Tsodilo Resources Limited
Annual Report 2007

Plain-text annual report

Contents President’s Message to Shareholders Management’s Discussion and Analysis of Financial Results 1 2 Financial Reporting Responsibility of Management 12 Auditors’ Report to the Shareholders Consolidated Financial Statements / Notes Corporate Information 13 14 IBC Newidico and Gcwihaba Prospecting Diamond Licenses - as of March 21, 2008 President’s Message Operating our own drill rig has given us the ability and flexibility to advance our exploration at a far greater rate and at a fraction of the per meter drilling costs of what it was previously. Fellow Shareholders, On behalf of the board of directors, I am pleased to provide this report of Tsodilo Resources Limited (“Tsodilo” or the “Company”) progress together with the audited financials for the year ended December 31, 2007. 2007 was the first full year for the operation of our Atlas Copco CT14 diamond core drill rig, and our drilling operations in the field proceeded efficiently and without interruption. In total, six kilometers were drilled on our kimberlite and base and precious metals targets and a similar length of core was collected for analysis. The decision to purchase a drill rig and supporting equipment as well as geophysical instruments has produced the expected results as we have the ability to select a target; perform a detail ground geophysical survey; and drill test it all in a matter of weeks as opposed to the months or years which it previously took. Operating our own drill rig has given us the ability and flexibility to advance our exploration at a far greater rate and at a fraction of the per meter drilling costs of what it was previously. This efficient use of our resources resulted in the confirmation of fifteen additional kimberlites in the Company’s Nxau Nxau kimberlite field in 2007 and provided a wealth of information in furtherance of our base and precious metals exploration projects. During the past year, the Company funded exploration activity by raising funds in the capital markets through the successful issuance of stock by way of private placements. This process will continue in the coming year. Our current Drilling in the Kalahari We are looking forward to an exciting year ahead as we make progress in the exploration for an economic kimberlite below the Kalahari cover on this section of the Congo craton and continue the expansion of our base and precious metals projects. Please follow our progress carefully and remain informed by regular visits to our website, www.TsodiloResources.com. On behalf of the board, share base consists of 14,960,241 issued and outstanding James M. Bruchs (19,827,553 on a fully diluted basis) common shares. President and Chief Executive Officer Tsodilo has a 93% interest in our Botswana Newdico March 21, 2008 project and a 100% interest in our Botswana Gcwihaba projects. The Company is well positioned to meet the challenges in the upcoming year. 1 tsodilo resources limited Management’s Discussion and Analysis This management’s discussion and analysis (“MD&A”) of substantially all of the Company’s assets. The assets were should be read in conjunction with the Consolidated transferred in settlement on debt due of $612,783 and Annual Financial Statements for the year ended December owing to Trans Hex Group Limited (“Trans Hex Group”), the 31, 2007 and comments on the factors that affected the principal shareholder and creditor of the Company prior Company’s performance during the periods covered by the to restructuring. The Company retained an interest in all Consolidated Annual Financial Statements as well as the future dividends that may be paid by either Northbank Company’s financial condition and future prospects. The Diamonds Limited, Hoanib Diamonds (Proprietary) Limited Company’s functional and reporting currency is United or Trans Hex (Zimbabwe) Limited. In addition, the Company States dollars and all amounts stated are in United States was released from the long-term loans due to Trans Hex dollar unless otherwise noted. The Company changed its Group by the subsidiaries being sold, of $3,341,690, and financial year end from March 31 to December 31 effective Trans Hex Group agreed to return the 10,688,137 common December 31, 2005 and was made to align with the shares in the capital of the Company, representing 73.22% reporting schedule of comparable public companies. The of the issued and outstanding shares of the Company at period December 31, 2005 was the transitional period and that time, to treasury for cancellation. The special meeting has a nine month reporting period. This management’s of shareholders also approved the discontinuance of the discussion and analysis has been prepared as at March 21, Company from the Province of Ontario and its continuance 2008. OVERVIEW under the Business Corporations Act (Yukon), the change of name of the Company from Trans Hex International Ltd. to Tsodilo Resources Limited, the election of new Tsodilo Resources Limited (“Tsodilo” or the “Company”) directors and the repeal of the existing stock option plan was organized under the laws of the Province of Ontario of the Company and adoption of a new stock option plan. in 1996 and continued under the laws of the Yukon in Following the restructuring of the Company, as approved 2002. The shares of the Company are listed and posted for by shareholders in April 2002, Tsodilo has no long-term trading on the TSX Venture Exchange under the symbol: debt. TSD. Tsodilo is an international diamond exploration company with the majority interest in a kimberlite Outstanding Share Data exploration project in northwest Botswana. The Company As of March 21, 2008, 14,960,241 common shares of the has not yet determined whether these properties contain Company were outstanding. Of the options to purchase reserves that can be economically mined. As an exploration common shares issued to eligible persons under the stock stage company, the recoverability of amounts shown for option plan of the Company, 1,940,000 options remain exploration expenditures is dependent upon the discovery outstanding of which 1,448,750 are exercisable at exercise of reserves that can be economically mined, the securing prices ranging from Canadian $0.50 - $1.85. If all options and maintenance of the interests in the properties, the were vested and exercised, 1,940,000 common shares of ability of the Company to obtain the necessary financing the Company would be issued. to complete the development, and future production or proceeds from the disposition thereof. The Company is As of March 21, 2008, 2,927,312 warrants are outstanding. also actively reviewing additional diamond and base and The warrants were issued by way of the private placements precious metal opportunities within southern Africa. utilized by the Company for financing purposes. Each warrant Corporate entitles the holder thereof to purchase one common share of the Company at purchase prices ranging from Canadian At a special meeting of the holders of common shares of $0.70 - $0.80 for a period of two years from the date of the Company held on April 9, 2002 shareholders approved issuance (6/01/2006 – 3/11/08). If converted, 2,927,312 a restructuring of the Company that incorporated the sale common shares of the Company would be issued. 2 tsodilo resources limited Principal Shareholders of the Company in the Company’s license blocks. Prior to the deposition The largest shareholder of the Company is its President of the superficial Kalahari sand that covers much of and Chief Executive Officer, James M. Bruchs, who Ngamiland, this area formed a topographic high. Rivers currently owns, controls or directs 2,793,085 or 18.67% of rising off this high ground flowed westward into a major the issued and outstanding common shares as of March inland sea located in the north of present-day Namibia. 21, 2008. John R. Redmond, a Director of the Company, The Company’s diamond targets cover former headwaters currently owns, controls or directs 2,434,024 or 16.27% of this ancient river system and lie within the southern of the issued and outstanding shares as of March 21, margin of the Congo craton. 2008 and the Firebird Global Master Fund, Ltd. controls 1,875,630 or 12.54% of the issued and outstanding shares as of March 21, 2008. Subsidiaries Base and Precious Metals Project The results of a soil sampling program by the Government of Botswana show a high nickel kick associated with the dyke swarms surrounding several large intrusive bodies The Company has a 93% operating interest in its Botswana within our license blocks. Most nickel mineralization is subsidiary, Newdico (Proprietary) Limited (“Newdico”), associated with highly magnetic basic and ultrabasic which holds prospecting licenses and applications rocks emplaced in orogenic belts and rifted plate margins covering approximately 16,800 square kilometers in and ocean basins. Examples of sulphide nickel deposits northwest Botswana on which there is encouragement developed along extensive faults/suture zones include for the existence of undiscovered kimberlites in at least the Kambalda deposit in Western Australia; Hunters Road three separate areas of the property. The Company’s in Zimbabwe; the Noril’sk-Talnakh region in Siberia; and, minority partner (7%) in this project, Trans Hex Group, is Sudbury, Ontario. It is also important to note that the an established South African diamond mining company. Jurassic Insizwa complex in South Africa is part of the Karoo Magmatic event with a setting similar to that of The Company has a 100% interest in its wholly owned the intrusion being investigated by Tsodilo. Regional Botswana subsidiary, Gcwihaba Resources (Proprietary) geological trends strongly suggest the continuation of the Limited (“Gcwihaba”), which has diamond prospecting economically viable Matchless Amphibolite Belt (MAB) in licenses covering approximately 7,543 square kilometers Namibia across northwest Botswana. and base and precious metal licenses covering 5,348 square kilometers. Exploration Activities Diamond Projects NEWDICO (Pty) Limited (“Newdico”) Summary of work completed in 2007 and to date ◊ The 2007 drilling program confirmed 15 target anomalies The Company’s Botswana licenses are proximal to two major in the Nxau Nxau field as kimberlites. unexplained surface concentrations of diamonds and G10 garnets across the border in Namibia, one near the village ◊ Over 4,000 kimberlite indicator minerals (“KIM”) from of Tsumkwe and another in the area known as Omatako. kimberlites A41, C15, A36, 1821C16, PD07, PD25, B1, B2, The characteristics of these kimberlite pathfinder mineral B3, B4, B5, B6, B7, B8 and B9 as well as those from A15 anomalies indicate that they are secondary concentrations are undergoing electron microprobe analysis to establish derived from respective primary high-grade kimberlite their chemical composition. sources located elsewhere. The geomorphological model envisages that the Tsumkwe and Omatako pathfinder ◊ A detailed petrography study is ongoing on core samples anomalies were formed by ancient rivers transporting from these kimberlites for the purpose of determining diamonds and garnets derived from kimberlites located their diamond-carrying potential. 