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Sanatana Releases Update and Unaudited Interim Results for Six Months Ended September 30, 2005

Posted on: Thursday, 8 December 2005, 15:00 CST

Sanatana Diamonds Inc ("Sanatana" or the "Company") (AIM:SAN) the London AIM quoted diamond explorer operating in Canada, today released an Update, Letter to Shareholders and the Unaudited Interim Results for the Six Months ending September 30, 2005.

UPDATE -HIGHLIGHTS

General - Company admitted to London AIM Market on July 28, 2005 - Share placements in July 2005 raised approximately Pounds Sterling 2.1 million after expenses Mackenzie Diamond Project - 20 million acres located in Northwest Territories of Canada, 700 kilometres north of Yellowknife. - Two exploration field seasons completed (2004 and 2005) - New Mackenzie kimberlite province defined with: -- Indicated diamondiferous kimberlite prospectivity -- At least 10 potential separate target areas for diamondiferous kimberlite clusters identified -- Multiple kimberlite drill targets indicated within target areas Kennecott Exploration and Development Agreement for Mackenzie Diamond Project - Signed definitive agreement with Kennecott Canada Exploration Inc, a subsidiary of Rio Tinto plc on July 19, 2005 - Kennecott provided C$2.5 million towards the financing as part of Company AIM admission - Sanatana manages and operates exploration program - Kennecott contributed C$2.5 million on August 31, 2005 and will contribute a further C$2.5 million in April 2006 towards Exploration Programs - Upon completion of C$7.5 million investment, Kennecott acquires a 15% interest in Mackenzie Project and acquires the right to earn into any individual kimberlite project on following basis -- 49% interest by taking each individual project to completed feasibility study within 4 years -- Further 11% by taking project to completed bankable feasibility study 2005 Exploration Programs - Major airborne geophysical surveys carried out - May to November 2005 -- At least 210,000 line kilometers completed by 2 contractors -- One of largest airborne surveys in North America in last decade -- Data currently being processed and interpreted -- Estimated C$3.5 million expenditure - Summer field program carried out - July to Sept 2005 -- 2114 till geochemical samples collected weighing over 80 tonnes -- Samples currently being processed for kimberlite indicator minerals -- Estimated C$3.2 million expenditure 2006 Spring Drill Program - At least 12 drill ready targets have been identified for Spring 2006 drill program - Access and drill permits currently being negotiated

LETTER TO SHAREHOLDERS AND UNAUDITED INTERIM RESULTS FOR 6 MONTHS PERIOD ENDING SEPTEMBER 6, 2005

The full text of the Letter to Shareholders and the Unaudited Interim Results for the Six Month Period Ending September 6, 2005can be found on www.sedar.com/companyprofiles/SanatanaDiamondsInc/ViewCompanyDocuments

Santana is quoted on the London AIM market under the trading symbol "SAN"

Shares Outstanding: 33,606,794

SANATANA DIAMONDS INC

November 28, 2005

For the three and six months ended September 30, 2005

Management's Discussion and Analysis of Financial Condition and Results of Operations

(All amounts stated in Canadian dollars, unless otherwise indicated)

1. Sanatana Diamonds Inc ("Sanatana or the "Company") was admitted to the Alternative Investment Market ("AIM") of the London Stock Exchange on Thursday July 28, 2005 and contemporaneously undertook a private placement to raise $6.3m to fund the Company's exploration activities and for general corporate purposes.

2. This Management Discussion and Analysis ("MD&A") should be read in conjunction with the Company's unaudited interim financial statements for the period ending September 30, 2005 and are intended to provide the reader with a review of the factors that affected the Company's performance during the six months ended September 30, 2005 and the factors reasonably expected to impact future operations and results.

Forward-looking Information

3. When used in this document, words such as "estimate", "expect", "anticipate" and "believe" and similar expressions are intended to identify forward-looking statements. Such statements are used to describe management's future plans, objects and goals for the Company and therefore involve inherent risks and uncertainties. The reader is cautioned that actual results, performance or achievements may be materially different from those implied or expressed in such statements. Sanatana makes no obligation to update publicly or otherwise revise any forward-looking information whether as a result of new information, future events or such factors which affect this information, except as required by law.

Overview

4. The Company's exploration activities are carried out solely in Canada in Northwest Territories and Nunavut. Sanatana has carried out prospecting and exploration for diamonds at the Mackenzie Diamond Project since its incorporation in June 2004. As at September 30, 2005, Sanatana held rights to approximately 20 million acres comprising the Mackenzie Diamond Project.

5. In the six month period ended September 30 2005 Sanatana has carried out a two pronged exploration program consisting of a 210,000 line kilometre airborne magnetic survey that would cover most of the Mackenzie Diamond Project and a field exploration program consisting of till sampling, with closer density spacing than that of last year. In addition, the ground crews collected till samples from areas that have been identified from the airborne magnetic surveys. A total of 2114 till samples weighing over 80 tonnes were collected. The till samples have been dispatched to the Kennecott Diamond Laboratory in Thunder Bay and Vancouver Indicator Processing facilities in Vancouver for processing and recovery of kimberlite indicator minerals.

