UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



|Q                                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|                                                
|For the quarterly period ended December 31, 2008
|                                                
|OR                                              
|                                                 |  |                                                                                             
|£                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934



For the transition period from _____ to _____



Commission file number: 333-127635







GRYPHON GOLD CORPORATION

(Exact Name of Registrant as Specified in its Charter)



|Nevada                                                         |  | 92-0185596                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State of other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|675 West Hastings Street, Suite 711                            |  |                                     
|Vancouver, British Columbia                                    |  | V6B 1N2                             
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          



(604) 261-2229

(Registrant's Telephone Number, including Area Code)





(Former name, former address and former fiscal year, if changed since last
report)





Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.      Q
Yes     £ No



Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.  See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check one):

|                              |                            
|----------------------------- | ---------------------------
|Large accelerated filer
    £ | Accelerated filer
    £    
|                              |                            
|Non-accelerated filer
    £   | Smaller reporting company Q



Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)   Yes £
     No Q

Number of common shares outstanding at February 13, 2009: 61,957,065

---

GRYPHON GOLD CORPORATION December 31, 2008

INDEX

|                                   |                                                                                                                                  | Page
    No.(s)
|---------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ---------------
|                                   |                                                                                                                                  |                
|PART I
    - FINANCIAL INFORMATION |                                                                                                                                 
|                                   |                                                                                                                                  |                
|Item 1.                            | Financial
    Statements.                                                                                                        |                
|                                   |                                                                                                                                  |                
|                                   | Unaudited Interim
    Consolidated Financial Statements as of December 31, 2008                                                  | 2              
|                                   |                                                                                                                                  |                
|                                   | Unaudited Consolidated
    Balance Sheet as of December 31, 2008 and Audited
    Consolidated Balance Sheet as of March 31, 2008 | 2              
|                                   |                                                                                                                                  |                
|                                   | Unaudited Consolidated
    Statements of Operations for the three and nine months
    ended December 31, 2008 and 2007           | 3              
|                                   |                                                                                                                                  |                
|                                   | Unaudited Consolidated
    Statements of Stockholders' Equity                                                                    | 4              
|                                   |                                                                                                                                  |                
|                                   | Unaudited Consolidated
    Statements of Cash Flows for the three and nine months
    ended December 31, 2008 and 2007           |                
|                                   |                                                                                                                                  |                
|                                   | Notes to Unaudited
    Interim Consolidated Financial Statements                                                                 | 6              
|                                   |                                                                                                                                  |                
|Item 2.                            | Management's
    Discussion and Analysis of Financial Condition and Results of Operation.                                        | 19             
|                                   |                                                                                                                                  |                
|Item 3.                            | Quantitative and
    Qualitative Disclosures About Market Risk.                                                                  | 31             
|                                   |                                                                                                                                  |                
|Item 4.                            | Controls and
    Procedures.                                                                                                     | 31             
|                                   |                                                                                                                                  |                
|PART II
    - OTHER INFORMATION    |                                                                                                                                 
|                                   |                                                                                                                                  |                
|Item 1.                            | Legal Proceedings.                                                                                                               | 33             
|                                   |                                                                                                                                  |                
|Item 1A.                           | Risk Factors.                                                                                                                    | 33             
|                                   |                                                                                                                                  |                
|Item 2.                            | Unregistered Sales
    of Equity Securities and Use of Proceeds.                                                                 | 34             
|                                   |                                                                                                                                  |                
|Item 3.                            | Defaults Upon
    Senior Securities.                                                                                             | 34             
|                                   |                                                                                                                                  |                
|Item 4.                            | Submission of
    Matters to a Vote of Security Holders.                                                                         | 34             
|                                   |                                                                                                                                  |                
|Item 5.                            | Other Information.                                                                                                               | 34             
|                                   |                                                                                                                                  |                
|Item 6.                            | Exhibits.                                                                                                                        | 36             
|                                   |                                                                                                                                  |                
|SIGNATURES                         | 37                                                                                                                              

i

---

Gryphon Gold Corporation

CONSOLIDATED BALANCE SHEETS

|                                                 | As at        | As at       
|------------------------------------------------ | ------------ | ------------
|                                                 | December 31, | March 31,   
|                                                 | 2008         | 2008        
|                                                 | $            | $           
|                                                 |              |             
|                                                 |              |             
|ASSETS                                           |              |             
|Current                                          |              |             
|Cash                                             | 1,014,678    | 4,196,394   
|Held for trading securities                      | 16,809       | 151,543     
|Accounts receivable                              | 18,098       | 92,104      
|Prepaid expenses                                 | 78,068       | 142,540     
|Total Current Assets                             | 1,127,653    | 4,582,581   
|                                                 |              |             
|Equipment [note 4]                               | 129,685      | 142,511     
|Mineral properties [notes 3 & 5]                 | 7,127,995    | 12,209,864  
|Other assets [note 7]                            | 209,437      | 257,844     
|                                                 | 8,594,770    | 17,192,800  
|                                                 |              |             
|LIABILITIES AND STOCKHOLDERS' EQUITY             |              |             
|Current                                          |              |             
|Accounts payable and accrued liabilities         | 489,066      | 626,843     
|Current portion of capital lease [note 8]        | -            | 18,127      
|Total current liabilities                        | 489,066      | 644,970     
|                                                 |              |             
|Convertible promissory note [note 9]             | 4,711,634    | 4,432,134   
|                                                 |              |             
|Commitments and contingencies [note 12]          |              |             
|                                                 |              |             
|Stockholders' equity                             |              |             
|Common stock                                     | 61,957       | 61,735      
|Additional paid-in capital                       | 38,337,937   | 37,885,549  
|Deficit accumulated during the exploration stage | (35,005,824) | (25,831,588)
|Total stockholders' equity                       | 3,394,070    | 12,115,696  
|                                                 | 8,594,770    | 17,192,800  
|See accompanying notes                           |              |             

See Note 1  Nature of Operations and Going Concern Uncertainty

2

---

Gryphon Gold Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                     |                    |                   |                |              | Period from 
|------------------------------------ | ------------------ | ----------------- | -------------- | ------------ | ------------
|                                     |                    |                   | April 24, 2003
|                                     | Three months ended | Nine months ended | (inception) to
|                                     | December 31,       | December 31,      | December 31,   | December 31, | December 31,
|                                     | 2008               | 2007              | 2008           | 2007         | 2008        
|                                     | $                  | $                 | $              | $            | $           
|Exploration [note 6]                 | 141,667            | 661,007           | 1,422,985      | 3,414,405    | 15,196,617  
|Management salaries and consulting   |                    |                   |                |              |             
|fees [note 11]                       | 258,876            | 529,729           | 1,246,269      | 1,663,160    | 8,551,306   
|General and administrative           | 167,209            | 254,831           | 510,425        | 812,436      | 3,024,456   
|Legal and audit                      | 52,077             | 111,020           | 208,167        | 308,877      | 1,660,962   
|Travel and accommodation             | 2,412              | 68,704            | 119,332        | 172,408      | 1,011,020   
|Depreciation & amortization          | 11,694             | 18,746            | 44,055         | 48,983       | 197,544     
|(Gain) loss on disposal of equipment | 1,309              | -                 | (1,865)        | 6,552        | 24,409      
|Loss on sale of mineral properties   | 34,360             | -                 | 34,360         | -            | 34,360      
|Foreign exchange loss                | 9,675              | 3,034             | 26,589         | 18,336       | 21,112      
|Lease revenue                        | -                  | -                 | (22,598)       | -            | (22,598)    
|Interest income                      | (1,386)            | (40,782)          | (25,536)       | (170,332)    | (731,867)   
|Interest expense                     | 133,129            | 130,300           | 395,487        | 188,853      | 712,450     
|Impairment of carrying value of      |                    |                   |                |              |             
|exploration properties [note 3]      | -                  | -                 | 5,100,000      | -            | 5,100,000   
|                                     |                    |                   |                |              |             
|Unrealized (gain) loss on securities | 7,496              | -                 | (20,325)       | -            | 21,162      
|Realized loss on sale of securities  | -                  | -                 | 136,891        | -            | 136,891     
|                                     |                    |                   |                |              |             
|Net loss for the period              | (818,518)          | (1,736,589)       | (9,174,236)    | (6,463,678)  | (35,005,824)
|                                     |                    |                   |                |              |             
|Basic and diluted loss per share     | $(0.01)            | $(0.03)           | $(0.15)        | $(0.13)      |             
|                                     |                    |                   |                |              |             
|Basic and diluted weighted average   |                    |                   |                |              |             
|number of common shares outstanding  | 61,957,065         | 58,954,952        | 61,796,947     | 49,764,662   |             
|See accompanying notes               |                    |                   |                |              |             

See Note 1  Nature of Operations and Going Concern Uncertainty

3

---

Gryphon Gold Corporation

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                |              |         |             | Deficit      |             
|----------------------------------------------- | ------------ | ------- | ----------- | ------------ | ------------
|                                                |              |         |             | accumulated  |             
|                                                |              |         | Additional  | during the   |             
|                                                | Common stock | paid-in | exploration |             
|                                                | Shares       | Amount  | capital     | stage        | Total       
|                                                | #            | $       | $           | $            | $           
|                                                |              |         |             |              |             
|Balance, inception April 24, 2003               |              |         |             |              |             
|Shares issued:                                  |              |         |             |              |             
|For private placements                          | 38,326,370   | 38,326  | 20,731,825  |             | 20,770,151  
|Share issue costs                               |             |        | (740,553)   |             | (740,553)   
|Initial Public Offering (IPO)                   | 6,900,000    | 6,900   | 5,029,597   |             | 5,036,497   
|Share issue costs (IPO)                         |             |        | (2,241,940) |             | (2,241,940) 
|Compensation component of shares                |              |         |             |              |             
|issued                                          |             |        | 226,000     |             | 226,000     
|Fair value of agents' warrants issued on        |              |         |             |              |             
|private placements [note 10[b]]                 |             |        | 168,137     |             | 168,137     
|Fair value of options granted to                |              |         |             |              |             
|consultants [note 10[c]]                        |             |        | 49,558      |             | 49,558      
|Fair value of underwriters'                     |              |         |             |              |             
|compensation warrants on IPO                    |              |         |             |              |             
|[note 10[b]]                                    |             |        | 135,100     |             | 135,100     
|Fair value of options granted [note             |              |         |             |              |             
|10[c]]                                          |             |        | 1,314,961   |             | 1,314,961   
|Fair value of vested stock grants               | 108,000      | 108     | 151,138     |             | 151,246     
|Exercise of warrants                            | 1,855,775    | 1,856   | 1,742,979   |             | 1,744,835   
|Exercise of options                             | 107,500      | 108     | 83,066      |             | 83,174      
|Net loss since inception                        |             |        |            | (17,980,822) | (17,980,822)
|Balance, March 31, 2007                         | 47,297,645   | 47,298  | 26,649,868  | (17,980,822) | 8,716,344   
|Shares issued:                                  |              |         |             |              |             
|For private placements                          | 9,486,500    | 9,487   | 7,346,431   |             | 7,355,918   
|Share issue costs                               |             |        | (523,288)   |             | (523,288)   
|For mineral properties [note 3]                 | 4,500,000    | 4,500   | 3,444,918   |             | 3,449,418   
|Fair value of agents' warrants issued on        |              |         |             |             |             
|private placements [note 10[b]]                 |             |        | 54,490      |              | 54,490      
|Fair value of options granted                   |              |         |             |             |             
|[note 10[c]]                                    |             |        | 459,519     |              | 459,519     
|Fair value of vested stock grants [notes
    10 |              |         |             |             |             
|[a] &[d]]                                       | 321,250      | 320     | 369,241     |              | 369,561     
|Exercise of warrants [note 10[b]]               | 130,000      | 130     | 84,370      |             | 84,500      
|Net loss for the period                         |             |        |            | (7,850,766)  | (7,850,766) 
|Balance, March 31, 2008                         | 61,735,395   | 61,735  | 37,885,549  | (25,831,588) | 12,115,696  
|Shares issued:                                  |              |         |             |              |             
|Shares issue cost                               |             |        | (9,246)     |             | (9,246)     
|Fair value of options granted                   |              |         |             |              |             
|[note 10[c]]                                    |             |        | 440,219     |             | 440,219     
|Fair value of vested stock grants [notes
    10 |              |         |             |              |             
|[a] &[d]]                                       | 221,670      | 222     | 21,415      |             | 21,637      
|Net loss for the period                         |             |        |            | (9,174,236)  | (9,174,236) 
|Balance, December 31, 2008                      | 61,957,065   | 61,957  | 38,337,937  | (35,005,824) | 3,394,070   
|See accompanying notes                          |              |         |             |              |             

See Note 1  Nature of Operations and Going Concern Uncertainty

4

---

1. NATURE OF OPERATIONS AND GOING CONCERN UNCERTAINTY

Gryphon Gold Corporation was incorporated in the State of
Nevada in 2003 and wholly owns its subsidiaries, Borealis Mining Company,
Gryphon Nevada Eagle Holding Company and Nevada Eagle Resources LLC
(collectively, the Company). The Company is an exploration stage company in
the process of exploring its mineral properties, and has not yet determined
whether these properties contain reserves that are economically
recoverable.

