ARMADILLO RESOURCES LTD. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED MAY 31, 2009

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1 ARMADILLO RESOURCES LTD. MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED MAY 31, 2009 REPORT DATE September 25, 2009 This Management Discussion and Analysis (the MD&A ) provides relevant information on the operations and financial condition of Armadillo Resources Ltd (the Company ) for the year May 31, This MD&A has been prepared as of September 25, The MD&A should be read in conjunction with the Company s audited financial statements and notes thereto for the year May 31, 2009 herein that are prepared in accordance with Canadian generally accepted accounting principles, all of which can be found on SEDAR at All monetary amounts in this MD&A and in the financial statements are expressed in Canadian dollars, unless otherwise stated. All of the financial information referenced below has been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The Company is a reporting issuer in each of the Provinces of British Columbia and Alberta. Its head and principal office is located at Granville Street Vancouver, British Columbia, V6C 1V5. QUALIFYING TRANSACTION Mineral Claim Option Waverly Tangier Property The Company acquired an option to earn a 60% interest in a block of mineral claims near Trout Lake, BC known as the Waverly-Tangier property from Silver Phoenix Resources Inc. The property lies approximately 50 kilometres north of Revelstoke, B.C., has a NI report prepared by Mr. James Turner, P.Geo., and may be viewed on our website, The Agreement was submitted to the TSX Venture Exchange ( Exchange ) as the Company s Qualifying Transaction. The Exchange accepted the transaction for filing, i.e. approved the closing of the transaction effective March 24, The Option Agreement and its terms are as follows: To maintain, satisfy and exercise the First Option the Company must: 1. (a) within 10 days after the Effective Date pay 75,000 and issue 175,000 Shares to the Optionor (paid and issued); (b) within one year after the Effective Date pay 75,000 and issue 150,000 Shares to the Optionor; (c) within two years after the Effective Date pay 100,000 and issue 150,000 Shares to the Optionor; (d) within three years after the Effective Date pay 100,000 and issue 150,000 Shares to the Optionor; being a total of 350,000 and 625,000 Shares. 2. incur 3,000,000 of Expenditures on the Property in the following amounts on or before the following dates: (a) 200,000 within one year of the Effective Date (which is a firm obligation); 1

2 (b) an aggregate total of 500,000 within two years of the Effective Date; (c) an aggregate total of 1,500,000 within three years of the Effective Date; and (d) an aggregate total of 3,000,000 within four years of the Effective Date. 3. pay 100% of all of the costs required to have a feasibility study done with respect to the Property and have the Feasibility Report prepared and delivered to the Joint Venture not later than December 31, With respect to this obligation: (a) the work which the Optionor must fund 100% shall include all of the work on or in relation to the Property, and all of the related costs and expenses whatsoever that will be necessary to have a feasibility study with respect to commercial production of ore from the Property performed by independent qualified geological and mining experts; (b) the Feasibility Report will have to be based on the feasibility study done and will have to satisfy the requirements and definition of feasibility study contained in Canadian Securities National Instrument The Company, if it satisfies all of the foregoing provisions, will have exercised the First Option and earned a 60% interest in the Property. At that point the Company and Silver Phoenix will be constituted a joint venture of which the Company will be the Operator. The Company and Silver Phoenix will, forthwith after the creation of the joint venture, bona fide negotiate the terms of a joint venture agreement. If the Company exercises the First Option it must, within 30 days thereafter, give an Election Notice to the Optionor that it will proceed to attempt the exercise of the Second Option or will not attempt to exercise the Second Option to earn an additional 10% interest in the property. If it gives a notice electing to attempt to exercise the Second Option it must, to exercise the Second Option: (a) lend Silver Phoenix, at the most attractive interest rate available and in no case great than LIBOR plus½%, all of the amounts that will be payable by Silver Phoenix under the Joint Venture Agreement; and (b) cause the Joint Venture to put the claims into commercial production. Silver Phoenix is entitled, notwithstanding the exercise of the Options described above, to receive a 3.0% Net Smelter Return Royalty ( NSR ) which shall be calculated quarterly, and the following provisions will apply: (a) If the First Option is exercised the Joint Venture shall pay Advance Royalty payments to the Optionor of150,000 per year, commencing January 1, 2015 and such 150,000 Advance Royalty payment shall be made on January 1 of each year thereafter until the Commencement of Commercial Production; (b) On the date of the Commencement of Commercial Production the total amount paid to the Optionor as Advance Royalty payments shall be calculated and the amount thereof shall be withheld from subsequent NSR payments to the Optionor until the total amount has been recovered by the Joint Venture from the NSR payments that would otherwise be payable to the Optionor; (b) The NSR royalty payments that would otherwise be paid or credited to Silver Phoenix must be a minimum of 150,000 per year. 2

