**Exhibit 2**

 

**Management’s Responsibility for theConsolidated Financial Statements**

 

The accompanying consolidated financial statements of QueenstakeResources Ltd. and its subsidiaries and all information in the annual reportare the responsibility of management and have been approved by the Board ofDirectors. The consolidated financial statements necessarily include someamounts that are based on management’s best estimates, which have been madeusing careful judgment.

 

The consolidated financial statements have been prepared by managementin accordance with Canadian generally accepted accounting principles. Financialand operating data elsewhere in the annual report are consistent with theinformation contained in the financial statements.

 

In fulfilling their responsibilities, management of QueenstakeResources Ltd. and its subsidiaries have developed and continue to maintainsystems of internal accounting controls, and segregation of duties andresponsibilities whenever possible.

 

Although no cost effective system of internal control will prevent ordetect all errors and irregularities, these systems are designed to providereasonable assurance that assets are safeguarded from loss or unauthorized use,transactions are properly recorded and the financial records are reliable forpreparing the consolidated financial statements.

 

The Board of Directors carries out its responsibility for theconsolidated financial statements in this annual report principally through itsAudit Committee, consisting of non-executive directors. The Audit Committeemeets periodically with management and with the external auditors to discussthe results of audit examinations with respect to the adequacy of internalaccounting controls, and to review and discuss the consolidated financialstatements and financial reporting matters.

 

The consolidated financial statements have been audited by Staley,Okada & Partners, Chartered Accountants, who have full access to theAudit Committee, with and without the presence of management. Their reportfollows.

 

**Dorian L. (Dusty) Nicol**

President and Chief Executive Officer

 

**Eric H. Edwards**

Vice President, Finance and Chief Financial Officer

 

1

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**To the Shareholders of Queenstake ResourcesLtd.:**

 

We have audited the accompanying consolidated balance sheets ofQueenstake Resources Ltd. (the “Company”) as at December 31, 2005 and 2004and the related consolidated statements of loss, deficit and cash flows foreach of the years in the three-year period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with the Canadian generallyaccepted auditing standards and with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of the Companyas at December 31, 2005 and 2004, and the results of its operations andits cash flows for each of each of the years in the three-year period ended December 31,2005, in accordance with Canadian generally accepted accounting principles.

 

**Staley, Okada & Partners**

Chartered Accountants

Vancouver, British Columbia, Canada

March 13, 2006 except as to Note 24, which is as of March 30,2006

 

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**CONSOLIDATED BALANCE SHEETS**

 
| **(In Thousands of U.S. Dollars)**                                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                         |       |                       | ** ** |                       |       |
| **Current assets**                                                 |       |                       | ** ** |                       |       |
| Cash and cash equivalents                                          | ** ** | **$**                      | **10,225** | ** **                 | $          | 6,132 |   |
| Trade and other receivables                                        | ** ** | **463**                    | ** ** | 117                        |       |
| Inventories - Note 3                                               | ** ** | **6,519**                  | ** ** | 5,084                      |       |
| Marketable securities - Note 4                                     | ** ** | **13**                     | ** ** | 500                        |       |
| Prepaid expenses - Note 5                                          | ** ** | **1,499**                  | ** ** | 1,450                      |       |
| Total current assets                                               | ** ** | **18,719**                 | ** ** | 13,283                     |       |
|                                                               | ** ** | ** **                 | ** ** |                       |       |
| Restricted cash - Note 6                                           | ** ** | **27,165**                 | ** ** | 26,379                     |       |
| Mineral property, plant and equipment, net  - Note 7               | ** ** | **45,692**                 | ** ** | 42,514                     |       |
| Other assets - Note 8                                              | ** ** | **1,763**                  | ** ** | 5,755                      |       |
| **Total assets**                                                   | ** ** | **$**                      | **93,339** | ** **                 | $          | 87,931 |   |
|                                                               |       |                       | ** ** |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                      |       |                       | ** ** |                       |       |
| **Current liabilities**                                            |       |                       | ** ** |                       |       |
| Accounts payable and accrued liabilities                           | ** ** | **$**                      | **11,063** | ** **                 | $          | 20,580 |   |
| Other current liabilities - Note 9                                 | ** ** | **2,846**                  | ** ** | 2,126                      |       |
| Total current liabilities                                          | ** ** | **13,909**                 | ** ** | 22,706                     |       |
|                                                               | ** ** | ** **                 | ** ** |                       |       |
| Other long-term obligations - Note 10                              | ** ** | **2,117**                  | ** ** | 1,093                      |       |
| Reclamation and mine closure - Note 11                             | ** ** | **26,382**                 | ** ** | 25,766                     |       |
| **Total liabilities**                                              | ** ** | **42,408**                 | ** ** | 49,565                     |       |
|                                                               |       |                       | ** ** |                       |       |
| **Shareholders’ equity**                                      |       |                       | ** ** |                       |       |
| Common shares, no par value, unlimited  number authorized          |       |                       | ** ** |                       |       |
| Issued and outstanding 550,021,360 (2004 -  410,404,627) - Note 12 | ** ** | **131,804**                | ** ** | 100,139                    |       |
| Contributed surplus - Note 13                                      | ** ** | **1,973**                  | ** ** | 1,053                      |       |
| Convertible securities - Note 15                                   | ** ** | **14**                     | ** ** | 363                        |       |
| Deficit                                                            | ** ** | **(82,860**                | **)**      | (63,189                    | )          |
| **Total shareholders’ equity**                                | ** ** | **50,931**                 | ** ** | 38,366                     |       |
| **Total liabilities and shareholders’ equity**                | ** ** | **$**                      | **93,339** | ** **                 | $          | 87,931 |   |

 

Commitmentsand contingencies - Note 20

 
| Approved on behalf of the Board:      |     |
|---------------------------------------|----------|
| /s/ Michael Smith                     |     | /s/ Dorian Nicol |   |
| Audit Committee Chairman and Director | Director |
|                                       |          |  |  |

 

*Theaccompanying notes form an integral part of these consolidatedfinancial statements*

 

3

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**CONSOLIDATEDSTATEMENTS OF LOSS**

 
| ** **                                                          | ** ** | **For the Years Ended December 31** | ** **  |
|---------------------------------------------------------------------|------------|------------------------------------------|-------------|
| **(In Thousands of U.S. Dollars, except per share amounts)**        | ** ** | **2005**                                 | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                                |       |                                     | ** **  |   |   |   |   |
| **Gold  sales**                                                     | ** ** | **$**                                    | **90,174**  | ** ** | $ | 100,394 |   | $ | 55,576 |   |
| **Costs  and expenses**                                             |       |                                     | ** **  |   |   |   |   |
| Cost of  sales                                                      | ** ** | **80,268**                               | ** **  | 85,346 |   | 40,667 |   |
| Depreciation,  depletion and amortization                           | ** ** | **17,194**                               | ** **  | 19,568 |   | 9,240 |   |
| Non-hedge  derivatives - Note 8                                     | ** ** | **2,647**                                | ** **  | 2,530 |   | 664 |   |
| Exploration                                                         | ** ** | **3,880**                                | ** **  | 6,629 |   | - |   |
| General and  administrative                                         | ** ** | **4,915**                                | ** **  | 3,381 |   | 1,936 |   |
| Accretion of  reclamation and mine closure liability                | ** ** | **1,174**                                | ** **  | 421 |   | 131 |   |
| Stock-based  compensation - Note 14                                 | ** ** | **579**                                  | ** **  | 537 |   | 350 |   |
| ** **                                                          |       | **110,657**                              | ** **  | 118,412 |   | 52,988 |   |
| Loss from operations                                                | ** ** | **(20,483**                              | **)**       | (18,018 | ) | 2,588 |   |
| Interest  expense - Note 16                                         | ** ** | **413**                                  | ** **  | 4,917 |   | 4,936 |   |
| Other  income, net                                                  | ** ** | **(1,012**                               | **)**       | (892 | ) | (282 | ) |
| Foreign  exchange (gain) loss                                       | ** ** | **(213**                                 | **)**       | 83 |   | (172 | ) |
| Provision  for impairment of Magistral Joint Venture                | ** ** | **—**                               | ** **  | **—** |   | 6,248 |   |
| ** **                                                          |       | **(813**                                 | **)**       | 4,108 |   | 10,730 |   |
| **Net loss**                                                        | ** ** | **$**                                    | **(19,671** | **)** | $ | (22,126 | ) | $ | (8,142 | ) |
|                                                                |       |                                     | ** **  |   |   |   |   |
| Net loss per  share - basic and diluted                             | ** ** | **$**                                    | **(0.04**   | **)** | $ | (0.06 | ) | $ | (0.04 | ) |
|                                                                |       |                                     | ** **  |   |   |   |   |
| Weighted  average number of shares outstanding (000’s) - basic | ** ** | **509,274**                              | ** **  | 377,609 |   | 185,866 |   |

 

**CONSOLIDATED STATEMENTS OF DEFICIT**

 
| ** **                                                     | ** ** | **For the Years Ended December 31** | ** **  |
|----------------------------------------------------------------|------------|------------------------------------------|-------------|
| **(In Thousands of U.S. Dollars)**                             | ** ** | **2005**                                 | ** **  | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | ** **                               | ** **  | ** ** | ** ** | **Restated - Note  2k** | ** ** |
| Deficit,  beginning of period - as previously reported         | ** ** | **$**                                    | **(63,189** | **)** | $ | (41,063 | ) | $ | (32,828 | ) |
| Cumulative  restatement for stock-based compensation - Note 2k | ** ** | **—**                               | ** **  | **—** |   | (93 | ) |
| Deficit,  beginning of period - as restated                    | ** ** | **(63,189**                              | **)**       | (41,063 | ) | (32,921 | ) |
| Net loss                                                       | ** ** | **(19,671**                              | **)**       | (22,126 | ) | (8,142 | ) |
| Deficit, end  of period                                        | ** ** | **$**                                    | **(82,860** | **)** | $ | (63,189 | ) | $ | (41,063 | ) |

