U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-KSB/A

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005

[   ]            TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from _______ to __________

Commission File Number 0-29657

SILVER DRAGON RESOURCES INC.

Delaware
      33-0727323(State or other jurisdiction
      of
      (I.R.S. Employer
      Identification No.)incorporation or
      organization)






5160 Yonge Street, Suite 803 
Toronto, Ontario, M2N 6L9

Issuers telephone number: (416) 223-8500

Securities registered under Section 12(b) of the Exchange Act:
None 
Securities registered under Section 12(g) of the Exchange Act: Common Stock $0.0001 par value 
(Title of class)

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YesQ

Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrants knowledge, in definitive proxy or

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State the issuers revenues for its most recent fiscal year:
$0.

State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days: The aggregate market
value of the shares of Common Stock held by non-affiliates of the Registrant, as
of March 30, 2006 was $34,270,550.

State the number of shares outstanding of each of the
issuers classes of common equity, as of the latest practical date: As of March
30, 2006, the Registrant had 46,020,533 common shares outstanding.

Transitional Small Business Disclosure Format (check one):
Yes
£No  
Q

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EXPLANATORY NOTE

This Amendment No. l on Form 10-KSB/A
is being filed as an amendment to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2005, as filed with the Securities and Exchange
Commission April 10, 2006. For the convenience of the reader, this Form 10-KSB/A
sets forth the originally filed Form 10-KSB in its entirety. However, the
following revisions are contained herein:

Item 1. Description of Business

We eliminated references to "mining"
since we are an exploration stage company. We also revised the risk factors
section significantly.

Item 2. Description of Property

We inserted a description of the
Cerro las Minitas property and a description of our QA/QC protocols.

Item 11. Security ownership of
Certain Beneficial Owners and Management

We revised the table under "Equity
Compensation Plan Information" to correct errors.

Item 13. Exhibits, Financial
Statements, Schedules and Reports on Form 8-K

We are filing the Executive
Employment Agreement with Marc Hazout as an exhibit. The Financial Statements
have been restated as set forth in Footnote 12 thereto.





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This Form 10-KSB contains certain forward-looking statements
within the meaning of the Private Securities Litigation reform Act of 1995. For
this purpose any statements contained in this Form 10-KSB that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue" or comparable terminology is
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors, many of which are not
within the Companys control. These factors include but are not limited to
economic conditions generally and in the industries in which the Company may
participate; competition within the Companys chosen industry, including
competition from much larger competitors; technological advances and failure by
the Company to successfully develop business relationships.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Corporate History

Silver Dragon Resources Inc., f/k/a American Entertainment
and Animation Corporation, and American Electric Automobile Company, Inc. (the
"Company") was formed in the State of Delaware on May 9, 1996.

Electric Car Operations

The Company was originally formed to go into the business of
developing and marketing electric automobiles. On June 15, 1996 the Company
acquired all of the outstanding stock of California Electric Automobile Co.,
Inc. ("CEAC"), a California corporation formed on November 14, 1995, in
consideration for 1,050,000 shares of the Companys common stock. Of the
1,050,000 shares, 900,000 were held in escrow pending the exercise of CEACs
option to purchase the assets and business of San Diego Electric Automobile
Company ("SDEAC"). On October 17, 1996 the Company exercised its option to
purchase the assets and business of SDEAC. The purchase price was the 900,000
shares of AEACs common stock held in escrow from the previous acquisition of
CEAC.

Chinese Electric Automobile Operations

On May 18, 1996, the Company entered into an agreement with
China Electric Automobile Company of Hong Kong, Ltd. ("CEHK") in which each
exchanged approximately 5% of their outstanding common stock for the other
companys stock. The object of the relationship was the pursuit of business
opportunities and product development using the companys combined resources. On
February 12, 1997, the Company entered into an agreement with CEHK to form a
joint venture named American Electric Automobile Company (Asia), Inc. ("AEAA"),
a California corporation, to engage in various electric vehicle related
businesses, including design, production and trading in electric vehicles and
related parts. The Company received forty-five percent of the ownership of AEAA
and CEHK received the remaining fifty-five percent ownership.

On January 31, 2001, the Company sold its interest in AEAA to
Edward F. Myers for $100. Mr. Myers was the former Chairman of the Company.
After careful consideration, the Board of Directors of the Company decided that
it would be in the Companys best interest to discontinue its investment into
Asia. The inherent risks involved in doing business in China, the difficulty in
monitoring the situation, as well as the continued monetary investment into Asia
that would have been required led the Board to the decision to discontinue its
investment in Asia.

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Investment by Bisell Investments Inc.

Originally, the Company was unsuccessful in its electric
automobile business. As a result, on August 23, 2000, the Company entered into a
Letter Agreement under which it agreed to issue 3,250,000 shares of restricted
common shares to Bisell Investments Inc. ("Bisell") for a total investment of
$275,000. On September 13, 2000 pursuant to the August 23, 2000 Letter of
Agreement, the Company accepted the resignations of Edward F. Myers, Betty N.
Myers and Gary Degano as directors and officers. The Company then appointed
Pierre Quilliam as a director, President and CEO; Stephen M. Cohen as director,
Secretary and Treasurer; and Denise Quilliam as a director. Edward F. Myers,
Betty N. Myers and Gary Degano remained as officers and directors of CEAC until
they resigned on February 16, 2001. On that date Pierre Quilliam was appointed
Chairman of CEAC, Stephen M. Cohen was appointed Secretary and Treasurer and
Glenn Roach was appointed President and elected to the Board of Directors of
CEAC.

On February 23, 2001, the Company moved from its facility in
San Diego to a new facility in Temecula, California, which was managed by Glenn
Roach. The facility was being used for conversion of Electric Vehicles and for
prototype development of the Electric Boats. In late 2001, the Company ran out
of funds to develop and operate its business, and efforts to raise capital to
continue business were not successful. As a result, the Company terminated
operations in January 2002.

Cyper Entertainment, Inc.

On February 28, 2002, the Company entered into an agreement
to purchase 100% of the shares of Cyper Entertainment Inc. ("Cyper"), a Korean
corporation (the "Acquisition Agreement") in consideration for 20,000,000 shares
of restricted common stock of the Company. Cyper was in the business of
manufacturing and distributing 3D digital animation, multi-media and
entertainment related products. On April 17, 2002, the Company completed the
acquisition of Cyper.

On May 31, 2002, the Company accepted the resignations of
Pierre Quilliam, Stephen Cohen and Denise Quilliam as Directors and Officers of
the Company. Simultaneously, the Company appointed Duk Jin Jang, Marc Hazout,
Jason Chung and John Chung to the Board of Directors. Mr. Jang was named
Chairman, Mr. Hazout was named President and CEO, and Jason Chung was named
Chief Financial Officer and Treasurer. Messrs. Jang, Chung and Chung were
appointed by the shareholders of Cyper. Mr. Hazout was appointed by the former
controlling shareholders of the Company.

On July 16, 2002, the Company amended its Certificate of
Incorporation to increase the number of shares of common stock that it is
authorized to issue to 150,000,000, and to change its name to "American
Entertainment and Animation Corporation."

The
Acquisition Agreement provided that Cyper and its controlling shareholders were
obligated to provide funds for the Companys administration, as well as auditing
and legal fees, and further provided that the Company had a right to rescind the
transaction in the event of a default by Cyper and its controlling shareholders.
On September 4, 2002, Mr. Hazout, acting on behalf of the Company, notified
Cyper that the Agreement was terminated and rescinded due to Cypers defaults,
as well as based on certain misrepresentations made by Cyper in connection with
the Acquisition Agreement. As a result of the termination, Mr. Hazout requested
that the Companys transfer agent cancel the 20,000,000 shares issued to Cypers
shareholders, and removed the directors appointed by Cyper under the authority
granted in the Acquisition Agreement. Mr. Hazout then appointed Pierre Quilliam
to the Board of Directors and named him Chairman of the Company. On September
21, 2002, Pierre Quilliam resigned as director and Chairman of the Company.

On March 7, 2003, the Company filed an action in the Court of
Chancery in the State of Delaware for a declaration that the agreement to
acquire the shares of Cyper was validly rescinded and that the 20,000,000 common
shares issued pursuant to the transaction were validly cancelled. On April 28,
2003, the Company reached a settlement with the shareholders of Cyper, who
agreed to accept $20,000 cash, marketable securities in an unrelated company
with a fair market value of approximately $42,500, and

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Art and Film BusinessOn December 3, 2002, the Company purchased from Tempest
Artwork Ltd. the exclusive option to acquire the rights to produce a feature
film or television production based on the original portrait of William
Shakespeare by John Sanders. The purchase price of the option was $30,000, and
was for a period of one year. The option price was $30,000 plus royalties on
various revenue streams that would be derived from the final production. The
Company did not have funding to produce the final production, and accordingly
did not exercise the option.
On May 28, 2003, the Company signed a letter of intent with
Words and Pictures Productions, Inc. to co-produce a full-length 3D animated
feature film based on the Uncle Mugsy animated character. The Company has not
signed a formal contract relating to the subject matter of the letter of intent,
and has no intention of doing so.Silver Exploration Business
On February 25, 2005, the Company amended its Certificate of
Incorporation to change its name to "Silver Dragon Resources Inc." in order to
better reflect its current business strategy focusing on global silver
exploration and development.
Overview.The
Companys primary objective is to explore for gold, silver, base metals and
industrial minerals and, if warranted, to develop those existing mineral
properties. Its secondary objective is to locate, evaluate, and acquire other
mineral properties, and to finance their exploration and development through
equity financing, by way of joint venture or option agreements or through a
combination of both. See "Item 2. Description of Property."Agreement with Sino Silver Corp.On April 24, 2005, the Company signed a Venture Agreement
with Sino Silver Corp. whereby the Company acquired 50% of Sino Silvers
interest in the net proceeds from the sale of minerals or the sale of mining
rights as a result of the exploration, evaluation and development of a property
located in the Erbaohuo Silver District in Northern China. Sino Silver owns 60%
of the equity in a Chinese company, Sanhe Sino-Top Resources & Technology, Ltd.,
which holds the exploration and mining rights to several properties, including
the one that is the subject of the Letter of Intent. In consideration for this
interest, the Company paid Sino Silver $150,000 on the closing date along with
250,000 restricted common shares of the Company. Pursuant to the Agreement, an
additional $200,000 is payable to Sino Silver within 2 years of the closing
date, along with the delivery of an additional 250,000 restricted common shares
of the Company.
Agreement with Linear Gold Corp.
On September 7, 2005, the Company entered into a Joint
Venture Agreement with Linear Gold Corp., Linear Gold Caribe, S.A. (Linear Gold
Corp. and Linear Gold Caribe, S.A. are collectively referred to as "Linear
Gold"), and Linear Gold Mexico, S.A. de C.V. ("Linear Mexico").
Linear Mexico, which is wholly-owned by Linear Gold, owns an
option ("Linear Mexicos Option") to acquire the exploration and exploitation
rights to the property known as the Tierra Blanca Property in Durango, Mexico
(the "Property"). Under Linear Mexicos Option, Linear Mexico is entitled to
acquire the exploration and exploitation rights to the Property by payment of
$2,000,000. Prior to exercisingLinear Mexicos Option, and to keep
Linear Mexicos Option in force, Linear Mexico is required to pay the property
owners $20,000 in year one, $35,000 by April 6, 2006, and $70,000 by April 6,
2007.

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Under the Agreement, the Company has the option to acquire a
55% interest in the Property. If the option is exercised, the property would be
conveyed to a newly formed corporation, which the Company would own 55% of, with
Linear Gold owning the remaining 45%. Upon execution of the Agreement, the
Company paid Linear Gold $45,000 and issued Linear Gold 100,000 shares of common
stock.
In order to exercise the option to acquire a 55% interest in the Property,
the Company must:pay Linear Gold an
  additional $75,000 on March 31, 2006; 
 
  issue Linear Gold an
  additional 200,000 shares of common stock on September 7, 2006; 
 
  pay Linear Gold an
  additional $110,000 on March 31, 2007; and 
 
  issue Linear Gold an additional 300,000 shares of
  common stock on September 7, 2007. 

In addition, the Company is required to make expenditures for work on the
Property in the following amounts: $150,000 in Year 1, $200,000 in Year 2, and
$500,000 in Year 3.
In the event the Company exercises the option to acquire an
interest in the Property, it would be responsible for paying 55% of the option
price (or $1,100,000) and 55% of any funds necessary to mine the Property.
The Company can terminate its obligation to pay funds and
issue shares under the Agreement at any time that it does not wish to continue
exploration of the Property on thirty days notice to Linear Gold. In the event
the Company makes all payments and issues all shares under the Agreement, but
Linear Gold elects not to exercise Linear Mexicos Option, then Linear Gold will
assign Linear Mexicos Option to a Mexican subsidiary of the Company in
consideration for $2.00.
In the event Linear Mexicos Option is exercised, and the
Company exercises its option under the Agreement, then Linear Gold and the
Company have agreed to work on good faith to develop a budget for exploring the
Property, in which event both Linear Gold and the Company will have thirty days
to contribute their respective shares of the budget. In the event one party does
not contribute its share of the budget, the defaulting partys share of
ownership of the corporation established to own the mining rights will be
reduced to reflect its pro rata share of total capital contributed, based upon
an initial valuation of the Property of $3,545,454.50.
The company formed to own the mining rights will be governed
by a management committee composed of one member selected by each of the Company
and Linear Gold. Among the decisions the company cannot make without the
unanimous consent of both the Company and Linear Gold are: a decision to bring
the mine into production; the incurrence of any indebtedness other than normal
accounts payable; pledging, assigning or encumbering the companys assets; any
capital commitment in excess of $100,000; hiring any employees with an annual
salary in excess of $100,000; the creation of new classes of capital stock or
the issuance of any new shares of capital stock; or any disposition of the
assets of the company. Day to day management of the company will be handled by
an operator, which will be the entity that holds the greatest share of ownership
of the company.
7Cerro Las Minitas, Mexico
1.     On March 2, 2006, the Companys
wholly-owned subsidiary, Silver Dragon Mining De Mexico, S.A. De C.V. ("Silver
Dragon Mexico") entered into an agreement with Jaime Muguiro Pena (the"Assignment Agreement")
wherein Mr. Pena assigned to Silver Dragon Mexico the mining and exploitation
rights to 10 mining concessions, which include an operating mine, totaling
approximately 1354 hectares in Guadalupe, Durango, Mexico in consideration for
the payment to Mr. Pena of US$799,000 plus applicable V.A.T. The Agreement
requires Mr. Pena to carry out all necessary actions to obtain registration in
his favour of 3 of the 10 concessions, which are in the process of being
registered in the name of Mr. Pena. The purchase price is payable as follows:

i)

ii)      US$100,000 payable six months from the closing date;

iii)     US$100,000 payable twelve months
from the closing date;

iv)    US$200,000 payable twenty-four
months from the closing date;

v)     US$299,000 payable thirty-six
months from the closing date.

All payments are subject to V.A.T.

Until such time as the purchase price is paid in full, Mr.
Pena retains a reservation of the concession domains and may continue to dispose
of up to 30 tons of ore per day from the mine. Silver Dragon Mexico is entitled
to all amounts mined over and above the 30 tons per day.

Silver Dragon Mexico has also entered into an Assets Bailment
Agreement with Mr. Pena which allows Silver Dragon Mexico the use of certain
mining equipment (the "Equipment") which, subject to the terms of the Assets
Bailment Agreement, is included in the purchase price for the mining concessions
referred to in the Assignment Agreement. Upon payment in full of the purchase
price pursuant to the Assignment Agreement, Silver Dragon Mexico can purchase
the Equipment for the sum of US$1,000 plus V.A.T.

2.     On March 2, 2006, Silver Dragon
Mexico entered into an agreement with Ramon Tomas Davila Flores (the "Assignment
Agreement") wherein Mr. Flores assigned to Silver Dragon Mexico the mining and
exploitation rights to 5 mining concessions, which include an operating mine,
totaling approximately 31 hectares in Guadalupe, Durango, Mexico in
consideration for the payment to Mr. Flores of US$245,000 plus applicable V.A.T.
which was paid on closing, along with 110,000 restricted common shares of the
Company

Silver Dragon Mexico has also entered into an Assets Purchase
Agreement with Mr. Flores for the purchase of certain mining equipment for the
sum of US$5,000 plus V.A.T.

3.     On March 8, 2006, Silver Dragon
Mexico entered into an agreement with Minera Real Victoria, S.A. De C.V. ("Minera")
wherein Minera assigned to Silver Dragon Mexico the mining and exploitation
rights to 1 mining concession known as "Puro Corazon" which includes an
operating mine, totaling approximately 9 hectares, in Guadalupe, Durango, Mexico
in consideration for the payment to Minera of US$400,000 plus applicable V.A.T.,
along with 2 Million restricted common shares of the Company The purchase price
is payable as follows:

i. US$100,000 was paid on the closing;

ii. US$100,000 payable six months from the closing
date;

iii. US$100,000 payable twelve months from the
closing date;

iv. US$100,000 payable twenty-four months from the
closing date.

Allpayments are subject to V.A.T.

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4.     On March 9, 2006, Silver Dragon
Mexico entered into an agreement with Silvia Villasenor Haro, the owner of Puro
Corazon, wherein, in consideration for the sum of US$50,000 plus V.A.T., she has
consented to the assignment of the mining and exploitation rights of Puro
Corazon to Silver Dragon Mexico. In addition, she has agreed to modify the
exploitation agreement of Minera which was assigned to Silver Dragon Mexico as
follows:i)     
The consideration to be paid to Ms. Haro due to the exploitation of the mining
concession will be in the amount of USD$1.50 per ton of economic ore that is
extracted from themine, to be paid monthly, within the following 30 days as of the date in which
the Silver Dragon Mexico receives the corresponding invoices.

Regardless of the above, in the event
that Silver Dragon Mexico does not initiate production over the lot regarding
the Concession Title within a 6 months period of the date of execution of the
Agreement, Silver Dragon Mexico must pay to Ms. Haro the monthly amount of
$3,500.00 dollars plus VAT. Such payment will be made for the period or periods
of time during which no ore is extracted, and paid within the first eight days
of the corresponding month.

In the event that Silver Dragon
Mexico pays Ms. Haro the above mentioned monthly consideration, such must be
discounted from any future payment made by Silver Dragon Mexico to Ms. Haro as a
result of the production and extraction of ore, subject to the condition that
the payments due to Ms. Haro by the production and extraction of ore are
maintained at least in the minimum monthly amount of US$3,500.00. If Silver
Dragon Mexico decides not to produce nor extract ore, any monthly payments that
are made to Ms. Haro will remain to her benefit.

ii)    Option to Purchase. Silver Dragon Mexico has been granted the option to
purchase the Concession, which can be exercised by Silver Dragon Mexico by
providing writtennotice to Ms. Haro within a 30 days period in advance
to the following events:

a)     The Option to Purchase the
Concession can be exercised by Silver Dragon Mexico within 3 years of the date
of execution of the Agreement upon payment of the amount of USD$2,000,000 plus
the applicable Value Added Tax ; or alternatively,

b)     The Option to Purchase the
Concession can be exercised by Silver Dragon Mexico within 5 years of the
execution of this Addendum upon payment of the amount of USD$3,000,000 plus the
applicable Value Added Tax.