The recoverability of amounts shown for mineral property
interests in the Company's consolidated balance sheets are dependent upon the
existence of economically recoverable reserves, the ability of the Company to
arrange appropriate financing to complete the development of its properties, the
receipt of necessary permitting and upon achieving future profitable production
or receiving proceeds from the disposition of the properties. The timing of such
events occurring, if at all, is not yet determinable. As a result, the Company's
ability to continue as a going concern is in substantial doubt.

Management recognizes that the Company must generate additional
resources to enable it to continue operations. Management intends to raise
additional funds through debt and/or equity financing or through other means
that it deems necessary. However, no assurance can be given that the Company
will be successful in raising additional capital. Further, even if the company
raises additional capital, there can be no assurance that the Company will
achieve profitability or positive cash flow. If management is unable to raise
additional capital and possible significant revenues do not result in positive
cash flow, the Company will not be able to meet its obligations and may have to
suspend or cease operations.

The accompanying financial statements do not include any
adjustments related to the recoverability and classification of assets or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.

2. BASIS OF PRESENTATION

These interim unaudited consolidated financial statements were
prepared by the Company in accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial statements applied on a consistent
basis. These interim financial statements follow the same significant accounting
policies and methods of application as those disclosed in Note 2 to the
Company's audited consolidated financial statements as at and for the year ended
March 31, 2008 (the Annual Financial Statements). Accordingly, they do not
include all disclosures required for annual financial statements. These interim
unaudited consolidated financial statements and notes thereon should be read in
conjunction with the Annual Financial Statements.

The preparation of these interim unaudited consolidated
financial statements and the accompanying notes requires management to make
estimates and assumptions that affect the amounts reported. In the opinion of
management, these interim unaudited consolidated financial statements reflect
all adjustments (which include only normal, recurring adjustments) necessary to
state fairly the results for the periods presented. Actual results could vary
from these estimates and the operating results for the interim periods presented
are not necessarily indicative of the results expected for the full year.

NEW POLICIES ADOPTED

In September 2006, the FASB issued SFAS No. 157, FairValue
Measurements. The objective of SFAS 157 is to increase consistency and
comparability in fair value measurements and to expand disclosures about fair
value measurements. SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements and
does not require any new fair value measurements. The provisions of SFAS 157 are
effective for fair value measurements made in fiscal years beginning after
November 15, 2007. The adoption of SFAS No. 157 did not have a material effect
on the Company's financial statements.

6

---

NEW POLICIES ADOPTED (cont'd)

The Company measures its held for trading securities at fair
value in accordance with SFAS 157. SFAS 157 specifies a valuation hierarchy
based on whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company's own assumptions. These
two types of inputs have created the following fair value hierarchy:

- Level 1  Quoted prices for identical instruments in active markets;
- Level 2  Quoted prices for similar instruments in active markets, quoted
  prices for identical or similar instruments in markets that are not active,
  and model-derived valuations in which all significant inputs and significant
  value drivers are observable in active markets; and
- Level 3  Valuations derived from valuation techniques in which one or
  more significant inputs or significant value drivers are unobservable.

This hierarchy requires the Company to minimize the use of
unobservable inputs and to use observable market data, if available, when
estimating fair value. The fair value of the held for trading securities using
the following inputs at December 31, 2008 is:

Fair Value Measurements at Reporting Date Using

Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsTotal
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)$ 16,809
    $
    16,809
    
    $
    
    
    $
    


In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities(FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value, with theobjective of
improving financial reporting by mitigating volatility in reported earnings
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. The provisions of FAS 159 are
effective for the Company's fiscal year beginning April 1, 2008. Effective April
1, 2008, the Company adopted FAS 159, which did not have a material impact on
the Company's interim unaudited consolidated financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements - an amendment
of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 is effective for our fiscal year
commencing April 1, 2009, including interim periods within that fiscal year.
Earlier adoption is prohibited. The Company believes that SFAS 160 should not
have a material impact on its financial position or results of operations.

In December 2007, the FASB issued FASB Statement No. 141(R),
Business Combinations, which amends SFAS No. 141, and provides revised
guidance for recognizing and measuring identifiable assets and goodwill
acquired, liabilities assumed, and any non-controlling interest in the acquiree.
It also provides disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for the Company's fiscal year
beginning April 1, 2009 and is to be applied prospectively.

7

---

RECENT ACCOUNTING PRONOUNCEMENTS (cont'd)

In March 2008, the FASB issued FAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161). FAS 161
changes the disclosure requirements for derivative instruments and hedging
activities by requiring enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under FAS 133, and how derivative instruments and related hedged
items affect an entity's operating results, financial position, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. Early
adoption is permitted. We are currently reviewing the provisions of FAS 161 and
have not yet adopted the statement. However, as the provisions of FAS 161 are
only related to disclosure of derivative and hedging activities, we do not
believe the adoption of FAS 161 will have a material impact on our consolidated
operating results, financial position, or cash flows.

3. NEVADA EAGLE RESOURCES LLC

On August 21, 2007 Gryphon Gold Corporation closed the
acquisition of Nevada Eagle Resources LLC, a privately held Nevada limited
liability company (Nevada Eagle), pursuant to a membership interest purchase
agreement (the Purchase Agreement), dated July 4, 2007, by and between the
Company, Gerald W. Baughman and Fabiola Baughman, as sellers (Sellers), and
Nevada Eagle. Under the Purchase Agreement, the company acquired all of the
outstanding limited liability company interests of Nevada Eagle from the Sellers
(the Acquisition) for the following consideration, paid on August 21, 2007
(the Closing Date):

| | (a) | $2,500,000 in cash;                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                
| | (b) | 4,500,000 shares of common stock of the Company (the
      Common Shares) valued at $3,449,418; and                                                                          
| |     |                                                                                                                                                                                
| | (c) | a 5% convertible note in the principal amount of
      $5,000,000 (the Convertible Note) with an issue date of August 21, 2007
      and a fair value of $4,272,359 [Note
9].

Consideration paid for acquisition of Nevada EagleCash at closing
    $2,500,000Cash due diligence costsand other expenses
    568,3403,068,340Common shares
    3,449,418Convertible note and valueof conversion feature
    4,272,359$10,790,117Allocation of Purchase PriceMineral properties
    10,719,209Non-competition agreement
    70,908$10,790,117


Subsequent to the purchase of NER, the value for exploration
properties has declined as evidenced by lower publically quoted stock values for
gold exploration companies. As the decline in value is an indicator of
impairment, an impairment test was performed for the quarter ended September 30,
2008. The Company also determined that undiscounted cash flows were not likely
to recover the carrying values of the properties.

The original purchase price allocation for the acquisition of
the NER properties was based on a valuation model provided by an independent
investment-banking firm. The model was driven by three parameters, 1- the value
of an exploration property, 2- the value of an acre of exploration property, and
3  the value of an identified mineral resource on the property. The value of
each parameter was determined from recent similar acquisition transactions in
the marketplace and the market values of a sample of publicly traded gold
exploration companies.

To measure for impairment, the Company updated the valuation
parameters that were utilized for the purchase price allocation. The updated
parameters were input into the valuation model. It was determined that the
Nevada Eagle exploration properties and the non-competition agreement were
impaired by $5,044,883 and $55,117, respectively, for a total of $5,100,000
effective September 30, 2008.

Management determined an impairment charge was not warranted
for the three month period ended December 31, 2008.

8

---

4. EQUIPMENT

|                         | December 31, 2008
|------------------------ | -----------------
|                         |                  
|                         | Cost             
|                         | $                
|                         |                  
|                         |                  
|Office and lab equipment | 199,261          
|Trucks                   | 64,097           
|Total                    | 263,358          

|                                 | March 31, 2008
|-------------------------------- | --------------
|                                 |               
|                                 | Cost          
|                                 | $             
|                                 |               
|Office and lab equipment         | 197,986       
|Trucks under
      capital lease | 71,319        
|Total                            | 269,305       

5. MINERAL PROPERTIES

The Company initially entered into a property option agreement
dated July 21, 2003 to acquire up to a 70% interest in the Borealis property in
Nevada, USA from Golden Phoenix Minerals, Inc. for cash consideration of
$125,000 and the obligation to make qualifying expenditures over several years.
On January 28, 2005, the Company purchased outright the rights to a full 100%
interest in the property for $1,400,000. A cash payment of $400,000 was made on
closing. The Company paid the full outstanding consideration of $1,000,000, in
four quarterly payments of $250,000 during the year ended March 31, 2006.

On August 22, 2008, the Company entered into a 12 month option
agreement, at a cost of $250,000 and an additional $25,000 to cover legal costs,
to amend the Borealis Property mining lease. If exercised, the net smelter
return royalty rate will be fixed at 5%, versus the current uncapped variable
rate. Payment upon exercise of the option is $1,750,000 in cash, 7,726,250
common shares of the Company and a three year, $1,909,500 5% note payable. The
option period can be extended for an additional six months for a payment of
$125,000.

Effective August 21, 2007, the Company purchased all the rights
and interests of Nevada Eagle, as described in note 3. $10,719,209 of the
purchase price was allocated to the value of the exploration properties
acquired.

|                                                                      |  | Total      |  
|--------------------------------------------------------------------- |  | ---------- | -
|                                                                      |  | **$**      |  
|Mineral property costs, March 31,
      2006                          |  | 1,898,207  |  
|Expenditures
      during the year                                    |  | 22,164     |  
|Mineral property costs, March 31,
      2007                          |  | 1,920,371  |  
|Nevada Eagle acquisition [note 3]                                     |  | 10,719,209 |  
|Lease payments received (cash)                                        |  | (245,805   | )
|Lease payments received (shares & warrants)                           |  | (193,030   | )
|Expenditures during the period                                        |  | 9,119      |  
|Mineral property costs, March 31, 2008                                |  | 12,209,864 |  
|Lease payments received (cash)                                        |  | (258,500   | )
|Proceeds from sale of properties                                      |  | (50,000    | )
|Lease payments received (shares)                                      |  | (10,000    | )
|Loss on sale of properties                                            |  | (34,360    | )
|Expenditures during the period                                        |  | 29,971     |  
|Option to amend Borealis Property mining lease                        |  | 285,903    |  
|Impairment of carrying value of exploration properties
      [note 3] |  | (5,044,883 | )
|Mineral
      property cost, December 31, 2008                        |  | 7,127,995  |  

9

---

6. EXPLORATION

Period from AprilThree month ended
    Nine month ended
    24, 2003(inception) toDecember
    December
    December
    December
    December 31,31, 2008
    31, 2007
    31, 2008
    31, 2007
    2008$
    $
    $
    $
    $NEVADA, USABorealis propertyExploration:Drilling
    21,083
    262,095
    423,291
    1,990,632
    7,128,672Property maintenance
    42,711
    194,654
    399,766
    546,233
    2.944,856Geologic and
      assay
    995
    106,752
    64,787
    609,393
    2,033,111Project management
    50,137
    69,899
    204,883
    189,772
    1,606,672Engineering
    12,401
    15,353
    283,096
    20,353
    1,108,881Metallurgy
    14,002
    9,556
    34,373
    35,324
    331,209Subtotal Borealis property
    141,329
    658,309
    1,410,196
    3,391,707
    15,153,401Other exploration
    338
    2,698
    12,789
    22,698
    43,216Total exploration
    141,667
    661,007
    1,422,985
    3,414,405
    15,196,617


7. OTHER ASSETS

December 31,
    March 31,2008
    2008$
    $Reclamation bond & deposits
    209,437
    195,636Non-compete
      agreement [note 3]
    -
    62,208209,437
    257,844


On December 31, 2008, the Company had $182,260 (March 31, 2008
- $168,459) on deposit to support a performance bond with the United States
Forest Service. The Company also holds a deposit with the Bureau of Land
Management (BLM) for $27,177 (March 31, 2008 - $27,177), which supports its
potential future obligations for reclamation during the Company's exploration
activities within the BLM area. At December 31, 2008, the Company has recorded
an estimated reclamation liability of $5,600 (March 31, 2008  $5,600)
representing future obligations related to its general property activities
completed to December 31, 2008.