 

*The accompanying notes form an integral part ofthese consolidated financial statements*

 

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                              | ** ** | **For the Years Ended December 31** | ** **  |
|---------------------------------------------------------|------------|------------------------------------------|-------------|
| **(In Thousands of U.S. Dollars)**                      | ** ** | **2005**                                 | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |                                     | ** **  |   |   |   |   |
| **OPERATING  ACTIVITIES**                               |       |                                     | ** **  |   |   |   |   |
| Net loss                                                | ** ** | **$**                                    | **(19,671** | **)** | $ | (22,126 | ) | $ | (8,142 | ) |
| Non-cash  items:                                        |       |                                     | ** **  |   |   |   |   |
| Depreciation,  depletion and amortization               | ** ** | **17,194**                               | ** **  | 19,568 |   | 9,240 |   |
| Interest  accretion and deferred financing costs        | ** ** | **—**                               | ** **  | 4,484 |   | 3,738 |   |
| Gain on  disposal of assets to be disposed of by sale   | ** ** | **—**                               | ** **  | (661 | ) | (504 | ) |
| Inventory  obsolescence                                 | ** ** | **—**                               | ** **  | 575 |   | **—** |   |
| Amortization  of deferred charges                       | ** ** | **1,903**                                | ** **  | 1,590 |   | **—** |   |
| Accretion of  reclamation and mine closure liability    | ** ** | **1,174**                                | ** **  | 421 |   | 131 |   |
| Amortization  of non-hedge derivatives                  | ** ** | **1,792**                                | ** **  | 2,530 |   | 664 |   |
| Write down  of non-hedge derivatives                    | ** ** | **855**                                  | ** **  | **—** |   | **—** |   |
| Stock-based  compensation                               | ** ** | **579**                                  | ** **  | 537 |   | 350 |   |
| Foreign  exchange loss                                  | ** ** | **(213**                                 | **)**       | 83 |   | (172 | ) |
| Loss on  marketable securities                          | ** ** | **45**                                   | ** **  | 23 |   | **—** |   |
| Provision  for doubtful accounts                        | ** ** | **—**                               | ** **  | **—** |   | 768 |   |
| Provision  for impairment of Magistral Joint Venture    | ** ** | **—**                               | ** **  | **—** |   | 6,248 |   |
| Warrants  issued for services                           | ** ** | **14**                                   | ** **  | 137 |   | **—** |   |
| ** **                                              |       | **3,672**                                | ** **  | 7,161 |   | 12,321 |   |
| Changes in  non-cash working capital:                   |       |                                     | ** **  |   |   |   |   |
| Inventories                                             | ** ** | **(1,435**                               | **)**       | (801 | ) | (378 | ) |
| Accounts  receivable and prepaid accounts               | ** ** | **(1,178**                               | **)**       | 3 |   | (2,261 | ) |
| Accounts  payable and accruals                          | ** ** | **(8,098**                               | **)**       | 10,354 |   | 4,017 |   |
| Cash  provided by (used in) operating activities        | ** ** | **(7,039**                               | **)**       | 16,716 |   | 13,699 |   |
|                                                    |       |                                     | ** **  |   |   |   |   |
| **INVESTING  ACTIVITIES**                               |       |                                     | ** **  |   |   |   |   |
| Property,  plant and equipment expenditures             | ** ** | **(19,644**                              | **)**       | (21,547 | ) | (8,960 | ) |
| Purchase of  non-hedge derivatives                      | ** ** | **(1,242**                               | **)**       | (717 | ) | (4,088 | ) |
| Environmental  risk transfer program                    | ** ** | **—**                               | ** **  | 1,031 |   | (6,892 | ) |
| Proceeds  from sale of assets to be disposed of by sale | ** ** | **—**                               | ** **  | 4,252 |   | — |   |
| Notes  receivable                                       | ** ** | **—**                               | ** **  | 2,500 |   | — |   |
| Sale of  marketable securities - Note 4                 | ** ** | **442**                                  | ** **  | 1,460 |   | — |   |
| Reclamation  costs incurred                             | ** ** | **(558**                                 | **)**       | (426 | ) | (127 | ) |
| Restricted  cash                                        | ** ** | **(786**                                 | **)**       | (41 | ) | (26,342 | ) |
| Other, net                                              | ** ** | **—**                               | ** **  | (3,493 | ) | 1,192 |   |
| Cash (used  in) investing activities                    | ** ** | **(21,788**                              | **)**       | (16,981 | ) | (45,217 | ) |
|                                                    |       |                                     | ** **  |   |   |   |   |
| **FINANCING  ACTIVITIES**                               |       |                                     | ** **  |   |   |   |   |
| Common  shares issued, net of costs - Note 12           | ** ** | **30,393**                               | ** **  | 15,030 |   | 32,346 |   |
| Term loan                                               | ** ** | **—**                               | ** **  | (9,952 | ) | 9,952 |   |
| Notes  payable and leases                               | ** ** | **2,527**                                | ** **  | (8,218 | ) | **—** |   |
| Other                                                   | ** ** | **—**                               | ** **  | **—** |   | (1,356 | ) |
| Cash provided  by (used in) financing activities        | ** ** | **32,920**                               | ** **  | (3,140 | ) | 40,942 |   |
|                                                    |       |                                     | ** **  |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents   | ** ** | **4,093**                                | ** **  | (3,404 | ) | 9,424 |   |
| Cash and  cash equivalents, beginning of period         | ** ** | **6,132**                                | ** **  | 9,536 |   | 112 |   |
| Cash and  cash equivalents, end of period               | ** ** | **$**                                    | **10,225**  | ** ** | $ | 6,132 |   | $ | 9,536 |   |

 

Supplementalcash flow information - Note 18

 

The accompanying notes form an integral part ofthese consolidated financial statements

 

5

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005, 2004 AND 2003**

*(Inthousands of U.S. dollars, except per share amounts)*

 

**1.****              Nature of operations**

 

Queenstake Resources Ltd. (“Queenstake”)engages in the mining, processing, production and sale of gold, as well asrelated activities including development and exploration. The Company’sprincipal asset and only current source of revenue is its 100% owned JerrittCanyon Mine, located 50 miles north of Elko, Nevada, acquired on June 30,2003.

 

**2.****              Summary of significantaccounting policies**

 

*(a)**       Basis of presentation*

 

The consolidated financial statements of Queenstake and its subsidiaries (collectively, unless the context requires otherwise, referred to as 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 23.

 

*(b)**       Basis of consolidation*

 

These consolidated financial statementsinclude the accounts of Queenstake and its subsidiaries. All materialintercompany transactions and balances have been eliminated. The subsidiariesand percentage of ownership at December 31, 2005, are as follows:

 

•                  QueenstakeResources U.S.A. Inc. (Delaware)– 100%

•                  Castle Exploration Inc. (Colorado) –100%

 

*(c)**        Use of estimates*

 

The preparation of financial statements inconformity with Canadian GAAP requires the Company to make estimates andassumptions that affect the amounts of assets, liabilities, shareholders’equity, revenue and expenses reported in these consolidated financialstatements. The most significant of these estimates and assumptions are those thatuse estimates of gold reserves and resources. Such estimates and assumptionsaffect the carrying value of assets, decisions as to when exploration anddevelopment costs should be capitalized or expensed, the rate at whichamortization of long-term assets is charged to earnings, and the estimation ofthe asset retirement obligation. The Company regularly reviews its estimatesand assumptions; however, actual results could differ from these estimates.

 

*(d)**       Foreign currencytranslation*

 

The activities of Queenstake, the Canadianparent company, are conducted and accounted for in Canadian dollars. Accordingly,the temporal rate method is used for the conversion of related Canadian dollardenominated accounts. Monetary assets and liabilities are translated into U.S.dollars at the exchange rate in effect at the balance sheet date, non-monetaryassets (including depreciation) and liabilities at the exchange rates in effectat the time of acquisition or issue, and revenues and other expenses at averagerates approximating exchange rates in effect during the prescribed time of thetransactions. Exchange gains or losses are included in the statement of loss.

 

6

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*(e)**        Cash and cash equivalents*

 

Cash and cash equivalents is considered toinclude cash on hand, demand balances held with banks, money market funds,certificates of deposit and highly liquid deposits with maturities of threemonths or less from the date of inception.

 

*(f)**           Inventories*

 

Work-in-process inventories, including orestockpiles, are valued at the lower of average production cost and netrealizable value, after a reasonable allowance for further processing and salescosts.

 

Finished goods inventories are valued at thelower of cost and net realizable value. Cost valuations are based on therelated three-month period’s average costs. Net realizable value is after areasonable allowance for sales costs.

 

Materials and supplies inventories are valuedat the lower of average cost and replacement cost, net of a provision forobsolescence with respect to identified inventory items.

 

*(g)**       Marketable securities*

 

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

 

*(h)**       Mineral property, plant andequipment*

 

Mineral property, plant and equipment arecarried at cost less accumulated depreciation and depletion. Cost includesacquisition and related costs, capitalized asset retirement costs, long-termdevelopment costs incurred on existing ore bodies, and development costsincurred to further define reserves deemed capable of subsequent commercialproduction. Depletion of mineral properties including deferred developmentcosts is charged on a units-of-production basis over proven and probablereserves. Depreciation for plant and equipment commences when they are placedin service. Depreciation of plant and equipment is calculated using thestraight-line method, based on estimated useful lives ranging from three to sixyears. Projects and assets considered to be Construction in Progress are notdepreciated until the projects are complete and placed in service.