6. On July 28, 2005, Sanatana was admitted to AIM, with the Company raising $6.3m to fund its proposed exploration programs over the Mackenzie Diamond Project and general corporate expenses.

7. In October 2005, Sanatana lodged drill permit applications over 12 drill targets that are planned for drilling in early fall 2006.

8. Exploration expenditures, particularly in relation to the airborne geophysics surveys and the field exploration programs, have been in line with predictions and budgets. The Company is embarking on a fund raising campaign in order to conduct the planned drilling programs next year.

9. At September 30, 2005 the Company held cash of $4.8m for use in 2005 programs and working capital needs.

Results of operations

10. Mineral exploration costs form the bulk of the Company's expenditures and for the last 16 months these are set out in the Table below:

June 2004 6mths ended to Sept 30, March 31, 2005 2005 Helicopter and fixed wing Aircraft costs 3,475,750 911,433 Sampling and Assays 1,070,652 438,410 Labour 180,344 127,449 Reimbursable bonds and Deposits 2,485,198 2,368,584 Geological Services 1,415,647 524,840 Project Management Fees 448,810 - Other Expenses 235,293 576,414 Recoveries (185,717) - Kennecott Option payment (2,500,000) - --------------------------------------------------------------------- Total Costs for the period 6,625,977 4,947,130

11. In the period ended March 31, 2005, Sanatana sourced legacy data and created a multi-dimensional, single data base using the Geoinformatics Intervention Process. In addition a Summer Field program was carried out in 2004 and 1310 till samples were collected. Based on kimberlite indicator minerals recovered from these till samples at least 7 separate potential diamondiferous kimberlite clusters were identified.

12. From April to September 2005, Sanatana carried out a two pronged exploration program consisting of a 210,000 line kilometre airborne geophysical survey (principally magnetics) over the majority of the Mackenzie Diamond Project area and a till sampling program at much closer density than last year over the potential kimberlite cluster target areas. A total of 2114 till samples weighing approximately 80 tonnes were collected in the period between July and September 2005.

Quarterly data (unaudited)

13. Quarterly figures for the Company for the period ending September 30, 2005 are scheduled below:

--------------------------------------------------------------------- (in thousands of dollars, except per share amounts) --------------------------------------------------------------------- Sept 30 Dec 31 Mar 31 June 30 Sept 30 2004 2004 2005 2005 2005 --------------------------------------------------------------------- Revenue 0 0 0.7 0 27 Loss from Operations 53 19 150 140 217 Loss (53) (19) (149) (140) (190) Basic and diluted (0.01) 0.00 (0.05) 0.00 (0.01) loss per share ---------------------------------------------------------------------

14. The Company had 30,679,810 common shares on issue at April 1, 2005. On July 28, 2005, the Company issued 2,926,984 fully paid ordinary shares in respect of the financing of $5,159,759 Of these, 36,586 shares were issued as listing costs of $64,026 At the end of the period there were no outstanding stock options or warrants.

15. The following escrow provision pertains to common shares issued: Canadian resident holders of Sanatana common shares are subject to a four month hold period ending April 1, 2006 before they will be able to trade their Santana common shares.

Transactions with Related Parties

Six month period to 30 September, 2005 --------------------------------------------------------------------- St Hermes Peter Geoinfor- George Manage- $'s Misape Miles matics Minerals ment Totals Administration fees 3,000 3,000 Consulting fees 3,624 3,624 Geological consulting fees 342,521 342,521 Management Services 26,000 22,000 48,000 NOTES 1 2 3 4 5 1 Fees paid or accrued to a management company controlled by a director of the Company. The director provides management and technical services. 2 Mr. Peter Miles provides financial and management services 3 Technical Services provided by a formerly related company 4 Fees paid or accrued for financial and administrative services by a company controlled by a director of the Company 5 Fess paid or accrued for secretarial services by a company controlled by a director of the Company ---------------------------------------------------------------------

Critical accounting estimates

16. Critical accounting estimates represent estimates that are highly uncertain and for which changes in those estimates could materially impact our financial statements. Costs relating to the acquisition, exploration and development of non-producing resource properties are capitalised until such time as either economically recoverable reserves are established or the properties are sold or abandoned. Based on the results at the conclusion of each phase of an exploration program, management re-evaluates properties that are not suitable as prospects to determine if future exploration is warranted, and that carrying values are appropriate. The decision to capitalise exploration expenditures and the timing of the recognition that the capitalised exploration is unlikely to have future economic benefits, can materially affect the reported earnings of the Company.

