and is calculated at the date the option lapsed using the Black Scholes option-pricing model assuming the performance criteria had been achieved;

No options were granted, exercised, or cancelled during the year in relation to key management personnel.

This is the end of the Remuneration Report.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

5. PRINCIPAL ACTIVITIES

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

6. OPERATING AND FINANCIAL REVIEW

During the financial years 2008 to 2012, there were no dividends paid or other returns of capital made by the Company to its shareholders. Refer to consequences of shareholder wealth table in the Remuneration Report for a detailed breakdown.

Net loss amounts for 2008 to 2012 have been calculated in accordance with Australian Accounting Standards (AASBs).

Summary of material transactions

During the financial year the Group contracted to sell its 10% participating interest in the Chorbane permit, and its 10% participating interests in the Kerkuoane and Pantelleria permits in Tunisia and Italy respectively (Tunisian Assets) to Gulfsands Petroleum Group for a consideration of USD 875,000.

A further USD 500,000 cash bonus is potentially payable upon first production resulting from drilling of the first exploration well on the Kerkouane Permit. The sale was subject to shareholder approval (obtained on 27 November 2012) and regulatory approvals. These approvals had not been received and the sale was not complete at the date of this report, with final approval anticipated to occur during March 2013.

Significant changes in the state of affairs

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

7. DIVIDENDS

The directors recommend that no dividend be provided for the year ended 31 December 2012.

8. EVENTS SUBSEQUENT TO REPORTING DATE

On 19 March 2013 Xstate and Blue Sky Langsa Ltd mutually agreed to terminate the conditional MOU (entered into on 14 February 2013) to acquire the company and its interest in the Langsa TAC in Indonesia due to a combination of timing delays required to satisfy regulatory conditions imposed on the transaction, and timing delays related to the supply of equipment and access to offset opportunities, together with other commercial considerations which increased the risk and lowered potential rewards to an unacceptable level for Xstate shareholders.

On 19 March 2013 Xstate concluded an agreement to acquire a 16.667% working interest in the West Brentwood onshore prospect in northern California. Under the terms of the deal Xstate will farm-in to the prospect area by paying 25% of the first US$1,000,000 spent on drilling activity (i.e. US$250,000) and thereafter pay its earned working interest share of 16.667%. The first well is scheduled to spud in early April 2013 and has an estimated dry hole cost of approximately US$700,000 (gross) (Xstate share – US$175,000). A further US$300,000 is required for completion and tie-in costs in the case of drilling success.

On 19 March 2103 Xstate acquired a 50% working interest in the High Island Block A549 (“HIA549”), offshore Texas, in the Gulf of Mexico. As consideration for the working interest Xstate will issue one million shares to the vendor. Under the terms of the deal Xstate will operate activity within the HIA549 Block.

Xstate made a placement of 10 million shares to raise US$175,000 to be used to fund the drilling at West Brentwood. The balance of the cost of the well will be funded from Xstate’s cash reserves.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

If any wells drilled under the West Brentwood farmout are successful, and there is 90 days of commercial production prior to 1 January 2016, Xstate will issue 7.5 million shares to the vendor. Where for any reason these shares are not able to be issued by Xstate, it will be required to assign a 2% Overriding Royalty Interest on its share of production or make a cash payment in lieu of those shares of US$750,000.

If any wells drilled by Xstate on HIA549 are successful, and are completed and developed, and commence production prior to 1 January 2016, Xstate will issue 6.5 million shares to the vendor. Where for any reason these shares are not able to be issued by Xstate, it will be required to either assign a 2% Overriding Royalty Interest on its share of production or make a cash payment in lieu of those shares of US$3,000,000.

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

9. LIKELY DEVELOPMENTS

Subject to shareholder approval, the Group will develop its investment as disclosed in note 32 of the notes to the consolidated financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

10. DIRECTORS’ INTERESTS

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

	Ordinary	Options over
Director	Shares	ordinary shares
Gary Jeffery	2,336,895	2,966,400
Ross Kestel	-	-
Andrew Childs	1,517,000	2,013,254

11. SHARE OPTIONS

Options granted to directors of the Company

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

Unissued shares under options

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

Expiry date Exercise price cents Number of Shares	Expiry date Exercise price cents Number of Shares
30-Jun-13 24	48,438,061
	48,438,061

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

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

Shares issued on exercise of options

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

12. INDEMNIFICATION AND INSURANCE OF OFFICERS

During the financial year, Xstate Resources Limited paid a premium of $19,005 (2011: $16,921) (excluding GST) to insure the Directors and Company Secretary of the Company and the current directors and Company Secretary of its controlled entity.

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ REPORT

12. INDEMNIFICATION AND INSURANCE OF OFFICERS AND AUDITORS (continued)

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

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

13. NON-AUDIT SERVICES

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

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

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

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

	2012 $ 2011 $
Audit services: *Auditors of the Group – KPMG:* Audit and review of financial reports
	36,324 52,540
	36,324 52,540
Services other than statutory audit - KPMG:	17,750 26,450 - 27,140
*Other services*
Taxation compliance services (KPMG Australia) Taxation compliance services (Overseas KPMG firms)
	17,750 53,590

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │LEAD AUDITOR’S INDEPENDENCE DECLARATION

14. LEAD AUDITOR’S INDEPENDENCE DECLARATION

The lead auditor’s independence declaration forms part of the directors’ report for the financial year ended 31 December 2012.

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

==> picture [84 x 74] intentionally omitted <==

GARY JEFFERY

Director

Dated at Perth, Western Australia this 25[th] day of March 2013.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

CORPORATE GOVERNANCE STATEMENT

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

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

1. BOARD OF DIRECTORS

(a) Role of the Board and responsibilities

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

The Board evaluates these policies on an ongoing basis.

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

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

1. BOARD OF DIRECTORS (continued)

(b) Board composition and expertise

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

The Board currently comprises three directors - one executive director and two independent nonexecutive directors.

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

(c) Retirement and re-election of directors

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

(d) Independence of directors

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

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

(e) Director education

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

(f) Independent professional advice

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

1. BOARD OF DIRECTORS (continued)

(g) Board Performance Review

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

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

(h) Conflict of Interest

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

(i) Directors’ remuneration

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

2. BOARD COMMITTEES

(a) Board committees and membership

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

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

To facilitate the execution of its responsibilities, the Board’s Committees provide a forum for a more detailed analysis of key issues. Each Committee is entitled to the resources and information it requires to carry out its duties, including direct access to advisors and employees. Current membership of the committees of the Xstate Resources Board, are set out in section 2(b) and 2(c).

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

2. BOARD COMMITTEES (continued)

(b) Audit And Risk Management Committee

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

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

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

Mr Ross Kestel – independent non-executive director (Chair of audit and risk management committee);
Mr Andrew Childs – independent non-executive director.

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

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

The responsibilities of the audit and risk management committee include:

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

2. BOARD COMMITTEES (continued)

(c) Remuneration And Nomination Committee

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

Mr Andrew Childs – independent non-executive director (Chair of remuneration and nomination committee);
Mr Ross Kestel – independent non-executive director.

