Tanzanian Royalty Exploration Corporation Consolidated Financial StatementsFor the years endedAugust 31, 2013 and 2012


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MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of Tanzanian Royalty Exploration Corporation were prepared by management in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board. Management acknowledges responsibility for the preparation and presentation of the consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of accounting principles and methods that are appropriate to the Companys circumstances. The significant accounting policies of the Company are summarized in Note 3 to the consolidated financial statements. Management has established processes, which are in place to provide them with sufficient knowledge to support management representations that they have exercised reasonable diligence that (i) the consolidated financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the year presented by the consolidated financial statements and (ii) the consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Company, as of the date of and for the year presented by the consolidated financial statements. The Board of Directors is responsible for ensuring that management fulfills its financial reporting responsibilities and for reviewing and approving the consolidated financial statements together with other financial information. An Audit Committee assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the internal controls over the financial reporting process. The Audit Committee meets with management as well as with the independent auditors to review the consolidated financial statements and the auditors' report. The Audit Committee also reviews the Annual Report to ensure that the financial information reported therein is consistent with the information presented in the consolidated financial statements. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements together with other financial information of the Company for issuance to the shareholders. Management recognizes its responsibility for conducting the Companys affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities. James E. Sinclair
	Steven Van TongerenJames E. Sinclair
	Steven Van TongerenChief Executive Officer
	Chief Financial Officer


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INDEPENDENT AUDITORS REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders ofTanzanian Royalty Exploration Corporation We have audited the accompanying consolidated financial statements ofTanzanian Royalty Exploration Corporation, which comprise the consolidated statement of financial position as at August 31, 2013, and the consolidated statements of comprehensive loss, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Managements responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.


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- 2 - We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position ofTanzanian Royalty Exploration Corporationas at August 31, 2013, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Other matter We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),Tanzanian Royalty Exploration Corporations internal control over financial reporting as of August 31, 2013, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 8, 2013 expressed an unqualified opinion onTanzanian Royalty Exploration Corporations internal control over financial reporting.   Vancouver, Canada,November 8, 2013.
	Chartered Accountants


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|-------------------------------- | --------- | ----- | -----------
|                                 |           |       |            
|                                
|                                 |           |       |            
|                                
|KPMG LLP                         | Telephone | (604) | 691-3000   
|Chartered Accountants            | Fax       | (604) | 691-3031   
|PO Box 10426 777 Dunsmuir Street | Internet  |       | www.kpmg.ca
|Vancouver BC V7Y 1K3             |           |       |            
|Canada                           |           |       |            

INDEPENDENT AUDITORS REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Directors of Tanzanian Royalty Exploration Corporation We have audited the accompanying consolidated financial statements of Tanzanian Royalty Exploration Corporation, which comprise the consolidated statement of financial position as at August 31, 2012, the consolidated statements of comprehensive loss, changes in equity and cash flow for the year ended August 31, 2012, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International Cooperative(KPMG International), a Swiss entity.KPMG Canada provides services to KPMG LLP.


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Tanzanian Royalty Exploration CorporationPage 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Tanzanian Royalty Exploration Corporation as at August 31, 2012, and its consolidated financial performance and its consolidated cash flows for the year ended August 31, 2012, in accordance with International Financial Reporting Standardsas issued by the International Accounting Standards Board. /s/ KPMG LLPChartered AccountantsNovember 16, 2012Vancouver, Canada


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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Companys management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of August 31, 2013. In making this assessment, the Companys management used the criteria established in Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management has completed their review and testing of the Companys internal control over financial reporting and concluded that they are appropriately designed and operating effectively as of August 31, 2013. 7


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INDEPENDENT AUDITORS REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Shareholders ofTanzanian Royalty Exploration Corporation We have auditedTanzanian Royalty Exploration Corporations internal control over financial reporting as of August 31, 2013, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Tanzanian Royalty Exploration Corporations management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.


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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion,Tanzanian Royalty Exploration Corporationmaintained, in all material respects, effective internal control over financial reporting as of August 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position ofTanzanian Royalty Exploration Corporationas at August 31, 2013 and the related consolidated statements of comprehensive loss, changes in equity, and cash flow for the year then ended and our report dated November 8, 2013 expressed an unqualified opinion thereon.







Vancouver, Canada,November 8, 2013.
	Chartered Accountants








- 2 -


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|                                                       |   |             |   |   |             |  
|------------------------------------------------------ | - | ----------- | - | - | ----------- | -
|Tanzanian Royalty Exploration Corporation             
|                                                      
|Consolidated Statements of Financial Position         
|(Expressed in Canadian Dollars)                       
|                                                      
|                                                       |   | August 31,  |   |   | August 31,  |  
|As at                                                  |   | 2013        |   |   | 2012        |  
|Assets                                                 |   |             |   |   |             |  
|Current Assets                                         |   |             |   |   |             |  
|Cash and cash equivalents(Note 18)                     | $ | 10,679,516  |   | $ | 20,058,678  |  
|Other financial assets(Note 7)                         |   | 5,250       |   |   | 17,850      |  
|Other receivables(Note 15)                             |   | 512,369     |   |   | 71,225      |  
|Inventory(Note 17)                                     |   | 11,849      |   |   | 248,395     |  
|Prepaid expenses(Note 14)                              |   | 80,761      |   |   | 87,676      |  
|                                                       |   | 11,289,745  |   |   | 20,483,824  |  
|Property, plant and equipment(Note 5)                  |   | 971,388     |   |   | 1,209,710   |  
|Mineral properties and deferred exploration(Note 4)    |   | 45,932,207  |   |   | 44,017,541  |  
|                                                       | $ | 58,193,340  |   | $ | 65,711,075  |  
|                                                      
|Liabilities                                            |   |             |   |   |             |  
|Current Liabilities                                    |   |             |   |   |             |  
|Trade, other payables and accrued liabilities(Note 16) | $ | 1,264,420   |   | $ | 2,318,393   |  
|Convertible debt(Note 6)                               |   | 1,085,221   |   |   | -           |  
|Warrant liability(Note 8)                              |   | 3,524,000   |   |   | -           |  
|                                                       |   | 5,873,641   |   |   | 2,318,393   |  
|Convertible debt(Note 6)                               |   | -           |   |   | 2,073,286   |  
|Warrant liability(Note 8)                              |   | -           |   |   | 8,114,000   |  
|                                                       |   | 5,873,641   |   |   | 12,505,679  |  
|Shareholders equity                                   |   |             |   |   |             |  
|Share capital(Note 8)                                  |   | 115,614,202 |   |   | 113,476,858 |  
|Share based payment reserve(Note 10)                   |   | 873,736     |   |   | 670,779     |  
|Warrants reserve(Note 9)                               |   | 870,037     |   |   | 870,037     |  
|Accumulated deficit                                    |   | (67,117,263 | ) |   | (64,098,273 | )
|Equity attributable to owners of the Company           |   | 50,240,712  |   |   | 50,919,401  |  
|Non-controlling interests(Note 4(j), 4(k))             |   | 2,078,987   |   |   | 2,285,995   |  
|Total shareholders equity                             |   | 52,319,699  |   |   | 53,205,396  |  
|                                                       | $ | 58,193,340  |   | $ | 65,711,075  |  



Nature of operations (Note 1) Segmented information (Note 19) Commitments (Notes 4 and 20) Subsequent event (Note 23)   The accompanying notes are an integral part of these consolidated financial statements 10


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|                                                                       |   |             |            |   |             |            |  
|---------------------------------------------------------------------- | - | ----------- | ---------- | - | ----------- | ---------- | -
|Tanzanian Royalty Exploration Corporation                             
|                                                                      
|Consolidated Statements of Comprehensive Loss                         
|(Expressed in Canadian Dollars)                                       
|                                                                      
|Year ended August 31,                                                  |   |             | 2013       |   |             | 2012       |  
|                                                                      
|Administrative expenses                                                |   |             |            |   |             |            |  
|Depreciation                                                           |   | $           | 288,519    |   | $           | 379,603    |  
|Consulting                                                             |   |             | 317,257    |   |             | 266,011    |  
|Directors fees(Note 11)                                               |   |             | 375,342    |   |             | 365,049    |  
|Office and general                                                     |   |             | 388,675    |   |             | 437,380    |  
|Shareholder information                                                |   |             | 343,291    |   |             | 581,526    |  
|Professional fees                                                      |   |             | 732,328    |   |             | 869,077    |  
|Salaries and benefits                                                  |   |             | 1,388,160  |   |             | 1,596,951  |  
|Share based payments(Note 8)                                           |   |             | 1,053,509  |   |             | 777,630    |  
|Travel and accommodation                                               |   |             | 126,362    |   |             | 169,420    |  
|                                                                       |   |             | (5,013,443 | ) |             | (5,442,647 | )
|Other income (expenses)                                                |   |             |            |   |             |            |  
|Foreign exchange                                                       |   |             | (5,215     | ) |             | 24,082     |  
|Interest, net                                                          |   |             | 133,116    |   |             | 274,913    |  
|Interest accretion                                                     |   |             | (55,549    | ) |             | (102,785   | )
|Loss on other financial assets(Note 7)                                 |   |             | (12,600    | ) |             | (18,017    | )
|Exploration costs                                                      |   |             | (497,263   | ) |             | (84,518    | )
|Change in value of warrant liability(Note 8)                           |   |             | 4,590,000  |   |             | (2,321,921 | )
|Write-off of mineral properties and deferred exploration costs(Note 4) |   |             | (2,194,907 | ) |             | (1,293,969 | )
|Write-off of inventory                                                 |   |             | (246,548   | ) |             | -          |  
|Modification of warrants(Note 8)                                       |   |             | -          |   |             | (183,000   | )
|Withholding tax recoveries (costs)                                     |   |             | 76,411     |   |             | 250,019    |  
|                                                                      
|Net loss and comprehensive loss                                        | $ |             | (3,225,998 | ) | $           | (8,897,843 | )
|                                                                      
|Loss and comprehensive loss for the year attributable to:              |   |             |            |   |             |            |  
|Owners of the Company                                                  |   |             | (3,018,990 | ) |             | (8,729,293 | )
|Non-controlling interests                                              |   |             | (207,008   | ) |             | (168,550   | )
|                                                                       | $ |             | (3,225,998 | ) | $           | (8,897,843 | )
|                                                                      
|Loss per share  basic and diluted                                     |   | $           | (0.03      | ) | $           | (0.09      | )
|Weighted average # of shares outstanding  basic and diluted           |   | 100,735,972 |            |   | 100,151,347 |           



The accompanying notes are an integral part of these consolidated financial statements 11