Other MD&A requirements

17. Sanatana's business of exploring mineral resources involves a variety of operational, financial and regulatory risks that are typical in the natural resource industry. The Company attempts to mitigate these risks and minimise their effect on its financial performance, but there is no guarantee that the Company will be profitable in the future, and Sanatana common shares should be considered speculative.

18. There can be no assurance that any funding required by the Company will become available to it, and if so, that it will be offered on reasonable terms, or that the Company will be able to secure such funding through third party financing or cost sharing arrangements. Furthermore there is no assurance that the Company will be able to secure new mineral properties or projects, or that they can be secured on competitive terms.

19. Given the size of the Company and the involvement at all levels of the CEO and CFO, we consider that the disclosure controls and procedures in place as of the end of the period covered by the interim filings are effective.

Additional information

20. Additional information relating to the Company is available on the Internet at the SEDAR website located at www.sedar.com

Disclosure of outstanding share data

21. Sanatana's shares trade on the London Stock Exchange Alternative Investment Market ("AIM") under the symbol SAN. The Company is authorised to issue shares without par value. At the end of the period ended 30 September 2005, there were 33,606,794 common shares issued and outstanding and no share options or warrants outstanding.

Risks and opportunities

Mineral exploration and development

22. Sanatana's properties (the "Properties") are in the exploration stage and are without a known body of commercial ore. Development of the Properties will only proceed upon obtaining satisfactory exploration results. Mineral exploration and development involve a high degree of risk and few properties, which are explored, are ultimately developed into producing mines. There is no assurance that even if a body of commercial ore is discovered on the Properties, a mine will be brought into commercial production. The feasibility of developing a mineral deposit once discovered is dependent on a number of factors, including the particular attributes of the deposit, such as size, grade and proximity to infrastructure, metal prices and government regulations.

23. The long term profitability of the Company's operations will be in part directly related to the cost and success of its exploration programmes, which may be affected by a number of factors, which are beyond the control of the Company.

Additional financing

24. The Company does not currently have sufficient financial resources to undertake by itself all of its planned exploration and possible development programmes. The exploration and subsequent development of the Properties may therefore depend on the Company's ability to obtain additional required financing. The Company has limited financial resources and there is no assurance that additional funding will be available to allow the Company to fulfil its obligations on the Properties. Failure to obtain additional financing could result in delay or indefinite postponement of further exploration and the possible loss of the Company's interest in the Properties.

Governmental Regulation

25. Exploration, development and mining of the Properties will be affected to varying degrees by:

i. government regulations relating to such matters as environmental protection, health, safety and labour;

ii. mining law;

iii. restrictions on production; price controls; tax increases;

iv. maintenance of claims;

v. tenure; and

vi. expropriation of property.

26. There is no assurance that future changes in such regulation, if any, will not adversely affect the Company's operations. Government approvals and permits are required in connection with the exploration activities proposed for the Properties. To the extent such approvals are required and not obtained, the Company's planned exploration, development and production activities may be delayed, curtailed, or cancelled entirely.

27. Failure to comply with applicable laws, regulations and requirements may result in enforcement action against the Company, including orders calling for the curtailment or termination of operations on the properties, or calling for corrective or remedial measures requiring considerable capital investment. Parties engaged in mineral exploration and mining activities may be subject to civil and criminal liability as a result of failure to comply with applicable laws and regulations.

28. Amendments to current laws, regulations and permitting requirements affecting mineral exploration and mining activities could have a material adverse impact on the Company's operations and prospects.

Claim Titles and Aboriginal Rights

29. Aboriginal rights may be claimed with respect to the Prospecting Permits or other types of tenure with respect to which rights have been conferred. The Company is not aware of any aboriginal land claims having been asserted or any legal actions relating to aboriginal issues having been instituted with respect to the Properties. The Company is aware of the mutual benefits afforded by co-operative relationships with indigenous people in conducting exploration activity and is supportive of measures established to achieve such cooperation.

Sanatana Diamonds Inc. (An Exploration Stage Company) Financial Statements For the three and six months ended September 30, 2005, the three months ended September 30, 2004, and the period from June 25, 2004 (Incorporation) to September 30, 2004 (expressed in Canadian dollars) (UNAUDITED)