The committee met once during the year and committee members’ attendance record is disclosed in the table of directors’ meetings.

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

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

3. MANAGING BUSINESS RISK

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

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

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

(a) Internal controls

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

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

(b)

CEO and CFO assurance on corporate reporting

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

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

(c) Environmental regulation

The Company has a policy of at least complying, but in most cases exceeding, its environmental performance obligations. No environmental breaches have been notified by any Government agency during the year ended 31 December 2012.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

4. ETHICAL STANDARDS

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

(a) Code of Conduct

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

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

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

(b) Diversity Policy

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

Where possible and practical, the Group will seek participation and employment opportunities for indigenous people.

The key elements of the diversity policy are as follows:

increased gender diversity throughout the Group when a position becomes available;
annual assessment of the board gender diversity objectives and performance against objectives by the board and nomination committee.

Due to size of the Company and there being no requirement to increase staff levels, there has been limited opportunity to implement the diversity policy in its entirety. As a result, the Company has not yet met its objectives. However, the Company outsources its corporate and accounting services to Broadway Management (WA) Pty Ltd where 80% of its employees are represented by female members. Should a Board position become vacant, the Company will endeavour to fill any new board appointment or key management personnel position with a suitably qualified female applicant.

Pursuant to Recommendation 3.4 of the Recommendations, the Company discloses the following information as at the date of this report:

	31 December	2012	31 December	2011
Gender representation	Women	Men	Women	Men
Group representation	20%	80%	29%	71%
Senior management representation	0%	100%	0%	100%
Board representation	0%	100%	0%	100%
Corporate services provider representation	80%	20%	75%	25%

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

4. ETHICAL STANDARDS (continued)

(c) Trading in Company securities by directors and employees

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

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

5. COMMUNICATION WITH SHAREHOLDERS

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

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

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

(a) Continuous Disclosure

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

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

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

ASX PRINCIPLES COMPLIANCE STATEMENT

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

ASX PRINCIPLES COMPLIANCE STATEMENT (continued)

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations	Reference Compliance
Principle 4 – Safeguard integrity in financial reporting
4.1 The Board should establish an audit committee	2b Comply
4.2 The audit committee should be structured so that it: • consists only of non-executive directors • consists of a majority of independent directors • is chaired by an independent chair, who is not chair of the Board • has at least three members	2b 2b 2b 2b Comply Comply Do not comply Comply
4.3 The audit committee should have a formal charter	2a Comply
4.4 Companies should provide the information indicated in the Guide to reporting on Principle 4.	2a, 2b, Directors’ report Comply
Principle 5 – Making timely and balanced disclosure
5.1 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.	5, 5a Comply
5.2 Companies should provide the information indicated in the Guide to reporting on Principle 5.	5a Comply
Principle 6 – Respect the rights of shareholders
6.1 Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.	5 Comply
6.2 Companies should provide the information indicated in the Guide to reporting on Principle 6.	5 Comply
Principle 7 – Recognise and manage risk
7.1 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.	2b, 3, 3a Comply
7.2 The Board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.	3, 3b Comply
7.3 The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that they system is operating effectively in all material respects in relation to financial reporting risks.	3b Comply
7.4 Companies should provide the information indicated in the Guide to reporting on Principle 7.	2b, 3, 3a, 3b, Directors’ report Comply

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │CORPORATE GOVERNANCE STATEMENT

ASX PRINCIPLES COMPLIANCE STATEMENT (continued)

ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations	Reference Compliance
Principle 8 – Remunerate fairly and responsibly
8.1 The Board should establish a remuneration committee	2a, 2c, Remuneration report Comply
8.2 The remuneration committee should be structured so that it: • consists of a majority of independent directors • is chaired by an independent chair • has at least three members.	2c 2c 2c Comply Comply Do not comply
8.3 Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.	Remuneration report Comply
8.4 Companies should provide the information indicated in the Guide to reporting on Principle 8.	2a, 2c, Remuneration report Comply

The Audit Committee and Remuneration Committee have only 2 non-executive directors. Due to the size of the company there are only 3 directors, and the Managing Director is an executive.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012

	2012	2011
Note	$	$
Assets Cash and cash equivalents 20a Asset disposal advance consideration 8 Trade and other receivables 18 Assets held for sale 8 Prepayments 19 Total current assets Exploration and evaluation expenditure 16 Property, plant and equipment 15 Trade and other receivables 18 Total non-current assets Total assets Liabilities Trade and other payables 25 Receipts in advance 8 Employee benefits 23 Total current liabilities Total liabilities Net assets Equity Share capital 21 Reserves 21 Retained earnings Total equity attributable to equity holders of the Company		1,400,137 - 37,663 - 27,624

	11,249
	296,949
	13,193
	858,162
	13,532
	1,193,085	1,465,424
		8,616,144 25,125 18,333
	-
	22,101
	18,333
	40,434	8,659,602
	1,233,519	10,125,026
		84,672 - -

	70,444
	296,949
	106,952
	474,345	84,672
	474,345	84,672
	759,174	10,040,354
		41,092,627 415,549 (31,467,822)

	41,092,627
	279,149
	(40,612,602)
	759,174	10,040,354

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2012

	2012 2011
Note	$ $
Other income 9 Administrative expenses 11 Other expenses 12 Impairment of exploration expenditure 8 Results from operating activities Finance income 13 Finance expenses 13 Net finance income Loss before income tax Income tax benefit 14 Loss from continuing operations Loss on dissolution of subsidiary 7 Loss for the period Other comprehensive income Reversal of foreign currency translation reserve 7 Other comprehensive income for the period, net of income tax Total comprehensive loss for the period Loss attributable to owners of the Company Total comprehensive loss attributable to owners of the Company Loss per share Basic and diluted (cents per share) 22	29,000 21,361 (747,819) (1,034,902) (199,142) (273,833) (8,386,468) -
	(9,304,429) (1,287,374)
	23,249 39,307 - (26,342)
	23,249 12,965
	(9,281,180) (1,274,409) - 113
	(9,281,180) (1,274,296) - (486,352)
	(9,281,180) (1,760,648)
	- 486,352
	- 486,352
	(9,281,180) (1,274,296)
	(9,281,180) (1,760,648)
	(9,281,180) (1,274,296)
	(9.20) (2.26)

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2012

	Attributable to equity holders of the Company	Attributable to equity holders of the Company
Note	Share capital $ Translation Reserve $	Equity-based benefits reserve $ Accumulated losses $	Total $
Balance at 1 January 2012 Total comprehensive loss for the year Loss for the year Other comprehensive income Total other comprehensive income Total comprehensive loss for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Share based payment transactions 21 Total contributions by and distributions to owners Total changes in ownership interests in subsidiaries Total transactions with owners Balance at 31 December 2012	41,092,627 -	415,549 (31,467,822)	10,040,354
	- -	- (9,281,180)
			(9,281,180)
	- -	- -
			-
	- -	- (9,281,180)	(9,281,180)
	- -	(136,400) 136,400

