A N N U A L R E P O R T

A N N U A L R E P O R TJuly 31, 2009

LUCARA DIAMOND CORP.MANAGEMENT’S DISCUSSION AND ANALYSISJuly 31, 2009This management’s discussion and analysis of results of operations (“MD&A”) describesmaterial factors that have affected the performance of Lucara Diamond Corp. (the “Company” or“Lucara”) and its subsidiaries during the year ending July 31, 2009, and factors that may affectits future performance. The following information should be read in conjunction with the auditedconsolidated annual financial statements for the year ended July 31, 2009 and 2008, togetherwith the notes thereto, prepared by management in accordance with Canadian generallyaccepted accounting principles. The effective date of this MD&A is November 24, 2009.Effective July 31, 2008, the Company changed its reporting currency to US dollars. Allcomparative financial information has been restated to reflect the Company’s results as if theyhad been historically reported in US dollars.Some of the statements in this MD&A are forward-looking statements that are subject to riskfactors set out in the cautionary note contained herein.Additional information about the Company and its business activities is available on SEDAR atwww.sedar.comHIGHLIGHTSMothae Project, Lesotho• Processing of a 100,000 tonne bulk sample was completed in April 2009, yielding anoverall sample grade of 4.7 carats per hundred tonnes (cpht) and a modeleddiamond value of US$549 per carat.• Delineation drilling and geologic modeling carried out concurrent with the bulksampling program resulted in an estimate of between 25 and 35 million tonnes ofkimberlite within the Mothae pipe to a depth of 200 meters.• Mothae Diamonds Pty Ltd (“Mothae Diamonds”), an indirect wholly-ownedsubsidiary, was granted a diamond mining lease by the Lesotho Department ofNatural Resources in September 2009. Concurrent with the issuance of the mininglease, Mothae Diamonds entered into a mining agreement which establishes a 25%interest in the project held by the Government of Lesotho and a 75% interest held byMothae Diamonds. The mining lease is valid for 10 years and renewable for anadditional 10 years.Corporate• On July 3, 2009, the Company completed a business combination with MotapaDiamonds Inc (“Motapa”) by way of a Plan of Arrangement (“ArrangementAgreement”). As a result of this business combination, the Company acquired theremaining 35% interest in the Mothae Project in Lesotho, and exploration propertiesin Namibia and Democratic Republic of Congo.2 | P age

AK6 Kimberlite, Botswana• On November 10, 2009, the Company, through a newly created indirect whollyownedsubsidiary Boteti Diamond Holdings Inc (“Boteti Diamond”), entered into anagreement to purchase a 70.268% interest in the AK6 project from De BeersProspecting Botswana (Pty) Limited (“De Beers”). Boteti Diamond will acquire itsinterest in consideration of $49 million. The remaining interest in Boteti is held as to28.381% by African Diamonds PLC (“African Diamonds”) and indirectly by WatiVentures (Pty) Ltd. (“Wati Ventures”) as to 1.351%. The AK6 kimberlite pipe is anadvanced diamond development project located in the Orapa district of Botswana,the largest diamond producing region in the world.INTRODUCTIONLucara is a diamond development company focused in Africa. The business of Lucara consistsof the acquisition and exploration of diamond exploration and development properties. Lucara’shead office is in Vancouver, British Columbia, and its common shares are listed on the TSXVenture Exchange under the symbol “LUC”.The principal assets of Lucara and the focus of Lucara’s development and exploration activitiesare its interest in diamond mining, exploration and prospecting licenses in Lesotho, Botswana,Namibia and Democratic Republic of Congo. In addition, Lucara has an active generativeprogram that seeks to bring new projects into its portfolio.Acquisition of Motapa Diamonds Inc. (“Motapa”)On July 3, 2009, the Company completed a business combination by way of a plan ofarrangement. Pursuant to the Arrangement Agreement, the Company acquired all of the issuedand outstanding shares of Motapa by issuing 34,455,022 shares on the basis of 0.9055 sharefor each one Motapa share (“Exchange Ratio”). All outstanding Motapa stock options wereexchanged for replacement stock options of the Company using the Exchange Ratio.As a result of the Arrangement Agreement, the Company acquired the remaining 35% interestin the Mothae diamond project and joint venture exploration properties located in Namibia andDemocratic Republic of Congo.DEVELOPMENT AND EXPLORATION UPDATELand statusThe following summarizes the Company’s current land holdings:Country Property Type Area (km2)Lesotho Mothae Diamond Mining Lease 20(75% interest)Namibia Kavango Prospecting license (10) 8,363(49% interest)3 | P age

Mothae Diamond Project – LesothoThe Mothae kimberlite pipe is located in northeast Lesotho and is a large low grade kimberlitewhich contains a significant population of large, high value Type lla diamonds. In April 2009, a100,000 tonne bulk sample was completed by Motapa (the operator at the time) which yieldedan average stone size of 0.44 carats per stone and a sample grade of 4.7 carats per 100tonnes. A diamond valuation exercise of the recovered 3,890 carat parcel was completed inJune 2009 resulting in a modeled diamond value of US$549 per carat.A preliminary delineation drilling program, comprising 15 holes for a total 2,455 meters, wascompleted January with the objective of compiling a preliminary geologic model for the Mothaekimberlite and to provide a provisional global tonnage estimate to 200 meter depth.Bulk sample information, together with preliminary delineation drilling and geological modelingtest work completed on the Mothae diamond project has resulted in an estimated tonnagepotential of between 25 and 35 million tonnes and an estimated in situ grade potential ofbetween 3 and 4 carats per hundred tonnes. This estimate is preliminary and does not conformto the definition of a mineral resource established by NI43-101. It is uncertain if furtherexploration and development work will result in a definition of a mineral resource on theproperty. The results derived from these calculations may not accurately reflect the totalnumber of carats that the Mothae kimberlite contains because: (i) the estimated tonnage doesnot constitute a mineral resource; (ii) further exploration will not necessarily provide the basisfor determining a mineral resource; and (iii) the diamond content of the samples collected todate may not be representative of the overall diamond content of these bodies given a numberof factors including the location of the drill holes and the location and size of the samples.Kavango Project – NamibiaPursuant to the Arrangement Agreement, the Company acquired a 49% interest in 10 ExclusiveProspecting Licenses for precious stones which cover approximately 8,363 km2 in northeastNamibia. Namdeb Diamond Corporation (“Namdeb”) earned 51% interest in the project bycommitting to fund a 24 month work program of approximately $4.48 million by March 2009. Thejoint venture agreement provides Namdeb with a second option to earn an additional 14%interest (for a total of 65%) by fully funding the project to completion of a bankable feasibilitystudy within five years of electing to exercise its second option.In late 2008, Namdeb advised Motapa that, as a result of the global economic financialdownturn, and resultant cash shortfall for Namdeb, that it would be unable to meet its fundingcommitment. The Company has agreed in principle to grant an extension to the time period inwhich Namdeb can meet its funding requirement of $4.4 million, and Namdeb has agreed inprinciple that the 51% interest it currently holds in the Kavango Project will revert to theCompany until such time Namdeb has meet its funding commitment.Analytical results on kimberlite indicator minerals recovered from stratigraphic drill holescompleted by Namdeb in 2007 provided an encouraging indication of a local diamond bearingkimberlite source. Reverse circulation drilling commenced in early May 2008 and 15 holes werecompleted. Ground gravity surveys were completed over previously identified magnetic targetsthat had been previously drilled and which had returned high interest indicator mineral4 | P age

