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The three judges sitting in Kuala Lumpur unanimously found the 54-year-old guilty but said she had a right of further appeal on the methamphetamine charges and wished her luck.
"We find the merits of the appeal, we allow the appeal and set aside the judgment of the judge and find her guilty as convicted. The only sentence under law is death by hanging," the judges found.
Exposto's lawyer, Shafee Abdullah, told her it was a temporary setback and "you will win and you will walk away" following a further appeal.
The new appeal will reportedly be lodged on Friday.
In a statement on Thursday evening Foreign Minister Julie Bishop said "Australia opposes the death penalty in all circumstances for all people".
She said the Department of Foreign Affairs and Trade would continue to provide full consular assistance to Ms Exposito in Malaysia following the overturning of her acquittal and imposition of the death sentence.
On December 27 last year Exposto was acquitted of drug trafficking but faced a prosecution appeal against the acquittal on charges of trafficking 1.5kg of methamphetamine into Malaysia.
Exposto was handcuffed in court where she was consoled by her lawyers and Australian Embassy officials after the verdict.
She had claimed she was the victim of a set-up after she was found with the drugs in her bag after arriving on a flight from China in 2014.
She was acquitted after the judge found she was scammed by her online boyfriend and was unaware she was carrying the drugs.
The prosecution in the appeal argued Exposto had been wilfully blind, that her defence was made up and she had engaged in a "sly game", News Corp reported.
Exposto's lawyer, Shafee Abdullah, responded, telling the court that Exposto was an innocent carrier hoodwinked by an internet romance scam.