			-
	- -	(136,400) 136,400	-
	- -	- -	-
	- -	(136,400) 136,400	-
	41,092,627 -	279,149 (40,612,602)	759,174

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │FINANCIAL STATEMENTS

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

	Attributable	to equity holders of the Company
Note	Share capital $ Translation Reserve $	Equity-based benefits reserve $ Accumulated losses $	Total $
Balance at 1 January 2011	38,517,929 (486,352)	415,549 (29,707,174)	8,739,952
Total comprehensive loss for the year
Loss for the year	- -	- (1,760,648)	(1,760,648)
Other comprehensive income
Reversal of foreign currency translation reserve 7 Total comprehensive income / (loss) for the year Transactions with owners, recorded directly in equity	- 486,352	- -	486,352
	- 486,352	- (1,760,648) - - - -	(1,274,296)

Contributions by and distributions to owners
Issue of ordinary shares Capital raising costs Total contributions by and distributions to owners Total changes in ownership interests in subsidiaries Total transactions with owners Balance at 31 December 2011	2,720,721 -		2,720,721
	(146,023) -		(146,023)
	2,574,698 -	- -	2,574,698
	- -	- -	-
	2,574,698 -	- -	2,574,698
	41,092,627 -	415,549 (31,467,822)	10,040,354

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2012

	2012 2011
Note	$ $
Cash flows from operating activities Receipts from customers Cash paid to suppliers and employees Income taxes received Net cash used in operating activities 20b Cash flows from investing activities Interest received Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Payments for exploration, evaluation and development Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares and options 21 Capital raising costs 21 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 20a	30,896 13,073 (818,868) (1,245,738) 8,173 113
	(779,799) (1,232,552)
	23,038 40,310 (4,525) (3,297) - 2,012 (628,136) (1,371,409)
	(609,623) (1,332,384)
	- 2,720,721 - (146,023)
	- 2,574,698
	(1,389,422) 9,762 1,400,137 1,416,717 534 (26,342)
	11,249 1,400,137

The notes are an integral part of these financial statements.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012

1. REPORTING ENTITY

Xstate Resources Limited (the “Company”) is a company domiciled in Australia. The address of the Company’s registered office is Level 2, 55 Carrington Street, Nedlands, Western Australia, 6009. The consolidated financial statements of the Company as at and for the year ended 31 December 2012 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group Entities”). The Group primarily was involved in the exploration of oil and gas in the Mediterranean and Tunisia.

2. BASIS OF PREPARATION

(a) Statement of compliance

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

The consolidated financial statements were authorised for issue by the Board of the Directors on 25 March 2013.

(b) Basis of measurement

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

(c) Going concern

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

The ability of the Group to continue funding its oil and gas exploration activities is dependent on the Group completing the sale of its Tunisian assets, which is currently progressing and expected to be completed in March 2012, and / or securing further working capital by the issue of additional equity or financing facilities. The timing of raising additional capital will depend on, amongst other factors, future drilling programs. The Group is continuing to evaluate future projects such as those disclosed in the subsequent events note 32.

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

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

In the event that the Company is unable to complete the sale of its Tunisian assets, the Company may not be able to continue as a going concern.

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PREPARATION (continued)

(d) Functional and presentation currency

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

(e) Use of estimates and judgements

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

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

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described as follows:

Critical judgements

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

Estimates and assumptions

(ii) Exploration and evaluation assets

Determining the recoverability of exploration and evaluation expenditure capitalised in accordance with the Group’s accounting policy (refer note 3(e)), requires estimates and assumptions as to future events and circumstances, in particular, whether successful development and commercial exploitation, or alternatively sale, of the respective areas of interest will be achieved. Critical to this assessment is estimates and assumptions as to the timing of expected cash flows, exchange rates, commodity prices and future capital requirements. Changes in these estimates and assumptions as new information about the presence or recoverability of an ore reserve becomes available, may impact the assessment of the recoverable amount of exploration and evaluation assets. If, after having capitalised the expenditure under accounting policy 3(e), a judgment is made that recovery of the expenditure is unlikely, an impairment loss is recorded in the income statement in accordance with accounting policy 3(f). The carrying amounts of exploration and evaluation assets are set out in note 17.

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PREPARATION (continued)

(e) Use of estimates and judgements (continued)

Estimates and assumptions (continued)

(iv) Share-based payments

As set out in note 25, share-based payments have been calculated at fair value using the Black & Scholes method and have been recognised as either an employee or professional expense, according to its nature.

3. SIGNIFICANT ACCOUNTING POLICIES

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

(a) Basis of consolidation

(i) Subsidiaries

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

(ii) Transactions eliminated on consolidation

Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

(b) Foreign currency

(i) Foreign currency transactions

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

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

(ii) Foreign operations

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Financial instruments

(i) Non-derivative financial assets

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

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

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

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

Loans and receivables

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

Cash and cash equivalents

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

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

(ii) Non-derivative financial liabilities

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

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Financial instruments (continued)

(iii) Share capital

Ordinary Shares

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

Dividends

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

(d) Property, plant and equipment

(i) Recognition and measurement

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

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

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

(ii) Depreciation

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

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

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

	Method	2012	2011
Office equipment	Straight line	20%	20%
Computer equipment	Straight line	20%	20%
Fixtures & Fittings	Straight line	20%	20%

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

(e) Exploration and evaluation

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Exploration and evaluation (continued)

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

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

(a) The rights to tenure of the area of interest are current; and
(b) At least one of the following conditions is also met:
(i) The expenditure is expected to be recouped through successful development and commercial exploitation of an area of interest, or alternatively by its sale; and
(ii) Exploration and evaluation activities in the area of interest have not, at reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of ‘economically recoverable reserves’ and active and significant operations in, or in relation to, the area of interest are continuing. Economically recoverable reserves are the estimated quantity of product in an area of interest that can be expected to be profitably extracted, processed and sold under current and foreseeable conditions.

Exploration and evaluation assets include:

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

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

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

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

Assets that are classified as intangible include:

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Exploration and evaluation (continued)

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

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

Impairment testing of exploration and evaluation assets

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

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

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

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

(f) Impairment

(i) Financial assets (including receivables)

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

Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security.

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(f) Impairment (continued)

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

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

(ii) Non-financial assets

The carrying amounts of the Group’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

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

(g) Employee benefits

(i)

Defined contribution plans

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

(ii) Share-based payment transactions

The share option programme allows Group employees to acquire shares of the Company. The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

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

(h) Provisions

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(i) Revenue

Rental income

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

(j) Finance income and finance costs

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

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

(k) Tax

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

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

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

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

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

(l) Segment reporting

Determination and presentation of operating segments

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Segment reporting (continued)

Determination and presentation of operating segments (continued)

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

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

(m) Non-current assets held for sale

Non-current assets that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on initial classification as held for sale and subsequent gains or losses on re-measurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss.

4. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

A number of new standards, amendments to standards and interpretation are effective for annual periods beginning after 1 January 2012, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early.

(a) AASB9 Financial Instruments (2010), AASB 9 Financial Instruments (2009)

AASB 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under AASB 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. AASB 9 (2010) introduces additions relating to financial liabilities. The IASB currently has an active project that may result in limited amendments to the classification and measurement requirements of AASB 9 and add new requirements to address the impairment of financial assets and hedge accounting.

AASB 9 (2010 and 2009) is effective for annual periods beginning on or after 1 January 2015 with early adoption permitted. The Group does not plan to adopt this standard early as the extent of the impact has not been determined.

(b) AASB10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities (2011)

AASB 10 introduces a single control model to determine whether an investee should be consolidated. As a result, the Group may need to change its consolidation conclusion in respect of its investees, which may lead to changes in the current accounting for these investees (see Note 3(a)(i)).

Under AASB 11, the structure of the joint arrangement, although still an important consideration, is no longer the main factor in determining the type of joint arrangement and therefore subsequent accounting.

The Group’s interest in a joint operation, which is an arrangement in which the parties have rights to the assets and obligations for the liabilities, will be accounted for on the basis of the Group’s interest in those assets and liabilities.
The Group’s interest in a joint venture, which is an arrangement in which the parties have rights to the net assets, will be equity accounted.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

(b) AASB10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities (2011) (continued)

AASB 12 brings together into a single standard all the disclosure requirements about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Group is currently assessing the disclosure requirements for interests in subsidiaries in comparison with the existing disclosures. AASB 12 requires the disclosure of information about the nature, risks and financial effects of these interests.

These standards are effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. The Group does not plan to adopt these standards early as they do not currently impact the financial statements.

(c) AASB13 Fair Value Measurement (2011)

AASB 13 provides a single source of guidance on how fair value is measured, and replaces the fair value measurement guidance that is currently dispersed throughout Australian Accounting Standards. Subject to limited exceptions, AASB 13 is applied when fair value measurements or disclosures are required or permitted by other AASBs. The Group is currently reviewing its methodologies in determining fair values (see Note 5). AASB 13 is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. The Group does not plan to adopt this standard early as it does not impact the financial statements.

5. DETERMINATION OF FAIR VALUES

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

Trade and other receivables

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

Non-derivative financial liabilities

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

Share-based payment transactions

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6. OPERATING SEGMENTS

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

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

	Oil and Gas
For the year ended 31 December	2012 2011
	$ $
Reportable segment loss before income tax Reportable segment assets Other materials items: Impairment loss on exploration and evaluation Finance income (including foreign exchange difference) Administration expenses Other expenses Capitalised exploration and evaluation expenditure – additions	(8,389,085) - 1,155,111 8,616,144 (8,386,468) - 392 - (259) - (2,750) - 621,755 1,371,126

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

	2012 2011
	$ $
Loss Total loss for reportable segments Unallocated amounts: other corporate expenses Finance expense (including foreign currency translation) Finance income Consolidated loss before income tax Assets Total assets for reportable segments Other assets Consolidated total assets Liabilities Total liabilities for reportable segments Other liabilities Consolidated total liabilities	(8,389,085) - (915,344) (1,287,374) - (26,342) 23,249 39,307
	(9,281,180) (1,274,409)
	1,155,111 8,616,144 78,408 1,508,882
	1,233,519 10,125,026
	(296,949) - (177,396) (84,672)
	(474,345) (84,672)

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

6. OPERATING SEGMENTS (continued)

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

Reportable segment totals	Adjustments Consolidated totals
$	$ $
Other material items 2012 Capitalised exploration and evaluation expenditure - additions 621,755 Other material items 2011 Capitalised exploration and evaluation expenditure - additions 1,371,126	- 621,755 - 1,371,126

7. DISPOSAL OF SUBSIDIARY

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

	2012	2011
	$	$
Loss on dissolution of subsidiary Basic loss per share (cents)		(486,352)
	-
		(0.48)
	-

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8. ASSETS HELD FOR SALE

Shareholder approval for the sale of the Tunisian assets on 27 November 2012 resulted in an impairment of $8,386,468.

	2012
Note	$
Consideration for Tunisian assets (USD 890,000) Value of assets prior to reclassification to assets held for sale Impairment of exploration expenditure asset
	851,431
	9,237,899
	(8,386,468)

At 31 December 2012 the disposal comprised of the following assets and liabilities:
Consideration for Tunisian assets (USD 890,000 after foreign exchange gain) Receipts received in advance (USD 307,966) (i)
	858,162
	296,949

(i) Deposit for the sale of the Tunisian assets with completion subject to final approval by the Tunisian government. If approval not received, this amount will be repayable within 90 days of request from the assets’ buyer should the transaction not be completed.

9. OTHER INCOME

	2012	2011
	$	$
Office rent and amenities		21,361
	29,000

10. PERSONNEL EXPENSES

Wages and salaries	38,701	78,205
Directors and executives remuneration	*486,005	659,572
Contributions to defined contribution plans	3,483	7,039
Increase / (decrease) in liability for annual leave	-	(1,725)
Fringe benefits tax	-	84
Other associated personnel expenses	21	42,585
	528,210	785,760

*Includes $110,968 of Directors’ and Management fees that have been deferred and are accrued at year end – refer notes 23 and 25

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11. ADMINISTRATIVE EXPENSES

	2012	2011
Note	$	$
Personnel expenses 10 Advertising and publicity Communication and information services Motor vehicle expenses Office administration Bank charges Share registry and statutory fees		785,760 98,044 10,962 64 100,039 1,494 38,481
	528,210
	49,530
	26,569
	17
	93,678
	1,356
	48,459
	747,819	1,034,902

12. OTHER EXPENSES

Professional fees	191,593	267,478
Depreciation and amortisation	7,549	6,422
(Gain) / loss on disposal of fixed assets	-	(67)
	199,142	273,833

13. FINANCE INCOME AND EXPENSE

Interest income on bank deposits	19,761	39,160
Other interest income	2,562	147
Foreign exchange gain	926	-
Finance income	23,249	39,307
Interest expense on financial liabilities measured at amortised cost
Net foreign exchange loss	-	(26,342)
Finance expense	-	(26,342)
Net finance income recognised in profit or loss	23,249	12,965

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAX EXPENSE

	2012 2011
	$ $
Current tax benefit Current period Adjustment for prior period Deferred tax benefit Origination and reversal of temporary differences Total income tax benefit	(148,243) (159,215) - (113) (148,243) (159,328) 148,243 159,215 - (113)

Numerical reconciliation between tax expense and pre-tax accounting loss

	2012 2011
	$ $
Loss for the period Total income tax benefit Loss excluding income tax Income tax using the Company’s domestic tax rate of 30% (2011: 30%) Adjustment for prior period Non-deductible expenses Current year tax losses not brought to account Change in unrecognised temporary differences Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% (2011: 30%)	(9,281,180) (1,760,648) - (113)
	(9,281,180) (1,760,761)
	(2,784,354) (528,228) - (113) 2,644,089 373,073 148,243 159,215 (7,978) (4,060)
	- (113)
	343,282 1,163,758
	102,985 349,127

All unused tax losses were incurred by Australian entities.