ecoveries. Sample processing results have presented a full suite of kimberlite indicatorminerals. In particular Drill hole RC 29, located in the northwest part of the license area,produced a full suite of kimberlite indicator minerals in anomalous concentrations from a drillsample at the base of Kalahari sands, which suggests these grains may have been derived froma nearby source. Namdeb is currently developing plans for follow-up exploration work on theRC 29 kimberlite indicator mineral anomaly.Lufupa Project – Democratic Republic of Congo (“DRC”)Pursuant to the Arrangement Agreement, the Company has acquired an option to earn a 50%interest in certain DRC exploration licenses held by African Minerals (Barbados) Ltd SPRL(“African Minerals”) by funding $2.0 million by October 2012.A field exploration program was implemented during September and October 2008 by Motapa,focusing on evaluation of aeromagnetic targets with heavy mineral sampling and groundgeophysical surveying of positive aeromagnetic targets. A total of 18 targets have beenprioritized based on ground magnetics for drill testing. An additional 22 positive aeromagnetictargets require ground magnetic survey coverage.SELECTED ANNUAL FINANCIAL INFORMATIONYear endedJuly 31, 2009Year endedJuly 31, 2008Year endedJuly 31, 2007Statement of Operations DataExploration Expenditures $ 549,132 $ - $ -Operating Expenses $ 1,198,954 $1,102,800 $ 189,583Net Loss $ 1,738,935 $1,002,541 $ 140,969Data per Common ShareBasic and Diluted Net Loss $ 0.03 $ 0.02 $ 0.00Balance Sheet Data (1)Total Assets $25,918,522 $5,175,447 $5,455,108Long Term Liabilities $ 3,759,982 $ - $ -(1) Refer to Subsequent EventsRESULTS OF OPERATIONSThe Company’s net loss for the year ended July 31, 2009 was $1,738,935 or $0.02 per sharecompared to a net loss $1,002,541 or $0.02 per share for the year ended July 31, 2008. Theincrease in the net loss is primarily due to higher exploration expenditures as the Company hadearned a 65% interest in the Mothae project in May 2009 and was required to fund its portion ofthe exploration expenditures thereafter. Prior to this date, payments made pursuant to theoption agreement with Motapa were capitalized as acquisition costs to Mineral Properties. Inaddition salaries and benefits have also increased year over year as the Company has grownand added additional employees.The operating losses are a reflection of the Company’s status as a non-revenue producingdiamond development and exploration company. As the Company has no main source ofincome, losses are expected to continue.5 | P age

SELECTED QUARTERLY FINANCIAL INFORMATIONFinancial Data for 8QuartersThree months Ended Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08 Oct-07A. Exploration Expenditures 237,531 131,824 143,299 36,478 - - - -B. Operating Expenses 508,025 180,090 200,679 310,160 395,494 193,523 401,094 112,689C. Net loss 760,442 311,820 339,076 327,597 376,155 182,067 356,981 87,338D. Loss per share(basic and diluted) ($) .01 0.00 0.01 0.01 0.00 0.01 0.01 0.00Operating expenses and net loss, quarter over quarter, is affected by the level of stock basedcompensation recognized, corporate development initiatives and exploration expendituresincurred and will vary accordingly. Stock based compensation recognized in a quarter willdepend on options granted and vested.LIQUIDITY AND CAPITAL RESOURCESAs of July 31, 2009, the Company had cash of $2,050,723 and working capital of $1,851,008 asat July 31, 2009 as compared to cash of $1,308,436 and working capital of $1,254,964 as atJuly 31, 2008.Net cash used in operating activities was $1,472,623 for the year ended July 31, 2009 andconsisted primarily of net loss from operations of $1,738,935 and adjusted for the impact of noncashitems and changes in non-cash working capitalNet cash from financing activities was $4,681,844 and consisted primarily of net proceeds froma private placement completed in August 2008.Net cash used in investing activities was $2,057,798 and consisted of $4,172,860 incurred tomeet the funding requirements as per the Mothae Diamond option agreement with Motapa,offset in part by cash acquired on the acquisition of Motapa of $2,115,162.Based on the Company’s financial position at July 31, 2009, the Company does not havesufficient funds to complete its planned expenditures on the Mothae Diamond Project and theAK6 Project upon acquisition, repayment of short term loans entered into subsequent to theyear end and general corporate expenses for the next twelve months. The Company’soperations are dependent on raising additional funds and will be required to carry out itscurrent business objectives.The global crisis has adversely affected the mineral industry and the ability to raisedevelopment/exploration funding through the equity market. Consequently, there can be noassurance that an equity financing will be available to the Company in the amount required atany time or for any period or, if available, that it can be obtained on terms satisfactory to theCompany.6 | P age

OFF-BALANCE SHEET ARRANGEMENTSThe Company has no off-balance sheet arrangements.TRANSACTIONS WITH RELATED PARTIESDuring the year ended July 31, 2009 the Company incurred:• $205,267 (2008 – $238,536) in respect of administrative services and office facilitiesprovided by a company owned by the CEO and President of the Company. As at July31, 2009, there was $1,010 (July 31, 2008 – $16,511) included in amounts due torelated parties.• $45,901 (2008 – $Nil) in respect of a donation to Lundin for Africa Foundation, acharitable organization with common directors.• $53,711 (2008 - $Nil) in respect of generative exclusivity rights, laboratory services,professional fees, project, general and administrative services provided by a companywith a common director. As at July 31, 2009 there was $107,824 (July 31, 2008 - $NiL)included in amounts due to related parties.These transactions, occurring in the normal course of operations, are measured at theexchange amount which is the amount established and agreed to by the related parties.ADOPTION OF NEW ACCOUNTING STANDARDSCICA Section 1400, “General Standards on Financial Statement Presentation”, has beenamended to include requirements to assess and disclose an entity’s ability to continue as agoing concern. This new standard became effective for the Company on July 1, 2008. Therewas no material impact on the Company’s financial condition or operating results as a result ofthe adoption of the new standard.RECENT ACCOUNTING PRONOUNCEMENTSIn February 2008, the Canadian Institute of Chartered Accountants issued the following newstandard:Section 3064, “Goodwill and Intangible Assets”. This section replaces Handbook section 3062“Goodwill and Other Intangible Assets” and establishes revised standards for the recognition,measurement and disclosure of goodwill and intangible assets. The Company will be requiredto adopt this standard for interim and annual financial statements relating to fiscal yearcommencing August 1, 2009. The adoption will not have material impact on the consolidatedfinancial statements.In January 2009, the Canadian Institute of Chartered Accountants issued the following newstandards:Section 1582 “Business Combinations”, Section 1601 “Consolidated Financial Statements” andSection 1602 “Non-controlling interests”.7 | P age

