Wednesday, March 28, 2007
Final Results For The Year Ended 31 December 2006

Management's Discussion and Analysis

General

The following discussion of performance and financial condition should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2006 and 2005. The Company's financial statements are prepared in accordance with Canadian GAAP. The Company's reporting currency is Canadian dollars unless otherwise stated. The date of this Management Discussion and Analysis is March 22, 2007.

Description of Business

Brazilian Diamonds Limited (the "Company") is a development stage resource company engaged in the acquisition, exploration and development of kimberlite and alluvial Diamond properties in Minas Gerais State, Brazil. The Company has over 100,000 hectares of alluvial and kimberlite exploration properties in the Paranaiba and Santo Antonio do Bonito River Basins and the Patos de Minas region as well as over 115,000 hectares of prospective exploration properties in the Serra da Canastra Kimberlite Province including the advanced stage diamondiferous Canastra 1 kimberlite pipe. In addition, the Company has its own Diamond laboratory used in the recovery of kimberlite indicator minerals and in 2006 the Company received an ISO 17025 rating for the facility.

The Company's head office is located in Belo Horizonte, Brazil and its corporate office is located in Vancouver, British Columbia, Canada. Exploration headquarters are located in Patos de Minas, Brazil.

The Company is a reporting issuer in Ontario and British Columbia, Canada and its common shares trade on the Toronto Stock Exchange and Alternative Investment Market ("AIM") of the London Stock Exchange under the symbol BDY.

Outlook

The Company's exploration efforts in 2007 will continue to focus on exploring its kimberlite bodies located on its properties in Brazil. It will also work to maximize the value from its diamondiferous alluvial gravel inventories located within these same properties through joint ventures with experienced alluvial Diamond miners. The Company is waiting for a final resolution of the nearby Serra da Canastra National Park boundary dispute between IBAMA (the Brazilian Federal environmental agency) and local landowners and mineral license holders. The matter has been referred to an inter-ministerial commission by the President of Brazil, which must propose a solution to resolve the dispute and present a new draft law to the Brazilian Congress. The original terms of reference for the commission stipulated a July 31, 2006 deadline for the completion of this new draft law. This deadline has now passed and the various Ministries involved in the commission are currently determining a new date for the introduction of this draft legislation. Once this dispute has been resolved, the Company expects to be in a position to commence trial mining at its Canastra 1 project.

The Stage II drilling program at the large Regis kimberlite was completed in 2006 and micro Diamond test results are expected from all the drill holes by the middle of 2007. The results from this testing will be important in determining the next stage of exploration work to be carried out at the project.

The Company expects to have a decision on the viability of a large scale dredging operation from its joint venture partners at Santo Antonio do Bonito in 2007. Stage I bulk sampling at the project has now been completed and the results will be an important part of the evaluation process in determining the next phase of the project.

Plans are underway to commence mini-bulk testing of the 6 hectare, Salvador 1 kimberlite, in the second quarter of 2007 and will take six months to complete. These activities include operating license applications and the construction of a mobile treatment plant. Once the mini-bulk sample is completed and the results evaluated, the Company will be in a position to consider implementing a larger scale bulk sample in a pre-feasibility study for a future mine development.

Resource Properties

Diamond properties

During the year ended December 31, 2006, the Company focused its exploration activities on Diamond properties within Minas Gerais and Bahia States, Brazil.

1. Coromandel Region
   1. Santo Antonio do Bonito River

      The Company, through its wholly owned subsidiary, Cobre Sul, owns various mineral claims covering both the headwaters and the main drainage valley of the river.

      In 2004, thirteen adjacent licenses covering the headwaters and adjacent plateau areas were acquired from Incris Mineracao Ltda ("INCRIS") for U.S. $8,000. Under the agreement, INCRIS will retain a 1% gross royalty over any kimberlites developed as mines on the licenses acquired.