Potential future income tax benefits of $102,985 (2011: $349,127) attributable to tax losses have not been brought to account because the directors do not believe it is appropriate to regard realisation of the future income tax benefits as probable.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAX EXPENSE (continued)

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

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

15. PROPERTY, PLANT AND EQUIPMENT

	Fixtures and fittings Computer equipment	Total
	$ $	$
Gross carrying amount Balance at 1 January 2011 Additions Disposals Balance at 31 December 2011 Balance at 1 January 2012 Additions Balance at 31 December 2012 Depreciation and impairment losses Balance at 1 January 2011 Depreciation for the year Disposals Balance at 31 December 2011 Balance at 1 January 2012 Depreciation for the year Balance at 31 December 2012 Carrying amounts Balance at 31 December 2011 Balance at 31 December 2012	4,199 27,053 3,297 - - (2,011)

		31,252
		3,297
		(2,011)
	7,496 25,042	32,538
	7,496 25,042 - 4,525
		32,538
		4,525
	7,496 29,567	37,063
	142 916 1,414 5,008 - (67)

		1,058
		6,422
		(67)
	1,556 5,857	7,413
	1,556 5,857 1,499 6,050
		7,413
		7,549
	3,055 11,907	14,962
	5,940 19,185

		25,125
	4,441 17,660	22,101

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

16. EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE

At a General meeting 27 November 2012, shareholders approved the sale of the Group’s 10% interest in the Tunisian assets. The effective date of disposal was 1 August 2012. Accordingly, the directors deemed it appropriate to impair the capitalised exploration expenditure incurred to 1 August 2012, being $8,386,468.

	2012	2011
	$	$
Costs carried forward in respect of areas of interest: Exploration phase Opening balance Additions Impairment Reclassification to assets held for sale		8,616,144


	-
		7,245,018 1,371,126 - -
	8,616,144
	621,755
	(8,386,468)
	(851,431)
	-	8,616,144

17. DEFERRED TAX ASSETS AND LIABILITIES

(a) Unrecognised deferred tax assets and liabilities

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

	Assets	Liabilities	Net
	2012 2011	2012 2011	2012 2011
	$ $	$ $	$ $
Trade and other receivables Black hole deductible costs Trade and other payables Employee benefits Carry forward tax losses	- - 32,099 46,690 7,200 10,965 3,686 - 102,985 349,127	- (983) - - - - - - - -	- (983) 32,099 46,690 7,200 10,965 3,686 - 102,985 349,127
	145,970 406,782	- (983)	145,970 405,799

The Group does not recognise deferred tax assets as it is not probable that sufficient taxable amounts will be available in future periods against which the DTA’s could be offset.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18. OTHER RECEIVABLES

	2012	2011
	$	$
Bank interest income ANZ security deposit Rental bond Other receivables GST and PAYG receivable Non-current Current		3,277 15,000 3,333 122 34,264
	-
	15,000
	3,333
	-
	13,193
	31,526	55,996
		18,333 37,663
	18,333
	13,193
	31,526	55,996

19. PREPAYMENTS

19. PREPAYMENTS	19. PREPAYMENTS	19. PREPAYMENTS
Insurance 6,501 6,321 Australian Securities Exchange - 7,838 Subscriptions and conference registrations 7,031 13,465 13,532 27,624
	6,501	6,321 7,838 13,465
	-
	7,031
	13,532	27,624

20. CASH AND CASH EQUIVALENTS

(a) Reconciliation of cash and cash equivalents

The Company’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 26.

	2012 2011
	$ $
Cash and cash equivalents in the statement of cash flows	11,249 1,400,137

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

20. CASH AND CASH EQUIVALENTS (continued)

(b) Reconciliation of cash flows from operating activities

Notes	2012	2011
	$	$
Cash flows from operating activities Loss for the period Adjustments for: Net finance expense / (income) 13 Depreciation 15 Profit / (loss) on sale of property, plant and equipment 15 Exploration expenditure written off 16 Annual leave expense provision movement 10 Net (gain) / loss on foreign exchange translations 13 Bank charges paid on receipts in advance Loss on disposal of subsidiary 7 Change in other receivables Change in trade and other payables Change in prepayments 19 Change in provisions and employee benefits 23 Net cash used in operating activities		(1,760,648) (39,160) 6,422 (67) - (726) 26,342 - 486,352

	(9,281,180)

	(19,761)
	7,549
	-
	8,386,468
	-
	(926)
	41
	-
	(907,809)	(1,281,485) 7,425 2,505 40,713 (1,710)
	21,193
	80,439
	14,092
	12,286
	(779,799)	(1,232,552)

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. CAPITAL AND RESERVES

(a) Share capital issued for cash

	Ordinary shares	Ordinary shares
	Number	Amount
	2012 2011	2012 2011
	shares shares	$ $
		40,850,828 38,276,130 - 1,250,000 - 732,721 - 738,000 - (146,023)
On issue at 1 January 28-Feb-11 Placement of 10 million 12.5 cent shares 16-Nov-11 Placement of 11,630,488 6.3 cent shares 16-Dec-11 Placement of 11,714,275 6.3 cent shares Capital raising costs On issue at 31 December	100,881,351 67,536,588 - 10,000,000 - 11,630,488 - 11,714,275 - -
	100,881,351 100,881,351	40,850,828 40,850,828

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. CAPITAL AND RESERVES (continued)

(b) Share options issued for cash

	Options issued for cash	Options issued for cash
	Number	Amount
	2012 2011	2012 2011
	Options Options	$ $
On issue at 1 January On issue at 31 December Share capital and options issued for cash at 31 December	24,179,932 24,179,932	241,799 241,799
	24,179,932 24,179,932	241,799 241,799

		41,092,627 41,092,627

(c) Share options issued through equity benefit reserve

	Options issued through equity benefit reserve	Options issued through equity benefit reserve
	Number	Amount
	2012 2011	2012 2011
	Options Options	$ $
On issue at 1 January 30-Apr-12 Lapsed options issued on 30 May 2007 On issue at 31 December	24,658,130 24,658,130 (333,334) -	415,549 415,549 (136,400) -
	24,324,796 24,658,130	279,149 415,549

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. CAPITAL AND RESERVES (continued)

(d) Issuance of ordinary shares

All issued shares are fully paid.

(e) Ordinary shares

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

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

All issued shares are fully paid.