Sino Silver Corp.

On March 21, 2006, the Company entered into an Asset Purchase
Agreement with Sino Silver Corp. ("Sino Silver") and Sanhe Sino-Top Resources
and Technologies, Ltd. ("Sino-Top") wherein Sino Silver agreed to sell its 60%
interest in Sino-Top to the Company. Sino-Top holds the exploration and mining
rights to 9 properties in the Erbaohuo Silver District in Inner Mongolia, China.
The total purchase price is US$650,000 plus 4,000,000 restricted common shares
of the Company payable as follows:

i. US$150,000 was paid on the closing;

ii. US$100,000 payable on May 20, 2006;

iii. US$400,000 payable and the
4,000,000 restricted common shares of the Company deliverable upon receipt of
the requisite approvals to the transfer by the local Provincial Department of
Commerce in China;

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The Company has also committed to invest approximately
US$1,300,000 into Sino-Top in 2006 towards exploration and property maintenance
on the nine properties in the portfolio, with emphasis on bringing the Erbahuo
mine into production in 2007 and advanced stage exploration on two properties (Zuanxinhu
and Saihanaobao). This agreement supersedes the Venture Agreement dated April
24, 2005 between the Company and Sino Silver.

Competition

Regulation. The Companys interests in its properties
will be subject to various laws and regulations concerning exploration,
allowable production, taxes, labor standards, environmental protection, mine
safety, regulations relating to royalties, importing and exporting of minerals
and other matters. In addition, new laws or regulations governing operations and
activities could have a material adverse impact on the Company.

Environment. Environmental legislation in all countries
is evolving in a manner which will require stricter standards and enforcement,
increased fines and penalties for non-compliance, more stringent environmental
assessments of proposed properties and a heightened degree of responsibility for
companies and their officers, directors and employees.

Recent Equity Sales

On January 31, 2005 the Company sold 1,500,000 shares of
common stock to accredited investors for a total of $30,000.

Between January 31, 2005 and April 5, 2005, the Company sold
180,000 shares of common stock in a private placement offering pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act")
and/or Section 4(2) of the Securities Act, and/or Regulation D promulgated
thereunder. Each share was sold for a price of $0.10 and the Company has
received $18,000 in proceeds for the sale of the shares as of April 5, 2005.

In September 2005, the Company sold 2,400,000 shares of
common stock to accredited investors for a total of $240,000.

In January 2006, the Company sold 2,500,000 shares of common
stock to accredited investors for a total of $250,000.

In March 2006, the Company sold 1,000,000 shares of common
stock to accredited investors for a total of $100,000.

In February and March 2006, the Company sold 1,000,000 Units
to accredited investors for a total of $1,000,000. Each Unit consists of one
share of the Companys common stock and 2 one-half of one (1/2) common stock
purchase warrants ("Warrant"). Each whole Warrant is exercisable at $2.00 per
common share and $5.00 per common share.

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Intellectual Property

The Company has no patents, trademarks, licenses, franchises,
concessions, royalty agreements or labor contracts that management believes have
any value.

Employees

The Company has no full or part-time employees, other than
Marc Hazout, the Companys President, CEO. Mr. Hazout is employed pursuant to an
Employment Agreement.

Risk Factors

You should consider each of the following risk factors and
any other information set forth in this Form 10-KSB and the other Companys
reports filed with the Securities and Exchange Commission ("SEC"), including the
Companys financial statements and related notes, in evaluating the Companys
business and prospects. The risks and uncertainties described below are not the
only ones that impact on the Companys operations and business. Additional risks
and uncertainties not presently known to the Company, or that the Company
currently considers immaterial, may also impair its business or operations. If
any of the following risks actually occur, the Companys business and financial
condition, results or prospects could be harmed.

Risk Relating To Our Operations

None of the properties in which we have an interest or the
right to earn an interest have any known reserves.

None of the properties we have an interest or the right to
earn an interest has any reserves. To date, we have engaged in only limited
preliminary exploration activities on the properties. Accordingly, we do not
have sufficient information upon which to assess the ultimate success of our
exploration efforts. If we do not establish reserves, we may be required to
curtail or suspend our operations, in which case the market value of our common
stock may decline, and you may lose all or a portion of your investment.

Our current cash will only fund our business as currently
planned for the next 2 months. We will need additional funding, either through
equity or debt financings or partnering arrangements, that could negatively
affect us and our stock price

We will need significant additional funds to continue
operations, which we may not be able to obtain. We estimate that we must raise
approximately $12 million to fund our anticipated capital requirements and our
obligations under the agreements for the concessions in Cerro las Minitas,
Mexico, the agreement with Sino-Top, and the agreement with Hubei Silver. Our
agreement with Jaime Muguiro Pena required us to make a $100,000 payment on
closing, with further payments totaling of $350,000 made during 2006, along with
450,000 restricted common shares. Our agreement with Ramon Tomas Davila Flores
required us to make a payment of closing of $245,000 along with  110,000
restricted common shares. Our agreement with Minera Real Victoria, S.A. de C.V.
required us to make a $100,000 payment on closing, a further payment of $100,000
was paid on September 11, 2006, and we must make payments totaling $200,000 over
the next 2 years along with 2,000,000 restricted common shares. We estimate that we will need to raise approximately
$5,300,000 to meet our obligations under the Cerro las Minitas agreements, as
well as to continue with the exploration and mining of the properties throughout
2007. Our agreement with Silvia Villasenor Haro, the owner of Puro Corazon,
required us to make payments of $50,000 at closing. In addition, we will require
an additional $2,000,000 should we choose to exercise the option to purchase the
mining concession from Silvia Villasenor Haro within 3 years or $3,000,000
within 5 years. We currently do not have arrangements in place to raise the
capital to fund these obligations. All payments in Mexico were and are subject
to Value Added Tax (V.A.T.).

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Our agreement with Sino Silver and Sino-Top required us to
make a $150,000 payment on closing, a further payment of $100,000 on May 20,
2006, which left a balance of $400,000, due upon receiving approval to the
transaction by authorities in China that was paid on November 9, 2006. In
addition, we have committed to advance approximately $1,300,000 to Sino-Top in
2006 for further exploration of the mining properties. To date, we have advanced
$786,180 to Sino-Top.We
estimate that we will require approximately $514,600 to meet our commitments to
Sino-Top over the next 2 months.In addition, we estimate
that we will require a minimum of $4,000,000 for exploration and mining through
the end of 2007. We currently do not have arrangements in place to raise the
capital to fund these obligations.

We have entered into a letter of intent to acquire a 60%
equity interest in the Hubei Silver in Hubei Province, China. The agreement will
require us to pay approximately $2,400,000 in cash and issue restricted shares
of our common stock valued at $1,600,000 for acquiring this interest on closing.
We currently do not have arrangements in place to raise the capital to fund
these obligations.

We have historically satisfied our working capital
requirements through the private issuances of equity securities as well as from
our chief executive officer. We will continue to seek additional funds through
such channels and from collaborative and other arrangements with corporate
partners. In particular, we will need $12 million in additional funding to
continue our operations for the next twelve months. However, we may not be able
to obtain adequate funds when needed or funding that is on terms acceptable to
us. If we fail to obtain sufficient funds, we may need to delay, scale back or
terminate some or all of our mining exploration programs.

We are an exploration stage company, and based on our negative cash flows
from operating activities there is uncertainty as to our ability to continue as
a going concern.

From inception, we have generated no revenues and have experienced negative
cash flows from operating losses. We anticipate continuing to incur such
operating losses and negative cash flows for the foreseeable future, and to
accumulate increasing deficits as we increase our expenditures for exploration
and mining of minerals, infrastructure, research and development and general
corporate purposes. Any increases in our operating expenses will require us to
achieve significant revenue before we can attain profitability. Our history of
operating losses and negative cash flows from operating activities will result
in our continued dependence on external financing arrangements. In the event
that we are unable to achieve or sustain profitability or are otherwise unable
to secure additional external financing, we may not be able to meet our
obligations as they come due, raising substantial doubts as to our ability to
continue as a going concern. Any such inability to continue as a going concern
may result in our security holders losing their entire investment. There is no
guaranty that we will generate revenues or secure additional external financing.
Our financial statements, which have been prepared in accordance with the United
States GAAP, contemplate that we will continue as a going concern and do not
contain any adjustments that might result if we were unable to continue as a
going concern. Changes in our operating plans, our existing and anticipated
working capital needs, the acceleration or modification of our expansion plans,
lower than anticipated revenues, increased expenses, potential acquisitions or
other events will all affect our ability to continue as a going concern. See
"Managements Plan of Operations".

The reports of independent auditors of our consolidated financial statements
included in this report contain explanatory paragraphs which note our recurring
operating losses since inception, our lack of capital and lack of long term
contracts related to our business plans, and that these conditions give rise to
substantial doubt about our ability to continue as a going concern. In the event
that we are unable to successfully achieve future profitable operations and
obtain additional sources of financing to sustain our operations, we may be
unable to continue as a going concern. See "Managements Plan of Operation" and
the our consolidated financial statements and notes thereto included in this
report.

12

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We have a history of operating losses and we anticipate future losses.

Since we changed our business focus to silver exploration, we
have generated no revenues. We incurred losses of approximately $542,909 and
$399,027, respectively, for the fiscal years ending December 31, 2005 and 2004.
We incurred losses of approximately $8,242,981, for the nine months ended
September 30, 2006 and have accumulated losses since inception of approximately
$11,396,041. In addition, we have a working capital deficiency of approximately
$195,655 at December 31, 2005. We anticipate that losses will continue until
such time when revenue from operations is sufficient to offset our operating
costs, if ever. If we are unable to increase our revenues or to increase them
significantly enough to cover our costs, our financial condition will worsen and
you could lose some or all of your investment.

Because our management does not have technical training or
experience in exploring for, starting and operating an exploration program, we
will have to hire personnel to conduct these efforts. If we can not effectively
supervise or retain such personnel, we may have to suspend or cease operations,
which will result in the loss of your investment.

Because our management is inexperienced with exploring for,
starting and operating an exploration program, we have had to hire new employees
and contractors to perform surveying, exploration and excavation of mineral
claims that we may acquire. Our management has no direct training or experience
in these areas and as a result may not be fully aware of many of the specific
requirements related to working within the industry. Management must rely on the
personnel it has hired or retained to assist them in making critical engineering
and business decisions and choices. Consequently, our operations, earnings and
ultimate financial success could suffer irreparable harm due to managements
lack of experience in this industry if our management were unable to supervise
and retain qualified personnel to carry out these tasks. As a result we may have
to suspend or cease operations, which will result in the loss of your
investment.

Our success also depends on our ability to hire and retain
skilled operating, marketing, technical, financial and management personnel. In
the mining sector, competition in connection with hiring and retaining skilled,
dependable personnel is intense. We may not offer salaries or benefits that are
competitive with those offered by our competitors, which may have significantly
more resources when compared to us. As such, even if we were to succeed in
hiring skilled personnel, we may not succeed in retaining them.

Because we do not have much capital, we may have to limit our exploration
activity, which may result in a loss of your investment.

Because we are small and do not have much capital, we must limit our
exploration activity. As such, we may not be able to complete an exploration
program that is as thorough as the one that we currently anticipate on
conducting. In that event, an existing ore body may go undiscovered. Without an
ore body, we cannot generate revenues, in which case, you will lose your
investment.

If our sole officer who also serves as our sole director resigns or dies
without having found replacements, our operations will be suspended or cease
altogether. If that should occur, you could lose your investment.

We have one individual who serves as our sole officer and sole director. We
are entirely dependent upon him to conduct our operations. If he should resign
or die, there will be no immediately available replacements. If that should
occur, until we find other persons to run us, our operations will be suspended
or cease entirely, and our business and the results of operations would suffer.

Because we have only one individual serving as our sole officer and director
who is responsible for our managerial and organizational structure, in the
future, there may not be effective disclosure and accounting controls to comply
with applicable laws and regulations, which could result in fines, penalties and
assessments against us.

One individual serves as both our sole officer and director. He is
responsible for our managerial and organizational structure, which will include
preparation of disclosure and accounting controls under the 
Sarbanes Oxley Act of 2002. When
theses controls are implemented, our officer and director will be responsible
for the administration of the controls. Should he not have sufficient
experience, he may be incapable of creating and implementing the controls, which
may subject us to sanctions and fines by the Securities Exchange Commission,
which ultimately could cause us to lose money and possibly to go out of
business.

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Pursuant to Section 404 Of The Sarbanes-Oxley Act Of 2002 ("Section 404"), we
will be required, beginning with our annual report on Form 10-KSB for the fiscal
year ending December 31, 2007, to include in our annual reports on Form 10-KSB,
our managements report on internal control over financial reporting and the
registered public accounting firms attestation report on our managements
assessment of our internal control over financial reporting.

We have not prepared an internal plan of action for compliance with the
requirements of Section 404. As a result, we cannot guarantee that we will not
have any "significant deficiencies" or "material weaknesses" reported by our
independent registered public accounting firm. Compliance with the requirements
of Section 404 is expected to be expensive and time-consuming. If we fail to
complete this evaluation in a timely manner, or if our independent registered
public accounting firm cannot timely attest to our evaluation, we could be
subject to regulatory scrutiny and a loss of public confidence in our internal
control over financial reporting. In addition, any failure to establish an
effective system of disclosure controls and procedures could cause our current
and potential shareholders and customers to lose confidence in our financial
reporting and disclosure required under the Securities and Exchange Act of 1934,
which could adversely affect our business.
Because our interests are in Mexico and China, our business is subject to
additional risks associated with doing business outside the United States.

We expect that a portion of our revenues, if any, may be derived from sales
of our products in foreign markets. Accordingly, we will be subject to all risks
associated with foreign trade. These risks include:
shipping delays, 
 
  increased credit risks, trade restrictions, 
 
  export duties and tariffs, 
 
  fluctuations in foreign currency, and 
 
  uncertainties in international, political,
  regulatory and economic developments.
In addition, we anticipate that our foreign operations will
require us to devote significant resources to system installation, training and
service, areas in which we have limited experience.
It is possible that third parties will challenge our title
for the properties in which we have an interest.

We have not obtained title insurance for our properties. It
is possible that the title to the properties in which we have our interest will
be challenged or impugned. If such claims are successful, we may loose our
interest in such properties.
Because all of our assets, our officer and our director are
located outside the United States of America, it may be difficult for an
investor to enforce within the United States any judgments obtained against us,
our officer or our director.

All of our assets are located outside of the United States,
the individual serving as both our sole officer and sole director is a national
and/or residents of a country or countries other than the United States, and all
or a substantial portion of such persons assets are located outside the United
States. As a result, it may be difficult for an investor to effect service of
process or enforce within the United States any judgments
obtained against us or our officer
and director, including judgments predicated upon the civil liability provisions
of the securities laws of the United States or any state thereof. In addition,
there is uncertainty as to whether the courts of Canada and other jurisdictions
would recognize or enforce such judgments rendered by the courts of the United
States. There is also uncertainty as to whether the courts of Canada or other
jurisdictions would be competent to hear original actions brought in Canada or
other jurisdictions against us or our officer and director predicated upon the
securities laws of the United States or any state thereof.

14

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Our President and Chief Executive Officer controls a
significant percentage of our common stock.

As of January 26, 2007, Marc Hazout, our President and Chief
Executive Officer, owned beneficially approximately 30.29% of our outstanding
common stock. Mr. Hazout is able to influence all matters requiring stockholder
approval, including election of directors and approval of significant corporate
transactions. This concentration of ownership, which is not subject to any
voting restrictions, could limit the price that investors might be willing to
pay for our common stock. In addition, Mr. Hazout is in a position to impede
transactions that may be desirable for other shareholders. He could, for
example, make it more difficult for anyone to take control of us.

Risks Relating To The Industry In General

Planned exploration, and if warranted, development and mining
activities involve a high degree of risk.

We cannot assure you of the success of our planned
operations. Exploration costs are not fixed, and resources cannot be reliably
identified until substantial development has taken place, which entails high
exploration and development costs. The costs of mining, processing, development
and exploitation activities are subject to numerous variables which could result
in substantial cost overruns. Mining for silver and other base or precious
metals may involve unprofitable efforts, not only from dry properties, but from
properties that are productive but do not produce sufficient net revenues to
return a profit after accounting for mining, operating and other costs.

Our mining operations may be curtailed, delayed or cancelled
as a result of numerous factors, many of which are beyond our control, including
economic conditions, mechanical problems, title problems, weather conditions,
compliance with governmental requirements and shortages or delays of equipment
and services. If our drilling activities are not successful, we will experience
a material adverse effect on our future results of operations and financial
condition.

In addition to the substantial risk that the mines that we
drill will not be productive or may decline in productivity after commencement
of production, there are hazards inherent in geothermal exploration and
production. Such hazards include unusual or unexpected geologic formations,
pressures, downhole fires, mechanical failures, blowouts, cratering, explosions,
uncontrollable flows of well fluids, pollution and other physical and
environmental risks. These hazards could result in substantial losses to us due
to injury and loss of life, severe damage to and destruction of property and
equipment, pollution and other environmental damage and suspension of
operations. As protection against operating hazards, we maintain insurance
coverage against some, but not all, of the potential losses. We do not fully
insure against all risks associated with our business because insurance is
either unavailable or its cost of coverage is prohibitive. The occurrence of an
event that is not fully covered or covered at all by insurance could have a
material adverse effect on our financial condition and results of operations.

The impact of governmental regulation could adversely affect
our business.

Our business is subject to applicable domestic and foreign
laws and regulations, including laws and regulations on taxation, the
exploration for and development, production and distribution of electricity, and
environmental and safety matters. Many laws and regulations require drilling
permits and govern the spacing of mines, rates of production, prevention of
waste and other matters. These laws and regulations may increase the costs and
timing of planning, designing, drilling, installing, operating and abandoning
our silver mines and other facilities. In addition, our operations are subject
to complex environmental

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In addition, the submission and approval of environmental
impact assessments may be required. Environmental legislation is evolving in a
manner which means stricter standards; enforcement, fines and penalties for
non-compliance are more stringent. Environmental assessments of proposed
projects carry a heightened degree of responsibility for companies and
directors, officers and employees. The cost of compliance with changes in
governmental regulations has a potential to reduce the profitability of
operations.

Because the requirements imposed by these laws and
regulations frequently change, we cannot assure you that laws and regulations
enacted in the future, including changes to existing laws and regulations, will
not adversely affect our business. In addition, because we acquire interests in
properties that have been operated in the past by others, we may be liable for
environmental damage caused by former operators. In Mexico, changes in
government leadership and/or the unionization of workers could adversely affect
our operations. In China, political instability and unexpected state
intervention could adversely affect our assets.

Decline in silver prices may make it commercially infeasible
for us to develop our property and may cause our stock price to decline.

