**Exhibit 2**

**Management’s Responsibility forthe Consolidated Financial Statements**

The accompanyingconsolidated financial statements of Queenstake Resources Ltd. and itssubsidiaries and all information in the Annual Information Form are theresponsibility of management and have been approved by the Board ofDirectors.  The consolidated financialstatements necessarily include some amounts that are based on management’s bestestimates, which have been made using careful judgment.

The consolidatedfinancial statements have been prepared by management in accordance withCanadian generally accepted accounting principles.  Financial and operating data elsewhere in theannual report are consistent with the information contained in the financialstatements.

In fulfillingtheir responsibilities, management of Queenstake Resources Ltd. and itssubsidiaries have developed and continue to maintain systems of internalaccounting controls, and segregation of duties and responsibilities wheneverpossible.

Although no cost effectivesystem of internal control will prevent or detect all errors andirregularities, these systems are designed to provide reasonable assurance thatassets are safeguarded from loss or unauthorized use, transactions are properlyrecorded and the financial records are reliable for preparing the consolidatedfinancial statements.

The Board ofDirectors carries out its responsibility for the consolidated financialstatements in this annual report principally through its Audit Committee,consisting of non-executive directors. The Audit Committee meets periodicallywith management and with the external auditors to discuss the results of auditexaminations with respect to the adequacy of internal accounting controls, andto review and discuss the consolidated financial statements and financialreporting matters.

The consolidatedfinancial statements have been audited by PricewaterhouseCoopers, CharteredAccountants, who have full access to the Audit Committee, with and without thepresence of management. Their report follows.

**Dorian L. (Dusty) Nicol**

President and ChiefExecutive Officer

**Eric H. Edwards**

Vice President, Financeand Chief Financial Officer

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|   |   | **PricewaterhouseCoopers LLP** |
|--------|--------|--------------------------------|
|   |   | PricewaterhouseCoopers Place   |
|   |   | 250 Howe Street, Suite 700     |
|   |   | Vancouver, British Columbia    |
|   |   | Canada V6C 3S7                 |
|   |   | Telephone +1 604 806 7676      |
|   |   | Facsimile +1 604 806 7222      |

**Auditors’Report**

**To theShareholders of Queenstake Resources Ltd.:**

Wehave audited the consolidated balance sheet of Queenstake Resources Ltd. (“theCompany”) as at December 31, 2006, and the consolidated statements ofoperations and deficit and cash flows for the year then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

Weconducted our audit in accordance with Canadian generally accepted auditingstandards. Those standards require that we plan and perform an audit to obtainreasonable assurance whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.

Inour opinion, these consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as at December 31,2006 and the result of its operations and its cash flows for the year thenended in accordance with Canadian generally accepted accounting principles.

Theconsolidated financial statements as at December 31, 2005 and for the two yearsthen ended, were audited by predecessor auditors who expressed an opinionwithout reservation on those statements in their report dated March 13, 2006,except as to note 24, which is as of March 30, 2006.

**/s/PricewaterhouseCoopers LLP**

**Chartered Accountants**

**Vancouver, British Columbia**

March 29, 2007

 

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**Commentsby auditors for U.S. readers on Canada- U.S. reporting differences**

Inthe United States, reporting standards for auditors require the addition of anexplanatory paragraph (following the opinion paragraph) when the financialstatements are affected by conditions and events that cast substantial doubt onthe company’s ability to continue as a going concern, such as those describedin Note 1 to the financial statements.  Our report to the shareholders dated March 29, 2007 is expressed inaccordance with Canadian reporting standards which do not require a referenceto such events and conditions in the auditor’s report when these are adequatelydisclosed in the financial statements.

**/s/ PricewaterhouseCoopers LLP**

**Chartered Accountants**

**Vancouver, British Columbia**

March 29,2007

 

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**CONSOLIDATEDBALANCE SHEETSAS AT DECEMBER 31, 2006 AND 2005**
| **(In Thousands of U.S. Dollars)**             | ** ** | **December 31, 2006** | ** **  | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| **ASSETS**                                                         | ** ** | ** **                      | ** **  | ** **                      | ** ** |
| **Current assets**                                                 | ** ** | ** **                      | ** **  | ** **                      | ** ** |
| Cash and cash  equivalents                                         | ** ** | **$**                           | **6,580**   |                            | $          | 10,225 |   |
| Trade and other  receivables - Note 3                              | ** ** | **726**                         |        | 463                             |       |
| Inventories - Note 4                                               | ** ** | **34,196**                      |        | 6,519                           |       |
| Marketable securities -  Note 5                                    | ** ** | **13**                          |        | 13                              |       |
| Prepaid expenses - Note  6                                         | ** ** | **1,896**                       |        | 1,499                           |       |
| Total current assets                                               | ** ** | **43,411**                      |        | 18,719                          |       |
|                                                               |       |                            |        |                            |       |
| Restricted cash - Note  7                                          | ** ** | **27,035**                      |        | 27,165                          |       |
| Mineral property, plant  and equipment, net - Note 8               | ** ** | **51,491**                      |        | 45,692                          |       |
| Other assets - Note 9                                              | ** ** | **1,254**                       |        | 1,763                           |       |
| **Total assets**                                                   | ** ** | **$**                           | **123,191** |                            | $          | 93,339 |   |
|                                                               |       |                            |        |                            |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                     | ** ** | ** **                      | ** **  | ** **                      | ** ** |
| **Current liabilities**                                            | ** ** | ** **                      | ** **  | ** **                      | ** ** |
| Accounts payable and  accrued liabilities                          | ** ** | **$**                           | **52,386**  |                            | $          | 11,063 |   |
| Other current  liabilities - Note 10                               | ** ** | **3,381**                       |        | 2,846                           |       |
| Total current  liabilities                                         | ** ** | **55,767**                      |        | 13,909                          |       |
|                                                               |       |                            |        |                            |       |
| Other long-term  obligations - Note 11                             | ** ** | **1,997**                       |        | 2,117                           |       |
| Reclamation and mine  closure - Note 12                            | ** ** | **22,606**                      |        | 26,382                          |       |
| **Total liabilities**                                              | ** ** | **80,370**                      |        | 42,408                          |       |
|                                                               |       |                            |        |                            |       |
| **Shareholders’ equity**                                      | ** ** | ** **                      | ** **  | ** **                      | ** ** |
| Common shares, no par  value, unlimited number authorized          |       |                            |        |                            |       |
| Issued and outstanding  583,706,489 (2005 - 550,021,360) - Note 13 | ** ** | **143,442**                     |        | 131,804                         |       |
| Contributed surplus -  Note 14                                     | ** ** | **3,069**                       |        | 1,973                           |       |
| Warrants - Note 16                                                 | ** ** | **14**                          |        | 14                              |       |
| Deficit                                                            | ** ** | **(103,704**                    | **)**       | (82,860                         | )          |
| **Total shareholders’ equity**                                | ** ** | **42,821**                      |        | 50,931                          |       |
| **Total liabilities and shareholders’ equity**                | ** ** | **$**                           | **123,191** |                            | $          | 93,339 |   |

 

Going Concern -Note 1

Contingencies -Note 21

Subsequent Events- Note 25

** **
| Approved on behalf of the Board:      | ** **       |
|---------------------------------------|------------------|
| /s/ John Hick                         | /s/ Dorian Nicol |
| Audit Committee Chairman and Director | Director         |

 

*Theaccompanying notes form an integral part of these consolidated financialstatements*

 

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**CONSOLIDATEDSTATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**
| ** **                                                                                           | ** ** | **For the Years Ended December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **(In Thousands of U.S. Dollars, except per share amounts)** | ** ** | **2006**                                                      | ** **  | **2005** | ** ** | **2004** | ** ** |
|                                                                                                 |       |                                                          |        |   |   |   |   |
| **Revenues**                                                                                         | ** ** | **$**                                                         | **102,910** |   | $ | 90,174 |   | $ | 100,394 |   |
| **Costs and expenses**                                                                               | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Cost of sales                                                                                        | ** ** | **93,389**                                                    |        | 80,268 |   | 85,346 |   |
| Depreciation,  depletion and amortization                                                            | ** ** | **19,016**                                                    |        | 17,194 |   | 19,568 |   |
| Non-hedge  derivatives - Note 9                                                                      | ** ** | **207**                                                       |        | 2,647 |   | 2,530 |   |
| Exploration                                                                                          | ** ** | **4,899**                                                     |        | 3,880 |   | 6,629 |   |
| General and  administrative                                                                          | ** ** | **4,418**                                                     |        | 4,915 |   | 3,381 |   |
| Accretion of  reclamation and mine closure liability - Note 12                                       | ** ** | **1,192**                                                     |        | 1,174 |   | 421 |   |
| Stock-based  compensation - Note 15                                                                  | ** ** | **1,176**                                                     |        | 579 |   | 537 |   |
| ** **                                                                                           | ** ** | **124,297**                                                   |        | 110,657 |   | 118,412 |   |
| Loss from  operations                                                                                | ** ** | **(21,387**                                                   | **)**       | (20,483 | ) | (18,018 | ) |
| ** **                                                                                           | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Interest expense  - Note 17                                                                          | ** ** | **368**                                                       |        | 413 |   | 4,917 |   |
| Other income,  net                                                                                   | ** ** | **(897**                                                      | **)**       | (937 | ) | (243 | ) |
| Foreign exchange  (gain) loss                                                                        | ** ** | **(109**                                                      | **)**       | (213 | ) | 83 |   |
| Gain on disposal  of assets                                                                          | ** ** | **(102**                                                      | **)**       | (75 | ) | (649 | ) |
| Write down of  assets                                                                                | ** ** | **197**                                                       | ** **  | **—** | ** ** | **—** | ** ** |
|                                                                                                 | ** ** | **(543**                                                      | **)**       | (812 | ) | 4,108 |   |
| **Net  loss**                                                                                        | ** ** | **$**                                                         | **(20,844** | **)** | $ | (19,671 | ) | $ | (22,126 | ) |
|                                                                                                 |       |                                                          |        |   |   |   |   |
| Net loss per  share - basic and diluted                                                              | ** ** | **($0.04**                                                    | **)**       | ($0.04 | ) | ($0.06 | ) |
| ** **                                                                                           | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Weighted average number  of shares outstanding (000’s) - basic                                  | ** ** | **573,152**                                                   |        | 509,274 |   | 377,609 |   |

 

**CONSOLIDATEDSTATEMENTS OF DEFICIT**

 
| ** **                                             | ** ** | **For the Years Ended December 31,** | ** **   |
|--------------------------------------------------------|------------|---------------------------------------------------------------|--------------|
| **(In Thousands of U.S. Dollars)** | ** ** | **2006**                                                      | ** **   | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                                          |         |   |   |   |   |
| Deficit, beginning of  year                            | ** ** | **$**                                                         | **(82,860**  | **)** | $ | (63,189 | ) | $ | (41,063 | ) |
| Net Income (loss)                                      | ** ** | **(20,844**                                                   | **)**        | (19,671 | ) | (22,126 | ) |
| Deficit, end of year                                   | ** ** | **$**                                                         | **(103,704** | **)** | $ | (82,860 | ) | $ | (63,189 | ) |

 

Going Concern -Note 1

 

*Theaccompanying notes form an integral part of these consolidated financialstatements*

 