Section 1582 replaces Handbook section 1581 “Business Combinations” and sections 1601 and1602 together replace Handbook section 1600 “Consolidated Financial Statements”. Theadoption of section 1582 and collectively, 1601 and 1602 provides the Canadian equivalent toInternational Financial Reporting (“IFRS”) 3 “Business Combinations” and InternationalAccounting Standards (IAS) 27 “Consolidated and Separate Financial Statements”, respectively.CICA 1582 applies prospectively to business combinations for which the acquisition date is onor after the beginning of the first annual reporting period beginning on or after August 1, 2011.CICA 1601 and CICA 1602 apply to interim and annual consolidated financial statementsrelating to years beginning on or after January 1, 2011.The Company has not yet determined the effect if any that the adoption of these new standardswill have on its consolidated financial results.International Financial Reporting Standards (“IFRS”)The Canadian Accounting Standards Board (“AcSB”) has set January 1, 2011 as the date forpublicly listed companies to adopt IFRS, replacing Canadian GAAP. Accordingly, IFRScompliant financial statements will be required for the first quarter of 2011. Comparative figurespresented in these financial statements are also required to comply with IFRS.During the year ended July 31, 2009, the Company completed an IFRS diagnostic study toassess the impact of the transition to IFRS on the Company’s accounting policies and toestablish a project plan to implement IFRS. A number of key accounting areas where IFRSdiffers and accounting alternative were reviewed. In 2009/2010 the Company will proceed tomake a determination of the impact of transaction to IFRS on its financial statements andsystems, if any.CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in conformity with Canadian generally acceptedaccounting principles requires management to establish accounting policies and to makeestimates that affect both the amount and timing of the recording of assets, liabilities, revenuesand expenses. Some of these estimates require judgements about matters that are inherentlyuncertain.Note 2 to the consolidated financial statements for the year ended July 31, 2009 includes asummary of the significant accounting policies adopted by the Company. The following policiesare considered to be the critical accounting policies since they involve the use of significantestimates.Mineral PropertiesThe Company carries the acquisition costs of its mineral properties at cost less any provision forimpairment. The costs of each property will be amortised over the economic life of the propertyon a units-of production basis. Costs are charged to operations when a property is abandonedor when impairment in value is other than temporary has been determined. Exploration costsare charged to operations as incurred.The Company undertakes a periodic review of the carrying values of mineral properties andwhenever events or changes in circumstances indicate that their carrying value may exceedtheir fair value. In undertaking this review, management of the Company is required to make8 | P age

significant estimates. These estimates are subject to various risks and uncertainties, which mayultimately have an effect on the expected recoverability of the carrying values of the mineralproperties and related expenditures.Income TaxesFuture income tax assets and liabilities are determined based on differences between thefinancial statement carrying values of assets and liabilities and their respective income taxbases (“temporary differences”), and losses carried forward. Future income tax assets andliabilities are measured using tax rates that are expected to be in effect when the temporarydifferences are likely to reverse. The effect on future income tax assets and liabilities of achange in tax rates included in operations in the period in which the change is substantivelyenacted. The amount of future income tax assets recognized is limited to the amount of thebenefit that is more likely than not to be realized.Management of the Company is required to exercise judgements and make assumptions aboutthe future performance of the Company in determining its ability to utilize loss carry-forwardsand realise the benefits of future income tax assets.Stock Based CompensationIn calculating the fair value of stock options granted, management is required to makesignificant estimates in relation to the future volatility of the Company’s share price and theperiod in which stock options will be exercised. The selection of the volatility factor and theestimate of the expected option life will have a significant impact on costs recognized for stockbased compensation. The estimates concerning volatility are made with reference to historicalvolatility, which is not necessarily an accurate indicator of volatility that will be experienced inthe future. Management assumes that stock options will be exercised prior to their expiry date.FINANCIAL INSTRUMENTSThe Company’s financial instruments consist of cash, marketable securities, accountsreceivable, other assets, accounts payable and accrued liabilities and due to related parties.The carrying value of cash, marketable securities, accounts receivable and accounts payableapproximates fair value.OUTSTANDING SHARE DATAAs of November 24, 2009, there were 98,441,243 common shares and 4,286,706 stockoptions outstanding.9 | P age

RISKS AND UNCERTAINTIESThe operations of the Company are speculative due to the high risk nature of its business whichincludes the acquisition, financing, exploration and development of diamond properties.Material risk factors and uncertainties, which should be taken into account in assessing theCompany’s activities, include, but are not necessarily limited to, those set below. Any one ormore of these risks could have a material effect on the Company.Additional Funding RequirementsThe further development and exploration of the various mineral projects in which the Companyholds an interest depends upon the Company’s ability to obtain financing through equity or debtfinancing, joint ventures or other means. The Company has been successful in the past inobtaining financing through the sale of equity securities, there can be no assurance that theCompany will be successful in obtaining additional financing, if available, on a timely basis, inthe amount required or on favorable terms. Failure to obtain equity or debt financing on a timelybasis may cause the Company to postpone its exploration and development plans or forfeitrights in some of its projects.Uncertainties Related to Mineral Resource EstimatesThere is a degree of uncertainty attributable to the calculation of mineral resources andcorresponding grades being mined or dedicated to future production. Until resources areactually mined and processed, the quantity of resources and grades must be considered asestimates only. In addition, the quantity and value of reserves or resources may vary,depending on commodity prices. Any material change in the quantity of resources, grades orstripping ratio may affect the economic viability of the Company’s properties. In addition, therecan be no assurance that recoveries in small-scale laboratory tests will be duplicated in largerscaletests under on-site conditions, or during production. Determining the economic viability ofa diamond project is complicated and involves a number of variables. It involves extensivegeostatistical analysis due to the highly variable nature of diamond distribution in kimberlitepipes and the fact that both diamond grade and average diamond value play important roles indetermining the viability of any given diamond project. Since no two diamonds are exactly alike,a significant parcel of diamonds is needed to gain the confidence levels on diamond sizedistribution and average diamond value necessary to make any realistic decisions regardingfuture development.Diamond Prices and MarketabilityThe mining industry, in general, is intensely competitive and there is no assurance that, even ifcommercial quantities of diamonds are discovered, a profitable market will exist for the sale ofdiamonds produced. Factors beyond the control of the Company may affect the marketability ofany diamonds discovered and which cannot be accurately predicted, such as marketfluctuations, the proximity and capacity of processing facilities, processing equipment, and suchother factors as government regulations, including regulations relating to royalties, allowableproduction, importing and exporting of minerals and environmental protection, the combinationof which factors may result in the Company not receiving an adequate return of investmentcapital if it goes into production. Pricing is also affected by numerous factors beyond theCompany’s control such as international economic and political trends, global or regional10 | P age

consumption and demand and supply patterns. There is no assurance that the price ofdiamonds recovered from any diamond deposit will be such that they can be mined at a profit.Currency RiskThe Company’s business is mainly transacted in South African Rand and U.S. dollar currencies.As a consequence, fluctuations in exchange rates may have a significant effect on the cashflows and operating results of the Company in either a positive or negative direction.Foreign Operations RiskThe Company’s current projects are located in Lesotho, Namibia, the Democratic Republic ofCongo and Botswana once the AK6 project is acquired. Each of these countries expose theCompany to risks that may not otherwise be experienced if all operations were domestic. Therisks include, but are not limited to, environmental protection, land use, water use, health safety,labor, restrictions on production, price controls, currency remittance, maintenance of mineraltenure and expropriation of property. There is no assurance that future changes in taxes orsuch regulation in the various jurisdictions in which the Company operates will not adverselyaffect the Company’s operations. Although the operating environment in Lesotho, Namibia andBotswana is considered favorable compared to that in other developing countries, there are stillpolitical risks. These risks include, but are not limited to terrorism, hostage taking, militaryrepression, expropriation, extreme fluctuations in currency exchange rates, high rates ofinflation and labor unrest. Changes in mining or investment policies of shifts in politicalattitudes may also adversely affect the Company’s business. The effect of these factors cannotbe accurately predicted.Mineral Exploration and DevelopmentThe business of exploring for minerals and mining is highly, speculative in nature and involvessignificant financial and other risks which even a combination of careful evaluation, experienceand knowledge may not eliminate. There is no certainty that the expenditures made or to bemade by the Company in the exploration and development of its mineral properties in which ithas an interest will result in the discovery of commercially mineable quantities. Most explorationprojects do not result in the discovery of commercially mineable deposits. While the discoveryof an diamond bearing structure may result in substantial rewards, few properties which areexplored are ultimately developed into producing mines. Major expenses may be required toestablish reserves by drilling and to construct mining and processing facilities at a site. It isimpossible to ensure that exploration programs carried out by the Company will result inprofitable commercial mining operations.Title MattersAny changes in the laws of Lesotho, Namibia or Botswana relating to mining could materiallyaffect the rights and title to the interests held there by the Company. No assurance can begiven that applicable governments will not revoke or significantly alter the conditions of theapplicable exploration and mining authorizations nor that such exploration and miningauthorizations will not be challenged or impugned by third parties.11 | P age