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|                                                         |                                              |   |                                 |   |                      |  |          |           |                     |   |                |  |                           |             |              |   |           |  |   |             | 
|-------------------------------------------------------- | -------------------------------------------- | - | ------------------------------- | - | -------------------- |  | -------- | --------- | ------------------- | - | -------------- |  | ------------------------- | ----------- | ------------ | - | --------- |  | - | ----------- | 
|                                                         | Tanzanian Royalty Exploration Corporation    |   |                                 |   |                      |  |          |           |                     |   |                |  |                           |            
|                                                        
|                                                         | Consolidated Statements of Changes in Equity |   |                                 |   |                      |  |          |           |                     |   |                |  |                           |            
|                                                         |                                              |   | (Expressed in Canadian Dollars) |   |                      |  |          |           |                     |   |                |  |                           |             |              |   |           |  |  
|                                                        
|                                                        
|                                                        
|                                                         | Share Capital                                |   | Reserves                        |   |                      |  |          |           |                     |   |                |  |                           |             |              |  
|                                                        
|                                                         | Number of Shares                             |   | Amount                          |   | Share based
payments |  | Warrants |           | Accumulated
deficit |   | Owner's
equity |  | Non controlling
interests |             | Total
equity |  
|                                                        
|Balance at September 1, 2011                             | 99,758,753                                   | $ | 109,935,253                     | $ | 706,988              |  | $        | 1,353,990 |                     | $ | (55,504,339)   |  | $                         | 56,491,892  |              | $ | 2,454,545 |  | $ | 58,946,437  | 
|Issued on conversion of convertible debt agreement       | 233,318                                      |   | 950,213                         |   | (30,638)             |  |          | -         |                     |   | -              |  |                           | 919,575     |              |   | -         |  |   | 919,575     | 
|Shares issued for services                               | 35,000                                       |   | 115,834                         |   | -                    |  |          | -         |                     |   | -              |  |                           | 115,834     |              |   | -         |  |   | 115,834     | 
|Issued pursuant to Restricted Share Unit ("RSU") Plan    | 182,866                                      |   | 1,024,793                       |   | (1,024,793)          |  |          | -         |                     |   | -              |  |                           | -           |              |   | -         |  |   | -           | 
|RSU shares forfeited                                     |                                              |   | -                               |   | (264,528)            |  |          | -         |                     |   | -              |  |                           | (264,528)   |              |   | -         |  |   | (264,528)   | 
|Reserve transferred on exercise of compensation warrants |                                              |   | 450,765                         |   | -                    |  |          | (450,765) |                     |   | -              |  |                           | -           |              |   | -         |  |   | -           | 
|Transfer of warrants to warrant liability                |                                              |   | -                               |   | -                    |  |          | (216,188) |                     |   | 135,359        |  |                           | (80,829)    |              |   | -         |  |   | (80,829)    | 
|Compensation warrants exercised                          | 250,000                                      |   | 1,000,000                       |   | -                    |  |          | -         |                     |   | -              |  |                           | 1,000,000   |              |   | -         |  |   | 1,000,000   | 
|Modification of warrants                                 |                                              |   | -                               |   | -                    |  |          | 183,000   |                     |   | -              |  |                           | 183,000     |              |   | -         |  |   | 183,000     | 
|Share based compensation                                 |                                              |   | -                               |   | 1,283,750            |  |          | -         |                     |   | -              |  |                           | 1,283,750   |              |   | -         |  |   | 1,283,750   | 
|Total comprehensive loss for the year                    |                                              |   | -                               |   | -                    |  |          | -         |                     |   | (8,729,293)    |  |                           | (8,729,293) |              |   | (168,550) |  |   | (8,897,843) | 
|Balance at August 31, 2012                               | 100,459,937                                  | $ | 113,476,858                     | $ | 670,779              |  | $        | 870,037   |                     | $ | (64,098,273)   |  | $                         | 50,919,401  |              | $ | 2,285,995 |  | $ | 53,205,396  | 
|Issued on conversion of convertible debt agreement       | 221,337                                      |   | 986,334                         |   | -                    |  |          | -         |                     |   | -              |  |                           | 986,334     |              |   | -         |  |   | 986,334     | 
|Issued pursuant to Restricted Share Unit ("RSU") Plan    | 241,308                                      |   | 1,151,010                       |   | (1,151,010)          |  |          | -         |                     |   | -              |  |                           | -           |              |   | -         |  |   | -           | 
|Share based payments                                     |                                              |   | -                               |   | 1,353,967            |  |          | -         |                     |   | -              |  |                           | 1,353,967   |              |   | -         |  |   | 1,353,967   | 
|Total comprehensive loss for the year                    |                                              |   | -                               |   | -                    |  |          | -         |                     |   | (3,018,990)    |  |                           | (3,018,990) |              |   | (207,008) |  |   | (3,225,998) | 
|Balance at August 31, 2013                               | 100,922,582                                  | $ | 115,614,202                     | $ | 873,736              |  | $        | 870,037   |                     | $ | (67,117,263)   |  | $                         | 50,240,712  |              | $ | 2,078,987 |  | $ | 52,319,699  | 



Theaccompanyingnotes are anintegralpart of theseconsolidated financial statements 12


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|                                                        |   |            |   |   |             |  
|------------------------------------------------------- | - | ---------- | - | - | ----------- | -
|Tanzanian Royalty Exploration Corporation              
|                                                       
|Consolidated Statements of Cash Flow                   
|(Expressed in Canadian Dollars)                        
|                                                       
|                                                       
|Year ended August 31,                                   |   | 2013       |   |   | 2012        |  
|                                                       
|Operations                                              |   |            |   |   |             |  
|Net loss                                                | $ | (3,225,998 | ) | $ | (8,897,843  | )
|Adjustments to reconcile net loss to cash flow from     |   |            |   |   |             |  
|operating activities:                                   |   |            |   |   |             |  
|Depreciation                                            |   | 288,519    |   |   | 379,603     |  
|Change in value of warrant liability                    |   | (4,590,000 | ) |   | 2,321,921   |  
|Modification of warrants                                |   | -          |   |   | 183,000     |  
|Shares issued for services                              |   | -          |   |   | 50,359      |  
|Share based payments                                    |   | 1,053,509  |   |   | 777,630     |  
|Loss on other financial assets                          |   | 12,600     |   |   | 11,550      |  
|Cash interest paid                                      |   | (74,486    | ) |   | (67,964     | )
|Cash interest received                                  |   | 124,432    |   |   | 259,116     |  
|Interest, net                                           |   | -          |   |   | (274,913    | )
|Interest accretion                                      |   | 55,549     |   |   | 102,785     |  
|Non cash directors fees                                |   | 208,572    |   |   | 289,448     |  
|Write-off of mineral properties                         |   | 2,194,907  |   |   | 1,293,969   |  
|Write-off of inventory                                  |   | 246,548    |   |   | -           |  
|Net change in non-cash operating working capital items: |   |            |   |   |             |  
|Other receivables                                       |   | (441,144   | ) |   | 85,909      |  
|Inventory                                               |   | (10,002    | ) |   | (24,877     | )
|Prepaid expenses                                        |   | 6,915      |   |   | (3,821      | )
|Trade, other payables and accrued liabilities           |   | 12,126     |   |   | (1,199,491  | )
|Cash used in operations                                 |   | (4,137,953 | ) |   | (4,713,619  | )
|Investing                                               |   |            |   |   |             |  
|Mineral properties and exploration expenditures         |   | (5,232,798 | ) |   | (8,564,005  | )
|Option payments received and recoveries                 |   | 41,786     |   |   | 50,114      |  
|Equipment and leasehold improvements, net               |   | (50,197    | ) |   | (142,283    | )
|Cash used in investing activities                       |   | (5,241,209 | ) |   | (8,656,174  | )
|Financing                                               |   |            |   |   |             |  
|Share capital issued  net of issue costs               |   | -          |   |   | 1,000,000   |  
|Cash provided from financing activities                 |   | -          |   |   | 1,000,000   |  
|Net decrease in cash and cash equivalents               |   | (9,379,162 | ) |   | (12,369,793 | )
|Cash and cash equivalents, beginning of year            |   | 20,058,678 |   |   | 32,428,471  |  
|Cash and cash equivalents, end of year                  | $ | 10,679,516 |   | $ | 20,058,678  |  
|                                                       

|The accompanying notes are an integral part of these consolidated financial statements
|--------------------------------------------------------------------------------------



13


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Tanzanian Royalty Exploration CorporationConsolidated Statements of Cash Flow(Expressed in Canadian Dollars)

Supplementary information:
	
	2013
	
	2012Non-cash transactions:Share based payments capitalized to mineral properties
	$
	91,886
	$
	17,138Shares issued on conversion of convertible debt
	
	986,334
	
	950,213Shares issued pursuant to RSU plan
	
	1,151,010
	
	1,024,793Shares issued for services
	
	-
	
	115,834




The accompanying notes are an integral part of these consolidated financial statements



14


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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012  1. Nature of Operations The Company is in the process of exploring and evaluating its mineral properties. The business of exploring and mining for minerals involves a high degree of risk. The underlying value of the mineral properties is dependent upon the existence and economic recovery of mineral reserves, the ability to raise long-term financing to complete the development of the properties, government policies and regulations, and upon future profitable production or, alternatively, upon the Companys ability to dispose of its interest on an advantageous basis; all of which are uncertain. The amounts shown as mineral properties and deferred expenditures represent costs incurred to date, less amounts amortized and/or written off, and do not necessarily represent present or future values. The underlying value of the mineral properties is entirely dependent on the existence of economically recoverable reserves, securing and maintaining title and beneficial interest, the ability of the Company to obtain the necessary financing to complete development, and future profitable production. At August 31, 2013 the Company had working capital of $5,416,104 (August 31, 2012  $18,165,431), including warrant liability or a working capital of $8,940,104 (August 31, 2012  $18,165,431) excluding warrant liability, had not yet achieved profitable operations, has accumulated losses of $67,117,263 (August 31, 2012  $64,098,273) and expects to incur further losses in the development of its business. In the long term, the Company will require additional financing in order to conduct its planned work programs on mineral properties, meet its ongoing levels of corporate overhead and discharge its future liabilities as they come due. 2. Basis of Preparation 2.1 Statement of compliance The Company was originally incorporated under the corporate name 424547 Alberta Ltd. in the Province of Alberta on July 5, 1990, under theBusiness Corporations Act(Alberta). The name was changed to Tan Range Exploration Corporation on August 13, 1991. The name of the Company was again changed toTanzanian Royalty Exploration Corporation (TREC or the Company)on February 28, 2006. The address of the Companys registered office is 400 3rd Avenue SW, Suite 3700, Calgary, Alberta T2P 4H2 Canada. The Companys principal business activity is in the exploration and development of mineral property interests. The Companys mineral properties are located in United Republic of Tanzania. The consolidated financial statements of the Company as at and for the years ended August 31, 2013 and 2012 comprise of the Company and its subsidiaries (together referred to as the Company or Group). The Companys consolidated financial statements, including comparatives, have been prepared in accordance with and using accounting policies in full compliance with the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB) and Interpretations of the International Financial Reporting Interpretations Committee (IFRIC), effective for the Companys reporting for the year ended August 31, 2013. These consolidated financial statements were approved and authorized by the Board of Directors of the Company on November 8, 2013. 2.2 Basis of presentation The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in note 3. 15


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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012
  2.
	Basis of Preparation (continued)  Adoption of new and revised standards and interpretations
The IASB issued a number
 of new and revised International Accounting Standards, International Financial Reporting Standards, amendments and related interpretations
 which are effective for the Company’s financial year beginning on or after September 1, 2012. For the purpose of preparing and
 presenting the Financial Information for the relevant periods, the Company has consistently adopted all
new standards for the relevant reporting
periods.


At the date of authorization of these financial statements, the IASB and IFRIC has issued the following
new and revised Standards and Interpretations which are not yet effective for the relevant reporting periods.

|
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| | 
| | 

| | 
| | 

| | 
| | 

| | 
| | 

|10. IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                   

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16

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Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012

|2. | Basis of Preparation (continued)
|-- | --------------------------------

IAS 32 ‘Financial
instruments, Presentation’ -In December 2011, effective for annual periods beginning on or after January 1,
2013, IAS 32 was amended to clarify the requirements for offsetting financial
assets and liabilities. The amendments clarify that the right of offset must be
available on the current date and cannot be contingent on a future date.

| | 2.3 | Adoption of new and revised standards and interpretations (continued)
| | --- | ---------------------------------------------------------------------

Management
anticipates that where required, the above standards will be adopted at the
applicable effective dates in the Company's financial statements, and is in
the process of considering the impact of adoption of these standards.

|3.   
Summary of
Significant Accounting Policies
|------------------------------------------------
|3.1                                             

The consolidated
financial statements include the financial statements of the Company and its
wholly controlled subsidiaries: Tanzania American International Development
Corporation 2000 Limited ("Tanzam"), Tancan Mining Co. Limited ("Tancan"),
Buckreef Gold Company Ltd. ("Buckreef"), and Northwestern Base Metals
Company Limited ("NWBM"). Control is achieved when the Company has	 power to govern the financial and
                            operating policies of an entity so as to obtain benefits from its activities.

Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continued to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

The consolidated financial statements of the Company set out the assets, liabilities, expenses, and cash flows of the Corporation and its subsidiaries, namely:

|         |               |                                     |   |      |  
|-------- | ------------- | ----------------------------------- | - | ---- | -
|         |               | Ownership interest as at August 31, |  
|         | Country of    |                                     |   |      |  
|         | incorporation | 2013                                |   | 2012 |  
|Tanzam   | Tanzania      | 100                                 | % | 100  | %
|Tancan   | Tanzania      | 100                                 | % | 100  | %
|Buckreef | Tanzania      | 55                                  | % | 55   | %
|NWBM     | Tanzania      | 75                                  | % | 0    | %

All intra-company transactions, balances,
income and expenses are eliminated in full on consolidation.

Noncontrolling interests in the net assets of consolidated subsidiaries are identified separately from the Companys equity therein. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if it results in a negative balance.



17

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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




3. Summary of Significant Accounting Policies
(continued) 3.2 Mineral properties

All direct costs related to the acquisition and exploration and development of specific properties are capitalized as incurred. If a property is brought into production, these costs will be amortized against the income generated from the property. If a property is abandoned, sold or impaired, an appropriate charge will be made to the statement of comprehensive loss at the date of such impairment. Discretionary option payments arising on the acquisition of mining properties are only recognized when paid. Amounts received from other parties to earn an interest in the Company's mining properties are applied as a reduction of the mining property and deferred exploration and development costs until all capitalized costs are recovered at which time additional reimbursements are recorded in the statement of comprehensive loss, except for administrative reimbursements which are credited to operations.

Consequential revenue from the sale of metals, extracted during the Company's test mining activities, is recognized on the date the mineral concentrate level is agreed upon by the Company and customer, as this coincides with the transfer of title, the risk of ownership, the determination of the amount due under the terms of settlement contracts the Company has with its customer, and collection is reasonably assured. Revenues from properties earned prior to the commercial production stage are deducted from capitalized costs.