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**
| ** **                                             | ** ** | **For the Years Ended December 31,** | ** **  |
|--------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **(In Thousands of U.S. Dollars)** | ** ** | **2006**                                                      | ** **  | **2005** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| **OPERATING ACTIVITIES**                               | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net loss                                               | ** ** | **$**                                                         | **(20,844** | **)** | $ | (19,671 | ) | $ | (22,126 | ) |
| Non-cash items:                                        |       |                                                          |        |   |   |   |   |
| Depreciation,  depletion and amortization              | ** ** | **19,016**                                                    |        | 17,194 |   | 19,568 |   |
| Interest  accretion and deferred financing costs       | ** ** | **—**                                                    |        | — |   | 4,484 |   |
| Write down of  mineral property, plant and equipment   | ** ** | **197**                                                       |        | — |   | — |   |
| Gain on disposal  of assets                            | ** ** | **(102**                                                      | **)**       | (75 | ) | (649 | ) |
| Inventory  valuation adjustments                       | ** ** | **3,575**                                                     |        | — |   | 575 |   |
| Amortization of  deferred charges                      | ** ** | **—**                                                    |        | 1,903 |   | 1,590 |   |
| Accretion of  reclamation and mine closure liability   | ** ** | **1,192**                                                     |        | 1,174 |   | 421 |   |
| Write down of  non-hedge derivatives - Note 9          | ** ** | **207**                                                       |        | 2,647 |   | 2,530 |   |
| Stock-based  compensation                              | ** ** | **1,176**                                                     |        | 579 |   | 537 |   |
| Foreign exchange  (gain) loss                          | ** ** | **(109**                                                      | **)**       | (213 | ) | 83 |   |
| Loss on sale of  marketable securities                 | ** ** | **—**                                                    |        | 45 |   | 23 |   |
| Warrants issued  for services                          | ** ** | **—**                                                    |        | 14 |   | 137 |   |
| ** **                                             | ** ** | **4,308**                                                     |        | 3,597 |   | 7,173 |   |
| ** **                                             | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Reclamation  costs incurred                            | ** ** | **(968**                                                      | **)**       | (558 | ) | (426 | ) |
| Deferred revenue                                       | ** ** | **1,731**                                                     |        | — |   | — |   |
| Changes in  non-cash working capital:                  |       |                                                          |        |   |   |   |   |
| Inventories                                            | ** ** | **(30,317**                                                   | **)**       | (1,435 | ) | (801 | ) |
| Accounts  receivable and prepaid accounts              | ** ** | **461**                                                       |        | (1,178 | ) | 3 |   |
| Accounts payable  and accruals                         | ** ** | **43,124**                                                    |        | (8,098 | ) | 10,354 |   |
| Cash provided by  (used in) operating activities       | ** ** | **18,339**                                                    |        | (7,672 | ) | 16,303 |   |
|                                                   |       |                                                          |        |   |   |   |   |
| **INVESTING ACTIVITIES**                               | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Mineral  property, plant and equipment expenditures    | ** ** | **(31,916**                                                   | **)**       | (19,662 | ) | (21,559 | ) |
| Purchase of  non-hedge derivatives                     | ** ** | **—**                                                    |        | (1,242 | ) | (717 | ) |
| Environmental  risk transfer program                   | ** ** | **—**                                                    |        | — |   | 1,031 |   |
| Proceeds from  sale of assets                          | ** ** | **121**                                                       |        | 93 |   | 4,252 |   |
| Notes receivable                                       | ** ** | **—**                                                    |        | — |   | 2,500 |   |
| Sale of  marketable securities                         | ** ** | **—**                                                    |        | 442 |   | 1,460 |   |
| Restricted cash                                        | ** ** | **130**                                                       |        | (786 | ) | (41 | ) |
| Other, net                                             | ** ** | **—**                                                    |        | — |   | (3,493 | ) |
| Cash used in  investing activities                     | ** ** | **(31,665**                                                   | **)**       | (21,155 | ) | (16,567 | ) |
| ** **                                             | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| **FINANCING ACTIVITIES**                               | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Common shares  issued, net of costs - Note 13          | ** ** | **11,559**                                                    |        | 30,393 |   | 15,030 |   |
| Term loan                                              | ** ** | **—**                                                    |        | — |   | (9,952 | ) |
| Notes payable  and leases                              | ** ** | **(1,794**                                                    | **)**       | 2,527 |   | (8,218 | ) |
| Other                                                  | ** ** | **(84**                                                       | **)**       | — |   | — |   |
| Cash provided by  (used in) financing activities       | ** ** | **9,681**                                                     |        | 32,920 |   | (3,140 | ) |
|                                                   |       |                                                          |        |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents  | ** ** | **(3,645**                                                    | **)**       | 4,093 |   | (3,404 | ) |
| Cash and cash  equivalents, beginning of year          | ** ** | **10,225**                                                    |        | 6,132 |   | 9,536 |   |
| Cash and cash  equivalents, end of year                | ** ** | **$**                                                         | **6,580**   |   | $ | 10,225 |   | $ | 6,132 |   |
| ** **                                             | ** ** | ** **                                                    | ** **  | ** ** | ** ** | ** ** | ** ** |
| Cash paid for interest                                 | ** ** | **$**                                                         | **322**     | ** ** | **$** | **413** | ** ** | **$** | **433** | ** ** |
| Supplemental cash flow information - Note 19           |       |                                                          |        |   |   |   |   |

 

*Theaccompanying notes form an integral part of these consolidated financialstatements*

 

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*(In thousands of U.S. dollars, except per shareamounts)*

**1.****              Nature of operationsand going concern**

Queenstake Resources Ltd.(the Company) engages in the mining, processing, production and sale of gold,as well as related activities including development and exploration.  The Company’s principal asset and onlycurrent source of revenue is its 100% owned Jerritt Canyon Mine, located 50miles north of Elko, Nevada, acquired on June 30, 2003.

For the year endedDecember 31, 2006, the Company had a net loss of $20.8 million and had anaccumulated deficit of $103.7 million and a working capital deficit of $12.4million at that date. During the last half of 2006, reduced mill operatinglevels and the costs associated with the construction of an evaporation pond whichwas mandated by state environmental agencies have impacted the Company’sability to meet it short term obligations as well as to fund ongoingexploration and development efforts. These circumstances raise substantialdoubt about its ability to continue as a going concern.

The Company’s ability todischarge its liabilities and realize the carrying value of its assets in thenormal course of operations is dependent upon, among other things, thesuccessful resumption of full mill processing capacity during the secondquarter of 2007, extension, payment, or conversion of the Auramet loan facility(Note 25) and either successful completion of the proposed merger with YGCResources Ltd. (“YGC”) (Note 25) or raising additional financing.  It is not possible to determine with anycertainty the success or adequacy of these initiatives.

These consolidatedfinancial statements have been prepared using Canadian generally acceptedaccounting principles applicable to a going concern and do not reflect theadjustments to the carrying values of assets and liabilities, the reportedrevenue and expenses and the balance sheet classifications that would benecessary were the going concern assumption inappropriate.  These adjustments could be material.

**2.****              Summary ofsignificant accounting policies**

*(a)**       Basis of presentation*

The consolidated financial statements of the Company and accompanying notes have been prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”).  For the purposes of these financial statements these principles conform, in all material respects, with generally accepted accounting principles in the United States, except as described in Note 24.

*(b)**       Basis of consolidation*

These consolidated financial statements include theaccounts of Queenstake and its subsidiaries. All material intercompany transactions and balances have beeneliminated.  The subsidiaries and percentageof ownership at December 31, 2006, are as follows:

·                  QueenstakeResources U.S.A. Inc. (Delaware) — 100%

·                  Castle Exploration Inc. (Colorado) —100%

*(c)**        Use of estimates*

The preparation of financial statements in conformitywith Canadian GAAP requires the Company to make estimates and assumptions thataffect the amounts of assets, liabilities, shareholders’ equity, revenue andexpenses reported in these consolidated financial statements.  The most significant of these estimates andassumptions are those that use estimates of mineral reserves andresources.  Such estimates andassumptions affect the carrying value of assets, decisions as to whenexploration and development costs should be capitalized or expensed, the rateat which amortization of long-term assets is charged to earnings, and theestimation of the asset retirement obligation. The Company regularly reviews its estimates and assumptions; however,actual results could differ from these estimates.

1

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*(d)**       Foreign currencytranslation*

The activities of Queenstake, the Canadian parent company,are conducted and accounted for in Canadian dollars.  Accordingly, the temporal rate method is usedfor the conversion of related Canadian dollar denominated accounts.  Monetary assets and liabilities aretranslated into U.S. dollars at the exchange rate in effect at the balancesheet date, non-monetary assets (including depreciation) and liabilities at theexchange rates in effect at the time of acquisition or issue, and revenues andother expenses at average rates approximating exchange rates in effect duringthe prescribed time of the transactions. Exchange gains or losses are included in the statement of operations.

*(e)**        Cash and cash equivalents*

Cash and cash equivalents is considered to includecash on hand, demand balances held with banks, money market funds, certificatesof deposit and highly liquid deposits with maturities of three months or lessfrom the date of inception.

*(f)**           Inventories*

Work-in-process inventories, including ore stockpiles,are valued at the lower of average production cost and net realizable value,after a reasonable allowance for further processing and sales costs.  Purchased ore is recorded at cost based uponthe contracted purchase price.

Finished goods inventories are valued at the lower ofcost and net realizable value.  Costvaluations are based on the related three-month period’s average costs.  Net realizable value is after a reasonableallowance for sales costs.

Materials and supplies inventories are valued at thelower of average cost and replacement cost, net of a provision for obsolescencewith respect to identified inventory items.

*(g)**       Stockpiles*

Stockpiles represent ore that has been mined orpurchased and is available for future processing.  Stockpiles are measured by estimating thenumber of tons added and removed from the stockpile, the number of containedounces (based on assay data) and the estimated metallurgical recovery rates(based on expected processing method). Stockpile ore tonnages are verified by periodic surveys.  Costs are allocated to stockpiles based onrelative values of material stockpiled and processed using current mining costsincurred up to the point of stockpiling the ore, including applicable overhead,depreciation, depletion and amortization related to mining operations, andremoved at each stockpile’s average cost per recoverable ounce.

*(h)**       Marketable securities*

Short-term investments in publicly traded marketablesecurities are valued at the lower of cost and quoted market value.

*(i)**          Mineral property, plantand equipment*

Mineral property, plant and equipment are carried atcost less accumulated depreciation and depletion.  Cost includes acquisition and related costs,capitalized asset retirement costs, long-term development costs incurred onexisting ore bodies, and development costs incurred to further define reservesdeemed capable of subsequent commercial production.  Depletion of mineral properties includingdeferred development costs is charged on a units-of-production basis overproven and probable reserves. Depreciation for plant and equipment commences when placed inservice.  Depreciation of plant andequipment is calculated using the straight-line method, based on estimateduseful lives ranging from three to six years. Projects and assets considered to be Construction in Progress are notdepreciated until the projects are complete and placed in service.

The Company expenses all exploration and evaluationexpenditures until management concludes that a future economic benefit is morelikely than not of being realized, i.e. probable.  In evaluating if expenditures meet thiscriterion to be

2

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capitalized, management utilize several differentsources of information depending on the level of exploration.  While the criteria for concluding whetherexpenditure should be capitalized is always probable the information thatmanagement use to make that determination depends on the level of exploration.

