etruscan resources inc. (eet:tsx)

Etruscan resources inc. – 2008 annual report

EEttrruussccaann RReessoouurrcceess IInncc.. ((EEEETT::TTSSXX)) management discussion and analysis consolidated financial statements November 30, 2008 and 2007

Etruscan Resources Inc. Suite 306, Royal Bank Building 1597 Bedford Highway Halifax, Nova Scotia Canada B4A 1E7 Phone: (902) 832 6700 Toll Free: (877) 465 3674 Fax: (902) 832 6702 Email: [email protected] Website: www.etruscan.com

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FOR THE year ended November 30, 2008 compared with 2007 and 2006


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General This Management Discussion and Analysis (MD&A) of Etruscan Resources Inc. (Etruscan or the Company) is dated February 27, 2009 and provides an analysis of the financial operating results for the year ended November 30, 2008 as compared to the previous two years. This MD&A should be read in conjunction with Etruscan’s 2008 audited consolidated financial statements including the related note disclosure, all of which are prepared in accordance with generally accepted accounting principles (GAAP) in Canada. All amounts are in Canadian dollars unless otherwise specified. The financial statements and additional information, including the Company’s Annual Information Form, Certifications of Annual and Interim Filings, press releases and technical reports referenced herein are available on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com under the Company’s name.

Overview Etruscan is a gold focused Canadian junior mining company with dominant land positions in district scale gold belts covering more than 14,000 square kilometers in West Africa. The Company operates the Youga Gold Mine in Burkina Faso through its 90% owned subsidiary, Burkina Mining Company S.A. (BMC). The Company also has two gold projects at the feasibility stage; the Agbaou Gold Project in Côte d’Ivoire and the Finkolo Gold Project in Mali, as well as multiple advanced and early stage exploration projects in Burkina Faso, Mali, Côte d’Ivoire and Ghana. Additionally, Etruscan holds a strategic land position in the southern African country of Namibia that is being explored for precious metals, base metals and rare earth elements (REEs) and a 52% interest in Etruscan Diamonds Limited which has a dominant land position in the Ventersdorp Diamond District located in South Africa. The common shares of Etruscan are traded on the Toronto Stock Exchange under the symbol “EET”. More extensive information on Etruscan can be found on its home page at http://www.etruscan.com Highlights for the year ended November 30, 2008 Youga Gold Mine located in Burkina Faso achieved commercial

production and substantial completion, effective July 1, 2008 and produced 29,305 ounces for the five months ended November 30, 2008

Resource estimations completed for three potential Youga satellite deposits containing 342,000 ounces of inferred mineral resource at an average grade of 2.1 grams per tonne and 83,000 ounces of indicated mineral resource at an average grade of 1.3 grams per tonne

A feasibility study was completed for the Agbaou Gold Project located in Cote d’Ivoire

A feasibility study was initiated by Resolute Mining Limited for the Finkolo Gold Project located in Mali

A rare earth element discovery was outlined on the Lofdal permit in Namibia

Blue Gum Diamond Project located in South Africa recovered 12,600 carats during the year but due to the collapse of rough diamond prices during the fourth quarter the operation was placed on care and maintenance during December, 2008

Review of Operations Youga Gold Mine, Burkina Faso The Youga Gold Mine is located in southern Burkina Faso near the border with Ghana. The mine is owned and operated by BMC which is owned 90% by Etruscan and 10% by the State of Burkina Faso. Commercial production and substantial completion for accounting purposes was achieved at the Youga Gold Mine in the third quarter effective July 1, 2008. The criteria established for commercial production stipulated that all components of the processing plant were to operate over a 30 day period at 60% of design capacity with gold production achieving at least 60% of forecast. Mill throughput for the 30 day period ended July 7, 2008 totaled 53,764 tonnes which represented 65% of the design throughput and 4,094 ounces of gold were produced during this period which represented 61% of the forecast amount. Prior to July 1, 2008 the operating and financing costs associated with the Youga Gold Mine were capitalized as preproduction costs to property, plant and equipment. Gold production for the fourth quarter was 21,169 ounces at a cash operating cost of US$480 per ounce. A total of 238,700 tonnes of ore were milled during the quarter at an average mill feed grade of 3.19 grams per tonne. Gold sales for the fourth quarter aggregated 18,970 ounces which generated cash revenues of $16.3 million. A total of 11,790 ounces were delivered into the $700 per ounce hedge commitment and 7,180 ounces were sold at spot prices for an average realized gold price for the quarter of US$745 per ounce. Gold production for fiscal 2008 which comprises the five months of commercial production ended November 30th aggregated 29,305 ounces at a cash operating cost of US$598 per ounce. A total of 371,000 tonnes of ore were milled during the period at an average mill feed grade of 2.93 grams per tonne. The mill throughput represented 89% of forecast as certain aspects of the operation continued to be optimized during the period. Gold sales for the five month period aggregated 26,988 ounces which generated cash revenues of $22.3 million. A total of 19,022 ounces were delivered into the $700 per ounce hedge commitment and 7,966 ounces were sold at spot prices for an average realized gold price for the five month period of $746 per ounce. Progress continued during the fourth quarter on the installation of the grid power line from Ghana. The sub-station at Zebila in Ghana is nearing completion and the line construction is continuing on both sides of the border. Power to the plant and facilities is currently being supplied by the onsite power plant. Conversion to grid power is scheduled for Q2 2009 with an expected reduction in operating costs of $200,000 per month. The life-of-mine reserves at Youga as at December 31, 2008 calculated using a US$700 per ounce gold price are estimated at 6.8 million tonnes with an average grade of 2.7 grams per tonne containing 596,000 ounces of gold. Additionally, 1.7 million tonnes have been classified as marginal ore with an average grade of 0.69 grams per tonne. This material will be stockpiled separately and considered for processing at the end of the mine life. This material had been classified as waste in the 2006 feasibility study reserve estimation.




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A number of potential satellite gold deposits have already been identified on the Youga mining permit within a three kilometer radius of the existing plant and are being evaluated for conversion into reportable resources and reserves. Furthermore, an exploration program at the Ouaré gold deposit, located 35 kilometers northeast of the Youga Gold Mine, has generated positive results. The Ouaré deposit has the potential to develop additional reserves to further extend the mine life at Youga. Refer to “Review of Exploration Projects” section below. Gold production for fiscal 2009 is estimated to be between 80,000 and 90,000 ounces. Non-GAAP financial measures The Company has provided measures prepared according to Canadian GAAP as well as certain non-GAAP performance measures. These non-GAAP performance measures do not have any standardized meaning prescribed by GAAP and, therefore, are unlikely to be

comparable to similar measures presented by other companies. The Company believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. These non-GAAP performance measures reconciled to reported GAAP measures are outlined below. The Company calculates operating costs per ounce in order to enhance comparability with other mining companies and to monitor its operations. Cash costs are derived from the statement of operations and include operating costs such as mining, milling, refining and transportation, royalties, and administration but exclude depreciation, financing, reclamation and mine closure and foreign exchange. Costs are based on production activity.

Three months

ended Nov 30, 2008

CDN $ USD /oz

Five months

ended Nov 30, 2008

CDN $ USD /oz

Average exchange rate – C$ to US$ 1.1538 1.1057

Gold sold (oz) 18,970 26,988

Gold revenue per financial statements 17,559,548 802 24,844,233 833

Delivered into hedge commitment (1,263,553) (57) (2,584,708) (87)

16,295,995 745 22,259,525 746

Gold produced (oz) 21,169 29,305

Direct mining costs 11,140,015 456 17,845,815 551

Mining administration costs 2,737,928 112 4,363,719 135

Third party smelting, refining and transportation 121,264 5 170,409 5

Inventory adjustment (2,272,945) (93) (3,020,542) (93)

Cash operating costs 11,726,262 480 19,359,401 598

Royalty expense 483,102 20 663,037 20

Total cash costs 12,209,364 500 20,022,438 618

Financing costs 1,580,564 2,535,135

Financing costs pre commercial production - 404,005

Mining amortization and accretion 3,933,069 5,448,496

Total expense per financial statements 17,722,997 28,410,074




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Review of Feasibility Projects Agbaou Gold Project, Cote d’Ivoire The Agbaou Gold Project is located on the Agbaou gold belt in Côte d’Ivoire, approximately 200 kilometers northwest of the port city of Abidjan. A 43-101 compliant resource estimation for the Agbaou Project was completed in February 2008 by Coffey Mining Pty Ltd. of Perth, Australia. Using a 1.0 gram per tonne cut-off, Coffey Mining concluded that the Agbaou Project contains indicated resources of 10.5 million tonnes at an average grade of 2.6 grams per tonne (871,000 ounces) of gold and inferred resources of 2.8 million tonnes at an average grade of 2.5 grams per tonne (218,000 ounces) of gold. Etruscan will have an 85% interest in any mining company established to mine at Agbaou with the remaining 15% held by the State of Côte d’Ivoire. The feasibility study of the Agbaou Project was completed in November 2008. Using a gold price of $850 per ounce, the base case scenario in the feasibility study concludes that the Agbaou Project will produce an average of 82,000 ounces of gold per year at a cash operating cost of US$507 per ounce over a 6.3 year mine life. The feasibility study is based on probable reserves of 7.4 million tonnes of ore with an average grade of 2.4 grams per tonne containing 566,000 ounces. Pit optimizations were carried out using a US$750 per ounce gold price. The reserve estimation was completed by Coffey Mining in accordance with National Instrument 43-101. The study proposes open pit mining of three pits using an owner operated mining fleet with the ore to be processed through a conventional gravity-CIL (carbon-in-leach) plant with a design capacity of 1.2 million tonnes per annum. The average gold recovery is 91% and the strip ratio is 8:1. Initial capital costs for the Agbaou Project are estimated to be US$106 million (excluding working capital) and were based on the purchase of all new equipment at prevailing prices in mid 2008 at the peak of the market. The Company believes the economics of the Agbaou Project can be improved as a result of cost reductions due to the economic downturn and the Company intends to revisit the costing. Mining and exploration activities in Côte d’Ivoire have continued to increase with the most important development being the announcement by Lihir Gold that the new Bonikro Gold Mine had achieved commercial production in August 2008. Bonikro is located 20 kilometers north of Agbaou and will be producing an average of 120,000 ounces gold per annum. La Mancha Resources continues to meet production forecasts at the Ity Gold Mine in western Côte d’Ivoire with 50,000 ounces being poured in 2008. In March 2008, gold production re-commenced at the Angovia Gold Mine where Cluff Mining anticipates average production of 40,000 ounces per annum. Randgold Resources continues with its development plans for the Tongon Gold Project in northern Cote d’Ivoire where it anticipates commencing mining operations in 2010 from an initial reserve base of 2.44 million ounces. In 2008, the Company incurred $1.6 million on its feasibility activities bringing the total investment in the Agbaou feasibility study to $2.2 million.

Finkolo Gold Project, Mali The Finkolo Gold Project is located on the Syama gold belt, approximately 300 kilometers southeast of Bamako, the capital city of Mali. The Finkolo permit is contiguous with Resolute Mining Limited's (Resolute) Syama permit, which hosts the Syama gold mine. Resolute holds a 60% interest in the Finkolo Gold Project and acts as operator and manager of the joint venture. Under the terms of the joint venture agreement Resolute finances all costs of the joint venture until completion of a feasibility study. The Company will reimburse Resolute for its share of joint venture costs from 50% of its share of future project cash flow. In 2007, Resolute completed an updated 43-101 compliant resource estimation for the Tabakoroni deposit on the Finkolo permit based on drilling to a vertical depth of approximately 120 meters from surface. At a 1.0 gram per tonne cutoff grade, Resolute reported 4.62 million tonnes of measured and indicated resource at 2.6 grams per tonne (382,000 ounces) and a further 4.54 million tonnes of inferred resource at 2.5 grams per tonne (364,000 ounces). Resolute is initiating a feasibility study that will determine the most effective means of exploiting the deposit. This would include a determination of the preferred treatment of the ore at either the existing Syama plant or whether sufficient reserves and potential exists to support a stand-alone operation. This will be carried out in conjunction with additional exploration both at depth and along strike.

Review of Exploration Projects Burkina Faso Exploration activities during 2008, were focused on the Bitou permits located on the Youga Gold Belt, 35 kilometers northeast of the Youga Gold Mine, in southern Burkina Faso. A reverse circulation drill program was completed to determine the resource potential of the Ouaré Main Zone, with a total of 7,118 meters drilled in 93 holes. Previous work on the Ouaré Main Zone, including trenching and reverse circulation drilling, had identified mineralization with resource potential over a strike length of 575 meters. Etruscan’s additional exploration work at Ouaré has expanded this potential strike length to over two kilometers and a resource estimation was reported in December 2008. Using a 1.0 gram per tonne cutoff grade, the deposit contains 4.45 million tonnes of inferred resource at 2.2 grams per tonne (315,000 ounces). Additionally, several new gold targets on the Bitou permits were confirmed in saprolite with single sample auger drilling and ground geophysical surveys were initiated to assist in tracking the mineralized zones. During the fourth quarter the Company invested $0.4 million in exploration activities in Burkina Faso. A total of $3.4 million was expended during 2008 bringing the total investment to $5.7 million.




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Côte d’Ivoire Exploration in Côte d’Ivoire over the past years has been limited to the Agbaou permit where potential satellite deposits have been identified in proximity to the main resource area. Etruscan has recognized the potential of Côte d’Ivoire to host multi-million ounce deposits by virtue of its prospective geology and relative lack of systematic exploration. To this end, the Company made a number of applications for additional permits in strategic parts of the country covering some 9,000 square kilometers. The applications are at various stages of processing and several have recently been granted in southeastern and eastern Côte d’Ivoire. During much of 2008, field teams carried out regional reconnaissance soil surveys over three of these large permits, collecting over 12,000 samples for analysis. Geologists have also confirmed orpailleurs activity (gold diggers) at a number of sites within the permit boundaries. Preliminary results indicate there are several high priority targets that will require further investigation. During 2008, the Company invested $1.8 million in exploration activities in Cote d’Ivoire bringing the total investment to $9.8 million. Mali Over the past five years, Etruscan has assembled a strategic portfolio of properties on several gold belts in Mali, including the Finkolo Gold Project and the Keniebandi Gold Project. The Company’s most advanced exploration project in Mali is the Finkolo permit, located in Mali South which hosts the Tabakoroni deposit. While Tabakoroni moves on to feasibility, the remainder of the Finkolo permit remains relatively unexplored with virtually no drilling. Following from the success of carefully targeted wide spaced air core drilling traverses in identifying mineralization near Syama, a similar program is being designed by Resolute to test the 15 kilometers of strike north of Tabakoroni towards Syama. The program is expected to comprise some 200 drill holes and will test a number of prospective structural targets identified from the recent electro-magnetic survey as well as priority geochemical targets. A helicopter-borne electromagnetic survey, using the VTEM system, was completed over the entire joint venture tenure as well as certain areas held by Etruscan outside of the joint venture on the Syama gold belt. These results are being processed and interpreted. It is already evident that the airborne geophysical survey has enhanced the Company’s understanding of the Syama gold belt and where the favourable package crosses the N'Gokoli permit (part of the joint venture) and the Pitiangoma permit (not part of the joint venture) to the south of Finkolo. Additional targets are being assessed from this airborne survey. During 2008, a major VTEM airborne geophysical survey was also conducted over much of the Company’s land holdings in Mali West including the Diba, Keniebandi and Djelimangara permits. The purpose of the survey was to provide a better geological and structural understanding of the area as it relates to known gold mineralization. The survey has identified possible intrusive complexes related to gold mineralization at both Diba and Keniebandi that will be drill tested, and provided better delineation of the Mali West Shear Zone and associated features. The priority target for the Company in Mali West is the Keniebandi auger anomaly where gold has been detected in saprolite over what appear to be two separate bodies, each having strike lengths of 1-1.5 kilometers with values up to 1.5 g/t gold.

During the fourth quarter the Company invested $0.4 million in exploration activities in Mali for a total of $4 million during 2008. At the end of the year, during its review of its mineral properties, the Company wrote-off its expenditures on six properties in Mali South and ten properties in Mali West for a total write-off of $1.6 million bringing the total remaining investment in Mali to $13.6 million. Ghana Etruscan continues to explore Ghana through a number of option and joint-venture agreements. The most promising results to date reported from geochemical surveys in southwestern Ghana which have identified several kilometer scale gold anomalies in the Kumasi Sedimentary Basin along a trend that parallels the prolific Ashanti Volcanic Belt, within 20 kilometers of the 60 million ounce Obausi Mine. Regional stream sediment surveys were carried out over the 79 square kilometer Dominase Reconnaissance Licence and the 204 square kilometer Kente Reconnaissance Licence followed by wide spaced soil sampling on a 400 x 50 meter grid over Dominase. Several anomalous stream sediment sample results, in excess of 0.5 grams per tonne gold, to a maximum of 1.4 grams per tonne gold were reported over both permits. Semi-regional soil samples have been collected on Dominase which have confirmed widespread gold anomalies with several samples in the 0.5 – 5.0 grams per tonne range. Follow up soil sampling over the anomalies at nominal 200 x 50 meter spacing is proceeding on Dominase, and semi-regional soil sampling on Kente is in progress. These initial geochemical results are considered to be encouraging and point towards the emergence of a new gold belt. These permits are being converted into prospecting licences and will be the focus of exploration activities in Ghana in the upcoming year. During the fourth quarter, the Company invested $0.4 million in exploration activities in Ghana. A total of $2 million was expended during 2008 bringing the total investment to $5.5 million. Namibia In Namibia, Southern Africa, Etruscan currently holds interests in 22 prospecting licenses covering over 17,000 square kilometers. Etruscan has undertaken initial reconnaissance surveys to identify early stage target areas for follow-up exploration programs. Geological mapping and prospecting have outlined a large number of rare earth element (REEs) enriched carbonatite dykes associated with an alkaline intrusive complex on its Lofdal permit in northern Namibia. Analytical results from outcrop samples and six drill holes indicate that both light rare earth elements and heavy rare earth elements occur at Lofdal in sufficient total concentrations (0.5% to 6.0%) to be of potential economic significance. REEs constitute a group of 16 elements and industry standards are to report rare earth deposit grades as the sum of the total concentration of all rare earth elements present plus yttrium which is typically an important accessory (TREE+Y). REEs are essential for a number of wide-ranging applications including many high-tech applications from long-lasting rechargeable batteries to new light emitting diodes. During the fourth quarter, the Company invested $0.7 million in exploration activities in Namibia. A total of $2.7 million was expended during 2008 bringing the total investment to $4.7 million.