InfrastructureExploration, development, mining and processing activities depend on the availability ofadequate infrastructure. Reliable roads, bridges, power and water supply are importantdeterminants which affect capital and operating costs. Unusual or infrequent weatherphenomena, sabotage or government or other interference in the maintenance of provision ofsuch infrastructure could adversely affect the activities and profitability of the Company.Uninsured RisksThe mining business is subject to a number of risks and hazards including environmentalhazards, industrial accidents, labor disputes, encountering unusual or unexpected geologicformations or other geological or grade problem, encountering unanticipated ground or waterconditions, cave-ins, pit wall failures, flooding, rock bursts, periodic interruptions due toinclement or hazardous weather conditions and other acts of God. Such risks could result indamage to, or destruction of, mineral properties or facilities, personal injury or death,environmental damage, delays in exploration, development or mining, monetary losses andpossible legal liability The Company maintains insurance against certain risks that areassociated with its business in amounts that it believes to be reasonable at the current stage ofoperations. There can be no assurance that such insurance will be available at economicallyacceptable premiums or will be adequate to cover any resulting claim.CompetitionThe mining industry is intensely competitive in all its phases and the Company competes withother companies that have greater financial resources and technical capacity. Competitioncould adversely affect the Company’s ability to acquire suitable properties in the future.Conflicts of InterestThe Company’s directors and officers may serve as directors or officers, or may be associatedwith other reporting companies or have significant shareholdings in other public companies. Tothe extent that such other companies may participate in business or asset acquisitions,dispositions, or ventures in which the Company may participate, the directors and officers of theCompany may have a conflict of interest in negotiating and concluding terms respecting thetransactions. If a conflict of interest arises, the Company will follow the provisions of the Actdealing with conflicts of interest. These provisions state that where a director has such aconflict, that director must, at a meeting of the company’s directors, disclose their interest andrefrain from voting on the matter unless otherwise permitted by the Act. In accordance with thelaws of the Province of British Columbia, the directors and officers of the Company are requiredto act honestly, in good faith and in the best interests of the Company.SUBSEQUENT EVENTSMothae Project, Lesotho:Mothae Diamonds Pty Ltd, an indirect wholly-owned subsidiary, was granted a mining lease bythe Lesotho Department of Natural Resources for the Mothae Project in September 2009. Thediamond mining lease, which has an initial term of 10 years and is renewable for an additional10 years, was granted concurrent with finalization of a mining agreement between Lucara and12 | P age

the Government of Lesotho, which sets out commercial terms of Government participation in theMothae project.In terms of the Mothae mining agreement, Lucara will hold a 75% interest in the project and theGovernment of Lesotho will hold a 25% interest. One half of the project interest held by theGovernment (i.e. 12.5% of the project interest) will be a free carried interest and one half will befunded by the Government through its share of project dividends. During an initial preproductiontest mining stage, a royalty of 4% of the sales value of diamonds produced fromMothae will be payable to the Government. At full production the royalty will increase to 8% ofdiamond sales value.AK6 Diamond Project, BotswanaOn November 10, 2009, the Company, through a newly created indirect wholly-ownedsubsidiary Boteti Diamond Holdings Inc. (“Boteti Diamond”) entered into an agreement (“SaleAgreement”) to acquire a 70.268% interest in the Boteti Exploration (PTY) Ltd. (“Boteti”), whichholds a 100% interest in the AK6 project from De Beers Prospecting Botswana (Pty) Limited(“De Beers”). Boteti Diamond will acquire its interest in consideration of $49 million. Theremaining interest in Boteti is held as to 28.381% by African Diamonds PLC (“AfricanDiamonds”) and indirectly by Wati Ventures (Pty) Ltd. (“Wati Ventures”) as to 1.351%. The AK6is an advanced diamond development project located in the Orapa district of Botswana, thelargest diamond producing region in the world.Boteti Diamond has agreed to grant African Diamonds a call option exercisable for 120 daysfrom the completion of the acquisition of AK6, allowing African Diamond to increase its interestin Boteti by a further 10.268% in consideration for approximately $7.0 million plus interest at 8%per annum. African Diamonds and Boteti Diamond have an option to acquire Wati Ventures’interest for approximately $700,000.To fund the AK6 acquisition, Lucara and Boteti Diamond have entered into a guarantee andloan facility with an insider of Lucara in the amount of $49.0 million for a period of 6 months. Asa condition of the guarantee and loan facility, the lender will receive consideration of 12,191,200shares of the Company, of which 5,202,436 are subject to shareholder approval. No furtherconsideration is payable.In addition, the Company provided a $2.0 million convertible loan to African Diamonds to fundtheir portion of an updated feasibility study and general working capital purposes. The loan isconvertible into shares of African Diamonds at a conversion price equal to 85% of the 5 dayvolume weighted average share price prior to the date of conversion. The convertible loanbears interest at 8% and is due with 120 days of demand. The Company has financed thisconvertible loan by a short term loan facility from an insider of the Company in the amount of$2.0 million. The short term facility bears interest at US prime plus 2% and is due in six months.13 | P age

FUTURE PLANS AND OUTLOOKMothae Project, Lesotho• Upgrade process plant facility to include a large diamond (>30 carat) recovery circuit,enhanced water treatment systems and a new recovery plant and sorthouse.• Initiate a pre-production mine operation to mine and process up to 720,000 tonnes ofkimberlite over a 24 month period.AK6 Project, Botswana• Upgrade feasibility study to a conceptual mine plan to develop a 2.0 million tonne perannum kimberlite mine.Kavango Project, Namibia• Detailed ground geophysical work proximal to drill hole RC29, followed by drill testing ofany anomalies generated.Lufupa Project, DRC• Initial drill testing of prioritized ground magnetic targets.The Company will continue to evaluate other opportunities in the diamond sector for possibleacquisition in order to position the Company for further growth. To complete the acquisitionof the AK6 Project, progress the Mothae Project and to settle its short term debt facilities theCompany will require additional capital funding. The Company intends to raise additionalcapital by way of an equity financing in the near term. There can be no assurance that thefinancing will available on acceptable terms, or at all. The failure to obtain financing couldhave a material adverse effect on the Company’s growth strategy and financial condition.CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTCertain statements contained in the forgoing MD&A constitute forward-looking statements.Such forward-looking statements involve a number of known and unknown risks, uncertaintiesand other factors which may cause the actual results, performance or achievements of theCompany to be materially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as of the date thestatements were made, and readers are advised to consider such forward-looking statements inlight of the risks set out above.14 | P age