Long-lived assets are evaluated for impairment at theend of each reporting period or more frequently when changes in circumstancesindicate that those carrying values may not be recoverable.  Estimated undiscounted future net cash flowsfor the Jerritt Canyon mine are subject to risks and uncertainties and arecalculated using estimated production, expected gold sales prices (consideringcurrent and historical prices, price trends and related factors), operatingcosts, capital costs, and reclamation and closure costs and estimates of assetrecovery values.  It is reasonable thatchanges in estimates could occur, which may affect the expected recoverabilityof these assets.  If it is determinedthat the carrying value exceeds estimated undiscounted future net cash flows,then a write-down to fair value would be recorded, with a charge to operations.

*(j)**           Asset retirementobligations*

A liability is recognized for legal obligationsrelating to the retirement of property, plant and equipment and obligationsarising from the acquisition, construction, development, or normal operation ofthose assets.  Such asset retirement costsare recognized at fair value, when a reasonable estimate of fair value can bemade, in the period in which the liability is incurred.  A corresponding increase to the carryingamount of the related asset, where one is identifiable, is recorded and amortizedover the life of the asset.  Where arelated asset is not easily identifiable with a liability, the change in fairvalue over the course of the year is expensed. The amount of the liability is subject to re-measurement at eachreporting period.  The estimates arebased principally on legal and regulatory requirements.  It is possible that the Company’s estimate ofits ultimate reclamation liabilities could change as a result of changes inregulations, the extent of environmental remediation required or completed, themeans of reclamation or changes in cost estimates.  Changes in estimates are accounted forprospectively commencing in the period the estimate is revised.

*(k)**       Obligations under capitalleases*

Leases are classified as either capital oroperating.  Leases that transfersubstantially all of the benefits and risks of ownership of property to theCompany are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded alongwith its related long-term financing obligation, net of interest.  Interest on capital lease financing isexpensed as financing payments are made. Payments made under operating leases are expensed as incurred.

*(l)**          Stock-based compensation*

Compensation expense for stock options granted isdetermined based on the estimated fair values of the stock options at the timeof the grant, the cost of which is recognized over the vesting periods of therespective options.  The estimated fairvalue of stock options granted is determined by using the Black-Scholes optionpricing model.  The estimated fair valueof stock options is credited to contributed surplus as the options vest and issubsequently transferred to share capital upon exercise of the related option.

Consideration paid by directors, officers, employeesand non-employees on exercise of stock options is credited to common shares.

*(m)**     Warrants*

Warrants issued as consideration for goods andservices are recorded at fair value and classified as ConvertibleSecurities.  Fair value is transferred tocommon shares upon exercise of the related warrants; proceeds from the exerciseof these warrants are accounted for as an increase to common shares.

The value of equity units, consisting of common sharesand warrants, issued in cash financings is assumed to be substantiallyattributable to the value of the common shares; accordingly no portion of thecash received for the units is assigned to the warrants.

3

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*(n)**       Revenue recognition*

Revenue from the sale of gold is recognized when thereis pervasive evidence that an arrangement exists, the selling price is fixedand determinable, collectibility is reasonably assured, the gold has shipped orprocessing is complete and the gold is ready for shipment and when title andthe risks and rewards of ownership pass to the buyer.

*(o)**       Commodity contracts*

The Company may purchase gold put option contracts toprotect against the risk of falling gold prices.  Gold put options allow the Company toexercise on a designated forward date, the option to sell a specified quantityof gold at the contract price (“strike price”) to the counterparty.  If the gold price is lower than the strikeprice of the respective purchased put option contract on the expiry date, goldis sold at the strike price of the put option. If the market gold price is higher that the strike price of the putoption, the option expires without exercise. The put option premium payments related to the contracts are recognizedas a deferred charge and liability on acquisition.

Put options are considered non-hedge derivativefinancial instruments and thus, are marked to fair market value.  Changes in the fair market value of the putoptions are recorded in current operations.

Put options which contain explicit provision in therelated contracts to deliver gold to settle these instruments do not requirefair market value adjustment. 

The Company does not use gold forward sales contractsto fix future gold prices to be realized.

*(p)**       Income taxes*

Future income tax assets and liabilities are recordedbased on temporary differences between the carrying amounts of balance sheetitems and their corresponding tax bases. Future income tax assets also arise from unused tax losses, subject to avaluation allowance, to the extent that it is more likely than not such lossesultimately will be utilized.  This methodalso requires that the future income tax assets and liabilities be measuredusing the enacted rates and laws that are expected to apply when these assetsand liabilities are either to be realized or settled.

*(q)**       Earnings/loss per share*

Basic earnings/loss per share is calculated bydividing the net earnings/loss for the year by the weighted average number ofcommon shares outstanding during the year. Diluted earnings per share is calculated using the treasury stock methodwhich, for outstanding stock options and warrants, assumes that the proceeds tobe received on the exercise of the stock options and warrants are applied torepurchase common shares at the average market price for the period, forpurposes of determining the weighted average number of shares outstanding.  Basic and diluted loss per share are the sameas the inclusion of common share equivalents would be anti-dilutive.

*(r)**         Comparative figures*

Certain of the comparative figures have beenreclassified to conform with the current year’s presentation.

4

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**3.****              Trade and otherreceivables**

|                                | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Reclamation  costs recoverable | ** ** | **$**                           | **370**    |                            | $          | 411 |   |
| Receivable from  employees     | ** ** | **15**                          |       | 45                              |       |
| Other                          | ** ** | **341**                         |       | 7                               |       |
|                           | ** ** | **$**                           | **726**    |                            | $          | 463 |   |

 

Reclamation costs recoverable are related to reclamationproject expenditures, reimbursable under the Company’s Environmental RiskTransfer Program (ERTP).

**4.****              Inventories**

|                         | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Finished goods          | ** ** | **$**                           | **328**    |                            | $          | 1,083 |   |
| Stockpiled ore          | ** ** | **3,665**                       |       | 1,768                           |       |
| Purchased ore           | ** ** | **24,702**                      |       | —                          |       |
| Work-in-process         | ** ** | **1,754**                       |       | 352                             |       |
| Materials and  supplies | ** ** | **3,747**                       |       | 3,316                           |       |
|                    | ** ** | **$**                           | **34,196** |                            | $          | 6,519 |   |

 

Purchased ore was purchased from Newmont under anore and concentrate purchase agreement and is expected to be processed in thenext twelve months.  The purchased orebalance includes $11.2 million of loaded carbon delivered to the Company duringDecember 2006 that was processed during the first quarter of 2007.  See further discussion of the Newmontagreement in Note 21.  The value of thepurchased ore is shown net of a $3.6 million write down to net realizable valueas of December 31, 2006.

**5.****              Marketablesecurities**

|                                              | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| Balance -  December 31, 2004                 |       | 669,485    |       | $          | 500        |   |
| Proceeds from  sale of marketable securities |       | (644,485   | )          | (442       | )          |
| Loss on sale of  marketable securities       |       | —     |       | (45        | )          |
| **Balance - December 31, 2005 and  2006**    | ** ** | **25,000** | ** ** | **$**      | **13**     | ** ** |

 

**6.****              Prepaid expenses**

|                            | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Prepaid  insurance         | ** ** | **$**                           | **1,055**  |                            | $          | 783 |   |
| Prepaid federal  land fees | ** ** | **615**                         |       | 540                             |       |
| Other                      | ** ** | **226**                         |       | 176                             |       |
|                       | ** ** | **$**                           | **1,896**  |                            | $          | 1,499 |   |

 

5

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**7.****              Restricted cash**

|                                             | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Commutation  Account                        | ** ** | **$**                           | **25,915** |                            | $          | 25,766 |   |
| Interest earned                             | ** ** | **1,110**                       |       | 707                             |       |
| Reclamation  costs incurred by Company      | ** ** | **(968**                        | **)**      | (558                            | )          |
|                                        | ** ** | **26,057**                      |       | 25,915                          |       |
| Workman’s  compensation self-insurance | ** ** | **157**                         |       | 522                             |       |
| Other restricted  cash                      | ** ** | **821**                         |       | 728                             |       |
|                                        | ** ** | **$**                           | **27,035** |                            | $          | 27,165 |   |

 

On June 30, 2003,the Company purchased from American Insurance Group (“AIG”) an environmentalrisk transfer program (the “ERTP”) (See Note 9).  As part of the ERTP, $25.8 million wasdeposited in an interest-bearing account with AIG (the “Commutation Account”).  The Commutation Account principal plusinterest earned on the principal is used to fund Jerritt Canyon mine’s ongoingreclamation and mine closure obligations identified as at June 30, 2003.

The Company hasassigned to Division of Insurance, State of Nevada a letter of credit for $0.2million secured by a cash deposit of $0.2 million in connection with the State’sWorkers Compensation program.  Interestis earned on the deposit.  During 2006,the Company was able to reduce the required letter of credit by $0.3 millioncompared to 2005 due to reduced workers compensation claim activity.

The Company hasassigned two letters of credit totaling $0.7 million secured by a cash depositof $0.7 million in connection with the purchase of mining equipment.  Interest is earned on this deposit.

 

6

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**8.****Mineral property, plant and equipment**
| ** **                             | ** ** | **December 31,   2005** | ** ** | **Additions /   (Depreciation)** | ** ** | **Disposals** | ** ** | **Writeoffs** | ** ** | **December 31,   2006** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|---------------|------------|---------------|------------|-----------------------------------|------------|
| **Cost:**                              | ** ** | ** **                        |       |                                       |       |          |       |          | ** ** | ** **                        | ** ** |
| Mineral properties and  deferred costs | ** ** | ** **                        |       |                                       |       |          |       |          | ** ** | ** **                        | ** ** |
| Jerritt Canyon                         | ** ** | **$**                             | **59,047** |                                       | $          | 12,256        |       | $             | —     |                              | $          | — | ** ** | **$** | **71,303** | ** ** |
| Plant and equipment                    | ** ** | ** **                        |       |                                       |       |          |       |          | ** ** | ** **                        | ** ** |
| Jerritt Canyon                         | ** ** | **28,276**                        |       | 13,408                                     |       | (85           | )          | (195          | )          | **41,404**                        | ** ** |
| **Subtotal  Jerritt Canyon**           | ** ** | **87,323**                        | ** ** | **25,664**                                 | ** ** | **(85**       | **)**      | **(195**      | **)**      | **112,707**                       | ** ** |
|                                   |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Office equipment                       | ** ** | **74**                            |       | 1                                          |       | —        |       | (4            | )          | **71**                            | ** ** |
| **Total  cost**                        | ** ** | **87,397**                        | ** ** | **25,665**                                 | ** ** | **(85**       | **)**      | **(199**      | **)**      | **112,778**                       | ** ** |
| **Accumulated depletion**              | ** ** | ** **                        | ** ** | ** **                                 | ** ** | ** **    | ** ** | ** **    | ** ** | ** **                        | ** ** |
| **and  depreciation**                  | ** ** | ** **                        | ** ** | ** **                                 | ** ** | ** **    | ** ** | ** **    | ** ** | ** **                        | ** ** |
| Mineral properties and  deferred costs |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Jerritt Canyon                         | ** ** | **(29,398**                       | **)**      | (12,845                                    | )          | —        |       | —        | ** ** | **(42,243**                       | **)**      |
| Plant and equipment                    |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Jerritt Canyon                         | ** ** | **(12,274**                       | **)**      | (6,792                                     | )          | 66            |       | —        | ** ** | **(19,000**                       | **)**      |
| **Subtotal  Jerritt Canyon**           | ** ** | **(41,672**                       | **)**      | **(19,637**                                | **)**      | **66**        | ** ** | **—**    | ** ** | **(61,243**                       | **)**      |
|                                   |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Office equipment                       | ** ** | **(33**                           | **)**      | (13                                        | )          | —        |       | 2             | ** ** | **(44**                           | **)**      |
| **Total  accumulated depletion**       | ** ** | ** **                        | ** ** | ** **                                 | ** ** | ** **    | ** ** | ** **    | ** ** | ** **                        | ** ** |
| **and  depreciation**                  | ** ** | **(41,705**                       | **)**      | **(19,650**                                | **)**      | **66**        | ** ** | **2**         | ** ** | **(61,287**                       | **)**      |
| **Mineral  property, plant and**       | ** ** | ** **                        |       |                                       |       |          |       |          | ** ** | ** **                        | ** ** |
| **equipment, net**                     | ** ** | **$**                             | **45,692** | ** **                                 | **$**      | **6,015**     | ** ** | **$**         | **(19**    | **)**                             | **$**      | **(197** | **)** | **$** | **51,491** | ** ** |