As part of the acquisition of Nevada Eagle, the primary
interest holder entered into a non-compete agreement. The non-compete agreement
was being amortized on a straight line basis over 5 years. At September 30,
2008, the value of the non-compete agreement was reduced to zero in conjunction
with the recording of an impairment in value of the Nevada Eagle exploration
properties [note 3].

8. CAPITAL LEASE

The Company leased a truck that was accounted for as a capital
lease, with the present value of the required lease payments recorded as a
liability and an asset at inception and thereafter lease payments reduce the
liability and result in interest expense and the asset is depreciated. The truck
was returned to the leasing company at the end of the minimum term of the lease,
during the quarter ended June 30, 2008, which extinguished any further required
lease payments.

10

---

9. CONVERTIBLE PROMISSORY NOTE

|                                                                                                                                                                                                                                                                                                              | December 31, | March 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------
|                                                                                                                                                                                                                                                                                                              | 2008         | 2008     
|                                                                                                                                                                                                                                                                                                              | $            | $        
|Convertible promissory note, with a face value of
      $5,000,000 due March 30, 2010, unsecured, bearing interest at 5%. Interest
      is payable each January 1stand June 1st. Discount
      accretion for the period from August 21, 2007 (date of issue) to December
      31, 2008, totalled $365,988. | 4,711,634    | 4,432,134

Gryphon Gold issued a Convertible Promissory Note to the former
owner of Nevada Eagle with a face amount of $5,000,000, due March 30, 2010,
bearing interest at 5% per annum, payable on January 1 and June 1 of each year.
The note is convertible at the holder's option into shares for the first 12
months after closing at a conversion price of $1 per common share; for the next
12 months at $1.25 per common share; for the period 24 months from closing to
March 29, 2010 at $1.50 per common share and on March 30, 2010 at $1.75 per
common share. The conversion rate is subject to certain anti-dilution
adjustments and is subject to adjustment on payment of cash dividends by Gryphon
Gold. Upon an event of default, which includes amongst other things a change in
control of Gryphon Gold, the holder may demand repayment of the principal amount
of the debenture or exercise the conversion feature for a fixed number of
shares. After an event of default, the interest rate on the convertible
debenture increases to 9%. The change in control event of default acceleration
feature is considered an embedded derivative however its issue date fair value
is not considered to be significant, nor is it considered to be significant at
December 31, 2008. The conversion feature does not require bifurcation in the
financial statements because it is not a beneficial conversion feature and a
cash payment is not required if common shares issued at time of conversion are
never successfully registered. The Convertible Promissory Note, including the
conversion feature and change in control event of default acceleration feature
embedded derivative, was recorded at its estimated issue date fair value of
$4,272,359 at date of issue. Interest and discount accretion of $188,356 and
$206,211, for the nine months ended December 31, 2008, has been recorded as
interest expense in the unaudited consolidated income statement. The former
owner of Nevada Eagle is also an employee of the Company (see note 3).

Effective August 5, 2008, the Company entered into an option
agreement with Gerald W. Baughman and Fabiola Baughman to amend the $5 million
face value note payable to them at a cost of $35,000. The option period is
twelve months and extendable for another six months for an additional $35,000.
At the time the option is exercised, the note payable will be reduced by $2.5
million by a payment of $500,000 in cash and 4,000,000 common shares of the
Company. Upon exercise of the option, the conversion rate of the remaining $2.5
million note payable would be amended to $0.70 per common share until March 30,
2009, $0.80 per common share until March 30, 2010, and the maturity date would
be extended from March 30, 2010 to March 30, 2012 and secured by certain
exploration properties. The Company may exercise the option if the royalty on
the Borealis property has been fixed at 5% or lower, and there is an arrangement
to merge the Company or the financing of a mine on the Borealis property has
been completed.

On November 10, 2008, the 5% convertible promissory note was
amended so that cash interest payments shall be $73,288 and $51,713 each January
1 and June 1, respectively, or one half of the previous amounts. The unpaid
interest will be added to the principal balance of the note, compound monthly at
5% and become due and payable at the due date of the note, March 30, 2010.

11

---

10. CAPITAL STOCK

|[a] | Authorized capital stock consists of 150,000,000 common
      shares with a par value of $0.001 per share and 15,000,000 preferred
      shares with a par value of $0.001 per share.                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | During the quarter ended September 30, 2008, the company
      issued 180,000 common shares to directors. The issuance was the last
      vesting of restricted stock grants dated January 10, 2007.                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | During the quarter ended June 30, 2008, the company
      issued 41,670 common shares to a director (retired April 8, 2008). The
      issuance was provided under a transition agreement, which allowed 2,778
      restricted stock units to vest monthly commencing January 2007 and until
      such time as this individual retired from the board of directors. See also
      note 10[d].
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|[b] | Warrants:                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The following table contains information with respect to
      all warrants:                                                                                                                                                                                                                                                                                                                    

|                                                           |  | Number of Warrants |   |  | Fair Value of Warrants | 
|---------------------------------------------------------- |  | ------------------ | - |  | ---------------------- | 
|                                                           |  | #                  |   |  | $                      | 
|                                                           |  |                    |   |  |                        | 
|Warrants outstanding, March 31, 2004                       |  |                   |   |  |                       | 
|Issued for:                                                |  |                    |   |  |                        | 
|Private placements                                         |  | 3,407,981          |   |  |                       | 
|Agents' compensation                                       |  | 141,008            |   |  | 45,100                 | 
|Exercised                                                  |  |                   |   |  |                       | 
|Warrants outstanding, March 31, 2005                       |  | 3,548,989          |   |  | 45,100                 | 
|Issued for:                                                |  |                    |   |  |                        | 
|Private placements                                         |  | 3,015,204          |   |  |                       | 
|Agents' compensation on
      private placement            |  | 130,000            |   |  | 35,100                 | 
|Initial Public Offering (IPO)  Series
      A             |  | 6,900,000          |   |  |                       | 
|Underwriters'
      compensation on IPO                    |  | 690,000            |   |  | 135,100                | 
|Private placements  Series B                              |  | 2,737,500          |   |  |                       | 
|Agents' compensation on
      private placement  Series C |  | 280,500            |   |  | 76,540                 | 
|Exercised                                                  |  | (197,500           | ) |  |                       | 
|Warrants outstanding, March 31, 2006                       |  | 17,104,693         |   |  | 291,840                | 
|Issued for:                                                |  |                    |   |  |                        | 
|Private placements 
      Series D                        |  | 64,500             |   |  |                       | 
|Private placements  Series E                              |  | 5,000,000          |   |  |                       | 
|Agents' compensation on
      private placement  Series F |  | 85,050             |   |  | 11,397                 | 
|Exercised                                                  |  | (1,658,275         | ) |  |                       | 
|Expired                                                    |  | (15,175,410        | ) |  |                       | 
|Warrants outstanding, March 31, 2007                       |  | 5,420,558          |   |  | 303,237                | 
|Issued for:                                                |  |                    |   |  |                        | 
|Private placements  Series G                              |  | 5,000,000          |   |  |                       | 
|Private placements  Series I                              |  | 4,486,500          |   |  |                       | 
|Agents' compensation on private placement 
      Series H |  | 265,050            |   |  | 44,040                 | 
|Agents' compensation on
      private placement  Series J |  | 89,530             |   |  | 10,450                 | 
|Exercised                                                  |  | (130,000           | ) |  |                       | 
|Expired                                                    |  | (290,558           | ) |  |                       | 
|Forfeited                                                  |  | (14,000            | ) |  |                       | 
|Warrants outstanding, March 31, 2008                       |  | 14,827,080         |   |  | 357,727                | 
|Expired                                                    |  | (340,580           | ) |  |                       | 
|Warrants outstanding, December 31, 2008                    |  | 14,486,500         |   |  | 357,727                | 

12

---

10. CAPITAL STOCK (cont'd)

The following table summarizes
information about warrants outstanding and exercisable as at December 31, 2008:

|Warrants Outstanding and Exercisable                                           
|-------------------------------------------------------------------------------
|                                                                               
|                                                                               
|Warrants                                                                       
|#                                                                              
|5,000,000                                                                      
|5,000,000                                                                      
|3,254,000                                                                      
|1,050,000                                                                      
|182,500                                                                        
|14,486,500                                                                     
|**Based
      on the December 31, 2008 exchange rate of Cdn$1 equals US$.08210.

|    | The fair value of agents' and underwriters' warrants
      issued during 2008, 2007 and 2006 has been estimated using the
      Black-Scholes Option Pricing Model based on the following assumptions: a
      risk-free interest rate of 3.38% to 5.21% as of the date of transaction;
      expected life of 1 to 3 years depending on their terms; an expected
      volatility of 51% to 70% (based on the average volatility of companies in
      the industry at date of issuance for period equivalent to the expected
      life); and no expectation for the payment of dividends.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[c] | Stock options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On April 8, 2008 directors, officers, a consultant and an
      employee were granted 500,000 options. 25% of these options vested June
      30, 2008 while the remaining will vest over the next three quarters and
      are exercisable for 5 years at a price of Cdn$0.41 per share.                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On July 2, 2008, an investor relations firm was granted
      250,000 stock options. The options vest over one year and are exercisable
      at a price of Cdn$0.40 for a term of two years.                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On July 7, 2008, several directors, officers and one
      consultant cancelled 2,627,500 options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On July 8, 2008, four employees and one consultant were
      granted 385,000 options. These options vest over one year and are
      exercisable at a price of Cdn$0.38 for a term of five years.                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On July 21, 2008, a director was granted 200,000 options.
      These options vest over one year and are exercisable at a price of
      Cdn$0.38 for a term of five years.                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On August 1, 2008, 750,000 stock options were granted to
      three executive officers. 550,000 of these options vest over the next two
      years, while the remaining 200,000 vest in the next six months. The
      options are exercisable at a price of Cdn$0.41 for a term of five
      years.                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On August 5, 2008, 3 employees and one consultant
      cancelled 940,000 options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On September 5, 2008, 175,000 options were forfeited by a
      director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On September 16, 2008 550,000 options were granted to two
      directors and a consultant. 400,000 options vest at date of grant and
      150,000 vest in the next nine months. The option are exercisable at a
      price of Cdn$0.28 for a term of five years.                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On September 18, 2008, 150,000 options were granted to a
      consultant which vested immediately, and have a term of five years and an
      exercise price of Cdn$0.26 per share.                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On November 18, 2008, 150,000 options were granted to a
      director which 37,500 have vested and the remaining 112,500 will vest in
      the next 8 months, and have a term of five years and an exercise price of
      Cdn$0.07 per share.                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On November 20, 2008, 275,000 options were granted to a
      consultant which vested immediately and have a term of five years and an
      exercise price of Cdn$0.07.                                                                                                                                                                                                                                                                                                                                                                                                                    

13

---

10. CAPITAL STOCK (cont'd)

| | On November 24, 2008, 250,000 options were
      granted to a consultant which vested immediately and have a term of five
      years and an exercise price of Cdn$0.26.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The Company recognizes stock-based compensation expense
      over the requisite service period of the individual grants, which
      generally equals the vesting period. SFAS 123(R) requires forfeitures to
      be estimated at the time of grant and revised, if necessary, in subsequent
      periods if actual forfeitures differ from those estimates. The Company's
      total employees are relatively few in number and turnover is considered
      remote, therefore the Company currently estimates forfeitures to be 15%.
      Estimate of forfeitures is reviewed on a quarterly basis. Stock-based
      compensation is expensed on a straight-line basis over the requisite
      service period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The Company recorded total non-cash stock-based
      compensation expense related to stock options and restricted stock units
      as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Three months ended
      Nine months endedDecember
      December
      December
      December31, 2008
      31, 2007
      31, 2008
      31, 2007$
      $
      $
      $Management salaries, exploration expense &consulting fees
      70,174
      199,422
      468,620
      683,916
 Stock option activity

The following table summarizes the Company's stock
option activity for the nine months ended December 31, 2008: Number of
      Weighted AverageStock Options
      exercise priceOutstanding, April 1, 2008
      6,069,500
      $0.83Granted
      3,460,000
      $0.27Exercised
      -
      -Forfeited
      (4,185,000)
      $0.80Total outstanding at December 31, 2008
      5,344,500
      $0.49Vested and exercisable at December 31, 2008
      4,014,500
      $0.54* Based on the December 31, 2008
      exchange rate of Cdn$1 equals US0.8210.