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

(f) Reserves

Equity-based benefits reserve

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

Foreign currency translation reserve

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

22. LOSS PER SHARE

(a) Basic loss per share

The calculation of basic loss per share at 31 December 2012 was based on the loss attributable to ordinary shareholders of $9,281,180 (2011: $1,760,648) and a weighted average number of ordinary shares outstanding of 100,881,351 (2011: 77,926,810) calculated as follows:

Loss attributable to ordinary shareholders

	2012	2011
	$	$
Loss for the period	(9,281,180)	(1,760,648)

Weighted average number of ordinary shares (basic)

	2012	2011
	Number	Number
Issued ordinary shares at 1 January Effect of shares issued during the period		67,536,588 10,390,222
	100,881,351
	-
	100,881,351	77,926,810

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

22. LOSS PER SHARE (continued)

(b) Diluted loss per share

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

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

23. EMPLOYEE BENEFITS

	2012	2011
	$	$
Current Liability for superannuation Deferred directors fees & accrued salary		- -

	12,286
	94,666
	106,952	-

Deferred directors fees of $92,968 represents a deferral of cash payments to directors and the balance owing will only be paid when the company is in a financial position to do so.

24. SHARE-BASED PAYMENT PLANS

(a) Description of the share-based payment arrangements

At 31 December 2012 the Group has the following share-based payment arrangements.

Equity-settled share option programme

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

On 30 April 2012, 333,334 options initially issued at a fair value between 12.7 cents and 14.9 cents each on 30 May 2007 lapsed.

(b) Terms and conditions of share-option programme

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

Tranche	Grant date Number of Vesting conditions Contractual
	instruments life of options
1	25-Feb-2010 66,667 Vested upon granting 2.91 years 66,667

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24. SHARE-BASED PAYMENT PLANS (continued)

(c) Disclosure of share option programme

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

	Weighted		Weighted
	average	Number of	average Number of
	exercise price	options	exercise price Options
	2012	2012	2011 2011
Outstanding at 1 January Expired during period Outstanding at 31 December Exercisable at 31 December		400,001 (333,334)	$1.64 400,001 - -
	$1.64
	$1.92
	$0.24	66,667	$1.64 400,001
	$0.24	66,667	$1.64 400,001

The options outstanding at 31 December 2012 have an exercise price of 24 cents and a weighted average contractual life of 0.06 years (2011: 0.45 years).

No options were granted during the year (2011: No options granted).

No options were exercised during the year (2011: no options exercised).

333,334 options lapsed / expired during the year (2011: no options forfeited).

(d) Inputs for measurement of grant date fair values

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

Fair value of share options	Tranche 1	Tranche 1
and assumptions
Fair value at grant date	2.1	cents
Share price	15.0	cents
Exercise price	24.0	cents
Expected volatility	80%
Option life	2.91	years
Vesting period	-	years
Risk free rate	3.75%

All options remain unexercised at 31 December 2012.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. TRADE AND OTHER PAYABLES

	2012	2011
	$	$
Current Trade payables Non-trade payables and accrued expenses		21,760 62,912
	24,444
	46,000
	70,444	84,672

Accrued expenses include a deferred cash payment of $18,000 for management fees payable when the company is in a financial position to do so. The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 26.

26. FINANCIAL INSTRUMENTS

(a) Financial Risk Management

Overview

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

credit risk
liquidity risk
• market risk

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

Risk Management framework

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

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

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

(b) Credit risk

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. FINANCIAL INSTRUMENTS (continued)

(b) Credit risk (continued)

Exposure to credit risk

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

	Carrying amount	Carrying amount
	2012	2011
	$	$
Other receivables Cash and cash equivalents		55,996 1,400,137
	31,526
	11,249
	42,775	1,456,133

None of the Group’s receivables are past due.

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

Cash and cash equivalents

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

Trade and other receivables

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

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

	Carrying Amount	Carrying Amount
	2012	2011
Australia		55,996
	31,526

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. FINANCIAL INSTRUMENTS (continued)

(b) Credit risk (continued)

Trade and other receivables (continued)

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

	Carrying Amount	Carrying Amount
	2012	2011
Authorised banking institutions and government agencies Rental bond		52,541 3,333
	28,193
	3,333
	31,526	55,996

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

(c) Liquidity risk

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

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

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

	Carrying Contractual	6 months
	amount cash flows	or less
	$ $	$
31 December 2012 Non-derivative financial liabilities Receipts in advance Trade and other payables 31 December 2011 Non-derivative financial liabilities Trade and other payables	296,949 (296,949) 165,110 (165,110)


		(296,949)
		(165,110)
	462,059 (462,059)	(462,059)
	84,672 (84,672)


		(84,672)
	84,672 (84,672)	(84,672)

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. FINANCIAL INSTRUMENTS (continued)

(d) Market risk

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

Currency risk management

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

The Group’s exposure to foreign currency risk, expressed in Australian dollars, was as follows:

	31 December 2012	31 December 2011
	AUD USD	AUD USD
Cash and cash equivalents Asset disposal advance consideration Trade and other receivables Trade and other payables Receipts in advance Net exposure	59,501 (48,252) - 296,949 31,526 - (165,110) - - (296,949)	1,400,137 - - - - - - - - -
	(74,083) (48,252)	1,400,137 -

The following significant exchange rates applied during the year:

		Reporting date
Average rate		spot rate
AUD 2012	2011	2012 2011
US Dollar (USD) 1.0327	1.0336	1.0371 1.0174

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. FINANCIAL INSTRUMENTS (continued)

(d) Market risk (continued)

Currency risk management (continued)

	Impact on profit and loss
	and equity
	2012 2011
If AUD strengthens by 10% USD If AUD weakens by 10% USD	(73,628) - 89,990 -

Interest rate risk

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

Profile

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

	Carrying amount
	2012 2011
	$ $
Variable rate instruments Financial assets	308,198 1,400,137
	308,198 1,400,137

Fair value sensitivity analysis for fixed rate instruments

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

26. FINANCIAL INSTRUMENTS (continued)

(d) Market risk (continued)

Cash flow sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rates at the reporting date would have increased / (decreased) profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for 2011.

	Profit or loss	Profit or loss
	100bp	100bp
	increase	decrease
	$	$
31 December 2012 Variable rate instruments Cash flow sensitivity		(743)

	3,081
	3,081	(743)
31 December 2011 Variable rate instruments Cash flow sensitivity		(14,001)

	14,001
	14,001	(14,001)

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

(e) Capital Management

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

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

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

(f) Fair values of financial assets and liabilities

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27. COMMITMENTS

	2012	2011
	$	$
*Office rent* Less than one year		10,360

	10,360

28. RELATED PARTIES

(a) Key management personnel compensation

The key management personnel compensation included in ‘personnel expenses’ (see note 10) is as follows:

	2012 2011
	$ $
Short term employee benefits Post-employment benefits	476,499 649,043 9,506 10,529
	486,005 659,572

(b) Individual directors and executives compensation

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

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

(c) Key management personnel and director transactions

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

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

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28. RELATED PARTIES (continued)

(c) Key management personnel and director transactions (continued)

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

Transactions value	Balance outstanding
year ended 31 December	as at 31 December
2012 2011	2012 2011
Note $ $	$ $

*Key management Transaction*
*person*	- - - 4,400
David Whitby Consulting fees (i) 36,000 34,000
Gary Jeffery Office rent (ii) 6,000 6,000
James Brown Consulting fees (iii) - 6,000 Total and current liabilities	- -
	- 4,400

(i) During the year the Group paid $36,000 (2011:$34,000) to Mr Whitby representing additional consulting services over and above his duties as non-executive Chairperson. This amount has been disclosed in the remuneration report as part of Mr Whitby’s total remuneration package.
(ii) During the year, Bombora Pty Ltd, a private company associated with Mr Jeffery, sublet office space from Xstate Resources Limited between July 2011 and December 2011.
(iii) During the year the Group paid $nil (2011:$6,000) to Mr Brown representing additional consulting services over and above his duties as non-executive director. This amount has been disclosed in the remuneration report as part of Mr Brown’s total remuneration package.