 

Long-lived assets are evaluated forimpairment at the end of each reporting period or more frequently when changesin circumstances indicate that those carrying values may not berecoverable. Estimated undiscounted future net cash flows for the JerrittCanyon mine are subject to risks and uncertainties and are calculated usingestimated production, expected gold sales prices (considering current andhistorical prices, price trends and related factors), operating costs, capitalcosts, and reclamation and closure costs and estimates of asset recovery values.It is reasonable that changes in estimates could occur, which may affectthe expected recoverability of these assets. If it is determined that thecarrying value exceeds estimated undiscounted future net cash flows, then awrite-down to fair value would be recorded, with a charge to operations.

 

*(i)**          Asset retirementobligations*

 

The recommendations of CICA Handbook Section 3110,*Asset Retirement Obligations*, becameeffective on January 1, 2004. This section requires the recognitionof a liability for legal obligations relating to the retirement of property,plant and equipment and obligations arising from the acquisition, construction,development, or normal operation of those assets. Such asset retirement costsmust be recognized at fair value, when a reasonable estimate of fair value canbe made, in the period in which the liability is incurred. A correspondingincrease to the carrying amount of the related asset, where one isidentifiable, is recorded and amortized over 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 issubject to re-measurement at each reporting period. The estimates are basedprincipally on legal and regulatory requirements. It is possible that theCompany’s estimate of its ultimate reclamation liabilities could change as aresult of changes in regulations, the extent of environmental remediationrequired or completed, the means of reclamation or changes in cost estimates. Changesin estimates are accounted for prospectively commencing in the period theestimate is revised.

 

7

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*(j)**           Obligations undercapital leases*

 

Leases are classified as either capital oroperating. Leases that transfer substantially all of the benefits and risks ofownership of property to the Company are accounted for as capital leases. Atthe time a capital lease is entered into, an asset is recorded along with itsrelated long-term financing obligation, net of interest. Interest on capitallease financing is expensed as financing payments are made. Payments made underoperating leases are expensed as incurred.

 

*(k)**       Stock-based compensation*

 

On January 1, 2004, the Companyretroactively adopted the transitional rules of CICA Handbook section 3870,*Stock-based Compensation and Other Stock-basedPayments* (“CICA 3870”). This requires the Company to: (a) forfiscal years beginning after January 1, 2004, commence recording in theaccounts the cost of stock-based compensation, estimated using the fair-valuemethod prescribed in CICA 3870; and (b) restate prior period financialstatements to record the fair value of stock-based compensation for the years2002 and 2003. The effect of the change in accounting policy was a $93 thousandincrease in the opening deficit as at January 1, 2003.

 

Compensation expense for stock optionsgranted is determined based on the estimated fair values of the stock optionsat the time of the grant, the cost of which is recognized over the vestingperiods of the respective options. The estimated fair values of stock optionsgranted is determined by using the Black-Sholes option pricing model. Theestimated fair value of stock options is credited to contributed surplus as theoptions vest and is subsequently transferred to share capital upon exercise ofthe related option.

 

Consideration paid by directors, officers,employees and non-employees on exercise of stock options is credited to commonshares.

 

*(l)**          Convertible securities*

 

Warrants issued as consideration for goodsand services are recorded at fair value and classified as ConvertibleSecurities. Fair value is transferred to common shares upon exercise of therelated warrants; proceeds from the exercise of these warrants are accountedfor as an increase to common shares. The value of equity units, consisting of commonshares and 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.

 

*(m)**     Revenue recognition*

 

Revenue from the sale of gold is recognizedwhen there is pervasive evidence that an arrangement exists, the selling priceis fixed and determinable, collectibility is reasonably assured, and when titleand the risks and rewards of ownership pass to the buyer.

 

*(n)**       Commodity contracts*

 

The Company may purchase gold put optioncontracts to protect against the risk of falling gold prices. Purchased goldput options allow the Company to exercise on a designated forward date, theoption to sell a specified quantity of gold at the contract price (“strikeprice”) to the counterparty. If the gold price is lower than the strike priceof the respective purchased put option contract on the expiry date, gold issold at the strike price of the put option. If the market gold price is higherthat the strike price of the put option, the option expires without exercise. Theput option premium payments related to the contracts are recognized as adeferred charge and liability on acquisition and expensed and paid,respectively, in the period in which the contracts expire. Put options areconsidered non-hedge derivative financial instruments and thus, are marked tofair market value. Changes in the fair market value of the put options arerecorded in current earnings or losses.

 

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

 

*(o)**       Future income taxes*

 

The future income tax asset and liabilitymethod of accounting for income taxes is used, whereby future income tax assetsand liabilities are recorded based on temporary differences between thecarrying amounts of balance sheet items and their 

 

8

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corresponding tax bases. Future income taxassets also arise from unused tax losses, subject to a valuation allowance, tothe extent that it is more likely than not such losses ultimately will beutilized. This method also requires that the future income tax assets andliabilities be measured using the enacted rates and laws that are expected toapply when these assets and liabilities are either to be realized or settled.

 

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

 

Basic earnings/loss per share is calculatedby dividing the net earnings/loss for the year by the weighted average numberof common shares outstanding during the year. Diluted earnings per share iscalculated using the treasury stock method which, for outstanding stock optionsand warrants, assumes that the proceeds to be received on the exercise of thestock options and warrants are applied to repurchase common shares at theaverage market price for the period, for purposes of determining the weightedaverage number of shares outstanding. Basic and diluted loss per share are thesame as the inclusion of common share equivalents would be anti-dilutive.

 

*(q)**       Comparative figures*

 

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

 

9

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**3.****              Inventories**

 

| ** **             | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------|------------|
| Finished goods         | ** ** | **$**                      | **1,083**  |                       | $          | 59 |   |
| Stockpiled ore         | ** ** | **1,768**                  |       | 1,889                      |       |
| Work-in-process        | ** ** | **352**                    |       | 286                        |       |
| Materials and supplies | ** ** | **3,316**                  |       | 2,850                      |       |
| ** **             |       | **$**                      | **6,519**  |                       | $          | 5,084 |   |

 

All inventories are associated with theJerritt Canyon mine.

 

**4.****              Marketablesecurities**

 

| ** **                                              | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| Balance - December 31, 2003                        |       | —     |       | $          | —     |   |
| Marketable securities received on sale of  assets       |       | 2,000,000  |       | 1,483      |       |
| Marketable securities received in lieu of  note payment |       | 669,485    |       | 500        |       |
| Proceeds from sale of marketable securities             |       | (2,000,000 | )          | (1,460     | )          |
| Loss on sale of marketable securities                   |       | —     |       | (23        | )          |
| 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**                    | ** ** | **25,000** | ** ** | **$**      | **13**     | ** ** |
|                                                         |            |            |            |            |            |  |  |

 

**5.****              Prepaid expenses**

 

| ** **                | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **Total**                  | ** ** | **Total**                  | ** ** |
| Prepaid insurance         | ** ** | **$**                      | **783**    |                       | $          | 794 |   |
| Prepaid federal land fees | ** ** | **540**                    |       | 502                        |       |
| Other                     | ** ** | **176**                    |       | 154                        |       |
| ** **                |       | **$**                      | **1,499**  |                       | $          | 1,450 |   |

 

**6.****              Restricted cash**

 

| ** **                                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Commutation Account                        | ** ** | **$**                      | **25,766** | ** **                 | $          | 25,771 |   |
| Interest earned                            | ** ** | **706**                    | ** ** | 421                        |       |
| Reclamation costs incurred by Company      | ** ** | **(558**                   | **)**      | (426                       | )          |
| ** **                                 |       | **25,915**                 | ** ** | 25,766                     |       |
| Workman’s compensation self-insurance | ** ** | **522**                    | ** ** | 510                        |       |
| Other restricted cash                      | ** ** | **729**                    | ** ** | 103                        |       |
| ** **                                 |       | **$**                      | **27,165** | ** **                 | $          | 26,379 |   |

 

On June 30, 2003, the Company purchasedfrom American Insurance Group (“AIG”) an environmental risk transfer program(the “ERTP”) (See Note 8). As part of the ERTP, $25.8 million wasdeposited in an interest-bearing account with AIG (the “Commutation Account”). TheCommutation Account principal plus interest earned on the principal is used tofund Jerritt Canyon mine’s ongoing reclamation and mine closure obligationsidentified as at June 30, 2003.

 

The Company has assigned to Division ofInsurance, State of Nevada a letter of credit for $0.5 million secured by acash deposit of $0.5 million in connection with the State’s WorkersCompensation program. Interest is earned on the deposit.

 

The Company has assigned two letters ofcredit totaling $0.7 million secured by a cash deposit of $0.7 million inconnection with the purchase of mining equipment. Interest is earned on thisdeposit.