14

---

10. CAPITAL STOCK (cont'd)

The following table summarizes
information about stock options outstanding as at December 31, 2008:

Stock Options Outstanding and ExercisableAverage RemainingStock Options
    Average Remaining
    Stock Options
    Life
    Exercise priceOutstanding
    Life
    Exercisable
    of Exercisable(Years)
    
    (Years)825,000
    1.2
    825,000
    1.2
    $0.7595,000
    1.9
    95,000
    1.9
    Cdn$0.8550,000
    2.0
    50,000
    2.0
    Cdn$1.2530,000
    2.2
    30,000
    2.2
    Cdn$1.37395,000
    2.3
    395,000
    2.3
    Cdn$1.3720,000
    2.3
    20,000
    2.3
    Cdn$1.3730,000
    2.4
    30,000
    2.4
    Cdn$1.6050,000
    2.6
    50,000
    2.6
    Cdn$1.2950,000
    2.8
    50,000
    2.8
    Cdn$1.3490,000
    3.0
    90,000
    3.0
    Cdn$0.8120,000
    3.1
    20,000
    3.1
    Cdn$0.88125,000
    3.2
    125,000
    3.2
    Cdn$0.8020,000
    3.4
    20,000
    3.4
    Cdn$0.9585,000
    3.7
    42,500
    3.7
    Cdn$0.9047,000
    3.8
    47,000
    3.8
    Cdn$0.88150,000
    4.1
    25,000
    4.1
    Cdn$0.62250,000
    4.2
    100,000
    4.2
    Cdn$0.4920,000
    4.2
    20,000
    4.2
    Cdn$0.43387,500
    4.3
    312,500
    4.3
    Cdn$0.4162,500
    4.5
    62,500
    4.5
    Cdn$0.40367,500
    4.5
    192,500
    4.5
    Cdn$0.38100,000
    4.6
    100,000
    4.6
    Cdn$0.38750,000
    4.6
    150,000
    4.6
    Cdn$0.41500,000
    4.7
    450,000
    4.7
    Cdn$0.28150,000
    4.7
    150,000
    4.7
    Cdn$0.26150,000
    4.9
    37,500
    4.9
    Cdn$0.07275,000
    4.9
    275,000
    4.9
    Cdn$0.07250,000
    4.9
    250,000
    4.9
    Cdn$0.265,344,500
    
    4,014,500


Valuation assumptions

Compensation expense recorded in the
financial statements has been estimated using the Black-Scholes option-pricing
model. The assumptions used in the pricing model include:

| |                         | 2009          | 2008         
| | ----------------------- | ------------- | -------------
| |                         |               |              
| | Dividend yield          | 0%            | 0%           
| | Expected volatility     | 51%-68%       | 49% - 55%    
| | Risk free interest rate | 1.20-2.83%%   | 1.79% -4.63% 
| | Expected lives          | 3
      years | 3
      years

The risk-free interest rate is
determined based on the rate at the time of grant for US government zero-coupon
bonds for a 3-year term, which is a term equal to the estimated life of the
option. Dividend yield is based on the stock option's exercise price and
expected annual dividend rate at the time of grant. Volatility is derived by
measuring the average share price fluctuation of three publicly listed companies
that operate in the same industry. The period of historical volatility is the
same period as the expected life of the option being 3 years.

15

---

10. CAPITAL STOCK (cont'd)

The Black-Scholes option-pricing model
used by the Company to calculate option values was developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
Options pricing models require the input of highly subjective assumptions,
including future stock price volatility and expected time until exercise, which
greatly affect the calculated values. Changes in these assumptions can
materially affect the fair value estimate and therefore it is management's view
that the existing models do not necessarily provide a single reliable measure of
the fair value of the Company's equity instruments.

The weighted-average fair value of
options granted during the nine months ended December 31, 2008 was US$0.10.
Options granted under the Company Option Plan are not available to be granted
again under the Company Option Plan upon exercise.

[d]

Restricted stock
units:

The RSU stock grant entitles the
recipient to receive shares of common stock of the Company upon vesting. The RSU
grants can vest immediately or over a period for up to five years.

On July 10, 2008, 180,000 RSU's vested
for four directors.

On September 5, 2007, the Company
entered into a Transition Agreement with an employee and director (see note
10(c) and note 12). Among other things, the agreement provided a grant of
112,500 RSU's that vest over two years; 18,750 RSU's that were to vest in
January 2008 were forfeited; a grant of 50,000 RSU's was forfeited and replaced
with a new RSU agreement that provides 2,778 units for each full month of
service (subject to a maximum of 50,000 RSU's) completed as a member of the
Board of Directors beginning January 1, 2007 and vest upon resignation from the
Board of Directors. Effective April 8, 2008, the individual resigned from the
Board and 41,670 RSU's vested.

The Company recognizes stock-based
compensation expense based on the grant date fair value of the award on a
straight-line basis over the requisite service period of the individual grants,
which generally equals the service period. The grant date fair value of the
restricted stock unit is calculated using the closing price of the Company's
common stock on the date of the grant.

The following table summarizes
information about restricted stock units outstanding as at December 31, 2008:

RSU's
    RSU's
    RSU's
    RSU's
    WeightedGranted
    Vested
    Forfeited
    Outstanding
    Average FairValue at GrantDateOutstanding at April 1, 2006
    
    
    
    
    Issued April 18, 2006
    8,000
    8,000
    
    
    Cdn$1.63Issued December 12, 2006
    29,000
    15,000
    14,000
    
    Cdn$0.84Issued January 10, 2007
    607,500
    488,750
    118,750
    
    Cdn$0.82Issued May 1, 2007
    10,000
    
    10,000
    
    Issued
      September 6, 2007
    154,170
    41,670
    
    112,500
    Cdn$0.77Outstanding at December 31, 2008
    808,670
    553,420
    142,750
    112,500
    $0.63**
      Based on the December 31, 2008 exchange rate of Cdn$1 equals
      US$0.8210.


16

---

11. RELATED PARTY TRANSACTIONS

All transactions with related parties have occurred in the
normal course of operations and are measured at their exchange amount as
determined by management. All material transactions and balances with related
parties not disclosed elsewhere are described below:

On March 20, 2008, the Company entered into a consulting
agreement with a director, former employee and shareholder for certain financial
services. The individual was paid $31,500 during the quarter ended June 30,
2008. Effective September 1, 2008, the terms of the financial services agreement
were amended and the individual was paid $32,250 during the quarter ended
September 30, 2008. During the quarter ended December 31, 2008 the consulting
agreement was terminated and the individual was paid $30,259.

In November 2008, the Company entered into two Consulting
Agreements with two former employees for certain financial services and
geological consulting services. There were no payments made to the individuals
under these agreements during the quarter ended December 31, 2008.

12. COMMITMENTS & CONTINGENCIES

[a] A portion of the Borealis Property is subject to a mining
lease. The Company is required to make monthly lease payments of $9,485,
adjusted annually based on the Consumer Price Index, for the duration of the
lease term. In addition, production of precious metals from the Borealis
Property will be subject to the payment of a royalty under the terms of the
mining lease. The mining lease expires in 2009, but may be renewed by the
Company annually thereafter, so long as mining related activity, including
exploration drilling, continues on the Borealis Property. The Company has the
option to terminate the mining lease at any time prior to expiry in 2009.

[b] The Company rents office space in Vancouver, BC for a 5
year term, commencing Sept 2008, and office space in Hawthorne, Nevada for a one
year term. The following are the remaining rental lease commitments in relation
to the office lease:

$2009
    15,6402010
    51,5612011
    49,3612012
    51,5442013
    51,5442014
    21,477


The Vancouver office has been sub-leased commencing Feb 1, 2009
for 4 years and 7 months (remaining life on lease) for Cdn$4,000 per month. The
subtenant has an option to terminate the lease on January 31, 2011; such option
must be exercised during October, 2010. If the option to terminate Sublease
Agreement is not executed by the Subtenant, then the agreement shall continue
until the expiration date. $68,000, the difference between the required lease
payments and the estimated future sub-lease receipts, has been accrued as a loss
at quarter ended December 31, 2008.

[c] In September 2007, the Company entered into a Transition
Agreement with an individual under which, the individual will cease to be an
employee and will continue as a director of the Company. The individual was
granted 112,500 Restricted Stock Units that will vest at 37,500 each on April 1,
2009, July 1, 2009 and October 1, 2009. The agreement provides for certain
incidental expenses for 18 months beginning October 2007. The Company recorded a
charge to expense of $322,464 during the quarter ended September 30, 2007 to
accrue the cost of the agreement.

[d] In August 2008, the Company entered into a Transition
Agreement with an individual under which, the individual ceased to be an
employee effective August 31, 2008 and ceased to be a director of the Company
September 4, 2008. The individual will receive monthly payments of Cdn$12,500
and certain incidental expenses for 12 months beginning September 2008. The
Company recorded a charge to expense of $162,809 during the quarter ended
September 30, 2008 to accrue the cost of the agreement. On December 12, 2008 the
individual and the Company terminated the Transition Agreement eliminating the
nine Cdn$12,500 future monthly payments and entered into a consulting agreement
requiring a Cdn$50,000 payment on January 1, 2009. The Cdn$50,000 has been
accrued as of December 31, 2008.

17

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[e] The market value and the market values for companies
similar to the Company have declined considerably over the past twelve months.
To preserve as much cash as possible and to ensure liquidity for the longest
period possible, the Company implemented steps to reduce the rate of cash
expenditure. These steps included reducing the number of personnel to three at
reduced compensation, terminating four full time employees, and temporarily
suspending development work on the Borealis property, including engineering
work. The Company also eliminated all discretionary spending. During the quarter
ended December 31, 2008, the Company recorded $178,887 in total severance cost.

18

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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.

Forward-Looking Statements

The information in this quarterly report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business plans and expectations. Such
forward-looking statements involve risks and uncertainties regarding the market
price of metals, commodities and precious metals, availability of funds,
government regulations, common share prices, operating costs, capital costs,
outcomes of ore reserve exploration and other factors. Forward-looking
statements are made, without limitation, in relation to operating plans,
property exploration, availability of funds, environmental reclamation,
operating costs and permit acquisition. Any statements contained herein that are
not statements of historical facts may be deemed to be forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential or continue, the
negative of such terms or other comparable terminology. Actual events or results
may differ materially. In evaluating these statements, you should consider
various factors, including the risks outlined below, and, from time to time, in
other reports we file with the Securities and Exchange Commission (SEC),
including, but not limited to our annual report n Form 10KSB/S as filed on July
8, 2008. These factors may cause our actual results to differ materially from
any forward-looking statement. We disclaim any obligation to publicly update
these statements, or disclose any difference between our actual results and
those reflected in these statements. Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements.

Cautionary Note Regarding Management's Discussion and
Analysis

This discussion and analysis should be read in conjunction with
the accompanying Consolidated Financial Statements and related notes. The
discussion and analysis of the financial condition and results of operations are
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of any contingent liabilities at the financial statement
date and reported amounts of revenue and expenses during the reporting period.
On an on-going basis, the company reviews its estimates and assumptions. The
estimates were based on historical experience and other assumptions that the
company believes to be reasonable under the circumstances. Actual results are
likely to differ from those estimates under different assumptions or conditions,
but the company does not believe such differences will materially affect our
financial position or results of operations. Critical accounting policies, the
policies the company believes are most important to the presentation of its
financial statements and require the most difficult, subjective and complex
judgments, are outlined below in Critical Accounting Policies, and have not
changed significantly.