3 tsodilo resources limited ◊ A complete study of the kimberlites in the Company’s with the known secondary alluvial diamond discoveries Nxau Nxau kimberlite field for the purposing of selecting down slope across the border in Namibia establish the kimberlites for macro diamond analysis is expected to be greater Nxau Nxau field as highly prospective with the completed in the 3rd quarter. possibility of several economic kimberlites present within ◊ Kimberlite samples from those bodies listed above were discovered and tested for diamond in the Nxau Nxau field submitted to GEMOC (Macquarie University, Australia) for are known to be diamondiferous. our ground. To date, at least 18% of the kimberlites U-Pb dating which established the age of the kimberlites in the Nxau Nxau field as 83.2 ± 1.2 Ma. ◊ Geophysical ground surveys (magnetic) were conducted over fifteen targets totaling 166 line kilometers GCWIHABA Resources (Pty) Limited (“Gcwihaba”) Diamond Licenses Planned Exploration Program for 2008 The program is based on our strategy of using a combination of indicator mineral sampling, magnetic and gravity data Summary of work completed in 2007 and to date ◊ Four target anomalies were drill tested in late 2007 and core samples have been submitted for petrography and to generate individual targets for drill evaluation and our regional strategy of evaluating possible transport KIM recovery. corridors giving rise to the alluvial secondary kimberlite indicator minerals (“KIM”) and diamond deposits at Tsumkwe and Omatako. Our program for 2008 will include the following: ◊ Drill testing of approximately twenty-five (25) magnetic target anomalies to the east / northeast of the Nxau Nxau kimberlite field. ◊ Geophysical ground surveys (magnetic) were conducted over ten targets totaling 80 line kilometers. ◊ Five Prospecting License (“PL”) Nos. 046 / 2007 – No. 050 / 2007 encompassing 3,325 square kilometers were granted to the Company in 2008. Planned Exploration Program for 2008 ◊ Drill testing of priority 1 and 2 target anomalies will take ◊ A ground magnetic geophysical survey covering place in the 3rd quarter of 2008. approximately 400 square kilometers has commenced and will be completed in the 2nd quarter. Base and Precious Metals Licenses ◊ Our study of the linkages between magnetotellurics, Summary of work completed in 2007 and to date other geophysical variables and kimberlite occurrences ◊ Two exploratory holes were completed on targets BM1 and it's applicability to our license areas in northwest and BM during the year and core samples from both these Botswana will continue in 2008. Work to date shows that holes have been submitted for analysis. there is a correlation of certain values for diamondiferous ◊ Two exploratory holes were commenced over target kimberlites as shown by the Resistivity and Temperature anomaly (JB) in the 4th quarter at the end of the year maps at a 200 kilometer depth in relation to high resistivity but were abandoned due to technical difficulties and value areas and low temperature. This will assist us in the onslaught of early rains. Geophysical modeling of prioritizing our drill target selection. the intrusive is still being performed and it is expect that drilling will recommence over this target in the 2nd The favorable chemistry and diamond preservation quarter of 2008. potential of the kimberlites in our license blocks together 4 tsodilo resources limited ◊ Geophysical ground surveys (magnetic) were conducted over five targets totaling 770 line kilometers. Newdico 3,780,000 BWP Gcwihaba - Diamond 885,000 BWP Gcwihaba - Base and 720,000 BWP $587,703 $137,597 $111,943 ◊ Two Prospecting License (“PL”) No. 051 / 2007 and No. Precious Metals 052 / 2007 encompassing 1,570 square kilometers were granted to the Company in 2008. To date, the Company has exceeded these requirements in both the Newdico and Gcwihaba projects. Financial Instruments The carrying amounts reflected in the consolidated balance sheets for cash and equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to the short maturities of these instruments. Due to the nature of the Company’s operations, there is no significant credit or interest rate risk. Operating Activities Cash outflow used in operating activities decreased from $292,016 in fiscal December 31, 2006 to $254,392 for the year ended December 31, 2007. This decrease is due to management’s decision to lower expenses pending completion of research and analysis with respect to the prioritization of drill targets. ◊ An examination of geochemical and geophysical variations in the Ngamiland area and the application of these observations to constrain areas of possible economic interest on a regional scale was undertaken. Amongst the data types compared are: aeromagnetics, geology, soil geochemistry (Pb, Zn, Cu, Ag, Ni, Cr and Mg), degree of exposure and detailed geophysics data interpretations. Planned Exploration Program for 2008 ◊ Geophysical modeling of the JB intrusive is still being performed and it is expected that drilling will recommence over this target in the 3rd quarter of 2008. ◊ Exploratory drilling of suspected base metals deposits to determine their nature, composition and size will continue. LIQUIDITY AND CAPITAL RESOURCES As at December 31, 2007, the Company had negative net working capital of ($207,155) (2006: $152,871, which included cash and equivalents $53,197 (2006: $201,177). These funds are managed in-house in accordance with specific investment criteria approved by the board of directors, the primary objective being the preservation of capital to assure funding for exploration activities. The Company has completed a private placement for an additional $325,000 in March 2008, see discussion in Financing Activities below. The Company does not hedge its activities or otherwise use derivatives. At year end the Company did not have any material contractual obligations. The Company is required to spend a minimum on prospecting over the period of its licenses. On licenses current as of December 31, 2007, the expenditure requirements exclusive of license fees are: 5 tsodilo resources limited ANNUAL INFORMATION (in US Dollars) Restated Fiscal Year Dec. 31 2006 Restated Nine Months Ended Dec. 31 2005 Fiscal Year Mar. 31 2005 Fiscal Year Dec. 31 2007 Total Revenues -- -- -- -- Loss before Non-controlling Interest (504,075) (554,547) (423,395) (620,822) Basic and diluted loss per share ($0.04) ($0.04) ($0.04) ($0.07) Non-controlling Interest Net Loss for the Year -- -- -- -- (504,075) (554,547) (423,395) (620,822) Basic and diluted loss per share ($0.04) ($0.04) ($0.04) ($0.07) Total Assets Total long term liabilities Cash dividends declared 4,050,815 3,472,693 2,032,426 2,087,421 228,395 245,491 280,642 237,008 -- -- -- -- QUARTERLY INFORMATION (in US Dollars) Fiscal Period 2005* (ended December 31, 2005) Total Revenues Loss for the period Basic and diluted loss per share Total Assets Total long term liabilities * Transitional period for year end change to December 31 Fiscal Year 2006 (ended December 31, 2006) Total Revenues Loss for the period Basic and diluted loss per share Total Assets Total long term liabilities Fiscal Year 2007 (ended December 31, 2007) Total Revenues Loss for the period Basic and diluted loss per share Total Assets Total long term liabilities Quarter 1 Quarter 2 Quarter 3 Quarter 4* -- (83,068) ($0.01) -- -- (190,070) (150,257) ($0.02) ($0.02) 2,171,006 2,166,670 2,032,426 294,236 294,236 280,642 -- -- (156,252) (234,194) ($0.01) ($0.02) -- (89,720) ($0.01) -- (74,381) ($0.00) 2,689,555 2,891,225 3,278,118 3,472,693 289,490 235,769 219,441 245,491 -- (97,193) ($0.01) 3,491,244 225,763 -- (239,086) ($0.02) -- (42,114) ($0.00) 3,779,683 3,904,928 225,236 229,607 -- (125,682) ($0.01) 4,050,815 228,395 See accompanying notes to the consolidate financial statements 6 tsodilol resources limited Tnvesting Activities and warrant shares are subject to a hold period of 12 months, Cash flow applied in investing activities decreased to $748,789 as agreed to by the parties, expiring on March 11, 2009. for the year ended December 31, 2007 (2006: $1,508,994). Tsodilo expects to raise the amounts required to fund its 93% Total expenditures of $914,757 on exploration properties for share of the Newdico project, the Gcwihaba projects and the period ended December 31, 2007 were attributable to corporate general and administration expenses, by way of non- the Newdico and Gcwihaba projects in northwest Botswana. brokered private placements. Included in this amount is the proportionate