 

10

----

 

**7.****              Mineral property,plant and equipment**

 

| ** **                             | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **Accumulated**            | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **depletion &**   | ** ** | ** ** | ** ** | ** ** | ** ** | **depletion &** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Cost**                   | ** ** | **depreciation**           | ** ** | **Net** | ** ** | **Cost** | ** ** | **depreciation** | ** ** | **Net** | ** ** |
| Mineral  properties and deferred costs |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Jerritt  Canyon                        | ** ** | **$**                      | **59,047** | ** **                 | **$**      | **(29,398** | **)** | **$** | **29,649** |   | $ | 45,538 |   | $ | (19,044 | ) | $ | 26,494 |   |
|                                   | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Plant and  equipment                   |       |                       |       |                       |       |   |   |   |   |   |   |   |   |
| Jerritt  Canyon                        | ** ** | **28,276**                 | ** ** | **(12,274**                | **)**      | **16,002** |   | 22,117 |   | (6,128 | ) | 15,989 |   |
| Subtotal  Jerritt Canyon(1)            | ** ** | **87,323**                 | ** ** | **(41,672**                | **)**      | **45,651** |   | 67,655 |   | (25,172 | ) | 42,483 |   |
| Office  equipment                      | ** ** | **74**                     | ** ** | **(33**                    | **)**      | **41** |   | 54 |   | (23 | ) | 31 |   |
| ** **                             | ** ** | **$**                      | **87,397** | ** **                 | **$**      | **(41,705** | **)** | **$** | **45,692** |   | $ | 67,709 |   | $ | (25,195 | ) | $ | 42,514 |   |

 

----

(1)          Jerritt Canyon cost basis

 

| ** **                                | ** ** | **Original cost** | ** ** | **2003 additions** | ** ** | **2004 additions** | ** ** | **2005 additions** | ** ** | **Cost basis** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|------------|------------|
|                                      |       |              |       |               |       |               |       |               |       |           |       |       |       |
| Mineral  properties and deferred costs(2) |       | $                 | 22,888     |               | $          | 5,088              |       | $                  | 17,562     |           | $          | 13,509     |       | $ | 59,047 |   |   |   |
| Plant and  equipment                      |       | 14,100            |       | 785                |       | 7,232              |       | 6,159              |       | 28,276         |       |       |       |
|                                      |       | $                 | 36,988     |               | $          | 5,873              |       | $                  | 24,794     |           | $          | 19,668     |       | $ | 87,323 |   |   |   |

 

----

(2)          The original cost of the mineral propertiesand deferred costs includes the $25,767 of capitalized asset retirement costs(Note 11) less negative goodwill on the acquistion of Jerritt Canyon.

 

**8.****              Other assets**

 
| ** **                           | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Beginning**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ending** | ** ** |
| ** **                           | ** ** | **Balance**                | ** ** | **Additions** | ** ** | **Amortization** | ** ** | **Write-down** | ** ** | **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** | ** ** |
| ** **                           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **December 31, 2004** | ** ** |
| ** **                           | ** ** | **Beginning**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ending** | ** ** |
| ** **                           | ** ** | **Balance**                | ** ** | **Additions** | ** ** | **Amortization** | ** ** | **Recovery** | ** ** | **Balance** | ** ** |
| Non-hedge  derivatives               |       | $                          | 3,425      |   | $ | 717 |   | $ | (2,530 | ) | $ | — |   | $ | 1,612 |   |
| Deferred  royalty charges            |       | —                     |       | 3,493 |   | (1,590 | ) | — |   | 1,903 |   |
| Deferred  financing cost             |       | 3,345                      |       | — |   | (3,345 | ) | — |   | — |   |
| Environmental  risk transfer program |       | 5,275                      |       | — |   | (2,004 | ) | (1,031 | ) | 2,240 |   |
|                                 |       | $                          | 12,045     |   | $ | 4,210 |   | $ | (9,469 | ) | $ | (1,031 | ) | $ | 5,755 |   |
|                                      |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As a condition of the Jerritt Canyon termloan, the lender required the Company to purchase a total of 394,591 gold putoptions, with a carrying value of approximately $4.1 million, with a series ofmonthly expiries from July 2003 through June 2005, inclusive. On June 30,2005 the remaining balance of the prepaid put options required by theconditions of the term loan expired in full.

 

The Company purchased gold put options in thefourth quarter of 2004 at a cost of $0.7 million with expiry dates through 2005.These gold put options have expired in full as of December 31, 2005.

 

11

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During 2005, the Company purchased 147,000gold put options as non-hedge derivatives at a cost of $1.2 million with a series ofmonthly expiries from January 2006 through March 2007, inclusive. Thecarrying value of $0.2 million is net of realized and unrealized losses of $0.9million resulting from decreases in the fair value of the gold put optioncontracts. The put options each have a strike price ranging from $400 to $425per ounce. Payments of the premiums for these put options are being deferredand will be settled each month based upon the respective number of put optionsexpiring or exercised in that month. See Note 19 – *CommodityRisk Management*for further discussion regarding put option contractvaluation and a summary of outstanding put options at December 31, 2005.

 

*Reclamation cost cap insurance*

 

The ERTP that the Company purchased from AIG(See Note 11) also includes a reclamation and mine closure cost cap insurancepolicy. The insurance provides coverage for future reclamation and mine closurecosts in existence at June 30, 2003, if they exceed those funded by theCommutation Account (Note 6). If these ultimate reclamation costs are less thanthe amount in the Commutation Account, the Company would be refunded the excesscash. In the event that these ultimate reclamation costs are more than theCommutation Account balance, the cost cap insurance, will pay the excess costsup to a defined maximum.

 

The insurance premium paid for the ERTP in June 2003is being depleted over the estimated proven and probable reserve estimated atthe inception of the policy. Depletion of the insurance premium is calculatedbased on each respective periods ounce production with respect to the estimatedproven and probable reserves.

 

*Pollution legal liability*

 

The ERTP also includes a pollution legalliability insurance coverage for third-party damage claims against the Companyfor both pre-existing pollution conditions and new pollution conditions, for aperiod of five years commencing June 30, 2003.

 

**9.****              Other currentliabilities**

 

| ** **                                                          | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Insurance policy premium payable                                    | ** ** | **$**                      | **423**    |                       | $          | 425 |   |
| Current portion of non-hedge derivative  premiums payable (Note 10) | ** ** | **994**                    |       | 732                        |       |
| Current portion of capital leases (Note 10)                         | ** ** | **1,429**                  |       | 969                        |       |
| ** **                                                          |       | **$**                      | **2,846**  |                       | $          | 2,126 |   |

 

**10.****       Other long-term liabilities**

 

| ** **                              | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Non-hedge derivative premiums payable   | ** ** | **$**                      | **1,062**  |                       | $          | 732 |   |
| Capital leases                          | ** ** | **3,478**                  |       | 2,062                      |       |
| ** **                              |       | **4,540**                  |       | 2,794                      |       |
| Less current portion:                   |       |                       |       |                       |       |
| - Non-hedge derivative premiums payable | ** ** | **(994**                   | )          | (732                       | )          |
| - Capital leases                        | ** ** | **(1,429**                 | )          | (969                       | )          |
| ** **                              |       | **$**                      | **2,117**  |                       | $          | 1,093 |   |

 

During 2005, the Company entered into a 5year capital lease with a mining equipment company with a total payment priceof $1.4 million. The delivered sales price for the equipment is $1.1 millionwith a deferred finance charge of $0.3 million calculated at 8.35%.

 

During 2005, the Company entered into a 5year capital lease with a mining equipment company with a total payment of $2.0million. The delivered sales price for the equipment is $1.6 million with adeferred finance charge of $0.4 million calculated at 7.25%.

 

12

----

 

During 2005, the Company entered into a twoyear capital lease with a software company with a total payment of $44thousand. The delivered sales price for the equipment is $41 thousand with adeferred finance charge of $3 thousand calculated at 7.00%.

 

During 2004, the Company entered into a 28month capital lease with a mining equipment company with a total payment of$539 thousand. The delivered sales price for the equipment is $476 thousandwith a deferred finance charge of $63 thousand calculated at 7.95%.

 

During 2005, the Company received miningequipment from a mining equipment company with a purchase price of $0.7million. The Company is in the process negotiating lease terms for the miningequipment which will be completed in 2006.

 

Capital lease obligations through thecompletion of current lease terms are as follows:

 
| **(In thousands of dollars)** | ** ** | **2006** | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010**   | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|----------|------------|----------|------------|------------|------------|-----------|------------|
| Mining  equipment                            |       | $        | 287        |       | $          | 281      |       | $        | 281        |       | $          | 281       |       | $ | 258 |   | $ | 1,388 |   |
| Mining  equipment                            |       | 194      |       | 194        |       | 194      |       | 194      |       | 354        |       | 1,130     |       |
| Mining  software                             |       | 20       |       | 12         |       | —   |       | —   |       | —     |       | 32        |       |
| Mining  equipment                            |       | 255      |       | —     |       | —   |       | —   |       | —     |       | 255       |       |
| Mining  equipment                            |       | 673      |       | —     |       | —   |       | —   |       | —     |       | 673       |       |
| ** **                                   | ** ** | **$**    | **1,429**  | ** ** | **$**      | **487**  | ** ** | **$**    | **475**    | ** ** | **$**      | **475**   | ** ** | **$** | **612** | ** ** | **$** | **3,478** |   |

 

**11.****       Reclamation and mineclosure**

 

Federal, state and local laws and regulationsconcerning environmental protection affect the Company’s operations. Undercurrent regulations, the Company is required to meet performance standards tominimize environmental impact from operations and to perform siterestoration and other closure activities. The Company’s provisions for futuresite closure and reclamation costs are based on known requirements. It is notcurrently possible to estimate the impact on operating results, if any, offuture legislative or regulatory developments. The Company’s estimate of thepresent value of the obligation to reclaim the Jerritt Canyon property is basedupon existing reclamation standards at December 31, 2005 and CanadianGAAP.

 

As part of the consideration for theJerritt Canyon mine acquisition, the Company assumed the liability for finalreclamation and closure of the mine. On June 30, 2003, the Companypurchased from American Insurance Group (“AIG”) an environmental risk transferprogram (the “ERTP”) (Note 8). The ERTP includes several components: aCommutation Account (Note 6), reclamation cost cap insurance, pollutionliability insurance, and surety bonds.