The value and price of our common shares and warrants, our
financial results, and our exploration, development and mining activities may be
significantly adversely affected by declines in the price of silver and other
precious metals. Silver prices fluctuate widely and are affected by numerous
factors beyond our control such as interest rates, exchange rates, inflation or
deflation, fluctuation in the value of the United States dollar and foreign
currencies, global and regional supply and demand, and the political and
economic conditions of silver producing countries throughout the world. The
price of silver fluctuates in response to many factors, which are beyond
anyones prediction abilities. The prices used in making the estimates in our
plans differ from daily prices quoted in the news media. The percentage change
in the price of a metal cannot be directly related to the estimated mineralized
material quantities, which are affected by a number of additional factors.
Because mining occurs over a number of years, it may be prudent to continue
mining for some periods during which cash flows are temporarily negative for a
variety of reasons. Such reasons include a belief that the low price is
temporary, and/or the expense incurred is greater when permanently closing a
mine.

Declines in the price of silver may cause our stock price to
decline, which could cause you to lose money while making it difficult for us to
raise capital on terms acceptable to us.

Weather interruptions in China may affect and delay our
proposed exploration operations.

Our proposed exploration work in China can only be performed
approximately six to seven months out of the year. The cold, rain and snow make
the roads leading to our claims impassible every year during certain times from
November to March. When the roads are impassible, we are unable to conduct
exploration operations on the mineral claim.

We may not have access to all of the supplies and materials
we need to begin exploration, which could cause us to delay or suspend
operations.

Competition and unforeseen limited sources of supplies in the
industry could result in occasional spot shortages of supplies such as dynamite
as well as certain equipment like bulldozers and excavators that we might need
to conduct exploration. If we cannot obtain the necessary supplies, we will have
to suspend our exploration plans until we do obtain such supplies.

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Risks Relating To The Market For Our Securities

Because the public market for shares of our common stock is
limited, investors may be unable to resell their shares of common stock.

Currently there is only a limited public market for our
common stock on the Over-The-Counter Bulletin Board in the United States. Thus
investors may be unable to resell their shares of our common stock. The
development of an active public trading market depends upon the existence of
willing buyers and sellers who are able to sell their shares as well as market
makers willing to create a market in such shares. Under these circumstances, the
market bid and ask prices for the shares may be significantly influenced by the
decisions of the market makers to buy or sell the shares for their own account.
Such decisions of the market makers may be critical for the establishment and
maintenance of a liquid public market in our common stock. Market makers are not
required to maintain a continuous two-sided market and are free to withdraw firm
quotations at any time. We cannot give you any assurance that an active public
trading market for the shares will develop or be sustained.

A significant number of shares of our common stock are
eligible for sale in the United States, which could have an adverse effect on
the market price for our common stock and could adversely affect our ability to
raise needed capital.

As of January 26, 2007, the number of shares in the public
float on the Over-The-Counter Bulletin Board in the U.S. is approximately
58,473,533. The market price for our common stock could decrease significantly
and our ability to raise capital could be adversely affected by the availability
of a large number of shares.

The price of our common stock is volatile, which may cause
investment losses for our shareholders.

The market for our common stock is highly volatile, having
ranged in the last twelve months from a low of $0.43 to a high of $2.46 on the
Over-The-Counter Bulletin Board. The trading price of our common stock on the
Over-The-Counter Bulletin Board is subject to wide fluctuations in response to,
among other things, quarterly variations in operating and financial results, and
general economic and market conditions. In addition, statements or changes in
opinions, ratings, or earnings estimates made by brokerage firms or industry
analysts relating to our market or relating to us could result in an immediate
and adverse effect on the market price of our common stock. The highly volatile
nature of our stock price may cause investment losses for our shareholders. In
the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. If securities class action litigation is brought against us, such
litigation could result in substantial costs while diverting managements
attention and resources.

Our common stock is considered to be a "penny stock," which
may make it more difficult for investors to sell their shares.

Our common stock is considered to be a "penny stock." The SEC
has adopted rules that regulate broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on some
national securities exchanges or quoted on NASDAQ, provided that current price
and volume information with respect to transactions in these securities is
provided by the exchange or system). Prior to a transaction in a penny stock, a
broker-dealer is required to:

- 

provide the customer with current bid and
  offer quotations for the penny stock;

explain the compensation of the
  broker-dealer and its salesperson in the transaction;

provide monthly account statements showing the market value
  of each penny stock held in the customers account; and

make a special written determination that the penny stock
  is a suitable investment for the purchaser and receive the purchasers written
  agreement to the transaction.

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These requirements may have the effect of reducing the level
of trading activity in the secondary market for our stock, and investors may
find it more difficult to sell their shares.

ITEM 2. DESCRIPTION OF PROPERTY

Since March 1, 2004, the Company has been maintaining its
offices at 1121 Steeles Avenue West, Suite 803, Toronto, Ontario, Canada

Cerro las Minitas

The following information is derived from National Instrument
43-101 Technical Report for Silver Dragon Resources Inc. on the Cerro Las
Minitas Property, Guadalupe Victoria, Durango, Mexico dated January 23, 2007
prepared by Craig L. Parkinson, P.Geo, Vector Engineering, Inc., 143E Spring
Hill Drive Grass Valley, California 95945 USA and Douglas R. Wood II, P. Geo.,
Professional Mining Consultant, 3135 Holly Lane, Washoe Valley, Nevada 89704.

PROPERTY LOCATION AND DESCRIPTION

The Cerro Las Minitas property is located 70 kilometers
northeast of the City of Durango, capital of the state of Durango, and six
kilometers northwest of the town of Guadalupe Victoria, in the municipality of
Guadalupe Victoria, Durango (Figure 6.1). The claims are located in the Minitas
Mining District in the Mining Region of Guadalupe Victoria. The property
consists of 16 mining concessions encompassing 1,423 hectares (Figure 6.2).









18

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Figure 6.1 Cerro Las
Minitas Location Map



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In a news release dated December 13, 2005, Silver Dragon Resources, Inc. (the
"Company") announced that it had entered into agreements to purchase a 100%
interest in the Cerro Las Minitas Property. In March, 2006, Silver Dragon
consolidated landholdings in the district and claims are now held by Silver
Dragon Mining de Mexico S.A. De C.V, a wholly owned Mexican subsidiary of Silver
Dragon Resources Inc, by virtue of "Agreements to Purchase" 15 of the mining
concessions. Silver Dragon Mining de Mexico S.A. De C.V holds a production lease
with option to purchase one additional claim.













20

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Figure 6.2 Cerro Las
Minitas Concession Map

21

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Agreements with property vendors are summarized in Table 6.1.
Agreements for 15 of the 16 concessions are agreements to purchase. The
agreement for the Puro Corazón claim is a 25-year Lease with Option to Purchase.

Under the terms of the Purchase Agreement with Sr. Jaime Muguiro Peña, the
Company has earned 100% interest in ten mining concessions (listed in Table 6.2)
by payment of $US 450,000 and 450,000 restricted common shares. All payments to Sr. Muguiro have been made. 
Under the terms of the Purchase Agreement with Sr. & Sra. Ramon Davila Flores,
the Company has earned 100% interest in five mining concessions (listed in Table
6.2) by payment of $US 245,000. All payments to Sr. and Sra. Flores have been
made.

The company currently holds interest in a Production Lease
with Option to Purchase the Puro Corazón Concession from the Villaseñor Family.
That Lease was previously held by Minera Real Victoria. Silver Dragon Mining de
Mexico, S.A. de C.V. has made $US 200,000 of the $US 400,000 payments to Minera
Real Victoria to acquire full ownership of the Puro Corazón Lease with Option to
Purchase. Two additional payments of $100,000 each will be paid to Minera Real
Victoria on the first and second anniversaries of the signing of that contract
to complete acquisition of the Lease.

Until Silver Dragon Mining de Mexico, S.A. de C.V. exercises
its option to purchase the Puro Corazón concession, it is obligated to pay
monthly production or non-production royalties to the Villaseñor Family.
Currently, the Company is paying a $US 3,500 per month non-production royalty to
the Villaseñor Family. At such time as production commences from the Puro
Corazón concession, the Company will then pay a $US 1.50 per ton royalty on
production from the concession. Silver Dragon Mining de Mexico S.A. de C.V. has
the option to purchase a 100% interest in the Puro Corazón concession for $US
2,000,000 if the purchase is made within the first three years of the lease
term. After the first three years of the Lease term, the Company has the option
to purchase the Puro Corazón concession for $3,000,000.

The surface access to the property is controlled by the
Guadalupe Victoria and Ignacio Ramirez Ejidos. Silver Dragon Mining de Mexico,
S.A. de C.V. has a surface agreement to cover the common ground of the Guadalupe
Victoria Ejido that lies within the Cerro Las Minitas concessions. Agreements
with individual Ejido landowners are negotiated as needed to cover deeded lands.
Silver Dragon Mining de Mexico, S.A. de C.V. does not yet have a surface
agreement with the Ignacio Ramirez Ejido, but negotiations for those rights are
expected to be concluded successfully in the near future.

In Mexico, the location of a concession is determined by the
location of a single claim monument, with all corners being located based on
surveyed distances and bearings from that monument. These distances and bearings
must be determined and verified by a licensed surveyor. The monument may be
placed outside of the concession boundaries. Although the perimeter lines may
have not been partially or entirely surveyed, the method of locating the
concession corners constitutes a legal survey. All of the concessions at Cerro
Las Minitas have been legally surveyed.

There were substantial changes to the Mexican Mining Law in
2005. Claims filed before 2006 were classified as either "Exploration" or
"Exploitation" concessions. Exploration concessions were granted with a term of
six years. In special cases, the term of exploration concessions could be
extended for an additional three years. After expiration of the exploration
designation for a concession, it was converted to an Exploitation concession for
a term of 25 years. Another 25 year extension could be applied for on each
concession if warranted.

When the Mining Law was changed in 2005, the distinction
between Exploration and Exploitation concessions was abandoned. Concessions are
now all classified as mining concessions and each is given an initial term of 50
years. Exploration concessions granted prior to 2006 still have a term of six
years. Exploitation concessions granted prior to 2006, whose terms were
originally 25 years, were extended by the changes to have an additional 25 years
added to their terms.

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A summary of the claim tenure information and projected
concession maintenance costs for 2007 are located in Table 6.2. Title to the
Cerro Las Minitas claims has been reviewed and verified by the management of
Silver Dragon Resources, Inc..

Prior to the commencement of ground disturbing exploration
activities such as drilling or trenching a "Preventative Report" (Informe
Preventivo) must be prepared and submitted to the Mexican Government
Environmental Agency (SEMARNAT). The report must detail the type of work to be
conducted and the amount of disturbance, the location, vegetation encountered
and proposed mitigation. One such report has been submitted to SEMARNAT to cover
operations to date and another is in preparation to cover planned operations.

Silver Dragon Resources, Inc and its subsidiary Silver Dragon
Mining de Mexico, S.A. de C.V. have warranted that the claims:

- 

Title to the concessions constituting the Cerro Las Minitas
property has been reviewed by management of Silver Dragon Resources, Inc. who
take responsibility for its accuracy.

The minimum annual work requirement for these mining
concessions is approximately $US 19,500. According to the Mining Law and Ruling,
there is an obligation to submit the evidence of the work expenditures to the
authorities for properties larger than 1,000 hectares. It is therefore
recommended that the required information for the previous reporting year be
submitted annually each May. The filing for annual work requirements for 2005
was made in 2006.

The mineralized zones currently known are in the area of the
Puro Corozon  Santo Nino and Mina Pina  La Bocona mining areas. The Puro
Corozon  Santo Nino mining area is located in the south-central portion of the
northern concessions. The Mina Pina  La Bocona area is located in the northeast
portion of the northern concessions. The mineral resources discussed in this
report are located in the Puro Corozon  Santo Nino mining area. The mine
workings are situated within the Puro Corozon  Santo Nino and Mina Pina  La
Bocona mining areas.

The are no tailings ponds and there are small waste dumps
associated with the workings at the El Sol, Santo Nino, Puro Corozon, Mina Pina,
and La Bocona mines. The significant natural feature is the hill called Cerro
Las Minitas. Improvements consist of a network of graded dirt roads and various
mine buildings in a poor state of repair located in the Puro Corozon  Santo
Nino and Mina Pina  La Bocona mining areas.

ACCESSIBILITY, CLIMATE, PHYSIOGRAPHY, LOCAL INFRASTRUCTURE

The Cerro Las Minitas property is located in the Minitas
Mining District, approximately seven kilometers north of the town of Guadalupe
Victoria, Durango and 70 km northeast of Ciudad Durango, the capital of the
state of Durango. The property can be reached from Ciudad Durango via Interstate
Highway 40 (Toll Road) and Highway 40 (Free Access), the road from Francisco I.
Madera to Cuencame (Figure 6.1). From Guadalupe Victoria, a graded dirt road
leads north to the property. About half of the property is located north of
Interstate Highway 40 (a limited access freeway) and an overpass over the
highway affords access to the northern part of the property.

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The Cerro Las Minitas property lies near the western edge of
the Mexican Altiplano, an extensive volcanic plateau characterized by narrow, NW
trending fault-controlled ranges separated by wide flat-floored basins. In the
Durango area the basins have elevations of 1900m to 2100m, and the higher peaks
rise to 3000m. The climate is generally dry with sporadic, occasionally violent
rainstorms in the hot summer months of June - September. The average
precipitation in the property area is about 600 mm mainly between May and
October. The winter months are cool and dry, and snow is rare but nighttime
temperatures below the freezing mark are common in December and January. Yearly
average temperatures are about 25 degrees Celsius. Grasses, small trees and
shrubs along with several varieties of cacti make up most of the vegetation on
the steep hillsides, and larger trees are found near springs and streams.

The broad valley south of the Cerro Las Minitas property is
relatively densely populated and well developed. The town of Guadalupe Victoria
is a growing farm community of about 27,000 persons that offers most basic
services. Both the quality of infrastructure and population density increase
towards the city of Durango, 70 km to the southwest. The nearby towns of
Guadalupe Victoria and Ignacio Ramirez are serviced by the commercial electrical
grid and a regional transmission line of the Comisión Federal de Electricidad (CFE)
follows Interstate Highway 40. A 33,000 Kva power drop has been extended from
the CFE line to the Mina Piña shaft and is serviceable, but in need of minor
repair.

There is no access to Interstate Highway 40 at Cerro Las
Minitas, although the Highway bisects the property. A small overpass affords
access between the north and southern portions of the property.









24

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Figure 7.1 View to
the Southeast from above the Puro Corazón Mine at Cerro Las Minitas with the
town of Ignacio Ramirez in the distance.

25

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Potable water is readily available in nearby towns and water
for drilling and other exploration purposes can be obtained from old workings on
the property. Any of the materials, supplies, and labor required to support
exploration and mining activities are available in Durango City and the
surrounding region. Telephone service, Internet access, and basic necessities
are available in Guadalupe Victoria.

No environmental reports were provided for the property.
Discussions with officials of SEMARNAT, the Mexican Environmental Agency
revealed that there are no outstanding environmental restrictions associated
with the property. Standard environmental reports (Informes) will be required in
advance of new earth-moving activities on the property, but no unusual problems
are foreseen regarding environmental permits for exploration or development. The
property has ample land suitable for the construction of any proposed mine or
mill structures and facilities, including tailings storage or waste disposal
areas and heap leach pads. Surface rights are owned by the Ejidos of Guadalupe
Victoria and Ignacio Ramirez and surface rights for all proposed exploration and
mining activities including the installation of tailings storage or waste
disposal areas, heap leach pads, and processing plant sites must be negotiated
with the Ejidos. Silver Dragon Mining de Mexico, S.A. de C.V. has negotiated
rights for use of 150 hectares of the common areas of the Guadalupe Victoria
Ejido that fall within the concession boundaries. Surface rights on deeded lands
within the Ejidos must be negotiated with individual property owners. Silver
Dragon Mining de Mexico, S.A. de C.V. does not currently have an agreement
regarding surface rights within the Ignacio Ramirez Ejido, but negotiations are
in progress and no problems are anticipated.

PROPERTY HISTORY

There is little documentation regarding the history and
production at Cerro Las Minitas, but local legend has it that Spaniards from the
city of Victoria de Durango (now Durango City) discovered the silver
mineralization at Cerro Las Minitas originally. The historical information
presented herein has been gleaned from discussions with local miners and
operators and the few previous evaluative reports concerning the property that
do exist (Minas de Bacis, 1995; Enriquez, 2005; Proyectos Mineros y Topografia,
2001).

No reliable record of historic production have been found,
but local miners and operators report that the mines have been active
intermittently since the early 1960s. The properties have passed from hand to
hand with no historical documentation. However, concessions covering the
properties have been maintained in good standing since the early 60s.

The only two areas with significant exploitation in the
district are the Santo Niño-Puro Corazón and La Bocona-Mina Piña areas, with a
total estimated production by Enriquez (2005) of 1,200,000 metric tons with an
estimated average grade of 350 g/t Ag and 1.5 g/t Au, 6.3% Pb, 5.6% Zn and about
1.0% Cu (Enriquez, 2005). Enriquez estimate was based on the earlier work of
Minas Bacis and additional sampling done by Minera Real Victoria.

Sr. Carlos Villaseñor discovered Ag-Pb-Zn-Cu mineralization
in the Santo Niño-Puro Corazón area in 1960. He explored the deposits there and
did minor exploitation of them until 1971, when he built a small mill in the
Velardeña district. When the mill became operational, mining was stepped up and
ores were shipped to the Velardeña mill to be processed. After attention was
drawn to the area by the Villaseñor operations, exploration by others discovered
the deposits in the La Bocona-Mina Piña area to the east.

The majority of the mining at Cerro Las Minitas is reported
to have been done during the period 1970  1981, but has continued
intermittently until the present. The mines were idle from 1997 - 2002 due to
problems with mine water and the drop in metal prices. Intermittent, small-scale
exploitation of the deposits in the Puro Corazón - Santo Niño area continued
until 2005 and operations in the Mina Piña  La Bocona area continued to late
2006. It has been estimated by Enriquez (2005), based on the size of mine
workings and limited sampling, that of the 1.2 million metric tons have been
exploited from the two areas, 0.7 million was produced from the Puro Corazón -
Santo Niño area and 0.5 million from the Mina Piña  La Bocona area.

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The Consejo de Recursos Minerales (CRM) has been giving
support to the miners in the area since 1977. In 1979, CRM completed 834.55m of
diamond drilling in seven holes on the Mina Piña area, which belonged at that
time to Mr. Santiago Valdez. Mr. Valdez exploited the mine until 1997, when he
suspended operations due to the drop in metal prices. CRM discovered additional
mineralization in their drilling, but no further exploration or development of
those discoveries has been done. CRM delivered drill and assay data to the
operators in the district without interpretation. Silver Dragons exploration
staff is in the process of compiling and analyzing that data.

In 1981, CRM continued its support of the development of the
district, completing 77m of shaft and 80m of crosscut to cut the upper, oxidized
portion of the La Bocona deposit. Following that work, Sr. Jaime Muguiro
deepened the Mina Piña shaft another 59 meters to reach the 210 level. A
140-meter crosscut was driven, encountering a number of thin mineralized
horizons and the Huisache mineralized chimney. Sr. Muguiro then suspended
operations due to problems with water inflow.