LUCARA DIAMOND CORPCONSOLIDATED BALANCE SHEETS AS OF(Expressed in United States Dollars)July 31, July 31,2009 2008ASSETSCurrent assetsCash and cash equivalents $ 2,050,723 $ 1,308,436Marketable securities (Note 4) 54,953 -Accounts receivable & other 232,158 26,6052,337,834 1,335,041Rough Diamond Inventory 1,529,937 -Equipment 1,319 2,305Mineral Properties (Note 5) 22,049,432 3,838,101$ 25,918,522 $ 5,175,447LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities $ 377,992 $ 63,566Due to related parties (Note 8) 108,834 16,511486,826 80,077Long-term liabilitiesAsset retirement obligations (Note 9) 320,409 -Future income taxes (Note 10) 3,439,573 -3,759,982 -4,246,808 80,077SHAREHOLDERS' EQUITYShare capital (Note 7) 23,398,813 5,271,241Contributed surplus (Note 3 & 7(c)) 1,124,240 531,238Deficit (2,786,765) (1,047,830)Accumulated other comprehensive income/(loss) (64,574) 340,72121,671,714 5,095,370$ 25,918,522 $ 5,175,447Nature and Continuance of Operations (Note 1)Subsequent Events (Note 13)APPROVED ON BEHALF OF THE BOARD OF DIRECTORS:/s/ Lukas H. LundinDirector/s/ Brian D EdgarDirectorSee accompanying notes to the consolidated financial statements16 | P age

LUCARA DIAMOND CORPCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THEFOR THE YEAR ENDED JULY 31,(Expressed in United States Dollars)2009 2008Exploration expenditures (Note 6) $ 549,132 $ -Operating expensesStock based compensation (Note 7(c)) 399,227 446,424Salaries & benefits 252,024 68,477Management fees 205,267 244,504Professional fees 143,652 147,817Stock exchange, transfer agent, shareholder communication 58,024 94,794Travel 52,810 66,014Donations 45,901 -Office and general 30,433 18,851Consulting 11,616 15,9191,198,954 1,102,800Loss before the following 1,748,086 1,102,800Interest income (24,720) (75,411)Foreign exchange loss realized 15,569 -Other income - (24,848)Net loss for the year $ 1,738,935 $ 1,002,541Other comprehensive loss/(income)Unrealized gain on available-for-sale investments (3,944) -Foreign currency translation adjustments 409,239 (235,841)Comprehensive loss for the year $ 2,144,230 $ 766,700Basic and diluted loss per common share $ 0.03 $ 0.02Weighted average number of common shares outstanding 66,401,035 58,430,665LUCARA DIAMOND CORPCONSOLIDATED STATEMENTS OF DEFICITFOR THE YEAR ENDED JULY 31,(Expressed in United States Dollars)2009 2008Deficit, beginning of the year 1,047,830 45,289Net loss for the year 1,738,935 1,002,541Deficit, end of the year $ 2,786,765 $ 1,047,830See accompanying notes to the consolidated financial statements17 | P age

LUCARA DIAMOND CORPCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEAR ENDED JULY 31,(Expressed in United States Dollars - Unaudited)2009 2008Cash flows from/(used in):Operating activitiesNet Loss for the year $ (1,738,935) $ (1,002,541)Items not affecting cash:Stock based compensation expense 399,227 446,424Depreciation 986 -Net changes in non-cash working capital items:Amounts receivable and other current assets 85,488 17,342Accounts payable and other current liabilities (219,386) 40,615(1,472,620) (498,160)Financing activityShares issued for cash (net of issue costs) 4,681,844 -Investing activitiesNet cash received on acquisition 2,115,162 -Purchase of equipment - (2,305)Mineral property acquisition costs (4,172,860) (3,838,101)(2,057,698) (3,840,406)Increase (decrease) in cash and cash equivalents 1,151,526 (4,338,566)Effect of exchange rate changes on cash and cash equivalents (409,239) 235,841Cash and cash equivalents, beginning of the year 1,308,436 5,411,161Cash and cash equivalents, end of the year $ 2,050,723 $ 1,308,436Supplemental Information:Cash received for interest $ 24,720 $ 75,411Cash paid for income taxes $ - $ -See accompanying notes to the consolidated financial statements18 | P age

LUCARA DIAMOND CORP.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED JULY 31, 2009 AND 2008(Expressed in U.S. Dollars)1. NATURE AND CONTINUANCE OF OPERATIONSThe Company is in the process of acquiring and developing diamond properties in Africa,with the intent of becoming a diamond producer.These consolidated financial statements have been prepared in accordance withaccounting principles applicable to a going concern, which assumes that the Companywill realize its assets and discharge its liabilities in the ordinary course of business. Asat July 31, 2009, the Company had working capital of $1,851,008. The Company doesnot have sufficient funds to complete its planned expenditures on the Mothae DiamondProject and AK6 Project upon acquisition, repayment of short term loan facilities enteredinto subsequent to year end and general corporate expenses for the next twelve months.The ability of the Company to fulfill its commitments, meet its planned businessobjectives and continue as a going concern is dependent upon successful results fromits mineral property acquisitions and exploration activities and the ability of the Companyto raise additional financing.The recoverability of the amounts shown as resource property acquisition costs isdependent upon the discovery of sufficient economically recoverable ore reserves, thepreservation of the Company’s interest in the mineral properties, the ability of theCompany to obtain the financing necessary to complete the development of theproperties and to achieve future profitable production, or upon the Company’s ability todispose of its interest on an advantageous basis. Changes in future conditions couldrequire material writedowns of the carrying amount of the properties.2. SIGNIFICANT ACCOUNTING POLICIESa) Basis of presentationThese consolidated financial statements have been prepared in accordance withCanadian generally accepted accounting principles. They include the accounts of theCompany and its wholly-owned subsidiaries, Motapa Diamonds Inc, Motapa ExplorationLimited, Kavango Diamond Company (Pty) Ltd, Motapa Exploration RCA SARL, LucaraDiamond Holdings (I) Inc., Mothae Diamond Holdings Inc and Mothae DiamondsProprietary Limited. These consolidated financial statements also include the accountsof the Company’s partially owned Mulonga Mining Limited. Kavango Diamond Company(Pty) Ltd and Mulonga Mining Limited were inactive at July 31, 2009.b) Change in Reporting CurrencyEffective July 31, 2008, the Company changed its reporting currency to the UnitedStates (“US”) dollar. The change in reporting currency is to better reflect the Company’sbusiness activities. Prior to July 31, 2008, the Company reported its annual andquarterly balance sheets and the related statements of operations and cash flows inCanadian dollars (“CAD”). In making this change in reporting currency, the Company19 | P age

followed the recommendations of the Emerging Issues Committee (“EIC”) of theCanadian Institute of Chartered Accountants, set out in EIC-130, Translation Methodwhen the Reporting Currency Differs from the Measurement Currency or there is aChange in the Reporting Currency. In accordance with EIC-130, the financialstatements for all years presented have been translated into the reporting currency usingthe current rate method. Under this method, the statement of operations and cash flowsstatement items for each year have been translated into the reporting currency using theaverage exchange rate prevailing during each year. All assets and liabilities have beentranslated using the exchange rate prevailing at the balance sheet dates.Shareholders’ equity transactions since August 1, 2006 have been translated at theexchange rate on that date. All resulting exchange differences arising from thetranslation are included as a separate component of other comprehensive income. Allcomparative financial information has been restated to reflect the Company’s results asif they had been historically reported in US dollars.c) Adoption of new accounting policiesCICA Section 1400, “General Standards of Financial Statement Presentation”, wasamended to include requirements to assess and disclose an entity’s ability to continueas a going concern. The new standard became effective for the Company on August 1,2008. There was no material impact on the Company’s financial condition or operatingresults as a result of the adoption of the new standard.d) Use of estimatesThe preparation of financial statements in conformity with Canadian generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities on a going concern basis, anddisclosure of contingent assets and liabilities at the date of the financial statements, andthe reported amounts of expenses during the reporting periods. Actual results coulddiffer from these estimates.e) Cash and cash equivalentsCash and cash equivalents includes highly liquid short-term investments that are readilyconvertible to know amounts of cash and which are subject to an insignificant risk ofchange in value.f) Marketable securitiesMarketable securities consist of common shares of a public company, are classified asavailable –for-sale and are reported at market value. Adjustments to market value aremade, with the offsetting debit or credit taken into to other comprehensive income/loss.g) Rough diamond inventoryDiamonds are valued at lower of cost or net realizable value.20 | P age