 

The following table sets out the activity forthe Company’s reclamation and mine closure liabilities for the years ending December 31,2005 and 2004:

 

| ** **                              | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Opening  balance                        | ** ** | **$**                           | **25,766** |                            | $          | 25,771 |   |
| Accretion                               | ** ** | **1,174**                       |       | 421                             |       |
| Reclamation  activities paid by Company | ** ** | **(558**                        | )          | (426                            | )          |
| Ending  balance                         | ** ** | **$**                           | **26,382** |                            | $          | 25,766 |   |

 

 

*Surety bonds*

 

AIG has posted a total of $35.5 million insurety bonds with the U.S. Forest Service and the Nevada Division ofEnvironment Protection, to provide these agencies assurance that the Companywill meet its reclamation obligations.

 

13

----

 

**12.****       Common Shares**

 

| ** **                                              | ** ** | **Shares (000’s)** | ** ** | **$ 000’s** | ** **  |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------|-------------|
| Balance, December 31,  2003                        |       | 360,313                      |       | $                     | 84,817      |   |
| Issued for  cash                                        |       | 34,254                       |       | 12,997                |        |
| Issued for  cash on exercise of warrants                |       | 15,313                       |       | 2,905                 |        |
| Issued for  cash on exercise of incentive stock options |       | 525                          |       | 110                   |        |
| Fair value  of broker’s warrants exercised         |       | —                       |       | 257                   |        |
| Fair value  of stock options exercised (Note 13)        |       | —                       |       | 35                    |        |
| Equity  issuance costs                                  |       | —                       |       | (982                  | )           |
| Activity for  the year                                  |       | 50,092                       |       | 15,322                |        |
| 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 13)        |       | —                       |       | 22                    |        |
| Equity  issuance costs                                  |       | —                       |       | (1,974                | )           |
| Activity for  the year                                  |       | 139,616                      |       | 31,665                |        |
| **Balance,  December 31, 2005**                    | ** ** | **550,021**                  | ** ** | **$**                 | **131,804** | ** ** |

 

On October 7, 2004, the Company issued34,254,000 common shares and 17,127,000 common share purchase warrants in anequity offering for gross proceeds of $13.0 million. Each common share purchasewarrant entitled the holder to purchase one common share at an exercise priceof Cdn $0.65 at any time until February 10, 2006. The Company paid theunderwriters a cash commission equal to 5.0% of the gross proceeds of theoffering million and issued 1,712,700 Compensation Options to the underwriters.Each Compensation Option entitled the holder to purchase one unit of theCompany at an exercise price of Cdn $0.50, at any time before October 8,2005; each unit purchased consisted of one common share and one-half of onecommon share purchase warrant; one whole common share purchase warrant entitledthe holder to purchase one additional common share at a price of Cdn $0.65until February 10, 2006. The common share purchase warrant and theCompensation Options expired unexercised on February 10, 2006 and October 8,2005, respectively.

 

On March 23, 2005 the Company issued100,000,000 common shares pursuant to an equity financing for gross proceeds of$24.8 million. The equity financing consisted of 100,000,000 units, with eachUnit consisting of one common share and one half of one common share purchasewarrant at a price of Cdn $0.30 per Unit. Each whole common share purchasewarrant (50,000,000 warrants in total) can be exercised to acquire oneadditional common share at a price of Cdn $0.40 for a period of 24 months. Thecommon share purchase warrants are subject to mandatory exercise with thirtydays notice by the Company, or they will expire and no longer be valid, shouldthe weighted average trading price exceed a specified threshold. The Companypaid the underwriters a cash commission of 5% of the gross proceeds.

 

On May 16, 2005, the Company issued5,434,783 common shares to settle outstanding liabilities and accrued interestof $1.3 million.

 

On June 22, 2005 the Company issued25,987,200 common shares pursuant to an equity financing for $5.9 millionthrough a syndicate of underwriters (“Underwriters”). The offering was pricedat Cdn $0.28 per share. The Underwriters received a 4% commission on the grossproceeds of the offering.

 

14

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**13.****       Contributed surplus**

 
| ** **                                                                      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Balance,  beginning of year                                                     | ** ** | **$**                           | **1,053**  |                            | $          | 551 |   |
| Fair value  of stock-based compensation                                         | ** ** | **579**                         |       | 537                             |       |
| Fair value  of expired warrants (Note 15)                                       | ** ** | **363**                         |       | —                          |       |
| Fair value  of stock options exercised - transferred to share capital (Note 12) | ** ** | **(22**                         | )          | (35                             | )          |
| Balance, end  of year                                                           | ** ** | **$**                           | **1,973**  |                            | $          | 1,053 |   |

 

**14.****       Stock options**

 

The following table sets out the activity inCompany’s incentive stock option plans for the years ending December 31,2005, 2004 and 2003:

 

| ** **                               | ** ** | ** **       | ** ** | **Weighted average**      | ** ** |
|------------------------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **Number**       | ** ** | **price per option** | ** ** |
| ** **                               | ** ** | **(000’s)** | ** ** | **Cdn $**                      | ** ** |
| Outstanding,  December 31, 2002     |       | 5,120            |       | $                              | 0.41       |   |
| Granted                                  |       | 3,900            |       | 0.39                           |       |
| Exercised                                |       | (1,752           | )          | 0.22                           |       |
| Cancelled or  expired                    |       | (493             | )          | 0.25                           |       |
| Outstanding,  December 31, 2003     |       | 6,775            |       | 0.43                           |       |
| Granted                                  |       | 5,050            |       | 0.57                           |       |
| Exercised                                |       | (525             | )          | 0.26                           |       |
| Cancelled or  expired                    |       | (155             | )          | 2.65                           |       |
| Outstanding,  December 31, 2004     |       | 11,145           |       | 0.47                           |       |
| Granted                                  |       | 7050             |       | 0.22                           |       |
| Exercised                                |       | (360             | )          | 0.20                           |       |
| Cancelled or  expired                    |       | (4,665           | )          | 0.50                           |       |
| **Outstanding,  December 31, 2005** | ** ** | **13,170**       | ** ** | **$**                          | **0.33**   | ** ** |

 

Options outstanding at December 31, 2005are exercisable in the following amounts and exercise prices:

 

| **Options outstanding**     | ** ** | **Options exercisable**    | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| **Exercise price per** | ** ** | ** **                      | ** ** | **Weighted average** | ** ** | **Weighted average** | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| **option**                       | ** ** | **Number of options** | ** ** | **price per option** | ** ** | **remaining life** | ** ** | **Number of options** | ** ** | **price per option** | ** ** |
| **Cdn $**                        | ** ** | **(000’s)**                | ** ** | **Cdn $** | ** ** | **(years)** | ** ** | **(000’s)** | ** ** | **Cdn $** | ** ** |
| 0.09                             |       | 150                             |       | $ | 0.09 |   | 1.0 |   | 150 |   | $ | 0.09 |   |
| 0.32                             |       | 1,600                           |       | 0.32 |   | 1.4 |   | 1,600 |   | 0.32 |   |
| 0.22                             |       | 50                              |       | 0.22 |   | 1.8 |   | 50 |   | 0.22 |   |
| 0.39                             |       | 1,850                           |       | 0.39 |   | 2.6 |   | 1,850 |   | 0.39 |   |
| 0.57                             |       | 1,385                           |       | 0.57 |   | 3.5 |   | 1,385 |   | 0.57 |   |
| 0.57                             |       | 1,505                           |       | 0.57 |   | 3.8 |   | 1,505 |   | 0.57 |   |
| 0.23                             |       | 550                             |       | 0.23 |   | 4.3 |   | 275 |   | 0.23 |   |
| 0.22                             |       | 5,065                           |       | 0.22 |   | 4.4 |   | 2,533 |   | 0.22 |   |
| 0.22                             |       | 500                             |       | 0.22 |   | 4.4 |   | 250 |   | 0.22 |   |
| 0.22                             |       | 300                             |       | 0.22 |   | 4.6 |   | 150 |   | 0.22 |   |
| 0.22                             |       | 200                             |       | 0.22 |   | 4.6 |   | 100 |   | 0.22 |   |
| 0.22                             |       | 15                              |       | 0.22 |   | 4.9 |   | 8 |   | 0.22 |   |
| ** **                       | ** ** | **13,170**                      | ** ** | **$** | **0.33** | ** ** | ** ** | ** ** | **9,855** | ** ** | **$** | **0.36** |   |

 

At December 31, 2005 the Company hadonly 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 onlyactive incentive stock option plan. A maximum of 30,000,000 five-year options may begranted under the 1995 Plan at an exercise price based on market value on theday before granting. Shareholder approval is required to increase the number ofoptions available for grant under the 1995 Plan. Full vesting

 

15

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of stock options granted under the 1995 planis completed after one year where 50% of the granted options vest immediatelyupon the date of grant and the remaining 50% vest one year from the date ofgrant.

 

On May 2, 2005, the Company granted575,000 stock options to a non-director officer and certain employees of theCompany with a strike price of Cdn $0.23 expiring on May 2, 2010.

 

On May 11, 2005, the Company granted5,460,000 stock options to directors, a non-director officer and certainemployees of the Company with a strike price of Cdn $0.22 expiring on May 11,2010.

 

On May 31, 2005, the Company granted500,000 stock options to newly appointed directors of the Company with a strikeprice of Cdn $0.22 expiring on May 31, 2010.

 

On August 15, 2005, the Company granted300,000 stock options to a non-director officer and certain employees of theCompany with a strike price of Cdn $0.22 expiring on August 15, 2010.

 

On August 23, 2005, the Company granted200,000 stock options to certain employees of the Company with a strike priceof Cdn $0.22 expiring on August 23, 2010.