In 1995, Minas de Bacis (Minas de Bacis, 1995) completed a
30-day evaluation of Cerro Las Minitas which consisted of analysis of previous
data, inspection of accessible workings and analysis of surficial geology. Based
on that work, Minas de Bacis reported an inferred mineral resource of 1,296,000
metric tons grading 0.12 gr/ton gold, 102 gr/ton silver, 2.86% lead, 10.36% zinc
and 0.15% copper. The data upon which that estimate was based have not been
found and it can only be reported as an historical estimate. Based on their
analysis, Minas de Bacis began negotiations to acquire the Concessions in the
district. Those negotiations were unsuccessful and Minas de Bacis withdrew. A
summary report of Minas de Bacis findings has been located, but much of the data
used as the basis for the conclusions in the report has not.

The authors reviewed the 1995 resource estimates of Minas de
Bacis. Some of the actual data upon which the resources were calculated are not
available. It is unknown what data or methods were used to make the resource
estimates. The historical estimates of resources reported by Minas de Bacis
(1995) are considered by the authors to be exploration targets.

From 1999 to 2000, Minerales Noranda, SA de CV (Noranda)
optioned the properties and completed an exploration program including 861 soil
and rock samples, an aeromagnetic survey covering the entire district, and seven
widely-spaced diamond drill holes (3886 meters total) within the Cerro Las
Minitas Dome. Results were encouraging but not up to Norandas expectations and
they abandoned the property. Unfortunately, the original Noranda data has not
been found and all that has been located is fragmentary data presented in a
summary report by Proyectos Minerales y Topografia, S.A. de C.V. (2001). Most of
the core from Norandas drilling has been located and a partial re-examination
of that core has been made to confirm data used in estimating the inferred
mineral resource reported herein. Continued reexamination of that core is
ongoing, as Norandas drill logs have not been recovered.

Minera Real Victoria (MRV) acquired leases on concessions in
the Puro Corazón - Santo Niño area in 2005 and began a program of exploration
and development in the area. In May 2005, MRV began driving a 2.5m X 2.5m
decline into the old Puro Corazón - Santo Niño workings to develop resources
believed to be present there. MRV drove 170 meters of workings to connect with
level 2 of the Puro Corazon workings and to make a preliminary exploration of
the near surface portion of the La Chive mineralized zone. That work was halted
in November, 2005 when MRV entered negotiations with Silver Dragon Resources,
Inc to acquire the property. The sampling and resource assessment started by MRV
was not completed, but fragmentary data from that work has been recovered.

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Silver Dragon Mining de Mexico, S.A. de C.V. signed
agreements to acquire a 100% interest in the properties that now constitute the
Companys holdings in the district in March, 2006. A combined
reverse-circulation and diamond drilling program to test continuity of
mineralization at depth commenced in May of 2006. Eleven holes were drilled for
2915 meters. Nine of the eleven holes have been sampled, logged and assayed.
Analysis of the two remaining holes will be completed when geotechnical
personnel are available.

The exploratory drill program and a concentrated program of
geologic mapping and sampling of underground workings in the district is in
progress, as well as the re-habilitation and de-watering required to support
that work. The work is ongoing and expected to be completed in early 2007.

GEOLOGICAL SETTING

Regional Geology

Cerro Las Minitas is located within the geomorphic province
of the Mesa Central (Altiplano) of Mexico, northwest of the Sierra Madre
Occidental in the State of Durango. In Durango, the Mesa Central is a broad
plain at about 2000 meters elevation traversed by NW trending mountain ranges
separated by broad NW-trending valleys. Within this province, Cerro Las Minitas
lies within a belt of prolific Au, Ag, Pb, Zn and Cu deposits that stretches
from the highly productive vein deposits of Fresnillo in Zacatecas to the south,
to the massive manto deposits of Santa Eulalia in Chihuahua to the north. This
belt includes the productive replacement deposits of San Martin, Santa Eulalia,
Santa Barbara and Naica as well as the rich vein deposits of Fresnillo, El Bote,
San Jose and various others.

The basement rocks of Mexico are now known to be composed of
an assemblage of tectono-stratigraphic terranes derived from the Paleozoic
Appalachian orogen and the Mesozoic of the Atlantic and Gulf of Mexico combined
with basement rocks of the North American Cordillera (Campa & Coney, 1983, 1987;
Figure 9.1.1) The assemblage includes deformed Pre-Cambrian intrusives and
sediments, deformed Lower to Middle Paleozoic sediments and Lower Mesozoic
sediments which are all covered with a thick succession of Mesozoic sedimentary
and volcanic strata. Those are covered by a thick succession of Tertiary
sediments and volcanics and cut by numerous Tertiary intrusives.



Figure 9.1.1 Tectono-stratigraphic terranes of Mexico (from
Campa and Coney 1983, 1987)

Cerro Las Minitas is located within the Parral
tectono-stratigraphic terrane near the regional fault that marks the contact
between the Parral terrane and the Sierra Madre Occidental terrane. The Parral
terrane is characterized by a thick Late Mesozoic, miogeoclinal marine sequence
deposited on a basement of Lower Mesozoic, eugeosynclinal sedimentary and
volcanic strata. The Parral terrane is host to some of Mexicos larger Au, Ag,
Pb, Zn and Cu replacement deposits, such as Santa Eulalia, Naica, Villardeña,
San Martin and Santa Barbara.

The Cerro Las Minitas project is located within the broad
Guadalupe Victoria Mining Region, which includes the districts of Avino, San
Sebastian and Minitas that constitute a trend of deposits and workings along a
50 kilometer northwest trend. The Cerro Las Minitas property lies within the
Minitas Mining District. The project is located in an area of intersection of
three principal structural trends (Starling, 2003; Figure 9.1.2)

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1.

2.

3.



Figure 9.1.2 Regional faults and photo-lineaments in the
Guadalupe Victoria Mining Region showing principal mines and prospects.

The broad valley that contains the Cerro Las Minitas property
trends W-NW and is covered with a thick succession of Tertiary continental
deposits and soil. The valley is flanked on the north and south by Oligocene and
Miocene felsic volcanic rocks and to the southwest by Miocene  Pliocene basalt
flows. Except for the later basalt flows, the volcanic rocks consist principally
of dacites, rhyolites and various volcanic breccias and ash flows with minor
andesite units.



Figure 9.1.3. Regional Geologic Map (from Consejo de Recursos
Minerales, 1993)

Within the valley, continental clastic deposits of the Upper
Cretaceous Proaño Fm and marine sediments of the Upper Cretaceous Caracol and
Indidura Formations crop out locally. The Caracol and Indidura Formations
consist generally of calcareous siltstones and mudstones, with interstratified,
minor siltstones, greywackes and rare limestone beds. The Indidura Formation
lies conformably over the Upper Cretaceous Cuesta Del Cura Formation which has
been structurally uplifted at Cerro Las Minitas. The uplift appears to have been
caused by the injection of a composite intrusive which has lifted the Cuesta Del
Cura to outcrop in an elliptical dome structure that rises about 150 meters
above the surrounding plain. The intrusive consists of an unknown number of
phases that range in composition from diorite to quartz-monzonite, associated
with numerous dikes that range in composition from andesite to rhyolite. An
aureole of contact metasomatic and replacement deposits of Au, Ag, Pb, Zn, and
Cu was produced during the emplacement of the intrusives and is the subject of
past mining activities and exploration currently underway at the Cerro Las
Minitas Project.

District Geology

Portions of the geology of the northern portion of the Cerro
Las Minitas concessions were mapped by the Consejo de Recursos Minerales (CRM)
in 1988 and Noranda in 1999, and modified by Erme Enriquez in 2005 and Silver
Dragons consultants in 2006 (Figure 9.2.1). The geological setting and
stratigraphy were originally defined by the Consejo de Recursos Minerales
(1993).



Figure 9.2.1 Geologic map of the northern portion of the Cerro
Las Minitas property, Durango, Mexico.

No outcrops are known in the southern half of the property
and the claims there cover fields under cultivation that are part of the
Guadalupe Victoria Ejido. No geologic information has been collected from that
area.

The northern portion of the property is dominated by a NW-SE
elongated domical uplift of Cretaceous marine sediments cored by an intrusive
porphyry complex. Contact metasomatic (skarnoid) deposits of

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The domical uplift of Cretaceous sediments is the principal
topographic feature on the property and has been the focus of all previous
exploration and production there. Past production has occurred principally from
contact deposits in the Puro Corazón  Santo Niño and Mina Piña  La Bocona
areas. The stratigraphic units in the region of Cerro Las Minitas are described
below (Figure 9.2.2)

Stratigraphy

Stratigraphy in the Cerro Las Minitas property has not been
defined in detail. Detailed mapping, as well as detailed study of drill cores
available, will be necessary to define the stratigraphic units and their
relationships there. Inspection of underground workings indicates that there is
a strong stratigraphic control of mineralization on the property, especially as
regards the manto-style mineralization.



Figure 9.2.2 Stratigraphy in the region of Cerro Las Minitas
(After Consejo de Recursos Minerales, 1993)

Regional stratigraphy has been defined by the Consejo de
Recursos Minerales and provides a starting point for definition of the
stratigraphy in the Minitas District.

Cuesta del Cura and Indidura Formations (Undivided)

Strata of the Cuesta del Cura formation are the oldest rocks
exposed in the district and appear to be equivalent to the Baluarte formation,
90km north of the project area. The Cuesta del Cura formation is a marine Lower
Cretaceous unit and consists principally of grey to black (carbonaceous), fine
grained, thin to medium bedded limestone with thin, undulatory, intercalated
dark chert beds.

The typical chert-bearing strata of the Cuesta Del Cura
formation on the property grade upwards into a mixed carbonate-siliclastic
sequence that contains inceasing amounts of thin to medium bedded shales and
sandstones upwards. Those strata are equivalent, but not typical, of the lower
part of the Indidura Formation in the region. The stratigraphic sequence on the
property is too poorly defined to allow separation of these units and they have
been mapped as Cuesta Del Cura and Indidura formations undivided.

Where affected by contact metamorphism, the limestone beds
are typically recrystallized and bleached and are the preferred hosts for both
contact metasomatic and manto-style mineralization. Closest to the intrusive
contact, the chert beds are converted to a quartz-scapolite-albite assemblage
and limestones are typically marbleized. Some of the more siliceous units are
hornfelsed and their mineralogic compositions are as yet undetermined. Higher in
the section, limestones containing a quartz sand component have been
metamorphosed to garnet (predominantly grossularite)  wollastonite - epidote
aggregates. Some of the more siliceous units are hornfelsed and their
mineralogic composition is yet to be determined. At the intrusive contact, small
amounts of hedenbergite and diopside have been identified, but only rarely.
Metamorphism of the calcareous sediments typically only reaches the grade
properly described as skarnoid, which is typical of zinc skarns.

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Intrusive Rocks

The intrusive rocks at Cerro Las Minitas have not been
studied or mapped in detail, but it is known that the central intrusive complex
is composed of at least two principal phases. Both hornblende diorite porphyry
and quartz monzonite porphyry phases are seen as major components of the
intrusive complex. Xenoliths of diorite are present in the quartz-monzonite
intrusive. The quartz monzonite is tan to light grey in color, medium to coarse
grained, with a porphyritic texture containing phenocrysts of feldspars, quartz,
amphiboles, and biotite. The diorite porphyry is similar in gross aspect, but
contains very little K-feldspar, no quartz and little biotite.

Peripheral to the central intrusive complex, numerous dikes
transect the folded and metamorphosed sediments of the Cerro Las Minitas Dome.
Mapping has not been in enough detail to identify or define the dikes in
outcrop, but many have been seen in drill core from the property. Dikes that
have been seen vary in composition from andesite to rhyolite, although most are
quartz monzonite porphyry and diorite porphyry.

Rhyolite (Upper Volcanic Group)

Unconformably overlying the Cuesta del Cura and Indidura
formations and intrusives of Cerro Las Minitas are an undetermined thickness of
rhyolites of the Upper Volcanic Group of the Sierra Madre Occidental. The unit
outcrops in the north and northwest part of the property and consists
predominantly of porphyritic crystal-lithic-vitric rhyolite flows. The presence
of jasperoids has been reported in the La Papa area, just NW of Cerro Las
Minitas and have been interpreted as evidence of high-level hydrothermal
alteration on that area.

Occasionally, thin deposits of continental clastic
sediments are seen at the base of the rhyolitic volcanics. Mapping has not been
completed in sufficient detail to differentiate these and they are presently
grouped with the rhyolites of the Upper Volcanic Group on the property.

Alluvium

The alluvium is composed principally of red soil overlying caliche deposits
that conceal underlying rocks in the areas of lower relief on the property. The
alluvium contains gravel to boulder sized clasts of weathered rock. In some
areas the clasts seem to be derived from underlying rocks and in other areas
they appear to be alluvium derived from upslope. Mapping on the property is of
insufficient detail to distinguish those areas.

Structure

Detailed mapping of the Cerro Las Minitas property has not been done.
Existing mapping was done by CRM in 1980 and modified by Noranda geologists in
1999 and consultants to Silver Dragon Mining de Mexico, S.A. de C.V. in 2006.
However, the current detail of mapping is insufficient to define structural
relationships or other possible ore controls on the property. Detailed mapping
of the Cerro Las Minitas dome will be necessary for effective exploration of the
property.

Accordingly to CRM (1993), the Minitas district, like the
neighboring districts Avino, La Preciosa and San Sebastian, lie in a graben
formed by the NW-trending Rodeo fault to the west and the NW-trending San
Lorenzo fault to the east. Faults were formed by post-Laramide extensional
stress that affected the western margin, and in some cases, the central part of
Mexico.

Locally, Upper Cretaceous strata of the Cuesta del Cura, Indidura and Caracol
Formations were folded about northwest trending axes when they were emplaced as
a regional allocthon during Laramide compression. Injection of the Tertiary(?)
intrusive complex that forms the core of Cerro Las Minitas further deformed the
rocks locally into an elliptical, NW-SE trending dome. As the invading
intrusives shouldered aside the sediments, substantial radial and low-angle
faulting as well as intense folding of the sediments occurred. Map data from
underground workings shows that the faulting at Cerro Las Minitas

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Alteration

Three distinct alteration assemblages have been recognized at Cerro Las
Minitas.

1.

2. Marmorization. It is clear that much recrystallization of carbonate rocks
occurred during the intrusion of the central intrusive complex at Cerro Las
Minitas. However, there are numerous field exposures of recrystallized carbonate
rocks at considerable distance from intrusive contacts and it is not clear that
the recrystallization seen there is associated with the primary metasomatic
event. Marmorization has therefore been recognized as a distinct form of
alteration at Cerro Las Minitas. Two types of marmorization have been
recognized.

a. Non-selective marmorization. This is seen as a widespread recrystallization
of carbonate rocks which shows little or no preference for individual strata. It
is a bulk recrystallization most closely associated with the primary metasomatic
event.

b. Selective marmorization. This is a visually distinct form of marmorization
that is commonly seen to be very bed-selective. Even though it may be confined
to thin beds within carbonate rocks that have been only very weakly
recrystallized, it is a very strong form of recrystallization that may produce
very large grain sizes. When this form of marmorization is well-advanced, a
central core of dark brown recrystallized calcite is often seen in the middle of
the affected bed. This form of marmorization has now been recognized to be
present lateral to Ag-Pb-Zn manto mineralization discovered on the property. The
photo below shows an example of selective marmorization.



3. Late Stage Alteration. This is a form of alteration that is as yet poorly
defined at Cerro Las Minitas. It has been seen only in few drill intersections
and in poor field exposures. It has been distinguished from other forms of
alteration there because it features strong silicification, sericitization of
feldspars and pyritization. Little study of late-stage alteration has been made
yet, but it appears to represent a later stage of alteration that occurred in a
very near-surface

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Geologic Summary

The contact metasomatic and massive sulfide chimney Ag, Zn,
Pb, Cu deposits of Cerro Las Minitas occur in garnetized calcareous sediments
surrounding the central intrusive complex of the Cerro Las Minitas dome. There
has been insufficient exploration on the property to determine the distribution
of these deposits, but two small areas of such deposits mined to date are
estimated (Enriquez, 2005) to have produced about 1.2 million metric tons of Ag,
Zn, Pb, Cu ores. Geologic observations within the Dome suggest that additional
skarnoid and chimney deposits remain to be discovered in the skarnoid zone at
Cerro Las Minitas.

Ag-rich, Pb-Zn manto mineralization was discovered at Cerro
Las Minitas by drilling in 2006. This style of mineralization was previously
unrecognized at Cerro Las Minitas. It was found to lie in areas distal to the
central intrusive contact with essentially no previous exploration. That
discovery reveals a new potential at Cerro Las Minitas and the prospect for
discovery of additional tonnages of Ag-rich, Pb-Zn mantos there.

Exploration of the Cerro Las Minitas dome is in its early
stages. Little exploration systematic has been done previously and past
activities in the district have been largely restricted to artisanal mining of
outcropping deposits. Continued exploration can be expected to reveal new
deposits.

DEPOSIT TYPES

Mineralization seen at Cerro Las Minitas to date has been
classified into four types based on surface and underground field observations
and examination of drill core. Although production records from the area are
very fragmentary, enough sampling of dumps, underground exposures and drill core
has been completed to estimate typical grades in each of the four deposit types.

1. Skarnoid.

2.

3.

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4. Dike
Margin

Of these four deposit types, the skarnoid and chimney
deposits have been reported to have produced the bulk of ore exploited in the
district. Recent underground exploration has shown that the La Bocona deposit,
which produced the bulk of the ore produced in the Mina Piña  La Bocona area,
is a manto deposit.

Exploration during 2006 revealed that Ag-Pb-Zn manto deposits
may be a major resource in the Minitas District, although they were not
previously recognized. The very small amount of exploration that has been done
in the district, and the results of drilling done in 2006, suggest that further
exploration for deposits of all four types is definitely warranted at Cerro Las
Minitas.

MINERALIZATION

Data collected to date reveal that the mineral system at
Cerro Las Minitas is properly classified as a zinc skarn (Meinert, 1992, 1997;
Megaw, 1998; Megaw et al., 1998). In some references, these deposits are known
as Pb-Zn skarns (Ray, 1995). Zinc skarns are well known and mineral deposit
models are well developed for them. Recognition of the Cerro Las Minitas system
as a zinc skarn by Silver Dragon geologists in 2006 led to a search for evidence
of distal Ag-Pb-Zn mantos there. Although Ag-Pb-Zn mantos had not been
previously recognized in the district, several have now been found there using
the zinc skarn model as a guide to exploration. The deposit model suggests that
there are more to be found. As predicted by the zinc skarn model, high-Fe skarn
deposits with Zn > Pb > Cu are found in the skarnoid (contact) zone at Cerro Las
Minitas. The model also predicts that zinc deposits with a decreasing skarn-mineral,
Fe and Cu components should be found at increasing distance from the intrusive
contact. These have now also been found and it has been further discovered that
these generally have higher silver contents than the deposits in the contact
zone. These more distal zones have had very little previous exploration
attention. The potential to discover additional Ag-Pb-Zn deposits there is high.