contributory share, ranging from 9.67% to 7.96%, attributed to the Trans Hex Group for the Newdico project. There were no material disposals of capital assets or investments during the year. RESULTS OF OPERATIONS On a consolidated basis Tsodilo recorded a net loss of $504,075 in the fiscal year ended December 31, 2007 ($0.04 cents per common share) compared to a net loss of $554,547 in the fiscal In December 2007, the board of directors of Newdico approved period ended December 31, 2006 ($0.04 cents per common an exploration program and budget for the period January share). The Company experienced decreases in travel, investor 1, to December 31, 2008 that calls for expenditures totaling relations and office and admin expenses reflecting general approximately Pula 7.76 million (approximately $1.2 million as corporate activity. The increase in stock option expense reflects of March 21, 2008). Trans Hex Group is presently responsible the timing of option grants. for funding 7% of the expenses of this company. The approved exploration program includes provision for additional drilling, soil sampling, ground geophysical surveys, processing and analysis. Financing Activities Exploration expenditures on all projects amounted to $914,757 during the year ended December 31, 2007 compared to $744,502 for the year ended December 31, 2006. Exploration expenditures incurred on the Newdico project for the year ended December 31, 2007 was $908,321 compared Following the restructuring of Tsodilo in April 2002 and the to $693,394 for the year ended December 31, 2006. The cancellation of the shares formerly held by Trans Hex, the principal components of the Newdico exploration program source of financing for the Company’s activities changed from were: (a) additional soil sampling and the completion of the debt (related party) finance to equity, through the issue of processing and analysis of the soil samples; (b) commissioning units by way of non-brokered private placements. Each unit of further ground magnetic surveys of selected aeromagnetic has consisted of one common share of the Company and one anomalies; (c) analyzing detailed propri¬etary aeromagnetic or one-half a warrant', with each full such warrant entitling the maps covering the target areas; and (d) commencement of a holder to purchase one common share of the Company for a diamond core drilling program on selected targets. Exploration purchase price equal to the unit price for a period of two years expenditures incurred on the Gcwihaba project for the year from the date of issuance. ended December 31, 2007 were $6,436 compared to $51,108 During the year ended December 31, 2007 the Company for the year ended December 31, 2006. received proceeds in the amount of $615,858 from the issuance PERSONNEL of units consisting of one common share and one warrant At December 31, 2007 the Company and its subsidiaries related to private placements. Additional proceeds in the employed twenty (20) individuals as compared to eighteen (18) amount of $44,393 were received from the issuance of common at December 31, 2006, including senior officers, administrative shares upon the exercise of options during fiscal year 2007. and operations personnel including those on a short-term Subsequent to the fiscal period end, the Company issued, service basis. through a non-brokered private placement 457,901 units at a FOURTH QUARTER – 2007 price of $0.71 (C$0.70) per unit for gross proceeds of $325,000. The fourth quarter was a normal operating period for a quarter Each unit consists of one common share of the Company and and year end. Having acquired drilling equipment during the one warrant of the Company, each warrant entitling the holder previous year, the Company was able to continue its drilling to purchase one common share of the Company at a price of program to the end of the year without interruption. Operating C$0.70 for a period of two years. The common shares, warrants expenses were at normal levels for the last quarter of the year. 7 tsodilo resources limited RISKS AND UNCERTAINTIES its proximity to existing infrastructure; financing costs and the Tsodilo’s primary objective is the discovery of an economic prevailing prices for diamonds. Also of key importance are kimberlite diamond deposit capable of rapid advancement government regulations, including those relating to prices, to feasibility stage and ultimate development as a producing taxes, royalties, land tenure, land use, the importing and property. The discovery of a kimberlite is only the first step in exporting of diamonds and production plant and equipment, the exploration process. Subsequent evaluation begins with and environmental protection. The effects of these factors caustic fusion diamond analysis of the kimberlite and, if results cannot be accurately predicted, but any combination of warrant, continues through progressively larger mini-bulk them may impede the development of a deposit or render it and bulk samples in order to make an increasingly accurate uneconomic. determination of the content and quality of the diamonds. Early stages of kimberlite evaluation provide an initial qualitative assessment rather than an accurate indication of either the grade of the ore body or the value per carat of the diamonds. Collection of larger bulk samples and formal appraisal of a commercial-size parcel of diamonds are necessary to make an accurate determination of these parameters. At any stage in the process, the results may indicate that the deposit lacks the required economic value. Capital Requirements In the absence of cash flow from operations, Tsodilo relies on capital markets to fund its operations. The ongoing exploration and eventual successful development of a diamond mine would require significant additional financing. There can be no assurance that adequate funding will be available, or available under terms favorable to the Company, for these purposes when ultimately required. The exploration and development of mineral deposits involve significant financial risks over an extended period of time. Even a combination of careful evaluation, experience and knowledge may not eliminate these risks. While discovery of a diamond deposit may result in substantial rewards, few exploration properties ultimately become producing mines. At this time, the major portion of the Company’s exploration activity is carried out in partnership with another party. Doing so allows the Company to maximize its exposure to promising exploration opportunities, to manage the risks inherent in diamond exploration, and to optimize its use of financial and management resources. Currency Risks The Company’s financing has generally been received in United States dollars while significant portions of its operating expenses has been and will be incurred in Botswana Pula. On May 29, 2005, the Botswana Minister of Finance and Development Planning announced a 12% devaluation of the pula against a basket of currencies, as well as a change in the system of exchange-rate adjustments to a crawling peg rather than the discrete steps previously used, in order to improve Botswana’s competitiveness. This action has stabilized the current pula / dollar rates similar to those in 2002. Key Personnel The Company is dependent upon on a relatively small number of key employees, the loss of any of whom could have an adverse effect on the Company. The Company currently does not have key personal insurance on these individuals. Off-Balance Sheet Arrangements The Company has not entered into any off-balance sheet ACCOUNTING STANDARDS financing arrangements. Exploration Risks The Company’s operations are subject to all the hazards and risks normally incident to the exploration, development and mining of diamond deposits, any of which could result in damage to life or property, environmental damage and possible legal liability for any or all damage. Whether a diamond deposit will ultimately be commercially viable depends on a number of factors, including the particular attributes of the deposit such as the deposit’s size; the quality and quantity of the diamonds; Tsodilo follows Canadian generally accepted accounting principles. The Company has adopted the policy of deferring property specific acquisition and exploration costs. Deferred costs relating to properties that are relinquished, or where continued exploration is deemed inappropriate, are written off in the year such assessment is made (no such write-offs were incurred in 2006 and 2007). If Tsodilo adopted a policy of expensing all exploration costs, the Company’s asset base, shareholders’ equity, and loss from operations would be materially different. 8 tsodilo resources limited The Company evaluates its license properties on a project Financial Instruments – Disclosures, Section 3862 basis as opposed to treating each individual license block as a Section 3862 Financial Instruments – Disclosures, requires separate project. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS Financial instruments additional disclosures to enable users to evaluate the significance of financial instruments to our financial position and performance. In addition, qualitative and quantitative disclosures are provided to enable users to evaluate the nature and extent of risks arising from financial instruments. Effective January 1, 2007, we adopted the new financial Financial Instruments – Presentations, Section 3863 instruments accounting standards and related amendments CICA 3863 carries forward, without change, the presentation to other standards on financial instruments issued by the CICA. related requirements of CICA 3861. The requirements of this In accordance with the transitional provisions, prior period Section address an issuer’s classification of financial instruments financial statements have not been restated. Financial Instruments–Recognition and Measurement, Section 3855 between liabilities and equity, the classification of related interest, dividends, losses and gains, as well as the offsetting of financial assets and financial liabilities. This standard prescribes when a financial asset, financial Capital Disclosures – Section 1535 liability, or nonfinancial derivative is to be recognized on Section 1535 Capital Disclosures, requires disclosure of the balance sheet and whether fair value or cost-based qualitative and quantitative information that enables users methods are used to measure the recorded amounts. It to evaluate our objectives, policies and process for managing also specifies how financial instrument gains and losses capital. are to be presented. Hedges, Section 3865 Inventories – Section 3031 In June 2007, the CICA issued Section 3031 “Inventories” to This standard is applicable when a company chooses to replace existing Section 3030. The new section, which is effective designate a hedging relationship for accounting purposes. January 1, 2008, establishes standards for the measurement It builds on the previous AcG-13 “Hedging Relationships” and and disclosure of inventories. Section 1650 “Foreign Currency Translation”, by specifying how hedge accounting is applied and what disclosures are necessary We do not expect the application of Sections 3862, 3863, 1535 and 3031 to have a significant impact on our financial when it is applied. statements. Comprehensive Income, Section 1530 This standard requires the presentation of a statement of comprehensive income and its components. Comprehensive income includes both net earnings and other comprehensive income. Other comprehensive income (“OCI”) includes holding gains and losses on available for sale investments, gains and losses on certain derivative instruments and foreign currency Over the next four years, the CICA will adopt its new strategic plan for the direction of accounting standards in Canada which was ratified in January 2006. As part of that plan, accounting standards in Canada for public companies will converge with International Financial Report Standards (IFRS) over the next four years. The Company continues to monitor and assess the impact of the planned convergence of Canadian GAAP with gains and losses relating to self-sustaining foreign operations, IFRS. all of which are not included in the calculation of net earnings until realized. As prescribed by these standards, prior periods have not been restated. The adoption of Sections 3250, 3865 and 3855 did not have a material impact on the consolidated financial statements of the Company. RELATED PARTY TRANSACTIONS During the year ended December 31, 2007, the Company borrowed $145,000 from a person who is an officer and director of the Company. $20,000 of this amount was repaid during the fiscal year. The $125,000 loan balance remaining has no interest The following provisions have been adopted by the Company rate, no maturity date, and no additional terms of repayment. as of January 1, 2008. In 2006, the Company borrowed $100,000 from a person who 9 tsodilo resources limited is an officer and director of the Company. The loan had no the parties’ respective interest in the project is attributed to interest rate, no maturity date, and no terms of repayment. The the dilution of THD’s interest as a result of not funding their loan was repaid during the 2006 fiscal year. proportionate share of expenditures from 2002 to date. The Accrued leave benefits in the amount of $87,192 was offset by following numbers are reflected in our records. an officer and director for the exercise of options (exercise cost Long-Term: $20,203) on December 7, 2007 and participation (97,102 units Loan from Tsodilo Resources Bermuda Limited Primary 3,247,940 for a value of $66,989) in the Company’s December private $1,149,078.11 * 75% = Secondary 861,808 placement. Tsodilo and its wholly owned subsidiary, Tsodilo Resources Bermuda (Ltd) (“TSDB”) entered into an agreement with Trans Hex Group and its wholly owned subsidiary Trans Hex Diamond (“THD”) with respect to their respective interests in Newdico (Pty) Ltd. (“Newdico”). At the time of agreement, Trans Hex Group owned 73.22% of Tsodilo. The agreement between the parties established that all expenditures undertaken by Newdico up to and including March 31, 2002 shall be deemed to have been incurred by Newdico and funded by TSDB and THD by way of shareholders loan account by Tsodilo as to 75% thereof; and Trans Hex as to 25% thereof. Of the outstanding loan amounting to $1,611,058 as at 31 March 2002, $1,149,078 shall constitute a secondary loan, deemed to have been advanced to the company by TSDB as to 75% thereof and THD as to 25% thereof and such secondary loans shall only be repayable after the primary loans have been repaid to TSDB and THD in full. These secondary loans shall be repayable before any additional secondary loans, which shall be repaid in the proportions in which they have been advanced. Thereafter, as to the secondary loans which existed as of March 31, 2002, in proportion after the additional secondary loans have been repaid, $461,980.67 shall be deemed to have been advanced to the company by TSDB as to 75% thereof and THD as to 25% thereof (“the primary loan”). The primary loans shall be repayable in full before any parts of the secondary loans are repayable. The secondary loans shall not be included in the necessary calculations for purposes of the share dilution provisions. All dilution calculations shall be based only on the value of the primary loans. All funding of the company by shareholders for purposes of the Ngami project, shall constitute additional primary loans, or additional secondary loans in the circumstances and to the extent set out in the parties agreement. As of December 31, 2007, TSDB holds a 93% (2006: 90%) interest in Newdico while THD holds 7% (2006: 10%). The change in Total Loan Outstanding Eliminated in Consolidation 4,109,748 Loan from Trans Hex Diamonds Limited (Minority Interest) Primary 228,395 OUTLOOK Diamond exploration remains a high-risk undertaking requiring patience and persistence. Despite difficult capital markets in the junior resource sector, the Company remains committed to international diamond exploration through carefully managed programs. ADDITIONAL INFORMATION Additional information relating to Tsodilo Resources Limited is available on its website www.TsodiloResources.com or through SEDAR at www.sedar.com. FORWARD-LOOKING STATEMENTS The Annual Report, including this MD&A, contains certain forward-looking statements related to, among other things, expected future events and the financial and operating results of the Company. Forward-looking statements are subject to inherent risks and uncertainties including, but not limited to, market and general economic conditions, changes in regulatory environments affecting the Company’s business and the availability and terms of financing. Other risks are outlined in the Uncertainties and Risk Factors section of this MD&A. Consequently, actual results and events may differ materially from those included in, contemplated or implied by such forward looking statements for a variety of reasons. Readers are therefore cautioned not to place undue reliance on any forward-looking statement. The Company disclaims any intention and assumes no obligation to update any forward- looking statement even if such information becomes available as a result of future events or for any other reason. Gary A. Bojes Chief Financial Officer March 21, 2008 10 tsodilo resources limited Financial Reporting Responsibility of Management The annual report and consolidated financial statements responsibilities for financial reporting and internal control. have been prepared by management. The consolidated The Audit Committee is composed of three directors, all of financial statements have been prepared in accordance with whom qualify as unrelated directors and are independent of Canadian generally accepted accounting principles and management and free from any interest or business relationship include amounts that are based on informed judgments and which could, or could be perceived to materially interfere best estimates. The financial information presented in this with their ability to act in the best interests of the Company. annual report is consistent with the consolidated financial This committee meets periodically with management and statements. Management acknowledges responsibility the external auditors to review accounting, auditing, internal for the fairness, integrity and objectivity of all information control and financial reporting matters. The Audit Committee contained in the annual report including the consolidated reviews the annual financial statements before they are financial statements. Management is also responsible for the presented to the Board of Directors for approval and considers maintenance of financial and operating systems, which include the independence of the auditors. effective controls to provide reasonable assurance that assets are properly protected and that relevant and reliable financial The financial statements for the period ended December 31, information is produced. Our independent auditors have the 2007 have been audited by KPMG Inc., the external auditors, in responsibility of auditing the consolidated financial statements accordance with Canadian generally accepted auditing standards and expressing an opinion on them. on behalf of the shareholders. Their report follows hereafter. The Board of Directors, through its Audit Committee, is responsible for ensuring that management fulfills its James M. Bruchs Gary A. Bojes President and Chief Executive Officer Officer Chief Financial Officer March 21, 2008 March 21, 2008 11 tsodilo resources limited Auditors’ Report to the Shareholders of Tsodilo Resources Limited We have audited the consolidated balance sheets of Tsodilo misstatement. An audit includes examining, on a test basis, Resources Limited as at December 31, 2007 and 2006 and the evidence supporting the amounts and disclosures in the consolidated statements of operations and comprehensive financial statements. An audit also includes assessing the loss, deficits and cash flows for the years ended December accounting principles used and significant estimates made 31, 2007 and 2006 period. These financial statements are the by management, as well as evaluating the overall financial responsibility of the Company’s management. Our responsibility statement presentation. is to express an opinion on these financial statements based on our audit. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the We conducted our audit in accordance with Canadian generally Company as at December 31, 2007 and 2006 and the results of accepted auditing standards. Those standards require that we its operations and its cash flows for the years ended December plan and perform an audit to obtain reasonable assurance 31, 2007 and 2006 in accordance with Canadian generally whether the financial statements are free of material accepted accounting principles. KPMG Inc. Chartered Accountants (SA) Bloemfonteim, South Africa March 21, 2008 12 tsodilo resources limited Tsodilo Resources Limited Consolidated Balance Sheets As at December 31, 2007 and 2006 (in United States dollars – note 2) ASSETS Current Cash Accounts receivable and prepaid expenses Exploration Properties (note 3) Property, Plant and Equipment (note 4) LIABILITIES Current Accounts payable and accrued liabilities (note 9) Notes Payable Non-Controlling Interest (note 3) SHAREHOLDERS' EQUITY Share Capital (note 5) Warrants (note 5) Contributed Surplus (note 5) Accumulated Other Comprehensive Income Deficit 2007 2006 (Restated – note 9) 53,197 33,294 86,491 3,338,875 625,449 4,050,815 168,646 125,000 293,646 228,395 27,423,585 1.194,742 6,668,132 (837,425) (30,920,260) 3,528,774 4,050,815 201,177 53,055 254,232 2,424,118 794,343 3,472,693 101,361 - 101,361 245,491 27,024,564 1,018,683 6,336,204 (837,425) (30,416,185) 3,125,841 3,472,693 Going Concern (note 1) Subsequent events (note 5) Commitments (note 12) See accompanying notes to the consolidated Financial Statements APPROVED ON BEHALF OF THE BOARD OF DIRECTORS James M. Bruchs Director Patrick C. McGinley Director 13 tsodilo resources limited Tsodilo Resources Limited Consolidated Statements of Operations and Comprehensive Loss For the years ended December 31, 2007 and 2006 (in United States dollars – note 2) Expenses Corporate remuneration (note 9) Corporate travel and subsistence Investor relations Legal and audit Office and administration Lease Expense Amortization Foreign exchange profit Stock-based compensation (note 5) Loss before non-controlling interest Non-controlling interest Loss and comprehensive loss for the year Basic and diluted loss per share - cents (note 7) 2007 2006 (Restated – note 9) 123,624 8,233 52,159 44,397 39.780 9.067 2,926 (22,868) 246,757 (504,075) - (504,075) $(0.04) 137,669 36,089 74,437 37,392 58,577 8, 728 5,092 (60,876) 257,439 (554,547) - (554,547) $(0.04) Consolidated Statements of Deficit For the years ended December 31 (in United States dollars – note 2) Deficit – Beginning of period Restatement due to accrued benefits (note 9) Deficit as restated Loss for the year as restated Deficit - End of year 2007 (30,416,185) - (504,075) 2006 (Restated – note 9) (29,814,222) (47,416) (29,861,638) (554,547) (30,920,260) (30,416,185) See accompanying notes to the consolidated Financial Statements 14 tsodilo resources limited Tsodilo Resources Limited Consolidated Statements of Cash Flows For the years ended December 31, 2007 and 2006 (in United States dollars – note 2) CASH PROVIDED BY (USED IN): Operating Activities Loss for the year Adjustments for non-cash items: Amortization Stock-based compensation (note 5) 2007 2006 (Restated – note 9) (504,075) (554,547) 2,926 246,757 (254,392) 5,092 257,439 (292,016) Net change in non-cash working capital balances (note 13) 87,046 (167,346) Investing Activities Exploration properties Additions to property, plant and equipment Financing Activities Shareholder Loan Issue of common shares Contribution from non-controlling interest Change in cash - For the year Cash - Beginning of year Cash - End of year (735,774) (13,015) (748,789) 125,000 660,251 (17,096) 768,155 (147,980) 201,177 53,197 7,623 (284,393) (617,723) (891,271) (1,508,994) 1,739,905 (35,151) 1,704,754 (88,633) 289,810 201,177 The accompanying notes are an integral part of these consolidated financial statements. 15 tsodilo resources limited  Tsodilo Resources Limited Notes to the Consolidated Financial Statements For the years ended December 31, 2007 and 2006 1. NATURE OF OPERATIONS AND GOING CONCERN Tsodilo Resources Limited is an exploration stage company (“Tsodilo” or “The Company”) which is engaged principally in the acquisition, exploration and development of mineral properties in the Republic of Botswana. The recovery of the Company’s investment in mineral properties and the attainment of profitable operations are dependent upon the discovery, development and sale of ore reserves, and the renewal of licenses, the ultimate outcome of which cannot presently be determined as they are contingent on future events. The Company along with its subsidiaries and joint ventures operates internationally with projects in continental Africa. These financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern, which assumes continuity of operations, realization of assets, and settlement of liabilities in the normal course of business. As at December 31, 2007, the Company reported an accumulated deficit of ($30,920,260) [2006: ($30,416,185] and negative net cash outflows from operations of ($254,392) [2006: ($292,016)] for the year then ended. The cash position of the Company is insufficient to finance continued exploration. As an exploration stage company, it is currently unable to self-finance its operations. Management believes that it will be able to secure the necessary financing through a combination of the issue of new equity or debt instruments, the entering into of joint venture arrangements or the exercise of warrants and options for the purchase of common shares. However, there is no assurance that the Company will be successful in these actions. These financial statements do not reflect the adjustments, which could be material, to the carrying value of assets and liabilities, the reported revenues and expenses and balance sheet classifications that would be necessary were the going concern assumption inappropriate. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation and preparation of the consolidated financial statements The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its direct and indirect subsidiaries. All inter-company transactions and balances have been eliminated. Group Companies: December 31, 2007 and 2006 Tsodilo Resources Bermuda Limited Gcwihaba Resources (Proprietary) Ltd (Botswana) (“Gcwihaba”) 2007 100% 100% 2006 100% 100% Newdico (Proprietary) Limited (Botswana) (“Newdico”) 93% (note 3) 90% (note 3) Earnings per share Basic Earnings-Per-Share (EPS) is computed as net income (loss) applicable to common stockholders’ divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution 16 tsodilo resources limited that could occur from common shares issued through stock options, warrants and other convertible securities when the effect would be dilutive. The “treasury share method” is used when calculating diluted earnings per share. However, diluted loss per share has not been presented as the potential exercise / conversion of options and warrants outstanding would have the effect of reducing loss per share. Basic and diluted loss per share are therefore presented as the same figure. Use of estimates The preparation of the consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The most significant estimates are related to the valuation of warrants and options, the recoverability of exploration expenditures, property, plant and equipment and contingencies. Actual results could differ from those estimates. Exploration properties All costs relating to the acquisition, exploration and development of non-producing mining properties are capitalized as incurred. The amounts capitalized represent costs to be charged to operations in the future and do not necessarily reflect the present or future values of the particular properties. If a property proceeds to development, these costs become part of preproduction and development costs of the mine and will be amortized over the expected life of the mine. If a property is abandoned, sold or continued exploration is not deemed appropriate in the foreseeable future or when other events and circumstances indicate that the carrying amount may not be recovered, the related costs and expenditures are written down to the net recoverable amount at the time the determination is made. Proceeds from the sale of exploration properties are credited to the costs of the relevant property. Exploration costs that do not relate to specific non-producing mining properties are expensed as incurred. The Company evaluates its license properties on a project basis as opposed to treating each individual license block as a separate project. Property, Plant and Equipment Property, plant and equipment are amortized principally on a straight-line basis over their estimated useful lives of three to five years to their estimated residual values. Property, plant and equipment awaiting installation on site are not amortized until they are commissioned. Property, plant and equipment are reviewed for impairment and if deemed impaired, an impairment loss is measured and recorded based on the net recoverable value of the asset. Foreign currency translation The Company’s functional and reporting currency is the US dollar. The Company’s subsidiaries are accounted for as integrated foreign operations. Transactions of the Company and its subsidiaries originating in foreign currencies are translated at the rates in effect at the time of the transaction. Monetary items are denominated in foreign currencies are translated to US dollar at exchange rates in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expense items are translated at the average rate prevailing during the year except for depreciation, depletion, amortization and write-downs, which are translated at the same exchange rates as the assets to which they relate. Foreign exchange gains and losses are included in the statement of operations. 