   2. Santo Antonio do Bonito Alluvial Diamond Mining Joint Venture

      In 2004, the Company signed an agreement with Companhia Mineradora de Minas Gerais ("CODEMIG") and Mineracao Rio Novo Ltda ("MRN"), a wholly owned subsidiary of Andrade Gutierrez SA, to form a joint venture to investigate the potential for commercial exploitation of the alluvial Diamond deposits within the Santo Antonio do Bonito Valley. Under the terms of the agreement CODEMIG was to spend $800,000 over two years to complete a definitive feasibility study prior to a decision to move to commercial mining operations. On January 29, 2006, the agreement was extended for another year as bulk sampling activities were completed. At the end of 2006, the joint venture partners finalized the Stage I bulk sampling program and are currently evaluating the results to determine the next phase of the project.

      In compensation for its investment in this feasibility work, CODEMIG will be entitled to a 3.5% over riding royalty from any future alluvial mining operations undertaken by the joint venture partners. Following successful completion of the evaluation programme, a new joint venture company is expected to be established in which MRN will hold a 75% interest and the Company a 25% interest.

2. Patos de Minas Region

   In 2003, the Company acquired Parima Mineracao Ltda. ("Parima") for $312,000 (U.S. $225,000) from Canabrava Diamond Corporation ("Canabrava"). Through the acquisition of Parima, the Company took possession of office and laboratory facilities, kimberlite geophysical and sampling databases and exploration licenses over properties in proximity to the Company's license portfolio in the Santo Antonio do Bonito and Abaete Valleys. In addition to the purchase price, Canabrava will receive a 2% royalty on any gross revenue generated by the production and sale of diamonds from future mines developed within the claims acquired, plus a 1% royalty on an area over and surrounding the claims acquired.

3. Serra da Canastra Region

   In 2002, the Company acquired all of the issued and outstanding shares of De Beers Brasil Ltda.'s ("De Beers"), wholly owned Brazilian subsidiary, Mineracao do Sul Ltda. ("Mineracao"). Mineracao's primary assets are the Canastra 1 kimberlite pipe and mineral licenses within the Serra da Canastra Region. In 2006, trial mining of the Canastra 1 pipe has been delayed until a dispute surrounding a possible extension of the nearby Serra da Canastra National Park boundary is resolved.

4. Data Sets

   On September 13, 2006, the Company, through its wholly owned subsidiary, Game Creek Company Ltd. ("Game Creek"), completed the acquisition of the Chapada Diamantina Kimberlite Project data sets in the State of Bahia from De Beers Brazil Ltda. The terms of the acquisition include:

   1. Cash payment on closing of $165,975 (paid);

   2. A second payment of $150,000 either in cash or the equivalent value in the common shares of the Company 180 days after closing;

   3. A third payment of $150,000 either in cash or the equivalent value in the common shares of the Company 360 days after closing;

   4. The issue to De Beers of 1 million common shares of the Company in the event of the discovery of a kimberlite pipe which after bulk testing is confirmed to contain more than 200 carats of diamonds;

   5. In the event that the Company shares are issued in lieu of cash, the number of shares issued will be determined using the higher of the prevailing market price or $0.10 per share; and

   6. De Beers will retain the right to re-acquire an interest of up to 40% in any kimberlite discovery which is confirmed to contain more than 200 carats of diamonds. To exercise this right, De Beers will have to pay an amount calculated as 300% of the Company's exploration expenditures to that date on the kimberlite body.

   On May 25, 2005, the Company, through its wholly owned subsidiary, Game Creek, entered into an agreement with De Beers to purchase a data set for the Maravilha Region of the State of Minas Gerais, Brazil. Pursuant to the agreement, the Company paid a total of $299,750 for the purchase of the data set as follows:

   1. Cash payments totalling $50,000 (paid)

   2. Issuance of a total of 450,000 common shares of the Company at a fair value of $249,750 (issued).

5. Gold property

   On November 4, 2005, the Company entered into an agreement with Hidefield Gold plc ("Hidefield") pursuant to which the Company sold its 50% interest in the Cata Preta Joint Venture for consideration comprising 2,500,000 new common shares of Hidefield (note 3(a)). The Company had previously written down the carrying value of the Cata Preta property to $Nil. The Company will also receive a 5% net profit interest on any future production from the joint venture license areas or 20% of the net proceeds received by Hidefield through future joint ventures, leases, or outright sale of any of the mineral licenses.

1. On February 15, 2006, the Company issued 8,735,294 new common shares to institutional investors at a price of $0.34 per share.