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

(The Company s independent auditor has not performed a review of these financial statements) Sanatana Diamonds Inc. (An Exploration Stage Company) Interim Balance Sheets --------------------------------------------------------------------- (expressed in Canadian dollars) --------------------------------------------------------------------- --------------------------------------------------------------------- As at September 30, March 31, 2005 2005 (Unaudited) (Audited) --------------------------------------------------------------------- Assets Current assets Cash and cash equivalents (Note 3(a)) $ 4,891,678 $ 1,183,691 Receivables 241,112 172,144 --------------------------------------------------------------------- 5,132,790 1,355,835 Deferred offering costs (Note 3(b)) - 189,411 Exploration advances - 320,351 Mineral properties and deferred exploration costs (Note 2) 6,625,977 4,947,130 --------------------------------------------------------------------- $ 11,758,767 $ 6,812,727 --------------------------------------------------------------------- --------------------------------------------------------------------- Liabilities and Shareholders Equity Current liabilities Accounts payable and accrued liabilities $ 346,350 $ 187,460 Future income tax liability (Note 4(b)) 574,269 599,515 --------------------------------------------------------------------- 920,619 786,975 --------------------------------------------------------------------- Shareholders equity Share capital (Note 3) 11,389,239 7,421,603 Subscriptions receivable - (1,175,000) Accumulated deficit (551,091) (220,851) --------------------------------------------------------------------- 10,838,148 6,025,752 --------------------------------------------------------------------- $ 11,758,767 $ 6,812,727 --------------------------------------------------------------------- --------------------------------------------------------------------- Going Concern Assumption (Note 1) Approved by the Board of Directors --------------------- --------------------- Peter Miles, Director Glenn Laing, Director The accompanying notes are an integral part of these financial statements (The Company s independent auditor has not performed a review of these financial statements) Sanatana Diamonds Inc. (An Exploration Stage Company) Interim Statements of Loss and Accumulated Deficit for the three and six months ended September 30, 2005, the three months ended September 30, 2004, and the period from June 25, 2004 (Incorporation) to September 30, 2004 --------------------------------------------------------------------- (expressed in Canadian dollars) (Unaudited) --------------------------------------------------------------------- --------------------------------------------------------------------- Period from Three Months Ended Six Months June 25, 2004 September 30, Ended Sept 30, to Sept 30, 2005 2004 2005 2004 --------------------------------------------------------------------- Expenses Consulting fees $ 13,124 $ - $ 25,624 $ - Filing fees 16,871 592 16,871 592 Investor relations 37,913 - 40,809 - Management fees 36,000 - 48,000 - Office and administration 20,100 2,760 24,061 2,760 Professional fees 44,569 27,785 111,320 27,785 Transfer agent fees 24,310 - 24,310 - Travel and accommodation 24,351 21,520 66,414 21,520 --------------------------------------------------------------------- 217,238 52,657 357,409 52,657 --------------------------------------------------------------------- Other Income Interest income (1,923) - (1,923) - --------------------------------------------------------------------- Loss before income taxes (215,315) (52,657) (355,486) (52,657) Decrease in future income tax liability (Note 4(b)) 25,246 - 25,246 - --------------------------------------------------------------------- Loss for the period (190,069) (52,657) (330,240) (52,657) Deficit, beginning of period (361,022) - (220,851) - --------------------------------------------------------------------- Deficit, end of period $ (551,091) $(52,657) $ (551,091) $ (52,657) --------------------------------------------------------------------- --------------------------------------------------------------------- Loss per share, basic and diluted $ (0.01) $ (0.18) $ (0.01) $ (0.19) --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted average number of common shares outstanding basic and diluted 32,738,346 289,344 31,709,078 271,446 --------------------------------------------------------------------- --------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements (The Company s independent auditor has not performed a review of these financial statements) Sanatana Diamonds Inc. (An Exploration Stage Company) Interim Statements of Cash Flows for the three and six months ended September 30, 2005, the three months ended September 30, 2004, and the period from June 25, 2004 (Incorporation) to September 30, 2004 --------------------------------------------------------------------- (expressed in Canadian dollars) (Unaudited) --------------------------------------------------------------------- --------------------------------------------------------------------- Period from Three Months Ended Six Months June 25, 2004 September 30, Ended Sept 30, to Sept 30, 2005 2004 2005 2004 --------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net loss for the period $ (190,069) $(52,657) $ (330,240) $ (52,657) Items not involving cash: Decrease in future income tax liability (25,246) - (25,246) - Changes in non-cash working capital balances: Receivables (163,387) - (68,968) - Accounts payable and accrued liabilities 7,699 - (6,074) - --------------------------------------------------------------------- (371,003) (52,657) (430,528) (52,657) --------------------------------------------------------------------- Investing activities: Decrease in exploration advances 130,345 - 320,351 - Mineral properties and deferred exploration costs (3,060,854) - (3,931,733) - Option payment Kennecott 2,500,000 - 2,500,000 - --------------------------------------------------------------------- (430,509) - (1,111,382) - --------------------------------------------------------------------- Financing activities: Common share proceeds 5,095,733 1,735,000 5,095,733 1,735,000 Share subscriptions receivable - 1,000,000 1,175,000 1,000,000 Offering costs (794,367) - (1,020,836) - --------------------------------------------------------------------- 4,301,366 2,735,000 5,249,897 2,735,000 --------------------------------------------------------------------- Increase in cash and cash equivalents during the period 3,499,854 2,682,343 3,707,987 2,682,343 Cash and cash equivalents, beginning of period 1,391,824 - 1,183,691 - --------------------------------------------------------------------- Cash and cash equivalents, end of period $ 4,891,678 $2,682,343 $ 4,891,678 $ 2,682,343 --------------------------------------------------------------------- Supplementary Non-Cash Information Shares issued as listing costs $ 64,026 $ - $ 64,026 $ - --------------------------------------------------------------------- --------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements (The Company's independent auditor has not performed a review of these financial statements) Sanatana Diamonds Inc. (An Exploration Stage Company) Notes to Interim Financial Statements for the three and six months ended September 30, 2005, the three months ended September 30, 2004, and the period from June 25, 2004 (Incorporation) to September 30, 2004 --------------------------------------------------------------------- (expressed in Canadian dollars) (Unaudited)