 
| ** **                             | ** ** | **December 31,   2004** | ** ** | **Additions /   (Depreciation)** | ** ** | **Disposals** | ** ** | **Writeoffs** | ** ** | **December 31,   2005** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|---------------|------------|---------------|------------|-----------------------------------|------------|
| Cost:                                  |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Mineral properties and  deferred costs |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Jerritt Canyon                         |       | $                                 | 45,538     |                                       | $          | 13,509        |       | $             | —     |                              | $          | — |   | $ | 59,047 |   |
| Plant and equipment                    |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Jerritt Canyon                         |       | 22,117                            |       | 6,199                                      |       | (40           | )          | —        |       | 28,276                            |       |
| Subtotal Jerritt  Canyon               |       | 67,655                            |       | 19,708                                     |       | (40           | )          | —        |       | 87,323                            |       |
|                                   |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Office equipment                       |       | 54                                |       | 20                                         |       | —        |       | —        |       | 74                                |       |
| Total cost                             |       | 67,709                            |       | 19,728                                     |       | (40           | )          | —        |       | 87,397                            |       |
| Accumulated depletion                  |       |                              |       |                                       |       |          |       |          |       |                              |       |
| and depreciation                       |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Mineral properties and  deferred costs |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Jerritt Canyon                         |       | (19,044                           | )          | (10,354                                    | )          | —        |       | —        |       | (29,398                           | )          |
| Plant and equipment                    |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Jerritt Canyon                         |       | (6,128                            | )          | (6,167                                     | )          | 21            |       | —        |       | (12,274                           | )          |
| Subtotal Jerritt  Canyon               |       | (25,172                           | )          | (16,521                                    | )          | 21            |       | —        |       | (41,672                           | )          |
|                                   |       |                              |       |                                       |       |          |       |          |       |                              |       |
| Office equipment                       |       | (23                               | )          | (10                                        | )          | —        |       | —        |       | (33                               | )          |
| Total  accumulated depletion           |       |                              |       |                                       |       |          |       |          |       |                              |       |
| and depreciation                       |       | (25,195                           | )          | (16,531                                    | )          | 21            |       | —        |       | (41,705                           | )          |
| Mineral  property, plant and           |       |                              |       |                                       |       |          |       |          |       |                              |       |
| equipment, net                         |       | $                                 | 42,514     |                                       | $          | 3,197         |       | $             | (19        | )                                 | $          | — |   | $ | 45,692 |   |

 

7

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**9.****              Other assets**

 
| ** **                           | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Beginning   Balance**    | ** ** | **Additions** | ** ** | **Amortization** | ** ** | **Write-down** | ** ** | **Ending   Balance** | ** ** |
| Non-hedge  derivatives               | ** ** | **$**                           | **207**    | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **(207** | **)** | **$** | **—** | ** ** |
| Environmental  risk transfer program | ** ** | **1,556**                       | ** ** | **—** | ** ** | **(302** | **)** | **—** | ** ** | **1,254** | ** ** |
|                                 | ** ** | **$**                           | **1,763**  | ** ** | **$** | **—** | ** ** | **$** | **(302** | **)** | **$** | **(207** | **)** | **$** | **1,254** | ** ** |

 
| ** **                           | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Beginning   Balance**    | ** ** | **Additions** | ** ** | **Amortization** | ** ** | **Write-down** | ** ** | **Ending   Balance** | ** ** |
| Non-hedge  derivatives               |       | $                               | 1,612      |   | $ | 1,242 |   | $ | (1,792 | ) | $ | (855 | ) | $ | 207 |   |
| Deferred royalty  charges            |       | 1,903                           |       | — |   | (1,903 | ) | — |   | — |   |
| Environmental  risk transfer program |       | 2,240                           |       | — |   | (684 | ) | — |   | 1,556 |   |
|                                 |       | $                               | 5,755      |   | $ | 1,242 |   | $ | (4,379 | ) | $ | (855 | ) | $ | 1,763 |   |

 

*Non-Hedge Derivatives*

As a condition of theJerritt Canyon term loan, obtained in July 2003, the lender required theCompany to purchase a total of 394,591 gold put options, with a carrying valueof approximately $4.1 million, with a series of monthly expiries from July 2003through June 2005, inclusive.  On June30, 2005 the remaining balance of the prepaid put options required by theconditions of the term loan expired in full.

The Company purchasedgold put options in the fourth quarter of 2004 as a non-hedge derivative at acost of $0.7 million with expiry dates through 2005.

During 2005, the Companypurchased 147,000 gold put options as non-hedge derivatives at a cost of $1.1million with a series of monthly expiries from January 2006 through March 2007,inclusive.  The put options each have astrike price ranging from $400 to $425 per ounce.  Payment of the premiums for these put optionswas deferred and is being settled each month based upon the respective numberof put options expiring or exercised in that month.  As a result of decreases in the fair value ofthe gold put option contracts, the remaining asset value of the put options waswritten off as of December 31, 2006.

*Environmental Risk TransferProgram*

i)     *Reclamationcost cap insurance*

The ERTP that the Companypurchased from AIG (see Note 12) also includes a reclamation and mine closure costcap insurance policy.  The insurancepolicy provides coverage for future reclamation and mine closure costs inexistence at June 30, 2003, if they exceed those funded by the CommutationAccount (Note 7).  If these reclamationcosts are less than the amount in the Commutation Account, the Company would berefunded the excess cash.  In the eventthat these reclamation costs are more than the Commutation Account balance, thecost cap insurance policy will pay the excess costs up to a defined maximum.

The insurance premiumpaid for the ERTP in June 2003 is being amortized over the estimated proven andprobable reserves at the inception of the policy.  Amortization of the insurance premium iscalculated based on each respective period’s production ounces with respect tothe estimated proven and probable reserves.

*ii)**                                   Pollutionlegal liability*

The ERTP also includes apollution legal liability insurance coverage for third-party damage claimsagainst the Company for both pre-existing pollution conditions and newpollution conditions, for a period of five years commencing June 30, 2003.

8

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**10.****       Other current liabilities**
| ** **                                                          | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Insurance policy  premium payable                                   | ** ** | **$**                           | **608**    |                            | $          | 423 |   |
| Current portion  of non-hedge derivative premiums payable (Note 11) | ** ** | **66**                          |       | 994                             |       |
| Deferred revenue                                                    | ** ** | **1,731**                       |       | —                          |       |
| Current portion  of capital leases (Note 11)                        | ** ** | **976**                         |       | 1,429                           |       |
|                                                                | ** ** | **$**                           | **3,381**  |                            | $          | 2,846 |   |

 

At the end of December2006, the Company entered into a gold sales agreement and received paymentwhich was recorded as deferred revenue and for which the gold was deliveredduring the first week of January 2007.

**11.****       Other long-term liabilities**
| ** **                                    | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Non-hedge  derivative premiums payable        | ** ** | **$**                           | **66**     |                            | $          | 1,062 |   |
| Capital leases                                | ** ** | **2,973**                       |       | 3,478                           |       |
|                                          | ** ** | **3,039**                       |       | 4,540                           |       |
| Less current  portion:                        |       |                            |       |                            |       |
|  - Non-hedge derivative premiums payable | ** ** | **(66**                         | **)**      | (994                            | )          |
|  - Capital leases                        | ** ** | **(976**                        | **)**      | (1,429                          | )          |
|                                          | ** ** | **$**                           | **1,997**  |                            | $          | 2,117 |   |

 

Capital Leases

During 2006, the Companyentered into a 3 year capital lease with a mining equipment company with atotal payment price of $0.4 million.  Thedelivered sales price for the equipment is $0.3 million with a deferred financecharge of $0.1 million calculated at 8.7%.

During 2006, the Companyentered into a 3 year capital lease with an automotive credit company with atotal payment price of $31 thousand.  Thedelivered sales price for the automobile was $30 thousand with a deferredfinance charge of approximately $1 thousand calculated at 11.4%.

During 2005, the Companyentered into a 5 year capital lease with a mining equipment company with atotal payment price of $1.4 million.  Thedelivered sales price for the equipment is $1.1 million with a deferred financecharge of $0.3 million calculated at 8.35%.

During 2005, the Companyentered into a 5 year capital lease with a mining equipment company with atotal payment of $2.0 million.  Thedelivered sales price for the equipment is $1.6 million with a deferred financecharge of $0.4 million calculated at 7.25%.

During 2005, the Companyentered into a two year capital lease with a software company with a totalpayment of $44 thousand.  The deliveredsales price for the equipment is $41 thousand with a deferred finance charge of$3 thousand calculated at 7.00%.

During 2004, theCompany entered into a 28 month capital lease with a mining equipment companywith a total payment of $0.5 million. The delivered sales price for the equipment is $476 thousand with adeferred finance charge of $63 thousand calculated at 7.95%.  A balloon payment of $0.2 million was due inJune 2006; however the Company has been allowed to continue monthly paymentsthrough 2007.

9

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Capital lease obligationsthrough the completion of current lease terms are as follows:
| **(In thousands of dollars)** | ** ** | **2007** | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|----------|------------|----------|------------|------------|------------|
| Mining equipment                             |       | $        | 401        |       | $          | 401      |       | $        | 401        |       | $          | 95 |   | $ | 1,298 |   |
| Mining equipment                             |       | 281      |       | 281        |       | 281      |       | 248      |       | 1,091      |       |
| Mining equipment                             |       | 128      |       | 128        |       | 111      |       | —   |       | 367        |       |
| Mining equipment                             |       | 174      |       | 174        |       | 53       |       | —   |       | 401        |       |
| Mining equipment                             |       | 173      |       | —     |       | —   |       | —   |       | 173        |       |
| Automotive  equipment                        |       | 8        |       | 8          |       | 6        |       | —   |       | 22         |       |
| Mining software                              |       | 13       |       | —     |       | —   |       | —   |       | 13         |       |
|                                         | ** ** | **$**    | **1,178**  | ** ** | **$**      | **992**  | ** ** | **$**    | **852**    | ** ** | **$**      | **343** | ** ** | **$** | **3,365** | ** ** |

 

**12.****       Reclamation and mineclosure**

Federal, state and locallaws and regulations concerning environmental protection affect the Company’soperations.  Under current regulations,the Company is required to meet performance standards to minimize environmentalimpact from operations and to perform site restoration and other closureactivities.  The Company’s provisions forfuture site closure and reclamation costs are based on known requirements.  It is not currently possible to estimate theimpact on operating results, if any, of future legislative or regulatorydevelopments. The Company’s estimate of the present value of the obligation toreclaim the Jerritt Canyon property is based upon existing reclamationstandards at December 31, 2006.