Farther out from the intrusive contact, the model predicts
that Ag-Pb-Zn mantos should occur. Directed exploration has now confirmed that
these deposits also occur at Cerro Las Minitas. The La Bocona deposit, now
identified as a Ag-Pb-Zn manto by underground exploration and sampling, was the
single largest deposit that has yet been mined at Cerro Las Minitas and is
estimated to have produced as much as 400,000 metric tons of ore. Drilling west
of the Puro Corazón mine in 2006 revealed that a number of Ag-Pb-Zn mantos occur
in that previously unexplored area.

Of great interest, the newly discovered manto deposits appear
to have the highest Ag contents, with a number of drill intercepts returning
assays in excess of 1 kg/ton Ag. Areas distal to the intrusive contact, where
the mantos are found to occur, have had no exploration previous to 2006. The
fact that evidence of manto mineralization was cut in five of seven holes
drilled west of the Puro Corazón mine suggests that the potential for discovery
of significant tonnages of high Ag manto mineralization there is very high.
Based on past experience in Mexican Ag-Pb-Zn camps, the manto deposits can be
expected to be the largest and most continuous deposits to be discovered at
Cerro Las Minitas.

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Among the distinctive characteristics of zinc skarns is their
generally high Mn content (Meinert, 1992). Samples of ore minerals from
underground and from drill intercepts confirm that this is the case at Cerro Las
Minitas. The oxidized surface expressions of known deposits typically feature
prominent Mn staining. Reconnaissance exploration has revealed that areas of
prominent Mn staining in outcrop are widespread within the Cerro Las Minitas
dome. Furthermore, it has been observed that there are some areas of strikingly
Mn-enriched soils in some of the covered areas peripheral to the outcropping
portions of the dome.

Historic operations at Cerro Las Minitas were hampered by
water problems. The inability of artisanal miners to deal with water inflow
problems is believed to be the reason that mineralization was not pursued
down-dip, rather then the absence of mineable mineralization. Intercepts of
down-dip extensions of mineralization at the Puro Corazón mine during 2006 lend
credence to that argument.

Artisanal miners in the Minitas district appear to have
avoided exploitation of the near surface oxide ores in favor of the deeper
sulfide ores. A number of near-surface, oxide deposits are now known in the
district, but require drilling to define. Drilling and underground sampling
shows that the oxidized deposits have been enriched by supergene processes and
that Ag grades within them are considerably elevated above that found in
proto-ores below. If metallurgical testing shows that metals may be extracted
profitably from these deposits, they offer the opportunity for rapid development
and exploitation as several are already accessed by, or are very near, existing
underground access. The potential for discovery of additional unexploited,
near-surface oxide deposits appears high.

Individual Ag-Pb-Zn manto deposits in the one million ton
range are not uncommon in other Ag-Pb-Zn replacement districts in the Parral
terrane in north-central Mexico. In light of data collected from the property to
date, it is not unreasonable to anticipate that the potential for such
discoveries exists at Cerro Las Minitas as well. Drilling by Silver Dragon in
2006 cut a number of previously unknown manto deposits in the district and
further exploration is planned to evaluate the significance of those
discoveries. Discovery and exploitation of only one large manto deposit can
significantly enhance overall project potential.

EXPLORATION

Little systematic exploration has been done in the
development of the Minitas District and the principal activities there were
artisanal mining of deposits that were discovered in outcrop. Additional
deposits were discovered below in short exploratory drifts driven by the miners,
but relatively little underground exploration was done. Some mine maps and assay
results from that work have been recovered, but were only a fragmentary record
of what was done. Silver Dragon has begun a program of de-watering,
rehabilitation, mapping and sampling of those workings and has found them to be
more extensive than records indicated. That work is still in progress.

In 1981, CRM continued its support of the development of the
district, completing 77m of shaft and 80m of crosscut to cut the upper, oxidized
portion of the La Bocona deposit. Following that work, Sr. Jaime Muguiro
deepened the Mina Piña shaft another 59 meters to reach the 210 level. A 140
meter crosscut was driven, encountering a number of thin mineralized horizons
and the Huisache mineralized chimney. Sr. Muguiro then suspended operations due
to water problems. Only fragmentary records of that work remain and Silver
Dragon geologists are mapping and sampling underground workings in the Mina Piña
- La Bocona area to determine if resources remain in the area accessed by the
workings and what potential may exist nearby. The Huisache chimney, discovered
by the work of Sr. Maguiro, appears to have had little development and it
appears that oxide resources remain there.

In 1995, Minas de Bacis completed a 30-day evaluation of
Cerro Las Minitas which consisted of analysis of previous data, inspection of
accessible workings and analysis of surface geology. Based on that work, Minas
de Bacis recognized an inferred resource of 1,296,000 metric tons grading 0.12
gr/ton gold, 102 gr/ton silver, 2.86% lead, 10.36% zinc and 0.15% copper (Table
13.2). The data upon which that estimate was based have not been found and it
can only be reported as an historical estimate. Based on their analysis, Minas
de Bacis began negotiations to acquire the concessions in the district. Those
negotiations were unsuccessful and Minas de Bacis withdrew. A summary report of
Minas de Bacis findings has been located, but much of the data used as the basis
for the conclusions in the report has not.

35

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From 1999 to 2000, Minerales Noranda, SA de CV (Noranda)
optioned the properties and completed an exploration program including 861 soil
and rock samples, an aeromagnetic survey covering the entire district, and seven
diamond drill holes, for 3,886 meters, within the Cerro Las Minitas Dome.
Results were encouraging but not up to Norandas expectations and they abandoned
the property. Unfortunately, the original Noranda data has not been found and
all that has been located is summary data presented in a report by Proyectos
Minerales y Topografia, S.A. de C.V. (2001).

Minera Real Victoria (MRV) acquired leases on concessions in
the Puro Corazón - Santo Niño area in 2005 and began a program of exploration
and development in the area. In May 2005, MRV began driving a 2.5m X 2.5m
decline into the Puro Corazón - Santo Niño workings to develop resources
believed to be present there. MRV drove 170 meters of workings to connect with
level 2 of the Puro Corazon workings and to make a preliminary exploration of
the near surface portion of the La Chiva mineralized zone. That work was halted
in November, 2005 when MRV entered negotiations with Silver Dragon Resources,
Inc to acquire the property. The sampling and resource assessment started by MRV
was not completed, but some underground geologic maps and sample data from that
work have been recovered.

DRILLING

The Consejo de Recursos Minerales (CRM) has offered some
support to district miners since 1977. In 1979 and 1980, the CRM drilled seven
diamond drill holes for 834.5 meters in the Mina Piña - La Bocona area, which
was then controlled by Sr. Santiago Valdez. Drill logs and assay data, as well
as some geologic sketch maps, were presented to Sr. Valdez without
interpretation. No records of interpretation or follow up of the intercepts of
mineralization made in that drilling have been found to date. Silver Dragon
geologists are currently compiling and analyzing that data.

A summary of the results of the CRM drilling is presented in
Table 13.1 and the locations of the drill holes are shown in Figure 13.1. The
results of CRM drilling have not been verified because the original drilling
samples are not available, and thus the samples cannot be retested for
verification. The length of drill hole intercepts is reported as down-hole
length only. True thicknesses of intercepts have not been calculated. True
thicknesses of intercepts have not been calculated because the original drill
logs are not available for analysis.







Figure 13.1 Location Map  CRM Drill Holes

From 1999 to 2000, Minerales Noranda, SA de CV (Noranda)
optioned the properties and completed a drilling program consisting of seven
widely-spaced diamond drill holes, for 3,886 meters, within the Cerro Las
Minitas Dome. Results were encouraging but not up to Norandas expectations and
they abandoned the property. Unfortunately, the original Noranda data has not
been found and all that has been located is summary data presented in a report
by Proyectos Minerales y Topografia, S.A. de C.V. (2001). Most of the core from
Norandas drilling has been located and a partial re-examination of that core
has been made to confirm data used in estimating the inferred mineral resource
reported herein. Continued re-examination of that core is ongoing, as Norandas
drill logs have not been recovered.

36

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A summary of the results of Norandas drilling are presented
in Table 13.3 and the location of Norandas drill holes is shown in Figure 13.2.
The results of Minerales Noranda drilling have not been verified because the
original drilling samples are not available, and thus the samples cannot be
retested for verification. The length of drill hole intercepts is reported as
down-hole length only. True thicknesses of intercepts have not been calculated
because the original drill logs are not available for analysis.



Silver Dragon Mining de Mexico, S.A. de C.V. began an
exploratory drilling program at Cerro Las Minitas in May 2006, shortly after
acquiring rights to the property. Concurrently, geologists began compiling and
analyzing existing data for the property. Examination of that data showed that
it was inadequate to guide further exploration operations and a program of
rehabilitation, mapping and sampling existing workings on the property began.
That program is still in progress, but much of the work in the Puro Corazón -
Santo Niño workings is near completion.

A summary of Silver Dragons drill results is presented in
Table 13.4 and the location of those drill holes is shown in Figure 13.2. The
results of selected portions of Silver Dragons drilling has been verified, and
is discussed in Item16 Data Verification. The length of drill hole intercepts is
reported as down-hole length only. True thicknesses of intercepts have not been
calculated. Nine of the eleven holes drilled have been logged, sampled and
assayed. Analysis of the two remaining holes is pending availability of
qualified geotechnical personnel. On the basis of interpretation of data in
hand, the Company has planned an aggressive exploration and development program
for 2007.



SAMPLING METHOD AND APPROACH

Sampling Overview:

- 

Random hand samples were collected from the specific areas
and placed in standard tight-woven cloth sample bags, sealed, and marked with an
identification number.

SAMPLE PREPARATION, ANALYSES AND SECURITY

Past Sampling and Drilling Programs:

37

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Verification Samples

Lab Accreditation: Vectors 10 verification samples were
delivered to ALS Chemex Laboratories in Vancouver, B.C., Canada which is ISO
9002 and ISO 9001:2000 certified. The coarse rejects from Chemex Vancouver were
submitted to American Assay Laboratories in Reno, Nevada which is under the
direction of a Certified Arizona Assayer. A set of 13 pulps from previous drill
sample analysis was delivered to Vector and submitted to Florin Analytical
Services in Reno, Nevada, which is a Nevada accredited laboratory.

Sample Preparation:

Multi-Element Analyses:

Quality Control:

Security: All 10 verification samples were collected by
Vector and assigned an individual sample number (1001 through 1010), and the
individual sample bags were tied secure. The samples were then transported by
vehicle in Vectors presence to Guadalupe Victoria, where they were shipped
directly to ALS Chemex in Guadalajara and then to ALS Chemex in Vancouver, B.C.,
Canada. No security seals were compromised in the presence of Vector.

Statement of Adequacy: It is Vectors opinion that the
sampling, sample preparation, analytical procedures, and security of the 10
samples collected by Craig L. Parkinson, P.Geo are acceptable and of
professional quality.

DATA VERIFICATION

Conditions & Limitations: Vector spent two days
inspecting relevant data in the office of Silver Dragon in Guadalupe Victoria
and conducting a site inspection of the Cerro Las Minitas property. Geologic
maps, land maps, and sampling data were provided to Vector by Douglas R. Wood,
P.Geo and Silver Dragon personnel. Vector spent two days inspecting and sampling
the property, and access to all mineralized areas was by foot and vehicle. No
underground sampling was conducted owing to safety considerations.

38

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Verification Summary:

- 

Inspection and discussion of data with Silver Dragon
  representatives (2 days)

Site Visit (2 days)

Sampling of Pura Corazon

Sampling of Guadalupe Ramp

Sampling of La Pina Ore

Sampling of Bocona

Discussions with Mexican geologists on site and in
  the office

Analysis of samples by ALS Chemex in Vancouver,
  Canada

Analysis of samples by American Assay in Sparks,
  Nevada

Analysis of drill pulps by Florin Analytical
  Services in Reno Nevada

Compilation of assay data

Review of all data

Verification Sampling: Craig L. Parkinson, P.Geo
personally collected all verification rock grab samples during the site visits
on September 26 and 27, 2006. Sampling focused on mineralized exposures at Pura
Corazon, Guadalupe Ramp, La Pina, and Bocona. Mr. Parkinson was accompanied by
Mr. Wood, who provided geologic input on the location of existing anomalous
mineralization. The grab samples were collected by picking up various-sized rock
by hand and placing them in a clean new cloth sample bag. Sample security,
analytical quality control and assurance are presented in Item 15. In addition
to the 10 rock samples collected by Vector, the authors selected 13 sample pulps
from previous drilling and sample analysis. Mineralized pulp samples were
selected from drill hole numbers LM-01, LM-02, and LM-03, and the pulps were
delivered to Vector and subsequently submitted for verification analysis.

Verification Sample Results: Tables 16.1 and 16.2
summarize the sample results. All areas reported as containing significant
silver, lead, zinc, and copper mineralization were verified by Vector. Select
sample results are summarized below.

39

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|Sample Numbers            | Location      
|------------------------- | --------------
|                          |               
|Samples 1001 and 1002     | Pura Corazon  
|Samples 1003 and
    1004 | Guadalupe Ramp
|Samples 1005 thru 1008    | La Pina Ore   
|Samples 1009 and
    1010 | Bocona        



|       | ALS
    Chemex  |       | American Assay
|------ | --------------- | ----- | --------------
|Sample | Ag              | Pb    | Zn            
|Number | ppm             | %     | %             
|       |                 |       |               
|1001   | 145             | 4.4   | 9.91          
|1002   | 205             | 7.2   | 5.85          
|1003   | 238             | 4.1   | 19.65         
|1004   | 139             | 4.4   | 9.93          
|1005   | 1170            | 27.7  | 11.75         
|1006   | 1305            | >30.0 | 1.96          
|1007   | 956             | 25.3  | 17.6          
|1008   | 1000            | 25.7  | 17.4          
|1009   | 150             | 1.97  | 11.2          
|1010   | 57              | .76   | 4.1           
|       |                 |       |               
|Note:  | 10,000 ppm = 1% |       |               
|       |                 |       |               

|Table 16.1:
Summary of Vector verification results of rock grab sampling and analysis.
|--------------------------------------------------------------------------------------
|                                                                                      
|                                                                                      
|                                                                                      
|Sample                                                                                
|Number                                                                                
|                                                                                      
|16050                                                                                 
|16080                                                                                 
|16081                                                                                 
|16082                                                                                 
|16128                                                                                 
|16129                                                                                 
|16130                                                                                 
|16145                                                                                 
|16146                                                                                 
|16152                                                                                 
|16153                                                                                 
|16219                                                                                 
|16220                                                                                 
|                                                                                      
|Note:                                                                                 

Table 16.2: Summary of Vector verification results from previous drill pulps.

-------------------------------------------------------------------------------------------------------------------------------

40

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The above results are similar to the assay results from
previous drilling provided in Tables 13.1, 13.3, and 13.4. The verification
sampling and assay results conducted by Vector are indicators of significant
mineralization at Cerro Las Minitas.

Verification Statement:

ADJACENT PROPERTIES

There are small mines and prospects located in the low hills
one kilometer to the northwest of Cerro Las Minitas. Those workings are located
on concessions held by Industrias Peñoles. Brief field inspection by Mr. Wood
revealed that the workings explore Ag-Pb-Zn-Cu replacement deposits associated
with quartz-monzonite dikes like those seen at Cerro Las Minitas. No other
information has been collected about those occurrences.

All mineral ground surrounding the Cerro Las Minitas
concessions of Silver Dragon Mining de Mexico, S.A. de C.V. is held under
concessions of Industrias Peñoles, as verified by Mr. Wood during a standard
mining title search for the property and surrounding area. Mr. Parkinson and Mr.
Wood have been unable to verify the information and the information is not
necessarily indicative of the mineralization on the Cerro Las Minitas Property.

MINERAL PROCESSING AND METALLURGICAL TESTING

Although artisanal miners have been producing ore from Cerro
Las Minitas since the early 1960s, no reliable records of either production or
mineral processing data have yet been found. Enriquez (2005) reported that
historical recoveries from sulfide ores treated by flotation are on the order of
85% for silver, 75% for gold, 65% for lead, and 75% for zinc. Enriquez did not
present any supporting data for the recovery data.

Minas de Bacis completed a 30-day review of data available at
Cerro Las Minitas in 1995. They reported metal recovery data for sulfides from
the La Bocona Mine, sulfides from the Puro Corazón Mine and oxides from the Puro
Corazón Mine. It is uncertain how they obtained this data, but local operators
say that it was obtained from the artisanal mills that were treating the ore in
the Velardeña district. These data are not considered reliable and are reported
as historical data (Table 18.1).



41

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QA/QC PROTOCOLS REGARDING SAMPLE PREPARATION, CONTROLS,
CUSTODY, ASSAY PRECISION AND ACCURACY.

This applies to exploration and operational analytical
procedures.

PREPARATION: Samples will be collected by field personnel and
then stored in secure warehouse facilities until shipped for assay. All sample
preparation, except cutting of core, will be performed by professional
analytical contractors at their laboratories. Drill core will be cut with saws
in company facilities and packaged in strong polyethelene bags for shipment to
laboratories where further sample preparation will be performed by laboratory
personnel.

CONTROLS: Samples will be collected by field personnel and
then stored in secure warehouse facilities until shipped for assay. All sample
numbers, their descriptions and sample locations, will be entered in the
companys digital sample database. As assays are returned, they will be merged
with corresponding sample data in the digital database. The digital database
will be archived to CD media for secure storage of backup files. Only authorized
personnel will have password access to assay data. Pulps from assays will be
returned from laboratories and stored in secure company warehouse facilities for
further assay verification.

CUSTODY: Samples will be kept in secure company warehouse
facilities from the time they are collected until they are shipped for assay.
Assay pulps returned from laboaratories will also be kept in secure company
warehouse facilities.

PRECISION and ACCURACY: Assay precision and accuracy will be
determined by inclusion of assay standards and blanks in the assay stream.
Statistical analysis of results of assays of standards and blanks will be used
to make a reasonable estimate of assay precision and accuracy. As well, samples
showing significant metal values will be re-assayed by one or more additional
laboratories to provide additional data on assay precision and accuracy.

ITEM 3. LEGAL PROCEEDINGS

The Company was not the subject of any pending or threatened
legal proceedings as of March 30, 2006.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were voted upon by the stockholders during the
fourth quarter of the fiscal year, as required to be reported upon by the
Company in response to this Item 4.

42

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PART IIITEM 5. MARKET FOR COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS

The Companys common stock is registered with the United
States Securities and Exchange Commission under section 12(g) of the Securities
Exchange Act of 1934. The Companys stock is traded on the Over the Counter
Bulletin Board under the symbol "SDRG." From January 1, 2001 to July 16, 2002,
the Companys common stock traded under the symbol "AEAC." On or about July 16,
2002, the Companys trading symbol changed to "AEAN" as a result of the change
in the Companys name its previous name. On March 9, 2005, following the change
of the Companys name, the Companys trading symbol changed to "SDRG".