2. On March 2, 2006, the Company issued 4,000,000 common shares at a price of $0.34 per share.

3. On March 2, 2006, the Company issued 352,093 common shares at a price of $0.34 per share as settlement of accrued interest on convertible loan.

4. On April 24, 2006, 240,952 share purchase warrants were exercised at a price of $0.25 per share for proceeds of $60,238.

5. On December 8, 2006, the Company issued 21,510,000 shares at a price of $0.18 per share (8 pence per share) and 3,200,000 shares at a price of $0.18 per share (U$0.16 per share).

1. The Company paid or accrued for corporate administrative fees which includes office administration and corporate secretarial services, accounting, investor relations, chief financial officer, rent and other office expenses at cost of $229,000 (2005 - $Nil) to HRG Management Ltd. ("HRG"). The Company received or accrued miscellaneous office recoveries of $50,000 (2005 - $Nil) from HRG. HRG is a captive management company jointly owned by the Company and certain other companies that share the Vancouver office and staff on a cost recovery basis. Kenneth P. Judge, Chairman and Stephen L. Fabian, President are common directors of the Company and HRG.

2. On February 1, 2006, the Company's Vancouver office sold all its office equipment and fixtures at its Vancouver office to HRG at book value for $84,000.

3. The Company paid a security deposit of $18,000 as last month's service and rent fee to HRG.

4. The Company advanced $17,000 to HRG for the fixed assets of HRG. The advance will be repaid annually over the useful life of the fixed assets.

5. Received or accrued office rent recoveries of $122,000 (2005 - $Nil) from HRG. Received or accrued office rent recoveries of $8,000 (2005 - $92,000) from companies with common directors of the Company.

6. Paid or accrued consulting fees for technical services and rent in the amount of $364,000 (2005 - $351,000) to Hamilton Capital Partners Limited, a company in which Kenneth P. Judge is a director.

7. Paid or accrued management fees of $165,000 to Massif Limited ("Massif"), a company in which Stephen L. Fabian is interested.

8. Paid or accrued professional fees of $27,000 (2005 - $30,000) to a law firm in which David Cowan, director is a partner.

9. Paid or accrued corporate admin fees of $79,000 (2005 - $179,000) to RWA Management Limited, a company controlled by a former officer of the Company.

10. Accrued or recovered office and technical costs of $126,000 (2005 - $247,000) from Hidefield have been capitalized to mineral properties. Kenneth P. Judge and Francis Johnstone, director are also directors of Hidefield.

11. In December 2006, the Company received 2,500,000 ordinary shares of Hidefield valued at $323,094 in a transaction during the year ended December 31, 2005 with Hidefield.

12. The $4,000 due from related parties are amounts due from companies with common directors of the Company and have normal trade terms.

1. March 13, 2007, the Company paid $150,000 cash as the second payment on the purchase of the Chapada Diamantina data set.

1. Nature of operations

   The Company is engaged in the exploration for and development of mineral resources. The properties of the Company are without a known body of commercial ore, the exploration programs undertaken and proposed constitute an exploratory search, and there is no assurance that the Company will be successful in its search. The Company has not earned any revenue to date from its mining operations and is therefore considered to be in the development stage. The business of exploring for minerals and mining involves a high degree of risk, and few properties that are explored are ultimately developed into producing mines. Significant expenses may be required to establish ore reserves, to develop recovery processes, and to construct mining and processing facilities at a particular site. It is not possible to ensure that the current exploration programs planned by the Company will result in a profitable commercial mining operation.

   Although the Company has taken steps to verify title to mineral properties in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Property title may be subject to prior agreements and non-compliance with regulatory requirements.

   The Company is actively exploring and maintaining its current mineral property portfolio in Brazil. It expects to selectively explore and develop the portfolio itself and through joint venture arrangements or otherwise. The scheduling and scale of such future activities will depend on results and market conditions. Repatriation of earnings and capital from Brazil is subject to compliance with registration requirements.

2. Significant accounting policies

   These audited annual consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, and they follow the same accounting policies and methods of application as the most recent annual financial statements. Consequently, these statements should be read in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2005.