The accompanying financial statements for the interim period ended September 30, 2005 are prepared on the basis of accounting principles generally accepted ("GAAP") in Canada. These financial statements are unaudited, but in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for fair presentation of the financial position, operations and cash flows for the interim period presented. The financial statements for the interim period are not necessarily indicative of the results to be expected for the full year. These financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters, which would be included in full year financial statements, and therefore should be read in conjunction with the Company's audited financial statements for the period from June 25, 2004 (Incorporation) to March 31, 2005. The Company was inactive for the period from June 25, 2004 (Incorporation) to June 30, 2004.

Canadian GAAP differs in certain material respects from International Financial Reporting Standards. Details as to differences pertaining to the Company's financial statements are set out in Note 6 to these financial statements.

1. Nature of Business and Ability to Continue as a Going Concern

Sanatana Diamonds Inc. ("the Company") was incorporated on June 25, 2004 in the Province of British Columbia under the British Columbia Business Corporations Act. The Company is an exploration stage company, and its principal business activity is the acquisition, exploration and development of mineral properties. The Company has entered into agreements regarding properties in the Northwest Territories in Canada.

These financial statements are prepared on a going-concern basis, which contemplates that the Company will continue realizing its assets and discharging its liabilities and commitments in the normal course of business. As at September 30, 2005, the Company has been operating for just over one year and has no source of operating cash flow. The Company selected March 31 as its fiscal year end.

The Company is in the process of exploring its mineral property interests and has not yet determined whether its mineral property interests contain mineral reserves that are economically recoverable. The Company's continuing operations and the underlying carrying value and recoverability of the amounts shown for deferred exploration costs are entirely dependent upon the existence of economically recoverable mineral reserves, the ability of the Company to obtain the necessary financing to complete the exploration and development of the mineral property interests, and on future profitable production or proceeds from the disposition of the mineral property interests. The Company is considered to be an exploration stage company as it has yet to generate revenue from operations.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. Although there are no assurances that management's plan will be realized, management believes the Company will be able to continue operations into the future.

The financial statements do not include any adjustments to the carrying value of assets and liabilities, the reported revenues and expenses and balance sheet classifications that would be necessary if the going concern assumption were not appropriate. Such adjustments could be material.

2. Mineral Properties and Deferred Exploration Costs

The cumulative costs of the Company's interest in its Northwest Territories mineral properties are as follows:

--------------------------------------------------------------------- --------------------------------------------------------------------- Three Months ended Six Months ended Sept. 30, 2005 Sept. 30, 2005 --------------------------------------------------------------------- Helicopter and fixed wing aircraft costs: Opening balance $ 1,355,582 $ 911,433 Incurred in the period 2,120,168 2,564,317 ----------------------------------- Closing balance 3,475,750 3,475,750 Sampling and assays Opening balance 693,012 438,410 Incurred in the period 377,640 632,242 ----------------------------------- Closing balance 1,070,652 1,070,652 Labour Opening balance 127,449 127,449 Incurred in the period 52,895 52,895 ----------------------------------- Closing balance 180,344 180,344 Reimbursable bonds and deposits Opening balance 2,368,584 2,368,584 Incurred in the period 116,614 116,614 ----------------------------------- Closing balance 2,485,198 2,485,198 Geological services Opening balance 524,840 524,840 Incurred in the period 890,807 890,807 ----------------------------------- Closing balance 1,415,647 1,415,647 Project management fees Opening balance - - Incurred in the period 448,810 448,810 ----------------------------------- Closing balance 448,810 448,810 Other Opening balance 844,581 576,414 Incurred in the period (609,288) (341,121) ----------------------------------- Closing balance 235,293 235,293 Recoveries Opening balance - - Received in the period (185,717) (185,717) ----------------------------------- Closing balance (185,717) (185,717) Option payment-Kennecott Opening balance - - Received in the period (2,500,000) (2,500,000) ----------------------------------- Closing balance (2,500,000) (2,500,000) --------------------------------------------------------------------- $ 6,625,977 $ 6,625,977 --------------------------------------------------------------------- ---------------------------------------------------------------------

Recoveries are amounts from "Reimbursable bonds and deposits" that have been refunded to the Company.