The following table summarizes the low and high prices for
the companys common stock for each of the calendar quarters for the fiscal
years ended December 31, 2004 and 2005.

|               | 2004  |       | 2005
|-------------- | ----- | ----- | ----
|               |       |       |     
|               | High  | Low   |     
|               |       |       |     
|First Quarter  | 0.12  | 0.025 |     
|               |       |       |     
|Second Quarter | 0.07  | 0.015 |     
|               |       |       |     
|Third Quarter  | 0.09  | 0.016 |     
|               |       |       |     
|Fourth Quarter | 0.075 | 0.022 |     

The high and low quotes on the Companys common stock reflect
inter-dealer prices, without retail markup, mark-down or commission and may not
represent actual transactions. There were 109 shareholders of record of the
common stock as of December 31, 2005. This number does not include an
indeterminate number of shareholders whose shares are held by brokers in "street
name." The Company has not declared any cash dividends on its Common Stock
during its fiscal years ended on December 31, 2004 or 2005.

ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION

Certain Forward-Looking Information

This Form 10KSB contains certain "forward-looking statements"
as such term is defined in the Private Securities Litigation Reform Act of 1995
or by the Securities and Exchange Commission in its rules, regulations and
releases. Without limiting the generality of the foregoing, words such as "may",
"will", "expect", "believe", "anticipate", "intend", "could", "estimate" or
"continue" or the negative or other variations thereof or comparable terminology
are intended to identify forward-looking statements.

Results of Operation

During the years ended December 31, 2005 and 2004, the
Company did not have any revenues.

During the years ended December 31, 2005 and 2004, the
Company incurred operating expenses of $543,688 and $387,921 respectively. The
increase is mainly a result of monies paid and shares issued related to the
joint ventures with Sino Silver Corp. and Linear Gold Corp. In addition,
advertising and promotion expenses totaled $152,373 in 2005 and overall expenses
increased as a result of the Companys increased activities in 2005.

During the years ended December 31, 2005 and 2004, the
Company incurred net other income (expense) of $779 and ($11,106), respectively
which relates to interest income in 2005.

43

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During the years ended December 31, 2005 and 2004, the
Company reported a net loss of ($542,909) and ($399,027), respectively. The
reason for the increase in 2005 is attributed to increases in legal and
accounting expenses, advertising expenses and the other factors discussed above.

Liquidity and Capital Resources

As of December 31, 2005 the Company had $303 in cash, $9,500
in subscriptions receivable, which funds were subsequently received. In
addition, the Company had $56,521 in related party advances, and accounts
payable and accrued liabilities totaling of $139,437, for a working capital
deficit of ($195,655) compare to a working capital deficit of ($890,155) in
2004. During 2005, the Company has been dependent on loans from its sole
director and officer to pay routine expenses, and the issuance of its common
stock to satisfy expenses. In 2006, the Company has financial commitments
through acquisition agreements of approximately $650,000 for the Chinese
properties and $750,000 for the Mexican properties. The Company intends to make such cash payments from
funds raised from private placement of the Companys common stock.

Going Concern

The Companys financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the accompanying financial statements, the Company incurred a large net
operating loss in the year ended December 31, 2005, and had significant unpaid
accounts payable and accrued liabilities. These factors create an uncertainty
about the Companys ability to continue as a going concern. The Companys
management has provided operating capital to the Company and has developed a
plan to raise additional capital. The ability of the Company to continue as a
going concern is dependent on the success of this plan. The financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.

Off Balance Sheet Arrangements. The
Company does not have any off-balance sheet arrangements or contractual
obligations that have had or are reasonably likely to have a material current or
future effect on the Companys financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that have not been disclosed in the Companys
financial statements.

ITEM 7. FINANCIAL STATEMENTS

The financial statements are attached hereto as Exhibit A.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

By resolution adopted on January 24, 2006, the board of
directors of Silver Dragon Resources Inc. elected to change independent
Accountants. The independent accounting firm of Moore Stephens Cooper Molyneux
LLP notified the Registrant on January 24, 2006 that they were terminating their
registration with the Public Company Accounting Oversight Board and therefore,
were resigning as the Registrants accountants. The independent auditors report
on the consolidated financial statements for the two years ended December 31,
2003 and December 31, 2004, and the subsequent periods preceding December 31,
2005 contained no adverse opinion, no disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles,
except that each report issued by Moore Stephens Cooper Molyneux LLP for the
years ended December 31, 2004 and 2003, and the interim periods ended March 31,
2005, June 30, 2005 and September 30, 2005 respectively raised substantial doubt
about the Companys ability to continue as a going concern. The decision to
change accountants was approved by the Registrants board of directors.
In connection with the audits of the Companys consolidated
financial statements for each of the two years ended December 31 2003 and
December 31, 2004, and during anysubsequent interim periods preceding
December 31, 2005, as well as the period up to and including January 24, 2006,
there have been no disagreements with Moore Stephens Cooper Molyneux LLP on any
matters of accounting principles or practices, financial statement disclosures,
or auditing scope or procedures, which if not resolved to the satisfaction of
Moore Stephens Cooper Molyneux LLP would have caused Moore Stephens Cooper
Molyneux LLP to make reference to the subject matter of the disagreements in
connection with their reports.

44

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Engagement of new independent accountants.

On January 24, 2006, the Registrants board of directors
engaged SF Partnership LLP, 4950 Yonge Street, Suite 400 Toronto, Ontario, M2N
6K1 as its new independent auditors (the "new" accounting firm) to audit the
Registrants financial statements. The Registrant, during the two most recent
fiscal years and the subsequent interim periods prior to the engagement of the
new accounting firm, did not consult with the new accounting firm with regard to
any of the matters listed in Regulation S-B items 304 (a) (2) (i) or (ii).

ITEM 8A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our
management, including our Chief Executive Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, the Chief Executive Officer concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures
were effective to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities Exchange Act of
1934, is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms and timely alerting them to material
information relating to the Company required to be filed in its periodic SEC
filings. There has been no change in the Companys internal control over
financial reporting during the Companys most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.

Audit Committee and Audit Committee Financial Expert

The Company has only one director and therefore does not have
an audit committee.

Code of Ethics

Currently, we have only limited business operations and only
one director and one officer and, therefore, we believe a code of ethics would
have limited utility. We intend to adopt a code of ethics as our business
operations expand and we have more directors, officers and employees.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The following table sets forth certain information concerning directors,
executive officers and key employees of the Company:

|Name                   | Age | Position                                       
|---------------------- | --- | -----------------------------------------------
|                       |     |                                                
|Marc
    M. Hazout     | 41  | President, Chief Executive Officer and Director
|                       |     |                                                
|Donald
    J. Robinson | 52  | Director (resigned on January 30, 2006)        

45

---



The term of office of each director of the Company ends at
the next annual meeting of the Companys stockholders or when such directors
successor is elected and qualifies. No date for the annual meeting of
stockholders is specified in the Companys bylaws or has been fixed by the Board
of Directors. Pursuant to the Companys bylaws, the date of the annual meeting
is to be determined by the current Board of Directors. Except as otherwise
indicated below, no organization by which any officer or director previously has
been employed is an affiliate, parent, or subsidiary of the Company.

During 2005, the Board of Directors held 2 meetings.

The following information sets forth the backgrounds and business experience
of the directors and executive officers:

Marc M. Hazout has been President, Chief Executive Officer
and a director of the Company since June 1, 2002. From 1985 to 1987, Mr. Hazout
was the Canadian licensee and franchisee for a multinational clothing
manufacturer and retailer. From 1987 to 1991, Mr. Hazout established a private
label apparel manufacturing and retailing company. From 1991 to 1998, Mr. Hazout
developed, owned and operated entertainment complexes in Toronto. Mr. Hazout
attended The Canadian Securities Institute from 1998-2000 and in 1999 worked as
an equity trader for Swift Trade Securities Inc. in Toronto. Since 1998, Mr.
Hazout has been President and C.E.O. of Travellers International Inc., an
investment and merchant banking firm headquartered in Toronto. Mr. Hazout
studied International Relations and Economics at York University in Toronto from
1983 to 1985. Mr. Hazout completed the Real Estate Licensing Course at Humber
College in Toronto in 1984.

Donald J. Robinson, Ph.D has been a director of the Company
since March 28, 2005. Dr. Robinson has been President and director of Eastmain
Resources (TSX:ER) since 1994. Dr. Robinson formerly operated a private
consulting firm, Robinson Exploration Services Limited ("RESL"), which
specialized in the exploration of base and precious metals within Canada, the
United States and Australia. For two years he managed the exploration of a
gold-rich VMS discovery at Lewis Ponds, Australia for Tri Origin Exploration
Ltd. Prior to forming RESL, Dr. Robinson initiated an integrated base and
precious metal program, on behalf of Westmin Resources Ltd., which led to the
discovery of the Eau Claire gold deposit at Clearwater. Dr. Robinson earned a
Ph.D. degree from the University of Western Ontario in 1982. His thesis, based
on the Redstone nickel-copper deposit located near Timmins, Ontario, was
sponsored by BHP Minerals Canada Ltd. (formerly Utah Mines Ltd.). Dr. Robinson
served on the board of the Company from March 28, 2005 until January 30, 2006,
when he resigned due to his time commitments as President and Director of
Eastmain Resources. There was no disagreement between Dr. Robinson and the
Company on any matter relating to the Companys operations, policies or
practices. Dr. Robinson did not resign for cause.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by the
Companys Chief Executive Officers during the last three fiscal years and other
officers who received compensation in excess of $100,000 during any of the last
three fiscal years. In accordance with Item 402(a)(5), the Company has omitted
certain columns from the table required by Item 402(b).

46

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Summary Compensation Table

|                   |      | Annual
    Compensation | Long Term
    Compensation
|------------------ | ---- | ----------------------- | --------------------------
|Name and           | Year | Salary ($),             | Other annual              
|Principal Position |      | Bonus                   | compensation              
|                   |      |                         | ($)                       
|                   |      |                         |                           
|                   |      |                         |                           
|Marc Hazout,       | 2005 | 288,000                 | --                        
|CEO, Director      | 2004 | 252,000                 |                           
|                   | 2003 | 252,000                 |                           

(a)The securities
underlying these options are the shares of the Companys Common Stock, $0.0001
par value.

Employment Agreements

On March 31, 2005, the Company issued 3,254,018 restricted
shares to Mr. Hazout in consideration for accrued salary and expenses owing to
Mr. Hazout pursuant to his previous Employment Agreement which expired in July
2005.

On November 15, 2005, the Company entered into an Employment
Agreement with Marc Hazout. The Employment Agreement provides that Mr. Hazout
shall be employed by the Company for a term of five years, and is entitled to a
base salary of $288,000 per year. Mr. Hazout is also entitled to a commission on
sales generated by him consistent with the Companys commission policy for all
sales personnel. Further, he is entitled to 8 weeks paid holiday and 14 personal
days, sick leave, medical and group insurance, participation in pension or
profit sharing plans of the Company, and a car allowance of up to $3,000 per
month. In the event of a termination of the Employment Agreement without cause
by the Company, he will be entitled to severance equal to 100% of his remaining
base salary under the Employment Agreement, plus an amount equal to 75% of the
base salary plus full medical coverage for 12 months following the termination
date. The Employment Agreement contains provisions prohibiting him from
competing with the Company or soliciting customers or employees from the Company
for a period of one year following the termination of his employment.

Compensation of Directors

The Companys past policy has been to pay its non-management
directors $500 in restricted common stock for each board meeting attended. In
addition, directors are reimbursed for any reasonable expenses incurred in the
connection with attendance at board or committee meetings or any expenses
generated in connection with the performance of services on the behalf of the
Company. The Company currently has two directors, one of whom is also the chief
executive officer of the Company. The Company is currently exploring acquisition
possibilities. The Company anticipates that its policy on director compensation
will change when and if it makes a material acquisition.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of
March 30, 2006, with respect to the beneficial ownership of the Companys Common
Stock by (i) each executive officer and director of the Company, (ii) all
directors and executive officers of the Company as a group, and (iii) any person
who is known by

47

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|                                                                                                                   | Amount and Nature of | Percent of
|------------------------------------------------------------------------------------------------------------------ | -------------------- | ----------
|Name and Address of Beneficial Owner                                                                               | Beneficial Ownership | Class (1) 
|                                                                                                                   |                      |           
|Marc Hazout (2)                                                                                                    | 17,221,751           | 37.4%     
|1121 Steeles
    Avenue West, Suite 803                                                                            |                      |           
|Toronto, Ontario M2R 3W7                                                                                           |                      |           
|                                                                                                                   |                      |           
|Donald J. RobinsonRR#1,
    Orangeville,                                                                           | 25,000               |           
|Ontario, L9W 2Y8                                                                                                   |                      |           
|                                                                                                                   |                      |           
|Officers and
    Directors                                                                                         | 17,221,751           | 37.4%     
|                                                                                                                   |                      |           
|(1)
    Based on 46,020,533 shares issued and outstanding as of March 17, 2006                                     |                     
|(2)
    Based on 17,221,751 shares owned by Travellers International, Inc., a
    company owned by Mr.
    Hazout.

Equity Compensation Plan Information

The following table provides information as of December 31, 2005 about our
compensation plans under which shares of stock have been authorized:

|                                      | Number of            | Weighted-         |                
|------------------------------------- | -------------------- | ----------------- | ---------------
|                                      | securities to be     | average exercise  | Number of      
|                                      | issued upon exercise | price of          | securities     
|                                      | of outstanding       | outstanding       | remaining      
|                                      | options, warrants    | options, warrants | available for  
|Plan Category                         | and rights           | and rights        | future issuance
|Equity compensation plans approved by |                      |                   |                
|security holders:                     |                      |                   |                
|None                                  | --                   | --                | --             
|Equity compensation plans not         |                      |                   |                
|approved by security
    holders:     |                      |                   |                
|2002 Employee, Consultant and         | --                   | --                | 440,420        
|Advisor Stock Compensation Plan       |                      |                   |                
|2002 Stock Option Plan                | --                   | --                | 4,000,000      
|Total                                 | --                   | --                | 4,440,420      

All options that had been previously issued under the plan were issued and
exercised in 2002.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On April 8, 2004, the Company issued Travellers
International, Inc. 375,000 shares of the common stock in settlement of payables
of $15,000 due to Mr. Hazout.



---

On November 5, 2004, the Company issued Travellers
International, Inc. 200,000 shares of the common stock in settlement of payables
of $10,000 due to Mr. Hazout.
On March 31, 2005, the Company issued Travellers
International Inc. 3,254,018 shares of the common stock in settlement of accrued
and outstanding salary and expenses of $813,504.54 due to Mr. Hazout pursuant to
his Employment Agreement dated July 10, 2002.
On January 10, 2006 the Company issued Travellers
International Inc. 1,000,000 shares of the common stock pursuant to the terms of
the Employment Agreement dated November 15, 2005 with Marc Hazout.
On March 1, 2006 the Company issued Travellers International
Inc. 1,000,000 shares of the common stock in consideration for its assistance to
the Company in the acquisition of the mining rights in Cerro Las Minitas,
Mexico.
Travellers International Inc. is controlled by Marc Hazout.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(a)The financial statements filed as part of this report are
listed separately in the Index to Financial Statements.
Regulation S-B
    DescriptionNo.3.1(i)
    Articles of
    Incorporation (1)3.1(ii)
    Amendment to
    Articles of Incorporation (2)3.1(iii)
    By-Laws (1)4.1
    Instruments
    defining the rights of holders (1)10.1
    Executive
    Employment Agreement dated as of November 15, 2005 between the Company and Marc
    Hazout (6)11
    Statement re:
    computation of per share earnings (3)16.1
    Letter on change
    in certifying accountants (4)21
    Subsidiaries of
    the registrant23
    Consent of Moore
    Stephens Cooper Molyneux, LLP31
    Rule
    13a-14(a)/15d-14(a) Certification by the Chief Executive Officer32
    Certification by
    the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant
    to Section 906 of the Sarbanes-Oxley Act of 200249
(1) Incorporated by reference from
the Form 10-SB filed on February 23, 2000.(2) Incorporated by reference from the Form 10-SB/A filed on July 17, 2003.
Most recent amendment attached.
(3) Included within financial statements attached hereto as Exhibit A.
(4)
Incorporated by reference from the Form 8-K filed on January 27, 2006.
(5)
Incorporated by reference from the Form 8-K filed on November 7, 2001.
(6)
Incorporated by reference to Form SB-2 filed on January 29, 2007.
(b) Reports on
Form 8-K: None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by the principal
accountant was $9,989 for 2004 and $23,000 for 2005.
Audit-Related Fees were nil for 2004 and 2005.
Tax Fees were nil for 2004 and 2005
All Other Fees were nil for 2004 and 2005.
50
SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004CONTENTSReport of Independent Registered Public
    Accounting Firm - 2005
    1Report of Independent Auditor - 2004
    2Consolidated Balance Sheets as at December
    31, 2005 and 2004
    3Consolidated Statements of Operations for the
    Years Ended December 31, 2005, and 2004, and for the
    Period from June 15,1996, [Date of Inception] Through to December
    31, 2005
    4Consolidated Statements of Stockholders
    Deficit for the Periods from June 15, 1996 [Date of Inception]
    Through to December 31,2005
    5 - 6Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2005, and 2004, and for the
    Period June 15, 1996,[Date of Inception] Through to December 31,
    2005
    7Notes to Consolidated Financial Statements
    8 - 21

52

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Silver Dragon Resources Inc., and Subsidiaries(Formerly American Entertainment and Animation Corporation)

We have audited the accompanying consolidated balance sheets
of Silver
Dragon Resources Inc., and Subsidiaries (a Delaware corporation in the
exploration stage) as of December 31, 2005, and the consolidated statements of
stockholders operations, deficit and cash flows the year then ended, and
cumulative from inception (June 15, 1996) through December 31, 2005, except as
explained as follows: We did not audit the cumulative data from June 15, 1996 to
December 31, 2004. The cumulative data was audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts in the cumulative data through December 31, 2004, is based solely on the
report of other auditors. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Silver Dragon
Resources Inc., and Subsidiaries as of December 31, 2005, and the results of
their operations and comprehensive loss, and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has experienced operating losses
since inception, has raised minimal capital, and has no long term contracts
related to its business plans. These factors raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans regarding
these matters are also described in note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

|                                     | "SF PARTNERSHIP, LLP"
|------------------------------------ | ---------------------
|                                     |                      
|                                     |                      
|Toronto, Canada                      | CHARTERED ACCOUNTANTS
|March 27, 2006, except as to Note 12 |                      
|which is as of October 10, 2006      |                      

-1-

---



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of 
Silver Dragon Resources, Inc. (formerly American Entertainment and Animation
Corporation)