17 tsodilo resources limited Income Taxes The Company uses the asset and liability method of accounting for income taxes. Assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is recorded against any future income to an asset if it is more than likely than not that the asset will not be realized. Future income tax assets and liabilities are measured using tax rates in effect for the period in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates or laws is recognized as part of the provision for income taxes in the period the changes are considered substantively enacted. The Company does not have deferred tax assets, deferred tax liabilities or current tax provisions. Stock-Based Compensation Plans Tsodilo has a Stock Option Plan (refer to note 5). Under the Stock Option Plan, the Company may grant options to directors, officers and employees for up to 2,715,471 shares of common stock. The exercise price is determined by the Chairman of the Compensation Committee and the President and CEO in consultation with the board of directors, but is not less than the market price of the Company’s stock on the date of the grant. An option’s maximum term is 5 years. The Company uses the fair value method of accounting for stock options. Under the fair value method stock-based payments are measured at the fair value of the equity investments and are amortized over the vesting period. Consideration paid on exercise of stock options is credited to common share capital. Asset Retirement Obligations The Company recognizes the fair value of liabilities for asset retirement obligations in the period in which they occur and/or in which a reasonable estimate of such costs can be made using the total undiscounted cash flows required to settle estimated obligations, estimated expected timing of cash flow payments required to settle the obligations and estimated credit-adjusted risk free discount rates and inflation rates. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS Financial instruments Effective January 1, 2007, we adopted the new financial instruments accounting standards and related amendments to other standards on financial instruments issued by the CICA. In accordance with the transitional provisions, prior period financial statements have not been restated. Financial Instruments – Recognition and Measurement, Section 3855 This standard prescribes when a financial asset, financial liability, or nonfinancial derivative is to be recognized on the balance sheet and whether fair value or cost-based methods are used to measure the recorded amounts. It also specifies how financial instrument gains and losses are to be presented. Hedges, Section 3865 This standard is applicable when a company chooses to designate a hedging relationship for accounting purposes. It builds on the previous AcG-13 “Hedging Relationships” and Section 1650 “Foreign Currency Translation”, by specifying how hedge accounting is applied and what disclosures are necessary when it is applied. Comprehensive Income, Section 1530 This standard requires the presentation of a statement of comprehensive income and its components. Comprehensive income includes both net earnings and other comprehensive income. Other comprehensive income (“OCI”) includes 18 tsodilo resources limited holding gains and losses on available for sale investments, gains and losses on certain derivative instruments and foreign currency gains and losses relating to self-sustaining foreign operations, all of which are not included in the calculation of net earnings until realized. As prescribed by these standards, prior periods have not been restated. The adoption of Sections 3250, 3865 and 3855 did not have a material impact on the consolidated financial statements of the Company. The following provisions have been adopted by the Company as of January 1, 2008. Financial Instruments – Disclosures, Section 3862 Section 3862 Financial Instruments – Disclosures, requires additional disclosures to enable users to evaluate the significance of financial instruments to our financial position and performance. In addition, qualitative and quantitative disclosures are provided to enable users to evaluate the nature and extent of risks arising from financial instruments. Financial Instruments – Presentations, Section 3863 CICA 3863 carries forward, without change, the presentation related requirements of CICA 3861. The requirements of this Section address an issuer’s classification of financial instruments between liabilities and equity, the classification of related interest, dividends, losses and gains, as well as the offsetting of financial assets and financial liabilities. Capital Disclosures – Section 1535 Section 1535 Capital Disclosures, requires disclosure of qualitative and quantitative information that enables users to evaluate our objectives, policies and process for managing capital. Inventories – Section 3031 In June 2007, the CICA issued Section 3031 “Inventories” to replace existing Section 3030. The new section, which is effective January 1, 2008, establishes standards for the measurement and disclosure of inventories. We do not expect the application of Sections 3862, 3863, 1535 and 3031 to have a significant impact on our financial statements. Over the next four years, the CICA will adopt its new strategic plan for the direction of accounting standards in Canada which was ratified in January 2006. As part of that plan, accounting standards in Canada for public companies will converge with International Financial Report Standards (IFRS) over the next four years. The Company continues to monitor and assess the impact of the planned convergence of Canadian GAAP with IFRS. 3. EXPLORATION PROPERTIES Exploration properties are summarized as follows: Balance at December 31, 2005 Jan. to Dec. 2006 expenditures Balance at December 31, 2006 Jan. to Dec 2007 expenditures Balance at December 31, 2007 Gcwihaba Botswana 179,564 51,108 230,672 6,436 237,108 Newdico Botswana 1,500,052 693,394 2,193,446 908,321 3,101,767 19 tsodilo resources limited Total 1,679,616 744,502 2,424,118 914,757 3,338,875 A summary of the significant agreements entered into by the Company is as follows: Newdico (Proprietary) Limited - Botswana Newdico holds prospecting licenses in the Ngamiland District of northwest Botswana. The company acquired the various licenses in 1999, 2001 and 2003. In 2005, the Company was reissued its prospecting licenses for an initial term of three years expiring June 30, 2008, and are renewable for 2 two year periods upon application and have a final expiry of 2012. The terms of the licenses require Newdico to spend a minimum of Botswana Pula 3.78 million (approximately $587,703 as of March 21, 2008) during the initial period of grant (7/1/05 – 6/30/08) exclusive of license fees. Originally, Newdico was held 75% by Tsodilo and 25% by Trans Hex Group Limited (“THG”), with Tsodilo being the operator. THG has funded or been attributed to its proportionate share of expenditure and these amounts have been reflected as non-controlling interest of $228,395 (2006: $245,491) in the financial statements. During the year ended December 31, 2007, THG decided not to fund its propionate share of expenditures on cash calls and therefore as of January 1, 2008, the Company’s interest in Newdico had effectively increased from 75% to 93% (2006: 90%) in accordance with the exploration agreement between the two parties. Trans Hex Group has also advanced funds amounting to $205,591 (2006: $205,591) to Newdico, relating to exploration properties which have been written off in earlier years. This liability has not been recorded in these financial statements as it is repayable only from Trans Hex Group’s share of any future earnings of Newdico after repayment of loans relating to the Newdico Project. Gcwihaba Resources (Proprietary) Limited – Botswana Gcwihaba, a wholly owned subsidiary of the Company, holds prospecting licenses in the southern Ngamiland project area. Diamond Exploration The terms of the licenses granted Gcwihaba the right to prospect for a total of three years to 2006, and were renewed for a two year period expiring on June 30, 2008. The terms of these licenses require Gcwihaba to spend a minimum of Botswana Pula 675,000 (approximately $104,947 as of March 21, 2008) exclusive of license fees during the first renewal grant period. The licenses can be renewed for an additional two year period with a final expiry of 2010. An additional license was granted to the Company for an initial three year period as of April 1, 2007. The terms of the license requires Gcwihaba to spend a minimum of Botswana Pula 210,000 (approximately $32,650 as of March 21, 2008) during the initial period of grant (4/1/07 – 3/31/2010) exclusive of license fees. Base and Precious Metal Exploration Gcwihaba holds base and precious metals prospecting licenses in the Ngamiland District of northwest Botswana. The Company acquired the various licenses in 2005. The licenses are granted for an initial period for three years expiring September 30, 2008 and are renewable for an additional 2 two year period upon application and have a final expiry of 2012. The terms of the licenses require Gcwihaba Newdico to spend a minimum of Botswana Pula 720,000 (approximately $111,943 as of March 21, 2008) during the initial period of grant (10/1/05 – 9/30/08) exclusive of license fees. 20 tsodilo resources limited 4. PROPERTY, PLANT and EQUIPMENT December 31, 2007 Vehicles Furniture and Equipment December 31, 2006 Vehicles Furniture and Equipment Depreciation Rate in Years Cost Accumulated amortization Book value 5 Years 3 Years 5 Years 3 Years 887,855 88,608 976,463 887,855 76,484 964,339 293,688 57,326 351,014 132,387 37,609 169,996 594,167 31,282 625,449 755,468 38,875 794,343 For the year ended 2007, an amount of $172,546 (2006: $126,781) of amortization has been capitalized under exploration properties. 