On July 31, 2004, the Company entered into a sale and purchase agreement with the Jaeger Joint Venture (the "Jaeger Diamond Property Sale and Purchase Agreement") to purchase the right to any diamonds located on a series of properties (the MacKenzie Diamond Project). The MacKenzie Diamond Project covers approximately 20 million acres in the Inuvialuit, Gwich'in and Sahtu mining districts in the Northwest Territories, Canada. The Jaeger Joint Venture ("Jaeger") initially retained a 20% carried interest in the properties. Pursuant to the agreement the Company issued 16,000,000 common shares to Jaeger and reimbursed costs incurred by Jaeger totalling $76,933. In addition, the Company agreed to pay 100% of the first $4,000,000 in exploration costs, after which Jaeger was to contribute 11.12% of exploration costs above $4,000,000. Under the terms of this agreement, the Company acknowledges that Geoinformatics Explorations Limited is entitled to a 1% gross overriding royalty and Matthew Mason is entitled to a 2% gross overriding royalty. Jaeger is an entity partially owned by a director of the Company.

On January 27, 2005, the Company entered into an agreement with the Jaeger Joint Venture, pursuant to which the parties agreed to amend the Jaeger Diamond Property Sale and Purchase Agreement to include a geographical area of common interest within which either party may require that any mineral interests acquired by either party be added to the property to which that agreement applies. The geographical area of interest includes that part of the NWT bounded by the line of latitude 65 degrees North; bounded on the west by meridian 135 degrees West; bounded on the east by meridian 115 degrees West; and bounded on the north by the coastline of the Arctic Ocean.

On March 4, 2005, the Company entered into another agreement with Jaeger whereby it issued 3,000,000 common shares (based on a valuation report obtained by management) for an additional 10% carried interest in the property discussed above, increasing the Company's interest to 90%.

The purchase of this additional 10% carried interest requires that the Company now pay all exploration and mine construction costs, relieving Jaeger of any responsibility for costs toward the property.

The property is subject to a 2.9% gross overriding royalty on diamond production, consisting of a 2% overriding royalty to a member of the Jaeger Joint Venture and 1% of the Company's 90% interest in the MacKenzie property to a company with a common director.

In May 2005, the Company acquired the diamond rights to an additional 42 prospecting permits from a member of the Jaeger Joint Venture for $60,000.

In June 2005, the Company acquired from Jaeger Joint Venture all other mineral rights, excluding uranium rights, to the prospecting permits to which it owns diamond rights, subject to the Jaeger Joint Venture retaining a 10% production carried interest and subject to Matthew Mason retaining a 2% net smelter returns royalty (NSR).

In June 2005, Matthew Mason executed an amended and restated declaration of trust in which he acknowledges that he holds recorded title to a total of 462 prospecting permits with a total acreage of 19,766,689 acres as bare trustee and nominee for and on behalf of the Company to the extent of any diamonds or other minerals, excluding uranium, located on, in or under such permits, including the right to explore for and exploit any and all such diamonds or other minerals. The Company has no rights in respect of uranium.

The Company also has rights in 52 unpatented mining claims which were staked on the Company's behalf in Spring, 2005. These claims were registered to Tim Young in June 2005 and are subject to the Company's agreement with the Jaeger Joint Venture by virtue of an area of interest provision contained therein.

In July 2005, the Company signed an agreement with Kennecott Canada Exploration Inc (Kennecott) which contains the following options and requirements:

i) The agreement grants Kennecott a 15% undivided interest in the MacKenzie Diamond Project property in exchange for assuming proportionate responsibility for both a 2% gross overriding royalty and a 2% NSR royalty and for paying $2.5 million (received) to Sanatana to fund the 2005 exploration program, as well as paying an additional $2.5 million to Sanatana on or before the first anniversary of the first closing date of the agreement. Kennecott will also contribute 15% of ongoing exploration costs beginning in 2007.

ii) The agreement also grants Kennecott the option to earn up to a 60% interest in any identified kimberlite or deposit ("Development Area") by solely funding the activities on the Development Area until a decision to mine is made.

iii) The agreement requires Kennecott to subscribe for a minimum of $2.5 million or 9.9% of the outstanding shares in the capital of Sanatana on the completion of the initial public offering and grants Kennecott the option to subscribe for an additional $2.5 million or the equivalent number of shares to bring Kennecott's ownership of Sanatana up to 9.9% of the issued and outstanding shares in the capital of Sanatana as at the end of the second closing date. Also, Kennecott may elect to purchase $1M worth of shares on each anniversary closing date until the first time it chooses not to so elect.