Overview:

We were established as a private company in April 2003 to
acquire and develop gold properties in the United States. Our objective is to
establish a producing gold company through the development and extraction of
gold deposits. In December of 2005, we completed our initial public offering.

In July 2003, through our wholly owned subsidiary Borealis
Mining, we acquired from Golden Phoenix an option to earn up to a 70% joint
venture interest in the mining lease for the Borealis Property and in January of
2006 completed the acquisition of all of the Golden Phoenix interest in the
Borealis Property. We now control, subject to a lease and royalty agreement,
approximately 23 square miles of claims located on land administered by the
Bureau of Land Management and Forest Service near Hawthorne Nevada.

We funded our early exploration activity and property
acquisition through a series of private placements and the proceeds received
from our initial public offering.

19

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In January 2007, we started the process of completing a mineral
resource estimate covering the entire property that included all drilling
results obtained during calendar year 2007. The mineral resource estimate was
completed April 28, 2008 and is available for review on the System for
Electronic Document Analysis and Retrieval (SEDAR) at website:
www.sedar.com and on the Company's website at www.gryphongold.com.
The report is entitled Technical Report on the Mineral Resources of the
Borealis Gold Project Located in Mineral County, Nevada, USA,(the Technical
Report) and was compiled by Dr. Roger Steininger, Ph.D., CPG.

On February 9, 2007 we completed a private placement of 5.0
million units at a price of Cdn$0.90 per unit for gross proceeds of Cdn$4.5
million. Each unit consisted of one common share and one full purchase warrant.
The two year warrants are exercisable at a price of Cdn$1.10 if exercised within
twelve months of the closing and at a price of Cdn$1.35 if exercised after the
first anniversary but prior to expiry. We paid qualified registered dealers a 7%
cash commission in the amount of Cdn$77,175 and issued compensation options to
acquire 85,050 common shares (at a price of Cdn$0.90 per share for a period of
12 months from closing) in respect of the 1.225 million units placed by them.
The shares, warrants and underlying shares were not qualified by prospectus and
were not registered under U.S. securities laws. We granted registration rights
to the investors in this private placement and used commercially reasonable
efforts to prepare and file a registration statement with the SEC. The proceeds
of this offering were applied to fund the continuation of our exploration and
development program on the Borealis Property.

On July 4, 2007, we entered into a membership interest purchase
agreement with Gerald W. Baughman and Fabiola Baughman, as sellers, and Nevada
Eagle, under which we agreed to purchase all of the outstanding limited
liability company interests of Nevada Eagle. Upon closing of the membership
interest purchase agreement on August 21, 2007, we acquired Nevada Eagle from
the sellers for the following consideration:

| | (a) | 2,500,000 in cash;                                                                  
| | --- | ------------------------------------------------------------------------------------
| |     |                                                                                     
| | (b) | four million five hundred thousand (4,500,000) shares of
      our common stock; and
| |     |                                                                                     
| | (c) | a 5% convertible note in the principal amount of
      $5,000,000.                  

The convertible note, due March 30, 2010, bears interest at the
annual rate of 5% and is convertible at the option of the holder into common
shares at an initial conversion price of $1.00 per share during first the twelve
month period following the closing date, $1.25 per share during the second
twelve month period following the closing date, $1.50 per share thereafter and
$1.75 per share if converted on March 30, 2010. The interest payments are due on
a semi-annual basis beginning on January 1, 2008. In addition to the purchase
consideration, the Baughmans were entitled to all revenues of Nevada Eagle
(payable in cash, stock, or other consideration) calculated to be received and
received on the assets and properties of Nevada Eagle from January 1, 2007
through midnight on December 31, 2007.

In addition, we granted the sellers registration rights under
which we agreed to file (within the later of (i) 90 days of the closing date or
(ii) any date in which we are required to file a registration statement for a
third-party in connection with a financing or acquisition, but no later than 120
days of the closing date) a resale registration statement to register the common
shares issuable at closing and issuable upon exercise of the convertible note
under the Securities Act of 1933, as amended. We filed a registration statement
to register the securities.

20

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We executed the following agreements at closing:

| | (a) A Lock-up Agreement, dated August 21, 2007, under which
      the Sellers agreed that for a period of three months following the Closing
      Date not to sell Common Shares issued or issuable under the Purchase
      Agreement and Convertible Note and, thereafter, to limit the sale of such
      Common Shares to 20% of the aggregate Common Shares issued under the
      Purchase Agreement and Convertible Note each quarter (with unsold Common
      Shares aggregating each quarter thereafter);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (b) An Employment Agreement between us and Mr. Baughman for
      a term of one year, renewable by the parties, to serve as our Vice
      President of Corporate Development; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (c) A Non-Competition Agreement under which the Sellers
      have agreed not to compete with the Registrant for the latter of (i)
      twelve (12) months following the Closing Date (the Restricted Period),
      or (ii) twelve (12) months following the termination of the Company's
      employment of Gerald Baughman. The scope of the non-competition obligation
      relates to the business of acquiring and/or holding base metal and
      precious metal mineral assets located in the state of Nevada within the
      Area of Interest and to properties that have been examined by the
      Registrant or Mr. Baughman during the course of his employment by the
      Registrant, in any manner or capacity. Area of Interest is defined as
      any property owned by the Registrant, Nevada Eagle, or any affiliate of
      the Registrant or Nevada Eagle on the latter of (i) Closing Date or (ii)
      the termination date of Gerald Baughman's employment by the Registrant, if
      any, together with any adjacent areas within one kilometer of the exterior
      boundary of such properties.

On August 7, 2007, we closed a private placement of 5.0 million
units at a price of Cdn. $0.80 per unit for gross proceeds of Cdn. $4.0 million.
Each unit consisted of one common share and one full purchase warrant. The two
year warrants are exercisable at a price of Cdn$1.00 if exercised within twelve
months of the closing and at a price Cdn$1.25 if exercised after the first
anniversary but prior to expiry. We paid qualified registered dealers cash
commissions in the amount of Cdn$152,040 and issued warrants to acquire 265,050
common shares (at a price of Cdn$0.83 for a period of up to 9 months from
closing). The shares, warrants and underlying shares were not qualified by
prospectus, were not registered under U.S. securities laws and were subject to
resale restrictions. The Company has granted registration rights to the
investors in this private placement and used commercially reasonable efforts to
prepare and file a registration statement with the SEC. Such registration was
filed. The proceeds of this offering were applied to fund the continuation of
our exploration and development programs.

On December 14, 2007 we completed a private placement of
4,486,500 units at Cdn$0.80 for gross proceeds of approximately Cdn$3,589,200.
The private placement closed in three tranches on November 22, November 27 and
December 14, 2007. Each unit consisted of one common share and one series I
warrant. Each series I warrant entitles the holder to purchase a common share at
a price of Cdn$1.00 per share during the first 12 months after closing and
Cdn$1.25 per share during the second 12 months after closing and until expiry.
We paid qualified registered dealers a 7% cash commission in the amount of
Cdn$71,624 and issued compensation warrants (series J) to acquire 89,530 common
shares (at a price of Cdn$0.80 per share for a period of 9 months from closing)
in respect of the 1,204,000 units placed by them (14,000 of the compensation
warrants were later rejected and cancelled by one of the registered dealers). We
have a right to force warrant holders to exercise warrants, if the price of our
common stock remains equal to or greater than, Cdn$1.85 per common share, for a
period of twenty consecutive days. The shares, warrants and underlying shares
were not qualified by prospectus, have not been registered under U.S. securities
laws, and are subject to resale restrictions. We granted registration rights to
the investors in this private placement and will use commercially reasonable
efforts to prepare and file with the SEC a registration statement under the
Securities Act and to cause such statement to be declared effective. The
proceeds of this offering will be applied to fund the continuation of our
exploration and development program on the Borealis Property.

In the calendar year 2007, we continued extension drilling,
focused on the expansion of the Graben deposit and exploration drilling for a
new gold deposit within the two newly identified potentially gold-bearing
hydrothermal systems in the pediments. This drilling program consisted of a
series of Graben deposit expansion drilling and extension drilling north and
west of the successful G3  G13 fence of holes. The drilling of the Graben
deposit alternated with follow up exploration drilling in the Central and
Western Pediments where 10 holes have intersected two distinct hydrothermal
systems hidden beneath the pediments.

21

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In April of 2008, we completed a CIM compliant, NI 43-101
resource report that included all drilling results to date. We have analyzed
those results and incorporated them in a Preliminary Assessment report (PA)
examining the engineering and economic feasibility of placing the oxide
resources into production.

During September 2008, we released the independent PA on the
development of an oxide heap leach mine. The PA indicated that the project had
an unlevered internal rate of return of 26% assuming a US$775 per ounce price of
gold. The potential mine produced 232,000 ounces of gold over an expected 5 year
life at an average cash operating cost of $439 per ounce of gold. The PA
indicated that for each 1% change in the price of gold, the projected internal
rate of return changed by 1.7% . We may perform more drilling to expand the
oxide base and take other steps as necessary to advance the potential oxide heap
leach mine. We will also consider extension drilling, focused on the expansion
of the Graben deposit and exploration drilling for new gold deposits within the
two newly identified potentially gold-bearing hydrothermal systems in the
pediments.

No exploration drilling was completed during the nine months
ended December 31, 2008. A water well necessary for the construction of an oxide
heap leach mine was installed during the quarter ended June 30, 2008. As of
December 31, 2008, approximately 203 holes and 142,220 feet of RC drilling had
been completed. A majority of the holes were in the area of existing
mineralization in order to allow us to complete the PA with the aim of
identifying gold reserves and, if economically feasible, building a mine. During
fiscal 2008, the majority of the holes drilled were to attempt to expand the
Graben resource or complete exploration in the Pediment areas of the Borealis
property.

Two water monitoring wells were installed during the quarter
ended September 30, 2008. Under our permits, a water-monitoring program must be
active for at least six months prior to the placement of material on a leach
pad, and these wells were therefore necessary prior to the start of any leaching
operation.

In July 2008, we announced the appointment of John L. Key as
President and CEO, replacing Mr. Tony Ker. Mr. Key is a mining engineer with
over 40 years experience and has run, in succession, the Magmont, Polaris and
Red Dog mines in the Teck Cominco organization. Mr. Key had been acting as our
Chief Operating Officer for the past six months, and his primary focus has been
overseeing the completion the Preliminary Assessment on the Borealis heap leach
mine and advancing the project towards production.

Mr. Key's employment contract provides for the granting of
350,000 stock options, which were granted August 1, 2008.

Mr. Ker entered into a Transition Agreement (TA) with us in
August 2008, under which, Mr. Ker ceased to be an employee effective August 31,
2008 and ceased to be a director of the Company upon the election of directors
at our Annual General Meeting September 5, 2008. Mr. Ker will receive monthly
payments of $12,500 and certain incidental expenses for 12 monthly beginning
September 2008. The Company recorded a charge to expense during the quarter
ended September 30, 2008 to accrue the cost of the agreement. Mr. Ker has
entered into a consulting agreement with the Company that becomes effect
September 2008. Under the agreement, he is eligible for 200,000 stock options
and a success fee of 0.67% of any financing initiated during the term of this
agreement. The consulting agreement was terminated effective September 28, 2008.
The TA was amended on December 12, 2008 terminating the monthly $12,500
payments. A consulting agreement was entered into on December 12, 2008 and Mr.
Ker will receive Cdn$50,000 on January 1, 2009.

Effective August 5, 2008, we entered into an option agreement
with Gerald W. Baughman and Fabiola Baughman to amend the $5 million face value
note payable to them at a cost of $35,000. The option period is twelve months
and extendable for another six months for an additional $35,000. At the time the
option is exercised, the note payable will be reduced by $2.5 million by a
payment of $500,000 in cash and 4,000,000 common shares. Upon exercise of the
option, the conversion rate of the remaining $2.5 million note payable would be
amended to $0.70 per common share until March 30, 2009, $0.80 per common share
until March 30, 2010, and the maturity date would be extended from March 30,
2010 to March 30, 2012 and secured by certain exploration properties. We may
exercise the option if the royalty on the Borealis property has been fixed at 5%
or lower, and there is an arrangement to merge the Company or the financing of a
mine on the Borealis property has been completed.