h) EquipmentEquipment is recorded at cost. Amortization is provided on a straight-line basis overvarying periods of three to five years according to the expected life of the asset.i) Mineral propertiesCosts related to the acquisition of mineral properties are capitalized by property-bypropertybasis. Exploration expenditures, net of recoveries, are expensed as incurred.After a property is determined by management to be commercially feasible, developmentexpenditures on the property are capitalized. When there is little prospect of furtherwork on a property being carried out by the Company, when a property is abandoned, orwhen the capitalized costs are no longer considered recoverable, property costs arewritten down to management’s estimate of the net recoverable amount. The costsrelated to a property from which there is production, together with the costs of productionequipment, will be depleted and amortized using the unit-of-production method.A mineral property acquired under an option where payments are to be made at the solediscretion of the Company, are capitalized at the time of payment.j) Joint venturesThe Company is a participant in certain joint ventures identified in Note 5. TheCompany’s funding in these joint ventures is reflected in its exploration expenditures.Expenditures by the Company have not been capitalized and reflect exploration costsrequired to evaluate and maintain title to mineral properties. All exploration costs havebeen expensed, and therefore, no proportionate interest in the assets and liabilities ofthese joint ventures is reflected in the financial statementsk) Asset retirement obligationsThe Company recognizes a liability for an asset retirement obligation on long-livedassets when a legal liability exists and the amount of the liability is reasonablydeterminable. Asset retirement obligations are calculated on discounted future paymentestimates and the liability is accreted over the expected term of the obligation.Subsequent adjustments to the estimates, due to changes in the underlyingassumptions, are made on a prospective basis. Corresponding amounts andadjustments are added to the carrying value of the related long-lived asset andamortized or depleted to operations in accordance with accounting policy.l) Environmental costsEnvironmental expenditures that relate to current operations are expensed or capitalizedas appropriate. Expenditures that relate to an existing condition caused by pastoperations and which do not contribute to current or future revenue generation areexpensed. Liabilities are recorded when environmental assessments and/or remedialefforts are probable, and the costs can be reasonably estimated. Generally, the timingof these accruals coincides with the earlier of completion of a feasibility study or theCompany’s commitment to a plan of action based on the then known facts. TheCompany intends to comply with all environmental regulations. Presently, the Companyhas not received any communication from regulatory authorities.21 | P age

m) Income taxesIncome taxes are calculated using the asset and liability method of accounting.Temporary differences arising from the difference between the tax basis of an asset orliability and its carrying amount on the balance sheet are used to calculate future incometax liabilities or assets at substantially enacted income tax rates. Future tax assets arerecognized to the extent that they are considered more likely than not to be realized.Valuation allowances are provided when unrecognized net future income tax assets arenot more likely than not to be realized.n) Loss per shareLoss per share is calculated based on the weighted average number of common sharesissued and outstanding during the year. Diluted loss per share is calculated using thetreasury stock method. The effects of potential issuance of shares under options wouldbe anti-dilutive, and therefore, basic and diluted loss per share are the same.o) Stock based compensationThe Company has a stock option plan that is described in Note 7(c). The Companyuses the fair value method of recognizing all stock-based compensation awardsincluding those made to employees, consultants, officers and directors of the Company.Except for those options having a performance clause attached, the fair value of stockoptions granted is determined on the grant date and that fair value is credited tocontributed surplus on the grant date if the options vest immediately, or over the vestingperiod if the options do not vest immediately. Those options having a performanceclause are revalued at each vesting or performance date and the fair value of the earnedoptions is credited to contributed surplus on the date earned. The fair value of stockoptions exercised will be transferred to share capital and the fair value of stock optionsthat expire unexercised remains in contributed surplus.p) Foreign currency translationThe US dollar is the reporting currency of the Company.The assets and liabilities of self-sustaining operations which are denominated in acurrency other than the US dollars are translated at year-end exchange rates, andrevenues and expenses are translated at the average exchange rates. Differencesarising from these foreign currency translations are reported as other comprehensiveincome.For integrated operations, monetary assets and liabilities and liabilities are translated atyear-end exchange rates and non-monetary assets and liabilities are translated athistorical rates. Revenues and expenses are translated at average exchange rates,except for items related to non-monetary assets and monetary liabilities are charged toearnings.22 | P age

q) Financial instrumentsThe Company classifies financial instruments as either held-to-maturity, available-forsale,held for trading, loans and receivables or other financial liabilities. At therespective balance sheet dates, the Company’s financial instruments consisted of cashand cash equivalents, marketable securities, accounts receivable, accounts payable andaccrued liabilities and due to related parties.Financial assets held-to-maturity, loans and receivables and financial liabilities otherthan those held for trading, are measured at amortized cost. Available-for-saleinstruments are measured at fair value with the unrealized gains and losses recognizedin other comprehensive income. Instruments classified as held for trading are measuredat fair value with the unrealized gains and losses recognized in the statement ofoperations.The following is a summary of the categories the Company has elected to apply to eachof its significant financial instruments.Financial instrumentCash and cash equivalentsMarketable securitiesAccounts receivableAccounts payable and accrued liabilitiesDue to related partiesCategoryAvailable for saleAvailable for saleLoans and receivablesOther financial liabilitiesOther financial liabilitiesThe carrying values of accounts receivable, accounts payable and accrued liabilities anddue to related parties approximates their fair values due to the short-term nature of thesebalances.r) Future accounting changesIn February 2008, the Canadian Institute of Chartered Accountants issued the followingnew standard:Section 3064, “Goodwill and Intangible Assets”. This section replaces Handbooksection 3062 “Goodwill and Other Intangible Assets” and establishes revisedstandards for the recognition, measurement and disclosure of goodwill and intangibleassets. The Corporation will be required to adopt for interim and annual financialstatements relating to its fiscal year commencing August 1, 2009. The adoption willnot have a material impact on the consolidated financial statementsIn January, 2009, the Canadian Institute of Chartered Accountants issued the followingnew standards:Sections 1582 “Business Combinations”, Section 1601 “Consolidated FinancialStatements” and Section 1602 “Non-controlling interests”.23 | P age