We have audited the accompanying consolidated balance sheet Silver Dragon
Resources, Inc. and subsidiary (a development stage company) as at December 31,
2004, and the related consolidated statements of operations, stockholders
deficit, and cash flows for the year ended December 31, 2004 and for the period
from June 15, 1996 [inception] to December 31, 2004. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the cumulative data from June 15, 1996 to December
31, 2001. The cumulative data was audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts in
the cumulative data through December 31, 2001, is based solely on the report of
other auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Silver Dragon Resources, Inc.
(formerly American Entertainment and Animation Corporation) and subsidiary [a
development stage company] as of December 31, 2004 and the results of their
operations and their cash flows for the years then ended and for the period from
June 15, 1996 (inception) to December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has recurring losses from
operations and has a net capital deficiency. These conditions raise substantial
doubt about the Companys ability to continue as a going concern. Managements
plans are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

|Toronto, Canada | Moore Stephens
    Cooper Molyneux LLP
|--------------- | --------------------------------------
|April 7, 2005   | CHARTERED
    ACCOUNTANTS             

-2-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)

Consolidated Balance Sheets 
December 31, 2005

|                                                                 |   | 2005        |   | 2004       
|---------------------------------------------------------------- | - | ----------- | - | -----------
|ASSETS                                                          
|Current
    Assets                                               |   |             |   |            
|Cash in bank                                                     | $ | 303         | $ | -          
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|Total
    Current Assets                                         |   | 303         |   | -          
|Mineral
    Rights
    (note 4)                                  |   | 589,126     |   | -          
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|Total Assets                                                     | $ | 589,429     | $ | -          
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|LIABILITIES                                                     
|Current
    Liabilities                                          |   |             |   |            
|Bank indebtedness                                                | $ | -           | $ | 9          
|Accounts payable and accrued liabilities                         |   | 139,437     |   | 805,432    
|Advances from related party(note 5)                              |   | 56,521      |   | 84,714     
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|Total
    Current Liabilities                                    |   | 195,958     |   | 890,155    
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|Total
    Liabilities                                            |   | 195,958     |   | 890,155    
|                                                                 |   |             |   |            
|Commitments and Contingencies
    (note 10)                      |   |             |   |            
|STOCKHOLDERS DEFICIT                                           
|Capital
    Stock                                                |   |             |   |            
|Preferred stock, $0.0001 par value, 20,000,000shares authorized, |   |             |   |            
|none issued and outstanding                                      |   |             |   |            
|Common stock, $0.0001 par value, 150,000,000
    shares          |   |             |   |            
|authorized 35,670,533 shares issued and
    outstanding          |   |             |   |            
|(2004 - 23,441,515)                                              |   | 3,569       |   | 2,345      
|Additional
    Paid in Capital                                   |   | 3,479,837   |   | 1,645,026  
|Common Stock Subscriptions Receivable                            |   | (9,500)     |   | -          
|Deficit Accumulated During the Exploration Stage                 |   | (3,080,435) |   | (2,537,526)
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|Stockholders Deficit                                            |   | 393,471     |   | (890,155)  
|                                                                 |   |             |   |            
|                                                                 |   |             |   |            
|Total Liabilities and Stockholders Deficit                      | $ | 589,429     | $ | -          

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

- 3 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)Consolidated Statements of
Operations 
For the Years Ended December 31, 2005, and 2004, and 
For the Period from June 15, 1996 [date of inception] Through S
to December 31, 2005

|                                                                            |   |            |   |            | For the period
|--------------------------------------------------------------------------- | - | ---------- | - | ---------- | --------------
|                                                                            |   |            |   |            | from June 15, 
|                                                                            |   |            |   |            | 1996 [date of 
|                                                                            |   |            |   |            |               
|                                                                            |   |            |   |            |               
|                                                                            |   | 2005       |   | 2004       | Dec. 31, 2005 
|                                                                            |   |            |   |            |               
|Net Revenues                                                                | $ | -          | $ | -          | $             
|Cost of Revenues                                                            |   | -          |   | -          |               
|                                                                            |   |            |   |            |               
|                                                                            |   |            |   |            |               
|Gross Profit                                                                |   | -          |   | -          |               
|                                                                            |   |            |   |            |               
|Operating Expenses                                                          |   |            |   |            |               
|Management and directors fees                                              |   | 294,000    |   | 342,000    |               
|Advertising and promotion                                                   |   | 152,373    |   | -          |               
|Legal and accounting                                                        |   | 79,530     |   | 38,565     |               
|Development expenses                                                        |   | -          |   | -          |               
|Office and general                                                          |   | 12,785     |   | 7,356      |               
|Consulting expense                                                          |   | 5,000      |   | -          |               
|                                                                            |   |            |   |            |               
|                                                                            |   |            |   |            |               
|                                                                            |   | 543,688    |   | 387,921    |               
|Other Income (Expenses)                                                     |   |            |   |            |               
|Interest income - related parties                                           |   | -          |   | -          |               
|Interest expense - related parties                                          |   | -          |   | -          |               
|Settlement with Cyper Entertainment, Inc.                                   |   | -          |   | -          |               
|Loss on disposal of asset                                                   |   | -          |   | -          |               
|Loss on investment                                                          |   | -          |   | -          |               
|Other income (expense)                                                      |   | 779        |   | (11,106)   |               
|                                                                            |   |            |   |            |               
|                                                                            |   | 779        |   | (11,106)   |               
|                                                                            |   |            |   |            |               
|Loss Before Income Taxes                                                    |   | (542,909)  |   | (399,027)  |               
|                                                                            |   |            |   |            |               
|Provision for income taxes                                                  |   | -          |   | -          |               
|                                                                            |   |            |   |            |               
|Net Loss                                                                    | $ | (542,909)  | $ | (399,027)  | $             
|                                                                            |   |            |   |            |               
|Net Loss Per Common Share - Basic andDiluted                                | $ | (0.02)     | $ | (0.02)     |               
|                                                                            |   |            |   |            |               
|Weighted Average Number
    of CommonShares Outstanding - Basic and Diluted |   | 31,091,548 |   | 23,441,515 |               

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

- 4 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)

Consolidated
Statements of Stockholders Deficit 
For the Periods from June 15, 1996 Through December 31, 2005

|                                                      | Common Stock |   |        |   |             |   |             |   |              
|----------------------------------------------------- | ------------ | - | ------ | - | ----------- | - | ----------- | - | -------------
|                                                      |              |   |        |   |             |   | Deficit     |   |              
|                                                      |              |   |        |   |             |   | Accumulated |   |              
|                                                      |              |   |        |   | Additional  |   | During the  |   | Common stock 
|                                                      | Number of    |   |        |   | Paid
    in |   | Exploration |   | Subscriptions
|                                                      | Shares       |   | Amount |   | Capital     |   | Stage       |   | Receivable   
|                                                      |              |   |        |   |             |   |             |   |              
|Issuance of
    common stock to founders for services | 55,000       | $ | 6      | $ | 159         | $ | -           | $ | -            
|Issuance of stock
    to founder for cash             | 333,334      |   | 33     |   | 967         |   | -           |   | -            
|Issuance of stock for investment
    in CEHK          | 50,000       |   | 5      |   | 37,495      |   | -           |   | -            
|Issuance of stock
    to purchase subsidiary          | 350,000      |   | 35     |   | 70          |   | (1,060)     |   | -            
|Issuance of stock for cash                            | 13,333       |   | 1      |   | 9,999       |   | -           |   | -            
|Net Loss, 1996                                        | -            |   | -      |   | -           |   | (14,198)    |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Balance, December
    31, 1996 (unaudited)            | 801,667      |   | 80     |   | 48,690      |   | (15,258)    |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Issuance of stock
    for vehicle                     | 33,333       |   | 3      |   | 24,997      |   | -           |   | -            
|Issuance of stock for cash                            | 37,333       |   | 4      |   | 28,896      |   |             |   |              
|Issuance of stock
    for services                    | 46,333       |   | 5      |   | 34,745      |   | -           |   | -            
|Net Loss, 1997                                        | -            |   | -      |   | -           |   | (142,622)   |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Balance, December 31, 1997 (unaudited)                | 918,666      |   | 92     |   | 137,328     |   | (157,880)   |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Issuance of stock for vehicle                         | 10,667       |   | 1      |   | 7,999       |   | -           |   | -            
|Issuance of stock
    for cash                        | 58,667       |   | 6      |   | 49,995      |   | -           |   | -            
|Net loss, 1998                                        | -            |   | -      |   | -           |   | (54,404)    |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Balance, December 31, 1998 (unaudited)                | 988,000      |   | 99     |   | 195,322     |   | (212,284)   |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Issuance of stock for cash                            | 151,918      |   | 15     |   | 56,759      |   | -           |   | (4,000)      
|Issuance of stock
    for debt                        | 16,000       |   | 2      |   | 8,773       |   | -           |   | -            
|Issuance of stock for services                        | 36,000       |   | 3      |   | 126,467     |   | -           |   | -            
|Forgiveness of
    debt of related party              | -            |   | -      |   | 23,000      |   | -           |   | -            
|Net loss, 1999                                        | -            |   | -      |   | -           |   | (181,898)   |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Balance, December 31, 1999 (unaudited)                | 1,191,918    |   | 119    |   | 410,321     |   | (394,182)   |   | (4,000)      
|                                                      |              |   |        |   |             |   |             |   |              
|Cancelled stock returned to
    company               | (10,667)     |   | (1)    |   | (3,999)     |   | -           |   | 4,000        
|Issuance of stock
    for cash                        | 4,296,666    |   | 430    |   | 667,070     |   | -           |   | (278,539)    
|Cancelled shares for non-payment                      | (442,433)    |   | (44)   |   | (165,868)   |   | -           |   | 153,791      
|Issuance of stock
    for services                    | 653,667      |   | 65     |   | 28,365      |   | -           |   | -            
|Forgiveness of debt
    reclassification              | -            |   | -      |   | (23,000)    |   | -           |   | -            
|Net loss, 2000                                        | -            |   | -      |   | -           |   | (419,296)   |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Balance, December
    31, 2000 (unaudited)            | 5,689,151    |   | 569    |   | 912,889     |   | (813,478)   |   | (124,748)    
|                                                      |              |   |        |   |             |   |             |   |              
|Shares issued for
    services                        | 879,415      |   | 88     |   | 59,814      |   | -           |   | -            
|Cash received for subscription
    receivable         | -            |   | -      |   | -           |   | -           |   | 124,748      
|Shares issued for
    consulting agreement            | 300,000      |   | 30     |   | 29,970      |   | -           |   | -            
|Other adjustment                                      | -            |   | -      |   | -           |   | 1           |   | -            
|Net loss, 2001                                        | -            |   | -      |   | -           |   | (339,546)   |   | -            
|                                                      |              |   |        |   |             |   |             |   |              
|Balance, December
    31, 2001 (unaudited)            | 6,868,566    | $ | 687    | $ | 1,002,673   | $ | (1,153,023) | $ | -            

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

- 5 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)Consolidated Statements of
Stockholders Deficit (Continued) 
For the Periods from June 15, 1996 Through December 31, 2005

|                                                                                             | Common Stock |   |         |   |            |   |             |   |              
|-------------------------------------------------------------------------------------------- | ------------ | - | ------- | - | ---------- | - | ----------- | - | -------------
|                                                                                             |              |   |         |   |            |   | Deficit     |   |              
|                                                                                             |              |   |         |   |            |   | Accumulated |   |              
|                                                                                             |              |   |         |   | Additional |   | During the  |   | Common Stock 
|                                                                                             | Number of    |   |         |   | Paid in    |   | Exploration |   | Subscriptions
|                                                                                             | Shares       |   | Amount  |   | Capital    |   | Stage       |   | Receivable   
|                                                                                             |              |   |         |   |            |   |             |   |              
|Shares issued for private
    placement                                                      | 400,000      | $ | 40      | $ | 17,960     | $ | -           | $ | -            
|Shares issued for services - related party                                                   | 1,100,833    |   | 110     |   | 32,390     |   | -           |   | -            
|Shares issued for the
    reverse acquisition ofCyper                                        | 20,000,000   |   | 2,000   |   | -          |   | -           |   | -            
|Shares issued in relation
    to the reverseacquisition of Cyper                             | 4,000,000    |   | 400     |   | 119,600    |   | -           |   | -            
|Shares cancelled in lieu of
    issuance ofwarrants for past services rendered               | (1,912,748)  |   | (191)   |   | -          |   | -           |   | -            
|Stock warrants issued for
    services - relatedparty                                        | -            |   | -       |   | 31,000     |   | -           |   | -            
|Stock warrants exercised by
    management                                                   | 3,255,880    |   | 326     |   | -          |   | -           |   | -            
|Shares issued for the settlement of relatedparty advances                                    | 116,118      |   | 12      |   | 23,212     |   | -           |   | -            
|Cancellation of shares issued in prior years                                                 | (65,467)     |   | (7)     |   | 7          |   | -           |   | -            
|Shares issued for the
    settlement of relatedparty advances                                | 370,000      |   | 37      |   | 66,619     |   | -           |   | -            
|Shares rescinded for the
    cancellation ofrelated party advances                           | 2,233,333    |   | 223     |   | 46,777     |   | -           |   | -            
|Shares rescinded for the
    cancellation of thereverse acquisition of Cyper                 | (20,000,000) |   | (2,000) |   | -          |   | -           |   | -            
|Issuance of stock for
    settlement of Cyperreverse acquisition                             | 250,000      |   | 25      |   | 17,475     |   | -           |   | -            
|Shares issued for the
    settlement of advances made to the company for the Cypersettlement | 1,388,889    |   | 139     |   | 62,361     |   | -           |   | -            
|Net loss, 2002                                                                               | -            |   | -       |   | -          |   | (570,874)   |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Balance, December 31, 2002 (unaudited)                                                       | 18,005,404   |   | 1,801   |   | 1,420,074  |   | (1,723,897) |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Shares issued for the settlement of relatedparty advances                                    | 4,861,111    |   | 486     |   | 149,514    |   | -           |   | -            
|Shares issued for the settlement of accountspayable for services performed                   | 66,300       |   | 7       |   | 1,319      |   | -           |   | -            
|Shares returned as a result of clerical error
    ina prior year                             | (66,300)     |   | (7)     |   | (1,319)    |   | -           |   | -            
|Net loss, 2003                                                                               | -            |   | -       |   | -          |   | (414,601)   |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Balance, December 31, 2003 (unaudited)                                                       | 22,866,515   |   | 2,287   |   | 1,569,588  |   | (2,138,498) |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Shares issued for the settlement of relatedparty advances                                    | 575,000      |   | 58      |   | 24,942     |   | -           |   | -            
|Short swing profits of shareholder                                                           | -            |   | -       |   | 50,496     |   | -           |   | -            
|Net loss, 2004                                                                               | -            |   | -       |   | -          |   | (399,028)   |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Balance, December 31, 2004
    (unaudited)                                                   | 23,441,515   |   | 2,345   |   | 1,645,026  |   | (2,537,526) |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Shares issued for cash                                                                       | 4,880,000    |   | 488     |   | 597,012    |   | -           |   | (9,500)      
|Shares issued for services                                                                   | 7,345,000    |   | 735     |   | 1,081,795  |   | -           |   | -            
|Shares issued for property
    acquisition                                                   | 250,000      |   | 25      |   | 67,475     |   | -           |   | -            
|Shares issued for the settlement of accounts payable to related party for servicesperformed  | 3,254,018    |   | 326     |   | 813,179    |   | -           |   | -            
|Cancelled stock returned to
    the Company                                                  | (3,500,000)  |   | (350)   |   | (724,650)  |   | -           |   | -            
|Net loss, 2005                                                                               | -            |   | -       |   | -          |   | (542,909)   |   | -            
|                                                                                             |              |   |         |   |            |   |             |   |              
|Balance, December 31, 2005                                                                   | 35,670,533   | $ | 3,569   | $ | 3,479,837  | $ | (3,080,435) | $ | (9,500)      

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

- 6 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)

Consolidated
Statements of Cash Flows 
Years Ended December 31, 2005, and 2004, and 
For the Periods from June 15, 1996 [date of inception] through December 31, 2005

|                                                                      |   |           |   |           | For the period from
|--------------------------------------------------------------------- | - | --------- | - | --------- | -------------------
|                                                                      |   |           |   |           |                    
|                                                                      |   |           |   |           | [date of inception]
|                                                                      |   |           |   |           |                    
|                                                                      |   | 2005      |   | 2004      |                    
|                                                                      |   |           |   |           |                    
|Cash Flows from Operating Activities                                  |   |           |   |           |                    
|Net loss                                                              | $ | (542,909) | $ | (399,028) | $                  
|Adjustments for:                                                      |   |           |   |           |                    
|Amortization                                                          |   | -         |   | -         |                    
|Impairment of investment                                              |   | -         |   | -         |                    
|Writedown of assets                                                   |   | -         |   | -         |                    
|Writedown of inventory                                                |   | -         |   | -         |                    
|Settlement of Cyper reverse acquisition                               |   | -         |   | -         |                    
|Settlement of debt, net                                               |   | -         |   | -         |                    
|Stock issued for management and directors fees to
    a related party |   | 154,500   |   | -         |                    
|Changes in non-cash working capital                                   |   |           |   |           |                    
|Inventories                                                           |   | -         |   | -         |                    
|Prepaid expenses                                                      |   | -         |   | -         |                    
|Other                                                                 |   | -         |   | -         |                    
|Accounts payable and accrued liabilities                              |   | (6,990)   |   | 17,484    |                    
|Accrued officer compensation                                          |   | -         |   | 342,000   |                    
|                                                                      |   |           |   |           |                    
|Net Cash Used in Operating Activities                                 |   | (395,399) |   | (39,544)  |                    
|                                                                      |   |           |   |           |                    
|Cash Flows from Investing Activities                                  |   |           |   |           |                    
|Investment in subsidiary                                              |   | -         |   | -         |                    
|Proceeds from sale of equipment                                       |   | -         |   | -         |                    
|Acquisition of property and equipment                                 |   | -         |   | -         |                    
|Investments in mineral rights                                         |   | (164,096) |   | -         |                    
|                                                                      |   |           |   |           |                    
|Net Cash Used in Investing Activities                                 |   | (164,096) |   | -         |                    
|                                                                      |   |           |   |           |                    
|Cash Flows from Financing Activities                                  |   |           |   |           |                    
|Payment of notes payable                                              |   | -         |   | -         |                    
|Advances receivable from related parties                              |   | (28,193)  |   | -         |                    
|Proceeds from issuance of notes payable                               |   | -         |   | -         |                    
|Advances payable related party                                        |   | -         |   | 38,647    |                    
|Cash overdraft                                                        |   | (9)       |   | 9         |                    
|Proceeds from subscriptions receivable, net                           |   | -         |   | -         |                    
|Proceeds from issuance of common stock                                |   | 588,000   |   | -         |                    
|                                                                      |   |           |   |           |                    
|Net Cash Provided by
    Financing Activities                         |   | 559,798   |   | 38,656    |                    
|                                                                      |   |           |   |           |                    
|Change in Cash                                                        |   | 303       |   | (888)     |                    
|Cash - beginning of period                                            |   | -         |   | 888       |                    
|                                                                      |   |           |   |           |                    
|Cash - end of period                                                  | $ | 303       | $ | -         | $                  

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

- 7 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

1.

The Company

Silver Dragon Resources, Inc. (formerly American Entertainment and Animation Corporation) ("SDR" or the "Company") a Delaware corporation, was incorporated on May 9, 1996. The Company is headquartered in Ontario, Canada and operates primarily in the United States and Canada. On June 15, 1996, SDR acquired all of the outstanding stock of California Electric Automobile Co., Inc. ("CEAC"), a California corporation incorporated on
  November 14, 1995.