3 Silver Phoenix may, at any time prior to the exercise of the Second Option, elect to sell or deal with three of the claims comprising the property covering approximately hectares and known as the George Prospect. In such case the Company will have a first right of refusal with respect to the Optionor s proposal. Wakefield Property The Company has acquired a 100% interest, for 250,000, in zinc claims in the vicinity of Golden Arch Resources Ltd s ( Golden Arch ) Wakefield Lakes zinc property located in northern Saskatchewan. The property lies southeast of Wollaston Lake approximately 300 kilometres north of La Ronge and 15 kilometres east of highway # 905. The Property consists of five Saskatchewan Government claims and appears to be on trend with the development completed by Golden Arch. Armadillo s plan is to joint venture the property with a larger zinc oriented company. Change of Management The founders of the Company the holders of significant numbers of escrowed shares have privately entered into an Agreement to sell and transfer 1,450,000 escrowed shares of the Company to Leslie Kjosness of Vancouver, BC (transferee of 150,000 shares) and Grant Hodgins of Melfort, Saskatchewan (transferee of 1,300,000 shares). The Agreement also provided that the majority of the Company s Directors and Officers would resign in favour of persons nominated by Messrs. Kjosness and Hodgins. The Exchange approved the transfer of the escrowed shares March 24, As a result, former Directors Malcolm Powell, Carl Jonsson and Lindsay Bottomer resigned from their positions as Directors and Officers of the Company on March 25, The fourth former Director Arthur Troup, resigned as a Director on March 31, New Directors and Officers have been appointed who now hold the following positions: Name Leslie Kjosness Blaine Bailey Corey Klassen David Rennie Position Director, President and Chief Executive Officer Director, Secretary and Chief Financial Officer Director Director Termination of Capital Pool Corporation Status The Exchange, simultaneously, with its acceptance for filing of the Option Agreement described in Clause 2 confirmed that the Company s status as a Pool Corporation was terminated and that the Company would, from and after, March 25, 2009, resume trading on the Exchange as a Tier 2 Mineral Exploration Company. Also, effective March 25, 2009, the Company s trading symbol on the Exchange changed to ARO. Move of Head Office Effective March 25, 2009, with the appointment of Leslie Kjosness as the Company s President and Chief Executive Officer, the head office of the Company was moved to: Address Granville Street, Vancouver, BC V6C 1V5 Telephone Number: Fax Number:

4 Address: Website: SELECTED ANNUAL INFORMATION The following selected financial data have been prepared in accordance with Canadian generally accepted accounting principles and should be read in conjunction with the Company s audited financial statements. The following table sets forth selected financial data for the Company for and as of the end of the last three completed financial years to the year May 31. Financial Year Ended Total revenue Nil Nil Nil Loss before extraordinary items Loss per share basic and diluted (310,340) (130,995) (2,859) (0.04) (0.02) (0.02) Net loss (310,340) (130,995) (2,859) Net loss per share basic and diluted (0.04) (0.02) (0.02) Total assets 974, , ,891 Total long term financial liabilities Cash dividends declared per share Nil Nil Nil Nil Nil Nil The Company was incorporated as a Capital Pool Company on May 4, 2007 and therefore had limited operating activities. The expenditures by the Company are those that are allowed to be spent in the acquisition of a qualifying transaction. The Company received its approval on its qualifying transaction on March 24, Results of Operation for the year May 31, 2009 and the year May 31, 2008 This review of operations should be read in conjunction with the Audited Financial Statements of the Company for the years May 31, 2009 and 2008 Year May 31, 2009 Financial Results Overview For the year ending May 31, 2009 the Company incurred a loss of 310,340 (0.04 per share) compared to a loss of 130,995 (0.02 per share) for the year May 31, The Company expects to continue losses for Fiscal Expenses General and administration expenses totaled 320,492 for the year May 31, 2009 compared to 154,515 for the year May 31, Details of the largest general and administration are as follows: 4

5 Stock based compensation of 151,046 ( ,637) as a result of the Company issuing stock options under the option plan during the year. Accounting and audit fees of 23,500 ( ,500) for the Company s audit. Legal fees of 63,695 ( ,386), consisting of general corporate matters, qualifying transaction and mineral property acquisitions. Administration fees of 19,500 ( Nil) for Company administration. Consulting of 14,000 ( Nil) consisting of 6,000 ( Nil) for media relations, 4,000 ( Nil) for accounting and administration and 4,000 ( Nil) for other. All other expenses are in the normal course of doing business. Other Interest income of 10,152 ( ,520) for interest earned on short term deposits Financial Results Overview For the year May 31, 2008 the Company incurred a loss of 130,995 (0.02 per share) compared to a loss of 2,859 (0.02 per share) for the year May 31, The Company was a Capital Pool Company and had limited operating activities. The Company was incorporated in May 2007 and therefore the amounts for the year May 31, 2007 are minimal. Expenses General and administration expenses totaled 154,515 for the year May 31, 2008 compared to 2,859for the year May 31, Details of the largest general and administration are as follows: Stock based compensation of 93,637 ( Nil) as a result of the Company issuing stock options under the option plan during the quarter. Accounting and audit fees of 26,500 ( Nil) for the Company s audit. Legal fees of 16,386 (2007-2,000) for legal services provided during the year. SUMMARY OF QUARTERLY RESULTS The following selected financial data have been prepared in accordance with Canadian generally accepted accounting principles and should be read in conjunction with the Company s audited financial statements. The following is a summary of selected financial data for the Company for its eight completed financial quarters ending May 31, Each quarter of each financial year is shown on a quarterly basis. 5