3. Investments

   

   1. During the year ended December 31, 2005, the Company entered into an agreement with a related party whereby they transferred their interests in the Cata Preta Joint Venture for consideration of 2,500,000 common shares of Hidefield with a market value of $323,094. As the Company had previously written down the carrying value of its Cata Preta property to $Nil, the Company recorded a gain of $323,094. On December 20, 2006, the Company received the 2,500,000 Hidefield shares. At December 31, 2006, the Company owned 14,625,000 shares of Hidefield.

   2. 1. At December 31, 2006, the net unrealized gain of the 12,125,000 Hidefield shares if sold at the then market value of 8.25 pence (2005 -- 5.79 pence) would be $1,135,000 (2005 - $663,000). The fair value of the Hidefield options at December 31, 2006, calculated using the Black-Scholes option pricing model was $837,000 (2005 - $433,000) resulting in an expense of $404,000 (2005 - $363,000).

         The estimated fair value of each option using the Black-Scholes option pricing model has been calculated based on the following assumptions:

         

      2. During the year ended December 31, 2005, the Company sold 12,125,000 of 24,250,000 Hidefield units with a book value of $311,674 to related parties for proceeds of $1,200,375. Each Hidefield unit was sold for 4.5 pence and is comprised of one ordinary common share of Hidefield and an option to acquire 12,125,000 common shares of Hidefield from the Company's remaining shareholding at 6 pence per share within three years of the date of grant ("the Hidefield options").

      3. The Company initially valued the Hidefield options at their estimated fair value of $70,000 based on the premium of 0.25 pence per unit to be received over the Hidefield share trading price at January 25, 2005, the transaction date. The balance of the proceeds of $1,130,375 was applied to the disposal of the Hidefield shares resulting in a gain of $818,701 which was recognized in the statement of loss and deficit during the year ended December 31, 2005.

4. SIGNIFICANT DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES

   The United States generally accepted accounting principles ("U.S. GAAP") reconciliation is included solely for the purpose of the Company's filing on the Alternative Investment Market (AIM) of the London Stock Exchange. The Company is currently listed on the Toronto Stock Exchange and is not a registrant with the United States Securities and Exchange Commission.

   The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada which differ, in certain respects, from U.S. GAAP. Had the Company prepared the consolidated financial statements in accordance with U.S. GAAP, certain items on the consolidated balance sheet, statements of loss and deficit and statements of cash flows would have been reported as follows:

   

   

   1. Mineral property expenditures

      Mineral property expenditures are accounted for in accordance with Canadian GAAP as disclosed in note 2. For U.S. GAAP purposes, the Company expenses expenditures relating to unproven mineral properties as they are incurred. When proven and probable reserves are indicated by a bankable feasibility study for a property, subsequent exploration and development costs of the property are capitalized.

      Under Canadian GAAP, exploration expenditures capitalized are shown as investing activities in the statement of cash flows. Under U.S. GAAP, exploration amounts expensed are classified as operating activities in the statement of cash flows.

   2. Convertible loan

      The Convertible loan has been accounted under Canadian GAAP which requires a portion of the convertible loan to be classified as equity. The difference between the carrying amount of the convertible loan and its face value is accreted over the life of the loan with a charge to the statement of loss and deficit. Under U.S. GAAP the convertible loan would be classified as a liability at its face value.

   3. Unrealized holding gains (losses)

      Under U.S. GAAP, securities are classified as trading securities or available for sale securities depending upon the Company's intentions. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized or an other than temporary impairment in value occurs. The Company has available-for-sale securities and the adjustment necessary in the year ended December 31, 2006 was an increase of $151,000 (year ended December 31, 2005 -- reduction of $767,000) to the unrealized holding gain category within shareholders' equity.

   
   For further information refer to the Company's website www.braziliandiamonds.com or contact:
   
   Brazilian Diamonds Limited
   Ken Judge, Chairman
   + 44 7733 001 002
   
   Stephen Fabian, President & CEO
   + 55 31 8814 5111
   
   Investor Relations
   Europe
   + 44 207 590 5503
   
   North America
   1-866-689-2599
   
   Hanson Westhouse Limited (Nomad to the Company)
   Tim Feather
   + 44 113 246 2610
   
   Teather & Greenwood: Landsbanki (Broker to the Company)
   James Maxwell
   + 44 207 426 9000