(d) Other related parties

Contributions to superannuation funds on behalf of employees are disclosed in note 10.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28. RELATED PARTIES (continued)

(e) Options and rights over equity instruments

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

							Vested and
	Held at	Granted			Held at	Vested	exercisable at
	1 January	as com-	* Other		31 December	during	31 December
	2012	pensation	changes	Exercised	2012	the year	2012
Directors
Gary Jeffery	2,966,400	-	-	-	2,966,400	-	2,966,400
							Vested and
	Held at	Granted			* Held at	Vested	exercisable at
	1 January	as com-	* Other		31 December	during	31 December
	2011	pensation	changes	Exercised	2011	the year	2011
Directors
Gary Jeffery	2,966,400	-	-	-	2,966,400	-	2,966,400
John Begg(1)	2,350,000	-	(2,350,000)	-	-	-	-
Brett Mitchell(2)	247,357	-	(247,357)	-	-	-	-

Other changes represent options that were cancelled and replaced or on date of resignation
(1) Resigned 10 July 2011
(2) Resigned 4 April 2011

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

28. RELATED PARTIES (continued)

(f) Movements in shares

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

	** Held at			Received		** Held at
	1 January		* Other	on exercise		31 December
	2012	Purchases	changes	of options	Sales	2012
Directors
David Whitby(1)	185,000	-	(185,000)	-	-	-
			-
Gary Jeffery	2,336,895	-		-	-	2,336.895
	** Held at			Received		** Held at
	1 January		* Other	on exercise		31 December
	2011	Purchases	changes	of options	Sales	2011
Directors
David Whitby	-	185,000	-	-	-	185,000
Gary Jeffery	2,098,800	238,095	-	-	-	2,336,895
John Begg(2)	2,032,400	-	(2,032,400)	-	-	-
Brett Mitchell(3)	494,713		(494,713)	-	-	-

Other changes represent shares that were cancelled and replaced or on date of resignation
** Shares held on date of appointment or on date of resignation
(1) Appointed 11 February 2011 and resigned 27 June 2012
(2) Resigned 10 June 2011
(3) Resigned 4 April 2011

No shares were granted to key management personnel during the reporting period as compensation in 2012 or 2011.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

29. GROUP ENTITIES

Place of Financial	2012 2011
Name incorporation Year end	% %

*Parent entity*
Xstate Resources Limited Australia 31 December

*Subsidiary* Xstate Mediterranean Pty Ltd Australia 31 December
	100 100

30. AUDITORS’ REMUNERATION

	2012 2011
	$ $
Audit Services: *Auditors of the Company* Audit and review of financial reports (KPMG Australia) Services other than statutory audit *Other services* *Auditors of the Company* Taxation compliance services (KPMG Australia) Taxation compliance services (Overseas KPMG)	36,324 52,540
	36,324 52,540
	17,750 26,450 - 27,140
	17,750 53,590

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31. PARENT COMPANY DISCLOSURES

As at, and throughout the financial year ended 31 December 2012, the parent entity of the Group was Xstate Resources Limited.

	2012 2011
	$ $
Result of the parent entity Loss for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Equity-settled benefits reserve Accumulated losses Total equity Commitments *Office rent* Less than one year	(7,482,814) (3,177,917) - -
	(7,482,814) (3,177,917)
	334,923 1,465,424 936,570 8,326,660 177,396 84,672 177,396 84,672 41,092,627 41,092,627 279,149 415,549 (40,612,602) (33,266,188)
	759,174 8,241,988
	10,360 10,360

32. SUBSEQUENT EVENTS

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

32. SUBSEQUENT EVENTS (continued)

Xstate made a placement of 10 million shares to raise US$175,000 to be used to fund the drilling at West Brentwood. The balance of the cost of the well will be funded from Xstate’s cash reserves.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │DIRECTORS’ DECLARATION

DIRECTORS’ DECLARATION

1 In the opinion of the directors of Xstate Resources Limited (the “Company”):
(a) the consolidated financial statements and notes, and the Remuneration report set out in section 4 in the Directors’ Report, are in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the Group’s financial position as at 31 December 2012 and of its performance for the financial year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
2 The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 31 December 2012.
3 The directors draw attention to note 2(a) to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards.

Signed in accordance with a resolution of the directors:

Dated at Perth this 25[th] day of March 2013.

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GARY JEFFERY Director

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XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │SECURITIES EXCHANGE INFORMATION

SECURITIES EXCHANGE INFORMATION

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

1. SHAREHOLDER INFORMATION

(a) Distribution of fully paid ordinary shares at 12 March 2013

Category	Number of Shareholders Shares held
1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over	714 84,043 114 320,177 81 675,057 248 9,694,370 156 90,107,704
	1,313 100,881,351

(b) Distribution of options at 12 March 2013

Category	Number of Optionholders Options held
1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over	30 6,976 83 352,417 69 573,716 96 4,359,028 76 43,145,942
	354 48,438,079

(c) Marketable Parcel

The number of shareholders holding less than a marketable parcel of ordinary shares is 932.

(d) Voting rights

Ordinary shares

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

Options

There are no voting rights attached to the options.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │SECURITIES EXCHANGE INFORMATION

1. SHAREHOLDER INFORMATION (continued)

(d) Substantial shareholders

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

	Ordinary shares
Name	Number of Shares
David McArthur	5,294,099
Argonaut Equity Partners Pty Ltd	5,285,117

(e) Shareholders

The twenty largest shareholders hold 47.58% of the total issued ordinary shares in the Company as at 12 March 2013.

(f) Listed Option holders

The twenty largest 30 June 2013 option holders hold 60.47% of the total issued 30 June 2013 options in the Company as at 12 March 2013.