The amounts shown for mining claims and related deferred costs represent costs incurred to date, less amounts expensed or written off, reimbursements and revenue, and do not necessarily reflect present or future values of the particular properties. The recoverability of these costs is dependent upon discovery of economically recoverable reserves and future production or proceeds from the disposition thereof.

The Company reviews the carrying value of a mineral exploration property when events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value of the property exceeds its fair value, the property will be written down to fair value with the provision charged against operations in the year of impairment. An impairment is also recorded when management determines that it will discontinue exploration or development on a property or when exploration rights or permits expire.

Ownership in mineral properties involves certain risks due to the difficulties in determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyance history characteristic of many mineral interests. The Company has investigated the ownership of its mineral properties and, to the best of its knowledge, ownership of its interests are in good standing.

Capitalized mineral property exploration costs are those directly attributable costs related to the search for, and evaluation of mineral resources that are incurred after the Company has obtained legal rights to explore a mineral property and before the technical feasibility and commercial viability of a mineral reserve are demonstrable. Any cost incurred prior to obtaining the legal right to explore a mineral property are expensed as incurred. Field overhead costs directly related to exploration are capitalized and allocated to mineral properties explored. All other overhead and administration costs are expensed as incurred.

Once an economically viable reserve has been determined for a property and a decision has been made to proceed with development has been approved, acquisition, exploration and development costs previously capitalized to the mineral property are first tested for impairment and then classified as property, plant and equipment under construction.

18








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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




3. Summary of Significant Accounting Policies
(continued)

3.3 Property, plant and equipment

Property, plant and equipment (PPE) are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Depreciation is provided at rates calculated to write off the cost of
PPE, less their estimated residual value, using the declining balance method over the following expected useful
lives:

|                                            |           |  
|------------------------------------------- | --------- | -
|Assets                                      | Rate      |  
|                                           
|Machinery and equipment                     | 20% to 30 | %
|Automotive                                  | 30        | %
|Computer equipment                          | 30        | %
|Drilling equipment and automotive equipment | 6.67      | %
|Leasehold improvements                      | 20        | %



An item of PPE is
derecognized upon disposal, when held for sale or when no future economic
benefits are expected to arise from the continued use of the asset. Any gain or
loss arising on disposal of the asset, determined as the difference between the
net disposal proceeds and the carrying amount of the asset, is recognized in the
consolidated statement of comprehensive loss.

The Company conducts an
annual assessment of the residual balances, useful lives and depreciation
methods being used for PPE and any changes arising from the assessment are
applied by the Company prospectively.

Where an item of plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

3.4
Decommissioning, restoration and similar liabilities ("Asset retirement
obligation" or "ARO")

The Company recognizes
liabilities for statutory, contractual, constructive or legal obligations,
including those associated with the reclamation of mineral properties and PPE,
when those obligations result from the acquisition, construction, development or
normal operation of the Company's assets. Initially, a liability for an asset
retirement obligation is recognized at its fair value in the period in which it
is incurred. Upon initial recognition of the liability, the corresponding asset
retirement obligation is added to the carrying amount of the related asset and
the cost is amortized as an expense over the economic life of the asset using
the declining balance method. Following the initial recognition of the asset
retirement obligation, the carrying amount of the liability is increased for the
passage of time and adjusted for changes to the current marketbased discount rate, and adjusted for changes to the amount or timing of the underlying cash flows needed to settle the obligation. As of August 31, 2013, and 2012 no liability for asset retirement obligations exists.

3.5 Share based payments

Share based payment transactions

Employees (including
directors and senior executives) of the Company receive a portion of their
remuneration in the form of share based payment transactions, whereby employees
render services as consideration for equity instruments ("equitysettled
transactions").

In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at fair value of the sharebased payment.



19



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Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012



3. Summary of
Significant Accounting Policies (continued)

3.5 Share based payments (continued)

Equity settled transactions

The costs of equitysettled transactions with employees are measured by reference to the fair value at the date on which they are granted.

The costs of equitysettled
transactions are recognized, together with a corresponding increase in equity,
over the period in which the performance and/or service conditions are
fulfilled, ending on the date on which the relevant employees become fully
entitled to the award ("the vesting date"). The cumulative expense is
recognized for equitysettled
transactions at each reporting date until the vesting date reflects the Company's
best estimate of the number of equity instruments that will ultimately vest. The
profit or loss charge or credit for a period represents the movement in
cumulative expense recognized as at the beginning and end of that period and the
corresponding amount is represented in share based payment reserve.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied provided that all other performance and/or service conditions are satisfied.

Where the terms of an equitysettled award are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the sharebased payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

The effect of
outstanding options is considered in the computation of earnings per share, if
dilutive.

3.6 Taxation

Income tax expense represents the sum of tax currently payable and deferred tax.

Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the date of the statement of financial position.

Deferred income tax

Deferred income tax is provided using the liability method on temporary differences at the date of the statement of financial position between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

|• |  | where
 the deferred income tax liability arises from the initial recognition of
 goodwill or of an asset or liability in a transaction that is not a business
 combination and, at the time of the transaction, affects neither the accounting
 profit nor taxable profit or loss; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|• |  | in
 respect of taxable temporary differences associated with investments in
 subsidiaries, associates and interests in joint ventures, where the timing of
 the reversal of the temporary differences can be controlled and it is probable
 that the temporary differences will not reverse in the foreseeable future.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20






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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012


3. Summary of
Significant Accounting Policies (continued)

3.6 Taxation (continued)

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized except:

|• |  | where
 the deferred income tax asset relating to the deductible temporary difference
 arises from the initial recognition of an asset or liability in a transaction
 that is not a business combination and, at the time of the transaction, affects
 neither the accounting profit nor taxable profit or loss; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|• |  | in
 respect of deductible temporary differences associated with investments in
 subsidiaries, associates and interests in joint ventures, deferred income tax
 assets are recognized only to the extent that it is probable that the temporary
 differences will reverse in the foreseeable future and taxable profit will be
 available against which the temporary differences can be utilized.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The carrying amount of deferred income tax assets is reviewed at each date of the statement of financial position and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each date of the statement of financial position and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.



Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the date of the statement of financial position.

Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the statement of comprehensive loss.

Deferred income tax assets and deferred income tax liabilities are offset if, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Sales tax

Expenses and assets are recognized net of the amount of sales tax, except:

|• |  | When
 the sales tax incurred on a purchase of assets or services is not recoverable
 from the taxation authority, in which case the sales tax is recognised as part
 of the cost of acquisition of the asset or as part of the expense item, as
 applicable
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|• |  | When
 receivables and payables are stated with the amount of sales tax included
|- |  | -------------------------------------------------------------------------------



The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.



21






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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




3. Summary of
Significant Accounting Policies (continued)

3.7 Loss per share

The basic loss per
share is computed by dividing the net loss by the weighted average number of
common shares outstanding during the period. The diluted loss per share reflects
the potential dilution of common share equivalents, such as outstanding
restricted stock units and share purchase warrants, in the weighted average
number of common shares outstanding during the year, if dilutive.

3.8 Financial assets

All financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: heldtomaturity, availableforsale, loansand-receivables
or at fair value through profit or loss ("FVTPL"). The Company initially
recognizes loans and receivables on the date they are originated. All other
financial assets are recognized on the trade date at which the Company becomes
party to the contractual provisions of the instruments.

Subsequent to initial
recognition, financial assets classified as FVTPL are measured at fair value
with unrealized gains and losses recognized through earnings. The Company's
other financial assets are classified as FVTPL.

Financial assets classified as loansandreceivables and heldtomaturity
are measured at amortized cost. The Company's cash and cash equivalents and
trade and other receivables are classified as loansand-receivables.

Subsequent to initial recognition, financial assets classified as availableforsale are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) except for losses in value that are considered other than temporary. During the periods presented, the Company has not classified any financial assets as availableforsale.

Transactions costs
associated with FVTPL financial assets are expensed as incurred, while
transaction costs associated with all other financial assets are included in the
initial carrying amount of the asset.

The Company
derecognizes a financial asset when the contractual rights to the cash flows
from the asset expire, or it transfers the rights to receive the contractual
cash flows on the financial asset in a transaction in which substantially all
the rights and rewards of ownership of the financial asset are transferred.

3.9 Financial liabilities

All financial
liabilities are initially recorded at fair value and designated upon inception
as FVTPL or otherfinancialliabilities on the trade date at which the Company becomes party to the contractual provisions of the instrument.

Financial liabilities classified as otherfinancialliabilities are initially recognized at fair value less directly attributable transaction costs. After initial recognition, otherfinancial-liabilities
are subsequently measured at amortized cost using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a
financial liability and of allocating interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future
cash payments through the expected life of the financial liability, or, where
appropriate, a shorter period. The Company's trade and other payables and
convertible debt are classified as otherfinancialliabilities.

Financial liabilities
classified as FVTPL include financial liabilities held for trading and financial
liabilities designated upon initial recognition as FVTPL. Derivatives, including
separated embedded derivatives are also classified as FVTPL unless they are
designated as effective hedging instruments. Fair value changes on financial
liabilities classified as FVTPL are recognized through the statement of
comprehensive loss. At August 31, 2013 and 2012 the Company's warrant
liability has been classified as FVTPL.

22






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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




3. Summary of
Significant Accounting Policies (continued)

3.9 Financial liabilities (continued)

The Company
derecognizes a financial liability when its contractual obligations are
discharged or cancelled, as they expire.

3.10 Impairment of financial assets

The Company assesses at each date of the statement of financial position whether a financial asset is impaired.

Assets carried at amortized cost

If there is objective
evidence that an impairment loss on assets carried at amortized cost has been
incurred, the amount of the loss is measured as the difference between the asset's
carrying amount and the present value of estimated future cash flows discounted
at the financial asset's original effective interest rate. The carrying amount
of the asset is then reduced by the amount of the impairment. The amount of the
loss is recognized in profit or loss.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the amortized cost would have been had the impairment not been recognized. Any subsequent reversal of an impairment loss is recognized in profit or loss.

In relation to trade
receivables, a provision for impairment is made and an impairment loss is
recognized in profit and loss when there is objective evidence (such as the
probability of insolvency or significant financial difficulties of the debtor)
that the Company will not be able to collect all of the amounts due under the
original terms of the invoice. The carrying amount of the receivable is reduced
through use of an allowance account. Impaired debts are written off against the
allowance account when they are assessed as uncollectible.

Available-for-sale

If an availableforsale asset is impaired, an amount comprising the difference between its cost and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to profit or loss. Reversals in respect of equity instruments classified as availableforsale are not recognized in profit or loss.

3.11 Impairment of non-financial assets

At each date of the statement of financial position, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cashgenerating unit to which the assets belong.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cashgenerating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cashgenerating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of comprehensive loss, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease.

23






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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




3. Summary of
Significant Accounting Policies (continued)

3.11 Impairment of non-financial assets (continued)

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cashgenerating unit) in prior years.

3.12 Cash and cash equivalents

Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand, and short term deposits with an original maturity of three months or less, which are readily convertible into a known amount of cash.

3.13 Related party transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related party transactions that are in the normal course of business and have commercial substance are measured at the exchange amount, being the amount agreed by the parties to the transaction.

3.14 Foreign currency transactions

Functional and presentation currency

Items included in the
financial statements of each of the Company's entities are measured using the
currency of the primary economic environment in which the entity operates ("the
functional currency"). The functional currency of the Company and each of its
subsidiaries is the Canadian Dollar ("CDN"). The consolidated financial
statements are presented in Canadian Dollars which is the Company's
presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive loss.

3.15 Significant accounting judgments and estimates

The preparation of
these consolidated financial statements requires management to make judgements
and estimates and form assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its judgements and estimates in relation to assets,
liabilities, revenue and expenses. Management uses historical experience and
various other factors it believes to be reasonable under the given circumstances
as the basis for its judgements and estimates. Actual outcomes may differ from
these estimates under different assumptions and conditions. The most significant
estimates relate to the appropriate depreciation rate for property, plant and
equipment, the valuation of warrant liability, the recoverability of accounts
receivable, the valuation of deferred income tax amounts, impairment testing of
mineral properties and deferred exploration and property, plant and equipment
and the calculation of sharebased
payments. The most significant judgements relate to the recognition of deferred
tax assets and liabilities and asset retirement obligations, the determination
of the economic viability of a project or mineral property and the determination
of functional currencies.

24






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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012


3. Summary of
Significant Accounting Policies (continued)

3.16 Inventory

Inventory consists of
supplies for the Company's drilling rig to be consumed during the course of
exploration development and operations. Cost represents the delivered price of
the item.

4. Mineral Properties

The Company explores or
acquires gold or other precious metal concessions through its own efforts or
through the efforts of its subsidiaries. All of the Company's concessions are
located in Tanzania.