As part of theconsideration for the Jerritt Canyon mine acquisition, the Company assumed theliability for final reclamation and closure of the mine.  On June 30, 2003, the Company purchased fromAmerican Insurance Group (“AIG”) an environmental risk transfer program (the “ERTP”)(Note 9).  The ERTP includes severalcomponents: a Commutation Account (Note 7), reclamation cost cap insurance,pollution liability insurance, and surety bonds.

The following table setsout the activity for the Company’s reclamation and mine closure liabilities forthe years ending December 31, 2006 and 2005:
| ** **                              | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Opening balance                         | ** ** | **$**                           | **26,382** |                            | $          | 25,766 |   |
| Reduction in  closure estimate          | ** ** | **(4,000**                      | **)**      | —                          |       |
| Accretion                               | ** ** | **1,192**                       |       | 1,174                           |       |
| Reclamation  activities paid by Company | ** ** | **(968**                        | **)**      | (558                            | )          |
| Ending balance                          | ** ** | **$**                           | **22,606** |                            | $          | 26,382 |   |

 

Each year, the Companyreviews its asset retirement obligation estimates.  During 2006, the Company began constructionof an evaporation pond as mandated by the Nevada Division of EnvironmentProtection (“NDEP”) for closure purposes. The construction of the evaporation pond reduces the time framenecessary for removing excess moisture from the tailings facility by as much asfour years, which has correspondingly reduced the liability related to futureclosure activities by $4.0 million.

*Surety bonds*

AIG has posted a total of$39.4 million in surety bonds with the U.S. Forest Service and the NDEP, toprovide these agencies assurance that the Company will meet its reclamationobligations.

10

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**13.****       Common Shares**
| ** **                                              | ** ** | **Shares (000’s)** | ** ** | ** ** | ** **  |
|---------------------------------------------------------|------------|------------------------------|------------|------------|-------------|
| Balance,  December 31, 2004                             |       | 410,405                      |       | $          | 100,139     |   |
| Issued for cash                                         |       | 125,978                      |       | 30,716     |        |
| Issued for cash on exercise of warrants                 |       | 7,843                        |       | 1,591      |        |
| Issued for cash on exercise of incentive stock  options |       | 360                          |       | 60         |        |
| Common shares issued in payment of liabilities          |       | 5,435                        |       | 1,250      |        |
| Fair value of stock options exercised (Note 14)         |       | —                       |       | 22         |        |
| Equity issuance costs                                   |       | —                       |       | (1,974     | )           |
| Activity for the year                                   |       | 139,616                      |       | 31,665     |        |
| Balance,  December 31, 2005                             |       | 550,021                      |       | 131,804    |        |
| Issued for cash                                         |       | 28,512                       |       | 10,192     |        |
| Issued for cash on exercise of warrants                 |       | 4,150                        |       | 1,482      |        |
| Issued for cash on exercise of incentive stock  options |       | 1,270                        |       | 231        |        |
| Fair value of stock options exercised (Note 14)         |       | —                       |       | 129        |        |
| Common share equivalents expired                        |       | (247                         | )          | (49        | )           |
| Equity issuance costs                                   |       | —                       |       | (346       | )           |
| Activity for the year                                   |       | 33,685                       |       | 11,639     |        |
| **Balance, December 31, 2006**                          | ** ** | **583,706**                  | ** ** | **$**      | **143,443** | ** ** |

 

On March 23, 2005 theCompany issued 100,000,000 common shares pursuant to an equity financing forgross proceeds of $24.8 million.  Theequity financing consisted of 100,000,000 units, with each unit consisting ofone common share and one half of one common share purchase warrant at a priceof Cdn $0.30 per unit.  Each whole commonshare purchase warrant (50,000,000 warrants in total) can be exercised toacquire one additional common share at a price of Cdn $0.40 until March 23,2007.  The Company paid the underwritersa cash commission of 5% of the gross proceeds.

On May 16, 2005, theCompany issued 5,434,783 common shares to settle outstanding liabilities andaccrued interest of $1.3 million.

On June 22, 2005 theCompany issued 25,987,200 common shares pursuant to an equity financing for netproceeds of $5.9 million through a syndicate of underwriters (“Underwriters”).  The offering was priced at Cdn $0.28 pershare.  The Underwriters received a 4%commission on the gross proceeds of the offering.

In January 2006, 247,066common share equivalents representing the right to exchange the ownership ofpredecessor common shares to common shares of the Company expired withoutexecution of the exchange right.  Theright to exchange common share equivalents was the result of a corporateamalgamation between Queenstake Resources Ltd. and Santa Cruz Gold Inc. wherecommon shares of Santa Cruz Gold Inc. were to be exchanged for common shares ofQueenstake Resources Ltd. within a defined time period.  These common share equivalents have beenremoved from common shares issued and outstanding upon the expiry of theexchange right.

On April 13, 2006, theCompany issued 28,512,195 common shares for Cdn $0.41 per share to NewmontCanada Limited (“Newmont”) pursuant to an equity financing by way of privateplacement for gross proceeds of $10.2 million. The private placement consisted of 28,512,195 common shares and warrantsexercisable to acquire 28,512,195 additional common shares of the Company at aprice of Cdn $0.55 per share until April 12, 2010.   Newmont has the right to participate infuture equity offerings by the Company to preserve its fully dilutedshareholding percentage and has certain additional rights to participate indebt financings until April 13, 2008. Proceeds are being used to fund exploration and for other corporateuses.

 

11

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**14.****       Contributed surplus**
| ** **                                                                      | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Balance, beginning of  period                                                   | ** ** | **$**                           | **1,973**  |                            | $          | 1,053 |   |
| Fair value of  stock-based compensation                                         | ** ** | **1,176**                       |       | 579                             |       |
| Fair value of common  share equivalents expired                                 | ** ** | **49**                          |       | —                          |       |
| Fair value of stock  options exercised - transferred to share capital (Note 13) | ** ** | **(129**                        | **)**      | (22                             | )          |
| Fair value of warrants  expired                                                 | ** ** | **—**                      |       | 363                             |       |
| Balance, end of period                                                          | ** ** | **$**                           | **3,069**  | ** **                      | $          | 1,973 |   |

 

**15.****       Stock options**

The followingtable sets out the activity in Company’s incentive stock option plans for the yearsending December 31, 2006, 2005 and 2004:

 

|                                    | ** ** | **Number**       | ** ** | **Weighted average  price per option** | ** ** |
|------------------------------------|------------|------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | **(000’s)** | ** ** | **Cdn $**                                        | ** ** |
| Outstanding, December  31, 2003    |       | 6,775            |       | $                                                     | 0.43       |   |
| Issued                             |       | 5,050            |       | 0.57                                                  |       |
| Exercised                          |       | (525             | )          | 0.26                                                  |       |
| Cancelled or expired               |       | (155             | )          | 2.65                                                  |       |
| Outstanding, December  31, 2004    |       | 11,145           |       | 0.47                                                  |       |
| Issued                             |       | 7,050            |       | 0.22                                                  |       |
| Exercised                          |       | (360             | )          | 0.20                                                  |       |
| Cancelled or expired               |       | (4,665           | )          | 0.50                                                  |       |
| Outstanding, December  31, 2005    |       | 13,170           |       | 0.33                                                  |       |
| Issued                             |       | 7,045            |       | 0.42                                                  |       |
| Exercised                          |       | (1,270           | )          | 0.21                                                  |       |
| Cancelled or expired               |       | (2,058           | )          | 0.34                                                  |       |
| **Outstanding, December 31, 2006** | ** ** | **16,887**       | ** ** | **$**                                                 | **0.37**   | ** ** |

 

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Optionsoutstanding at December 31, 2006 are exercisable in the following amounts andexercise prices:
| **Options outstanding**                   | ** ** | **Options exercisable**      | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| **Exercise price   per option** | ** ** | **Number of   options** | ** ** | **Weighted average  price per option** | ** ** | **Weighted average  remaining life** | ** ** | **Number of  options** | ** ** | **Weighted average  price per option** | ** ** |
| **Cdn$**                                       | ** ** | **(000’s)**                  | ** ** | **Cdn$** | ** ** | **(Years)** | ** ** | **(000’s)** | ** ** | **Cdn$** | ** ** |
| 0.32                                           |       | 1,600                             |       | $ | 0.32 |   | 0.4 |   | 1,600 |   | $ | 0.32 |   |
| 0.22                                           |       | 50                                |       | 0.22 |   | 0.8 |   | 50 |   | 0.22 |   |
| 0.39                                           |       | 1,850                             |       | 0.39 |   | 1.6 |   | 1,850 |   | 0.39 |   |
| 0.57                                           |       | 1,145                             |       | 0.57 |   | 2.5 |   | 1,145 |   | 0.57 |   |
| 0.57                                           |       | 1,115                             |       | 0.57 |   | 2.8 |   | 1,115 |   | 0.57 |   |
| 0.23                                           |       | 500                               |       | 0.23 |   | 3.3 |   | 500 |   | 0.23 |   |
| 0.22                                           |       | 3,525                             |       | 0.22 |   | 3.4 |   | 3,525 |   | 0.22 |   |
| 0.22                                           |       | 500                               |       | 0.22 |   | 3.4 |   | 500 |   | 0.22 |   |
| 0.22                                           |       | 250                               |       | 0.22 |   | 3.6 |   | 250 |   | 0.22 |   |
| 0.22                                           |       | 200                               |       | 0.22 |   | 3.6 |   | 200 |   | 0.22 |   |
| 0.22                                           |       | 7                                 |       | 0.22 |   | 3.9 |   | 7 |   | 0.22 |   |
| 0.42                                           |       | 5,945                             |       | 0.42 |   | 4.3 |   | 2,973 |   | 0.42 |   |
| 0.44                                           |       | 50                                |       | 0.44 |   | 4.3 |   | 25 |   | 0.44 |   |
| 0.37                                           |       | 150                               |       | 0.37 |   | 4.3 |   | 75 |   | 0.37 |   |
| ** **                                     | ** ** | **16,887**                        | ** ** | **$** | **0.37** | ** ** | ** ** | ** ** | **13,815** | ** ** | **$** | **0.36** | ** ** |

 

At December 31,2006 the Company had only one stock option plan, the 1995 Plan.  The 1995 Plan was established on May 17,1995, amended most recently on May 12, 2004 and is the Company’s only activeincentive stock option plan.  A maximumof 30,000,000 five-year options may be granted under the 1995 Plan at anexercise price based on market value on the day before granting.  Shareholder approval is required to increasethe number of options available for grant under the 1995 Plan.  Full vesting of stock options granted underthe 1995 plan is completed after one year where 50% of the granted options vestimmediately upon the date of grant and the remaining 50% vest one year from thedate of grant.

On May 2, 2005,the Company granted 575,000 stock options to a non-director officer and certainemployees of the Company with a strike price of Cdn $0.23 expiring on May 2,2010.