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Review of Blue Gum Diamond Project During the first quarter of 2008, the Company’s 52% owned subsidiary, Etruscan Diamonds Limited, recommenced mining and processing operations at the Tirisano Diamond Mine located on the Blue Gum property in the alluvial diamond district of Ventersdorp in South Africa. The gravel from the mine was being processed at the Tirisano DMS (dense media separation) plant and through four 16 foot pans installed near the DMS plant. The objective was to achieve a monthly throughput of 100,000 cubic meters of gravel per month from the two facilities with 40,000 cubic meters coming from the DMS plant and 60,000 cubic meters from the pan plant. Etruscan Diamonds continued to make progress ramping up processing operations at the Blue Gum Diamond Project during the second and third quarters of 2008. However, the ramp up was negatively impacted by the global economic crisis which resulted in a substantial reduction in both the demand for rough diamonds and the rough diamond price. In an effort to reduce costs, during the month of November, Etruscan Diamonds scaled back staff and operations at Blue Gum to process 60,000 cubic meters per month through the pan plants only and suspended processing at the DMS plant. Due to uncertainty in the timing of the recovery of the price and demand for rough diamonds, subsequent to November 30, 2008, Etruscan Diamonds reduced the work force at the Blue Gum Project to a skeleton staff to allow the Project to be placed on care and maintenance. The Blue Gum Project remains on care and maintenance. Production for the year ended November 30, 2008 was approximately 483,000 cubic meters yielding 12,600 carats for an overall grade of 2.61 carats per hundred cubic meters and a rough tender average value of US$512 per carat. Production at the Blue Gum Project for the three month period ending November 30, 2008 was approximately 156,000 cubic meters yielding 4,250 carats for an overall grade of 2.7 carats per hundred cubic meters and a rough tender average value of US$381 per carat. All costs associated with the Blue Gum operation, net of diamond revenues realized, have been capitalized given commercial production has not yet been achieved. The amount capitalized in 2008 was $13 million bringing the total net investment in the Blue Gum Project to $31.6 million. Company management believes that the geological foundation of the Blue Gum Project remains strong. During 2008, Etruscan Diamonds received a National Instrument 43-101 compliant independent resource update on the Blue Gum Project. The independent resource update prepared by Dr. Tania Marshall of Explorations Unlimited as of June 30, 2008 estimated that the Blue Gum Project contains 25.5 million cubic meters of indicated diamond resource and 15.3 million cubic meters of inferred diamond resources at grades ranging from 1.77 to 2.85 carats per hundred cubic meters of gravel. This represents almost a 24% increase in the indicated resource from the previous resource calculation in January 2008.

The Blue Gum Diamond Project is operated through Blue Gum Diamonds (Pty) Limited, which is owned 74% by Etruscan Diamonds (Pty) Limited and 26% by Mogopa Blue Gum (Pty) Limited (Mogopa). The Company holds a 52% interest in Etruscan Diamonds. Mogopa is Etruscan Diamond’s Black Economic Empowerment (BEE) partner for the project as required by South African mineral legislation.

Social Report Consistent with its corporate philosophy, Etruscan funded various social initiatives in both West and South Africa during 2008. In Burkina Faso, the Company supplied 80 school desks and playground equipment, to the Youga School. The Company administered the logistics related to the delivery of a full container of medical, school and household supplies to Youga valued at approximately $300,000, which was donated by the Rotary Club of Dartmouth, Nova Scotia. In Ouagadougou, the Company arranged for the shipment of donated antibiotics and food to an orphanage and donated $10,000 to an association for mentally handicapped children. In Niger, the Company constructed, with contributions from the Rotary Club of Wolfville, Nova Scotia, two new classrooms and sanitary facilities at the Bossey Bangou School. The Company administered the logistics related to supplying the Bossey Bangou School with 50 new desks, which were donated by the Rotary Clubs of Wolfville and Dartmouth. The Company also donated money to an orphanage in Niamey. The Company continues to support medical clinics at Youga (Burkina Faso), Touré (Niger), Bamako (Mali) and Ventersdorp (South Africa) with the regular shipment of medical supplies. In the village of Agbaou (Côte d’lvoire), the Company has donated a manioc (vegetable) grinder to support small businesses. It also funded a number of education and upliftment projects related to the betterment of its South African employees.




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Consolidated Results of Operations

Comparative results

Commercial production for the Youga Gold Mine was achieved on July 1, 2008. Accordingly, there is no comparative information for gold revenues and expenses. The fourth quarter includes three months of gold revenues and expenses while the third quarter results include only two months.

Consolidated Statement of Operations - for the years ended November 30, 2008

($) 2007

($) 2006

($) Gold revenue 24,844,233 - - Royalty expense 663,037 - - 24,181,196 - - Expenses Mining operations 14,995,682 - - Mine amortization 5,448,496 - - Mine administration 4,363,719 - - (626,701) - - Other expenses (income) General and administrative 6,542,262 5,942,660 4,946,052 Financing costs 2,939,140 - - Foreign exchange (gain) loss 10,297,364 (2,448,222) (223,111) Wage and benefits – stock

based compensation 1,453,400 2,259,500 1,900,000 Other income (661,872) (2,271,550) (1,135,223) Write-down of mineral

properties 3,203,847 545,099 231,952 23,774,141 4,027,487 (5,719,670) Loss (24,400,842) (4,027,487) (5,719,670) Loss on financial derivative

instrument (368,107) (34,129,721) - Write-down of Blue Gum

Diamond operations (31,551,079) - - Non-controlling interest in loss and write-down of

diamond operations and net gain on restructuring 13,619,191 2,325,615 (247,458)

Loss from equity investment in African GeoMin - - (4,504,643)

Net loss (42,700,837) (35,831,593) (10,471,771) Basic and diluted net loss per

share (0.34) (0.33) (0.12) Total assets 173,719,773 179,813,508 86,068,445 Total long-term debt 48,623,693 32,323,179 541,631

Consolidated net loss

Etruscan’s consolidated net loss for the fourth quarter was $22.2 million or $0.17 per share compared to a net loss of $19.1 million or $0.17 for the fourth quarter 2007. The fourth quarter 2008 loss includes the net loss and write-down of the diamond operations of $17.9 million or $0.14 per share. The fourth quarter 2007 loss includes a loss on the financial derivative instrument of $20.1 million or $0.18 per share.

Etruscan’s consolidated net loss for the year ended November 30, 2008 was $42.7 million or $0.34 per share compared to a net loss of $35.8 million or $0.33 per share in 2007 and a net loss of $10.5 million or $0.12 per share in 2006. In 2008, the loss includes the net loss and write-down of the diamond operations of $17.9 million or $0.14 per share. In 2007, the loss includes a loss on the financial derivative of $34.1 million or $0.32 per share. In 2006, the loss includes loss from the equity investments in African GeoMin of $4.5 million or $0.05 per share.

Cashflow from operations

The Youga Gold Mine generated cashflow from operations of $4.1 million for the fourth quarter of 2008 and cash flow of $2.2 million for the five month commercial production period.

Youga Gold Mine revenues

The Company’s gold revenues for the last five months of 2008 were $24.8 million or US$833 per ounce of gold sold. The non-cash revenue adjustment related to the financial derivative for this period aggregated $2.6 million (US$87 per ounce) for net cash revenue received of $22.3 million (US$746 per ounce).

Youga Gold Mine expenses

Mine operations expenses aggregated $15 million and mine administration expenses aggregated $4.4 million for the last five months of 2008. Cash operating costs for this period after giving effect to an inventory adjustment for a reduction of $3 million were US$598 per ounce of gold produced. Amortization expenses for the five month period aggregated $5.4 million.

General and administrative expenses

General and administrative expenses increased to $6.5 million in 2008 from $5.9 million in 2007 and $4.9 million in 2006. These increases are attributed to the increased level of activities. Financing costs related to the Youga Gold Mine aggregated $2.5 million for the five months of commercial production with an additional $0.4 million prior to the commencement of commercial production.

Other expenses and income

The Company incurred a foreign currency loss of $10.3 million in 2008 compared to gains of $2.4 million in 2007 and $0.2 million in 2006. The current year loss is directly attributable to the significant weakening of the Canadian dollar against the US dollar during the last six months of 2008. The exchange rate at the end of May was 0.99, 1.06 at the end of the August and 1.24 at the end of 2008. The largest component of the foreign currency loss relates to the long term debt associated with the Youga Project which is denominated in US dollars. In the last six months of 2008 the Company incurred a foreign currency loss of $8.9 million on the Youga debt. In the prior year the Company had recorded a gain of $3.8 million on the Youga debt. The Company has issued approximately 1.6 million stock options in each of the last three years. As a result of applying the Black-Scholes option-pricing model, the Company has recorded stock-based compensation expense of $1.5 million in 2008 as compared to $2.3 million in 2007 and $1.9 million in 2006. In 2008, the Company also recorded additional stock based compensation of $0.4 million (2007 - $0.7 million) of which $0.2 million (2007 - $0.5 million) was charged to mineral properties, $0.2 million (2007 - $0.2 million) was charged to the cost of the Youga Gold Project.




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The Company has earned interest revenue of $0.6 million in 2008. In 2007, the Company recorded gains on the sale of investments of $1.7 million and earned interest revenue of $0.6 million. In 2006, the Company recorded gains on the sale of investments of $0.4 million and earned interest revenue of $0.7 million. In 2008, during its yearend reviews of its mineral properties, the Company wrote-down its expenditures on most of its diamond exploration properties resulting in a write-down of $1.1 million. The Company also wrote-down its expenditures on its Mali exploration properties by $1.6 million which includes six properties in Mali South and ten properties in Mali West. In 2008 the Company commenced exploration activities in Benin, however, by the end of the year there were no significant results and the Company elected to close its Benin operations and has written-down its mineral property expenditure by $0.4 million. In 2007, the Company wrote off its expenditures on six diamond properties in South Africa for a total write-off of $0.5 million. In 2006, the Company wrote off its expenditures on five properties in Mali South and one property in Mali West for a total write-off of $0.2 million.

Financial Derivative Instrument

In early 2007, the Company entered into gold options contracts (bought put options and sold call options) solely for purposes of mitigating the risks associated with downward movements in the gold price, and to participate in higher market prices. The Company does not hold these options for trading purposes. It was a condition of the Youga debt financing that the downside risk be mitigated. The Company, in consultation with independent consultants, has determined that the Youga gold hedge constitutes an effective economic hedge that meets the designated objectives of providing 100% downside price protection for the Company’s first gold mining operation while also providing upside participation in higher gold prices. The Company considers future gold prices (i.e. the potential for significantly lower gold prices over the period of operations) to be the single largest risk factor associated with the successful operation of the Youga Gold Project. Accordingly, the Youga gold hedge with its 100% downside price protection feature effectively mitigates this primary risk factor.

Recent accounting pronouncements require non-hedging financial derivative instruments, those which do not qualify for hedge accounting, to be recorded at fair value (marked to market) at the balance sheet date and the resulting gains or losses are to be included in earnings for the period. While the Youga gold hedge constitutes an effective economic hedge for the Youga Gold Project, the hedge structure does not meet the requirements for hedge accounting under Canadian GAAP. The unrealized marked to market loss represents the theoretical value on cancellation of the gold option contracts based on market values as at November 30, 2008. As such it does not represent an estimate of future gains or losses nor does it represent an economic obligation for the Company as long as it is expected to meet its gold delivery obligations as these obligations are due.

The composition of the loss on the financial derivative for the years ended November 30th is summarized as follows:

2008

$

2007

$

Cash settled 3,670,039 629,721

Gold sale 3,898,068 -

Change in unrealized loss (7,200,000) 33,500,000

368,107 34,129,721

The monthly delivery obligations under the call option contracts commenced at the end of September 2007. In 2007 the Company settled for cash, delivery obligations aggregating 10,554 ounces at a net cost of $630,000. In the first eight months of fiscal 2008, the Company settled for cash, additional delivery obligations aggregating 19,702 ounces at a net cost of $3.7 million.

In the eight months ended November 30, 2008, the Company also delivered into the hedge obligation a total of 25,628 ounces from production. As a result of the accounting treatment for the financial derivative, gold revenue is recorded at the spot gold price on the date of sale and the difference between the spot gold price and the cash price received is recorded as a realized loss on the financial derivative. The loss realized aggregated $3.9 million.

The Company has recorded a net unrealized gain of $7.2 million ($0.06 per share) in fiscal 2008 and recorded the related decrease in the financial derivative liability on the balance sheet to $26.3 million. The marked to market valuation of the Youga gold financial derivative liability is summarized as follows:

Spot price of

Gold (US$)

Youga Gold

Financial

Derivative Liability

C$ 000’s

Balance - November 30, 2007 797 33,500

Change in the three months ended

February 29, 2008 974 34,200

May 31, 2008 886 (19,300)

August 31, 2008 833 (12,100)

November 30, 2008 815 (10,000)

Change in the year ended

November 30, 2008 (7,200)

Balance – November 30, 2008 815 26,300

The marked to market valuation of the Youga gold financial derivative, as at January 31, 2009 with a spot gold price of US$918 per ounce, is a liability of $50 million.

The following table details the remaining options contracts as at November 30, 2008:

Year

Bought Put Options

(number of ounces)

Price per

ounce US$

Sold Call Options

(number of ounces)

Price per

ounce US$

2009 109,512 629 59,142 700 2010 93,846 629 50,682 700 2011 90,276 629 48,750 700 2012 58,974 629 31,848 700

352,608 629 190,422 700

The fixed monthly ratio of call options to put options is 0.54 to 1 with the put option volumes matched to the production schedule in the October 2006 Youga Feasibility Study Update. The Company is in discussions with its hedge providers to amend the monthly option volumes to match the updated production schedule.




8

Blue Gum Diamond Operations At the end of 2008, the Company placed the Blue Gum Diamond Project on care and maintenance due to operating losses associated with reduced demand for rough diamonds and decreased diamond prices. The Company recorded a write-down of its deferred development costs of $31.6 million based on the amount by which the carrying value exceeded the discounted value of the expected future cash flows. This amount includes the accumulated deferred development costs $27.6 million, as well as, an amount of $3.4 million recorded for the

obligation under the completion guarantee to the IDC for the performance of the Mogopa under its preference share subscription agreement. As a result, the Company has also eliminated the balance of $13.1 million as the non-controlling interests’ share of the loss and write down of the diamond operations. Earlier in 2008 the Company had also recorded a dilution gain of $0.5 million on its $2 million rights offering in Etruscan Diamonds Limited. In 2007, the Company recorded a net gain on the restructuring and financing of Etruscan Diamonds Limited of $1.5 million and the non-controlling interests’ share of the loss was $0.8 million.

Consolidated Statement of Operations – for the quarters ended

Nov 30, 2008

($)

Aug 31, 2008

($)

May 31, 2008

($)

Feb 29, 2008

($)

Nov 30, 2007 ($)

Aug 31, 2007

($)

May 31, 2007 ($)

Feb 28, 2007

($)

Gold revenue 17,559,548 7,284,685 - - - - - - Royalty expense 483,101 179,936 - - - - - - 17,076,447 7,104,749 - - - - - - Expenses Mining operations 8,988,337 6,007,345 - - - - - - Mine amortization 3,933,069 1,515,427 - - - - - - Mine administration 2,737,926 1,625,793 - - - - - -

1,417,115 (2,043,816) - - - - - - Other expenses (income) General and administrative expenses 1,462,176 1,568,883 1,933,755 1,576,953 1,532,751 1,698,557 1,751,631 1,218,533 Financing costs 1,580,564 954,571 404,500 - - - - -

Foreign currency (gain) loss 7,140,227 3,150,387 730,889 (724,139) (1,474,011) (411,546) (937,149) 115,672

Stock based compensation (104,500) 15,900 1,485,600 56,400 2,000 42,500 2,215,000 - Other income (90,563) (64,799) (170,700) (335,810) (922,644) (103,482) (1,174,162) (31,262) Write-off of mineral property 3,203,847 - - - 91,297 453,802 - -

Income (loss) for the quarter (11,774,636) (7,668,758) (4,384,044) (573,404) 770,607 (1,679,831) (1,855,320) (1,302,943)

Gain (loss) on financial derivative

instrument 8,736,447 9,037,844 18,056,191 (36,198,589) (20,129,721) 500,000 1,000,000 (15,500,000) Write-down of Blue Gum Diamond

Project (31,551,079) - - - - - - - Non-controlling interest in loss and write-down of Blue Gum Diamond Project and net gain on restructuring of diamond operations 12,401,016 700,697 237,165 280,313 307,147 366,466 1,692,002 -

Net income (loss) (22,188,252) 2,069,783 13,909,312 (36,491,680) (19,051,967) (813,365) 836,682 (16,802,943)

Net income (loss) per share (0.17) 0.02 0.11 (0.30) (0.17) (0.01) 0.01 (0.17)




9

Long-term Debt

Etruscan Resources Inc.