The reimbursable bond consists of an exploration deposit paid to the Northwest Territories government to ensure required exploration and reporting is done. In order for the deposit to be refunded, exploration activity must be performed on the property in the amount of the deposit during the period to which the deposit relates. These deposits must accompany the applications for permits. Permit applications must be filed in the month of December previous to the calendar year to which the application pertains.

Future exploration deposits will be required as summarized in the table below. However it should be noted that these amounts are based on the current area of exploration, and are likely the maximum amounts that will be paid. Since deposits are calculated on a per acre basis, should the company decide to reduce the area of exploration, the required deposits will also be reduced.

Exploration Deposits Property located above the 68th parallel ------------------------------------------------ Jan 2004 - Jan 2006 Paid by Jaeger Jan 2006 - Jan 2008 $ 1,275,437 Jan 2008 - Jan 2009 2,550,874 Property located below the 68th parallel ------------------------------------------------ 2004 permits: Feb 2004 - Feb 2005 Paid by Jaeger 2005 permits: Feb 2005 - Feb 2006 $ 2,368,584(a) Feb 2006 - Feb 2007 5,020,600 Feb 2007 - Feb 2008 618,594 ------------------------------------------------ Total $ 11,834,089 ------------------------------------------------ ------------------------------------------------ (a) - Paid Jan 2005

In December 2003, exploration deposits of $1,815,544 were paid by Jaeger to the Northwest Territories government for 2004 exploration permits. $1,177,825 of these deposits has been refunded to Jaeger as of the date of these financial statements.

In the event that insufficient exploration expenditures are incurred by the Company on the properties above the 68th parallel, the balance of the deposits, $637,719, may not be fully refunded to Jaeger, and the Company may be liable to Jaeger for the shortfall. Any shortfall in amounts refunded will be recorded in the period the shortfall becomes likely to occur. Management believes these amounts will be fully refunded to Jaeger.

3. Share capital Authorized: Unlimited common shares without par value Issued: --------------------------------------------------------------------- --------------------------------------------------------------------- Common Shares Number of Shares Amount --------------------------------------------------------------------- Balance, March 31, 2005 30,679,810 7,421,603 Public offering 2,890,398 5,095,733 Offering costs -- (1,192,123) Shares issued as listing costs 36,586 64,026 --------------------------------------------------------------------- Balance, September 30, 2005 33,606,794 11,389,239 --------------------------------------------------------------------- ---------------------------------------------------------------------

(a) Flow-through shares

As of September 30, 2005, the Company had extinguished their commitment to spend unused proceeds from previous flow-through share issuances on qualifying Canadian exploration activities. These additional expenditures have not yet been renounced to shareholders. At March 31, 2005, this commitment was $1,021,133.

(b) Deferred offering costs

Accounting, legal and brokerage costs incurred to July 28, 2005 in respect of the Company's AIM registration (which was completed on July 28, 2005) were deferred until the registration. After the AIM registration, the costs previously deferred were recorded as a reduction to proceeds received from the associated common shares issued upon registration. See also Note 3(d).

(c) Stock options and warrants

The Company did not issue stock options or warrants during the period from June 25, 2004 (Incorporation) to September 30, 2005. As of May 11, 2005, the Company has adopted a stock option plan for the Company's employees and directors. The plan allows for the issuance of options numbering up to 10% of the outstanding number of common shares of the Company.

(d) AIM listing

The Company completed a listing and placement on the AIM Market of the London Stock Exchange. In conjunction with the placement, 2,890,398 shares were issued at 82 pence, for gross proceeds of approximately Pounds Sterling 2.4 million Great Britain Pounds (GBP). An additional 36,586 shares were issued to Insinger de Beaufort as payment for fees.

4. Income and resource taxes

(a) The provision for income taxes reported differs from the amounts computed by applying cumulative Canadian federal and provincial tax rates to the loss before tax provision due to the following:

--------------------------------------------------------------------- ----------------------------------- Six Months ended September 30, ----------------------------------- ----------------------------------- 2005 2004 --------------------------------------------------------------------- Statutory tax rate (prorated) 34.87% 35.62% Loss for the period $ (330,240) $ (52,657) --------------------------------------------------------------------- Expected tax (recovery) expense (115,155) (18,756) Reduction in tax rate (25,246) - --------------------------------------------------------------------- Valuation allowance 115,155 18,756 --------------------------------------------------------------------- (Recovery of) provision for taxes on Interim statement of loss $ (25,246) $ - --------------------------------------------------------------------- (b) The significant components of the Company s future tax liability are as follows: --------------------------------------------------------------------- --------------------------------------------------------------------- September 30, March 31, 2005 2005 --------------------------------------------------------------------- Non capital losses carried forward $ 188,032 $ 78,667 Valuation allowance (188,032) (78,667) Deferred exploration costs (574,269) (599,515) --------------------------------------------------------------------- Future income tax liability $ (574,269) $ (599,515) ---------------------------------------------------------------------

The realization of benefits relating to the operating losses carried forward is uncertain and cannot be viewed as more likely than not. Accordingly, no future income tax asset has been recognized for accounting purposes.