The Company's mineral
interests in Tanzania are initially held under prospecting licenses granted
pursuant to the Mining Act, 2010 (Tanzania) for a period of up to four years,
and are renewable two times for a period of up to two years each. Annual rental
fees for prospecting licenses are based on the total area of the license
measured in square kilometres, multiplied by USD$100/sq.km for the initial
period, USD$150/sq.km for the first renewal and USD$200/sq.km for the second
renewal. With each renewal at least 50% of the licensed area, if greater than 20
square kilometres, must be relinquished and if the Company wishes to keep the
relinquished one-half portion, it must file a new application for the
relinquished portion. There is also an initial one-time "preparation fee" of
USD$500 per license. Upon renewal, there is a renewal fee of USD$300 per
license.

Certain of the Company's
prospecting licenses are currently being renewed.

The Company assessed the carrying value of mineral properties and deferred exploration costs as at August 31, 2013 and recorded a write-down of $2,194,907 during the year ended August 31, 2013 (2012 - $1,293,969).

25






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|                                                                    |   |           |   |   |                                                |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |        |         |        |          |         |        |           |            |            |   |          |         |          |         |        |            |            |            |  
|------------------------------------------------------------------- | - | --------- | - | - | ---------------------------------------------- | - | - | ---------- | - | - | --------- | - | - | --------- | -------- | - | ------------------------------------ | -------- | ------ | -------- | ------- | -------- | ------- | ------ | ------- | ------ | -------- | ------- | ------ | --------- | ---------- | ---------- | - | -------- | ------- | -------- | ------- | ------ | ---------- | ---------- | ---------- | -
|                                                                    |   |           |   |   | Tanzanian Royalty Exploration Corporation      |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |       
|                                                                    |   |           |   |   | Notes to the Consolidated Financial Statements |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |       
|                                                                    |   |           |   |   | For the Years Ended August 31, 2013 and 2012   |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |       
|                                                                   
|                                                                   
|4. Mineral Properties (continued)                                   |   |           |   |   |                                                |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |        |         |        |          |         |        |           |            |            |   |          |         |          |         |        |            |           
|                                                                   
|                                                                   
|The continuity of expenditures on mineral properties is as follows: |   |           |   |   |                                                |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |        |         |        |          |         |        |           |           
|                                                                   
|                                                                    |   | Itetemia  |   |   | Luhala                                         |   |   | Kigosi     |   |   | Lunguya   |   |   | Kanagele  |          |   | Tulawaka Ushirombo Mbogwe Biharamulu |          |        | Buckreef |         |          | Kabanga |        |         | Other  |          |         |        |          
|                                                                    |   | (a)       |   |   | (b)                                            |   |   | (c)        |   |   | (d)       |   |   |           | (e)      |   |                                      |          | (f)    |          |         |          | (g)     |        |         | (h)    |          |         | (i)    |           |            | (j)        |   |          | (l)     |          |         | (k)    |            |            | Total      |  
|                                                                   
|Balance, September 1, 2011                                          | $ | 5,823,059 |   | $ | 3,727,626                                      |   | $ | 13,753,050 |   | $ | 3,184,675 |   | $ | 1,124,487 |          | $ | 636,175                              |          | $      |          | 264,355 |          | $       | 82,039 |         | $      | 124,329  |         | $      | 6,875,788 |            | $          | - |          | $       | 121,934  |         | $      | 35,717,517 |           
|Exploration expenditures:                                           |   |           |   |   |                                                |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |        |         |        |          |         |        |           |            |            |   |          |         |          |         |        |            |            |            |  
|Camp, field supplies and travel                                     |   | 14,565    |   |   | -                                              |   |   | 116,566    |   |   | 34,976    |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 424,035    |   |          | -       |          |         | -      |            |            | 590,142    |  
|License fees and exploration and field overhead                     |   | 1,420     |   |   | 1,340                                          |   |   | 47,581     |   |   | 71,737    |   |   |           | 2,755    |   |                                      |          | 3,573  |          |         |          | 6,285   |        |         | 12,463 |          |         | 7,211  |           |            | 1,124,484  |   |          | -       |          |         | 88,114 |            |            | 1,366,963  |  
|Geological consulting and field wages                               |   | -         |   |   | -                                              |   |   | -          |   |   | -         |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 664,513    |   |          | -       |          |         | -      |            |            | 664,513    |  
|Geophysical and geochemical                                         |   | -         |   |   | 30,381                                         |   |   | -          |   |   | 90,050    |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 569,283    |   |          | -       |          |         | -      |            |            | 689,714    |  
|Property acquisition costs                                          |   | 37,070    |   |   | -                                              |   |   | 3,892      |   |   | 13,326    |   |   |           | 17,693   |   |                                      |          | 17,092 |          |         |          | -       |        |         | -      |          |         | -      |           |            | 108,804    |   |          | -       |          |         | 13,070 |            |            | 210,947    |  
|Trenching and drilling                                              |   | -         |   |   | -                                              |   |   | 39,636     |   |   | 28,527    |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 6,053,665  |   |          | -       |          |         | -      |            |            | 6,121,828  |  
|Recoveries                                                          |   | (41,834   | ) |   | -                                              |   |   | -          |   |   | -         |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | (176   | )        |         | (2,250 | )         |            | -          |   |          | -       |          |         | (5,854 | )          |            | (50,114    | )
|                                                                    |   | 11,221    |   |   | 31,721                                         |   |   | 207,675    |   |   | 238,616   |   |   |           | 20,448   |   |                                      |          | 20,665 |          |         |          | 6,285   |        |         | 12,287 |          |         | 4,961  |           |            | 8,944,784  |   |          | -       |          |         | 95,330 |            |            | 9,593,993  |  
|                                                                    |   | 5,834,280 |   |   | 3,759,347                                      |   |   | 13,960,725 |   |   | 3,423,291 |   |   | 1,144,935 |          |   |                                      | 656,840  |        |          |         | 270,640  |         |        | 94,326  |        |          | 129,290 |        |           | 15,820,572 |            |   | -        |         |          | 217,264 |        |            | 45,311,510 |           
|Write-offs                                                          |   | (46,544   | ) |   | -                                              |   |   | -          |   |   | -         |   |   |           | (297,588 | ) |                                      | (331,402 | )      |          |         | (266,379 | )       |        | (13,019 | )      | (129,290 | )       |        | -         |            |            | - |          |         | (209,747 | )       |        | (1,293,969 | )         
|Balance, August 31, 2012                                            | $ | 5,787,736 |   | $ | 3,759,347                                      |   | $ | 13,960,725 |   | $ | 3,423,291 |   |   | $         | 847,347  |   | $                                    | 325,438  |        | $        |         | 4,261    |         | $      | 81,307  |        | $        | -       |        | $         | 15,820,572 |            | $ | -        |         | $        | 7,517   |        | $          | 44,017,541 |           
|Exploration expenditures:                                           |   |           |   |   |                                                |   |   |            |   |   |           |   |   |           |          |   |                                      |          |        |          |         |          |         |        |         |        |          |         |        |           |            |            |   |          |         |          |         |        |            |            |            |  
|Camp, field supplies and travel                                     |   | 20,408    |   |   | -                                              |   |   | 11,288     |   |   | (227      | ) |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 231,466    |   |          | -       |          |         | -      |            |            | 262,935    |  
|License fees and exploration and field overhead                     |   | 65,755    |   |   | 10,169                                         |   |   | 337,710    |   |   | 71,638    |   |   |           | 33,675   |   |                                      |          | 80,250 |          |         |          | 34,270  |        |         | 3,546  |          |         | 18,022 |           |            | 1,254,651  |   |          | 655,051 |          |         | 20,717 |            |            | 2,585,454  |  
|Geological consulting and field wages                               |   | 74,750    |   |   | -                                              |   |   | -          |   |   | -         |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 418,315    |   |          | -       |          |         | -      |            |            | 493,065    |  
|Geophysical and geochemical                                         |   | -         |   |   | -                                              |   |   | (6,431     | ) |   | (10,596   | ) |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 122,443    |   |          | -       |          |         | -      |            |            | 105,416    |  
|Property acquisition costs                                          |   | 37,054    |   |   | -                                              |   |   | (10,092    | ) |   | -         |   |   |           | 11,705   |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | (29,849    | ) |          | 129,825 |          |         | -      |            |            | 138,643    |  
|Trenching and drilling                                              |   | -         |   |   | -                                              |   |   | (33,630    | ) |   | (13       | ) |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | -      |           |            | 599,489    |   |          | -       |          |         | -      |            |            | 565,846    |  
|Recoveries                                                          |   | (40,650   | ) |   | -                                              |   |   | -          |   |   | -         |   |   |           | -        |   |                                      |          | -      |          |         |          | -       |        |         | -      |          |         | (1,116 | )         |            | -          |   |          | -       |          |         | (20    | )          |            | (41,786    | )
|                                                                    |   | 157,317   |   |   | 10,169                                         |   |   | 298,845    |   |   | 60,802    |   |   |           | 45,380   |   |                                      |          | 80,250 |          |         |          | 34,270  |        |         | 3,546  |          |         | 16,906 |           |            | 2,596,515  |   |          | 784,876 |          |         | 20,697 |            |            | 4,109,573  |  
|Write-offs                                                          |   | -         |   |   | (6,983                                         | ) |   | (469,940   | ) |   | (103,636  | ) |   |           | (892,727 | ) |                                      | (405,688 | )      |          |         | (38,531  | )       |        | (84,853 | )      |          | (16,906 | )      |           | -          |            |   | (147,429 | )       |          | (28,214 | )      |            | (2,194,907 | )         
|Balance, August 31, 2013                                            | $ | 5,945,053 |   | $ | 3,762,533                                      |   | $ | 13,789,630 |   | $ | 3,380,457 |   |   | $         | -        |   |                                      | $        | -      |          |         | $        | -       |        | $       | -      |          | $       | -      |           | $          | 18,417,087 |   | $        | 637,447 |          | $       | -      |            | $          | 45,932,207 |  



26


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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




|4.  | Mineral Properties (continued)
|--- | ------------------------------
|    |                               
|(a) | Itetemia
Project:             
|    |                               

Through prospecting and
mining option agreements, the Company has options to acquire interests in
several ltetemia property prospecting licenses. The prospecting licenses
comprising the Itetemia property are held by the Company; through the Company's
subsidiaries, Tancan or Tanzam. In the case of one prospecting license, Tancan
acquired its interest pursuant to the State Mining Corporation ("Stamico")
Venture Agreement dated July 12, 1994, as amended June 18, 2001, July 2005, and
October 13, 2008.

Stamico retains a 2%
royalty interest as well as a right to earn back an additional 20% interest in
the prospecting license by meeting 20% of the costs required to place the
property into production. The Company retains the right to purchase one-half of
Stamico's 2% royalty interest in exchange for USD$1,000,000.

The Company is required
to pay Stamico an annual option fee of USD$25,000 per annum until commercial
production.

As at August 31, 2013,
there are no licenses subject to an Option Agreement with Barrick Exploration
Africa Ltd. (BEAL) (note 4(m)).

During the year ended August 31, 2013, the Company did not abandon any licenses in the area and no write off was taken in this area (year ended August 31, 2012 - $46,544) related to deferred exploration costs associated with licenses the Company does not intend to renew.

(b) Luhala
Project:

During the year ended August 31, 2013, the Company agreed to abandon 5 licenses in the area and a write-off of $6,983 was taken in this area (year ended August 31, 2012 - $nil).

(c) Kigosi:

The Kigosi Project is
principally located within the Kigosi Game Reserve controlled area. Through
prospecting and mining option agreements, the Company has options to acquire
interests in several Kigosi prospecting licenses. The Company has an agreement
with Stamico providing Stamico a 15% carried interest in the Kigosi Project.

The Kigosi Mining
Licence application with an area of 9.91 sq km was officially lodged with the
Ministry of Energy and Minerals (MEM) on 4thMarch
2013 after some amendments as required by the Ministry. The Kigosi Mining
License application was given a number and sent to the Minister for signature.
The application covers parts of two licences and the licences will cease after
the grant of the Mining Licence. Company management, together with Ministry
officials will be attending the Kigosi Mining Licence signing ceremony where the
Kigosi Project will be officially handed over to the Company. Subsequent to the
period end the official signing ceremony took place and the Kigosi Mining
Licence has been signed by the respective Ministries.

During the year ended August 31, 2013, the Company abandoned 10 licenses not considered core to the main targeted mining area therefore a write off $469,940 was taken for these licenses related to the property (year ended August 31, 2012 - $nil).

(d)
Lunguya:

During the year ended August 31, 2013, the Company abandoned 8 licenses not considered core properties in the area and a write-off of $103,636 was taken in this area (year ended August 31, 2012 -$nil).

27






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Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




|4.            | Mineral Properties (continued)
|------------- | ------------------------------
|              |                               
|(e) Kanagele:
|              |                               

During the year ended August 31, 2013, the Company agreed to abandon 5 licenses in the area and a write-off of $892,727 was taken for this property (year ended August 31, 2012 - $297,588), as the Company is focusing its exploration efforts on other projects at this time, however, the Company may consider future exploration development on the license.