On December 24, 2008, the Company completed a US$5 million debt financing for working capital purposes by issuing senior unsecured convertible promissory notes (Notes) to Conus Partners Inc. and its affiliates (Lenders). The Notes are repayable on December 24, 2010 and bear interest at the rate of 7% per annum. If the Notes are not repaid, the Notes will be convertible, at the option of the holder, at any time after June 30, 2010, into common shares of Etruscan at a conversion price of $1.00 per common share.

Youga Gold Project

A US$35 million debt facility was provided to the Company by RMB Australia Holdings Limited and Macquarie Bank Limited for purposes of developing the Youga Gold Mine. In the second and third quarters of 2008, the Company repaid US$2 million and US$2.5 million respectively resulting in a balance owing of US$30.5 million at the end of 2008. The Youga debt facility is structured as a full recourse facility to the Company until certain economic and technical completion conditions are achieved when it becomes non-recourse to Etruscan and is secured by all of Etruscan’s interests in the Youga Gold Project. Standard project finance security provisions apply. Initial draw down under the facility was subject to the Company satisfying a number of conditions precedent including the implementation of a gold price protection program. The loan was originally repayable on a quarterly basis over a 4-year term with interest at LIBOR plus 3% pre-completion and LIBOR plus 2.5% post completion. In late 2008 the debt repayment schedule was restructured to reduce the required principal payments for the two remaining payments in 2008 and the four payments in 2009. The margins over LIBOR were increased to 5% pre-completion and 4.5% post completion as part of this restructuring. In the first quarter of 2008, the Company completed and drew down a subordinated project debt financing of US$7.5 million from RMB Australia Holdings Limited and Macquarie Bank Limited. The net proceeds were used to fund the completion of the Youga Gold Project. The subordinated loan is repayable in two equal quarterly instalments following the repayment of the senior debt facility and bears interest at LIBOR plus 3.5%. Under the terms of the subordinated debt facility, the Company also issued 1,452,222 financier warrants to the lenders. The exercise price of the warrants was originally $2.56 however the warrants were re-priced to $0.78 with the restructuring of the debt repayment schedule in the fourth quarter. The fair value of the initial issuance and the re-pricing of these warrants in the amounts of $1.8 million and $0.3 million respectively have been recorded as deferred financing costs.

Blue Gum Diamond Project

In the second quarter of 2008, the Company drew down a loan facility from the Industrial Development Corporation of South Africa (IDC) in the amount of R15 million bearing interest at South African prime (as at November 30, 2008 – 15.5%) plus 0.5%. This loan was repayable in quarterly instalments of R882,350 ($108,000) plus interest commencing on August 1, 2008. The first payment was made in August however, no further payments have been made and at the end of 2008 the balance owed was R14.1 million ($1.7 million). The IDC has not issued a notice of default. In February, 2009 the IDC agreed to defer all repayments of principal and interest on the loan until January 1, 2010. The loan is secured by a notarial bond over all of the moveable property and effects of Blue Gum Diamonds (Pty) Limited as well as a pledge of the Company’s shares of Blue Gum Diamonds (Pty) Limited.

The IDC has also agreed to loan Etruscan Diamonds a further R5.5 million (approximately $0.7 million). Advances under this loan are subject to certain conditions including the requirement for Etruscan Diamonds to raise an additional R10 million in equity financing and to convert R10 million of outstanding creditors’ accounts payable to equity. Etruscan is presently in discussions with its shareholders and creditors to meet these conditions. The loan proceeds together with the additional equity proceeds will be used by Etruscan Diamonds to pay its smaller creditors and fund the ongoing care and maintenance costs of the operation. The costs to maintain the Blue Gum Project on care and maintenance are estimated to be R650,000 (approximately $75,000) per month. On December 5, 2007, Etruscan Diamonds concluded an agreement with Mogopa Blue Gum (Pty) Ltd. (Mogopa) to transfer a 26% interest in the Tirisano Diamond Mine to Mogopa. Mogopa is the Black Economic Empowerment (BEE) partner for the mine as required by South African mineral legislation. Mogopa is also Etruscan Diamonds’ BEE partner on the Hartbeestlaagte and Zwartrand properties which, together with the Tirisano Diamond Mine, constitute Etruscan Diamonds’ Blue Gum Project.

On December 5, 2007, Mogopa completed a financing in the form of a preference share investment of R25.35 million from the Industrial Development Corporation of South Africa Limited (IDC) to finance the acquisition of a 26% interest in the Tirisano Diamond Mine for R26 million (Cdn$3.9 million). Mogopa and Etruscan Diamonds each contributed its share of these properties, 26% and 74% respectively, to Blue Gum Diamonds (Pty) Ltd. Mogopa’s 26% interest in Blue Gum Diamonds (Pty) Limited has been recorded as non-controlling interest and at the end of 2008, this amount has been reversed as the non-controlling interest’s share of the write-down in the Blue Gum Diamond Project.

Etruscan Resources Inc. provided a completion guarantee to the IDC guaranteeing the performance of Mogopa under the preference share subscription agreement, including redemption of the R25.35 million of preference shares on the fifth anniversary of the date of issue and payment of dividends yielding a real after tax interest rate of return of 8%, in accordance with the terms set out in preference share subscription agreement. The guarantee is only effective once the Youga Gold Project reaches project completion and remains in place until the Blue Gum Project achieves project completion as defined in the completion guarantee which includes arranging sufficient funding for the expansion of the Blue Gum Project to 250,000 cubic meters per month. As at November 30, 2008, the Company has recorded the obligation under this completion guarantee at its fair value in the amount of $3.4 million.

Long-term debt repayment

The aggregate amount of principal repayments required in each of the next five years, based on November 30, 2008 exchange and interest rates, to meet retirement provisions on long-term debt, is summarized as follows:

$000’s

Year ending November 30, 2009 16,400

2010 13,100

2011 13,800

2012 9,300

2013 10

The subsequent US$5 million debt financing which is repayable on December 24, 2010 is not reflected in the above table.




10

Liquidity and Capital Resources

Etruscan Resources Inc.

Etruscan has historically financed its acquisition, exploration and development of mineral properties and its ongoing operating costs with proceeds from equity subscriptions, debt financing, as well as funding arrangements with other companies. With the Youga Gold Mine now in commercial production the Company also has operating revenues from the sale of gold. During 2007 the Company completed a public offering of common shares for net proceeds of $32.8 million and also received an additional $13.1 million from the exercise of warrants and stock options. During 2008 the Company completed a public offering of common shares for net proceeds of $11.5 million and received $4.3 million from the exercise of warrants and stock options. The Company had a consolidated working capital deficiency at November 30, 2008 of $20.1 million as compared to a working capital surplus of $16.2 million at the end of 2007. Available cash at November 30, 2008 was $3.9 million with an additional $3.1 million held in the Youga debt service account. Given the current financial situation, the Company has significantly reduced its exploration budget for 2009 as compared to 2008 and has completed a detailed review of corporate general and administrative expenditures. The timing of recommencement and extent of drilling and other exploration activities for 2009 is dependent upon accessing sufficient funding. In December 2008 the Company raised US$5 million by issuing senior unsecured convertible notes to its largest shareholder, Conus Partners Inc. In February 2009 the Company negotiated a $10.5 million private placement financing, $5.8 of which closed on February 24, 2009 and the balance of which is expected to be closed in March 2009. The combination of the aforementioned funds together with forecast positive cash flow from the Youga Gold Mine, and potential amendments to the Youga debt facility is expected to address the near term funding requirements for Burkina Mining Company. The Company’s current exploration and general and administrative expenditures are approximately $900,000 per month. An additional funding requirement in the order of $10 to $15 million is estimated to be needed to address the balance of Etruscan’s forecast expenditures net of gold revenues for 2009. The expected sources of cash include debt and equity financing, as well as strategic joint venture and business combinations and the disposition of assets. Additionally, the Company will undertake a further review of its exploration and general and administrative expenditures with a view to reducing costs. The ongoing costs associated with the Company’s diamond subsidiary, Etruscan Diamonds Limited, are presently funded by that entity. Pursuant to the Youga debt facility agreement Etruscan Resources Inc. is precluded from funding the activities of Etruscan Diamonds Limited until the Youga Gold Mine reaches project completion as defined in the Youga debt facility agreement.

Etruscan Diamonds Limited

Etruscan Diamonds Limited is a 52% owned subsidiary of Etruscan Resources Inc. During 2007 Etruscan Diamonds Limited completed a private placement financing for net proceeds of $10.1 million. During 2008 Etruscan Diamonds Limited completed a rights offering for net proceeds of $2 million.

Etruscan Diamonds Limited had a consolidated working capital deficiency at November 30, 2008 of $5.6 million as compared to a working capital deficiency of $1 million at the end of 2007. Available cash as at November 30, 2008 was $0.1 million. The working capital deficiency and cash amounts are included in the Etruscan Resources Inc. consolidated working capital and cash figures presented. During the fourth quarter of 2008 the world wide credit crisis negatively impacted diamond prices. With buyers of rough diamonds not being able to finance their inventories, the industry experienced a rapid deterioration in the demand for and prices of rough diamonds. Diamond prices realized by the Company during the latter part of the fourth quarter were less than 50% of the prices realized during the first nine months of the year. As a result, most of the small to mid-sized diamond operators in South Africa have either suspended or significantly scaled back operations. Etruscan Diamonds placed the Blue Gum operation on care and maintenance in December. In February 2009 the Industrial Development Corporation of South Africa (IDC) agreed to defer all payments of principal and interest on its loan until January 1, 2010. In addition the IDC has agreed to loan Etruscan Diamonds a further R5.5 million ($0.7 million). Advances under this loan are subject to certain conditions including the requirement for Etruscan Diamonds to raise an additional R10 million ($1.3 million) in equity financing and to convert R10 million ($1.3 million) of accounts payable to equity. Etruscan is presently in discussions with its shareholders and creditors to meet these conditions. The loan proceeds together with the equity proceeds will be used by the Company to pay its smaller creditors and funding the ongoing care and maintenance costs for the Blue Gum Project. The costs to maintain the project on care and maintenance are estimated to be R600,000 ($75,000) per month. In the event Etruscan Diamonds is not successful in meeting the conditions to access the additional IDC financing, the Company intends to pursue other ways and means to preserve the Blue Gum Project which may include joint ventures or sale of assets. The ability of Etruscan Diamonds to continue as a going concern in the near term is dependent upon the Company raising the additional equity financing to allow it to draw down the IDC financing. In the longer term the ability of Etruscan Diamonds to continue as a going concern is dependent upon a recovery and stabilization of rough diamond prices.

Outstanding share data

As at February 27, 2009, the Company has 146,955,075 common shares outstanding (November 30, 2008 – 132,338,126). For financial statement presentation, the Company nets 488,000 common shares of the Company held by subsidiaries. These shares are held as portfolio investments; however, as required by generally accepted accounting principles, have been recorded as a reduction to capital stock in the financial statements. Since November 30, 2008 the Company has issued 14,616,949 common shares for $5.8 million being the first tranche in a $10.5 private placement equity financing comprised of a total of 26,315,789 common shares and 6,890,741 warrants. Each warrant will entitle the holder to acquire a common share at a price of Cdn$0.5478 until July 15, 2010. The warrants and the remaining common shares are expected to be issued in March 2009. The Company has also granted 10,430,531 common stock purchase warrants in association with the debt financing by way of promissory notes (Notes) with Conus Partners Inc. Each Warrant entitles the holder




11

to purchase one common share of Etruscan on or before December 24, 2013 at an exercise price of $0.2915 per common share. If the financing has not been repaid by December 24, 2009, the Lender will be entitled to a second tranche of warrants (B Warrants) equal to 50% of any principal and interest outstanding on the Notes at that time divided by the five day volume weighted average trading price (vwap) of the common shares of Etruscan on the TSX immediately prior to the first anniversary of the Notes (First Anniversary vwap). Each B Warrant will entitle the holder to purchase one common share of Etruscan for a period of five years at an exercise price equal to the First Anniversary vwap. In accordance with the requirements of the TSX, Etruscan has agreed that it will not issue greater than 2,852,081 B Warrants to the Lender without obtaining shareholder approval. As at February 27, 2009, the Company has 24,429,753 (November 30, 2008 – 13,999,222) common stock purchase warrants outstanding. Since the end of November, the Company has granted 4,185,000 stock options to directors and employees with an exercise price of $0.37. As at February 27, 2009, the Company has 12,414,500 (November 30, 2008 – 8,229,500) stock options outstanding at a weighted average price of $1.57 with exercise prices ranging from $0.26 to $4.45 and a weighted average remaining contractual life of 7 years. Subsequent to November 30, 2008, the Company agreed to further amend the pricing on the financier warrants (originally issued as partial consideration for the provision of the Youga subordinated debt) as consideration for the lenders agreeing to amend the debt repayment schedule. As a result 1,452,222 warrants, with an amended exercise price of $0.78, have been re-priced to $0.49.

Related Party Transactions The Company rents a fishing lodge, located in northern New Brunswick, for one week annually for business development purposes. An affiliate of Mr. Gerald McConnell, the President and CEO of Etruscan, owns a 20% interest in the fishing lodge. In 2008, the Company incurred business development rental expense of $38,800 (2007 - $36,800).

Internal Control over Financial Reporting

Management has designed, established and is maintaining a system of internal control over financial reporting to provide reasonable assurance that the financial information prepared by the Company for external purposes is reliable and has been recorded, processed and reported in an accurate and timely manner and in accordance with Canadian GAAP. The Company’s system of internal control is designed to address identified risks that threaten the reliability of its external financial reporting. However, due to the inherent limitations in any system of internal control, material misstatements may not be prevented or detected on a timely basis. As a result of the Company commencing commercial production at its Youga Gold Project, the Company has implemented additional controls and procedures surrounding these gold producing activities. Except for these changes, there were no other changes in the Company’s internal control over financial reporting during the past two fiscal years that materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Disclosure Controls and Procedures Disclosure controls and procedures have been designed by the Company to ensure that financial information disclosed by the Company in the MD&A, the consolidated financial statements and the related annual filings of the Company is properly recorded, processed, summarized and reported to its Officers and the Board of Directors. Management believes such controls and procedures are effective in providing reasonable assurance that material items requiring disclosure are identified and reported in a timely manner.

Recent Accounting Pronouncements Effective for interim and annual financial statements relating to years beginning on or after October 1, 2007, the Company adopted the following new CICA accounting standards regarding accounting changes, capital disclosures and financial instruments disclosures and presentation. These standards were adopted on a prospective basis without restatement of prior periods. For a summary of these new accounting standards and the resulting effects thereof, refer to note 4 in the consolidated financial statements. This note also summarizes future new accounting standards which may be applicable to the Company.

Critical Accounting Estimates The preparation of the Company’s financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported results. Estimates and assumptions are based on historical experience, guidelines and practices within the mining industry or other business and are reviewed by management on an ongoing basis. Actual results could differ from those based on such estimates and assumptions. Management considers the following accounting estimates and assumptions to be the most critical to understanding the Company’s financial statements and the uncertainties that could impact its financial condition, results of operations and cash flows.

Property, plant and equipment and mineral reserve estimates

The Company’s mineral reserves are its best estimate of product that can be economically and legally extracted from its mining property. The Company’s mineral reserve estimates are calculated by qualified persons in accordance with the definitions and guidelines adopted by the Canadian Institutes of Mining, Metallurgy and Petroleum. These estimates are developed after taking into account a range of factors including quantities, ore grades, production techniques and recovery rates, exchange rates, forecast commodity prices and production costs. The estimates are supported by geological studies and drilling samples to determine the quantity and grade of the ore body. Significant judgment is required to generate an estimate based on the geological data available.

The Company’s reserve estimates may have a great impact on the information contained in the Company’s financial statements. A large portion of the Company’s property, plant and equipment is amortized using the units of production method over the expected operation life of the mine based on estimated recoverable ounces of gold. Estimated recoverable ounces of gold includes proven and probable reserves and non-reserved material when sufficient objective evidence exists that the non-reserve material will be processed.




12

The calculation of the units-of-production rate of amortization and, accordingly, the annual amortization charge to operations, could be materially affected to the extent that actual production in the future is different from current forecasts of production based on estimated mineral reserves. These factors could include an expansion of estimated mineral reserves through exploration activities, differences between estimated and actual cash costs of mining, due to differences in grade, metal recovery rates and changes to foreign currency exchange and commodity prices from the assumptions used in the estimation of mineral reserves. The accounting estimates related to amortization are critical accounting estimates and are influenced by the Company’s estimates of mineral reserves. Amortization charges are adjusted prospectively based on annual year-end assessments of Company’s mineral reserves.