Section 1582 replaces Handbook section 1581 “Business Combinations” and sections1601 and 1602 together replace Handbook section 1600 “Consolidated FinancialStatements”. The adoption of section 1582, and collectively, 1601 and 1602 providesthe Canadian equivalent to International Financial Reporting Standard (“IFRS”) 3“Business Combinations” and International Accounting Standards (IAS) 27“Consolidated and Separate Financial Statements”, respectively. CICA 1582 appliesprospectively to business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after January 1, 2011.CICA 1601 and CICA 1602 apply to interim and annual consolidated financialstatements relating to years beginning on or after January 1, 2011.The Company has not yet determined the effect if any that the adoption of these newstandards will have on its consolidated financial statements.3. ACQUISITION OF MOTAPA DIAMONDS INC.On July 3, 2009, the Company acquired Motapa Diamonds Inc (“Motapa”) through a plan ofarrangement by issuing a total of 34,455,022 shares to the shareholders of Motapa on thebasis of 0.9055 share (“Exchange Ratio”) for each Motapa share. In addition, the Companyissued a total of 3,019835 replacement stock options to the Motapa stock option holdersbased on the Exchange Ratio.The net assets acquired on the acquisition of Motapa are not considered to meet thedefinition of a business under Emerging Issues Abstract 124, as published by the CanadianInstitute of Chartered Accountants; accordingly, the acquisition had been accounted for asa purchase of assets and liabilities. The allocation of the purchase price is summarized asfollows:Purchase price:Share issued on acquisition (34,455,022 shares) $13,445,728Fair value of replacement options issued 193,775Acquisition costs 263,959$13,903,462Net assets acquiredCash $ 2,379,121Accounts receivable and prepaid expenses 291,036Marketable securities 51,006Diamond inventory 1,529,937Mineral properties 13,845,479Accounts payable and accrued liabilities (626,135)Asset retirement obligations (127,409)Future income tax liability (3,439,573)$13,903,462The purchase price has been allocated to the fair value of the assets acquired and liabilitiesassumed, based on management’s best estimates and taking into account all availableinformation at the time of acquisition.24 | P age

For the year ended July 31, 2009Cash acquired on acquisition $ 2,379,121Cash paid for transaction costs (263,959)Net cash received from the acquisition $ 2,115,1624. MARKETABLE SECURITIES2009 2008Opening market value on acquisition (Note 3) $ 51,009 $ -Unrealized gain on available-for-sale investments 3,944 -Closing market value $54,953 $ -5. MINERAL PROPERTIES2009 2008Mothae Diamond Project $22,049,432 $3,838,101Kavango Project – Namibia - --Lufupa Project – Democratic Republic of Congo - -$22,049,432 $3,838,101a) Mothae Diamond ProjectIn July 2006, the Company signed an option agreement with Motapa to acquire up to a70% interest in the Mothae Diamond Project located in Lesotho, Africa. Pursuant to theterms of the option agreement the Company had earned a 65% in the property in April2009 by making payments to Motapa totaling $8.0 million. The Company acquired theremaining 35% as part of the Arrangement Agreement (Note 3).The Mothae Diamond Project was granted a diamond mining lease in September 2009.The diamond mining lease has an initial term of 10 years and is renewable for anadditional 10 years, was granted concurrent with finalization of a mining agreementbetween the Company and the Government of Lesotho, which sets out commercialterms of Government participation in the Mothae Diamond Project.Pursuant to the terms of the Mothae mining agreement, the Company will hold a 75%interest in the project and the Government of Lesotho will hold a 25% interest. One halfof the project interest held by the Government will be a free carried interest and one halfwill be funded by the Government through its share of project dividends. During aninitial pre-production test mining stage, a royalty of 4% of the sales value of diamondsproduced from Mothae will be payable to the government. At full production the royaltywill increase to 8% of diamond sales value.25 | P age

) Kavango Project - NamibiaThe Company has a 49% interest in 10 Exclusive Prospecting Licenses for preciousstones which cover approximately 8,363 km 2 in northeast Namibia. The properties aresubject to the Minerals (Prospecting and Mining) Act (Act No 33 of 1992), which isadministered by the Namibian Ministry of Mines. Namdeb Diamond Corporation(“Namdeb”) have earned 51% by committing to fund a 24 month work program ofapproximately $4.4 million.. The joint venture agreement provides Namdeb with asecond option to earn an additional 14% interest (for a total of 65%) by fully funding theproject to completion of a bankable feasibility study within five years of electing toexercise its second option.In late 2008, Namdeb advised Motapa that, as a result of the global economic financialdownturn, and resultant cash shortfall for Namdeb, that it would be unable to meet itsfunding commitment. The Company has agreed in principle to grant an extension to thetime period in which Namdeb can meet its funding requirement of $4.4 million, andNamdeb has agreed in principle that the 51% interest it currently holds in the KavangoProject will revert to the Company until such time Namdeb has meet its fundingcommitment.c) Lufupa Project – Democratic Republic of CongoThe Company has an option to earn a 50% interest in certain DRC explorationlicenses held by African Minerals (Barbados) Ltd SPRL (“African Minerals”) by funding$2.0 million by October 2012.6. EXPLORATION EXPENDITURESMothae Kavango LufupaProject Project ProjectLesotho Namibia DRC Other TotalExploration Expenditures for the year ended July 31, 2009Site and administration $ 120,828 $ - $ - $ - $ 120,828Conceptual studies and reports 205,321 - - - 205,321Valuations 68,140 - - - 68,140Pipe evaluation 25,398 25,398License fees 11,255 - 11,255Office and other 5,971 18,042 - 3,117 27,130Project investigation 91,060 91,060Total for the year $ 425,658 $ 29,297 $ - $ 94,177 $ 549,132Exploration expenditures for the year ended July 31, 2008 were nil.26 | P age

7. SHARE CAPITAL(a) Authorized:Unlimited number of common shares without par value(b) Issued:Number ofShare ContributedSharesCapitalSurplusBalance, July 31, 2007 11,686,133 $5,271,241 $ 84,814Stock split 46,744,532 - -Stock based compensation - - 446,424Balance, July 31, 2008 58,430,665 5,271,241 531,238Private placement, net 5,555,556 4,681,844 -Issued for 100% of Motapasecurities (Note 3) 34,455,022 13,445,728 193,775Stock based compensation 399,227Balance, July 31, 2009 98,441,243 $23,398,813 $1,124,240In July 2007, the shareholders approved a five (new) for one (old) basis stock split thatbecame effective on August 16, 2007.In August 2008, the Company completed a non-brokered private placement of 5,555,556common shares at a price of CAD$0.90 per share for gross proceeds of CAD$5.0 million.(c) Stock Options:The Company has an incentive stock option plan in which 11.6 million common shareshave been made available for the Company to grant incentive stock options to certaindirectors, officers, employees and consultants of the Company. Terms and vesting of theoption agreement are at the discretion of the Board of Directors at the time of grant.Incentive stock options outstanding and held by directors, officers and employees of theCompany are as follows:Weighted AverageNumber of Options Exercise price – CAD$Outstanding-July 31, 2007 - $ -Granted 910,000 1.18Exercised - -Cancelled/Forfeited - -Outstanding-July 31, 2008 910,000 1.18Granted 4,919,835 0.76Exercised - -Cancelled/Forfeited (229,209) 0.87Outstanding – July 31, 2009 5,600,626 $0.83Exercisable 4,039,954 $0.9127 | P age