(f) Tulawaka:

The Company owns or has
options to acquire interests ranging from 65% to 90% in the licenses through
prospecting and option agreements. Three licenses in the Tulawaka area were
subject to an option agreement with MDN Inc. (MDN) (note 4(n)).

During the year ended August 31, 2013, the Company agreed to abandon 5 licenses in the area and a write-off of $405,688 was taken for this property (year ended August 31, 2012 - $331,402), as the Company is focusing its exploration efforts on other projects at this time, however, the Company may consider future exploration development on the license.

(g) Ushirombo:

During the year ended August 31, 2013, the Company agreed to abandon 4 licenses in the area and a write-off of $38,531 was taken for this property (year ended August 31, 2012 - $266,379), as the Company is focusing its exploration efforts on other projects at this time, however, the Company may consider future exploration development on the license.

(h) Mbogwe:

During the year ended August 31, 2013, the Company did not abandon any licenses in the area and a write-off of $84,853 was taken for this property (year ended August 31, 2012 - $13,019), as the Company is focusing its exploration efforts on other projects at this time, however, the Company may consider future exploration development on the license.

(i) Biharamulo:

Five Biharamulo
licenses were subject to the option agreement with MDN (note 4(n)).

During the year ended August 31, 2013, the Company agreed to abandon 4 licenses in the area and a write-off of $16,906 was taken for this property (year ended August 31, 2012 - $129,290), The Company is focusing its exploration efforts on other projects at this time, however, the Company may consider future exploration development on the license.

28






---





Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




|4.  | Mineral Properties (continued)
|--- | ------------------------------
|    |                               
|(j) | Buckreef Gold
Project:        
|    |                               

On December 21, 2010,
the Company announced it was the successful bidder for the Buckreef Gold Mine
Re-development Project in northern Tanzania (the Buckreef Project). Pursuant to
the terms of the heads of agreement dated December 16, 2010, the Company paid
USD $3,000,000 to Stamico in consideration of the transaction. On October 25,
2011, a Definitive Joint Venture Agreement was entered into with Stamico for the
development of the Buckreef Gold Project. Through its wholly-owned subsidiary,
Tanzania American International Development Corporation 2000 Limited (Tanzam),
the Company holds a 55% interest in the joint venture company, Buckreef Gold
Company Limited, with Stamico holding the remaining 45%. The comparative
statement of financial position has been adjusted to reflect an immaterial
adjustment relating to recording NCI in respect of Stamico's 45% interest.

The Company has 100%
control over all aspects of the joint venture company. In accordance with the
joint venture agreement, the Company has to arrange financing, incur
expenditure, make all decisions and operate the mine in the future. The Company's
obligations and commitments include completing a preliminary economic
assessment, feasibility study and mine development. Stamico's involvement is
to contribute the licences and rights to the property and received a 45%
interest in Buckreef Gold Company Limited.

The joint venture agreement contains an obligation clause regarding the commissioning date for the plant. If the property has not been brought into production by May 31, 2014, the Company shall be entitled to extend the date for one additional year:

|i)   | for the extension year,
on payment to Stamico of US$500,000;            
|---- | ------------------------------------------------------------------------
|ii)  | for the second
extension year, on payment to Stamico of US$625,000; and 
|iii) | for each subsequent
extension year, on payment to Stamico of US$750,000.
|     |                                                                         

The Company has
recognized a non-controlling interest (NCI) in respect of Stamico's 45%
interest on the Consolidated Financial Statements based on the initial payment
by the Company to Stamico and will be adjusted based on annual exploration and
related expenditures. Stamico has a free carried interest and does not
contribute to exploration expenses.

There is supervisory
board made up of 4 directors of Tanzam and 3 of Stamico who will be updated with
periodic reports and review major decisions. Amounts paid to Stamico and
subsequent expenditure on the property were capitalized under Mineral Properties
and reported under Buckreef Gold Company Limited.

(k) Kabanga:

The Kabanga Project is
located in northwestern Tanzania, south of Lake Victoria and near the Burundi
border within the Mesoproterozoic Karagwe-Ankolean sequence within the Kibaran
Fold Belt of NW Tanzania.

The Company is engaged
in the exploration and development of the Kagera Nickel project, adjacent to the
Barrick/Xstrata Kabanga Nickel Project within the Kabanga-Musongati
mafic-ultramafic belt, which contains Ni sulphide ores at Kabanga deposit and
reef-type PGE concentrations at Musongati.

During the year ended August 31, 2013, the company abandoned 6 licenses not considered core and a write off of $147,429 was taken (year ended August 31, 2012 $nil).

Northwestern Basemetals
Company Limited, a new company 75% owned by the Company, 15% owned by Stamico
and 10% owned by Songshan Mining Company was formed to explore the Kabanga
nickel, cobalt and platinum group metals belt in Tanzania. Stamico has a carried
interest on the Company and Songshan has a carried interest.

29






---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




4. Mineral
Properties (continued) (l) Other properties:

The Company has options to acquire interests in their other properties. To maintain these options and licenses, the Company made the following payment:

USD$2013
	19,000




During the year ended August 31, 2013, the Company did not abandon any licenses in the area but recorded a write-off of $28,214 (year ended August 31, 2012 - $209,747) of costs related to the abandoned area located within the other properties category.

(m) Option
Agreement with BEAL (now ABG Exploration Limited ("ABG"):

BEAL had the option to acquire the total rights, titles, and interests of the Company in prospecting licenses in various properties, herein called the BEAL project. In exchange for this option, BEAL paid USD$100 to the Company. To maintain and exercise the option, BEAL was required to incur USD$250,000 in exploration and development costs on the BEAL project within a year of closing the agreement (completed), and thereafter, BEAL must expend USD$50,000 each year for each retained prospecting license. In addition, BEAL must make USD$40,000 annual payments to the Company for each retained prospecting licenses in December 2006 and subsequent years.

In prior years, the
Company received from BEAL notices of relinquishment for all rights, titles and
interests in prospecting licenses included in the Option Agreement, and on April
18, 2013, ABG advised that they were returning the last remaining prospecting
licence optioned under the BEAL Option Agreement.

(n) Option
Agreement with MDN:

On January 20, 2003, as
amended on March 18, 2003 and January 9, 2007, the Company entered into an
agreement with MDN granting MDN the exclusive option to acquire the total
rights, titles, and interests of the Company in certain prospecting licenses.
The prospecting licenses under option to MDN are located at Biharamulo and
Tulawaka.

In January 2013 MDN
advised the Company that they were unable to fulfill the terms of the option
agreement between the Company and MDN and the option agreement has been
terminated. The Company is focusing its exploration efforts on other projects at
this time, however, the Company may consider future exploration development on
these licenses.

30






---



|  |   |                               |   |                                                |                                              |            |           |         |               |   |           |              |   |         |       |   |           |  
|- | - | ----------------------------- | - | ---------------------------------------------- | -------------------------------------------- | ---------- | --------- | ------- | ------------- | - | --------- | ------------ | - | ------- | ----- | - | --------- | -
|  |   |                               |   |                                                | Tanzanian Royalty Exploration Corporation    |            |           |         |               |   |           |             
|  |   |                               |   | Notes to the Consolidated Financial Statements |                                              |            |           |         |               |   |          
|  |   |                               |   |                                                | For the Years Ended August 31, 2013 and 2012 |            |           |         |               |   |           |             
| 
|5 | . | Property, plant and equipment |   |                                                |                                              |            |           |         |               |   |           |              |   |         |       |   |           |  
| 
|  |   |                               |   | Drilling                                       |                                              |            | Computer  |         | Machinery and |   |           | Leasehold    |   |         |       |  
|  |   |                               |   | equipment                                      |                                              | Automotive | Equipment |         | equipment     |   |           | improvements |   |         | Total |  
|  |   | Cost                          |   |                                                |                                              |            |           |         |               |   |           |              |   |         |       |   |           |  
|  |   | As at September 1, 2011       |   | 464,487                                        |                                              | 302,640    |           | 157,892 |               |   | 1,507,349 |              |   | 4,469   |       |   | 2,436,837 |  
|  |   | Additions                     |   | -                                              |                                              | -          |           | 12,372  |               |   | 40,582    |              |   | 89,329  |       |   | 142,283   |  
|  |   | Disposals                     |   | -                                              |                                              | -          |           | (78,619 | )             |   | (20,778   | )            |   | (4,469  | )     |   | (103,866  | )
|  |   | As at August 31, 2012         | $ | 464,487                                        | $                                            | 302,640    | $         | 91,645  |               | $ | 1,527,153 |              | $ | 89,329  |       | $ | 2,475,254 |  
|  |   | Additions                     |   | -                                              |                                              | -          |           | 26,122  |               |   | 13,076    |              |   | 10,999  |       |   | 50,197    |  
|  |   | As at August 31, 2013         | $ | 464,487                                        | $                                            | 302,640    | $         | 117,767 |               | $ | 1,540,229 |              | $ | 100,328 |       | $ | 2,525,451 |  
|  |   | Accumulated depreciation      |   |                                                |                                              |            |           |         |               |   |           |              |   |         |       |   |           |  
|  |   | As at September 1, 2011       |   | 217,630                                        |                                              | 124,895    |           | 106,345 |               |   | 536,468   |              |   | 4,469   |       |   | 989,807   |  
|  |   | Depreciation expense          |   | 14,509                                         |                                              | 49,606     |           | 22,645  |               |   | 274,977   |              |   | 17,866  |       |   | 379,603   |  
|  |   | Removed on disposal of asset  |   | -                                              |                                              | -          |           | (78,619 | )             |   | (20,778   | )            |   | (4,469  | )     |   | (103,866  | )
|  |   | As at August 31, 2012         | $ | 232,139                                        | $                                            | 174,501    | $         | 50,371  |               | $ | 790,667   |              | $ | 17,866  |       | $ | 1,265,544 |  
|  |   | Depreciation expense          |   | 15,490                                         |                                              | 35,160     |           | 22,695  |               |   | 199,415   |              |   | 15,759  |       |   | 288,519   |  
|  |   | As at August 31, 2013         | $ | 247,629                                        | $                                            | 209,661    | $         | 73,066  |               | $ | 990,082   |              | $ | 33,625  |       | $ | 1,554,063 |  
|  |   | Net book value                |   |                                                |                                              |            |           |         |               |   |           |              |   |         |       |   |           |  
|  |   | As at September 1, 2011       | $ | 246,857                                        | $                                            | 177,745    | $         | 51,547  |               | $ | 970,881   |              | $ | -       |       | $ | 1,447,030 |  
|  |   | As at August 31, 2012         | $ | 232,348                                        | $                                            | 128,139    | $         | 41,274  |               | $ | 736,486   |              | $ | 71,463  |       | $ | 1,209,710 |  
|  |   | As at August 31, 2013         | $ | 216,858                                        | $                                            | 92,979     | $         | 44,701  |               | $ | 550,147   |              | $ | 66,703  |       | $ | 971,388   |  





31


---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012



|6.  | Convertible Debt
|--- | ----------------
|    |                 
|(i) | August 31, 2013:
|    |                 