On May 11, 2005,the Company granted 5,460,000 stock options to directors, a non-directorofficer and certain employees of the Company with a strike price of Cdn $0.22expiring on May 11, 2010.

On May 31, 2005,the Company granted 500,000 stock options to newly appointed directors of theCompany with a strike price of Cdn $0.22 expiring on May 31, 2010.

On August 15,2005, the Company granted 300,000 stock options to a non-director officer and certainemployees of the Company with a strike price of Cdn $0.22 expiring on August15, 2010.

On August 23,2005, the Company granted 200,000 stock options to certain employees of theCompany with a strike price of Cdn $0.22 expiring on August 23, 2010.

On November 22,2005, the Company granted 15,000 stock options to certain employees of theCompany with a strike price of Cdn $0.22 expiring on November 22, 2010.

On April 6, 2006,6,845,000 stock options were granted to officers, directors and employees witha strike price of Cdn $0.42 and an expiry date of April 6, 2011 with 50% of theoptions vesting and exercisable immediately and 50% vesting one year from thegrant date.

On April 17, 2006,50,000 stock options were granted to an employee with a strike price of Cdn$0.44 and an expiry date of April 17, 2011 with 50% of the options vesting andexercisable immediately and 50% vesting one year from the grant date.

On August 17, 2006,150,000 stock options were granted to employees with a strike price of Cdn $0.37and an expiry date of August 17, 2011 with 50% of the options vesting andexercisable immediately and 50% vesting one year from the grant date.

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The fair value of stock options granted to directors,officers and employees were estimated at the grant date based on theBlack-Scholes option pricing model.  Fromthe specific assumptions applied at each respective grant date, the weightedaverage assumptions for stock options granted are as follows:

 

|                                | ** ** | **Weighted Average Assumptions** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected volatility            |       | 72.0                                       | %          | 74.7 | % | 50.0 | % |
| Risk-free interest rate        |       | 4.83                                       | %          | 3.79 | % | 3.47 | % |
| Expected lives                 |       | 3 years                                    |       | 3 years |   | 2 years |   |
| Dividend yield                 |       | 0                                          | %          | 0 | % | 0 | % |
|                           |       |                                       |       |   |   |   |   |
| Weighted average fair  value   |       |                                       |       |   |   |   |   |
|  per stock option granted |       | $                                          | 0.21       |   | $ | 0.09 |   | $ | 0.14 |   |
|                                |            |                                            |            |  |  |  |  |  |  |  |

 

Option pricing models require the input of highlysubjective assumptions including the expected price volatility.  Changes in the subjective input assumptionscan materially affect the fair value estimate, and therefore, the existingmodels do not necessarily provide a reliable measure of the fair value of theCompany’s stock options.

The Company recognized $1,176,000, $579,000 and$537,000 in stock-based compensation expense for the years ended 2006, 2005 and2004, respectively.

**16.****       Warrants**
| ** **         | ** ** | **December 31,   2005** | ** ** | **Issued in  2006** | ** ** | **Exercised in  2006** | ** ** | **Expired in  2006** | ** ** | **December 31,  2006** | ** ** | **Exercise  price** | ** ** | **Expiry** | ** ** |
|--------------------|------------|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------|------------|------------|------------|
| ** **         | ** ** | **(000’s)**                  | ** ** | **(000’s)**         | ** ** | **(000’s)**            | ** ** | **(000’s)**          | ** ** | **(000’s)**            | ** ** | **Cdn $**      | ** ** | ** ** | ** ** |
|               |       | 17,127                            |       | —                   |       | —                      |       | (17,127                   | )          | **—**                  |       | 0.65                |       | 02/10/06   |       |
|               |       | 50,000                            |       | —                   |       | (4,150                      | )          | —                    | ** ** | **45,850**                  |       | 0.40                |       | 03/23/07   |       |
|               |       | 100                               |       | —                   |       | —                      |       | —                    | ** ** | **100**                     |       | 0.40                |       | 03/23/07   |       |
|               |       | —                            |       | 28,512                   |       | —                      |       | —                    | ** ** | **28,512**                  |       | 0.55                |       | 04/12/10   |       |
| **Total warrants** | ** ** | **67,227**                        | ** ** | **28,512**               | ** ** | **(4,150**                  | **)**      | **(17,127**               | **)**      | **74,462**                  | ** ** | ** **          | ** ** | ** ** | ** ** |
|               |       |                              |       |                     |       |                        |       |                      |       |                        |       |                |       |       |       |
| **Fair Value**     | ** ** | **$**                             | **14**     | ** **               | **$**      | **—**                  | ** ** | **$**                     | **—** | ** **                  | **$**      | **—**          | ** ** | **$**      | **14**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|                    |            |                                   |            |                          |            |                             |            |                           |            |                             |            |                     |            |            |            |  |  |  |  |  |

 
| ** **         | ** ** | **December 31,   2004** | ** ** | **Issued in  2005** | ** ** | **Exercised in  2005** | ** ** | **Expired in  2005** | ** ** | **December 31,  2005** | ** ** | **Exercise  price** | ** ** | **Expiry** | ** ** |
|--------------------|------------|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------|------------|------------|------------|
| ** **         | ** ** | **(000’s)**                  | ** ** | **(000’s)**         | ** ** | **(000’s)**            | ** ** | **(000’s)**          | ** ** | **(000’s)**            | ** ** | **Cdn $**      | ** ** | ** ** | ** ** |
|               |       | 10,534                            |       | —                   |       | (7,843                      | )          | (2,691                    | )          | **—**                  |       | 0.25                |       | 06/25/05   |       |
|               |       | 2,000                             |       | —                   |       | —                      |       | (2,000                    | )          | **—**                  |       | 1.00                |       | 12/15/05   |       |
|               |       | 17,127                            |       | —                   |       | —                      |       | —                    | ** ** | **17,127**                  |       | 0.65                |       | 02/10/06   |       |
|               |       | 1,713                             |       | —                   |       | —                      |       | (1,713                    | )          | **—**                  |       | 0.50                |       | 08/10/05   |       |
|               |       | —                            |       | 50,000                   |       | —                      |       | —                    | ** ** | **50,000**                  |       | 0.40                |       | 03/23/07   |       |
|               |       | —                            |       | 100                      |       | —                      |       | —                    | ** ** | **100**                     |       | 0.40                |       | 03/23/07   |       |
| **Total warrants** | ** ** | **31,374**                        | ** ** | **50,100**               | ** ** | **(7,843**                  | **)**      | **(6,404**                | **)**      | **67,227**                  | ** ** | ** **          | ** ** | ** ** | ** ** |
|               |       |                              |       |                     |       |                        |       |                      |       |                        |       |                |       |       |       |
| **Fair Value**     | ** ** | **$**                             | **363**    | ** **               | **$**      | **14**                      | ** ** | **$**                     | **—** | ** **                  | **$**      | **(363**            | **)**      | **$**      | **14**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|                    |            |                                   |            |                          |            |                             |            |                           |            |                             |            |                     |            |            |            |  |  |  |  |  |

 

On March 23, 2005,100,000 warrants were issued under an agreement for financial advisory andinvestment banking services.  Thewarrants issued have the same terms as warrants issued in the March 23, 2005equity financing (Note 13).  The warrantswere issued at a strike price of Cdn $0.40 and the estimated fair value of thewarrants was calculated using the Black-Scholes option pricing model.  The estimate of the fair value of thewarrants of $14 thousand was based upon a volatility of 75.0%, a risk freeinterest rate of 3.9% and an expected life of 2 years.  On March 23, 2007, these warrants, along withthe remaining 45.9 million warrants outstanding from the equity financing,expired unexercised (Note 25).

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On February 10,2006, 17.1 million warrants with an exercise price of Cdn $0.65 expired.

**17.****       Interest expense**
| ** **                                                                 | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Amortization of  deferred financing costs, related to term loan            | ** ** | **$**      | **—** |     | $          | —   |       | $ | 3,345 |   |
| Amortization of  deferred financing costs, related to put options financed | ** ** | **—** |       | —   |       | 257      |       |
| Accretion of production  payment owing to Jerritt Canyon sellers           | ** ** | **—** |       | —   |       | 788      |       |
| Oxygen plant note                                                          | ** ** | **—** |       | —   |       | 94       |       |
| Non-cash  interest expense                                                 | ** ** | **—** |       | —   |       | 4,484    |       |
| Term loan                                                                  | ** ** | **—** |       | —   |       | 322      |       |
| Capital leases                                                             | ** ** | **241**    |       | 413      |       | 80       |       |
| Other                                                                      | ** ** | **127**    |       | —   |       | 31       |       |
|                                                                       | ** ** | **$**      | **368**    |     | $          | 413      |       | $ | 4,917 |   |

 

**18.****       Income taxes**

The Company’sprovision for income taxes differs from the amounts computed by applying thecombined Canadian federal and provincial income tax rates to the net loss as aresult of the following:

|                                                    | ** ** | **2006**  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------|------------|-----------|------------|------------|------------|------------|------------|
| Provision for recovery  of taxes at stautory rates | ** ** | **$**     | **(7,112** | **)**      | $          | (6,885     | )          | $ | (7,877 | ) |
| Tax benefit not  recognized on current year losses | ** ** | **3,454** |       | 3,624      |       | 1,491      |       |
| Differences in foreign  tax rates                  | ** ** | **(52**   | **)**      | 154        |       | (57        | )          |
| Non-deductible items  and other                    | ** ** | **3,710** |       | 3,107      |       | 6,443      |       |
|                                               | ** ** | **$**     | **—** | ** ** | **$**      | **—** | ** ** | **$** | **—** | ** ** |

 

Future incometaxes reflect the net effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. The significant components of the Company’sfuture tax assets as at December 31, 2006 are as follows:

 

|                                      | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| Non-capital loss carry  forwards     | ** ** | **$**       | **14,279** |       | $          | 10,552     |       | $ | 7,322 |   |
| Net capital loss carry  forwards     | ** ** | **6,961**   |       | 7,851      |       | 6,088      |       |
| Unutilized exploration  expenditures | ** ** | **12,427**  |       | 7,620      |       | 5,990      |       |
| Capital assets                       | ** ** | **2,213**   |       | 1,044      |       | (330       | )          |
| Other                                | ** ** | **2,137**   | ** ** | 1,161      | ** ** | 832        | ** ** |
| Total net future  income tax assets  | ** ** | **38,017**  |       | 28,228     |       | 19,902     |       |
| Less: Valuation  allowance           | ** ** | **(38,017** | **)**      | (28,228    | )          | (19,902    | )          |
| Net future income tax  allowance     | ** ** | **$**       | **—** | ** ** | **$**      | **—** | ** ** | **$** | **—** | ** ** |

 

The Company hasincome tax loss carry forwards of approximately $6.9 million in Canada, whichmay be used to reduce future income taxes otherwise payable and which expire inthe years 2007 to 2026.

The Company hasincome tax loss carry forwards of approximately $34.5 million in the UnitedStates, which may be used to reduce future income taxes otherwise payable andwhich expire in the years 2007 to 2026. A portion of the losses in the U.S. are subject to limitation.

The tax benefitof the above noted tax assets have been offset by recognition of a valuationallowance in these financial statements.