The fair values of stock options with vesting provisions are amortized on a straight-linebasis as stock-based compensation expense over the applicable period. As of July 31,2009, the Company had an additional $407,276 of stock based compensation expense tobe recognized in the Statement of Operations and Comprehensive Income.The stock based compensation was estimated using the Black-Scholes option-pricingmodel. Assumptions used in the pricing model for options granted are as follows:8. RELATED PARTY TRANSACTIONS2009 2008Dividend yield 0.00% 0.00%Average risk free interest rate 1.37% 4.04%Expected stock price volatility 106.61% 100.00%Expected life of options 1.47 years 3 yearsDuring the year ended July 31, 2009 the Company incurred:a) $205,267 (2008 – $238,536) in respect of administrative services and office facilitiesprovided by a company owned by the CEO and President of the Company. As at July31, 2009, there was $1,010 (July 31, 2008 – $16,511) included in amounts due torelated parties.b) $45,901 (2008 – $Nil) in respect of a donation to Lundin for Africa Foundation, acharitable organization with common directors.c) $53,711 (2008 - $Nil) in respect of generative exclusivity rights, laboratory services,professional fees, project, general and administrative services provided by a companywith a common director. As at July 31, 2009 there was $107,824 (July 31, 2008 - $NiL)included in amounts due to related parties.These transactions, occurring in the normal course of operations, are measured at theexchange amount which is the amount established and agreed to by the related parties.9. ASSET RETIREMENT OBLIGATIONSThe Company’s estimate of future site remediation obligations is based on reclamationstandards that meet or exceed regulatory requirements. Significant reclamation andclosure activities include land and road rehabilitation and stream diversion, demolition andremoval of buildings and mine facilities, fencing, ongoing care and maintenance and othercosts. The Company has calculated the fair value of its asset retirement obligation using acredit adjusted rate of 13.50% and an inflation rate of 8%. The estimated total liability forreclamation and remediation costs on an undiscounted basis after inflation is approximately$1.7 million (2008 – Nil), which is expected to incurred in 2023.28 | P age

10. INCOME TAXESProvision for income taxesThe provision for income tax expense (recovery) differs from amount computed byapplying the statutory rates to the net income (loss) before income taxes. The reason forthese differences and the related tax effects are as follows:2009 2008Basic statutory tax rate 31% 33%Computed income tax expense/(recovery) $(539,000) $(327,000)Differences between Canadian and foreign taxrates 46,000 -Non-deductible expenses 124,000 146,000Change in valuation allowance for the year 369,000 181,000$ - $ -Future income taxes result primarily from temporary differences in the recognition ofcertain revenue and expense items for financial and income tax reporting purposes. Theapproximate tax effect of temporary differences that gives rise to the Company’s futureincome tax assets and liabilities are as follows:Future income tax assets 2009 2008Non-capital loss carried forward $1,951,307 $ 159,000Resource pools 150,734 55,000Share issue costs 86,521 15,000Less: valuation allowance (2,188,562) (229,000)Future Tax Assets $ - $ -Future income tax liabilitiesMineral property acquisition costs $3,439,573 $ -Future Tax Liabilities $3,439,573 $ -As at July 31, 2009, the Company has non-capital losses for income tax purposes inCanada available to offset future taxable income in the amount of approximatelyCAD$7,064,000 (2008 - CAD$617,000). These losses, if not utilized, will expire throughto 2029. Future tax benefits which may arise as a result of these non-capital losseshave not been recognized in these financial statements and have been offset by avaluation allowance.11. CAPITAL DISCLOSURESThe Company’s objectives when managing capital are to safeguard the Company’sability to continue as a going concern in order to pursue the development of its mineralproperties and to maintain a flexible capital structure which optimizes the costs of capitalat an acceptable risk.In the management of capital, the Company considers the items included inshareholders’ equity to be capital.29 | P age

The Company manages the capital structure and makes adjustments to it in light ofchanges in economic conditions and the risk characteristics of the Company’s assets. Inorder to maintain or adjust the capital structure, the Company may attempt to issue newshares or debt instruments, acquire or dispose of assets, or to bring in joint venturepartners.In order to facilitate the management of its capital requirements, the Company preparesannual expenditures budgets that are updated as necessary depending on variousfactors, including successful capital deployment and general industry conditions. Theannual and updated budgets are approved by the Board of Directors.Based on the Company’s working capital of $1,851,008 as of July 31, 2009, the Companydoes not have sufficient funds to complete its planned expenditures on the MothaeDiamond Project and the AK6 Project upon acquisition, repayment of short term loanfacilities entered into subsequent to year end and general corporate expenses for the nexttwelve months. The ability of the Company to fulfill its commitments, meet its plannedbusiness objectives and continue as a going concern is dependent upon successful resultsfrom its mineral property acquisitions and exploration activities and the ability of theCompany to raise additional financing.12. MANAGEMENT OF FINANCIAL RISKThe Company’s financial instruments are exposed to certain financial risks, includingcurrency, credit, liquidity and price risk.a) Currency riskThe Company is exposed to the financial risk related to the fluctuation of foreignexchange rates. The operating results and financial position of the Company arereported in US dollars. The fluctuation of the Canadian dollar, Lesotho Malutiand South African Rand in relation to the US dollar will consequently have animpact on the financial results of the Company and will also affect the Company’sassets, liabilities and shareholders’ equity. The Company has not hedged itsexposure to currency fluctuations.At July 31, 2009, the Company is exposed to currency risk relating to funds heldin Canadian dollars of $1.9 million.b) Credit riskCredit risk is the risk of an unexpected loss if a customer or third party to afinancial instrument fails to meet its contractual obligations. The majority of theCompany’s cash is held through a large Canadian financial institution with a highinvestment grade rating.c) Liquidity riskLiquidity risk is the risk that the Company will not be able to meet its financialobligations as they fall due. The Company manages its liquidity risk through the30 | P age

management of its capital structure and financial leverage. Accounts payableand accrued liabilities are due within the current operating period.d) Interest rate riskThe Company’s exposure to interest rate risk arises from the interest rate impacton cash. There is minimal risk that the Company would recognize any loss as aresult of a decrease in the fair value of any short-term investments included incash due to the short term nature.e) Equity market riskThe Company is exposed to equity price risk arising from its marketablesecurities, which are classified as available-for-sale.13. SUBSEQUENT EVENTSa) On November 10, 2009, the Company, through a newly created indirect wholly-ownedsubsidiary Boteti Diamond Holdings Inc (“Boteti Diamond”) entered into an agreement(“Sale Agreement”) to acquire a 70.268% interest in the Boteti Exploration (PTY) Ltd.(“Boteti”), which holds a 100% interest in the AK6 project from De Beers ProspectingBotswana (Pty) Limited (“De Beers”). Boteti Diamond will acquire its interest inconsideration of $49 million. The remaining interest in Boteti is held as to 28.381% byAfrican Diamonds PLC (“African Diamonds”) and indirectly by Wati Ventures (Pty) Ltd.(“Wati Ventures”) as to 1.351%. The AK6 is an advanced diamond development projectlocated in the Orapa district of Botswana, the largest diamond producing region in theworld.Boteti Diamond has agreed to grant African Diamonds a call option exercisable for 120days from the completion of the acquisition of AK6, allowing African Diamond to increaseits interest in Boteti by a further 10.268% in consideration for approximately $7.0 millionplus interest at 8% per annum. African Diamonds and Boteti Diamond have an option toacquire Wati Ventures’ interest for approximately $700,000.To fund the AK6 acquisition, Lucara and Boteti Diamond have entered into a guaranteeand loan facility with an insider of Lucara in the amount of $49.0 million for a period of 6months. As a condition of the guarantee and loan facility, the lender will receiveconsideration of 12,191,200 shares of the Company, of which 5,202,436 are subject toshareholder approval. No further consideration is payable.In addition, the Company has agreed to provide a $2.0 million convertible loan to AfricanDiamonds to fund their portion of an updated feasibility study and general workingcapital purposes. The loan is convertible into shares of African Diamonds at aconversion price equal to 85% of the 5 day volume weighted average share price prior tothe date of conversion. The convertible loan bears interest at 8% and is due with 120days of demand. The Company will finance this convertible by a short term loan facilityfrom an insider of the Company in the amount of $2.0 million. The short term facilitybears interest at US prime plus 2% and is due in six months.b) Other subsequent events are disclosed in Note 5(a)31 | P age