|     |                                                |   |           |   |   |           |   |   |           |   |   |            |  
|---- | ---------------------------------------------- | - | --------- | - | - | --------- | - | - | --------- | - | - | ---------- | -
|     |                                                |   | August    |   |   | September |   |   | October   |   |   | Total      |  
|     |                                                |   | 2010      |   |   | 2010      |   |   | 2010      |   |   |            |  
|    
|     | Gross proceeds at inception                    | $ | 1,000,000 |   | $ | 1,000,000 |   | $ | 1,060,000 |   | $ | 3,060,000  |  
|     | Fair value of liability portion                |   | 965,375   |   |   | 965,375   |   |   | 1,023,297 |   |   | 2,954,047  |  
|     | Fair value of equity portion                   |   | 34,625    |   |   | 34,625    |   |   | 36,703    |   |   | 105,953    |  
|    
|     | Liability portion of convertible debt:         |   |           |   |   |           |   |   |           |   |   |            |  
|     | Initial fair value of debt component           | $ | 965,375   |   | $ | 965,375   |   | $ | 1,023,297 |   | $ | 2,954,047  |  
|     | Issuance costs                                 |   | (111,160  | ) |   | (3,359    | ) |   | (22,383   | ) |   | (136,902   | )
|     | Accretion expense                              |   | 101,523   |   |   | 87,606    |   |   | 147,937   |   |   | 337,066    |  
|     | Interest paid                                  |   | (36,164   | ) |   | (63,288   | ) |   | (63,630   | ) |   | (163,082   | )
|     | Conversion into common shares                  |   | (919,574  | ) |   | (986,334  | ) |   | -         |   |   | (1,905,908 | )
|    
|     | Closing balance of liability portion (current) | $ | -         |   | $ | -         |   | $ | 1,085,221 |   | $ | 1,085,221  |  
|    
|     | Equity portion of convertible debt:            |   |           |   |   |           |   |   |           |   |   |            |  
|     | Opening balance                                | $ | -         |   | $ | -         |   | $ | -         |   | $ | -          |  
|     | Initial fair value of equity component         |   | 34,625    |   |   | 34,625    |   |   | 36,703    |   |   | 105,953    |  
|     | Issuance costs                                 |   | (3,987    | ) |   | (120      | ) |   | (804      | ) |   | (4,911     | )
|     | Conversion into common shares                  |   | (30,638   | ) |   | (34,505   | ) |   | -         |   |   | (65,143    | )
|    
|     | Closing balance of equity portion              | $ | -         |   | $ | -         |   | $ | 35,899    |   | $ | 35,899     |  
|    
|    
|(ii) | August 31, 2012:                               |   |           |   |   |           |   |   |           |   |   |            |  
|     |                                                |   |           |   |   |           |   |   |           |   |   |            |  
|     |                                                |   | August    |   |   | September |   |   | October   |   |   | Total      |  
|     |                                                |   | 2010      |   |   | 2010      |   |   | 2010      |   |   |            |  
|    
|     | Gross proceeds at inception                    | $ | 1,000,000 |   | $ | 1,000,000 |   | $ | 1,060,000 |   | $ | 3,060,000  |  
|     | Fair value of liability portion                |   | 965,375   |   |   | 965,375   |   |   | 1,023,297 |   |   | 2,954,047  |  
|     | Fair value of equity portion                   |   | 34,625    |   |   | 34,625    |   |   | 36,703    |   |   | 105,953    |  
|    
|     | Liability portion of convertible debt:         |   |           |   |   |           |   |   |           |   |   |            |  
|     | Initial fair value of debt component           | $ | 965,375   |   | $ | 965,375   |   | $ | 1,023,297 |   | $ | 2,954,047  |  
|     | Issuance costs                                 |   | (111,160  | ) |   | (3,359    | ) |   | (22,383   | ) |   | (136,902   | )
|     | Accretion expense                              |   | 101,523   |   |   | 82,065    |   |   | 90,091    |   |   | 273,679    |  
|     | Interest paid                                  |   | (36,164   | ) |   | (30,000   | ) |   | (31,800   | ) |   | (97,964    | )
|     | Conversion into common shares                  |   | (919,574  | ) |   | -         |   |   | -         |   |   | (919,574   | )
|     | Closing balance of liability portion           | $ | -         |   | $ | 1,014,081 |   | $ | 1,059,205 |   | $ | 2,073,286  |  
|    
|     | Equity portion of convertible debt:            |   |           |   |   |           |   |   |           |   |   |            |  
|     | Opening balance                                | $ | -         |   | $ | -         |   | $ | -         |   | $ | -          |  
|     | Initial fair value of equity component         |   | 34,625    |   |   | 34,625    |   |   | 36,703    |   |   | 105,953    |  
|     | Issuance costs                                 |   | (3,987    | ) |   | (120      | ) |   | (804      | ) |   | (4,911     | )
|     | Conversion into common shares                  |   | (30,638   | ) |   | -         |   |   | -         |   |   | (30,638    | )
|     | Closing balance of equity portion              | $ | -         |   | $ | 34,505    |   | $ | 35,899    |   | $ | 70,404     |  







32


---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012


6. Convertible Debt (continued)

On August 17, 2010, the
Company issued a three-year convertible promissory note to an arm's length
third party, in the principal amount of $1,000,000 bearing interest at 3% and
convertible into 255,484 common shares at a price of $4.286 per share. The
agreement charged finance and commitment fees of $95,000 which was paid by
issuing 22,166 common shares. In September 2011, the loan was converted into
233,318 shares (see note 8).

On September 23, 2010
the Company completed a private placement with an arm's length third party
consisting of a three-year convertible promissory note in the principal amount
of $1,000,000 bearing interest at 3% and convertible into 221,337 common shares
at the price of $4.518 per share. The Company received notice to convert the
Promissory Note in the principal amount of $1,000,000 and 221,337 shares were
issued on October 17, 2012 (see note 8).

On October 4, 2010 the
Company completed a private placement with arm's length third parties
consisting of three-year convertible promissory notes in the aggregate principal
amount of $1,060,000 bearing interest at 3% and convertible into 204,772 common
shares at the price of $5.1765 per share. Subsequent to year end, the notes were
repaid (see note 23).

Each of the convertible
debentures includes a conversion feature. The Company determined a fair value of
the financial liability by obtaining independent bank rates of 4.25% for the
August, September and October 2010 debt, assuming a three-year expected life and
assigned the residual value of all debts to the equity conversion feature in the
amount of $105,953. Total transaction costs for all debt agreements were
$141,813 of which $4,911 was allocated to the equity component, which aggregated
to $35,899 at August 31, 2013 (August 31, 2012 - $70,404) and is included in
share based payment reserve in shareholders' equity.

7. Other financial assets

Other financial assets
are comprised of shares of publicly traded companies. As at August 31, 2013,
these investments have been measured at their fair value of $5,250 (August 31,
2012 - $17,850). The impact to the consolidated financial statements of this
revaluation to market value for the year ended August 31, 2013 resulted in a
$12,600 loss (2012 - $11,550 loss) as market values of these securities
decreased (2012 - decreased) in the year.

33






---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




8. Capital Stock

Share Capital

The Company's
Restated Articles of Incorporation authorize the Company to issue an unlimited
number of common shares. On November 23, 2011, the Board resolved that the
Company authorize for issuance up to a maximum of 115,000,000 common shares,
subject to further resolutions of the Company's board of directors.

|                                                         |             |   |            
|-------------------------------------------------------- | ----------- | - | -----------
|                                                         | Number      |   | Amount ($) 
|Balance on September 1, 2011                             | 99,758,753  |   | 109,935,253
|Issued on conversion of convertible debt                 | 233,318     |   | 950,213    
|Issued for services                                      | 35,000      |   | 115,834    
|Issued pursuant to Restricted Share Unit Plan            | 182,866     |   | 1,024,793  
|Compensation warrants exercised                          | 250,000     |   | 1,000,000  
|Reserve transferred on exercise of compensation warrants | -           |   | 450,765    
|Balance at August 31, 2012                               | 100,459,937 | $ | 113,476,858
|Issued on conversion of convertible debt                 | 221,337     |   | 986,334    
|Issued pursuant to Restricted Share Unit Plan            | 241,308     |   | 1,151,010  
|Balance at August 31, 2013                               | 100,922,582 | $ | 115,614,202

|                                               
|-----------------------------------------------
|Activity during the year ended August 31, 2012:

On September 23, 2011,
pursuant to the private placement completed on August 17, 2010, the Company
received notice from an arm's length third party to convert its Promissory
Note in the principal amount of $1,000,000 bearing interest at 3% and
convertible into 233,318 common shares at a price of $4.286 per share, and
233,318 shares were issued on September 23, 2011.

On
January 25, 2012 the Company issued 25,000 common shares common shares at a
price of $2.619 per share respectively to an arm's length third party in
satisfaction of finder's services provided to the Company in connection with a
previous transaction. On April 23, 2012 the Company issued 10,000 common shares
at a price of $5.036 to an arm's length third party for investor relations
services.

Activity during the year ended August 31, 2013:

On October 17, 2012,
pursuant to the private placement completed on September 23, 2010, the Company
received notice from an arm's length third party to convert its Promissory
Note in the principal amount of $1,000,000 bearing interest at 3% and
convertible into 221,337 common shares at a price of $4.518 per share, and
221,337 shares were issued on October 17, 2012.

34






---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




8. Capital Stock (continued)

Warrant issuances:

There were no warrant issuances during the year ended August 31, 2013 or the year ended August 31, 2012.

Warrants outstanding:

At August 31, 2013, the
following warrants and compensation options were outstanding:

|                     |           |   |                |                   
|-------------------- | --------- | - | -------------- | ------------------
|                     | Number of |   |                |                   
|                     | Warrants  |   | Exercise price | Expiry date       
|Private placement    |           |   |                |                   
|November 5, 2010     | 125,000   | * | USD$4.00       | October 20, 2013**
|Equity financing     |           |   |                |                   
|August 12, 2011      | 5,263,158 | * | USD$4.00       | August 12, 2014   
|Equity financing     |           |   |                |                   
|compensation options |           |   |                |                   
|August 12, 2011      | 118,421   |   | USD$4.00       | August 12, 2014   
|Balance,             |           |   |                |                   
|August 31, 2013      | 5,506,579 |   | -              | -                 

* warrants classified under Warrant Liability ** expired unexercised subsequent to year end

Effective December 7, 2011 the exercise price of 5,263,158 common share purchase warrants was

reduced from USD$6.25 to USD$4.00 and the term of the warrants was extended one year to expire August 12, 2014. In addition, if the weighted average trading price of the common shares increases to USD$6.50 after March 11, 2012, the Company will be entitled to require that the holders exercise the warrants, failing which the warrants will terminate. 368,421 compensation warrants issued under the prospectus financing have been amended in the same manner and re-priced from USD$5.91 to USD$4.00. The 5,263,158 warrants are accounted for and included in the calculation of the warrant liability. The compensation warrants continue to be classified as an equity instrument under warrants reserve and the increase in value of $183,000 from the modification of the warrants was recorded in the statement of loss and comprehensive loss for the year ended August 31, 2012.

35




---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




8. Capital Stock (continued)Warrant liability:

Foreign currency
denominated warrants (not including compensation warrants), are considered a
derivative as they are not indexed solely to the entity's own stock. The
Company's functional currency is the Canadian dollar as such the warrants
whose exercise price is denominated in US dollars have been recorded under
liabilities and carried at fair value as determined by the Black-Scholes option
pricing model, with changes in fair values recorded as gains or losses in the
statements of comprehensive loss.

The table below shows the activity for warrant liability for the year ended August 31, 2013 and the year ended August 31, 2012:

|                                                  |   |                 |   |        |          
|------------------------------------------------- | - | --------------- | - | ------ | ---------
|Year ended                                        |   | August 31, 2013 |   | August | 31, 2012 
|Balance at beginning of year                      | $ | 8,114,000       |   | $      | 5,711,250
|(Decrease) Increase in value of warrant liability |   | (4,590,000      | ) |        | 2,321,921
|Transfer of warrants on
re-pricing to USD (i)     |   | -               |   |        | 80,829   
|Balance at end of year                            | $ | 3,524,000       |   | $      | 8,114,000
|                                                 
|Current portion of warrant liability              | $ | 3,524,000       |   | $      | -        
|Long term portion of warrant liability            | $ | -               |   | $      | 8,114,000

During the year ended
August 31, 2013, the value of the warrants decreased to $3,524,000 from the
balance at August 31, 2012 of $8,114,000, as a result of changes in fair value
of warrants during the year. The assumptions in valuing the warrants at August
31, 2013 included an expected volatility of 64-83% (August 31, 2012 -
58%-71%), a US risk free interest rate of 0.03% to 0.13% (August 31, 2012 -
1.16%) and an expected life ranging from 2 to 12 months (August 31, 2012 - one
to two years). The decrease in value of $4,590,000 (2012 - $2,321,921
increase) has been recorded as a gain (2012 - loss) in the statement of
comprehensive loss. (i)
	Effective January 25,
2012 the exercise price of 125,000 common share purchase warrants was reduced
from CDN $7.309 to USD$4.00, and the term of the warrants was extended one year
to expire October 20, 2013. In addition, if the weighted average trading price
of the common shares increases to USD$6.50 after April 12, 2012, the Company
will be entitled to require that the holders exercise the warrants, failing
which the warrants will terminate. The warrants are held by an arm's length
investor. The result of the modification resulted in the new foreign currency
denominated warrants being considered a derivative as they are not indexed
solely to the entity's own stock. The warrants were transferred from reserve
for warrants to liabilities and were accounted for and included in the
calculation of the warrant liability and consequently reclassified $80,829 from
warrants reserve to warrant liability.  36


---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012




8. Capital Stock (continued)Compensation options:Employee stock ownership plan:

On May 1, 2003, the
Company established a non-leveraged employee stock ownership plan (ESOP) for all
eligible employees, consultants, and directors. The Company matches 100 percent
of participants' contributions up to 5 percent of the participants' salaries
and 50 percent of participants' contributions between 6 percent and 30 percent
of the participants' salaries. All contributions vest immediately. ESOP
compensation expense for the year ended August 31, 2013 was $58,864 (2012 -
$70,859) and is included in salaries and benefits expense.