22

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On August 22, 2008, the Company entered into a 12 month option
agreement, at a cost of $250,000, to amend the Borealis Property mining lease.
If exercised, the net smelter return royalty rate will be fixed at 5%, versus
the current uncapped variable rate. Payment upon exercise is $1,750,000 in cash,
7,726,250 common shares of the Company and a three year, $1,909,500 5% note
payable. The option period can be extended for an additional six months for a
payment of $125,000.

Fiscal 2009 Plan of Operations

Our long-term plan is to focus on moving the Borealis property
into production through the development of an oxide heap leach mine, produce a
Scoping Study on the Graben sulphide deposit, and continue exploration in the
pediment areas of the Borealis property.

During September 2008, we released an independent Preliminary
Assessment (PA) on the development of an oxide heap leach mine. We may perform
more drilling to expand the oxide base and take other steps as necessary to
advance the potential oxide heap leach mine. We will also consider extension
drilling, focused on the expansion of the Graben deposit and exploration
drilling for new gold deposits within the two newly identified potentially
gold-bearing hydrothermal systems in the pediments.

We recognize that additional resources are required to enable
us continue operations. See discussions under the section heading Liquidity and
Capital Resources below.

Effective November 2008, the CEO, VP Business Development
became part time, and we terminated the CFO, VP Exploration, administrative
assistant and Field Supervisor for the Borealis property. The CFO and VP
Exploration have entered into consulting agreements with us.

On November 10, 2008, we amended our 5% convertible note and
ongoing cash interest payments will be $73,288 and $51,713 each January 1 and
June 1, respectively, or one half of their previous amounts. The unpaid interest
will be added to the principal balance of the note, compound monthly at 5% and
become due and payable at the due date of the note, March 30, 2010.

We intend to continue to take all steps necessary to preserve
our rights to the Borealis property under the existing terms of the property
lease. We will also work with the USFS to maintain our permits under the Plan of
Operations.

It is our intention to continue to lease and joint venture out
the exploration properties held by Nevada Eagle Resources. The leased properties
will provide a cash and liquidity for us, and therefore we will continue to
actively manage the portfolio of leases.

In December 2008 we sold an exploration property held by Nevada
Eagle Resources for $50,000. We anticipate that we will sell certain other
properties. The ability to sell and the payment terms and amount of proceeds we
will receive is likely will be impacted by the general condition of the gold
exploration industry.

Results of Operations

We are in an exploration stage and currently have no producing
mineral properties and thus we had no sales revenue during all reporting
periods. Property payments we received under lease or joint venture arrangements
were recorded as a reduction in the carrying value of the property unless the
carrying value of the property was at or near zero, in which case the payments
were recognized as lease revenue in the Statement of Operations.

Three months ended December31, 2008 compared to three
months ended December 31, 2007

For the three months ended December 31, 2008, we had a net loss
of $818,518 or $0.01 per share compared to a net loss of $1,736,589 or $0.03 per
share in the same period in the prior year. Cash spending on all areas of our
operations decreased as we made an effort to conserve cash.

23

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Exploration expenses during the quarter ended December 31, 2008
were $141,667 or 18% of our total expenses compared to $661,007 or 38% of total
expenses in the prior year. Most of the exploration costs recognized in the
current quarter were maintaining our rights to the Borealis property by
completing all ongoing property lease payments and the cost of the severance
packages of the VP of Exploration and Field Supervisor. No exploration drilling
was completed during the quarter ended December 31, 2008. During the prior
year's comparable quarter, we drilled a total of 5 reverse circulation holes
(totaling 5,515 feet) on the Borealis property.

Management salaries and consulting fees in the quarter ended
December 31, 2008 were $258,876, which includes an accrual of $149,555 for
severance of administrative staff, compared to $529,729 incurred in the quarter
ended December 31, 2007. Total non-cash compensation expense due to the
recognition of costs related to stock options, was $76,938 in the quarter ended
December 31, 2008 compared to the prior year's fiscal third quarter of $199,422.
Consulting fees during the quarter decreased due to the majority of consulting
contracts being terminated in effort to conserve cash. General and
administrative costs decreased to $167,209 compared to $254,831 the prior year's
quarter because of our efforts to eliminate spending. The anticipated loss over
the life of our sub-lease agreement for our former Vancouver, British Columbia
office was $68,000 and included in the current year's fiscal third quarter
costs. Legal and audit fees for the period were $52,077, which is a decrease
compared to the prior year's quarter ended of $111,020. These costs decreased
due to the additional legal and accounting work related to the acquisition of
Nevada Eagle Resources preformed in the prior year. Travel and accommodation
during the quarter ended December 31, 2008 was $2,412, compared to $68,704
expended on travel in the prior year's comparable quarter. The decrease in
travel and entertainment cost is due to the elimination of most travel during
the quarter.

Interest income earned on cash deposits was $1,386 for the
quarter ended December 31, 2008, compared to $40,782 in the prior year quarter
and the decrease was due to reduced cash balances held on average through the
current quarter versus the prior year's comparable quarter and the lower
interest rates received on deposits during the current year's third fiscal
quarter. Interest expense on the 5% note payable incurred to purchase Nevada
Eagle Resources totaled $133,129 of which $70,003 was non-cash accreted
interest.

We hold certain securities for trading. We receive these
securities as partial payment of lease obligations for certain Nevada Eagle
exploration properties. When we receive these shares, they have trading
restrictions and we cannot sell them for approximately four to six months from
the date of receipt. During this restriction period, the market value of these
shares held declined substantially. During the quarter ended December 31, 2008,
we recorded an unrealized loss of $7,496.

Nine months ended December 31, 2008 compared to nine
months ended December 31, 2007

For the nine-month period ended December 31, 2008 we incurred a
net loss of $9,174,236 or $0.15 per share compared to a net loss of $6,463,678
or $0.13 per share incurred during the same period in the prior year. The
current year expenses include a charge to earnings of $5,100,000 for the
impairment of the carrying value of the Nevada Eagle exploration properties. The
loss before the impairment charge is $4,074,236 and is less than the prior
period's comparable loss. The reduction in the comparable loss is due to
decreased spending on our exploration activities, management salaries and
consulting fees, and general and administrative as a result of our efforts to
conserve cash.

Exploration expense during the nine-month period ended December
31, 2008 was $1,422,985 or 35% (before the effect of the non-cash impairment
charge) of our total expenses compared to $3,414,405 or 53% of total expenses in
the prior year. No exploration drilling was completed during the nine months
ended December 31, 2008. During the prior year's comparable nine months, we
drilled a total of 31 holes at the Borealis property, representing 36,405 feet.
During the nine months ended December 31, 2008, we completed a CIM compliant NI
43-101 resource report and in September 2008, we released the results of our
Preliminary Assessment of the development of an oxide heap leach gold mine on
the Borealis property. Much of the current year's exploration expense covered
the completion of these two reports plus permitting efforts for exploration
drilling in the pediment areas of the Borealis property.

24

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Management salaries and consulting fees in the nine months
ended December 31, 2008 were $1,246,269 compared to $1,663,160 for the same
period in the prior year. The decrease is due to the reduced consulting fees for
investor relations activities and the termination of several employees in
November 2008. Total non-cash compensation cost for stock options included in
the nine months ended December 31, 2008 was $468,620 versus $683,916 in the
prior year's comparable period.

Legal and audit fees for the nine month period decreased to
$208,167 from $308,877 incurred in the prior year's comparable period. The lower
costs reported in the nine months ended December 31, 2008 were due to reduced
spending on Nevada Eagle. Travel and accommodation during the nine months ended
December 31, 2008 was $119,332 compared to $172,408 reported in prior year's
nine-month period ended December 31, 2007. The decrease was due primarily to a
decrease in investor relations travel. General and administrative expenses were
$510,425, versus $812,436 in the prior year's comparable period. The decrease is
due to reduced spending on investor relations and our efforts to conserve cash.
Interest income earned on cash deposits was $25,536 for the nine months ended
December 31, 2008, compared to $170,332 for the nine months ended December 31,
2007, due to lower average cash balances during the nine-month period and lower
interest rates received on deposits. Interest expense totaled $395,487 and arose
from the issuance of a convertible promissory note related to the purchase of
Nevada Eagle Resources LLC on August 21, 2007. $206,211 of the interest expense
is non-cash.

During the nine months ended December 31, 2008 we recognized a
realized loss of $136,891 from the sale of securities and recognized an
unrealized gain of $20,325

Liquidity and Capital Resources

Our principal source of liquidity is cash that is raised by way
of sale of common stock from treasury and other equity securities. Our secondary
source of liquidity, is cash received through lease payments and sales of
exploration properties, and the sale of shares received as lease payments on
exploration properties.

Effective November 2008, our CEO, VP Business Development went
to a part time basis, and we terminated the CFO, VP Exploration, administrative
assistant and Field Supervisor for the Borealis property. The CFO and VP
Exploration have entered into consulting agreements with us.

On November 10, 2008, we amended our 5% convertible note and
ongoing cash interest payments will be $73,288 and $51,713 each January 1 and
June 1, respectively, or one half of their previous amounts. The unpaid interest
will be added to the principal balance of the note, compound monthly at 5% and
become due and payable at the due date of the note, March 30, 2010.

We anticipate continuing to take all steps necessary to
preserve our rights to the Borealis property under the existing terms of the
property lease. We will also work with the USFS to maintain our permits under
the Plan of Operations. These steps are intended to preserve the existing value
of the Borealis property for our shareholders.

We intend to continue to lease and joint venture out the
exploration properties held by Nevada Eagle Resources. The leased properties
provide a cash and liquidity for us, and therefore we intend to continue to
actively manage the portfolio of leases. Certain of these properties may be sold
outright and during the quarter ended December 31, 2008 we sold an unleased
mineral property held by Nevada Eagle Resources for $50,000.

In the event we make the decision to construct and operate a
gold heap leach mine on the Borealis property, we will need to raise capital and
will consider debt, equity or forms of joint venture to raise the required
capital.

At December 31, 2008, we had working capital of $638,587.
Current assets consisted of $1,014,678 in cash, $16,809 in securities held for
trading, $18,098 in accounts receivable and $78,068 in prepaid expenses. We had
$489,066 in accounts payable and accrued liabilities at December 31, 2008.

25

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There has been severe deterioration in global credit and equity
markets. This has resulted in the need for government intervention in major
banks, financial institutions and insurers and has also resulted in greater
volatility, increased credit losses and tighter credit conditions. These
disruptions in the current credit and financial markets have had a significant
material adverse impact on a number of financial institutions and have limited
access to capital and credit for many companies. These disruptions could, among
other things, make it more difficult for us to obtain, or increase our cost of
obtaining, capital and financing for our operations. Our access to additional
capital may not be available on terms acceptable to us or at all.

As we expect our reliance on equity financings to continue into
the future, these current market conditions could make it difficult or
impossible for us to raise necessary funds to meet our capital requirements. If
we are unable to obtain financing through equity investments, we will seek
multiple solutions including, but not limited to, credit facilities or debenture
issuances.

Our market value and the market values for companies similar to
us have declined considerably over the past twelve months due the market
conditions as discussed above. To preserve as much cash as possible and to
ensure liquidity for the longest period possible, we are taking steps to reduce
our rate of cash expenditure. These steps include reducing the number of
personnel to three at reduced compensation rates, terminating other employees
and temporarily suspending development work on the Borealis property, including
engineering work. We have also reduced discretionary spending, including
sub-leasing our Vancouver, British Columbia office and reducing the size of our
rented office in Reno.

We recognize that additional resources are required to enable
us continue operations. We intend to raise additional funds through debt and/or
equity financing, selling certain exploration properties, and continue leasing
exploration properties held by Nevada Eagle Resources or through other means
that we deem necessary. However, no assurance can be given that we will be
successful in raising additional capital. Further, even if we raise additional
capital, there can be no assurance that we will achieve profitability or
positive cash flow. If we are unable to raise additional capital and expected
significant revenues do not result in positive cash flow, we will not be able to
meet its obligations and may have to suspend or cease operations.

Our current working capital is $638,587 with an average burn
rate of $69,000 per month in a typical month based on the current number of
employees we have. This burn rate is subject to adjustments based upon future
events.