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │SECURITIES EXCHANGE INFORMATION

2. TOP TWENTY SHAREHOLDERS AS AT 12 MARCH 2013

	Ordinary shares
Name	Number of Shares Percentage of issued shares
1 Argonaut Equity Partners Pty Ltd
	5,285,117 5.24
2 Suburban Holdings Pty Ltd	4,517,000 4.48
3 Aviemore Capital Pty Ltd 4 BT Portfolio Services Limited	4,200,000 4.16
	4,028,766 3.99
5 Dasmac (WA) Pty Ltd	3,910,000 3.88
6 HSBC Custody Nominees (Australia) Limited 7 Berenes Nominees PTY LTD	3,786,527 3.75
	2,500,000 2.48
8 Mr Raymond Ronchi	2,410,000 2.39
9 PATA Nominees Pty Ltd 10 JP Morgan Nominees Australia Limited 11 Rock Doc Pty Ltd 12 Mr Errol & Mrs Melanie Bome 13 Philaton Pty Ltd 14 Forsyth Barr Custodians Limited 15 Bond Street Custodians Limited 16 Ms Wai Fong Cheung	2,288,095 2.27
	2,075,087 2.06
	2,032,400 2.01
	1,600,000 1.59
	1,506,429 1.49
	1,343,781 1.33
	1,320,920 1.31
	1,130,000 1.12
17 Andrew Ross Childs	1,077,000 1.07
18 Mr Gary John & Mrs Jane Elizabeth Jeffery	1,015,975 1.01
19 Mr Lindsay & Mrs Jennie Reed	1,000,000 0.99
20 Mrs Susan Jane McArthur	964,097 0.96
	47,991,194 47.58

XSTATE RESOURCES LIMITED│ANNUAL REPORT│31 DECEMBER 2012 │SECURITIES EXCHANGE INFORMATION

3. TOP TWENTY 30 JUNE 2013 OPTION HOLDERS AS AT 12 MARCH 2013

	Ordinary shares
Name	Number of Shares Percentage of issued shares
	6,210,475 12.82 3,567,354 7.36 2,500,000 5.16 2,000,000 4.13 1,702,320 3.51 1,618,079 3.34 1,250,000 2.58 1,000,000 2.06 1,000,000 2.06 1,000,000 2.06 1,000,000 2.06 900,000 1.86 800,000 1.65 795,000 1,64 750,000 1.55 750,000 1.55 720,000 1.49 639,666 1.32 550,000 1.14 545,834 1.13
1 Craig Ian Burton
2 Suburban Holdings Pty Ltd 3 Mr Gary John & Mrs Jane Elizabeth Jeffery
4 Mr Harry Bruce Goff
5 Mr Andrew Ross Childs
6 BT Portfolio Services Limited
7 Argonaut Investments Pty Limited
8 Argonaut Equity Partners Pty Ltd 9 Berenes Nominees Pty Ltd 10 Mr Brendon Chevely Deshon 11 Rock Doc Pty Ltd 12 AFM Perseus Fund Limited 13 Dreampt Pty Ltd 14 DASMAC Pty Ltd 15 Drill Holdings Pty Ltd 16 Mr John Douglas & Mrs Adrienne Stacey Begg
17 Mr Craig Burton
18 Mr George Simm
19 Mr Saul Lawrence Segal
20 Far East Capital Limited
	29,298,728 60.47

AI assistant

XSTATE RESOURCES LIMITED — Proxy Solicitation & Information Statement 2013

66107_rns_2013-04-29_bb535d5d-d465-4d70-9cba-528626cc46ed.pdf

ASX Limited

DESPATCH OF 2012 ANNUAL REPORT AND NOTICE OF AGM

XSTATE RESOURCES LIMITED

NOTICE OF ANNUAL GENERAL MEETING

PROXY FORM

AND

EXPLANATORY MEMORANDUM

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

NOTICE OF ANNUAL GENERAL MEETING

AGENDA

ORDINARY BUSINESS

2012 Accounts

Non-binding Ordinary Resolution 1: Directors’ Remuneration Report

Voting Prohibition Statement:

(collectively, a " Prohibited Voter ").

Ordinary Resolution 2: Re-election of Mr Ross Kestel as a Director of the Company

Ordinary Resolution 3: Election of Director - Mr Andrew Childs

Ordinary Resolution 4: Ratification of Issue of Shares – Placement

Ordinary Resolution 5: Ratification of Issue of Shares to Vendor

Ordinary Resolution 6: Issue of Options to Related Party – Gary Jeffery

Voting Prohibition Statement:

Ordinary Resolution 7: Issue of Options to Related Party – Andrew Childs

Voting Prohibition Statement:

Ordinary Resolution 8: Issue of Options to Related Party – Ross Kestel

Voting Prohibition Statement:

Ordinary Resolution 9: Adoption of Incentive Option Plan

Ordinary Resolution 10: Approval of Incentive Share Plan

Ordinary Resolution 11: Approval of Issue of Shares to Director under Incentive Share Plan – Mr Gary Jeffery

Special Resolution 12: Approval of 10% Placement Capacity

By Order of the Board

ENTITLEMENT TO ATTEN D AND VOTE

PROXIES

CORPORATE REPRESENTATIVE

ENQUIRIES

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

EXPLANATORY MEMORANDUM

FINANCIAL STATEMENTS AND REPORTS

NON-BINDING ORDINARY RESOLUTION 1: Directors’ Remuneration Report

General

Proxy restrictions

ORDINARY RESOLUTION 2: Re-election of Mr Ross Kestel as a Director of the Company

ORDINARY RESOLUTION 3: Election of Director - Mr Andrew Childs

ORDINARY RESOLUTION 4: Ratification of Issue of Shares- Placement

ORDINARY RESOLUTION 5: Ratification of Issue of Shares to Vendor

ORDINARY RESOLUTIONS 6, 7 and 8: Grant of Options to Directors

Shareholder Approval (Chapter 2E of the Corporations Act and Listing Rule 10.11)

ORDINARY RESOLUTION 9 - Adoption of Incentive Option Plan

Material terms and conditions of the Plan

ORDINARY RESOLUTION 10 - Approval of Incentive Share Plan

Material terms and conditions of the Share Plan

ORDINARY RESOLUTION 11- Approval to Issue Shares to Mr Gary Jeffery under the Share Plan

SPECIAL RESOLUTION 12: Approval of 10% Placement Capacity – Shares

General

ASX Listing Rule 7.1A

(A x B) – C

11.3 Technical information required by ASX Listing Rule 7.1A

(a) Minimum Price

(b) Date of Issue

(c) Risk of voting dilution

Shareholders should note that there is a risk that:

Purpose of Issue under 10% Placement Capacity

(e)

Allocation under the 10% Placement Capacity

(f) Previous Approval under ASX Listing Rule 7.1A

Voting Exclusion

GLOSSARY

Instructions for Completing ‘Appointment of Proxy’ Form

( Signing Instructions ):

8.

( Voting in person ):

XSTATE RESOURCES LIMITED

ABN 96 009 217 154

APPENDIX 1

XSTATE RESOURCES LIMITED ABN 96 009 217 154

APPENDIX 2

XSTATE RESOURCES LIMITED Proxy Solicitation & Information Statement 2013

* Important for Resolutions 1 and 6 - 11