Mineral properties and related deferred costs

Exploration and development costs relating to mineral properties are deferred until the properties are brought into commercial production, at which time they are amortized on the unit of production basis, or until the properties are abandoned or sold or management determines that the mineral property is not economically viable, at which time the deferred costs are written off. The Company has maintained title to certain properties that have been written off. Any proceeds relating to these properties will be recorded in income as received. Management’s estimate of mineral prices, recoverable proven and probable reserves and operating and capital costs are subject to certain risks and uncertainties that may affect the recoverability of mineral properties and related deferred costs. Although management has made its best estimate of these factors, it is possible that material changes could occur which may adversely affect management’s estimate of the net cash flows to be generated from its properties. Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the industry standards for the current stage of exploration and development of such properties, these procedures do not guarantee the Company’s title. Such properties may be subject to prior undetected agreements or transfers and title may be affected by such defects.

Asset retirement obligation and reclamation

Mining operations involve activities that have a significant effect on the area surrounding such operations. The Company’s operations, development and exploration activities are also subject to various laws and regulations governing the protection of the environment. Potential changes in the laws and regulations could have an adverse effect on the actual environmental and reclamation costs that the Company could incur in the future. The Company has estimated its ultimate legal obligation with respect to reclamation and closure costs. Provisions are made for the costs of decommissioning and site rehabilitation when the related environmental disturbance takes place. To calculate the fair value of these obligations, the Company discounted the projected cash flows for the corresponding time periods over which these costs would be incurred. Provisions are recognized at the net present value of future expected costs which are accreted to full value over time through charges to income. The inflation rates and discount rates the Company used to calculate the fair value of the Company’s asset retirement obligations are critical factors in the calculation of future value and discounted present value costs.

The accounting estimates related to reclamation and closure costs are critical accounting estimates. The Company will not incur most of these costs for a number of years, requiring it to make estimates over a relatively long period. Reclamation and closure laws and regulations could change in the future or circumstances affecting the Company’s operations could change, either of which could result in significant changes to its current plans and future costs. Calculating the fair value of the Company’s asset retirement obligations requires management to assign probabilities to projected cash flows, to make long-term assumptions about inflation rates, to determine its long-term credit-adjusted, risk-free interest rates and to determine market risk premiums that are appropriate for its operations over long periods of time. Given the magnitude of its estimated reclamation and closure costs, changes in any or all of these estimates could have a material impact on the Company’s financial condition and results of operations.

The provision recognized represents management’s best estimate of the costs that will be incurred, but significant judgment is required as many of these will not crystallize until the end of the life of the mine. Estimates are reviewed annually and are based on current regulatory requirements and the estimated useful life of mines. Engineering and feasibility studies are undertaken periodically; however significant changes in the estimates of contamination, restoration standards and techniques will result in changes to provisions from period to period. The final cost of currently recognized rehabilitation provisions may be higher or lower than currently provided for based on the range of engineering estimates evaluated by management.

Risk and Uncertainties Under Canadian reporting requirements, management of the Company is required to identify and comment on significant risks and uncertainties associated with its business activities. Management has identified the following potentially significant inherent risks and uncertainties that it considers to be particularly unique to its operations and business plans in the upcoming years.

Additional Funding Requirements

To fund its growth, to date the Company has been reliant upon securing the necessary capital through bank financing, and public and private offerings of equity and debt. The Company may require additional funds to finance further exploration, development and production activities as well as other corporate opportunities. The sources of external financing that the Company may use for these purposes include project or bank financing, or public or private offerings of equity or debt. In addition, the Company may enter into strategic alliances or decide to sell certain property interests and the Company may utilize any one or more of these alternatives. The ability of the Company to arrange such transactions in the future will depend in part upon obtaining the required consents from its lenders, prevailing capital market conditions, as well as the business success of the Company. Recent market events and conditions, including disruptions in the Canadian, U.S. and international credit markets and other financial systems and the deterioration of the Canadian, U.S. and global economic conditions, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on the Company’s ability to fund its working capital and other capital requirements. In 2007 and into 2008, the U.S. credit markets began to experience serious disruption due to a deterioration in residential property values, defaults and delinquencies in the residential mortgage market (particularly, sub-prime and non-prime mortgages)




13

and a decline in the credit quality of mortgage-backed securities. These problems led to a slow-down in residential housing market transactions, declining house prices, delinquencies in non-mortgage consumer credit and a general decline in consumer confidence. These conditions continued and worsened in 2008 and early 2009, causing a loss of confidence in the broader U.S. and global credit and financial markets and resulting in the collapse of, and government intervention in, major banks and other financial institutions and insurers and creating a climate of greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding various actions by the U.S. and other governments, concerns about the general condition of the capital markets, financial instruments, banks, investment banks, insurers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to decline substantially. In addition, general economic indicators, including employment levels, announced corporate earnings, economic growth and consumer confidence have deteriorated. These unprecedented disruptions in the current credit and financial markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies, particularly resource companies such as the Company. These disruptions could, among other things, make it more difficult for the Company to obtain, or increase its cost of obtaining, capital and financing for its operations. The Company’s access to additional capital may not be available on terms acceptable to the Company or at all. In recent months, worldwide securities markets, particularly those in the United States and Canada, have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly those considered exploration or development stage companies, have experienced unprecedented declines in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. Most significantly, the share prices of junior natural resource companies have experienced an unprecedented decline in price and there has been a significant decline in the number of buyers willing to purchase such securities. In addition, significantly higher redemptions by holders of mutual funds has forced many of such funds (including those holding the Company’s securities) to sell such securities at any price. As a consequence, despite the Company’s past success in securing significant equity financing, market forces may render it difficult or impossible for the Company to secure investors to purchase new share issues at a price which will not lead to severe dilution to existing shareholders. Therefore, there can be no assurance that significant fluctuations in the trading price of the Company’s common shares will not occur, or that such fluctuations will not materially adversely impact the Company’s ability to raise equity funding without significant dilution to its existing shareholders, or at all.

Exploration and Development

The exploration and development of gold and diamond deposits involves significant risks, which even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of a mineable deposit may result in substantial rewards, few properties which are explored are ultimately developed into producing mines. Major expenses may be required to establish ore reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site. It is impossible to ensure that the current exploration programs planned by the Company will result in a profitable commercial mining operation, and significant capital investment is required to achieve commercial production from successful exploration efforts. There is no certainty that exploration

expenditures made by the Company will result in discoveries of commercial mineable quantities.

Mineral Reserve and Mineral Resource Estimates

Mineral reserve and mineral resource estimates are imprecise and depend partially on statistical inference drawn from drilling and other data, which may prove to be unreliable. Future production could differ dramatically from mineral reserve estimates. With respect to diamonds, the random distribution of alluvial diamonds within the diamondiferous gravel deposits, by its very nature, is a risk. One of the greatest challenges facing any alluvial mining operation is to establish the grade of the resource. Because of the large volumes of gravel involved, it is not possible to accomplish this by traditional drilling and sampling methods. While the volume of gravel can be readily determined by drilling, the diamond grade cannot be readily determined.

Production

No assurance can be given that the intended or expected production schedules or the estimated direct operating cash costs will be achieved at the Company’s mining operations. The Company’s level of production is dependent on a number of factors including the grade of reserves, recovery and plant throughput. The cash cost of production at any particular mining location is frequently subject to great variation from one year to the next due to a number of factors such as changing waste to ore ratios, ore grade, metallurgy, labour costs, and the cost of supplies and services, such as electricity and fuel. Many factors may cause delays or cost increases including labour issues, disruptions in power and mechanical failures. These variances can have a negative impact on the profitability of operations.

Depletion of Mineral Reserves

The Company must continually replace mining reserves depleted by production to maintain production levels over the long term. There is no assurance that the Company’s current or future exploration programs will result in any new commercial mining operations or yield new reserves to replace or expand current reserves.

Outside Contractor Risks

The drill blast and mining operations at the Company’s Youga Gold Project are conducted by outside contractors. As a result, the Company’s operations at Youga are subject to a number of risks including reduced control over the aspects of the operations that are the responsibility of the contractor, failure of a contractor to perform under its agreement with the Company, inability to replace the contractor if either party terminates the contract, interruption of operations in the event the contractor ceases operations due to insolvency or other unforeseen events, failure of the contractor to comply with applicable legal and regulatory requirements and failure of the contractor to properly manage its workforce resulting in labor unrest or other employment issues.

Environmental Risks and other Hazards

All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which the Company operates. Environmental legislation in many countries is evolving and the trend has been toward stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and increasing responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital




14

outlays on behalf of the Company and may cause material changes or delays in the Company’s intended activities. There can be no assurance that future changes in environmental regulations will not adversely affect the Company’s business, and it is possible that future changes in these laws or regulations could have a significant adverse impact on some portion of the Company’s business, causing the Company to re-evaluate those activities at that time. Mining involves various other types of risks and hazards, including: industrial accidents; metallurgical and other processing problems; unusual or unexpected rock formations; structural cave-ins or slides; flooding; fires; metals losses; and periodic interruptions due to inclement or hazardous weather conditions. These risks could result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury, delays in mining, increased production costs, monetary losses and possible legal liability. The Company uses sodium cyanide in its gold production at the Youga Gold Mine. Should sodium cyanide leak or otherwise be discharged from the containment system, the Company may be subject to liability for clean up work. The Company carries insurance to protect against certain risks in such amounts as it considers adequate. Risks not insured include environmental pollution and mine flooding. Therefore, the Company may suffer a material adverse impact on its business if it incurs losses related to any significant events that are not covered by its insurance policies.

Reclamation

With regard to the Youga Gold Mine, recent legislation has been adopted that provides that mining companies exploiting a mine in Burkina Faso must establish an environmental preservation and rehabilitation fund trust account (EPRF) and make annual contributions equal to the total forecasted rehabilitation budget as stated in the project’s environmental impact assessment divided by the number of years forming the mine life. The Company is in the process of establishing an EPRF account for the Youga Project. With regard to the Blue Gum Diamond Project, Etruscan Diamonds has provided reclamation bonding to the Department of Mines and Energy in South Africa in accordance with legislative requirements. There is no assurance that any funds or bonding provided will be sufficient to complete required reclamation work or that the Company will not be required to fund additional costs related to reclamation that could have a material adverse effect on the Company’s financial position.

Political Risks

The Company believes that the governments of the countries in which it is presently operating support the development of their natural resources by foreign companies. There is no assurance however that future political and economic conditions in the countries in which the Company has properties will not result in their governments adopting different policies respecting foreign ownership of mineral resources, taxation, rates of exchange, environmental protection, labour relations, repatriation of income or return of capital, restrictions on production, price controls, export controls, expropriation of property, foreign investment, maintenance of claims and mine safety. The possibility that a future government in any of these countries may adopt substantially different policies, which might extend to the expropriation of assets, cannot be ruled out.

The Company’s Agbaou gold exploration permit is located in Côte d’Ivoire, which is currently experiencing a period of political unrest. Company management continues to believe that the current political situation in Côte d’Ivoire does not have a significant impact on the long-term recoverability of its investments in the Agbaou property; however, in the event the current political unrest should continue or worsen, it may have a negative effect on the recoverability of this investment. The political situation in South Africa introduces a certain degree of risk with respect to the Company’s activities. The Government of South Africa exercises control over such matters as exploration and mining licensing, permitting, exporting and taxation, which may adversely impact on the Company’s ability to carry out exploration, development and mining activities.

Mineral Legislation

The Company’s most significant operations are carried on in Burkina Faso and South Africa. The legislative regimes of certain of these countries have undergone significant change in recent years. Most notable is the enactment in South Africa of the Mineral and Petroleum Resources Development Act No. 28 of 2002 (Act) on May 1, 2004. The Act legislates the abolition of private mineral rights in South Africa and replaces them with a system of state licensing. Holders of old order rights are required to apply for conversion of their old order rights into new order rights under the Act and all applications for new mineral rights must be made in accordance with the Act. The Company has successfully converted its old order rights into new order rights. Following a further draft in 2008, the Mineral and Petroleum Resources Royalty Act was adopted and comes into force on May 1, 2009. With regard to rough diamonds it provides for a royalty based on earnings as a percentage of sales to a maximum of 7%.

Economic Risk

The profitability of the Company’s operations may be significantly affected by changes in the market price of gold and diamonds. The prices of gold and diamonds fluctuate, and are affected by numerous factors beyond the control of the Company including the level of interest rates, expectations with respect to the rate of inflation, world supply of gold and diamonds, stability of exchange rates, global and regional political and economic conditions, supply and demand for jewelry, and sale by central banks and other holders, speculators and producers response to any of the foregoing factors. In the fourth quarter of 2008 the international diamond market softened due to disruption in international credit markets and uncertainty in the banking and financial sector. Sales of rough diamonds slowed and the price of rough diamonds weakened significantly. There is no certainty when or if the rough diamond demand and price will stabilize at levels to allow the Company’s diamond operations to be profitable. In addition, recent technological breakthroughs in the production of gem quality synthetic diamonds may have a material negative impact on diamond prices and economic viability of the Company’s interest in its South African diamond properties. Gold is currently sold in US dollars and although the majority of the costs of the Company’s gold operations are in US dollars, certain costs are incurred in other currencies and subject to exchange rate fluctuation. The price of gold and diamonds are denominated in United States dollars. The operating costs of the Company’s diamond operations are denominated in South African rand. Some of the




15

operating costs of the Company’s gold operations are denominated in currencies other than the US dollar. Fluctuations in these currencies and the United States dollar against the Canadian dollar could have a material effect on the Company’s financial results, which are denominated and reported in Canadian dollars. In respect of financial assets, the Company’s policy is to invest cash at floating rates of interest and cash reserves are to be maintained in cash or cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates therefore impact on the value of cash equivalents and short term investments. As a borrower, the Company is subject to the risk of increases in interest rates. The Company has long-term debts bearing interest at LIBOR-based rates and South African prime-based rates. The Company is entitled to obtain reimbursement from the government of Burkina Faso for value added taxes paid in Burkina Faso. If the Company is unable to obtain this reimbursement this will affect its financial operating results.

Hedging and Commodity Prices

The profitability of the Company is directly related to the market price of the commodities it produces. The Company can reduce price risk by using hedging tools for a portion or all of its gold production. The main hedging tools available to protect against price risk are forward contracts and put options. Various strategies are available using these tools. The Company has employed a hedging arrangement for a portion of its production from the Youga Gold Project. When gold prices rise above the price at which future production has been committed under the Company’s existing hedge arrangement, the Company will not benefit fully from the price increases.

Title to Mineral Holdings

The Company requires licenses and permits from various governmental authorities. The Company believes that it holds all necessary licenses and permits under applicable laws and regulation in respect of its properties and that it is presently complying in all material respects with the terms of such licenses and permits. Such licenses and permits, however, are subject to change in various circumstances. There can be no guarantee that the Company will be able to obtain or maintain all necessary licenses and permits that may be required to explore and develop its properties, commence construction or operation of mining facilities on properties under exploration or development, or to maintain continued operations that economically justify the cost. The validity of ownership of property holdings can be uncertain and may be contested. Although the Company has attempted to acquire satisfactory title to its properties, risk exists that some titles, particularly titles to undeveloped properties, may be defective.

Competition

The mining industry is intensely competitive. Significant competition exists for the acquisition of properties producing or capable of producing gold or other metals. The Company may be at a competitive disadvantage in acquiring additional mining properties because it must compete with other individuals and companies, many of which have

greater financial resources, operational experience and technical capabilities than the Company. The Company may also encounter increasing competition from other mining companies in its efforts to hire experienced mining professionals. Increased competition could adversely affect the Company’s ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future.

Acquisitions

The Company undertakes evaluations of opportunities to acquire additional assets and businesses. Any resultant acquisitions may be significant in size, may change the scale of the Company’s business and may expose the Company to new geographic, political, operating, financial and geological risks. The Company’s success in its acquisition activities depends on its ability to identify suitable acquisition candidates, acquire them on acceptable terms and integrate their operation successfully. Any acquisitions would be accompanied by risks such as an ore body proving to be below expectations, the difficulty of assimilating the operations and personnel of any acquired companies, and the potential of unknown liabilities associated with acquired assets and businesses. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with such acquisitions.

Foreign Assets

Substantial portions of the assets of the Company are located in jurisdictions outside of Canada. As a result, it may be difficult for investors resident in Canada or other jurisdictions to enforce judgments obtained against the Company in Canada if the damages awarded exceed the realizable value of the Company’s Canadian assets.

Dependence on Key Personnel

The Company is dependent on a relatively small number of key personnel. The Company currently does not have key person insurance on these individuals. Due to the Company’s relatively small size, the loss of these persons or the Company’s inability to attract and retain additional highly skilled employees required for the development of the Company’s activities may have a material adverse effect on the Company’s business or future operations.

In addition, the Company anticipates that as it brings its mineral properties into production and as the Company acquires additional mineral rights, the Company will experience significant growth in its operations. The Company expects this growth to create new positions and responsibilities for management and technical personnel and to increase demands on its operating and financial systems. There can be no assurance that the Company will successfully meet these demands and effectively attract and retain additional qualified personnel to manage its anticipated growth. The failure to attract such qualified personnel to manage growth effectively could have a material adverse effect on the Company’s business, financial condition and results of operations.

Caution on Forward-Looking Statements

This Management Discussion and Analysis contains certain forward-looking statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements may include statements regarding exploration results and budgets, mineral reserve and resource estimates, work programs, capital expenditures, mine operating costs, production targets and timetables, future commercial production, strategic plans, market price of precious metals or other statements that are not statements of fact. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Various factors that may affect future results include, but are not limited to: fluctuations in market prices of precious metals; foreign currency exchange fluctuations; risks relating to mining exploration and development including reserve estimation and costs and timing of commercial production; requirements for additional financing; political and regulatory risks, and other risks and uncertainties. Accordingly, readers should not place undue reliance on forward-looking statements.