 

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

 

The fair value of stock options granted todirectors, officers and employees were estimated at the grant date based on theBlack-Scholes option pricing model. From the specific assumptions applied ateach respective grant date, the weighted average assumptions for stock optionsgranted are as follows:

 

| ** **                                            | ** ** | **Weighted Average Assumptions** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected  volatility                                  |       | 74.7                                       | %          | 50.0 | % | 29.7 | % |
| Risk-free  interest rate                              |       | 3.79                                       | %          | 3.47 | % | 4.33 | % |
| Expected  lives                                       |       | 3 years                                    |       | 2 years |   | 2 years |   |
| Dividend  yield                                       |       | 0                                          | %          | 0 | % | 0 | % |
|                                                  |       |                                       |       |   |   |   |   |
| Weighted  average fair value per stock option granted |       | $                                          | 0.09       |   | $ | 0.14 |   | $ | 0.07 |   |
|                                                       |            |                                            |            |  |  |  |  |  |  |  |

 

Option pricing models require the input ofhighly subjective assumptions including the expected price volatility. Changesin the subjective input assumptions can materially affect the fair valueestimate, and therefore, the existing models do not necessarily provide areliable measure of the fair value of the Company’s stock options.

 

The Company recognized $579,000, $537,000 and$350,000 in stock-based compensation expense for the years ended 2005, 2004 and2003, respectively.

 

16

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**15.****       Convertible securities**

 
| **Outstanding at** | ** ** | ** **         | ** ** | ** **            | ** ** | ** **          | ** ** | ** **                      | ** ** | ** **              | ** ** | ** ** | ** ** |
|-------------------------|------------|--------------------|------------|-----------------------|------------|---------------------|------------|---------------------------------|------------|-------------------------|------------|------------|------------|
| **December 31,**   | ** ** | **Issued in** | ** ** | **Exercised in** | ** ** | **Expired in** | ** ** | **Outstanding at**         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **2004**                | ** ** | **2005**           | ** ** | **2005**              | ** ** | **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   |       |
| **31,374**              | ** ** | **50,100**         | ** ** | **(7,843**            | **)**      | **(6,404**          | **)**      | **67,227**                      |       |                    |       |       |       |

 
| ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | **Fair value of** | ** ** | **Fair value of** | ** ** | **Fair value of ** | ** ** | **Fair value of** | ** ** |
|-----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Warrants**     | ** ** | **Warrants**     | ** ** | **Warrants**     | ** ** | **Warrants**     | ** ** | **warrants**                | ** ** | **warrants**                | ** ** | **warrants**                      | ** ** | **warrants**                | ** ** |
| ** **                              | ** ** | **issued**       | ** ** | **exercised**    | ** ** | **expired**      | ** ** | **outstanding**  | ** ** | **issued**                  | ** ** | **exercised**               | ** ** | **expired**                       | ** ** | **outstanding**             | ** ** |
| ** **                              | ** ** | **(000’s)** | ** ** | **(000’s)** | ** ** | **(000’s)** | ** ** | **(000’s)** | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **                  | ** ** |
| Balance, December 31, 2004         |       | 148,779          |       | (117,405         | )          | —           |       | 31,374           |       | $                           | 5,420      |                        | $          | (5,057                            | )          | $                           | —     |   | $ | 363 |   |
| Warrants issued in financings (Note 13) |       | 50,000           |       | (7,843           | )          | (2,691           | )          | 39,466           |       | —                      |       | —                      |       | —                            |       | —                      |       |
| Warrants issued for services            |       | 100              |       | —           |       | —           |       | 100              |       | 14                          |       | —                      |       | —                            |       | 14                          |       |
| Warrants expired                        |       | —           |       | —           |       | (3,713           | )          | (3,713           | )          | —                      |       | —                      |       | (363                              | )          | (363                        | )          |
| **Balance, December 31, 2005**     | ** ** | **198,879**      | ** ** | **(125,248**     | **)**      | **(6,404**       | **)**      | **67,227**       | ** ** | **$**                       | **5,434**  | ** **                  | **$**      | **(5,057**                        | **)**      | **$**                       | **(363**   | ) | $ | 14 |   |

 

On April 29, 2005, 100,000 warrants wereissued under an agreement for financial advisory and investment bankingservices. The warrants issued have the same stipulations as warrants issued inthe March 23, 2005 equity financing (Note 12). The warrants were issued ata strike price of Cdn $0.40 and the estimated fair value of the warrants wascalculated using the Black-Scholes option pricing model. The estimate of thefair value of the warrants of $14 thousand was based upon a volatility of75.0%, a risk free interest rate of 3.9% and an expected life of 2 years.

 

On February 16, 2006, 17.1 millionwarrants with an exercise price of Cdn $0.65 expired.

 

**16.****       Interest expense**

 
| ** **                                                                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Amortization  of deferred financing costs, related to term loan            | ** ** | **$**                           | **—** |                            | $          | 3,345                           |       | $ | 3,344 |   |
| Amortization  of deferred financing costs, related to put options financed | ** ** | **—**                      |       | 257                             |       | 50                              |       |
| Accretion of  production payment owing to Jerritt Canyon sellers           | ** ** | **—**                      |       | 788                             |       | 256                             |       |
| Oxygen plant  note                                                         | ** ** | **—**                      |       | 94                              |       | 88                              |       |
| Non-cash  interest expense                                                 | ** ** | **—**                      |       | 4,484                           |       | 3,738                           |       |
| Term loan                                                                  | ** ** | **—**                      |       | 322                             |       | 978                             |       |
| Capital  leases                                                            | ** ** | **413**                         |       | 80                              |       | 83                              |       |
| Other                                                                      | ** ** | **—**                      |       | 31                              |       | 137                             |       |
| ** **                                                                 |       | **$**                           | **413**    |                            | $          | 4,917                           |       | $ | 4,936 |   |

 

17

----

 

**17.****       Income taxes**

 

The Company’s provision for income taxesdiffers from the amounts computed by applying the combined Canadian federal andprovincial income tax rates to the net loss as a result of the following:

 

| ** **                                         | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Provision  for recovery of taxes at stautory rates | ** ** | **$**     | **(6,885** | )        | $          | (7,877   | )          | $ | (2,932 | ) |
| Tax benefit  not recognized on current year losses | ** ** | **3,624** |       | 1,491    |       | 1,222    |       |
| Differences  in foreign tax rates                  | ** ** | **154**   |       | (57      | )          | 85       |       |
| Non-deductible  items and other                    | ** ** | **3,107** |       | 6,443    |       | 1,625    |       |
| ** **                                         |       | **$**     | **—** |     | $          | —   |       | $ | — |   |

 

Future income taxes reflect the net effectsof temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes.The significant components of the Company’s future tax assets as at December 31,2005 are as follows:

 

| ** **                            | ** ** | **2005**    | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Non-capital  loss carry forwards      | ** ** | **$**       | **10,552** |     | $          | 7,322    |       | $ | 7,776 |   |
| Net capital  loss carry forwards      | ** ** | **7,851**   |       | 6,088    |       | —   |       |
| Unutilized  exploration expenditures  | ** ** | **7,620**   |       | 5,990    |       | 2,619    |       |
| Capital  assets                       | ** ** | **1,044**   |       | (330     | )          | (204     | )          |
| Total gross  future income tax assets | ** ** | **27,067**  |       | 19,070   |       | 10,191   |       |
| Less:  Valuation allowance            | ** ** | **(27,067** | )          | (19,070  | )          | (10,191  | )          |
| Net future  income tax allowance      | ** ** | **$**       | **—** |     | $          | —   |       | $ | — |   |

 

The Company has income tax loss carry forwards ofapproximately $6.6 million in Canada, which may be used to reduce futureincome taxes otherwise payable and which expire in the years 2006 to 2009.

 

The Company has income tax loss carry forwards ofapproximately $20.5 million in the United States, which may be used toreduce future income taxes otherwise payable and which expire in the years 2006to 2025.

 

The tax benefit of the above noted tax assets havebeen offset by recognition of a valuation allowance in these financialstatements.

 

18

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**18.****       Supplemental cash flowdisclosure**

 
| ** **                                                                                         | ** ** | **For the years ended December 31** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Non-cash  financing and investing activities**                                                   |       |                                                         |       |   |   |   |   |
| Property,  plant and equipment expenditures accrued                                                | ** ** | **$**                                                        | **3,309**  |   | $ | 3,265 |   | $ | — |   |
| Common  shares issued in payment of liabilities                                                    | ** ** | **1,250**                                                    |       | — |   | 6,353 |   |
| Finance of  prepaid insurance                                                                      | ** ** | **783**                                                      |       | — |   | — |   |
| Contributed  surplus arising on fair value of convertible securities expired                       | ** ** | **363**                                                      |       | — |   | — |   |
| Fair value  of stock options exercised and transferred from contributed surplus to share  capital  | ** ** | **22**                                                       |       | 35 |   | 43 |   |
| Marketable  securities received in sale of assets disposed of by sale                              | ** ** | **—**                                                   |       | 4,483 |   | — |   |
| Marketable  securities received in lieu of note payment                                            | ** ** | **—**                                                   |       | 500 |   | — |   |
| Fair value  of broker’s warrants issued for services                                          | ** ** | **—**                                                   |       | — |   | 5,283 |   |
| Fair value  of lender’s and broker’s warrants exercised and transferred to share capital | ** ** | **—**                                                   |       | 257 |   | 4,802 |   |
| Issued  shares to satisfy the loan payable by the Magistral Joint Venture                          | ** ** | **—**                                                   |       | — |   | 562 |   |
| Acquisition  of the Jerritt Canyon mine:                                                           |       |                                                         |       |   |   |   |   |
| Shares  issued to sellers                                                                          | ** ** | **—**                                                   |       | — |   | 4,089 |   |
| Deferred  production payment owing to sellers                                                      | ** ** | **—**                                                   |       | — |   | 4,506 |   |
| Reclamation  liability assumed                                                                     | ** ** | **—**                                                   |       | — |   | 25,767 |   |
| Other  liabilities assumed                                                                         | ** ** | **—**                                                   |       | — |   | 4,159 |   |
| Warrants  issued to lenders                                                                        | ** ** | **—**                                                   |       | — |   | 4,565 |   |
|                                                                                               |       |                                                         |       |   |   |   |   |
| **Operating  activities including interest paid in cash**                                          | ** ** | **413**                                                      |       | 433 |   | 1,286 |   |
|                                                                                                    |            |                                                              |            |  |  |  |  |  |  |  |

 

**19.****       Financial instruments**

 

*Fair value*

 

The fair value of the Company’s currentfinancial assets and liabilities, excluding marketable securities, approximatestheir carrying values, due to their short-term maturities. Marketablesecurities are carried at the lower of cost and fair market value and werereduced to fair market value at December 31, 2005.