5. SHARE CAPITAL Common Shares Authorized The authorized capital stock of the Company comprises an unlimited number of common shares. Issued and outstanding Details of the issued and outstanding common shares are as follows: Issued and outstanding at December 31, 2005 Shares (number) Amount $ 11,045,045 26,218,172 On private placement for cash in 2006 See (i) to (v) below 2,390,793 1,739,907 Ascribed to warrants issued in 2006 Issued and outstanding at December 31, 2006 On private placement for cash (vi) On private placement for cash (vii) On private placement for cash (viii) On private placement for cash (vi) On private placement not for cash (x) Ascribed to Exercise of Options Ascribed to warrants issued in 2007 Issued and outstanding at December 31, 2007 Subsequent to Year End Private Placement (x) (i)Private Placement - (933,515) 13,435,838 27,024,564 141,516 95,869 167,146 120,000 231,714 175,000 235,024 158,000 91,102 200,000 66,989 44,392 - (261,229) 14,502,340 27,423,585 457,901 $325,000 In January 2006, the Company issued, through a non-brokered private placement, 468,776 units of the Company at a price of $1.07 (C$1.25) per unit for gross proceeds to the Company of $499,990. Each unit consists of one common share of the Company and one warrant of the Company, each warrant entitling the holder to purchase one common share of the Company at a price of $0.87 (C$1.00) for a period of two years. 21 tsodilo resources limited (ii) Private Placement In February 2006, the Company issued, through a non-brokered private placement, 319,108 units of the Company at a price of $0.78 (C$0.90) per unit for gross proceeds to the Company of $248,828 Each unit consists of one common share of the Company and one warrant of the Company, each warrant entitling the holder to purchase one common share of the Company at a price of $0.87 (C$1.00) for a period of two years. (iii) Private Placement In May 2006, the Company issued, through a non-brokered private placement 649,984 units of the Company at a price of $0.63 (C$0.70) per unit for gross proceeds to the Company of $405,441. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of $0.62 (C$0.70) for a period of two years. . (iv) Private Placement In July 2006, the Company issued, through a non-brokered private placement 161,586 units of the Company were issued at a price of $0.62 (C$0.70) per Unit for proceeds to the Company of $100,000. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of $0.62 (C$0.70) for a period of two years. (v) Private Placement In September 2006, the Company issued, through a non-brokered private placement 791,339 units of the Company at a price of $0.63 (C$0.70) per Unit for gross proceeds to the Company of $485,648. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of $0.63(C$0.70) for a period of two years. The Company has negotiated finder’s fees of $13,875, payable in accordance with the policies of the TSX Venture Exchange with respect to 500,000 units of the placement. (vi) Private Placement On February 13, 2007, the Company completed a non-brokered private placement. 141,516 units of the Company (the "Units") were issued at a price of $0.68 (C$0.80) per Unit for proceeds to the Company of $95,869. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price ofC$0.80 for a period of two years. vii) Private Placement On May 18, 2007, the Company completed a non-brokered private placement. 167,146 units of the Company (the "Units") were issued at a price of $0.72 (C$0.80) per Unit for proceeds to the Company of $120,000. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of C$0.80 for a period of two years. (viii) Private Placement On June 29, 2007, the Company completed a non-brokered private placement. 231,714 units of the Company (the "Units") were issued at a price of $0.75 (C$0.80) per Unit for proceeds to the Company of $175,000. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of C$0.80 for a period of two years. 22 tsodilo resources limited  (ix) Private Placement On December 19, 2007, the Company completed a non-brokered private placement. 326,126 units of the Company (the "Units") were issued at a price of $0.69 (C $0.70) per Unit for proceeds to the Company of $224,989. Of this amount, 91,102 units valued at $66,989 are attributed to an officer and director as an offset for accrued leave benefits as outlined in note 8. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of C$0.70 for a period of two years. (x) Private Placement On March 11, 2008, the Company completed a non-brokered private placement. 457,901 units of the Company (the "Units") were issued at a price of $0.71 (C $0.70) per Unit for proceeds to the Company of $325,000. Each Unit consists of one common share of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company at a price of C$0.70 for a period of two years. (b) Warrants As at December 31, 2006, the following warrants were outstanding: Number of Warrants Value Expiry June 1, 2006 October 14, 2006 November 8, 2006 March 4, 2007 January 27, 2008 February 21, 2008 May 4, 2008 July 19, 2008 September 21, 2008 Exercise Price Opening Issued [Exercised] (Expired) Closing Opening (dollars) Issued [Exercised] (Expired) Closing (dollars) C$0.75 C$1.12 C$2.35 C$1.15 C$1.00 C$1.00 C$0.70 C$0.70 C$0.70 65,024 59,969 26,668 230,785 -- -- -- -- -- (65,024) (56,969) (26,668) -- 468,776 319,108 649,984 161,586 791,339 -- -- -- 230,785 468,776 319,108 649,984 161,586 791,339 14,164 20,156 20,622 85,170 -- -- -- -- (14,164) (20,156) (20,622) -- 146,788 109,988 167,886 49,643 -- -- -- 85,170 146,788 109,988 167,886 49,643 459,208 459,208 379,446 2,242,132 2,621,578 140,112 878,571 1,018,663 During the year ended December 31, 2006 2,390,853 warrants issued and a value of $933,813 was attributed as at December 31, 2006 (2005: none issued). During the year ended December 31, 2006 warrants were valued using the Black-Scholes model, using key assumptions of volatility ranging from 69-89%, a risk-free interest rate of 4.5%, a term equivalent to the life of the warrant, and reinvestment of all dividends in the Company. 23 tsodilo resources limited As at December 31, 2007, the following warrants were outstanding: Number of Warrants Exercise Price Opening Issued [Exercised] (Expired) Closing Opening (dollars) Value Issued [Exercised] (Expired) Closing (dollars) C$0.75 C$1.12 C$2.35 C$1.15 C$1.00 C$1.00 C$0.70 C$0.70 C$0.70 C$0.80 C$0.80 C$0.80 C$0.70 65,024 56,969 26,668 230,785 468,776 319,108 649,984 161,586 791,339 -- -- -- -- (65,024) (56,969) (26,668) (230,785) -- -- -- -- -- 141,516 167,146 231,714 326,126 -- -- -- -- 468,776 319,108 649,984 161,586 791,339 141,516 167,146 231,714 326,126 -- -- -- 85,170 146,788 109,988 167,886 49,643 459,208 -- -- -- -- -- -- -- (85,170) -- -- -- -- -- 55,047 40,408 67,829 97,945 -- -- -- -- 146,778 109,988 167,886 49,643 459,208 55,047 40,408 67,829 97,945 2,770,239 487,056 3,257,295 1,018,683 176,059 1,194,742 Expiry June 1, 2006 October 14, 2006 November 8, 2006 March 4, 2007 January 27, 2008 Febryary 21, 2008 May 4, 2008 July 19, 2008 September 21, 2008 February 13, 2009 May 18, 2009 June 29, 2009 December 19, 2009 During the year ended December 31, 2007 866,502 warrants issued and a value of $261,229 was attributed as at December 31, 2007 (2006: 2,390,853 issued and a value of $933,813 was attributed). During the year ended December 31, 2007, warrants were valued using the Black-Scholes model, using key assumptions of volatility ranging from 99-131% (2006: 69-89%), a risk-free interest rate of approximately 4% (2006: 4.5%), a term equivalent to the life of the warrant, and reinvestment of all dividends in the Company. Subsequent to year end 146,788 warrants expired on January 27, 2008 and 109,988 warrants expired on February 21, 2008. (c) Contributed Surplus As at December 31, 2005 Relating to the expiry of warrants Relating to stock based compensation As at December 31, 2006 Relating to the expiry of warrants Relating to stock based compensation As at December 31, 2007 6,023,823 54,942 257,439 6,336,204 85,170 246,757 6,668,132 24 tsodilo resources limited (d) Stock Option Plan Outstanding stock options granted to directors, officers and employees at December 31, 2007 and December 31, 2006 were as follows: Outstanding Granted Outstanding Outstanding Exercisable December [Cancelled] December Granted [Cancelled] December December Expiry Price 31, 2005 (Exercised) 31, 2006 (Exercised) 31, 2007 31, 2007 (100,000) [50,000] (50,000) (50,000) (i) (i) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) (ii) 0 0 0 0 0 0 100,000 100,000 50,000 50,000 250,000 250,000 10,000 10,000 260,000 260,000 60,000 60,000 300,000 300,000 65,000 48,750 June 24, 2007 C$0.15 100,000 September 18, 2007 C$0.23 100,000 December 31, 2007 C$0.41 50,000 July 8, 2008 C$0.50 100,000 - - - - 100,000 100,000 50,000 100,000 January 1, 2009 C$0.75 60,000 (10,000) 50,000 August 31, 2009 C$0.75 260,000 (10,000) 250,000 January 3, 2010 C$1.85 35,000 (25,000) 10,000 280,000 (20,000) 260,000 - 60,000 60,000 - 300,000 300,000 - 65,000 65,000 August 19, 2010 January 3, 2011 April 27, 2011 August 18, 2011 November 1, 2011 January 3, 2012 May 7, 2012 C$1.25 C$1.25 C$0.70 C$0.70 C$1.00 C$1.00 C$0.80 Cancelled Exercised - 50,000 50,000 [50,000] (iii) 0 0 - - - - - - 85,000 550,000 (iii) (iii) 85,000 42,500 550,000 275,000 [100,000] (200,000) Total 985,000 410,000 1,395,000 635,000 (300,000) 1,730,000 1,396,250 Options exercisable at end of year 680,000 873,375 Weighted average exercise price - issued - outstanding - exercisable C$0.67 C$0.83 C$0.65 All options have a term of five years. C$0.76 C$0.80 C$0.79 1,396,250 C$0,79 C$0.88 C$0.90 (i) These common share purchase options vest as to one-half immediately and one-half on the six-month anniversary of the date granted. (ii) These common share purchase options vest as to one-quarter immediately and one-quarter on each of the six- month, 12-month and 18-month anniversaries of the date granted. (iii) The Company recognized an expense of $246,757 (2006: $257,439) relating to the¬ fair value of options granted or vesting during the year. The fair value of options granted was calculated using the Black-Scholes model, using key assumptions of volatility of 98% and 103%, a risk-free interest rate of approximately 4%, a term equivalent to the life of the option, and reinvestment of all dividends in the Company. On January 2, 2008, the Company issued 210,000 options under its Stock Option Plan to persons who are officers and employees of the Company. 