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ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss


16

Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in Canada and contain estimates based on management’s judgement. Management maintains an appropriate system of internal controls to provide reasonable assurance that transactions are authorized, assets safeguarded and proper records maintained. The Audit Committee of the Board of Directors has met with the Company’s independent auditors to review the scope and results of the annual audit and to review the consolidated financial statements and related financial reporting matters prior to submitting the consolidated financial statements to the Board for approval. The Company’s independent auditors, PricewaterhouseCoopers LLP, are appointed by the shareholders to conduct an audit in accordance with Canadian generally accepted auditing standards and their report follows.

G.J. McConnell G.A. Holmes President and Chief Financial Officer Chief Executive Officer and Treasurer Halifax, Canada February 27, 2009

Auditors’ Report

To the Shareholders of Etruscan Resources Incorporated

We have audited the consolidated balance sheets of Etruscan Resources Incorporated as at November 30, 2008 and 2007 and the consolidated statements of operations, deficit and comprehensive loss and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Halifax, Canada February 27, 2009

ccoonnssoolliiddaatteedd bbaallaannccee sshheeeettss as at November 30, 2008 and 2007 (in Canadian dollars)

(note 1)


17

Approved on behalf of the Board ____________________________ Director __________________________ Director

2008 $

2007$

Assets Current assets Cash and cash equivalents 3,867,363 31,926,710Restricted cash (note 7) 3,094,576 -Amounts receivable 3,905,567 1,239,840Available-for-sale securities 65,086 376,180Deposits and prepaid expenses 719,922 301,532Inventory (note 4) 9,465,759 365,902 21,118,273 34,210,164 Property, plant and equipment (note 5) 108,749,819 114,811,521 Reclamation deposits 1,071,094 997,270 Mineral properties and related deferred costs (note 6) 42,780,587 29,794,553 173,719,773 179,813,508Liabilities Current liabilities Accounts payable and accrued liabilities 26,019,956 11,404,302Current portion of long-term debt (note 7) 16,400,000 6,647,318Current portion of financial derivative instrument (note 8) 8,600,000 4,700,000 51,019,956 22,751,620 Long-term debt (note 7) 32,223,693 25,675,861 Financial derivative instrument (note 8) 17,700,000 28,800,000 Provision for reclamation (note 9) 2,870,000 1,630,000 Non-controlling interest in subsidiary company (note 10) 825,000 8,580,452 104,638,649 87,437,933Commitments (note 11) Shareholders’ Equity Capital stock (note 12) 259,750,450 245,250,462 Warrants (note 12) 7,626,553 4,258,061 Contributed surplus (note 12) 7,544,000 5,710,000 Accumulated other comprehensive loss (note 13) (1,901,584) (1,605,490) Deficit (203,938,295) (161,237,458) 69,081,124 92,375,575 173,719,773 179,813,508

ccoonnssoolliiddaatteedd ssttaatteemmeennttss ooff OOPPEERRAATTIIOONNSS for the years ending November 30, 2008 and 2007 (in Canadian dollars)

(Note 1)


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2008 2007 $ $ Gold revenue 24,844,233 - Royalty expense 663,037 - 24,181,196 - Expenses Mining operations 14,995,682 - Mine amortization 5,448,496 - Mine administration 4,363,719 - (626,701) - Other expenses (income) General and administrative 6,542,262 5,942,660 Financing costs 2,939,140 - Foreign currency exchange loss 10,297,364 (2,448,222) Wages and benefits – stock based compensation 1,453,400 2,259,500 Other income (661,872) (2,271,550) Write-down of mineral property 3,203,847 545,099 23,774,141 4,027,487 Loss for the year before the following (24,400,842) (4,027,487) Loss on financial derivative instrument (note 8) (368,107) (34,129,721) Write-down of Blue Gum Diamond Project (note 10) (31,551,079) - Non-controlling interest in loss and write-down of diamond operations and net gain

on restructuring and financing of Etruscan Diamonds Limited (note 10) 13,619,191 2,325,615

Net loss for the year (42,700,837) (35,831,593)

Loss per share - Basic and fully diluted (0.34) (0.33)

Weighted average number of shares – basic 126,985,336 106,961,924

ccoonnssoolliiddaatteedd ssttaatteemmeennttss ooff ddeeffiicciitt

aanndd ccoommpprreehheennssiivvee lloossss for the years ending November 30, 2008 and 2007 (in Canadian dollars)

(Note 1)


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2008 2007 $ $

Consolidated Deficit Deficit – Beginning of year (161,237,458) (125,405,865) Net loss for the year (42,700,837) (35,831,593) Deficit – End of year (203,938,295) (161,237,458)

Consolidated Comprehensive Loss Net loss for the year (42,700,837) (35,831,593) Other comprehensive loss (note 13) Net change in unrealized loss on available for sale securities (296,094) (1,899,013) Comprehensive loss (42,996,931) (37,730,606)

ccoonnssoolliiddaatteedd ssttaatteemmeenntt ooff ccaasshh fflloowwss for the years ending November 30, 2008 and 2007 (in Canadian dollars)


20

2008 2007 $ $

Cash provided by (used in)

Operating activities Net income (loss) for the year (42,700,837) (35,831,593)Charges (credits) to income not affecting cash

Loss (gain) on sale of assets 17,844 (1,719,745)Amortization and accretion 6,569,028 181,581Foreign exchange loss (gain) on revaluation of long-term debt and reclamation

deposits 8,819,121 (3,849,140)Write-down of mineral properties 3,203,847 545,099Unrealized (gain) loss on financial derivative instrument (7,200,000) 33,500,000Write-down of Blue Gum Diamond Project 31,551,079 -Non-controlling interest in loss and write-down of diamond operations and net gain

on restructuring and financing of Etruscan Diamonds Limited (13,619,191) (2,325,615)Stock-based compensation expense 1,453,400 2,270,500

(11,905,709) (7,228,913)Net change in non-cash working capital balances related to operations

Increase in accounts receivable and deposits and prepaid expenses (3,084,117) (979,016)Increase in inventory (9,099,857) (58,024)Increase (decrease) in accounts payable and accrued liabilities 18,965,654 (1,503,167)

(5,124,029) (9,769,120)Financing activities Proceeds from issuance of capital stock - net 14,496,988 43,140,233Proceeds from issuance of warrants - net 1,268,492 4,258,061Proceeds from long-term debt 9,574,439 39,553,372Repayment of long-term debt (4,811,479) (481,660)Increase in deferred financing costs (421,219) (1,899,999)Net proceeds from Etruscan Diamonds Limited financing 5,863,739 10,121,067 25,970,960 94,691,074Investing activities Acquisition of property, plant and equipment (30,397,819) (56,939,585)Proceeds on disposal of assets 8,273 2,306,391Expenditures on mineral properties and related deferred costs – net (15,218,144) (14,296,617)Reclamation deposits (204,012) (722,343) (45,811,702) (69,652,154) Net change in cash and cash equivalents during the year (24,964,771) 15,269,800 Cash and cash equivalents – Beginning of year 31,926,710 16,656,910 Cash and cash equivalents – End of year 6,961,939 31,926,710 Supplemental cash flow information (note 18)

nnootteess ttoo ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss for the years ending November 30, 2008 and 2007 (in Canadian dollars)


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1. Nature of operations and going concern

The Company is in the business of exploring and developing its gold and diamond properties in Africa and producing gold at the Youga Gold Project in West Africa. As at November 30, 2008, the Company is in the early stages of commercial production. The amounts shown as property, plant and equipment, mineral properties and related deferred and development costs represent costs net of recoveries to date, less amounts amortized and/or written off, and do not necessarily represent present or future values. The recoverability of the amounts shown for the investment in the property, plant and equipment, and mineral properties and related deferred and development costs is, among other things, dependent upon the discovery of economically recoverable reserves, securing and maintaining title and beneficial interest in the properties, the ability of the companies to obtain necessary financing to complete the development and upon future profitable production or proceeds from the disposition thereof. These financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as the liabilities come due. For the year ended November 30, 2008 the Company reported a loss of $42.7 million and an accumulated deficit of $204 million at that date. As at November 30, 2008, the Company has a working capital deficit of $30 million. In addition to its on-going working capital requirements, the Company must secure sufficient funding for existing commitments, including incremental capital projects at the Youga Gold Project and long-term debt repayments. These circumstances lend significant doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern. As at November 30, 2008, the Company has cash and cash equivalents of $3.9 million. These cash resources are not sufficient in and of themselves to enable the Company to fund all aspects of its operations and, accordingly, management is pursuing other alternatives to fund the Company's operations so it can continue as a going concern. Management expects that the Company will be able to secure the necessary funds through a combination of sale of assets and raising additional debt or equity financing. While the Company has been successful raising additional financing in the past, there can be no assurance that it will be able to do so in the future. The Company's ability to continue as a going concern is dependent upon securing and maintaining title and beneficial interest in its significant properties and generating positive cash flows from future production at the Youga Gold Project and

subsequent projects. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported revenue and expenses and balance sheet classifications that would be necessary were the going concern assumption inappropriate, and these adjustments could be material.

2. Significant accounting policies Financial statement presentation These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are expressed in Canadian dollars, unless otherwise stated. Consolidation These consolidated financial statements include the accounts of Etruscan Resources Incorporated and its subsidiaries, Cayman Burkina Mines Limited (100%), Burkina Mining Company (90%), Etruscan Resources Burkina Faso S.A. (100%), ER Burkina Exploration (100%), Etruscan Resources Côte d’Ivoire SARL (100%), Etruscan Resources Bermuda Ltd. (100%), Etruscan Resources Bermuda (Mali) Ltd. (100%), Etruscan Resources Mali SARL (100%), Etruscan Resources Namibia (Pty) Ltd. (100%), Etruscan Resources Ghana Ltd. (100%), Etruscan Haber Joint Ventures Limited (50%), Etruscan Resources Benin SARL (100%), Etruscan Diamonds Limited (52%), Etruscan Diamonds Bermuda Ltd. (52%), Etruscan Diamonds (Pty) Ltd. (Etruscan Diamonds) (52%), Blue Gum Diamonds (Pty) Limited (39%), Secor GeoMin Mining Development Corporation Incorporated (Secor GeoMin) (90%), Hackett River Resources Inc. (100% excluding 10 Class B non-voting shares), 2313057 Nova Scotia Limited (100%), 2454056 Nova Scotia Limited (100%), and 3001635 Nova Scotia Limited (100%). Management estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reported period. The more significant estimates that the Company was required to make relate to the recoverability of its investments in the Youga Gold Project and the Blue Gum Diamond Project, assessing impairment of its mineral properties, estimating reclamation obligations, and estimating stock-based compensation expense. Actual results could differ from those reported.



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Equity investment The investment in African GeoMin Mining Development Corporation Ltd. (50%) is accounted for on the equity basis. The other shareholder of African GeoMin has agreed to provide funding for the equity financing required for the Samira Hill Gold Project and is required to fund the ongoing working capital requirements of African GeoMin. Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks and highly liquid temporary investments. In order to limit its exposure, the Company deposits these funds with large financial institutions and limits maturity dates to 30 days or less.

Inventories Inventory includes doré bars, gold-in-circuit, ore stockpile, spare parts and supplies, and refined gold. Refined gold, doré bars, gold-in-circuit and ore stockpiles are stated at the lower of production cost and net realizable value. Spare parts and supplies inventories are stated at the lower of average cost and net realizable value. Ore stockpiles and gold-in-circuit inventories represent costs that are incurred in the process of converting mineralized ores into partially refined precious metals, or doré bars, consisting primarily of gold by value which must be refined off-site to return saleable refined gold. The process includes milling the ore, treatment with chemical solutions to dissolve precious metals and channeling the resulting gold-bearing solutions to a plant for recovery of gold in the form of doré bars. Inventory of diamonds is valued at the lower of cost and market value.

Property, plant & equipment Property (including costs associated with the exploration and development of mineral property), plant and equipment is recorded at cost. The cost property, plant and equipment that is acquired, constructed, or developed over time includes carrying costs directly attributable to the acquisition, construction, or development activity, such as interest costs. Capitalization of carrying costs ceases when an item of property, plant and equipment is substantially complete and ready for productive use. Net revenue and operating expense derived from property, plant and equipment prior to substantial completion and readiness for use is included in the cost. Amortization is calculated on a straight line over five years or the unit-of-production based on ounces produced. Where a unit-of-production methodology is used, the assets are amortized to their estimated residual value over the useful life

defined by management’s best estimate of recoverable proven and probable reserves in the current mine plan. Equipment relating to exploration and the corporate office is recorded at cost. Amortization is provided over the estimated useful life using a 20% declining balance basis. Estimates of residual values and useful lives are reassessed annually, and any change in estimate is taken into account in the determination of future amortization charges. The Company regularly reviews the carrying values of its property, plant and equipment and performs impairment tests on property plant and equipment. When events or changes in circumstances occur that indicate the carrying value of an asset may not be recoverable an impairment loss is recognized to the extent the carrying amount is not recoverable and exceeds fair value. The impairment loss is measured by the amount by which the carrying value exceeds fair value. Mineral properties and related deferred costs Exploration and development costs relating to mineral properties are deferred until the properties are brought into commercial production, at which time they are amortized on the unit-of-production basis, or until the properties are abandoned or sold or management determines that the mineral property is not economically viable, at which time the deferred costs are written down to fair value. The Company has maintained title to certain properties that have been written off. Any proceeds relating to these properties will be recorded in income as received. Management’s estimate of mineral prices, recoverable proven and probable reserves and operating and capital costs are subject to certain risks and uncertainties that may affect the recoverability of mineral properties and related deferred costs. Although management has made its best estimate of these factors, it is possible that material changes could occur which may adversely affect management’s estimate of the net cash flows to be generated from its properties. Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the industry standards for the current stage of exploration and development of such properties, these procedures do not guarantee the Company’s title. Such properties may be subject to prior undetected agreements or transfers and title may be affected by such defects.



23

Reclamation of mining properties Mining operations involve activities that have a significant effect on the area surrounding such operations. The Company’s operating, development and exploration activities are also subject to various laws and regulations governing the protection of the environment. The Company has estimated its ultimate legal obligation with respect to reclamation and closure costs. Provisions are made for the costs of decommissioning and site rehabilitation when the related environmental disturbance takes place and are capitalized into the cost of the related asset. To calculate the fair value of these obligations, the Company discounted the projected cash flows for the corresponding time periods over which these costs would be incurred. Provisions are recognized at the net present value of future expected costs which are accreted to full value over time through charges to income. The capitalized cost is amortized on a unit-of-production basis. Commercial production The Company uses a number of criteria to determine when a project achieves commercial production including attainment of running the processing plant at 60% of designed capacity over a 30 consecutive day period with gold production achieving at least 60% of forecast. The Company commenced commercial production at the Youga Gold Mine effective July 1, 2008. Revenue recognition The Company records revenue when persuasive evidence of an arrangement exists, delivery has occurred under the terms of the arrangement, the price is fixed or determinable and collectability is reasonably assured. Revenue recorded in the financial statements is primarily from the sale of gold and is recognized when refined metal is delivered to the purchaser, which occurs when title and risks have been transferred to the purchaser. The sales price and quantity is fixed on the delivery date. Incidental revenues from the sale of by-products, such as silver, are classified in revenue. These incidental revenues are not significant.

Loss per common share Loss per common share is calculated based on the weighted average number of common shares outstanding during the year. The Company follows the “treasury stock” method in the calculation of diluted earnings per share. Since the Company has losses, the exercise of outstanding stock options and warrants has not been included in this calculation as it would be anti-dilutive.

Income taxes The Company uses the liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes using the substantively enacted tax rates that will be in effect when the differences are expected to reverse or when losses are expected to be utilized. Future income tax assets are evaluated and, if realization is not considered more likely than not, a valuation allowance is provided. Translation of foreign currencies The Company follows the guidelines for foreign currency translation of integrated foreign operations. Monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at the exchange rates in effect at the time of acquisition or issue. Revenues and expenses are translated at rates approximating exchange rates in effect at the time of the transactions. Exchange gains or losses arising on translation are included in income or loss for the year. For purposes of calculating the equity pick-up in African GeoMin, the Company follows the accounting guidelines for translation of self-sustaining foreign operations. Exchange gains and losses on shareholder advances and preferred shares that form part of the Company’s investment in African GeoMin are deferred and included in the accumulated other comprehensive income in shareholders’ equity. Stock-based compensation The Company has two stock option plans which are outlined in note 12. The Company accounts for stock options as required by CICA Handbook Section 3870 stock-based compensation and other stock based payments. Handbook Section 3870 establishes standards for the recognition, measurement, and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It applies to transactions, including non-reciprocal transactions, in which an enterprise grants shares of common stock, stock options, or other equity instruments, or incurs liabilities based on the price of common stock or other equity instruments. The granting of stock options to non-employees and direct awards of stock to employees and non-employees must be accounted for using the fair value method of accounting. Consideration paid for shares on exercise of the options is credited to capital stock.