 

*Foreign currency risk management*

 

All revenues and substantially all of theCompany’s expenses are incurred in U.S. dollars. The Company’s equity capitalis raised in Canadian dollars. Potential currency fluctuations could affect theamount of U.S. dollars that can be purchased with Canadian dollars. The Companybelieves that the risk of material loss as a result of an adverse prolongedchange in Canadian / U.S. dollar exchange rates is managed by its policy forthe conversion of Canadian funds into U.S. funds as necessary with consultationfrom foreign currency exchange specialists, and currently does not use foreigncurrency exchange contracts to fix exchange rates.

 

*Commodity risk management*

 

The profitability of the Company is directlyrelated 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 premiumto acquire the contracts which is settled in the period the option is exercisedor allowed to expire. If the gold price is lower than the strike price of therespective purchased put option on the expiry date, gold is sold at the strikeprice of the put option. If the market gold price is higher that the strikeprice of the put option, the option expires without exercise.

 

The Company does not use gold forward salescontracts to fix future gold prices realized.

 

The Company has purchased gold put optioncontracts starting in late 2004 and 2005 with expiry dates extending into 2007.These put option contracts are considered non-hedge derivative financialinstruments and thus, are marked to fair market value each reporting period andchanges in the fair market value are recorded in current earnings or losses.

 

In 2005, the Company purchased 147,000 goldput options as non-hedge derivatives with a series of monthly expiriesfrom January 2006 through March 2007, inclusive. The put options eachhave a strike price ranging from $400 to $425 per ounce.

 

Put options remaining for 2006 and 2007 areas follows:

 

19

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| ** **          | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| ** **          | ** ** | **Q1**   | ** ** | **Q2**   | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** |
| Ounces              |       | 15,000   |       | —   |       | 37,500 |   | 30,000 |   | — |   |
| Strike  price/ounce |       | $        | 400        |     | $          | — |   | $ | 400 |   | $ | 400 |   | $ | — |   |
|                |       |     |       |     |       |   |   |   |   |   |   |
| Ounces              |       | 15,000   |       | 37,500   |       | — |   | — |   | 12,000 |   |
| Strike  price/ounce |       | $        | 425        |     | $          | 425 |   | $ | — |   | $ | — |   | $ | 425 |   |

 

**20.****       Commitments andcontingencies**

 

*(a)**       Commitments*

 

The Company has certain contractedcommitments and obligations under capital leases, operating leases andnon-hedge derivative financial instrument contracts. Future payments for thesecontracted commitments and obligations with initial or remaining terms inexcess of one year at December 31, 2005 are as follows:

 

| ** **                                  | ** ** | **Payments due by period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                | ** ** | **Less than 1** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than 5** | ** ** |
| **(In millions of dollars)** | ** ** | **Total**                                 | ** ** | **year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **years** | ** ** |
| Capital  lease obligations                  | ** ** | **$**                                     | **3.5**    |   | $ | 1.4 |   | $ | 2.1 |   | $ | — |   | $ | — |   |
| Operating  leases                           | ** ** | **0.6**                                   |       | 0.2 |   | 0.4 |   | — |   | — |   |
| Non-hedge  derivative financial instruments | ** ** | **1.1**                                   |       | 1.0 |   | 0.1 |   | — |   | — |   |
| Total  Material Contractual Obligations     | ** ** | **$**                                     | **5.2**    |   | $ | 2.6 |   | $ | 2.6 |   | $ | — |   | $ | — |   |

 

The Company has certain operating leases forcorporate office space and equipment with payments of $0.6 million due over thenext three years. These leases range from 1 to 3 years with payment obligationsof $0.2 million in 2006, $0.2 million in 2007 and $0.2 million in 2008.

 

*(b)**       Legal*

 

The Company may be involved in variousclaims, legal proceedings and complaints arising in the ordinary course ofbusiness. The Company does not believe that adverse decisions in any pending orthreatened proceedings 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.

 

*(c)**        Environmental*

 

The Company engages in mining, developmentand exploration activities, which are subject to various federal and state lawsand regulations governing the protection of the environment. These laws andregulations are continually changing and may become more restrictive. TheCompany conducts its operations in a manner to protect public health and theenvironment and believes its operations are materially in compliance with allapplicable laws and regulations.

 

**21.****       Retirement plans**

 

Upon completion of the Jerritt Canyonacquisition, the Company assumed sponsorship, from the prior owners of theJerritt Canyon mine, of a qualified tax-deferred savings plan in accordancewith the provisions of Section 401(k) of the U.S. Internal Revenue Code,which is available to permanent U.S. employees. The Company makes definedcontributions of up to 7.5% of eligible employees’ salaries and is notresponsible for the performance of investment vehicles selected by employees.The Company

 

20

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contributed $1,347,879 for the twelve-monthperiod ended December 31, 2005 and contributed $1,372,206 during thetwelve-month period ended December 31, 2004.

 

**22.****       Segment information**

 

The Company operates only in the gold sectorwithin the United States. Currently, revenues are earned exclusively at theCompany’s Jerritt Canyon mine in Nevada.

 

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

 

These consolidated financial statements havebeen prepared in accordance with Canadian GAAP. For the purposes of thesefinancial statements these principles differ in certain material respects fromgenerally accepted accounting principles in the United States (“U.S. GAAP”).

 

The adjustments to comply with U.S. GAAP,with respect to the consolidated balance sheets for the years ended December 31,2005 and 2004 would be as follows:

 
| ** **                                                      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **Canadian**                    | ** ** | ** **                      | ** ** | ** ** | ** ** | **Canadian** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In Thousands of Dollars)**                    | ** ** | **GAAP**                        | ** ** | **Differences**                 | ** ** | **U.S. GAAP** | ** ** | **GAAP** | ** ** | **Differences** | ** ** | **U.S. GAAP** | ** ** |
| **ASSETS**                                                      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Total  current assets                                           | ** ** | **$**                           | **18,719** | ** **                      | **$**      | **—** | ** ** | **$** | **18,719** |   | $ | 13,283 |   | $ | — |   | $ | 13,283 |   |
| Other assets*(b)*                                               | ** ** | **74,620**                      | ** ** | **—**                      | ** ** | **74,620** |   | 74,648 |   | (878 | ) | 73,770 |   |
| **Total  assets**                                               | ** ** | **$**                           | **93,339** | ** **                      | **$**      | **—** | ** ** | **$** | **93,339** |   | $ | 87,931 |   | $ | (878 | ) | $ | 87,053 |   |
|                                                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                  |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| **Liabilities**                                                 |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Total  current liabilities                                      | ** ** | **$**                           | **13,909** | ** **                      | **$**      | **—** | ** ** | **$** | **13,909** |   | $ | 22,706 |   | $ | — |   | $ | 22,706 |   |
| Other  long-term liabilities                                    | ** ** | **28,499**                      | ** ** | **—**                      | ** ** | **28,499** |   | 26,859 |   | — |   | 26,859 |   |
| **Total  liabilities**                                          | ** ** | **42,408**                      | ** ** | **—**                      | ** ** | **42,408** |   | 49,565 |   | — |   | 49,565 |   |
|                                                            |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| **Shareholders’  equity**                                  |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Common  shares, contributed surplus, and convertible securities | ** ** | **133,791**                     | ** ** | **—**                      | ** ** | **133,791** |   | 101,555 |   | — |   | 101,555 |   |
| Deficit*(b)*                                                    | ** ** | **(82,860**                     | **)**      | **—**                      | ** ** | **(82,860** | ) | (63,189 | ) | (878 | ) | (64,067 | ) |
| **Total  shareholders’ equity**                            | ** ** | **50,931**                      | ** ** | **—**                      | ** ** | **50,931** |   | 38,366 |   | (878 | ) | 37,488 |   |
| **Total  liabilities and shareholders’ equity**            | ** ** | **$**                           | **93,339** | ** **                      | **$**      | **—** | ** ** | **$** | **93,339** |   | $ | 87,931 |   | $ | (878 | ) | $ | 87,053 |   |

 

The adjustments to comply with U.S. GAAP,with respect to the consolidated statements of loss for the years ended December 31,2005, 2004 and 2003 would be as follows:

 