25 tsodilo resources limited 6. INCOME TAXES The recovery of income taxes varies from the amounts that would be computed by applying the Canadian federal and provincial statutory rate of approximately 36.12% (Dec. 2006 – 36.12%) to income before taxes as follows: Net loss for the period Income tax (recovery) provision at Canadian statutory income tax rates Current year losses not recognized Permanent differences Dec-31 2007 Dec-31 2006 (Restated – note 9) (504,075) (554,547) (182,072) (200,302) 92,943 89,129 110,875 89,427 Provision for (recovery of ) income taxes - - The following summarizes the principal temporary differences and related future tax effect: (Restated – note 9) Property, Plant and Equipment Exploration & Development - Canada Exploration & Development - Botswana Losses carried forward - Canada Losses carried forward - Botswana Other Subtotal – fut¬ure income tax asset Valuation allowance Dec-31 2007 Dec-31 2006 (Restated – note 9) 8.000 93,000 14,000 93,000 (1,206,002) (890,617) 1,197,000 1,389,000 1,294,426 941,563 35,000 42,000 1,421,424 1,588,944 (1,421,424) (1,588,944) Net future income tax asset recorded - - The permanent differences are primarily the result of expenses not allowed for stock-option based compensation for 2007 and 2006. At December 31, 2007, the Company has Canadian net operating losses carried forward that expire as follows: Loss 818,000 697,000 322,000 383,000 505,000 198,000 227,000 210,000 Year of Expiry 2008 2009 2010 2011 2012 2012 2013 2014 (1) (1) (1) (1) (1) * (2) * (2) (2) * 2005 was a transitional year for year end change from March 31 to December 31. (1) expires March 31 and (2) expires December 31. Total assessable losses relating to the activity in Botswana as at December 31, 2007 was $3,209,762 (December 31, 2006: $3,337,768) of which $2,606,760 have no expiry date. 26 tsodilo resources limited 7. LOSS PER SHARE Loss per share is computed on the basis of the loss of ($504,075) for the year ended December 31, 2007 [2006: ($554,547)] and the weighted average number of common or equivalent shares outstanding during period, December 31, 2007: 13,889,166 (2006: 12,473,977). The effects of stock options and warrants in computing diluted per share amounts for December 31, 2007 and December 31, 2006 are anti-dilutive. 8. RELATED PARTY TRANSACTIONS During the year ended December 31, 2007, the Company borrowed $145,000 from a person who is an officer and director of the Company. $20,000 of this amount was repaid during the fiscal year. The $125,000 loan balance remaining has no interest rate, no maturity date, and no additional terms of repayment. In 2006, the Company borrowed $100,000 from a person who is an officer and director of the Company. The loan had no interest rate, no maturity date, and no terms of repayment. The loan was repaid during the 2006 fiscal year. Accrued leave benefits in the amount of $87,192 was offset by an officer for the exercise of options (exercise cost $20,203) on December 7, 2007 and participation (97,102 units for a value of $66,989) in the Company’s December private placement. Tsodilo and its wholly owned subsidiary, Tsodilo Resources Bermuda (Ltd) (“TSDB”) entered into an agreement with Trans Hex Group and its wholly owned subsidiary Trans Hex Diamond (“THD”) with respect to their respective interests in Newdico (Pty) Ltd. (“Newdico”). At the time of agreement, Trans Hex Group owned 73.22% of Tsodilo. The agreement between the parties established that all expenditures undertaken by Newdico up to and including March 31, 2002 shall be deemed to have been incurred by Newdico and funded by TSDB and THD by way of shareholders loan account by Tsodilo as to 75% thereof; and Trans Hex as to 25% thereof. Of the outstanding loan amounting to $1,611,058 as at 31 March 2002, $1,149,078 shall constitute a secondary loan, deemed to have been advanced to the company by TSDB as to 75% thereof and THD as to 25% thereof and such secondary loans shall only be repayable after the primary loans have been repaid to TSDB and THD in full. These secondary loans shall be repayable before any additional secondary loans, which shall be repaid in the proportions in which they have been advanced. Thereafter, as to the secondary loans which existed as of March 31, 2002, in proportion after the additional secondary loans have been repaid, $461,980.67 shall be deemed to have been advanced to the company by TSDB as to 75% thereof and THD as to 25% thereof (“the primary loan”). The primary loans shall be repayable in full before any parts of the secondary loans are repayable. The secondary loans shall not be included in the necessary calculations for purposes of the share dilution provisions. All dilution calculations shall be based only on the value of the primary loans. All funding of the company by shareholders for purposes of the Ngami project, shall constitute additional primary loans, or additional secondary loans in the circumstances and to the extent set out in the parties agreement. As of December 31, 2007, TSDB holds a 93% (2006: 90%) interest in Newdico while THD holds 7% (2006: 10%). The change in the parties’ respective interest in the project is attributed to the dilution of THD’s interest as a result of not funding their proportionate share of expenditures from 2002 to date. The following numbers are reflected in our records. Long-Term: Loan from Tsodilo Resources Bermuda Limited $1,149,078.11 * 75% = Total Loan Outstanding Eliminated in Consolidation Primary Secondary Loan from Trans Hex Diamonds Limited (Minority Interest) Primary 3,247,940 861,808 4,109,748 228,395 27 tsodilo resources limited 9. Restatement The Company did not previously record leave for the prior year of the President and CEO. In the current year, the Company recorded this liability and the financial statements of 2006 have been restated to correct this error. The effect of the restatement on those financial statements is summarized below. Increase in corporate remuneration Increase in loss for the period Decrease in non-cash working capital Increase in accounts payable Increase in deficit – end of year Restated loss per share 10. SEGMENTED INFORMATION Effect on 2006 13,415 13,415 13,415 13,415 60,831 ($0.04) Substantially all working capital balances of the Company are situated at the head office in Canada and in Botswana. Materially all of the Company’s property plant and equipment is presently located in Canada ($3,768) and Botswana ($621,681). The geographic distribution of the property acquisition costs and exploration expenditures is outlined in note 4. 11. FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheets for cash and equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to the short maturities of these instruments. 12. COMMITMENTS All operating leases that are for a period of no longer than one year are prepaid. The aggregate minimum lease payments are $52,374 as follows: 2008 2009 $26,187 $26,187 The lease commitment is for storage space in Maun, Botswana at an annual rental of BWP 158,888 per year for 2008 and 2009 converted at an exchange rate as of December 31, 2007 to US dollar. The Company holds prospecting licenses which require the Company to spend a specified minimum amount on prospecting over the period of the terms as outlined in note 3. 13. NOTES TO THE CASH FLOW Net change in non-working Capital balances Decrease / (Increase) in accounts receivable and prepaid expenses Increase in accounts payable and accrued liabilities Total 2007 19,761 67,285 87,046 2006 (25,000) 32,623 7,623 28 tsodilo resources limited Corporate Information DIRECTORS James M. Bruchs Washington, DC Appointed as director in 2002 Patrick C. McGinley Washington, D.C. Appointed as director in 2002 R. Stuart Angus Vancouver, British Columbia Appointed as director in 2004 John R. Redmond Potomac, Maryland Appointed as director in 2005 Jonathan R. KeLafant Arlington, Virginia Appointed as director in 2007 OFFICERS James M. Bruchs, B.Sc., J.D. CORPORATE HEAD OFFICE Canada Trust Tower - BCE Place 161 Bay Street, Box 508 Toronto, Ontario M5J 2S1 Telephone: (416) 572-2033 Facsimile: (416) 987-4369 Website: www.TsodiloResources.com E-Mail: info@TsodiloResources.com AUDITORS KPMG Inc. Johannesburg, South Africa LEGAL COUNSEL Fasken Martineau DuMoulin LLP Toronto, Ontario REGISTRAR AND TRANSFER AGENT Computershare Trust Company of Canada Toronto, Ontario President and Chief Executive Officer STOCK EXCHANGE LISTING TSX Venture Exchange Trading Symbol: TSD Appointed in 2002 Gary A. Bojes, CPA, Ph.D. Chief Financial Officer Appointed in 2007 Gail McGinley Corporate Secretary Appointed in 2005 

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