 

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**19.****       Supplemental cash flowdisclosure**
| ** **                                                                                         | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Non-cash activities**                                                                            | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Finance of prepaid  insurance                                                                      | ** ** | **$**                                                         | **1,037**  |   | $ | 783 |   | $ | — |   |
| Changes in property,  plant and equipment expenditures accrued                                     | ** ** | **(2,620**                                                    | **)**      | 3,309 |   | 3,265 |   |
| Changes in mineral  properties due to adjustment in retirement obligation estimate                 | ** ** | **(4,000**                                                    | **)**      | — |   | — |   |
| Capital lease  obligations entered into for new equipment                                          | ** ** | **369**                                                       |       | — |   | — |   |
| Change in inventory  valuation derived from depreciation, depletion and amortization allocation    |       | **935**                                                       |       | — |   | — |   |
| Marketable securities  received in sale of assets disposed of by sale                              | ** ** | **—**                                                    |       | — |   | 4,483 |   |
| Marketable securities  received in lieu of note payment                                            | ** ** | **—**                                                    |       | — |   | 500 |   |
| Common shares issued in  payment of debt                                                           | ** ** | **—**                                                    |       | 1,250 |   | — |   |
| Contributed surplus  arising on fair value of convertible securities expired                       | ** ** | **—**                                                    |       | 363 |   | — |   |
| Fair value of lender’s  and broker’s warrants exercised and transferred to share capital | ** ** | **—**                                                    |       | — |   | 257 |   |
| Fair value of stock  option exercised and transferred from contributed surplus to share capital    |       | **(129**                                                      | **)**      | 22 |   | 35 |   |
| Fair value of common share equivalents expired and transferred to  contributed surplus             |       | **$ **                                                   | **49**     |   | $  | — |   | $  | — |   |

 

**20.****       Financial instruments**

*Fairvalue*

The fair value ofthe Company’s current receivables, inventories, prepaid expenses, tradepayables and other current liabilities, excluding marketable securities,approximates their carrying values, due to their short-term maturities.

*Foreigncurrency risk management*

All revenues andsubstantially all of the Company’s expenses are incurred in U.S. dollars.  The Company’s equity capital is raised inCanadian dollars.  Potential currencyfluctuations could affect the amount of U.S. dollars that can be purchased withCanadian dollars.  The Company believesthat the risk of material loss as a result of an adverse prolonged change inCanadian / U.S. dollar exchange rates is managed by its policy for theconversion of Canadian funds into U.S. funds as necessary with consultation fromforeign currency exchange specialists, and currently does not use foreigncurrency exchange contracts to fix exchange rates.

*Commodityrisk management*

The profitabilityof the Company is directly related to the market price of gold.  Accordingly, the Company may purchasenon-hedge derivative financial instruments, such as gold put option contracts,to protect against the risk of falling gold prices.  The Company pays a premium to acquire thecontracts which is settled in the period the option is exercised or allowed toexpire.  If the gold price is lower thanthe strike price of the respective purchased put option on the expiry date,gold is sold at the strike price of the put option.  If the market gold price is higher than thestrike price of the put option, the option expires without exercise.

The Company doesnot use gold forward sales contracts to fix future gold prices realized.

The Company purchasedgold put option contracts starting in late 2004 and 2005 with expiry datesextending into 2007.  These put optioncontracts are considered non-hedge derivative financial instruments and thus,are marked to fair market value each reporting period and changes in the fairmarket value are recorded in current earnings or losses.

In 2005, theCompany purchased 147,000 gold put options as non-hedge derivatives with aseries of monthly expiries from January 2006 through March 2007,inclusive.  The put options each have astrike price ranging from $400 to $425 per ounce.  At the end of 2006, the Company had 12,000put options remaining with an average strike price of $425 per ounce.  Given the 

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current goldprice, the remaining value of these options was written off during theyear.  These options expired during thefirst quarter 2007.

**21.****       Commitments and contingencies**

*Commitments*

The Company hascertain contracted commitments and obligations under capital leases, operatingleases and non-hedge derivative financial instrument contracts. Future paymentsfor these contracted commitments and obligations with initial or remainingterms in excess of one year at December 31, 2006 are as follows:

 
| ** **                                  | ** ** | **Payments due by period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| **(In millions of dollars)** | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **More than  5 years** | ** ** |
| Capital lease  obligations                  | ** ** | **$**                                     | **3.3**    |   | $ | 1.2 |   | $ | 1.8 |   | $ | 0.3 |   | $ | — |   |
| Operating leases                            | ** ** | **0.4**                                   |       | 0.2 |   | 0.2 |   | — |   | — |   |
| Non-hedge  derivative financial instruments | ** ** | **0.1**                                   |       | 0.1 |   | — |   | — |   | — |   |
| Total Material  Contractual Obligations     | ** ** | **$**                                     | **3.8**    |   | $ | 1.5 |   | $ | 2.0 |   | $ | 0.3 |   | $ | — |   |

 

The Company hascertain operating leases for corporate office space and equipment with paymentsof $0.4 million due over the next three years. These leases range from 1 to 2 years with payment obligations of $0.2million in 2007 and $0.2 million in 2008.

On April 13, 2006, the Company entered into anagreement with Newmont to purchase and process ore at the Company’s JerrittCanyon facility.  The Company iscommitted to purchase 500,000 tons of Newmont ore annually for two years fromthe date of the agreement.  The Companypurchases ore from Newmont at a price determined based on the calculatedrecoverable gold content of the ore and at the gold market price per ounce ineffect at the time the ore is delivered to the Jerritt Canyon property.  The Company is at risk should the price ofgold drop between the time that the ore is purchased and the time that thepurchased ounces are produced and sold. As of December 31, 2006, the Company had received approximately 440,000tons of ore pursuant to the agreement and had processed approximately 181,000tons.

At the end of the thirdquarter, the Company instructed its financial advisors Blackmont Capital Inc.of Toronto to assist the Company in evaluating and pursuing strategicalternatives regarding the long-term value of Queenstake’s assets.  As a result of this process, on March 16,2007, the Company and YGC Resources Ltd. (“YGC”) signed a definitivecombination agreement to merge the companies to form Yukon-Nevada GoldCorporation (Note 25).  Upon completionof the merger, the Company is obligated to pay Blackmont a success fee equal to1.25 percent of the transaction value.

*Legal*

The Company may beinvolved in various claims, legal proceedings and complaints arising in theordinary course of business.  The Companydoes not believe that adverse decisions in any pending or threatenedproceedings related to any matter, or any amount which the Company may berequired to pay by reason thereof, will have a material effect on the futureconditions or future results of operations for the Company.

See Note 25(b) fordiscussion of the lawsuit filed by the Company against AIG in January 2007.

*Environmental*

The Companyengages in mining, development and exploration activities, which are subject tovarious federal and state laws and regulations governing the protection of theenvironment.  These laws and regulationsare continually changing and may become more restrictive.  The Company conducts its operations in amanner to protect public health and the environment and believes its operationsare materially in compliance with all applicable laws and regulations.

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**22.****       Retirement plans**

Upon completion ofthe Jerritt Canyon acquisition, the Company assumed sponsorship, from the priorowners of the Jerritt Canyon mine, of a qualified tax-deferred savings plan inaccordance with the provisions of Section 401(k) of the U.S. Internal RevenueCode, which is available to permanent U.S. employees.  The Company makes defined contributions of upto 7.5% of eligible employees’ salaries and is not responsible for theperformance of investment vehicles selected by employees.  The Company contributed $1,435,232 for theyear ended December 31, 2006 and contributed $1,347,879 during year endedDecember 31, 2005.

**23.****       Segment information**

The Company operates onlyin the gold sector within the United States. Currently, revenues are earned exclusively at the Company’s JerrittCanyon mine in Nevada.

**24.****       Differences betweenCanadian and United States generally accepted accounting principles**

These consolidatedfinancial statements have been prepared in accordance with Canadian GAAP.  For the purposes of these financialstatements these principles differ in certain material respects from generallyaccepted accounting principles in the United States (“U.S. GAAP”).

The adjustments tocomply with U.S. GAAP, with respect to the consolidated balance sheets for theyears ended December 31, 2006 and 2005 would be as follows:

** **

**CONSOLIDATEDBALANCE SHEETS**
| **(In Thousands of Dollars)**         | ** ** | **December 31, 2006** | ** **  | **Restated  December 31, 2005** | ** ** |
|------------------------------------------------------|------------|---------------------------------|-------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Canadian   GAAP**        | ** **  | **Differences**                           | ** ** | **U.S. GAAP** | ** ** | **Canadian   GAAP** | ** ** | **Differences** | ** ** | **U.S. GAAP** | ** ** |
| **ASSETS**                                           | ** ** | ** **                      | ** **  | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total current  assets                                | ** ** | **$**                           | **43,411**  | ** **                                | **$**      | **—** | ** ** | **$** | **43,411** |   | $ | 18,719 |   | $ | — |   | $ | 18,719 |   |
| Other assets                                         | ** ** | **79,780**                      | ** **  | **—**                                | ** ** | **79,780** |   | 74,620 |   | — |   | 74,620 |   |
| **Total  assets**                                    | ** ** | **123,191**                     | ** **  | **—**                                | ** ** | **123,191** |   | 93,339 |   | — |   | 93,339 |   |
|                                                 |       |                            |        |                                      |       |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**       | ** ** | ** **                      | ** **  | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Liabilities**                                      | ** ** | ** **                      | ** **  | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total current  liabilities                           | ** ** | **55,767**                      | ** **  | **—**                                | ** ** | **55,767** |   | 13,909 |   | — |   | 13,909 |   |
| Other long-term  liabilities                         | ** ** | **24,603**                      | ** **  | **—**                                | ** ** | **24,603** |   | 28,499 |   | — |   | 28,499 |   |
| **Total  liabilities**                               | ** ** | **80,370**                      | ** **  | **—**                                | ** ** | **80,370** |   | 42,408 |   | — |   | 42,408 |   |
|                                                 |       |                            |        |                                      |       |   |   |   |   |   |   |   |   |
| **Shareholders’  equity**                       | ** ** | ** **                      | ** **  | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common shares,  contributed surplus,                 |       |                            |        |                                      |       |   |   |   |   |   |   |   |   |
| and convertible  securities                          | ** ** | **146,525**                     | ** **  | **—**                                | ** ** | **146,525** |   | 133,791 |   | — |   | 133,791 |   |
| *Deficit (b)*                                        | ** ** | **(103,704**                    | **)**       | **—**                                | ** ** | **(103,704** | **)** | (82,860 | ) | — |   | (82,860 | ) |
| **Total  shareholders’ equity**                 | ** ** | **42,821**                      | ** **  | **—**                                | ** ** | **42,821** |   | 50,931 |   | — |   | 50,931 |   |
| **Total liabilities and  shareholders’ equity** | ** ** | **$**                           | **123,191** | ** **                                | **$**      | **—** | ** ** | **$** | **123,191** |   | $ | 93,339 |   | $ | — |   | $ | 93,339 |   |

 

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The adjustments tocomply with U.S. GAAP, with respect to the consolidated statements of loss forthe years ended December 31, 2006, 2005 and 2004 would be as follows:

**CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                                                 | ** ** | **For the Years Ended December 31** | ** **  |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                                                 | ** ** | ** **                                                   | ** **  | **Restated** | ** ** | **Restated** | ** ** |
| **(In Thousands of Dollars, except per share amounts)** | ** ** | **2006**                                                     | ** **  | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                                         |        |   |   |   |   |
| Loss from operations  Canadian GAAP                                                        | ** ** | **$**                                                        | **(20,844** | **)** | $ | (20,483 | ) | $ | (18,018 | ) |
| Interest expense*(a)*                                                                      | ** ** | **(368**                                                     | **)**       | (413 | ) | (4,917 | ) |
| Other income,  net*(a)*                                                                    | ** ** | **802**                                                      |        | 1,012 |   | 892 |   |
| Foreign exchange  gain (loss)*(a)*                                                         | ** ** | **109**                                                      |        | 213 |   | (83 |   |
| Realized  non-hedge derivative loss*(b)*                                                   | ** ** | **—**                                                   |        | 878 |   | 2,994 |   |
| Unrealized  non-hedge derivative loss*(b)*                                                 | ** ** | **—**                                                   |        | — |   | (878 | ) |
| **Loss  from operations and net loss under U.S. GAAP**                                     | ** ** | **$**                                                        | **(20,301** | **)** | **$** | **(18,793** | **)** | **$** | **(20,010** | **)** |
|                                                                                       |       |                                                         |        |   |   |   |   |
| Net loss per  share - basic and diluted                                                    | ** ** | **($0.04**                                                   | **)**       | ($0.04 | ) | ($0.05 | ) |
|                                                                                       |       |                                                         |        |   |   |   |   |
| Weighted average number  of shares outstanding (000’s) - basic                        |       | **573,152**                                                  | ** **  | 509,274 |   | 377,609 |   |

 

The adjustments tocomply with U.S. GAAP, with respect to the consolidated statements of cashflows for the years ended December 31, 2006, 2005 and 2004 would have nomaterial effect on net cash provided by / (used in) operations, cash used ininvesting activities and cash provided by / (used in) financing activities.