During the quarter ended December 31, 2008, we used cash in
operating activities of $550,181 which included our net loss during the quarter
of $818,518 off-set by depreciation of $11,694, non-cash compensation of
$70,174, non-cash interest expense of $143,321, unrealized loss of $7,496 on the
valuation of marketable securities, loss on disposal of equipment $1,309, a loss
on sale of mineral property of $34,360, and changes in non-cash working capital
of a $3,276 decrease in accounts receivable, a $24,326 increase in accounts
payable and a $21,067 decrease in prepaid expenses.

We generated cash from investing activities of $150,904
including $2,499 for spend for mineral properties, and we received $102,500 in
cash payments from the leasing of exploration properties, $4,902 from sale of
equipment and $50,000 from the sale of a mineral property. We did not use or
receive any cash from financing activities in the quarter ended December 31,
2008. Cash decreased during the period by $395,278 to $1,014,678 as at December
31, 2008.

On August 22, 2008, we entered into a 12 month option
agreement, at a cost of $250,000 plus $25,000 is legal and consulting costs, to
amend the Borealis Property mining lease. If exercised, the net smelter return
royalty rate will be fixed at 5%, versus the current uncapped variable rate.
Payment upon exercise is $1,750,000 in cash, 7,726,250 common shares of the
Company and a three year, $1,909,500 5% note payable. The option period can be
extended for an additional six months for a payment of $125,000.

26

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On July 4, 2007, we entered into a membership interest purchase
agreement with Gerald W. Baughman and Fabiola Baughman, as sellers, and Nevada
Eagle, under which we agreed to purchase all of the outstanding limited
liability company interests of Nevada Eagle. Upon closing of the membership
interest purchase agreement on August 21, 2007, we acquired Nevada Eagle from
the sellers for the following consideration:

| | (a) | 2,500,000 in cash;                                                                  
| | --- | ------------------------------------------------------------------------------------
| |     |                                                                                     
| | (b) | four million five hundred thousand (4,500,000) shares of
      our common stock; and
| |     |                                                                                     
| | (c) | a 5% convertible note in the principal amount of
      $5,000,000.                  

The convertible note, due March 30, 2010, bears interest at the
annual rate of 5% and is convertible at the option of the holder into common
shares at an initial conversion price of $1.00 per share during first the twelve
month period following the closing date, $1.25 per share during the second
twelve month period following the closing date, $1.50 per share thereafter and
$1.75 per share if converted on March 30, 2010. The interest payments are due on
a semi-annual basis beginning on January 1, 2008 and due each January 1 and June
1. In addition to the purchase consideration, the sellers were entitled to all
revenues of Nevada Eagle (payable in cash, stock, or other consideration)
calculated to be received and received on the assets and properties of Nevada
Eagle during calendar year 2007.

In addition, we granted the sellers registration rights on the
shares issued.

Under the terms of the purchase agreement, the closing of the
acquisition was subject to closing conditions, including:

| | (a) A Lock-up Agreement, dated August 21, 2007, under
      which the Sellers agreed that for a period of three months following the
      Closing Date not to sell Common Shares issued or issuable under the
      Purchase Agreement and Convertible Note and, thereafter, to limit the sale
      of such Common Shares to 20% of the aggregate Common Shares issued under
      the Purchase Agreement and Convertible Note each quarter (with unsold
      Common Shares aggregating each quarter thereafter);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (b) An Employment Agreement between Mr. Baughman and us
      for a term of one year, renewable by the parties, to serve as our Vice
      President of Business Development;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (c) A Non-Competition Agreement under which the Sellers
      have agreed not to compete with the Registrant for the latter of (i)
      twelve (12) months following the Closing Date, or (ii) twelve (12) months
      following the termination of the Company's employment of Gerald Baughman.
      The scope of the non- competition obligation relates to the business of
      acquiring and/or holding base metal and precious metal mineral assets
      located in the state of Nevada within the Area of Interest and to
      properties that have been examined by the Registrant or Mr. Baughman
      during the course of his employment by the Registrant, in any manner or
      capacity. Area of Interest is defined as any property owned by the
      Registrant, Nevada Eagle, or any affiliate of the Registrant or Nevada
      Eagle on the latter of (i) Closing Date or (ii) the termination date of
      Gerald Baughman's employment by the Registrant, if any, together with any
      adjacent areas within one kilometer of the exterior boundary of such
      properties.

Updated share capital as of February 13, 2009:

Basic Common Stock Issued and Outstanding
    61,957,065Warrants, Options and other Convertible Securities
    19,943,500Fully Diluted Common Stock
    81,900,565


27

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Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is in
accordance with accounting principles generally accepted in the United States.
The following are critical accounting policies and estimates, which we believe
are important to understanding our financial results.

Use of estimates

The preparation of financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the revenues and
expenses for the period reported. By their nature, these estimates are subject
to measurement uncertainty and the effect on the financial statements of changes
in such estimates in future periods could be significant. Actual results will
likely differ from these estimates.

Revenue recognition

Mineral lease rentals or option payments are treated as
reductions of the cost of the property as the payer is accumulating an interest
in the mineral property; payments in excess of capitalized costs are recognized
in income. Some agreements provide for payments in the form of stock and other
equity instruments as well as cash payments. Stock and other equity instruments
are recognized based on their fair market value at the time of receipt.
Fluctuations incurred during the holding period are accounted for as gains or
losses from held for trading securities. Privately held stock, or stock that is
not currently trading is valued at zero. The leases provide for the receipt of
royalty payments upon production of the property. Royalty payments will be
recognized in the period in which production occurs. There are no properties in
the production stage at this time.

Exploration of mineral property interests

We expense exploration costs as they are incurred. When we
determine that a mining deposit can be economically and legally extracted or
produced based on established proven and probable reserves, development costs
incurred after such determination will be capitalized. The establishment of
proven and probable reserves is based on results of final feasibility studies,
which indicate whether a property is economically feasible. Upon commencement of
commercial production, we will transfer capitalized costs to the appropriate
asset category and amortize them over their estimated useful lives and/or ounces
produced, as appropriate. We capitalize the cost of acquiring mineral property
interests (including claims establishment) until we have determined the
viability of the property. We expense capitalized acquisition costs if we
determine that the property has no future economic value. We will also write
down capitalized amounts if estimated future cash flows, including potential
sales proceeds, related to the mineral property are estimated to be less than
the carrying value of the property.

Stock-based compensation

In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard 123R, Share-Based Payment,
(SFAS 123 (R)) a revision to SFAS 123. SFAS 123(R) requires all share-based
payments to be recognized in the financial statements based on their values
using either a modified-prospective or modified-retrospective transition method.

Prior to March 31, 2006, the Company's stock-based employee
compensation plans were accounted for under the recognition and measurement
provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations, as
permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123). The Company did not recognize employee stock-based compensation
costs in its statement of operations for the periods prior to March 31, 2006, as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant.

Effective April 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), using the
modified-prospective-transition method. The Company's total employees are
relatively few in number and turnover is considered remote, therefore the
Company currently estimates forfeitures to be 10%. Estimation of forfeitures is
reviewed on a quarterly basis.

28

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Asset retirement obligations

The Company records the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that results from
the acquisition, construction, development or normal use of the assets with a
corresponding increase in the carrying amount of the related long-lived asset.
This amount is then depreciated over the estimated useful life of the asset.
Over time, the liability is increased to reflect an interest element considered
in its initial measurement at fair value. The amount of the liability will be
subject to re-measurement at each reporting period. Currently, the Company has a
reclamation liability of $5,600, which is disclosed further in Note79 of the
financial statements.

Tax valuation allowance

We have recorded a valuation allowance that fully reserves for
our deferred tax assets because at this time we cannot establish that we will be
able to utilize the tax loss carryforwards in the future. If in the future we
determine that we will be able to use all or a portion of our deferred tax
assets in the future, based on our projections of future taxable income, we will
reduce the valuation allowance, thereby increasing income in that period.

Foreign currency translation

The United States dollar is our functional currency.
Transactions involving foreign currencies for items included in operations are
translated into U.S. dollars using average exchange rates; monetary assets and
liabilities are translated at the exchange rate prevailing at the balance sheet
date and all other balance sheet items are translated at the historical rates
applicable to the transactions that comprise those amounts. Translation gains
and losses are included in our determination of net income.

Recent Accounting Pronouncements

The Financial Accounting Standards Board ratified the consensus
of the Emerging Issues Task Force that stripping costs incurred during the
production phase of a mine are variable production costs that should be included
in the costs of the inventory produced during the period that the stripping
costs are incurred. This consensus is effective for the first reporting period
in fiscal years beginning after December 15, 2005, with early adoption
permitted. To date the Company has not incurred any stripping costs.

In June 2006, the FASB issued FASB interpretation No. 48 
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in tax return. This Interpretation also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. This interpretation is
effective for fiscal years beginning after December 15, 2006. The adoption of
FIN 48 did not have a material impact on the Company's consolidated financial
statements.

In September 2006, the FASB issued SFAS 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that
require or permit fair value measurements, the Board having previously concluded
in those pronouncements that fair value is a relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, the application of this Statement will change current practice,
effective December 1, 2007. The adoption of SFAS 157 did not have a material
impact on the Company's consolidated financial statements.

29

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In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements - an amendment
of ARB No. 51. SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. Among other requirements, this
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 is effective for our fiscal year
commencing April 1, 2009, including interim periods within that fiscal year.
Earlier adoption is prohibited. The Company believes that SFAS 160 should not
have a material impact on its financial position or results of operations.

In December 2007, the FASB issued FASB Statement No. 141(R),
Business Combinations, which amends SFAS No. 141, and provides revised
guidance for recognizing and measuring identifiable assets and goodwill
acquired, liabilities assumed, and any non-controlling interest in the acquiree.
It also provides disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for the Company's fiscal year
beginning April 1, 2009 and is to be applied prospectively. The Company is
currently evaluating the potential impact of adopting this statement on the
Company's consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities(FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value, with theobjective of
improving financial reporting by mitigating volatility in reported earnings
caused by measuring related assets andliabilities differently without
having to apply complex hedge accounting provisions. The provisions of FAS 159
are effective for the Company's fiscal year beginning April 1, 2008. The
adoption of FAS 159 did not have a material impact on the Company's consolidated
financial results.

In March 2008, the FASB issued FAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (FAS 161). FAS 161
changes the disclosure requirements for derivative instruments and hedging
activities by requiring enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under FAS 133, and how derivative instruments and related hedged
items affect an entity's operating results, financial position, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. Early
adoption is permitted. We are currently reviewing the provisions of FAS 161 and
have not yet adopted the statement. However, as the provisions of FAS 161 are
only related to disclosure of derivative and hedging activities, at this time we
do not believe the adoption of FAS 161 will have a material impact on our
consolidated operating results, financial position, or cash flows.

Summary of any product research and development that the
company will perform for the term of the plan.

We do not anticipate performing any product research and
development under our plan of operation.

Expected purchase or sale of plant and significant
equipment.

We do not anticipate any significant equipment purchases or
sales.

Significant changes in number of employees.

We currently have three employees. We do not expect significant
changes in this number.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.

30

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Contractual Obligations

We make advance royalty payments of $9,485 per month to certain
leaseholders while exploration is proceeding on the Borealis Property. In
addition, to maintain its existing claims on the Borealis property, we make
payments totaling approximately $130,000 annually. These payments are contingent
upon us maintaining an interest in the property. Through Nevada Eagle, we also
make claim payments of approximately $50,000 annually. The definitive amount
depends on the exact number of claims and the number of unleased properties.

Under the terms of the acquisition agreement for Nevada Eagle
Resources LLC, we have a note payable outstanding for $4,568,313. Refer to the
section Liquidity and Capital Resources' under this document for a full
description of the acquisition and commitment.

As of December 31, 2008, we had the following non-cancelable
contractual obligations:

Payments Due by PeriodLess than 1
    
    
    More than 5Total
    Year
    2-3 Years
    4-5 Years
    YearsOperating Lease Obligation (1)
    235,627
    32,908
    99,632
    103,087
    -Operating Lease Obligation (2)
    55,00
    5,00
    -
    -
    -


(1)Obligation for the rental of office space in
Vancouver, BC, 5-year term, terminating August 2013 and payments of
approximately $5,010 per month for the first 3 years and $5,232 per month for
the remaining two years.