Restricted share units:

The Restricted Stock
Unit Plan (RSU Plan) is intended to enhance the Company's and its affiliates'
abilities to attract and retain highly qualified officers, directors, key
employees and other persons, and to motivate such officers, directors, key
employees and other persons to serve the Company and its affiliates and to
expend maximum effort to improve the business results and earnings of the
Company, by providing to such persons an opportunity to acquire or increase a
direct proprietary interest in the operations and future success of the Company.
To this end, the RSU Plan provides for the grant of restricted stock units (RSUs).
Each RSU represents an entitlement to one common share of the Company, upon
vesting. As of November 9, 2012 the Board resolved to suspend 1,500,000 of the
2,500,000 common shares previously authorized for issuance under the RSU Plan,
such that a maximum of 1,000,000 shares shall be authorized for issuance under
the RSU Plan, until such suspension may be lifted or further amended. RSU awards
may, but need not, be subject to performance incentives to reward attainment of
annual or long-term performance goals in accordance with the terms of the RSU
Plan. Any such performance goals are specified in the award agreement.

The Board of Directors
implemented the RSU Plan under which officers, directors, employees and others
are compensated for their services to the Company. Annual compensation for
outside directors is $68,750 per year, plus $6,875 per year for serving on
Committees, plus $3,437 per year for serving as Chair of a Committee. On April
11, 2012 the board approved that at the election of each individual director, up
to one half of the annual compensation may be received in cash, paid quarterly.
The remainder of the director's annual compensation (at least one half, and up
to 100%) will be awarded as RSUs in accordance with the terms of the RSU Plan
and shall vest within a minimum of one (1) year and a maximum of three (3)
years, at the election of the director, subject to the conditions of the RSU
Plan with respect to earlier vesting. In 2012 outside directors had the option
to elect to receive 100% of their compensation in RSUs. If 100% compensation in
RSUs is elected, the compensation on which the number of RSUs granted in excess
of the required one half shall be increased by 20%.

The Company uses the
fair value method to recognize the obligation and compensation expense
associated with the RSU's. The fair value of RSU's issued is determined on
the grant date based on the market price of the common shares on the grant date
multiplied by the number of RSUs granted. The fair value is expensed over the
vesting term. Upon redemption of the RSU the carrying amount is recorded as an
increase in common share capital and a reduction in the share based payment
reserve.

The Company has a RSU
Plan which allows the Company to issue RSU's which are redeemable for the
issue of common shares at prevailing market prices on the date of the RSU grant.
The aggregate number of RSU's outstanding is limited to a maximum of ten
percent of the outstanding common shares. The Company has granted RSU's to
officers and key employees.

Of the 1,000,000 shares authorized for issuance under the Plan, 873,361 shares have been issued as at August 31, 2013.

37






---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012


8. Capital Stock (continued)

Total share-based
compensation expense related to the issue of RSUs was $1,353,967 for the year
ended August 31, 2013 (2012 - $1,283,750).

|                                                                           |   |                                               |          |   |        |                     |   |   |            |  
|-------------------------------------------------------------------------- | - | --------------------------------------------- | -------- | - | ------ | ------------------- | - | - | ---------- | -
|The following table
summarizes changes in the number of RSU's outstanding: |   |                                               |          |   |        |                     |  
|                                                                          
|                                                                           |   |                                               |          |   |        | Weighted average    |  
|                                                                           |   |                                               |          |   |        | fair value at issue |  
|                                                                           |   | Number of RSU's                               |          |   |        | date                |  
|                                                                           |   | Balance, September 1, 2011                    | 440,932  |   | $ 5.55 |                     |  
|                                                                           |   | Granted                                       | 296,926  |   | $ 4.83 |                     |  
|                                                                           |   | Redeemed for common shares                    | (182,866 | ) | $ 5.60 |                     |  
|                                                                           |   | Forfeited - unvested                          | (108,745 | ) | $ 5.39 |                     |  
|                                                                           |   | Balance, August 31, 2012                      | 446,247  |   | $ 5.09 |                     |  
|                                                                           |   | Granted                                       | 416,639  |   | $ 3.52 |                     |  
|                                                                           |   | Redeemed for common shares                    | (241,308 | ) | $ 4.77 |                     |  
|                                                                           |   | Balance, August 31, 2013                      | 621,578  |   | $ 4.16 |                     |  
|                                                                          
|9                                                                          | . | Reserve for warrants                          |          |   |        |                     |   |   |            |  
|                                                                          
|                                                                           |   |                                               |          |   |        | August 31,          |   |   | August 31, |  
|                                                                           |   | Year ended                                    |          |   |        | 2013                |   |   | 2012       |  
|                                                                           |   | Balance at beginning of year                  | $        |   |        | 870,037             |   | $ | 1,353,990  |  
|                                                                           |   | Transfer of warrants to warrant liability     |          |   |        | -                   |   |   | (216,188   | )
|                                                                           |   | Modification of warrants                      |          |   |        | -                   |   |   | 183,000    |  
|                                                                           |   | Transfer on exercise of compensation warrants |          |   |        | -                   |   |   | (450,765   | )
|                                                                           |   | Balance at end of year                        | $        |   |        | 870,037             |   | $ | 870,037    |  
|                                                                          
|10                                                                         | . | Reserve for share based payments              |          |   |        |                     |   |   |            |  
|                                                                          
|                                                                           |   |                                               |          |   |        | August 31,          |   |   | August 31, |  
|                                                                           |   | Year ended                                    |          |   |        | 2013                |   |   | 2012       |  
|                                                                           |   | Balance at beginning of year                  | $        |   |        | 670,779             |   | $ | 706,988    |  
|                                                                           |   | Shares issued pursuant
to RSU plan            |          |   |        | (1,151,010          | ) |   | (1,024,793 | )
|                                                                           |   | Issued on conversion of convertible debt      |          |   |        | -                   |   |   | (30,638    | )
|                                                                           |   | RSU shares forfeited                          |          |   |        | -                   |   |   | (264,528   | )
|                                                                           |   | Share based compensation                      |          |   |        | 1,353,967           |   |   | 1,283,750  |  
|                                                                           |   | Balance at end of year                        | $        |   |        | 873,736             |   | $ | 670,779    |  







38


---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012




11. Related party transactions and key management compensation

Related parties include the Board of Directors and officers, close family members and enterprises that are controlled by these individuals as well as certain consultants performing similar functions.

Related party transactions conducted in the normal course of operations are measured at the exchange value (the amount established and agreed to by the related parties).

(a) Tanzanian Royalty Exploration Corporation entered into the following transactions with related parties:

|                      |       |   |         |           |     
|--------------------- | ----- | - | ------- | --------- | ----
|Year ended August 31, | Notes |   | 2013    |           | 2012
|Legal services        | (i)   | $ | 269,880 | $ 553,949
|Director compensation | (ii)  | $ | 375,342 | $ 365,049
|Rent                  | (iii) | $ | 21,364  | $ 8,886  
|Technical Committee   | (iv)  | $ | 55,709  | $ 130,160
|Rent                  | (v)   | $ | 23,750  |           | $nil

(i) The Company engages
a legal firm for professional services in which one of the Company's directors
is a partner. During the year ended August 31, 2013, the legal expense charged
by the firm was $269,880

(2012 - $553,949), of which $13,143 remains payable at August 31, 2013 (2012 - $140,245).

(ii) During the year ended August 31, 2013, $375,342 (2012 - $365,049) was paid or payable by the Company to directors for serving on the Board and/or related Committees.

(iii) During the year
ended August 31, 2013, $21,364 (2012 - $8,886) was paid to a company associated
with the Company's Chairman and COO and his spouse for office rental.

(iv) During the year
ended August 31, 2013, $55,709 (2012 - $130,160) was paid or payable by the
Company to directors as incremental fees for serving on the Company's
Technical Committee.

(v) During the year
ended August 31, 2013, $23,750 (2012 - $nil) was paid to a company associated
with the Company's CFO for office rental.

At August 31, 2013, the
Company has a receivable of $nil (2012 - $22,977) from an organization
associated with the Company's President and CEO.

(b) Remuneration of
Directors and key management personnel (being the Company's Chief Executive
Officer, Chief Financial Officer and Chief Operating Officer), other than
consulting fees, of the Company was as follows:

|                      |   |             |   |                  |   |             |   |                |    
|--------------------- | - | ----------- | - | ---------------- | - | ----------- | - | -------------- | ---
|Year ended August 31, |   |             |   | 2013             |   |             |   | 2012           |    
|                      |   | Salaries    |   | Share            |   | Salaries    |   | Share          |    
|                      |   | and         |   | based            |   | and         |   | based payments |    
|                      |   | benefits(1) |   | payments(2), (3) |   | benefits(1) |   | (2),           | (3)
|Management            | $ | 508,217     | $ | 654,412          | $ | 377,230     | $ | 617,449        |    
|Directors             |   | 166,770     |   | 208,572          |   | 75,601      |   | 289,448        |    
|Total                 | $ | 674,987     | $ | 862,984          | $ | 452,831     | $ | 906,897        |    

(1)Salaries
and benefits include director fees. The board of directors do not have
employment or service contracts with the Company. Directors are entitled to
director fees and RSU's for their services and officers are entitled to cash
remuneration and RSU's for their services.

(2)Compensation shares may carry restrictive legends.

(3)All
RSU share based compensation is based on the accounting expense recorded in the
year.

39




---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012 12. Management of Capital The Company's objective when managing capital is to obtain adequate levels of funding to support its exploration activities, to obtain corporate and administrative functions necessary to support organizational functioning and obtain sufficient funding to further the identification and development of precious metals deposits. The Company manages its
capital structure and makes adjustments to it, based on the funds available to
the Company, in order to support the acquisition, exploration and development of
mineral properties. The Board of Directors does not establish quantitative
return on capital criteria for management, but rather relies on the expertise of
the Company's management to sustain future development of the business. The
Company defines capital to include its shareholders' equity. In order to carry
out the planned exploration and pay for administrative costs, the Company will
spend its existing working capital and raise additional amounts as needed. The
Company will continue to assess new properties and seek to acquire an interest
in additional properties if it feels there is sufficient geologic or economic
potential and if it has adequate financial resources to do so. Management
reviews its capital management approach on an ongoing basis and believes that
this approach, given the relative size of the Company, is reasonable. There were
no changes in the Company's approach to capital management during the year ended
August 31, 2013. The Company is not subject to externally imposed capital
requirements. The Company considers
its capital to be shareholders' equity, which is comprised of share capital,
reserves, and deficit, which as at August 31, 2013 totaled $50,240,712 (August
31, 2012 - $50,919,401). The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through equity capital raised by way of private placements. There can be no assurance that the Company will be able to continue raising equity capital in this manner. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The Company invests all capital that is surplus to its immediate operational needs in short term, liquid and highly rated financial instruments, such as cash, and short term guarantee deposits, all held with major Canadian financial institutions and Canadian treasury deposits. 13. Financial Instruments Fair Value of Financial Instruments The Company designated
its other financial assets and warrant liability as FVTPL, which are measured at
fair value. Fair value of other financial assets is determined based on quoted
market prices and is categorized as Level 1 measurement. Fair value of warrant
liability is categorized as Level 3 measurement as it is calculated based on
unobservable market inputs. Trade and other receivables and cash and cash
equivalents are classified as loans and receivables, which are measured at
amortized cost. Trade and other payables and convertible debt are classified as
other financial liabilities, which are measured at amortized cost. Fair value of
trade and other payables and convertible debt are determined from transaction
values that are not based on observable market data. The carrying value of
the Company's cash and cash equivalents, trade and other receivables, trade
and other payables approximate their fair value due to the relatively short term
nature of these instruments. The Company's
convertible debt fair value is based on market interest rate. As at August 31,
2013, and August 31, 2012 the fair value of the convertible debt agreements did
not differ materially from their carrying value, due to the short time to
maturity. 40


---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012 13. Financial Instruments (continued) Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates are subject to and involve uncertainties and matters of significant judgment, therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. A summary of the Company's risk exposures as they relate to financial instruments are reflected below: Credit Risk Credit risk is the risk
of an unexpected loss if a third party to a financial instrument fails to meet
its contractual obligations. The Company is subject to credit risk on the cash
balances at the bank, its short-term bank investments and accounts and other
receivables and the carrying value of those accounts represent the Company's
maximum exposure to credit risk. The Company's cash and cash equivalents and
short-term bank investments are with Schedule 1 banks or equivalents. The
accounts and other receivables consist of GST/HST and VAT receivable from the
various government agencies and amounts due from related parties. The Company
has not recorded an impairment or allowance for credit risk as at August 31,
2013, or August 31, 2012. Interest Rate Risk Interest rate risk is
the risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market interest rate. The Company's bank
accounts earn interest income at variable rates. The Company's future interest
income is exposed to changes in short-term rates. As at August 31, 2013, a 1%
increase/decrease in interest rates would decrease/increase net loss for the
year by approximately $107,000 (2012 - $200,000). Liquidity Risk The Company's
approach to managing liquidity risk is to ensure that it will have sufficient
liquidity to meet liabilities when due. As at August 31, 2013, the Company had
current assets of $11,289,745 (August 31, 2012 - $20,483,824) and current
liabilities of $5,873,641 (August 31, 2012 - $2,318,393), including warrant
liability or $2,349,641 (August 31, 2012 - $2,318,393) excluding warrant
liability. All of the Company's trade payables and receivables have
contractual maturities of less than 90 days and are subject to normal trade
terms. Current working capital of the Company is $5,416,104 (August 31, 2012 -
$18,165,431) including warrant liability or a working capital of $8,940,104
(August 31, 2012 - $18,165,431) excluding warrant liability. Foreign Currency Risk The Company is exposed
to the financial risk related to the fluctuation of foreign exchange rates. The
Company has offices in Canada, USA, and Tanzania, but holds cash mainly in
Canadian and United States currencies. A significant change in the currency
exchange rates between the Canadian dollar relative to US dollar and Tanzanian
shillings could have an effect on the Company's results of operations,
financial position, or cash flows. At August 31, 2013, the Company had no
hedging agreements in place with respect to foreign exchange rates. As a
majority of the funds of the Company are held in Canadian currencies, the
foreign currency risk associated with US dollar and Tanzanian Shilling financial
instruments is not considered significant at August 31, 2013. 41