24

Financial Instruments – Recognition and Measurement, Section 3855 This standard prescribes when a financial asset, financial liability, or non-financial derivative is to be recognized on the balance sheet and whether fair value or cost-based measures are used. This standard also specifies how financial instrument gains and losses are to be measured. Derivative contracts and embedded derivatives in non-derivative contracts are to be recorded on the balance sheet at their respective fair values, with any marked to market adjustments included in net income. The Company has implemented the following classifications: Cash and cash equivalents and restricted cash are classified

as “financial assets held for trading”. These financial assets are measured at fair value and the gains/losses resulting from the evaluation at the end of each period are recorded in net income.

Securities are classified as “available for sale”. These financial assets are measured at fair value, with unrealized gains and losses recognized in “Other Comprehensive Income”.

Amounts receivable are classified as “loans and receivables”. After their initial fair value measurement, they are measured at amortized cost using the effective interest method.

Accounts payable and long-term debt are classified as “other financial liabilities” and are initially measured at fair value after which they are measured at amortized cost net of financing costs, using the effective interest method.

Financial derivative instruments are classified as “financial liabilities held for trading”. These financial liabilities are measured at fair value and the gains/losses resulting from the evaluation at the end of each period are recorded in net income.

Section 3855 was adopted December 1, 2006 on a retroactive basis without restatement of prior period amounts. Upon initial application, any adjustments to the carrying amount of financial assets and liabilities are recognized as an adjustment to the opening balance of deficit or accumulated other comprehensive income, depending on the classification of existing assets or liabilities. For the impact of application of the standard see note 17. Comprehensive Income, Section 1530 This standard requires the presentation of comprehensive income and its components. Other comprehensive income includes holding gains and losses on certain investments that are classified available-for-sale 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 they are realized. This standard was adopted prospectively on December 1, 2006 without restatement of prior periods. (See note 13)

3. Changes in accounting policies

The Company adopted, effective December 1, 2007, new accounting standards mandated by the Canadian Institute of Chartered Accountants (CICA) relating to accounting changes, capital disclosures and financial instruments disclosures and presentation. These standards were adopted on a prospective basis without restatement of prior periods. Accounting changes – section 1506 Section 1506, Accounting Changes, prescribes the criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. This Section allows for voluntary changes in accounting policies only if they result in the financial statements providing reliable and more relevant information. In addition, this Section requires entities to disclose the fact that they did not apply a primary source of GAAP that have been issued but not yet effective. The adoption of this Section has no impact on the consolidated financial statements. Capital disclosures – Section 1535 Section 1535, Capital Disclosures, establishes disclosure requirements regarding an entity’s capital, including (i) an entity’s objectives, policies, and processes of managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any externally imposed capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. The disclosure requirements relating to this section are provided in note 16. Financial instruments – Sections 3862 and 3863 Sections 3862, Financial Instruments – Disclosures and 3863 Financial Instruments – Presentation, replace Section 3861 Financial Instruments – Disclosure and Presentation, revising and enhancing disclosure requirements while leaving presentation requirements unchanged. These sections require entities to disclose quantitative and qualitative information that enables users to evaluate (i) the significance of financial instruments for the Company’s financial performance, and (ii) the nature and extent of risks arising from financial instruments to which the Company is exposed during the period and at the balance sheet date, and management’s objectives, policies and procedures for managing such risks. The Company is required to disclose the measurement bases used, and the criteria used to determine classification of financial instruments. The Company has included disclosures recommended by the new Handbook section in note 17 to these consolidated financial statements. Refer to the additional sensitivity disclosure in notes 7 and 8.



25

Goodwill and intangible assets – section 3064 In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Intangible Assets, and CICA Section 3450, Research and Development Costs, and amendments to Accounting Guideline (AcG) 11, Enterprises in the Development Stage, and EIC-27, Revenues and Expenditures during the Pre-operating Period and CICA Section 1000, Financial Statement Concepts. The standard intends to reduce the differences with International Financial Reporting Standards (IFRS) in the accounting for intangible assets and results in closer alignment with U.S. GAAP. Under current Canadian standards, more items are recognized as assets than under IFRS or U.S. GAAP. The objectives of CICA Section 3064 are to reinforce the principle-based approach to the recognition of assets only in accordance with the definition of an asset and the criteria for asset recognition; and clarify the application of the concept of matching revenues and expenses such that the current practice of recognizing assets that do not meet the definition and recognition criteria are eliminated. The standard will also provide guidance for the recognition of internally developed intangible assets (including research and development activities), ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. This standard is effective for fiscal years beginning on or after October 1, 2008 with early adoption encouraged. The Company has adopted this section during the year. There was no impact for the current and prior years as a result of the adoption of this section. Future accounting changes Inventories – section 3031 Section 3031, Inventories, eliminates last-in first-out accounting for inventories. Certain items (insurance and capital spares) previously carried in inventory are classified within property, plant and equipment. Other changes include the ability to reverse previous write-downs to net realizable value

when there is a subsequent increase in the value of inventories and requirements for additional disclosure. The Company is currently evaluating the impact of adopting this standard in 2009. Going concern – section 1400 amendments Section 1400, General Standards of Financial Statement Presentation, modifies the existing section 1400 to include requirements aimed at assessing and disclosing an entity’s ability to continue as a going concern and disclosing any material uncertainties that may cast significant doubt upon an entity's ability to continue as a going concern. The Company is currently evaluating the impact of adopting this standard in 2009. International financial reporting standards In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB’s strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to adopt IFRS, replacing Canada’s own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Accordingly, the Company will be required to adopt IFRS on December 1, 2011. The transition will require the restatement for comparative purposes of amounts reported by the Company for the year ended November 30, 2011. The Company is currently evaluating the future impact of IFRS on its financial statements and will continue to invest in training and additional resources to ensure a timely conversion. Information regarding the Company’s plan to converge and the anticipated effects is to be disclosed prior to the adoption, with the first disclosure expected to be made in the consolidated financial statements for the year ended November 30, 2009.



26

4. Inventory

2008 $

2007 $

Dore bars 3,289,622 - Gold in circuit 868,723 - Ore stockpiles 392,072 - Spare parts and supplies 4,674,683 - Diamonds 240,659 365,902 9,465,759 365,902

5. Property, plant and equipment

Commercial production at the Youga Gold Mine Commercial production and substantial completion of construction at the Youga Gold Mine was effective July 1, 2008. The Company has reclassified costs previously shown as deferred development and exploration costs to the appropriate asset categories.

As at November 30, 2008

Cost

$

Accumulated amortization

$ Net

$ Property including deferred exploration and

developement 32,531,682 1,730,516 30,801,166Plant and equipment 71,341,489 3,400,826 67,940,663Mobile equipment 6,847,121 1,019,458 5,827,663Land and buildings 3,509,425 212,803 3,296,622Office equipment and leaseholds 1,912,526 1,028,821 883,705

116,142,243 7,392,424 108,749,819

As at November 30, 2007

Cost$

Accumulatedamortization

$ Net

$ Youga Gold Project production plant,

related equipment under construction, related deferred development and exploration costs 90,103,672 - 90,103,672

Mobile equipment 4,000,308 286,964 3,713,344Land and buildings 374,259 55,498 318,761Office equipment and leaseholds 1,682,127 845,401 836,726Blue Gum Diamond Project production

plant, related deferred development and exploration costs 19,839,018 - 19,839,018

115,999,384 1,187,863 114,811,521



27

6. Mineral properties and related deferred cost

For the year ended November 30, 2008 Property description

BalanceNovember 30,

2007 $

Acquisitions and expenditures

during the period $

Write-down $

BalanceNovember 30,

2008 $

Gold properties, Africa Burkina Faso 2,295,276 3,409,350 - 5,704,626Côte d’Ivoire 8,597,966 3,436,955 (15,762) 12,019,159Mali 11,142,033 4,020,265 (1,596,939) 13,565,359Ghana 3,559,975 1,976,860 - 5,536,835Namibia 2,076,229 2,662,839 (14,258) 4,724,810Benin - 435,882 (435,882) - Diamond properties, South Africa 2,123,074 247,730 (1,141,006) 1,229,798

29,794,553 16,189,881 (3,203,847) 42,780,587

Carrying value of mineral properties The Company’s recorded amount of its mineral properties is accumulated based upon costs incurred to date, net of recoveries and provisions. This approach to recording mineral properties is consistent with industry standards and the Company believes that this represents its best estimate of the appropriate carrying amount for each property. The economic feasibility of each property is assessed regularly by management based upon current geological exploration results, independent geological reports, surrounding exploration and development activities, ongoing assessment of the political environment in the countries where properties are held and the availability of funding. When a property is deemed economically unfeasible, the cost thereof is written down to fair value.

Some of the Company’s investments in mineral properties and related deferred development costs are located in Côte d’Ivoire, a country which has experienced political unrest in recent years. Company management believes that the current political situation in Côte d’Ivoire does not have a significant impact on the long-term recoverability of its investments in Côte d’Ivoire. However in the event the current political unrest should continue or worsen, it may have a negative effect on the recoverability of the investments and the Company may reduce the carrying value of the related assets.

For the year ended November 30, 2007 Property description

Balance November 30,

2006 $

Acquisitions and expenditures

during the year $

Transfer to development

costs(1) or write-down(2)

$

Balance November 30,

2007 $

Youga Gold Project acquisition and

exploration expenditures 18,851,242 84,823 (18,936,065) (1) - Gold properties, Africa Burkina Faso 833,512 1,461,764 - 2,295,276Côte d’Ivoire 4,434,448 4,163,518 - 8,597,966Mali 6,706,098 4,435,935 - 11,142,033Ghana 894,753 2,665,222 - 3,559,975Namibia 1,057,860 1,018,369 - 2,076,229 Diamond properties, South Africa

Hartbeestlaagte permit 1,362,832 971,913 (2,334,745) (1) -Various diamond properties 2,265,457 402,716 (545,099) (2) 2,123,074

36,406,202 15,204,260 (21,815,909) 29,794,553



28

7. Long-term debt

Note

As at

Nov 30,

2008

$

As at

Nov 30,

2007

$ RMB Australia Holdings

Limited and Macquarie Bank Limited

Youga debt facility (a) 37,733,515 35,028,022

Subordinated debt facility (b) 9,278,733 -

47,012,248 35,028,022

Deferred financing costs (c) (3,992,403) (3,441,024)

43,019,845 31,586,998 Industrial Development

Corporation of South Africa (IDC)

Mogopa Blue Gum (Pty) Limited (Mogopa) (d) 3,400,000 -

Blue Gum Diamonds (Pty) Limited (e) 1,703,660 -

Wesbank (f) 447,772 667,622

Nedbank Limited (g) 52,416 68,559

5,603,848 736,181

48,623,693 32,323,179

Less current portion (16,400,000) (6,647,318)

32,223,693 25,675,861

a) On November 30, 2006, the Company executed a debt facility agreement for US$35 million with RMB Australia Holdings Limited (RMB) and Macquarie Bank Limited (Macquarie) for purposes of developing the Youga Gold Mine. The Youga debt facility is structured as a full recourse facility to the Company until certain economic and technical completion conditions are achieved when it becomes non-recourse to Etruscan and is secured by all of Etruscan’s interests in the Youga Gold Project. Standard project finance security provisions apply. In 2008 the Company repaid US$4.5 million, resulting in a balance owing of US$30.5 million at November 30, 2008. The loan is repayable on a quarterly basis over a 4-year term with interest at LIBOR (as at November 30, 2008 – 2.22%) plus 5% pre-completion and LIBOR plus 4.5% post completion. Initial draw down under the facility was subject to the Company satisfying a number of conditions precedent including the implementation of a gold price protection program. This debt facility was fully drawn down in 2007. The restricted cash is held to meet payment of this debt facility. b) In the first quarter of 2008, the Company completed and drew down subordinated project debt financing for US$7.5 million from RMB and Macquarie. The subordinated loan is repayable in two equal quarterly instalments following the repayment of the senior debt facility and bears interest at LIBOR plus 3.5%.

c) With the implementation of the financial instruments standards in 2007, deferred financing costs are netted against the related long-term debt. The Company has incurred financing costs of $5.9 million associated with the senior and subordinated debt facilities. These financing costs include $2.3 million in banking fees and $1.5 million which represents the calculated fair value, based on the Black-Scholes method, of one million common share purchase warrants exercisable at $3.50 per warrant issued to RMB Resources Limited. These warrants were issued as partial consideration for arranging the Youga debt facility. The terms of the subordinated debt facility also included the issuance to the lenders of 1,452,222 financier warrants. The exercise price of the warrants was originally $2.56 however the warrants were re-priced to $0.78 with the restructuring of the debt repayment schedule in the fourth quarter. The fair value of the initial issuance and the re-pricing of these warrants in the amounts of $1.8 million and $0.3 million has been recorded as deferred financing costs. These deferred financing costs of $5.9 million are being amortized using the effective interest rate method. Prior to the commencement of commercial production, the Company capitalized amortization of the deferred financing costs of $1.2 million. Since the commencement of commercial production, the Company has recorded additional amortization of $739,625 which is included in Youga financing costs. During the development phase, the Company capitalized financing costs of $4.3 million including the amortization of deferred financing costs and net interest costs of $3.1 million. d) Etruscan Resources Inc. has provided a completion guarantee to the IDC guaranteeing the performance of Mogopa under the preference share subscription agreement (see note 10), including redemption of the R25.35 million of preference shares on the fifth anniversary of the date of issue and payment of dividends yielding a real after tax interest rate of return of 8%, in accordance with the terms set out in preference share subscription agreement. The guarantee is only effective once the Youga Gold Project reaches project completion and remains in place until the Blue Gum Project achieves project completion as defined in the completion guarantee which includes arranging sufficient funding for the expansion of the Blue Gum Project to 250,000 cubic meters per month. As at November 30, 2008, the Company has recorded the obligation under this completion guarantee at its fair value in the amount of $3.4 million. e) The Company’s 37% owned subsidiary, Blue Gum Diamonds (Pty) Limited concluded a loan from the IDC. The outstanding balance of this loan as at November 30, 2008 is R14,117,650 bearing interest at South African prime (as at November 30, 2008 – 15.5%) plus 0.5%. The loan is repayable in quarterly instalments of R882,350 ($108,000) plus interest commencing on August 1, 2008. The loan is secured by a notarial bond over all of moveable property and effects of Blue Gum Diamonds (Pty) Limited as well as a pledge of the Company’s shares of Blue Gum Diamonds (Pty) Limited.



29

f) The Company’s 52% owned subsidiary, Etruscan Diamonds (Pty) Limited, concluded loans with Wesbank, a division of FirstRand Limited. The outstanding balance of these loan as at November 30, 2008 is R3,658,252, bearing interest at South African prime and repayable over 36 months with a blended monthly instalment of R61,976 ($7,585). Two front-end loaders are pledged as security for these loans. g) The Company’s 52% owned subsidiary, Etruscan Diamonds (Pty) Limited, concluded a loan with Nedbank Limited, the balance of which is R428,241, bearing interest at South African prime less 1%, repayable over thirteen years with a blended monthly instalment of R8,885 ($1,087) and is secured by a first mortgage bond over land and buildings. h) The RMB/Macquarie debt facilities are denominated in US dollars. The South African amounts are denominated in South African rand. As a result, the Company translates this debt at the foreign exchange rates at the balance sheet dates with the exchange loss recorded in the corresponding period. Changes in the exchange rates can have a significant effect on operating results. The following table summarizes the sensitivity of changes in the US$ / Cdn$ exchange rate as it relates to the Youga debt facilities:

US$/Cdn$ exchange rate 1.000 1.063 1.20 1.237 1.25 1.30 Debt in US$ millions $38.0 $38.0 $38.0 $38.0 $38.0 $38.0 Translated to Cdn$ millions $38.0 $40.4 $45.6 $47.0 $47.5 $49.4 Foreign exchange loss 0.0 2.4 7.6 9.0 9.5 11.4 i) The aggregate amount of principal repayments required in each of the next five years based on November 30, 2008 exchange and interest rates to meet retirement provisions on the long-term debt, is as follows: $ 000’s

Year ending November 30, 2009 16,400

2010 13,100

2011 13,800

2012 9,300

2013 10 8. Financial derivative instrument

The Company has implemented a gold price protection program for the Youga Gold Project which was a requirement under the US$35 million debt facility. The gold price protection program is comprised of a combination of bought put options and sold call options whereby 100% of forecast gold production for the first five years of the project (initially 456,102 ounces) is price-protected at a minimum price of US$629 per ounce. The put options were funded by writing call options covering 45% of the feasibility study life-of-mine production (initially 246,306 ounces) having a strike price of US$700 per ounce. Consequently, 100% of production is available to be sold at spot prices up to US$700 per ounce with 55% of the feasibility study life-of-mine gold production

(approximately 298,000 ounces) uncapped and fully exposed to any upward increase in the gold price above US$700 per ounce. The program required no cash or other margin. The fixed monthly ratio of call options to put options is 0.54 to 1 with the put option volumes matched to the production schedule from the October 2006 Youga Feasibility Study Update. During the period ended November 30, 2008 put options aggregating 103,494 ounces expired unexercised. The following table details the options contracts as at November 30, 2008:

Year

Bought Put Options

(number of ounces)

Price per ounce

Sold Call Options

(number of ounces)

Price per

ounce

2009 109,512 US$629 59,142 US$700 2010 93,846 US$629 50,682 US$700 2011 90,276 US$629 48,750 US$700 2012 58,974 US$629 31,848 US$700

352,608 US$629 190,422 US$700

The Company entered into these gold options contracts when the spot price of gold was approximately US$639 per ounce for purposes of mitigating the risks associated with downward movements in the gold price and to benefit from higher market prices. The Company does not hold these options for trading purposes. The Company has determined that this put-call structure constitutes an effective economic hedge for the Youga Gold Project however it does not meet the requirements for hedge accounting under current Canadian generally-accepted accounting principles (Canadian GAAP). Financial derivative instruments, those which do not qualify for hedge accounting, are required under Canadian GAAP to be recorded at fair value (marked to market) at the balance sheet date and the resulting gains or losses are to be included in the results for the period. Composition of loss on financial derivative

Note

Year ended

Nov 30,

2008

$

Year ended

Nov 30,

2007

$

Cash settled (a) 3,670,039 629,721

Gold sales (b) 3,898,068 -

Change in unrealized loss (c) (7,200,000) 33,500,000

368,107 34,129,721

a) The monthly delivery obligations under the call option contracts commenced at the end of September 2007. In the period ended November 30, 2007, the Company settled for cash, delivery obligations aggregating 10,554 ounces which resulted in a realized loss on the financial derivative of $0.6 million. In the first eight months of fiscal 2008, the Company settled for cash, an additional 19,702 ounces which resulted in a realized loss on the financial derivative of $3.7 million.