As at September 30, 2005, the Company has estimated Canadian non-capital losses carried forward (expiring in 2015 and 2016) of $551,091 and estimated Canadian Exploration Expenses and Canadian Development Expenses totalling $4,942,891 with no expiry date.

5. Related Party Transactions and Balances

At September 30, 2005, the Company did not have any employees and had arrangements with a number of contractors to provide most of the administrative, accounting, and management services required. Certain directors and insiders provided management and consulting services to the Company.

St. George Minerals Limited, a private company 50% owned by a director of the Company, provided management and consulting services to the Company.

From July 2004 to March 2005, Geoinformatics Explorations Limited ("Geoinformatics", a company in which the Company's chief executive officer was formerly a director) carried out the Geoinformatics Intervention Project which consisted of collecting and validating all available geological data over the Mackenzie Diamond Project, compiling this data into 3D databases and generating 3D models and target areas that were prospective for kimberlite exploration. Geoinformatics has retained a 1% NSR Royalty over the Mackenzie Diamond Project.

Geoinformatics continued to provide geological consulting services to the Company during the quarter ended September 30, 2005.

--------------------------------------------------------------------- --------------------------------------------------------------------- Services provided by: Three months Six months Period from ended ended June 25, 2004 September 30, September to September 2005 30, 2005 30, 2004 --------------------------------------------------------------------- Directors and insiders $ 36,000 $ 51,000 $ - Geoinformatics 257,349 342,521 - St. George Minerals Limited 3,624 3,624 - --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Balances payable to: September March 31, 30, 2005 2005 --------------------------------------------------------------------- Directors $ 13,000 $ - St. George Minerals Limited 3,624 - ---------------------------------------------------------------------

Pursuant to agreements with the Company's directors, the Company has agreed to pay its directors a fee totalling approximately $75,000 (Pounds Sterling 35,000) per annum. Fees were accrued but none had been paid at September 30, 2005.

6. Reconciliation from Canadian GAAP to International Financial Reporting Standards (IFRS)

Had the financial information been drawn up in accordance with IFRS, the net loss for the period and assets/liabilities and shareholders' equity at March 31 2005 would have been as follows:

--------------------------------------------------------------------- --------------------------------------------------------------------- Period from Three Months Ended Six Months June 25, 2004 September 30, Ended Sept 30, to Sept 30, 2005 2004 2005 2004 --------------------------------------------------------------------- Net loss under Canadian GAAP $ (190,069) $(52,657) $ (330,240) $ (52,657) Amortization of mineral property valuation (670,833) - (1,341,667) - Capitalisation of amortization charge as deferred exploration costs 670,833 - 1,341,667 - --------------------------------------------------------------------- Net loss under IFRS $ (190,069) $(52,657) $ (330,240) $ (52,657) --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- As at September March 31, 30, 2005 2005 --------------------------------------------------------------------- Assets / Liabilities and Shareholders equity under Canadian GAAP $ 11,758,767 $ 6,812,727 Fair value of mineral properties 8,050,000 8,050,000 Accumulated amortization of mineral property valuation (2,454,167) (1,112,500) Capitalisation of amortization charge as deferred exploration costs 2,454,167 1,112,500 --------------------------------------------------------------------- Assets / Liabilities and Shareholders equity under IFRS $ 19,808,767 $ 14,862,727 ---------------------------------------------------------------------

Fair value of mineral properties:

During the fiscal year ended 31 March 2005, the Company purchased the right to any diamonds on a number of properties from Jaeger Joint Venture, using the Company's own shares as payment. Under Canadian GAAP, the properties have been recorded at their previous carrying value less the cash reimbursement to Jaeger (which has resulted in a carrying value in the Company's balance sheet of $Nil). IFRS 2 (Share-based payments) requires that where shares are used to purchase goods and services, these goods and services are included within the financial statements at their fair value.

19 million shares were issued as consideration for the property under the agreement with Jaeger, in two separate issues. The first issue, of 16 million shares, took place in July 2004 at a fair value of $0.25 per share. 3 million shares were issued in March 2005 at a fair value of $1.35 per share. These share issues result in a valuation of $8,050,000 and the related intangible asset thus created is being amortised from the issue date over three years, which is the minimum period of the exploration licence.

In line with the Company's accounting policy of full deferral of exploration costs, the amortisation charge has been included within deferred exploration costs. This deferral will remain until either the diamonds are ready for extraction (at which point amortisation will commence) or the deferred exploration costs are considered to be impaired in value.

With regard to the commencement date of amortisation, IAS38 (Intangible assets) requires that amortisation shall begin when the asset is available for use, that is when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

Sanatana Diamonds Incorporated (AIM:SAN)

Source: Business Wire

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