6 (a) net sales or total revenues (b) Gain (Loss) before Extraordinary items - total - per share undiluted (c) Net Loss - Total - Per share diluted May 31/09 (267,101) ( 0.03) (267,101) (0.03) February 28/09 November 30/08 August 31/08 May 31/08 February 29/08 November 30/07 Ended August 31/07 Nil Nil Nil Nil Nil Nil Nil Nil (27,212) ( 0.01) (27,212) (0.01) (13,109) (13,109) (2,918) (2,918) (43,405) (0.01) (43,405) (5,282) (5,282) (4,065) (4,065) (78,243) (0.02) (78,243) The Company was incorporated on May 4, 2007 and had been operating as a Capital Pool Company. The expenditures to date have been mainly operating expenditures such as rent, audit, legal and miscellaneous expenditures. With the completion of its Qualifying Transaction the Company expects its administration and exploration expenditures on its properties to increase. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 2009 the Company has working capital of 440,354 ( ,298). The Company has limited financial resources and has financed its operations primarily through the sale of its common shares. For the foreseeable future, the Company will need to rely on the sale of such securities for sufficient working capital and to finance its mineral property acquisition and exploration activities, and /or enter into joint venture agreements with third parties. As the Company does not generate any revenue from operations, the long-term profitability of the Company will be directly related to the success of its mineral property acquisition and exploration activities. On March 24, 2009 The Company received TSX Venture Exchange approval on a private placement of 1,500,000 Units at 0.20 per Unit for gross proceeds of 300,000. Each Unit consisted of one share of the Company, one-half of a A Share Purchase Warrant and one-half of a B Share Purchase Warrant. The Holder of a full A Warrant will be entitled to purchase an additional share of the Company for 0.30 on or before September 25, The Holder of a full B Warrant will be entitled to purchase an additional share of the Company for 0.40 until March 25, The A Warrants will entitled the Holders to purchase up to a total of 750,000 shares at 0.30 per share, and the Holders of the B Warrants will be entitled to purchase up to 750,000 shares at 0.40 per share. On March 25, 2009 directors of the Company had 382,500 share purchase options exercised for gross proceeds of 57,375. As a result of the global economic downturn, there is uncertainty in capital markets and the Company anticipates that it and others in the mineral resource sector will have limited access to capital. Although the business and assets of the Company have not changed, investors have increased their risk premium and their overall equity investment has diminished. The Company continually monitors its financing alternatives and expects to finance its Fiscal 2009 operating overhead through a private placement and its exploration expenditures through a flow-through private placement. 6

7 The Company has no long-term debt obligations. SHARE CAPITAL As of the date of this MD&A, the Company has issued and outstanding common shares as follows. The authorized share capital is unlimited no par value common shares. Number of Common Shares Amount Balance, May 31, ,650, ,750 Issued for cash Private placement 5,000, ,000 Share issuance costs - (150,385) Balance, May 31, ,650, ,365 Issued for cash Exercise of options 382,500 57,375 Fair value of options exercised - 53,859 Private placement 1,500, ,000 Exercise of agent options 70,000 10,500 Issued for mineral interests 175,000 35,000 Balance, September 25, ,777,500 1,180,099 As of the date of this MD&A the Company had the following incentive stock options outstanding: Outstanding Outstanding Exercise May 31, Sept. 25, Expiry Date Price 2008 Granted Exercised Forfeited 2009 August 10, ,000-70, ,000 - June 15, , , ,500 - March 31, ,000-50, ,000 May 15, , ,000 September 11, , ,000 1,165, , , , ,000 As of the date of this MD&A the Company had the following share purchase warrants, enabling the holder to acquire further common shares as follows: Outstanding Outstanding Exercise May 31, Sept. 25 Expiry Date Price 2008 Issued Exercised Expired 2009 March 25, 2010(*) , ,000 March 25, 2011(*) , ,000-1,500, ,500,000 7

8 (*) The Company received TSX Venture Exchange approval to change the expiry date and the exercise price on the outstanding warrants. RELATED PARTY TRANSACTIONS The Company incurred rental charges, included in office and miscellaneous, of 10,736 (2008-8,000) from companies with common directors. The Company incurred legal fees and disbursements of 48,710 ( ,386) and share issuance costs of Nil ( ,117) from a law firm which a Director of the Company is a principal. As at May 31, 2009, accounts payable and accrued liabilities included 3,509 (2008-7,878) owed to the law firm. The Company paid management and consulting fees of 23,500 ( Nil) to a current director of the Company and to a company with a current common director. These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. INVESTOR RELATIONS The Company has entered into an Investor Relations agreement with Progressive I.R. Consultants Corp. to provide investor relations services to the Company. The term of the contract is for 4 months, extendable by mutual consent, at a monthly fee of 3,000. APPROVAL The Board of Directors of Armadillo Resources Ltd. has approved the disclosures in this MD&A. FORWARD LOOKING STATEMENTS All statements in this report that do not directly and exclusively relate to historical facts constitute forward-looking statements. These statements represent the Company s intentions, plans, expectations and belief, and are subject to risk, uncertainties, and other factors of which many are beyond the control of the Company. These factors could cause actual results to differ materially from such forward-looking statements. The Company disclaims any intention or obligation to update or revise any forward-looking statements, as a result of new information, future events or otherwise. RISKS AND UNCERTAINTIES The Company s principal activity is mineral exploration and development. Companies in this industry are subject to many and varied kinds of risks, but not limited to, environmental, metal prices, political and economical. Failure to comply strictly with applicable laws, regulations and local practices relating to mineral right applications and tenure could result in loss, reduction or expropriation of entitlements, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests. The occurrence of these various factors and uncertainties cannot be accurately predicted and could have an adverse effect on the Company s operations. Although the Company has taken steps to verify the 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 titles may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects. 8