30

b) In the eight months ended November 30, 2008, the Company also delivered into the hedge obligation a total of 25,628 ounces from production. As a result of the accounting treatment for the financial derivative, gold revenue is recorded at the spot gold price on the revenue recognition date and the difference between the spot sales price and the cash price received is recorded as a realized loss on the financial derivative. The loss realized during the period ended November 30, 2008 aggregated $3.9 million. c) The Company recorded a net unrealized gain of $7.2 million in 2008 and recorded the related decrease in the financial derivative liability on the balance sheet decreasing this amount to $26.3 million. The marked to market valuation of the Youga gold financial derivative liability is summarized as follows:

Spot price

of Gold

(US$)

Youga Gold

Financial

Derivative Liability

C$ 000’s

Balance - November 30, 2007 797 33,500

Change in the three months ended

February 29, 2008 974 34,200

May 31, 2008 886 (19,300)

August 31, 2008 833 (12,100)

November 30, 2008 815 (10,000)

Change in the year ended

November 30, 2008 (7,200)

Balance – November 30, 2008 815 26,300

Less current portion (8,600)

17,700

d) The following table summarizes the approximate valuation of the Youga gold financial derivative (asset) liability at varying gold prices. The results in this table are calculated using the end of November 2008 option volumes and volatility as well as the year end exchange rate. Spot gold price (US$) 600 700 800 900 1,000 Youga gold financial derivative liability (Cdn$ millions) (32.2) (4.2) 21.8 46.8 71.2 e) The following table summarizes the approximate valuation of the Youga gold financial derivative liability at varying US$ exchange rates. The results in this table are calculated using the gold price of US$815 and the end of November 2008 option volumes and volatility. US$/Cdn$ exchange rate 1.15 1.20 1.237 1.25 1.30 Youga gold financial derivative liability (Cdn$ millions) 24.4 25.5 26.3 26.6 27.6

f) The fair value of the Youga gold financial derivative as at January 31, 2009 with a spot gold price of US$918 per ounce is a liability of $50 million.

9. Provision for reclamation

Note

As at

Nov 30,

2008

$

As at,

Nov 30,

2007

$

Youga Gold Project (a) 1,030,000 -

Blue Gum Diamond Project (b) 1,840,000 1,630,000

2,870,000 1,630,000

a) In May 2008 the Company assessed the reclamation liability for the Youga Gold Project at $1.1 million. The feasibility study established the reclamation amount at $1.5 million at the end of the mine life. As at November 30, 2008, the Company estimates that a reclamation liability of $1.1 million has been incurred. The fair value of this future reclamation liability has been calculated by adjusting this amount out to 2015 for a projected Burkina Faso rate of inflation of 4% which results in an undiscounted amount of $1.4 million. This amount has been discounted by applying a discount rate of 6% resulting in a present value of future reclamation liability in the amount of $1 million. The liability will be accreted over the projected life of the mine to accumulate the estimated liability of $1.4 million in 2015. For the six months ended November 30, 2008, accretion expense of $30,000 was recorded increasing the Youga reclamation provision to $1.03 million. b) In April 2008 the Company reassessed the reclamation liability for the Hartbeestlaagte and the Tirisano Diamond Mine which together with the Zwartrand property, constitute the Blue Gum Diamond Project. The reclamation amount of R15 million ($2 million) has been submitted to the South African Department of Mines and Energy. The fair value of this future reclamation liability has been calculated by adjusting this amount out to 2015 for a projected South African rate of inflation of 7% which results in an undiscounted amount of R24.1 million ($3.2 million). This amount has been discounted by applying a discount rate of 9% resulting in a present value of future reclamation liability in the amount of R13.2 million ($1.76 million) at the beginning of April 2008. The fair value amount will be accreted over the projected life of the mine to accumulate the estimated liability of R24.1 million ($3.2 million) in 2015. For the year ended November 30, 2008, accretion expense of $91,000 was recorded increasing the Blue Gum reclamation provision to $1.84 million.



31

10. Investment in subsidiary company and non-controlling interest

Composition of non-controlling interest As at

Nov 30,

2008

$

As at

Nov 30,

2007

$ Etruscan Diamonds Limited - 7,755,452 Etruscan Haber Joint Ventures

Limited 825,000 825,000

825,000

8,580,452

Restructuring and financing of diamond assets In early 2007, the financiers of the initial development of the Tirisano Diamond Mine and Mountain Lake Resources Inc. (Mountain Lake) converted their respective equity and debt interests in Etruscan Diamonds (Pty) Ltd. to an equity interest in Etruscan Diamonds Limited (EDL). The Company converted its equity and inter-corporate debt with Etruscan Diamonds (Pty) Ltd. to an equity interest in EDL. On the conversion of its debt of $21.6 million, the Company acquired an additional 11% in EDL and Etruscan Diamonds (Pty) Ltd. became a 100% owned subsidiary of EDL. Later in 2007 EDL completed a private placement financing issuing shares representing a 17.95% equity interest for net proceeds of $10.1 million. These transactions resulted in a net dilution gain to the Company of $1.5 million. The net proceeds from the private placement were recorded as a non-controlling interest in EDL. Late in 2007, the Company acquired an additional 2.75% of EDL bringing its ownership interest to 53.65%. In the third quarter of 2008 EDL completed a rights offering, issuing shares representing a 2.95% equity interest for net proceeds of $2 million. This transaction resulted in a dilution gain to the Company of $500,000. The net proceeds from these financings was recorded as a non-controlling interest in EDL. As a result, of these share transactions, Etruscan Resources Inc. now holds a 52% ownership interest in Etruscan Diamonds Limited, Mountain Lake Resources Inc. has a 16.07% ownership interest and the balance is held by third parties including employees and their affiliates and associates who own an aggregate of 5.4% of Etruscan Diamonds Limited. At the end of 2008, the Company placed the Blue Gum Diamond Mine on care and maintenance due to operating losses, lower than planned production and decreased diamond prices. The Company recorded a write-down of its deferred development costs of $31.6 million based on the amount by which the carrying value exceeded the discounted value of the expected future cash flows. As a result the Company has eliminated the balance of the Etruscan Diamonds Limited non-controlling interests ($9.2 million) and the Blue gum

Diamonds Pty Ltd non-controlling interest ($3.9 million) representing the non-controlling interests’ share of the loss and write down of the diamond operations. In 2007 the non-controlling interests’ share of the loss was $0.8 million. Etruscan Diamonds Limited The composition of the non-controlling interest in Etruscan Diamonds Limited is as follows:

As at

Nov 30,

2008

$

As at

Nov 30,

2007

$

Non-controlling interest in Etruscan

Diamonds Limited 10,038,513 1,459,156

Investment in Etruscan Diamonds

Limited – net 1,963,739 10,121,067

Net gain on restructuring and

financing of diamond assets (500,000) (1,541,720)

11,502,252 10,038,513 Accumulated non-controlling

interest in loss – Beginning of year (2,283,061) (1,459,156)

Non-controlling interest in loss for

the year (9,219,191) (823,895) Accumulated non-controlling

interest in loss – End of year (11,502,252) (2,283,061)

Non-controlling interest in Etruscan

Diamonds Limited - 7,755,452

Blue Gum Diamonds (Pty) Ltd On December 5, 2007, Etruscan Diamonds concluded an agreement with Mogopa Blue Gum (Pty) Ltd. (Mogopa) to transfer a 26% interest in the Tirisano Diamond Mine to Mogopa. Mogopa is the Black Economic Empowerment (BEE) partner for the mine as required by South African mineral legislation. Mogopa is also Etruscan Diamonds’ BEE partner on the Hartbeestlaagte and Zwartrand properties which, together with the Tirisano Diamond Mine, constitute Etruscan Diamonds’ Blue Gum Project. On December 5, 2007, Mogopa completed a financing in the form of a preference share investment of R25.35 million from the Industrial Development Corporation of South Africa Limited (IDC) to finance the acquisition of a 26% interest in the Tirisano Diamond Mine for R26 million (Cdn$3.9 million). Mogopa’s 26% interest in Blue Gum Diamonds (Pty) Limited has been recorded as non-controlling interest and the Company has eliminated this amount by recording Mogopa’s share of the loss and write-down of the diamond operations.



32

Etruscan Haber Joint Ventures Limited In 2007, the Company entered into an agreement with Haber Mining Ghana Ltd. (Haber) to explore six gold concessions in southwestern Ghana. Etruscan Ghana acquired its 50% interest in the company for cash payments of $825,000 establishing a fair value of $1.65 million for the concessions contributed to the company. As a result, the Company has recorded the fair value of concessions with $825,000 recorded as non-controlling interest. This represents the fair value of the 50% of the concessions contributed by Haber. Etruscan Ghana has the option to increase its interest in the company to 75% by investing US$2.5 million in exploration on the concessions over a period of three years.

11. Commitments and contingencies

Youga Gold Project There are three major contracts in place at the Youga Gold Mine. Burkina Faso Mines Services (BFMS) is providing drill and blasting services, PW International Ltd. (PW) is providing load and hauling services and Total Burkina (Total) has a fuel supply contract. The term of the BFMS contract is from January 1, 2007 to December 31, 2012. Under the provisions of the contract, BFMS is required to blast a minimum of 2.5 million bank cubic meters (BCM) of rock per annum at a base cost of US$1.57 per BCM, to be adjusted on an annual basis over the contract term. The annual commitment is approximately US$4.5 million. There is a contract break fee of US$600,000 after the second anniversary of the contract. This break fee is reduced annually to nil after the fourth year. The term of the PW contract is from January 1, 2007 to December 31, 2012. Under the provisions of the contract, PW is required to load and haul approximately 15 million BCM of ore and waste in total or approximately 3 million BCM per annum. The average annual commitment is US$12 million. The term of the Total contract is for seven years, from the commissioning of the fuel depot which is expected in the first quarter of 2009. Under the provisions of the contract, Total is required to install infrastructure for the storage and distribution of fuel at site, at the approximate cost of US$1 million. The Company is to repay Total for the infrastructure cost over a five year period from the date of commissioning.

As at November 30, 2008, the Company has also made additional purchase commitments for equipment and services in the amount of $650,000 relating to the completion of the power line for the Youga Gold Project.

Executive employment arrangements The Company has an employment arrangement with the President and CEO of the Company which provides that, in the event of a sale of at least 50% in fair market value of all assets of the Company to an arms length third party or the acquisition by a party of 25% or more of the outstanding shares of the Company (change in control) then the President may elect to terminate his employment with the Company in which event the Company is required to pay the President a lump sum payment equal to three times his annual salary. The Company also has employment arrangements with other officers and employees of the Company, which provide that, in the event of a change of control of the Company and if, among other things, there is a change in job responsibilities, location or remuneration, then such officer or employee may elect to terminate their employment with the Company in which event the Company is required to pay such officer or employee a lump sum payment equal to their annual salary.

12. Capital stock

Authorized capital stock 250 million common shares without nominal or par value.

Issuance of common shares

Number of

shares

Ascribed

value

$

Balance – November 30, 2006 100,841,160 198,661,209

Issued in 2007

For cash, net of issue costs 11,700,000 30,111,752For cash, pursuant to warrant

agreements, net of costs 6,885,655 12,017,480For cash pursuant to stock option

plan 1,041,500 1,045,650Stock option exercises transferred

from contributed surplus - 90,000For the acquisition of the

remaining 50% of the Tirisano Diamond Mine Joint Venture 1,184,848 3,621,500

Treasury stock (488,000) (297,129)


Issued in 2008

For cash, net of issue costs 8,620,000 10,209,502For cash, pursuant to warrant

agreements, net of costs 2,212,963 3,872,686For cash pursuant to stock option

plan 340,000 414,800Stock option exercises transferred

from contributed surplus - 3,000




33

Treasury stock During 2007, subsidiaries of Etruscan Resources Inc., acquired 488,000 common shares of the Company at a cost of $297,129. These shares are held as portfolio investments; however, as required by generally accepted accounting principles, have been recorded as a reduction to capital stock. Warrants

Issuance of warrants

Number of

warrants

Ascribed

value

$

Balance –November 30, 2006 9,273,618 -

Issued as consideration for

arranging the senior debt

facility 1,000,000 1,522,132

Exercised during the year (6,885,655) -

Issued with the October 2007 public

offering 6,727,500 2,735,929


Issued as consideration for

arranging the subordinated debt

facility 1,452,222 1,800,000

Issued with the July 2008

public offering 4,819,500 1,268,492

Exercised during the period (2,212,963) -

Expired during the period (175,000) -

Re-pricing of warrants on

restructuring of debt

repayment schedule - 300,000


A summary of the Company’s common share purchase warrants outstanding is as follows:

Expiry Date

Exercise price

$

As at Nov 30,

2008

As at Nov 30,

2007

December 2007 1.75 - 2,387,963March 2009 3.50 1,000,000 1,000,000November 2010 4.00 6,727,500 6,727,500November 2012 0.78 1,452,222 -August 2011 1.85 4,819,500 - 13,999,222 10,115,463

Stock options plans The Company has two stock option plans. The Company has a stock option plan for the parent company, Etruscan Resources Inc.,and, in late 2007 the Company established a stock option plan for its diamond subsidiary, Etruscan Diamonds Limited. The details of these two option plans are described below.

Etruscan Resources Inc. Etruscan Resources Inc. has a stock option plan providing for the issuance of options equal to up to 10% of the outstanding shares. The Company may grant options to its directors, officers, employees and service providers. The exercise price of each option cannot be lower than the market price of the shares at the date of grant of the option. The number of shares optioned to insiders may not exceed 10% of the issued and outstanding shares at the date of grant. The options are exercisable immediately for a ten-year period from the date of grant. A summary of Etruscan Resources Inc.’s stock option plan and changes during the years is as follows:

Number of stock options

Weighted average exercise

price $

Balance November 30, 2006 6,486,000 1.38

Granted during the year 1,580,000 4.40Exercised during the year (1,041,500) 1.00


Granted during the year 1,570,000 2.33Exercised during the year (340,000) 1.22Expired during the year (25,000) 3.21


The following table summarizes information about the stock options outstanding and exercisable at November 30, 2008:

Range of

prices $

Number outstanding

Weighted average

remaining contractual life

(years)

Weighted average

exercise price$

0.26 – 0.50 785,000 1.5 0.34 0.51 – 0.75 179,500 6.9 0.64 0.76 – 1.24 390,000 4.1 1.01

1.25 1,480,000 0.5 1.25 1.48 – 1.90 745,000 6.0 1.67

1.98 1,225,000 7.3 1.98 2.00 – 2.43 95,000 6.6 2.17

2.44 1,435,000 9.3 2.443.21 – 3.93 395,000 7.8 3.31

4.45 1,500,000 8.3 4.45

8,229,500 5.6 2.19

Subsequent to November 30, 2008, the Company issued an additional 4,185,000 options to directors and employees with an exercise price of $0.37 per share. These options expire January 28, 2019.



34

The fair value of options recognized in the consolidated statements of operations and deficit, have been estimated at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used in the pricing model for the periods, are as follows:

2008 2007

Risk free interest rate 3.8% 4.6%

Expected life 5 years 5 years

Expected volatility 54% 56%

Expected dividend yield Nil Nil

Weighted average fair value at the

date of grant 1.18 1.66 Option pricing models require the input of highly subjective assumptions regarding the expected volatility. Changes in assumptions can significantly affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock options. Etruscan Diamonds Limited Etruscan Diamonds Limited has a stock option plan providing for the issuance of options equal to up to 10% of the outstanding shares. The company may grant options to its directors, officers, employees and service providers. The exercise price of each option cannot be lower than the market price of the shares at the date of grant of the option. The number of shares optioned to insiders may not exceed 10% of the issued and outstanding shares at the date of grant. The initial options issued under this plan are exercisable one year after completion of the initial public offering and for a ten-year period from the date of grant. Etruscan Diamonds Limited’s stock option plan and information related to the stock options outstanding at November 30, 2008 is summarized as follows:

Number of stock options

Weighted average exercise

price $

Weighted average

remaining contractual

life (years)

Balance November 30, 2007 630,000 2.00

9.7

Granted during the

period 200,000 2.00

Expired during the period (75,000) 2.00

Balance November 30, 2008 755,000 2.00

8.7

The fair value of options has been estimated at the grant date using the Black-Scholes option pricing model. However, subsequent to November 30, 2008, most of the employees of Etruscan Diamonds were terminated when the diamond operations were placed on care and maintenance and their stock options expired unvested on the date of termination.