21

----

 

| ** **                                                                                                   | ** ** | **For the Years Ended December 31** | ** **  |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| **(In Thousands of Dollars, except per share amounts)**                   | ** ** | **2005**                                                     | ** **  | **2004** | ** ** | **2003** | ** ** |
| Income  (Loss) from operations Canadian GAAP                                                                 | ** ** | **$**                                                        | **(20,483** | ) | $ | (18,018 | ) | $ | 2,588 |   |
| Interest  expense *(a)*                                                                                 | ** ** | **(413**                                                     | )           | (4,917 | ) | (4,936 | ) |
| Other  income, net *(a)*                                                                                | ** ** | **1,012**                                                    |        | 892 |   | 282 |   |
| Foreign  exchange gain (loss) *(a)*                                                                     | ** ** | **213**                                                      |        | (83 | ) | 172 |   |
| Provision  for impairment of Magistral Joint Venture *(a)*                                              | ** ** | **—**                                                   |        | — |   | (6,248 | ) |
| Realized  non-hedge derivative loss *(b)*                                                                    | ** ** | **878**                                                      |        | 2,994 |   | — |   |
| Unrealized  non-hedge derivative loss *(b)*                                                             | ** ** | **—**                                                   |        | (878 | ) | (2,994 | ) |
| Loss from  operations and Net loss under U.S. GAAP                                                           | ** ** | **(18,793**                                                  | )           | (20,010 | ) | (11,136 | ) |
| Other  comprehensive income - unrealized gain on marketable securities in 2002;  realized in 2003 *(c)* | ** ** | **—**                                                   |        | — |   | (198 | ) |
| **Comprehensive  loss under U.S. GAAP**                                                                      | ** ** | **$**                                                        | **(18,793** | ) | $ | (20,010 | ) | $ | (11,334 | ) |
|                                                                                                         |       |                                                         |        |   |   |   |   |
| Net loss per  share - basic and diluted                                                                      | ** ** | **$**                                                        | **(0.04**   | ) | $ | (0.05 | ) | $ | (0.06 | ) |
|                                                                                                         |       |                                                         |        |   |   |   |   |
| Weighted  average number of shares outstanding (000’s) - basic                                          | ** ** | **509,274**                                                  |        | 377,609 |   | 185,866 |   |

 

The adjustments to comply with U.S. GAAP,with respect to the consolidated statements of cash flows for the years ended December 31,2005, 2004 and 2003 would have no material effect on net cash provided by /(used in) operations, cash used in investing activities and cash provided by /(used in) financing activities.

 

The significant differences between generallyaccepted accounting principles (“GAAP”) in Canada and in the United States, asthey relate to these financial statements are as follows:

 

*(a)**      *Certain income andexpense items may be disclosed after income (loss) from operations forCanadian GAAP. These items are included in income (loss) from operations forU.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 putoptions expired in June 2005. These contracts do not qualify as designatedhedges under FAS 133 and FAS 137 and accordingly for U.S. GAAP, changes in thefair value of the outstanding puts are recognized as a component of net loss.Canadian GAAP would not have required a measurement of fair value as thesecontracts were purchased pursuant to a borrowing arrangement.

 

*(c)**       *Under U.S. GAAP,unrealized gains and losses on investments held for re-sale are shownseparately in the derivation of comprehensive income. After the investment issold, the related gain and loss amounts in comprehensive income arereclassified to the statement of loss.

 

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

 

*Stock BasedCompensation*

 

In December 2004, the FASB issued SFAS No. 123R,“Share-Based Payment,” which revised SFAS No. 123, “Accounting forStock-Based Compensation.” SFAS No. 123R will supersede APB Opinion 25, “Accountingfor Stock Issued to Employees” and amends SFAS No. 95, “Statement of CashFlows.”  The significant differences inaccounting from Canadian GAAP under SFAS No. 123R include the requirementto measure and record to the financial statements the costs of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award, recognized over the period during which anemployee is required to provide services in exchange for such award. SFAS 123Ralso requires forfeitures of unvested instruments such as stock options beestimated at the grant date to determine the total compensation to berecognized. Under Canadian GAAP, the Company recognizes the fair value of anemployee’s services award over the vesting period and accounts for forfeituresonly as they occur. SFAS No. 123R is effective January 1, 2006. TheCompany is currently assessing the impact of these and other differencesarising from the application of SFAS 123R.

 

In March 2005, the SEC staff issuedStaff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” whichprovides guidance on the interaction between SFAS No. 123R and certain SECrules and regulations, as well as on

 

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the valuation of share-based payments. SAB No. 107provides interpretive guidance related to valuation methods (includingassumptions such as expected volatility and expected term), first time adoptionof SFAS No. 123R in an interim period, the classification of compensationexpense and disclosures subsequent to adoption of SFAS No. 123R. TheCompany is currently evaluating the impact of SAB No. 107 on ourconsolidated financial statements.

 

*Asset Retirement Obligations*

 

In March 2005, the FASB issuedInterpretation 47 (“FIN 47”), “Accounting for Conditional Asset RetirementObligations”—an interpretation of FASB No. 143. FIN 47 clarifies that theterm “conditional asset retirement obligation” as used in SFAS No. 143refers to a legal obligation to perform an asset retirement activity inwhich the timing and/or method of settlement are conditional on a future eventthat may or may not be within 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 47requires a liability to be recognized for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. FIN 47 was effective for fiscal years ending after December 15,2005. The adoption of FIN 47 did not have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

*Accounting Changes and Error Corrections*

 

In May 2005 the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections.” SFAS No. 154 established new standards on accounting for changes inaccounting 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 foraccounting changes and error corrections made in fiscal years beginning after December 15,2005. Adoption of SFAS No. 154 is not expected to have a material impacton our consolidated financial position, results of operations or cash flows.

 

*Other-Than-TemporaryImpairment*

 

In June 2005, the FASB issued FASB StaffPosition Paper (“FSP”) 115-1, “The Meaning of Other-Than-Temporary Impairmentand its Application to Certain Investments,” superseding EITF 03-1. FSP 115-1will replace the accounting guidance on the determination of whether aninvestment is other-than-temporarily impaired as set forth in EITF 03-1 withreferences to existing other-than-temporary impairment guidance. FSP 115-1 iseffective for reporting periods beginning after December 15, 2005.Adoption of FSP 115-1 is not expected to have a material impact on ourconsolidated financial position, results of operations or cash flows.

 

**24.****       Subsequent Events**

 

On March 29, 2006, the Company enteredinto an agreement with Newmont Canada Limited (“Newmont”) whereby Newmont willpurchase 28.51 million Queenstake common shares at Cdn $0.41 per share forgross proceeds of US $10.0 million through an equity private placement. As part ofthe private placement, Newmont will receive warrants that can be exercised toacquire up to 28.51 million common shares of Queenstake at a price of Cdn$0.55for a four-year period, which would generate Cdn $15.7 million in cash ifexercised. After closing, Newmont will own approximately 4.9% of Queenstake’soutstanding common shares. If Newmont were to exercise all of its warrants andmaintain its holdings of Queenstake’s common shares, Newmont would holdapproximately 8.5% of Queenstake’s fully diluted outstanding common shares. Fora period of two years from closing, Newmont will have the right to participatein future equity offerings by Queenstake to preserve its fully dilutedshareholding percentage and will have certain additional rights to participatein debt financings. The private placement, which remains subject to certainclosing conditions, including regulatory approvals, is expected to close in thesecond quarter of 2006. Proceeds will be used to fund exploration and for othercorporate uses.

 

An affiliate of Newmont has also agreed toconvey three of its Nevada exploration properties to Queenstake on alease-option basis. The properties are subject to a sliding scale net smelterroyalty, dependent on the gold price, of 3% to a maximum of 5% if gold is at orabove $500 per ounce, and Newmont retains the right to back into a 51% jointventure interest in each of the properties.

 

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In addition, another affiliate of Newmont hasagreed to sell concentrates and ore from its Nevada operations to Queenstakefor processing at its Jerritt Canyon roasting and milling facility. Thecontract calls for Queenstake to purchase at least 500,000 tons per year overtwo years. Queenstake will pay Newmont for the recoverable ounces in the purchasedconcentrates and ore, and Queenstake will charge Newmont commercial terms forprocessing and refining. Ore purchases with Newmont may continue for up tothree additional years if Queenstake has the spare processing capacity. Thepurchase of Newmont’s concentrates and ore for processing of at least 500,000tons per year over two years will increase the Jerritt Canyon mill throughputto approximately 95% of its past demonstrated capacity of approximately 1.5million tons per year, which is expected to reduce the Company’s unit operatingcosts.

 

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Form 52-109F1- Certification of Annual Filings

 

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

 

1.                                       I have reviewedthe annual filings (as this term is defined in Multilateral Instrument 52-109 *Certification of Disclosure in Issuers’ Annual andInterim Filings*) of Queenstake Resources Ltd. (the issuer) for theperiod ending December 31, 2005;

 

2.                                       Based on myknowledge, the annual filings do not contain any untrue statement of a materialfact 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.                                       Based on myknowledge, the annual financial statements together with the other financialinformation included in the annual filings fairly present in all materialrespects the financial condition, results of operations and cash flows of theissuer, as of the date and for the periods presented in the annual filings;

 

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

 

a.                                       designed suchdisclosure controls and procedures, or caused them to be designed under oursupervision, to provide reasonable assurance that material information relatingto the issuer, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which theannual filings are being prepared;

 

b.                                      evaluated theeffectiveness of the issuer’s disclosure controls and procedures as of the endof 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 23, 2006

 

 
| /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.                                       I have reviewedthe annual filings (as this term is defined in Multilateral Instrument 52-109 *Certification of Disclosure in Issuers’ Annual andInterim Filings*) of Queenstake Resources Ltd. (the issuer) for theperiod ending December 31, 2005;

 

2.                                       Based on myknowledge, the annual filings do not contain any untrue statement of a materialfact 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.                                       Based on myknowledge, the annual financial statements together with the other financialinformation included in the annual filings fairly present in all materialrespects the financial condition, results of operations and cash flows of theissuer, as of the date and for the periods presented in the annual filings;

 

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

 

c.                                       designed suchdisclosure controls and procedures, or caused them to be designed under oursupervision, to provide reasonable assurance that material information relatingto the issuer, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which theannual filings are being prepared;

 

d.                                      evaluated theeffectiveness of the issuer’s disclosure controls and procedures as of the endof 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 23, 2006

 

 
| /s/ Eric Edwards |   |
|------------------|--------|

Chief Financial Officer

 

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