The Vancouver office has been sub-leased commencing Feb 1, 2009
for 4 years and 7 months (remaining life on lease) for Cdn$4,000 per month. The
subtenant has an option to terminate the lease on January 31, 2011; such option
must be exercised during October, 2010. If the option to terminate Sublease
Agreement is not executed by the Subtenant, then the agreement shall continue
until the expiration date. $68,000, the difference between the required lease
payments and the estimated future sub-lease receipts, has been accrued as a loss
at quarter ended December 31, 2008.

(2)Obligation for rental of office space in
Hawthorne, Nevada, one-year term, terminating April 30, 2009 and payments of
$1,100 per month.

Item 3. Quantitative and Qualitative Disclosure about Market
Risk

Not Applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

At the end of the period covered by this report, an evaluation
was carried out under the supervision of and with the participation of the
Company's management, including its Chief Executive Officer (CEO), John L.
Key, and Chief Financial Officer (CFO), Michael Longinotti, of the
effectiveness of the design and operations of the Company's disclosure controls
and procedures (as defined in Rule 13a  15(e) and Rule 15d  15(e) under the
Exchange Act). Based on that evaluation the CEO and the CFO have concluded that
as of the end of the period covered by this report, the Company's disclosure
controls and procedures were adequately designed and effective in ensuring that:
(i) information required to be disclosed by the Company in reports that it files
or submits to the Securities and Exchange Commission under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms and (ii) material information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, as appropriate, to
allow for accurate and timely decisions regarding required disclosure.

31

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Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial
reporting (as defined in Rule 13(a)-15(f) or 15(d)-15(f)) that occurred during
the period covered by this quarterly report that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.

During the quarter ended December 31, 2008, our staffing levels
decreased and certain positions were eliminated or converted to part-time. We
have analyzed certain parts of our system of internal control that were affected
by these changes and made reasonable efforts to reassign tasks to maintain an
appropriate segregation of duties. In conjunction we, eliminated signing
authorities for certain individuals, and retained our CFO and VP of Exploration
on consulting agreements to perform certain tasks. These changes were reviewed
and approved by our Board of Directors. Our disclosure controls were not
affected by these personnel changes and remain effective.

32

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Except as provided below, neither we nor any of our properties,
including the Borealis Property, are currently subject to any material legal
proceedings or other regulatory proceedings and to our knowledge no such
proceedings are contemplated.

On September 16, 2005, our subsidiary, Borealis Mining Company,
was named as a co-defendant in an ongoing civil action pending in the United
States District Court for the District of Nevada, entitled United States v.
Walker River Irrigation District (Court Doc. No. In Equity C-125, Subfile
C-125-B). The action seeks to determine the existence and extent of water rights
held by the federal government in the Walker River drainage area for use on
federally reserved lands such as Indian reservations, National Forests, military
reservations, and the like. The suit does not dispute nor seek to invalidate any
existing water rights (including ours); rather, it seeks to determine the extent
and priority of the federal government's water rights. On May 27, 2003, the
Court stayed all proceedings to allow the United States, the State of Nevada,
the State of California, the Walker River Paiute Tribe, the Walker River
Irrigation District, Mono County, California, Lyon County, Nevada, Mineral
County, Nevada and the Walker Lake Working Group to attempt to mediate a
settlement. No settlement has yet been reached. Borealis Mining Company was
named as one of several hundred co-defendants in this action because it owns
water rights within a portion of the Walker River drainage area in Nevada, which
were granted under a permit on September 16, 2005. We, like most private water
right owners, intent to have only minimal involvement in the merits of the
lawsuit. We do not believe that this civil action, which will determine the
extent and priority of federally reserved water rights in the area, will have
any effect on our potential business operations.

Item 1A. Risks Factors.

Except for the risk factors as provided below, there have been
no material changes from the risk factors as previously disclosed in our Form
10-KSB/A, which was filed on with the SEC on July 8, 2008.

Financial market conditions, including disruptions in the
U.S. and international credit markets and other financial systems and the
deterioration of the U.S. and global economic conditions, could, among other
things, impede access to capital or increase the cost of capital, which would
have an adverse effect on our ability to fund our working capital and other
capital requirements.

There has been severe deterioration in global credit and equity
markets. This has resulted in the need for government intervention in major
banks, financial institutions and insurers and has also resulted in greater
volatility, increased credit losses and tighter credit conditions.

These unprecedented disruptions in the current credit and
financial markets have had a significant material adverse impact on a number of
financial institutions and have limited access to capital and credit for many
companies. These disruptions could, among other things, make it more difficult
for us to obtain, or increase our cost of obtaining, capital and financing for
our operations. Our access to additional capital may not be available on terms
acceptable to us or at all.

We recognize that additional resources are required to enable
us continue operations. We intend to raise additional funds through debt and/or
equity financing, selling certain exploration properties, and continue leasing
exploration properties held by Nevada Eagle Resources or through other means
that we deem necessary. However, no assurance can be given that we will be
successful in raising additional capital. Further, even if we raise additional
capital, there can be no assurance that we will achieve profitability or
positive cash flow. If we are unable to raise additional capital and expected
significant revenues do not result in positive cash flow, we will not be able to
meet its obligations and may have to suspend or cease operations.

Our current working capital is $638,587 with an average burn
rate of $69,000 per month in a typical month based on the current number of
employees we have. This burn rate is subject to adjustments based upon future
events.

33

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Recent market events and current economic conditions may
negatively impact the expected cash flow to Nevada Eagle for the lease of its
exploration properties.

The rapid decline in the financial markets, much greater
volatility in equity valuations and generally weaker economic conditions
experienced during 2008 and into 2009, has made it more difficult for companies,
including junior exploration companies, to raise capital. Nevada Eagle Resources
leases many of its exploration properties to junior exploration companies. Many
of these companies may experience difficulties raising money to complete their
planned exploration programs and this may negatively impact the expected cash
flow to Nevada Eagle Resources for the lease of the exploration properties, and
may result in the renegotiation of terms or cancellation of some of the leases
by the exploration companies.

Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.

During the nine months ended December 31, 2008, we did not
offer or sell unregistered securities pursuant to exemptions under the
Securities Act of 1933, as amended, and no securities repurchases occurred
during the nine months ended December 31, 2008.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

Effective November 1, 2008, John Key, our CEO and Gerald
Baughman, our VP Business Development have began employment on a part time
basis. Effective November 12, 2008, we terminated our employment agreement with
Michael Longinotti, our CFO, and effective November 1, 2008, we terminated our
employment agreement with Steve Craig, our VP Exploration, and we terminated our
administrative assistant and Field Supervisor for the Borealis property.

On November 1, 2008, we entered into a consulting agreement
with Mr. Craig for the provision of services related to activities at the
Borealis Project. Under the terms of the consulting agreement, Mr. Craig will
provide consulting services for oversight of the Company's Borealis permits and
compliance, conducting other activities related to the Borealis Project, and any
other general activities as directed by the Company. The Company will pay Mr.
Craig a consulting fee of $600 per day for time spent by Mr. Craig in the
provision of services. The Company will also pay or reimburse Mr. Craig for all
reasonable out-of-pocket expenses directly related to the provision of services.
The consulting agreement is for a term from November 1, 2008 to December 31,
2009, and may be renewed thereafter upon mutual agreement of the parties. The
consulting agreement can be terminated by the Company for cause, as defined in
the consulting agreement, without notice, or by either party for any reason upon
fifteen days notice to the other party.

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On November 12, 2008, we entered into a consulting agreement
with Mr. Longinotti for the provision of services as the CFO to the Company.
Under the terms of the consulting agreement, Mr. Longinotti will provide the
following services to the Company:

- Assist in debt and equity financings of the Company;
- Assist with ongoing accounting requirements of the Company, including
  check signing, reconciliation of bank accounts, review of monthly and
  quarterly reports, attend audit committee and board meetings as required;
- Provide accounting advice regarding US GAAP;
- Assist with the preparation and review of press releases and other public
  documents;
- Act in the capacity of CFO and Principal Financial and Accounting Officer
  to the Company;
- Assist in the maintenance of relationships with key shareholders and
  prospective investors in the Company;
- Perform other associated duties as instructed.

Mr. Longinotti will be compensated at a rate of Cdn$90 per hour
for actual hours spent on the Company, billed monthly and payable in arrears.
Mr. Longinotti will also be reimbursed for actual out-of-pocket expenses
incurred in the provision of the above services. The consulting agreement is for
a term of 12 months less a day beginning on November 12, 2008. Both parties have
the right to terminate the consulting agreement upon ten days written notice to
the other party.

The Financial and Advisory Services Agreement between the
Registrant and Matter & Associates, dated October 1, 2008, was amended
November 13, 2008 to terminate on December 31st, 2008.

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Item 6. Exhibits

|Exhibit
    Number | Description                                                                                                                                                                                                                 
|------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1                | Articles of Incorporation of Gryphon Gold Corporation, filed
    April 24, 2003 (Previously filed on Form SB-2 on August 17, 2005)                                                                                          
|3.2                | Certificate of Amendment to Articles of
    Incorporation of Gryphon Gold Corporation, filed August 9, 2005 (Previously
    filed on Form SB-2 on August 17, 2005)                                                          
|3.3                | Bylaws of Gryphon Gold
    Corporation (Previously filed on Form SB-2 on August 17, 2005)                                                                                                                                   
|3.4                | Articles of Incorporation of Borealis Mining
    Company, filed June 5, 2003 (Previously filed on Form SB-2 on August 17,
    2005)                                                                                         
|3.5                | Bylaws of Borealis Mining
    Company (Previously filed on Form SB-2 on August 17, 2005)                                                                                                                                    
|10.1               | Employment Agreement between the Registrant
    and John L. Key, dated July 21, 2008 (Previously filed on Form 8-K on July
    23, 2008 as exhibit 10.1)                                                                    
|10.2               | Financial Services
    Agreement between the Registrant and Tony Ker, dated September 1, 2008
    (Previously filed on Form 8-K on July 23, 2008 as exhibit 10.2)                                                           
|10.3               | Transition Agreement between the Registrant
    and Tony Ker, dated July 21, 2008 (Previously filed on Form 8-K on July 23,
    2008 as exhibit 10.3)                                                                       
|10.4               | Option to Restructure Debt
    Agreement between the Registrant and Gerald and Fabiola Baughman, dated
    August 5, 2008 (Previously filed on Form 8-K on August 5, 2008 as exhibit
    10.4)                              
|10.5               | Option to Amend the Mining Lease on the
    Borealis Property, dated effective August 22, 2008 (Previously filed on Form
    8-K on August 22, 2008 as exhibit 10.5)                                                        
|10.6               | Termination of Financial
    Services Agreement between the Registrant and Tony Ker, dated effective
    September 28, 2008 (Previously filed on Form 8-K on October 23, 2008 as
    exhibit 10.6)                          
|10.7               | Financial and Advisory Services Agreement
    between the Registrant and Matter & Associates (Vancouver, British
    Columbia), dated October 1, 2008 (Previously filed on Form 8-K on October
    23, 2008 as exhibit 99.1)
|10.8               | Consulting Agreement
    between the Registrant and Steven Craig, dated November 1, 2008 
    (Previously filed on Form 10-Q on November 14, 2008 as exhibit 10.8)                                                          
|10.9               | Consulting Agreement between the Registrant
    and Michael Longinotti, dated November 12, 2008  (Previously filed on
    Form 10-Q on November 14, 2008 as exhibit 10.9)                                                   
|31.1               | Certification Required
    Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|31.2               | Certification Required Pursuant to Section
    302 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|32.1               | Certification Required
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                        
|32.2               | Certification Required Pursuant to Section
    906 of the Sarbanes-Oxley Act of 2002                                                                                                                                        



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

GRYPHON GOLD CORPORATIONBy:
    /s/ John L. KeyJohn L. KeyChief Executive Officer(On behalf of the registrant and asPrincipal executive officer)Date:
    February 13, 2009By:
    /s/ Michael K. LonginottiMichael K. LonginottiChief Financial Officer(On behalf of the registrant and asPrincipal financial and accounting officer)Date:
    February 13, 2009


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