The significantdifferences between generally accepted accounting principles (“GAAP”) in Canadaand in the United States, as they relate to these financial statements are asfollows:

*(a)**      *Certain income andexpense items may be disclosed after income (loss) from operations for CanadianGAAP.  These items are included in income(loss) from operations for U.S. GAAP.

*(b)**      *The Company purchasedgold put options as required by the Jerritt Canyon term loan to establish aminimum price, which the Company would receive for a significant portion of itsgold production during the amortization period of the term loan.  These gold put options expired in June2005.  These contracts do not qualify asdesignated hedges under FAS 133 and FAS 137 and accordingly for U.S. GAAP,changes in the fair value of the outstanding puts are recognized as a componentof net loss.  Canadian GAAP would nothave required a measurement of fair value as these contracts were purchasedpursuant to a borrowing arrangement.

*(c)**       *In a recent continuousdisclosure review, the SEC determined that for US GAAP purposes it is generallynot possible to treat as equity, warrants whose exercise price is differentfrom the functional currency of the entity. The SEC’s view is that for US GAAP purposes such warrants are derivativeinstruments and should be recorded as liabilities and carried at fair value,with the fair value of warrants exercised during the year being transferred toshare capital and changes in fair value from year to year recorded in earnings.

This interpretation does not apply under CanadianGAAP.  A recent meeting of the FASBconsidered the SEC’s view and the FASB have recommended that companies beallowed to implement this accounting in a future year, as an accountingchange.  The Company intends to adoptthis accounting in the period the FASB recommends and to treat the adjustmentsas an accounting change.

*(d)**       Recent U.S. GAAP  accounting pronouncements*

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*StockBased Compensation*

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment,” which revised SFAS No.123, “Accounting for Stock-Based Compensation.” SFAS No. 123R will supersedeAPB Opinion 25, “Accounting for Stock Issued to Employees” and amends SFAS No.95, “Statement of Cash Flows.”  Thesignificant differences in accounting from Canadian GAAP under SFAS No. 123Rinclude the requirement to estimate forfeitures of unvested instruments such asstock options at the grant date to determine the total compensation to berecognized.  Under Canadian GAAP, theCompany recognizes the fair value of an employee’s services award over thevesting period and accounts for forfeitures only as they occur.  SFAS No. 123R was adopted by the Company in2006.

In March 2005, theSEC staff issued Staff Accounting Bulletin (“SAB”) No. 107, “Share-BasedPayment,” which provides guidance on the interaction between SFAS No. 123R andcertain SEC rules and regulations, as well as on the valuation of share-basedpayments.  SAB No. 107 providesinterpretive guidance related to valuation methods (including assumptions suchas expected volatility and expected term), first time adoption of SFAS No. 123Rin an interim period, the classification of compensation expense anddisclosures subsequent to adoption of SFAS No. 123R.

*Asset Retirement Obligations*

In March 2005, theFASB issued Interpretation 47 (“FIN 47”), “Accounting for Conditional AssetRetirement Obligations”—an interpretation of FASB No. 143.  FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS No. 143 refers to a legalobligation to perform an asset retirement activity in which the timing and/ormethod of settlement are conditional on a future event that may or may not bewithin the control of the entity.  Theobligation to perform the asset retirement activity is unconditional eventhough uncertainty exists about the timing and/or method of settlement.  FIN 47 requires a liability to be recognizedfor the fair value of a conditional asset retirement obligation if the fairvalue of the liability can be reasonably estimated.  FIN 47 was effective for fiscal years endingafter December 15, 2005. The adoption of FIN 47 did not have a material impacton the Company’s consolidated financial position, results of operations or cashflows.

*Accounting Changes and Error Corrections*

In May 2005 theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”  SFAS No. 154 established new standards onaccounting for changes in accounting principles.  SFAS No. 154 requires all such changes to beaccounted for by retrospective application to the financial statements of priorperiods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error correctionsmade in fiscal years beginning after December 15, 2005.  Adoption of SFAS No. 154 did not have amaterial impact on our consolidated financial position, results of operationsor cash flows.

*Other-Than-TemporaryImpairment*

In June 2005, theFASB issued FASB Staff Position Paper (“FSP”) 115-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”superseding EITF 03-1.  FSP 115-1 willreplace the accounting guidance on the determination of whether an investmentis other-than-temporarily impaired as set forth in EITF 03-1 with references toexisting other-than-temporary impairment guidance.  FSP 115-1 is effective for reporting periodsbeginning after December 15, 2005. Adoption of FSP 115-1 did not have a material impact on our consolidatedfinancial position, results of operations or cash flows.

**25.****       Subsequent Events**

*                        (a) *On January 15, 2007, the Company closed asecured convertible bridge loan financing facility (the “Facility”) of $8million with Auramet Trading LLC.  TheFacility has an interest rate of 12.9% per annum and is repayable no later thanMay 31, 2007 (extended from April 30, 2007) in cash, or at the option ofAuramet, part or all of the Facility may be repaid in common shares ofQueenstake at a conversion price of $0.22 per share.  The costs of the Facility include a 3.5% 

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underwriting fee inrespect of which Auramet elected to receive partial payment with 1,464,579Queenstake common shares.  In addition, Aurametreceived warrants exercisable to acquire 10 million Queenstake common sharesfor a term of one year at an exercise price of $0.22 per share.

*                        (b) *The Company filed suit on January 19, 2007against American International Specialty Lines Insurance Company, a subsidiaryof AIG, (the “Insurance Company”) in United States District Court for theDistrict of Colorado.  The suit seeks $8.4 million for construction of theevaporation pond at the Company’s Jerritt Canyon operations in Nevada plus anunspecified amount for additional damages as a result of the Insurance Company’sfailure to reimburse Queenstake under its reclamation costs insurance policy.

*                        (c)  *Effective March 16, 2007, the Company andYGC Resources Ltd. (“YGC”) completed all due diligence requirements and signeda definitive combination agreement to merge the companies to form Yukon-NevadaGold Limited (“Newco”).  The businesscombination is structured as a plan of arrangement.  Under the agreed upon terms, shareholders of YGCwill retain one common share of Newco for each share of YGC held, andshareholders of Queenstake will receive one common share of Newco for each tenshares of Queenstake held.  The businesscombination is subject to shareholder, court and regulatory approvals and otherconditions precedent, including a minimum Cdn$ 80.0 million net proceedsfinancing to be completed by YGC for the benefit of Newco.   The respective shareholder meetings of theCompany and YGC are scheduled to be held on May 18, 2007.

*                        (d) *On March 23, 2007 45,950,000 warrants,issued as part of an equity financing completed on March 23, 2005, expiredunexercised.

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Form 52-109F1 -Certification of Annual Filings

I, Dorian Nicol,Queenstake Resources Ltd., Chief Executive Officer, certify that:

1.                                       Ihave reviewed the annual filings (as this term is defined in MultilateralInstrument 52-109 *Certification ofDisclosure in Issuers’ Annual and Interim Filings*) of Queenstake ResourcesLtd. (the issuer) for the period ending December 31, 2006;

2.                                       Basedon my knowledge, the annual filings do not contain any untrue statement of amaterial fact or omit to state a material fact required to be stated or that isnecessary to make a statement not misleading in light of the circumstancesunder which it was made, with respect to the period covered by the annualfilings;

3.                                       Basedon my knowledge, the annual financial statements together with the otherfinancial information included in the annual filings fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the issuer, as of the date and for the periods presented in the annualfilings;

4.                                       Theissuer’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures for the issuer, and we have:

a.                                       designedsuch disclosure controls and procedures, or caused them to be designed underour supervision, to provide reasonable assurance that material informationrelating to the issuer, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthe annual filings are being prepared;

b.                                      evaluatedthe effectiveness of the issuer’s disclosure controls and procedures as of theend of the period covered by the annual filings and have caused the issuer todisclose in the annual MD&A our conclusions about the effectiveness of thedisclosure controls and procedures as of the end of the period covered by theannual filings based on such evaluation.
| Date: March 29, 2007 |   |   |
|---------------------------|--------|--------|
|                      |   |   |
|                      |   |   |
| /s/ Dorian Nicol          |   |   |
| Chief Executive  Officer  |   |   |

 

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Form 52-109F1 -Certification of Annual Filings

I, Eric Edwards,Queenstake Resources Ltd., Chief Financial Officer, certify that:

1.                                       Ihave reviewed the annual filings (as this term is defined in MultilateralInstrument 52-109 *Certification ofDisclosure in Issuers’ Annual and Interim Filings*) of QueenstakeResources Ltd. (the issuer) for the period ending December 31, 2006;

2.                                       Basedon my knowledge, the annual filings do not contain any untrue statement of amaterial fact or omit to state a material fact required to be stated or that isnecessary to make a statement not misleading in light of the circumstancesunder which it was made, with respect to the period covered by the annualfilings;

3.                                       Basedon my knowledge, the annual financial statements together with the otherfinancial information included in the annual filings fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the issuer, as of the date and for the periods presented in the annualfilings;

4.                                       Theissuer’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures for the issuer, and we have:

c.                                       designedsuch disclosure controls and procedures, or caused them to be designed underour supervision, to provide reasonable assurance that material informationrelating to the issuer, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthe annual filings are being prepared;

d.                                      evaluatedthe effectiveness of the issuer’s disclosure controls and procedures as of theend of the period covered by the annual filings and have caused the issuer todisclose in the annual MD&A our conclusions about the effectiveness of thedisclosure controls and procedures as of the end of the period covered by the annualfilings based on such evaluation.
| Date: March 29, 2007 |   |   |
|---------------------------|--------|--------|
|                      |   |   |
|                      |   |   |
| /s/ Eric Edwards          |   |   |
| Chief Financial  Officer  |   |   |

 

 

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