The Company had calculated the initial fair value of all of the stock option grants as $1.1 million. The remaining employee holds 150,000 options with a calculated fair value of $200,000 on the date of grant. No stock based compensation has been recorded in the year ending November 30, 2008 as vesting is contingent on an initial public offering. The weighted average assumptions used in the pricing model for the period are as follows:

2008 2007

Risk free interest rate 4.55% 4.28%

Expected life 10 years 10 years

Expected volatility 50% 50%

Expected dividend yield Nil Nil

Weighted average fair value at the

date of grant

1.33 1.57 Option pricing models require the input of highly subjective assumptions regarding the expected volatility. Since there is no volatility data for Etruscan Diamonds Limited, as a non-public entity, Canadian GAAP requires that the expected volatility is calculated based on volatility data from similar public companies. Changes in assumptions can significantly affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock options. Contributed surplus

As at

Nov 30,

2008

As at

Nov 30,

2007

$ $

Balance-beginning of year 5,710,000 2,840,000

Exercise of options (3,000) (90,000)

Stock based compensation 1,837,000 2,960,000

Balance - end of year 7,544,000 5,710,000

Stock-based compensation relating to stock options In 2008 the Company recorded $1,453,400 of stock–based compensation which has been expensed during the period. The Company has also recorded $383,600 of stock–based compensation of which $192,000 has been allocated to the Youga Gold Project and $191,600 to mineral properties. In 2007 the Company recorded $2,259,500 of stock–based compensation which has been expensed during the period. The Company has also recorded $700,500 of stock–based compensation of which $241,500 has been allocated to the Youga Gold Project, $448,000 to mineral properties and $11,000 to property investigation.



35

Shareholder rights plan On January 13, 2006, the Company adopted a shareholder rights plan (Rights Plan). The Rights Plan has been adopted to ensure the fair treatment of shareholders in connection with any take-over offer for the Company and is not intended to prevent take-over bids that treat shareholders fairly. The Rights Plan will also provide the Board with more time to fully consider any unsolicited take-over bid and to pursue, if appropriate, other alternatives to maximize shareholder value in the event of a takeover bid. The Rights Plan was not adopted in response to any proposal to acquire control of the Company. Under the Rights Plan, those bids that meet certain requirements intended to protect the interests of all shareholders are deemed to be Permitted Bids. Permitted Bids must be made by way of a take-over circular prepared in compliance with applicable securities laws and, among other conditions, must remain open for sixty days. In the event a take-over bid does not meet the Permitted Bid requirements of the Rights Plan, the rights will entitle shareholders, other than any shareholder or shareholders making the take-over bid, to purchase additional common shares of the Company at a substantial discount to the market value at the time. The Rights Plan was presented for ratification by the shareholders at Etruscan’s 2006 Annual General Meeting held on May 25, 2006. The shareholders approved the Rights Plan and the plan has an initial term of three years. The Rights Plan is available on the Canadian System of Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com under the Company’s name.

13. Accumulated other comprehensive loss

In 2007, the Company adopted the new CICA handbook sections which establish standards for reporting and presenting certain gains and losses normally not included in net earnings or losses, such as unrealized gains and losses related to available for sale securities and foreign currency translation adjustments, in a statement of comprehensive loss. These sections establish standards for the presentation of equity and changes in equity as a result of the new requirements. The guidelines allow retroactive treatment of the cumulative translation adjustment; however, the section does not allow retroactive treatment for unrealized gains.

On December 1, 2006, the Company re-measured its available-for-sale securities at fair value (market value) as appropriate. A net unrealized gain of $2,143,523 was recorded in opening accumulated other comprehensive loss. The change in accumulated other comprehensive loss is as follows:

Nov 30,

2008

Nov 30,

2007

$ $

Balance - beginning of the year (1,605,490) (1,850,000)

Cumulative effect of adopting

new accounting policy as

at December 1, 2006 - 2,143,523

Other net comprehensive loss for

the year (306,694) (191,364)

Other comprehensive income

recognized in net income

for the year 10,600 (1,707,649)

Balance - end of the year (1,901,584) (1,605,490)

The components of accumulated other comprehensive loss is as follows:

Nov 30,

2008

Nov 30,

2007

$ $ Accumulated unrealized gains on

other assets (51,584) 244,510 Cumulative translation

adjustment (1,850,000) (1,850,000)

(1,901,584) (1,605,490)

14. Related party transactions

The Company recorded the following charges by (revenue from) affiliated companies, employees and directors and business interests thereof:

2008

$ 2007

$

Net interest charged - (11,798)Business development expenses 38,800 33,600



36

15. Income taxes

The following table reconciles the expected income tax recovery at the statutory income tax rate to the amounts recognized in the consolidated statements of operations for the years ended November 30, 2008 and 2007.

2008

($ 000’s) 2007

($ 000’s)

Loss for the years 42,701 35,831Income tax rate 35% 35% Expected income tax recovery 14,945 12,541Tax effect of equity loss on

investments 4,767 275Other non-deductible expenses (50) (57)Effect of expiry of losses (840) (1,232)Non-deductible stock option

expense (510) (790)Valuation allowance (18,312) (10,737) Provision for income taxes - - The Company has accumulated non-capital losses for Canadian tax purposes of approximately $27.8 million which may be carried forward and used to reduce taxable income in future years. These losses (in millions) may be claimed no later than: $ Year ending November 30, 2009 3.4

2014 2.8 2015 3.8 2026 7.2 2027 2.1 2028 8.5

In addition, the Company has incurred resource expenditures of approximately $15 million in foreign countries for Canadian tax purposes, which may be carried forward indefinitely and used to reduce taxable income in future years. The Company has also incurred capital losses carry forward for Canadian tax purposes of approximately $5 million available to reduce future capital gains. The potential tax benefits of these items have not been recognized in these accounts as realization is not considered more likely than not.

16. Capital disclosures

The Company manages its capital to attempt to maximize the return to shareholders through the optimization of a reasonable debt and equity balance commensurate with current operating requirements. The strategy remains unchanged from 2007. The capital structure consists of debt, cash and cash equivalents and shareholders’ equity. The Company raises capital, as necessary, to meet its needs and to take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. There were no changes to the Company’s approach to capital management during the year ended

November 30, 2008 compared to the prior year which is summarized as follows:

As at

Nov 30,

2008

As at

Nov 30,

2007

$ $

Total debt 52,616,096 35,764,203

Less: cash and cash

equivalents (6,961,939) (31,926,710)

Net debt 45,654,157 3,837,493

Shareholders’ equity 69,081,124 92,375,575

Total Capital 114,735,281 96,213,068

The Company is in compliance with its debt covenants.

17. Financial instruments

Financial assets, financial liabilities and derivative financial instruments are classified into one of five categories: held-to-maturity, available-for-sale, loans and receivables, other financial liabilities and held-for-trading. Financial assets

The carrying amounts and fair values of financial assets are as follows:

Category

As at Nov 30,

2008 $

As at Nov 30,

2007 $

Cash and cash equivalents (a) Held-for-trading 3,867,363 31,926,710

Restricted cash (a) Held-for-trading 3,094,576 - Amounts receivable (a)

Loans and receivables 743,707 719,577

Available for sale securities (b) Available-for-sale 65,086 376,180

a) The carrying amount is a reasonable approximation of

estimated fair value due to the immediate or short-term maturities of these financial instruments.

b) The available for sale securities are recorded at fair value

as represented by quoted market prices in an active market.

Financial liabilities The carrying amounts and fair values of financial liabilities are as follows:

Category

As at Nov 30,

2008 $

As at Nov 30,

2007 $

Accounts payable and accrued liabilities (a)

Other financial liabilities 26,019,956 11,404,302

Long-term debt (c)

Other financial liabilities 48,623,693 32,323,179

Financial derivative instrument (d) Held-for-trading 26,300,000 33,500,000



37

c) The carrying amount is a reasonable approximation of estimated fair value as interest rates remain consistent with current rates available to the Company.

d) The financial derivative instruments are recorded at fair

value. Financial instrument risk exposure and risk management The Company is exposed in varying degrees to a variety of financial instrument related risks. Management approves and monitors the risk management processes. The types of risk exposure and the way in which such exposure is managed is provided as follows: Credit risk Management does not believe it is exposed to any significant concentration of credit risk with the exception of the value added taxes recoverable from the government of Burkina Faso, which accounts for 76% of amounts receivable as at November 30, 2008. The Company’s exposure to credit risk on its cash and equivalents, restricted cash and deposits is limited by maintaining these assets with high-credit quality financial institutions. The Company does not have financial assets that are invested in asset backed commercial paper. Liquidity risk The Company ensures that there is sufficient capital in order to meet short term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash and cash equivalents. The Company will have to raise additional debt or equity financing or sell some of its assets in order to meet its capital requirements. Market risk The significant market risk exposures to which the Company is exposed are foreign exchange risk, interest rate risk and commodity price risk. These are discussed further below. Foreign exchange risk The Company’s revenues from the production and sale of gold and diamonds are denominated in US$. A significant portion of the Company’s operating expenses, operating materials, supplies, services and equipment purchases are in non US$ currencies. Accordingly, the results of the Company’s operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Company are reported in Canadian dollars in the Company’s consolidated financial statements. The

fluctuation of the Canadian dollar in relation to the US$ and other non US$ currencies will consequently have an impact upon the profitability of the Company and may also affect the value of the Company’s assets and the amount of shareholders’ equity. Interest rate risk In respect of financial assets, the Company’s policy is to invest cash at floating rates of interest and cash reserves are to be maintained in cash or cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates therefore impact on the value of cash equivalents and short term investments. With respect to financial liabilities, the long-term debt is subject to interest rate risk since it bears interest at floating rates of interest. Commodity price risk The value of the Company’s mineral resource properties is related to the price of gold and diamonds and the outlook for these minerals. Gold prices historically have fluctuated widely and are affected by numerous factors outside of the Company’s control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative hedging activities, and other factors. The profitability of the Company’s operations is highly dependent on the market price of gold. If gold prices decline for a prolonged period below the cost of production at the Company’s mines, it may not be economically feasible to continue production. In order to mitigate this risk, the Company has entered into a gold price protection program (see note 8).

18. Supplemental cash flow information During the year ended November 30, 2008, the Company incurred expenditures on mineral properties for $600,000 (2007 - $250,000) and capital assets for $5 million (2007 – $6.7 million) all of which were recorded as accounts payable at November 30, 2008. The Company also recorded additional reclamation assets and liabilities in the amount of $1.1 million (November 2007 - $650,000). During the current year the Company recorded the issuance of warrants at a calculated fair value of $2.1 million. In 2007, the Company issued shares at the fair value of $3,621,500 on the acquisition of Mvelaphanda Exploration’s 50% of the Tirisano Diamond Mine Joint Venture, recorded the fair value in the amount of $825,000 for the 50% of the Ghana concessions contributed by Haber and settled employee loans of $262,480 by accepting shares of the Company. These items are non-cash transactions and have been excluded from the statements of cash flows.



38

19. Segmented information

The Company’s three main operating segments are gold mining, gold exploration and development and diamond exploration and development. The Company’s segmented information is as follows:

Nov 30, 2008

$

Nov 30,2007

$ Net Revenue

Gold mining 24,181,196 -

Segment income (loss) Gold mining (3,565,841) - Gold exploration and development (2,062,841) - Diamond exploration and development (19,072,894) 1,780,516

Income (loss) of combined segments (24,701,576) 1,780,516

Foreign currency (loss) gain (10,297,364) 2,448,222 Stock based compensation (1,453,400) (2,259,500)Corporate general and

administration – net (5,880,390) (3,671,110)Loss on financial derivative (368,107) (34,129,721) (42,700,837) (35,831,593) Capital Expenditures

Corporate 91,066 300,981 Gold mining 17,882,574 -Gold exploration and development 15,715,835 57,720,432 Diamond exploration and development 8,926,488 13,214,789 42,615,963 71,236,202

Assets Corporate 2,240,709 603,463 Gold mining 122,698,813 - Gold exploration and development 43,940,615 120,745,697 Diamond exploration and development 4,839,636 24,620,085

173,719,773 145,969,245 Assets Canada 2,240,709 603,463 South Africa 4,839,636 24,620,085 Mali 14,123,543 11,682,567 Côte d’Ivoire 12,852,725 9,156,447 Burkina Faso 128,403,439 93,574,715Ghana 6,127,858 4,177,834 Namibia 5,060,009 2,154,134 Benin 71,854 - 173,719,773 145,969,245

20. Subsequent events

Promissory notes

Subsequent to November 30, 2008, the Company completed a US$5 million debt financing by issuing senior unsecured convertible promissory notes (Notes) to Conus Partners Inc. and its affiliates (Lenders). The Notes are repayable on December 24, 2010 and bear interest at the rate of 7% per annum. If the Notes are not repaid, the Notes will be convertible, at the option of the holder, at any time after June 30, 2010, into common shares of Etruscan at a conversion price of $1.00 per common share. As part of the financing, Etruscan also agreed to issue to the Lenders two tranches of warrants. A total of 10,430,531 warrants representing 50% of the principal of the Notes were issued to the Lenders on closing (A Warrants). Each A Warrant entitles the holder to purchase one common share of Etruscan on or before December 24, 2013 at an exercise price of $0.2915 per common share. If the Notes have not been repaid by December 24, 2009, the Lenders will be entitled to a second tranche of warrants (B Warrants) equal to 50% of any principal and interest outstanding on the Notes at that time divided by the five day volume weighted average trading price (vwap) of the common shares of Etruscan on the TSX immediately prior to the first anniversary of the Notes (First Anniversary vwap). Each B Warrant will entitle the holder to purchase one common share of Etruscan for a period of five years at an exercise price equal to the First Anniversary vwap. In accordance with the requirements of the TSX, Etruscan has agreed that it will not issue greater than 2,852,081 B Warrants to the Lenders without obtaining shareholder approval. Private placement Subsequent to November 30, 2008, the Company reached an agreement to complete a $10.5 million private placement equity financing comprised of 26,315,789 common shares and 6,890,741 warrants. Each warrant will entitle the holder to acquire a common share at a price of Cdn$0.5478 until July 15, 2010. On February 24, 2009 $5.8 million of the private placement closed and the balance of the private placement is expected to be closed in March 2009.

21. Comparative figures

Certain comparative figures have been reclassified to conform to the presentation adopted in the current period.

CCoorrppoorraattee iinnffoorrmmaattiioonn


39

Corporate Office Suite 306, Royal Bank Building 1597 Bedford Highway Halifax, Nova Scotia CANADA B4A 1E7 Tel: +01 (902) 832 6700 Toll Free: +01 877 465 3674 Fax: +01 (902) 832 6702 email: [email protected] Website: www.etruscan.com

Officers Gerald McConnell Q.C. President & CEO Donald Burton M.Sc. VP Corporate Development & COO Robert Harris M.Sc. Eng., P.Eng. VP Operations Werner Claessens, LicGeo.Sc. VP Exploration Glenn Holmes C.A. VP Finance, CFO & Treasurer Janice Stairs LL.B, M.B.A. VP, General Counsel & Corporate Secretary

Directors Gerald McConnell Halifax, Nova Scotia Joel D. Schneyer Parker, Colorado Rick Van Nieuwenhuyse Vancouver, British Columbia William Young Ottawa, Ontario Walt Tyler Lakewood, Colorado Eddie Lui Hong Kong Michael L. Page Castle Rock, Colorado Stephen R. Stine Centennial, Colorado

Stock Listing Toronto Stock Exchange

Trading Symbol: EET Warrants: EET.WT

EET.WT.A

Register and Transfer Agent CIBC Mellon Trust Company

Halifax, Nova Scotia

Auditors PricewaterhouseCoopers LLP


Legal Counsel McInnes Cooper


Bankers TD Canada Trust


Nedbank Johannesburg, South Africa

Bank of Africa

Burkina Faso, Côte d’Ivoire and Mali, West Africa

Field Offices Youga Gold Mine, Burkina Faso 08 BP 11197, Rue 13.26 porte 195 Ouagadougou 10, BURKINA FASO Tel: +226 50 36 10 80 Fax: +226 50 36 02 43 Etruscan Resources Burkina Faso Secteur 13, Section EP, Lot 15 Parcelle 08, Zone du Bois Ouagadougou, BURKINA FASO Tel: +226 50 36 97 49 Fax: +226 50 36 97 48 Etruscan Resources Mali BPE 2564 Bamako Quartier Mali, rue 229, Lot 55X Bamako, MALI Tel/Fax : +223 20 23 99 04 Etruscan Resources Côte d’Ivoire 25 BP 603, Abidjan 25 CÔTE D’IVOIRE Tel: +225 22 44 53 40 Fax: +225 22 44 53 48 Etruscan Resources Ghana H/NO, C6/17 North Alajo PMB 38, Kanda, Accra, GHANA Tel: +233 21 24 19 83 Fax: +233 21 24 19 84 Etruscan Resources Namibia 62 Aschernborn Street Pionierspark, Windhoek, NAMIBIA Tel: +264 61 30 32 07 Fax: +264 61 30 32 10 Etruscan Diamonds South Africa 10 Roth Street, P.O. Box 46 Ventersdorp 2710, SOUTH AFRICA Tel: +27 18 264 4627 Fax: +27 18 264 4628

etruscan resources inc. (eet:tsx)

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