9 The Company has no significant sources of operating cash flow and no revenue from operations. Additional capital will be required to fund the Company s exploration program. The sources of funds available to the Company are the sale of marketable securities, sale of equity capital or the offering of an interest in its project to another party. There is no assurance that it will be able to obtain adequate financing in the future or that such financing will be advantageous to the Company. The property interests owned by the Company or in which it has an option to earn an interest are in the exploration stages only, are without known bodies of commercial mineralization and have no ongoing mining operations. Mineral exploration involves a high degree of risk and few properties, which are explored, are ultimately developed into producing mines. Exploration of the Company s mineral exploration may not result in any discoveries of commercial bodies of mineralization. If the Company s efforts do not result in any discovery of commercial mineralization, the Company will be forced to look for other exploration projects or cease operations. The Company is subject to the laws and regulations relating to environmental matters in all jurisdictions in which it operates, including provisions relating to property reclamation, discharge of hazardous materials and other matters. The Company may also be held liable should environmental problems be discovered that were caused by former owners and operators of its properties in which it previously had no interest. The Company conducts its mineral exploration activities in compliance with applicable environmental protection legislation. The Company is not aware of any existing environmental problems related to any of its current or former properties that may result in material liabilities to the Company. FINANCIAL INSTRUMENTS The Company s financial instruments consist of cash and cash equivalents and accounts payable. Unless otherwise noted, it is management s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted. Changes in accounting policies Effective April 1, 2008, the Company adopted new accounting policies of the Canadian Institute of Chartered Accountants Handbook: Assessing going concern Section 1400 requires management to assess and disclose an entity s ability to continue as a going concern. Financial instruments Disclosures and presentation Section 3862, Disclosure is required to enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. The principles in this section complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in Section 3855, Financial Instruments Recognition and Measurement, Section 3863, Financial Instruments Presentation, and Section 3865, Hedges. Section 3863, Presentation is required to enhance financial statement users' understanding of the significance of financial instruments to an entity's financial position, performance and cash flows. This section establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the 9

10 issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. Capital management Section 1535, Disclosure is required to provide information about an entity's capital and how it is managed. Recent accounting pronouncements Business combinations, consolidated financial statements and non-controlling interests In January 2009, the CICA issued Handbook Sections 1582 Business Combinations, 1601 Consolidated Financial Statements and 1602 Non-Controlling Interests which replace CICA Handbook Sections 1581 Business Combinations and 1600 Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under IFRS. Section 1601 together with Section 1602 establishes standards for the preparation of consolidated financial statements. These sections are applicable for the Company s interim and annual consolidated financial statements for its fiscal year beginning on or after January 1, Early adoption of these Sections is permitted and all three Sections must be adopted concurrently. International Financial Reporting Standards ( IFRS ) In 2006, the Canadian Accounting Standards Board ( AcSB ) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian generally accepted accounting principles ( GAAP ) with IFRS over an expected five-year transitional period. In 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada s own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, The transition date of April 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year March 31, While the Company has begun the process of assessing the adoption of IFRS for 2011, the financial reporting impact of the transition cannot be reasonably estimated at this time. Additional information on the Company available through the following source: 10