---



|                                               |   |                 |   |                
|---------------------------------------------- | - | --------------- | - | ---------------
|Tanzanian Royalty Exploration Corporation     
|Notes to the Consolidated Financial Statements
|For the Years Ended August 31, 2013 and 2012  
|                                              
|                                              
|14. Prepaid expenses                           |   |                 |   |                
|                                              
|                                               |   | August 31, 2013 |   | August 31, 2012
|                                              
|Insurance                                      | $ | 47,159          | $ | 41,525         
|Listing fees                                   |   | 30,411          |   | 23,806         
|Other                                          |   | 3,191           |   | 22,345         
|Total prepaid expenses                         | $ | 80,761          | $ | 87,676         
|                                              
|15. Other receivables                          |   |                 |   |                

The Company's other
receivables arise from two main sources: receivables due from related parties
and harmonized services tax ("HST") and value added tax ("VAT")
receivable from government taxation authorities. These are broken down as
follows:

|                                                              |   |                 |   |                
|------------------------------------------------------------- | - | --------------- | - | ---------------
|                                                              |   | August 31, 2013 |   | August 31, 2012
|Receivable from related parties                               | $ | 811             | $ | 23,315         
|HST and VAT Receivable                                        |   | 510,062         |   | 38,824         
|Other                                                         |   | 1,496           |   | 9,086          
|Total Trade and Other Receivables                             | $ | 512,369         | $ | 71,225         
|                                                             
|Below is an aged
analysis of the Company's other receivables: |   |                 |   |                
|                                                              |   | August 31, 2013 |   | August 31, 2012
|Less than 1 month                                             | $ | 499,537         | $ | 4,034          
|1 to 3 months                                                 |   | 12,832          |   | 64,016         
|Over 3 months                                                 |   | -               |   | 3,175          
|Total Other Receivables                                       | $ | 512,369         | $ | 71,225         

At August 31, 2013, the Company anticipates full recovery of these amounts and therefore no impairment has been recorded against these receivables. The credit risk on the receivables has been further discussed in Note 13.

The Company holds no collateral for any receivable amounts outstanding as at August 31, 2013.

42




---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012




16. Trade, other payables and accrued liabilities

Trade and other payables of the Company are principally comprised of amounts outstanding for trade purchases relating to exploration activities and payroll liabilities. The usual credit period taken for trade purchases is between 30 to 90 days.

|                                                                                        |                 |           |                 |          
|--------------------------------------------------------------------------------------- | --------------- | --------- | --------------- | ---------
|The following is an aged analysis of the trade, other payables and accrued liabilities: |                 |          
|                                                                                       
|                                                                                        | August 31, 2013 |           | August 31, 2012
|                                                                                       
|Less than 1 month                                                                       | $               | 1,186,377 | $               | 921,893  
|1 to 3 months                                                                           |                 | 51,315    |                 | 1,378,486
|Over 3 months                                                                           |                 | 26,728    |                 | 18,014   
|Total Trade, Other Payables and Accrued Liabilities                                     | $               | 1,264,420 | $               | 2,318,393

17. Inventory

Inventory consists of
supplies for the Company's drilling rig and fuel to be consumed during the
course of exploration development and operations. Cost represents the delivered
price of the item. The following is a breakdown of items in inventory:

|                              |   |                 |   |                
|----------------------------- | - | --------------- | - | ---------------
|                              |   | August 31, 2013 |   | August 31, 2012
|                             
|Replacement parts for drill   | $ | -               | $ | 186,296        
|Other                         |   | 11,849          |   | 62,099         
|Total Inventory               | $ | 11,849          | $ | 248,395        
|                             
|18. Cash and cash equivalents |   |                 |   |                

As at August 31, 2013,
cash and cash equivalents total $10,679,516 (August 31, 2012 - $20,058,678),
consisting of cash on deposit with banks in general minimum interest bearing
accounts totalling $329,659 (August 31, 2012 - $2,027,295), and Government
investment certificates and treasury bills consisting of interest-generating
money-market accounts of $10,349,857 (August 31, 2012 - $18,031,383). The
interest-generating government investment certificate is cashable at any time
and the Company expects to convert this into cash on an as needed basis.

19. Segmented information

Operating Segments

At August 31, 2013 the
Company's operations comprise a single reporting operating segment engaged in
mineral exploration in Tanzania. The Company's corporate division only earns
interest revenue that is considered incidental to the activities of the Company
and therefore does not meet the definition of an operating segment as defined in
IFRS 8'Operating
Segments'.
As the operations comprise a single reporting segment, amounts disclosed in the
consolidated financial statements also represent operating segment amounts.

An operating segment is defined as a component of the Company:

- that engages in business activities from which it may earn revenues and incur expenses;
- whose operating results
are reviewed regularly by the entity's chief operating decision maker; and
- for which discrete financial information is available.

43




---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012




19. Segmented information, (continued)

Geographic Segments

The Company is in the business of mineral exploration and production in the country of Tanzania.

Information concerning
TREC's geographic locations is as follows:

|                               |   |            |   |   |            |  
|------------------------------ | - | ---------- | - | - | ---------- | -
|                               |   | Year ended |   |   | Year ended |  
|                               |   | August 31, |   |   | August 31, |  
|                               |   | 2013       |   |   | 2012       |  
|Consolidated net income (loss) |   |            |   |   |            |  
|Canada                         | $ | 1,223,920  |   | $ | (6,088,262 | )
|Tanzania                       |   | (4,449,918 | ) |   | (2,809,581 | )
|                               | $ | (3,225,998 | ) | $ | (8,897,843 | )
|                              
|                               |   | As at      |   |   | As at      |  
|                               |   | August 31, |   |   | August 31, |  
|                               |   | 2013       |   |   | 2012       |  
|Identifiable assets            |   |            |   |   |            |  
|Canada                         | $ | 10,748,028 |   | $ | 20,137,766 |  
|Tanzania                       |   | 47,445,312 |   |   | 45,573,309 |  
|                               | $ | 58,193,340 |   | $ | 65,711,075 |  
|Non-current assets             |   |            |   |   |            |  
|Canada                         | $ | 21,486     |   | $ | 14,470     |  
|Tanzania                       |   | 46,882,109 |   |   | 45,212,781 |  
|                               | $ | 46,903,595 |   | $ | 45,227,251 |  

20. Commitments

In addition to the property payments committed to by the Company to maintain options in certain prospecting and mining option agreements (note 4), the Company is committed to rental payments of approximately $13,266 for premises in 2014.

44




---



Tanzanian Royalty Exploration Corporation Notes to the Consolidated Financial Statements For the Years Ended August 31, 2013 and 2012


21. Taxes

The Company's
provision for income taxes differs from the amount computed by applying the
combined federal and provincial income tax rates to income (loss) before income
taxes as a result of the following:

|                                                |   |          |   |   |            |  
|----------------------------------------------- | - | -------- | - | - | ---------- | -
|                                                |   | 2013     |   |   | 2012       |  
|Combined basic Canadian federal and             |   |          |   |   |            |  
|provincial statutory income tax rates           |   |          |   |   |            |  
|including surtaxes                              |   | 26.0     | % |   | 25.8       | %
|                                               
|Statutory income tax rates applied to           |   |          |   |   |            |  
|accounting income                               | $ | (837,000 | ) | $ | (2,292,000 | )
|                                               
|Increase (decrease) in provision for income     |   |          |   |   |            |  
|taxes:                                          |   |          |   |   |            |  
|Foreign tax rates different from statutory rate |   | (259,000 | ) |   | (120,000   | )
|Permanent differences and other items           |   | 487,000  |   |   | 645,000    |  
|Benefit of tax losses not recognized            |   | 609,000  |   |   | 1,767,000  |  
|                                               
|Provision for income taxes                      | $ | -        |   | $ | -          |  

The enacted tax rates in Canada of 26.0% (25.8% - 2012) and Tanzania of 30% (30% - 2012) where the company operates are applied in the tax provision calculation. The combined Canadian federal and provincial statutory rate has increased from the prior period due to a scheduled enacted rate increase.

The following
table reflects the Company's deferred income tax assets (liabilities):

The tax effects of significant temporary differences which would comprise deferred income tax assets and liabilities at August 31, 2013 and 2012 are as follows:

|                                         |  |  |   |             |         |   |         |               |   |             |       | 
|---------------------------------------- |  |  | - | ----------- | ------- | - | ------- | ------------- | - | ----------- | ----- | 
|                                         |  |  |   |             | Mineral |   |         | Debt issuance |   |             | Total | 
|Deferred Income Tax Liabilities          |  |  |   | properties  |         |   | cost    |               |   |             |      
|                                        
|At August 31, 2012                       |  |  | $ | (10,348,000 | )       | $ | (18,000 | )             | $ | (10,366,000 | )    
|Charged to the consolidated statement of |  |  |   |             |         |   |         |               |  
|comprehensive loss                       |  |  |   | (369,000    | )       |   | (8,000  | )             |   | (377,000    | )    
|At August 31, 2013                       |  |  | $ | (10,717,000 | )       | $ | (26,000 | )             | $ | (10,743,000 | )    
|                                        
|                                         |  |  |   |             | Mineral |   |         | Debt issuance |   |             | Total | 
|Deferred Income Tax Assets               |  |  |   | properties  |         |   | cost    |               |   |             |      
|                                        
|At August 31, 2012                       |  |  | $ | 10,348,000  |         | $ | 18,000  |               | $ | 10,366,000  |      
|Charged to the consolidated statement of |  |  |   |             |         |   |         |               |  
|comprehensive loss                       |  |  |   | 369,000     |         |   | 8,000   |               |   | 377,000     |      
|At August 31, 2013                       |  |  | $ | 10,717,000  |         | $ | 26,000  |               | $ | 10,743,000  |      
|                                        
|Net deferred tax assets (liabilities)    |  |  | $ | -           |         | $ | -       |               | $ | -           |      



45




---



Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2013 and 2012




21. Taxes (continued)

The following temporary
differences have not been recognized in the Company's consolidated financial
statements:

|                              |   |                 |   |                
|----------------------------- | - | --------------- | - | ---------------
|                              |   | August 31, 2013 |   | August 31, 2012
|                             
|Non capital losses            | $ | 30,136,000      | $ | 27,076,000     
|Property, plant and equipment |   | 184,000         |   | 271,000        
|Capital losses                |   | 127,000         |   | 127,000        
|                              | $ | 30,447,000      | $ | 27,474,000     

At August 31, 2013, the Company has Tanzanian non-capital losses of $13,743,000 (2012 - $12,965,000), that have not been recognized and may be carried forward and applied against Tanzania taxable income of future years. The non-capital loss may be carried forward without limitation.

At August 31, 2013, the Company has non-capital losses of $16,393,000 (2012 - $14,111,000), that have not been recognized and may be carried forward and applied against Canadian taxable income of future years. The non-capital losses have expiry dates as follows:

|     |   |           
|---- | - | ----------
|2014 | $ | 914,000   
|2015 |   | 997,000   
|2026 |   | 1,711,000 
|2027 |   | 1,388,000 
|2028 |   | 1,333,000 
|2029 |   | 1,587,000 
|2030 |   | 1,427,000 
|2031 |   | 2,378,000 
|2032 |   | 2,496,000 
|2033 |   | 2,162,000 
|     | $ | 16,393,000

At August 31, 2013,
$nil (2012 - $nil) was recognized as a deferred tax liability for taxes that
would be payable as the Company's subsidiaries have a deficit.

22. Comparative figures

Certain comparative
figures have been reclassified to conform to the current year's presentation.

23. Subsequent event

On October 4, 2010 the
Company completed a private placement with arm's length third parties
consisting of three-year convertible promissory notes in the aggregate amount of
$1,060,000 bearing interest at 3% per annum and convertible into 204,772 common
shares, if the Holders elected to convert. On September 14, 2013 the promissory
notes matured and the Holders elected repayment of the promissory notes in cash.
Accordingly $1,060,000 plus interest in the amount of $30,000 was paid on
September 16, 2013.

46