The Company is in the exploration stage as defined in Financial Accounting Standards Board Statement No.7. "Accounting and Reporting For Development Stage Companies." To date, the Company has generated minimal sales and has devoted its efforts primarily to developing its products, implementing its business strategy and raising working capital through equity financing or short-term borrowings.

The Companys mission is to acquire and develop a portfolio of silver properties in proven silver districts globally.

2.

Going Concern and Exploration Stage Activities

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.  The Company incurred a net loss of approximately $542,909 (2004 - $399,027) for the year and has accumulated losses since inception of approximately $3,080,435
  (2004 - $2,537,526). In addition, the Company has a working capital deficiency of approximately $195,655 (2004 - $890,155) at December 31, 2005.  The Companys continuation as a going concern is uncertain and dependant on successfully bringing its services to market, achieving future profitable operations and obtaining additional sources of financing to sustain its operations.  In the event the Company cannot obtain the necessary
  funds, it will be necessary to delay, curtail or cancel the further exploration of its products and services. Though the business plan indicates revenues from the operating mines it has acquired in the coming year, these revenues, if any, may not be sufficient to cover operating capital.  The Company plans to pursue additional financing, however, there can be no assurance that the Company will be able to secure financing when needed
  or obtain financing on terms satisfactory to the Company, if at all.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

3.

Summary of Significant Accounting Policies

a)

Principles of Consolidation



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, California Electric Automobile Co., Inc., and Silver Dragon Mining De Mexico.  All significant inter-company balances and transactions have been eliminated on consolidation.



-8-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

3.

Summary of Significant Accounting Policies(contd)

b)

Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates are based on
  managements best knowledge of current events and actions the Company may undertake in the future.  Actual results may ultimately differ from those estimates.  These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become available.

c)

Cash and Cash Equivalents



For purposes of the cash flows statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents at December 31, 2005.

d)

Mineral Rights



The Company records its interest in mineral rights at cost. Accordingly, all costs associated with acquisition, exploration and development of mineral reserves, including directly related overhead costs, are capitalized and are subject to ceiling tests to ensure the carrying value does not exceed the fair market value.

All capitalized costs of mineral properties subject to amortization and the estimated future costs to develop proved reserves, are amortized using the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major exploration and development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an
  assessment indicate that the properties are impaired, the capitalized cost of the property will be added to the costs to be amortized.  The Company presently has no proven. Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses if carrying values can be recovered. If the carrying values exceed estimated recoverable values, then the costs are written-down to fair
  values with the write-down expensed in the period.



-9-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

3.

Summary of Significant Accounting Policies(contd)

e)

Income Taxes



The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".  Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates.  Valuation allowances are established when necessary
  to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is recorded for the amount of income tax payable or refundable for the period, increased or decreased by the change in deferred tax assets and liabilities during the period.

f)

Advertising Expense



Advertising costs are expensed as incurred.

g)

Loss per share of Common Stock



The Company accounts for earnings per share pursuant to SFAS No. 128, "Earnings per Share", which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share.  Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year.  Diluted earnings (loss) per share is computed by dividing net income (loss) by the
  weighted average number of common shares outstanding plus potentially dilutive securities outstanding for each year.

h)

Impairment of Long Lived Assets



In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets", long lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.  If there are indications of
  impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable.  In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.  Long lived assets to be disposed of are reported at the lower of the carrying amount or the fair value
  of the asset less cost to sell.



-10-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

3.

Summary of Significant Accounting Policies(contd)

i)

Stock-based Compensation



The Company uses the intrinsic value method to account for stock based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and, as permitted by SFAS No. 123, "Accounting for Stock Based Compensation", provides pro forma disclosures of net income and earnings per common share as if the fair value methods had been applied in measuring compensation expense.  Under
  the intrinsic value method, compensation cost for employee stock awards is recognized as the excess, if any, of the deemed fair value for financial reporting purposes of the Companys common stock on the date of grant over the amount an employee must pay to acquire the stock.  Compensation cost is amortized over the vesting period using an accelerated graded method in accordance with Financial Accounting Standards Board ("FASB")
  Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."

For all non-employee stock based compensation the Company uses the fair value method in accordance with SFAS No. 123 and EITF 96-18.

In managements opinion, existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option valuation models require the input of highly subjective assumptions, and changes in such subjective assumptions can materially affect the fair value estimate of employee stock options.

In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment".  This pronouncement amends SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS No. 123R requires that companies account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in the statement of operations.  The implementation of this statement will be effective beginning with the Companys first
  quarter of fiscal 2006, and will be adopted using the modified prospective method.



-11-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

3.

Summary of Significant Accounting Policies(contd)

j)

Foreign Currency Translation



The Company accounts for foreign currency translation pursuant to SFAS No. 52, "Foreign Currency Translation". The Companys functional currency is Canadian Dollars. All assets and liabilities are translated into United States dollars using the current exchange rate.  Revenues and expenses are translated using the average exchange rates prevailing throughout the year. Translation adjustments are included in other comprehensive income
  for the period. Foreign transaction gains and losses are immaterial.

k)

Fair Value of Financial Instruments

The carrying amounts reported in the accompanying financial statements for current assets and current liabilities approximates fair value because of the short term maturity of these financial instruments.  The fair value of long-term convertible debt is indeterminable due to terms of the instrument and the absence of a market for such instruments.

l)

Recent Accounting Pronouncements
  In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4."  This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).  SFAS No. 151 requires that those items be recognized as current-period charges.  In addition, this statement requires
  that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred in fiscal years beginning after June 15, 2005.  The Company is currently evaluating the impact of SFAS No. 151 on its financial statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29."  SFAS No. 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance.  A non-monetary exchange has commercial
  substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  SFAS No. 153 is to be applied prospectively, and is effective for non-monetary asset exchanges occurring in fiscal periods after the December 2004 issuance of SFAS No. 153.  The Company does not believe the impact of adoption of SFAS No. 153 will be significant to the overall results of operations or financial position.



-12-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

3.

Summary of Significant Accounting Policies(contd)

l)

Recent Accounting Pronouncements (contd)



In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the employee services is recognized as compensation cost over the period that an employee provides service in exchange for the award. SFAS
  No. 123R will be effective July 1, 2005 for the Company and may be adopted using a modified prospective method or a modified retrospective method.

In March 2005, the FASB issued FASB Staff Position ("FSP") No. 46(R) 5, "Implicit Variable Interests under FASB Interpretation No. ("FIN") 46 (revised December 2003), Consolidation of Variable Interest Entities" ("FSP FIN 46R 5"). FSP FIN 46R 5 provides guidance for a reporting enterprise on whether it holds an implicit variable interest in Variable Interest Entities ("VIEs") or potential VIEs when specific conditions exist. This FSP
  is effective in the first period beginning after March 3, 2005 in accordance with the transition provisions of FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities   an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46R"). The adoption of FSP FIN 46R 5 in 2005 did not have an impact on the Companys results of operations and financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity".  SFAS No. 150 requires that issuers classify as liabilities the following three types of freestanding financial instruments: (1) mandatory redeemable financial instruments, (2) obligations to repurchase the issuers equity shares by transferring assets; and (3) certain obligations to issue a
  variable number of shares.  The Company adopted SFAS No. 150 for the year ended December 31, 2003.  The adoption of SFAS No. 150 did not have a material impact on the financial position or results of operations of the Company.



-13-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

3.

Summary of Significant Accounting Policies(contd)

l)

Recent Accounting Pronouncements (contd)

In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which will result in (1) more consistent recognition of liabilities relating to asset retirement obligations, (2) more information about expected future cash outflows associated with those obligations, and (3) more information about investments in long lived assets because additional asset retirement costs will
  be recognized as part of the carrying amounts of the assets. FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations", refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to
  perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of
  an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 in 2005 did not have a material impact on the financial position or results of operations of the Company.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements   An Amendment of APB Opinion No. 28". SFAS No. 154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS No. 154 requires retrospective application to
  prior period financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 also requires certain disclosures for restatements due to correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after
  December 15, 2005, and is required to be adopted by the Company as of January 1, 2006. The impact that the adoption of SFAS No. 154 will have on the Companys results of operations and financial condition will depend on the nature of future accounting changes adopted by the Company and the nature of transitional guidance provided in future accounting pronouncements.



-14-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

|   |                   |   |         |              |   |      |         |      |  
|-- | ----------------- | - | ------- | ------------ | - | ---- | ------- | ---- | -
|   |                   |   |         |              |   |      |         |      |  
|4. | Mineral Rights    |   |         |              |   |      |         |      |  
|   |                   |   |         | Accumulated  |   | Net  |         | Net 
|   |                   |   | Cost    | Amortization |   | 2005 |         | 2004
|   | Mining properties |   |         |              |   |      |         |      |  
|   | Sino Silver       | $ | 372,500 | $            | - | $    | 372,500 | $    | -
|   | Linear Gold       |   | 216,626 |              | - |      | 216,626 |      | -
|   |                   |   |         |              |   |      |         |      |  
|   |                   | $ | 589,126 | $            | - | $    | 589,126 | $    | -

Sino Silver

On April 24, 2005, the Company entered into a venture agreement with Sino Silver Corp. ("Sino Silver") whereby the Company acquired 50% of Sino Silvers interest in the net proceeds from the sale of minerals or the sale of mining rights as a result of the exploration, evaluation and development of a property located in the Erbaohuo Silver District in Northern China.  In consideration for this interest, the Company paid Sino Silver
  $150,000 on the closing date along with 250,000 restricted common stock of the Company.  Pursuant to the Agreement, an additional $200,000 is payable to Sino Silver within 2 years of the closing date, along with the delivery of an additional 250,000 restricted common stock of the Company.  Included in these costs are financing fees incurred through the issuance of 500,000 restricted common stock.

Linear Gold

On September 7, 2005, the Company entered into a joint venture agreement  with Linear Gold Corp., Linear Gold Caribe, S.A. (Linear Gold Corp. and Linear Gold Caribe, S.A. are collectively referred to as "Linear Gold"), and Linear Gold Mexico, S.A. de C.V. ("Linear Mexico").

Linear Mexico, which is wholly-owned by Linear Gold, owns an option to acquire the exploration and exploitation rights to the property known as the Tierra Blanca Property in Durango, Mexico (the "Mexico Property"). Under Linear Mexicos Option, Linear Mexico is entitled to acquire the exploration and exploitation rights to the Property by payment of $2,000,000. Prior to exercising Linear Mexicos Option, and to keep Linear Mexicos
  Option in force, Linear Mexico is required to pay the property owners $20,000 in year one, $35,000 by April 6, 2006, and $70,000 by April 6, 2007.

Under the agreement, the Company has the option to acquire a 55% interest in the Mexico Property. If the option is exercised, the property would be conveyed to a newly formed corporation, which the Company would own 55% of, with Linear Gold owning the remaining 45%. Upon execution of the agreement, the Company paid Linear Gold $45,000 and issued Linear Gold 100,000 shares of common stock.



-15-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

5.

Related Parties

Related party loans receivable consists of an advance to a company controlled by an officer and shareholder of the Company. The advance does not have a stated maturity date or interest rate.

During the year, the following transactions involving related parties occurred:

In 2005 the Company issued 3,254,018 restricted common shares, valued at $813,505 in settlement of all amounts owing to an officer of the Company in accordance with the terms of his employment agreement.

In 2004, the Company issued 575,000 common shares, valued at approximately $25,000, for advances of $25,000 from a company whose officer and shareholder is a stockholder of the Company.

In 2003, the Company issued 4,861,111 common shares, valued at $150,000, for advances of $150,000 from a company whose officer and shareholder is an officer and stockholder of the Company.

During the year ended December 31, 2003 the Company issued approximately 66,300 shares of its common stock, valued at approximately $1,326, for services provided by a former officer and stockholders of the Company. The shares were returned to the Company as the result of an over issuance of shares in a prior year as a result of a clerical error.

The Company is party to a month-to-month lease for office space for approximately $2,800 per month with a company owned by an officer and stockholder of the Company. Rental expense under this lease for the year ended December 31, 2005 was Nil (2004 - Nil).

6.

Concentration of Credit Risk

SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk", requires disclosure of any significant off-balance sheet risk and credit risk concentration.  The Company does not have significant off-balance sheet risk or credit concentration.  The Company maintains cash and short-term investments with major financial institutions.  From
  time to time the Company has funds on deposit with commercial banks that exceed federally insured limits.  Management does not consider this to be a significant credit risk as these banks and financial institutions are well-known.



-16-

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

7.

Income Taxes

|                                                                                                                                                                                                                                                 |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | -----------
|The Companys income tax provision (recovery) has been calculated as follows:                                                                                                                                                                    |   |            
|                                                                                                                                                                                                                                                 |   | 2005       
|Earnings before income taxes                                                                                                                                                                                                                     | $ | (542,909)  
|Deferred: Expected income tax recovery at the
                  statutory rates of 34% (2004 - 32.6%)                                                                                                                                            |   | (184,589)  
|Current year losses not recognized                                                                                                                                                                                                               |   | -          
|Permanent differences                                                                                                                                                                                                                            |   | -          
|Other                                                                                                                                                                                                                                            |   | (31,850)   
|Change in valuation allowance                                                                                                                                                                                                                    |   | 389,542    
|                                                                                                                                                                                                                                                 |   |            
|Provision for income taxes                                                                                                                                                                                                                       | $ | 173,103    
|                                                                                                                                                                                                                                                 |   |            
|                                                                                                                                                                                                                                                 |   |            
|                                                                                                                                                                                                                                                 |   |            
|The following summarizes the principal temporary differences and related future tax effect:                                                                                                                                                     
|                                                                                                                                                                                                                                                 |   | 2005       
|Property, plant and equipment                                                                                                                                                                                                                    | $ | -          
|Exploration and development                                                                                                                                                                                                                      |   | -          
|Losses carried forward                                                                                                                                                                                                                           |   | 1,131,192  
|Other                                                                                                                                                                                                                                            |   | -          
|                                                                                                                                                                                                                                                 |   |            
|Subtotal  future income tax asset                                                                                                                                                                                                               |   | 1,131,192  
|Valuation allowance                                                                                                                                                                                                                              |   | (1,131,192)
|                                                                                                                                                                                                                                                 |   |            
|Net deferred income tax asset recorded                                                                                                                                                                                                           | $ | -          
|                                                                                                                                                                                                                                                 |   |            
|                                                                                                                                                                                                                                                 |   |            
|Management determined that the deferred tax assets do not satisfy the recognition criteria of SFAS No. 109 and, more likely than not the losses will not be utilized. Accordingly, a full valuation allowance has been recorded for this amount.



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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

7.

Income Taxes(contd)

The Company has accumulated approximately $3,000,000 of taxable losses, which can be used to offset future federal taxable income. The utilization of the losses expires in years 2015 to 2025.

The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change", as defined by the Internal Revenue Code. Federal and State net operating losses are subject to limitations as a result of these restrictions. Under such circumstances, the Companys ability to utilize its net operating losses against future income may be reduced.

8.

Statement of Cash Flows Supplemental Disclosures

During the year ended December 31, 2005, the Company issued 3,254,018 shares of its common stock in lieu of $813,505 cash in settlement of amounts owing to an officer of the Company in accordance with the terms of his employment agreement.

During the year ended December 31, 2005, the Company issued 7,345,000 shares of its common stock in settlement of $1,082,530 in payables due for services performed.

During the year ended December 31, 2005, the Company issued 250,000 shares of its common stock in settlement of $67,500 as part of acquisition of properties and mineral rights.

During the year ended December 31, 2005, 3,500,000 shares were cancelled and returned to treasury which were initially issued for consulting services as part of an acquisition that did not consummate.

During the year ended December 31, 2004, the Company issued 575,000 shares of its common stock in lieu of $25,000 cash in settlement of related party advances.

During the year ended December 31, 2003, the Company issued 4,861,111 shares of its common stock in lieu of approximately $150,000 cash in settlement of related party advances.

During the year ended December 31, 2003, the Company issued 66,300 shares of its common stock for the settlement of approximately $1,326 of payables due to a former director and current shareholder for services performed.

For the year ended December 31, 2005 and 2004, there were no cash payments for income taxes and no cash was paid for accrued interest.



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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

9.

Litigation

In the normal course of its operations, the Company has been or, from time to time, may be named in legal actions seeking monetary damages. While the outcome of these matters cannot be estimated with certainty, management does not expect, based upon consultation with legal counsel, that they will have a material effect on the Companys business or financial condition or results of operations.

10.

Commitments and Contingencies

In July 2002, the Company entered into an employment agreement with an officer of the Company. During the years ended December 31, 2005 and 2004, $154,500 and $342,000 respectively is included in the statement of operations in management and director fees. The term of the employment agreement is for three years and carries an option for renewal upon mutual agreement between the officer and the Company.  On March 31, 2005, the Company
  issued 3,254,018 restricted common shares, valued to $813,505 in settlement of all amounts owing to the officer of the Company in accordance with the terms of his employment agreement..

On November 15, 2005, the Company entered into an employment agreement with an officer of the Company. The term of the agreement is five years and carries an option for renewal upon mutual agreement between the officer and the Company.  The agreement includes a base salary of  $288,000 per year, a signing bonus of 1,000,000 shares of common stock of the company and a benefits package.

On December 8, 2005 the Company entered into a twelve month agreement Uptick Capital for financing and strategic advice for fees totaling $27,000 and 1.5 million restricted common shares.

On January 10, 2006 the Company entered into a three month contract with Small Cap Voice.Com Inc for investor relations services for fees totaling $15,000 and 100,000 restricted common shares.

On January 10, 2006 the Company entered into a three month contract with Torrey Hills Capital for strategic planning services for fees of $32,500 and 300,000 restricted common shares.

On March 1, 2006 the Company entered into a twenty-four month contract with an individual for administrative services for $4,000 per month and 1,000,000 restricted common shares.

On March 15, 2006 the Company entered into a three month contract with Empire Relations Group for investor relations services for fees of $15,000 and 40,000 restricted common shares.

On March 21, 2006 the Company entered into an Asset Purchase Agreement with Sino Silver and Sanhe Sino-Top Resources and Technologies Ltd. to purchase the assets of Sino Silver. The total purchase price is US$650,000 plus 4,000,000 restricted common shares of the Company payable as follows: US$150,000 was paid on the closing;US$100,000 payable on May 20, 2006; US$400,000 payable and the 4,000,000 restricted common shares of the
  Company deliverable upon receipt of the requested government approvals in China. The Company has also committed to invest approximately US$1,300,000 into Sino-Top in 2006 .



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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

11.

Subsequent Events

On January 10, 2006 the Company entered into a two month contract with Small Cap Voice.Com, Inc., who will provide the Company with investor relations services in return for cash fees and 100,000 restricted shares.

On January 10, 2006 the Company entered into a three month consulting contract with Torrey Hills Capital, who will provide the Company with strategic planning services in return for cash fees and 300,000 shares of its restricted common stock.

On January 10, 2006 the Company issued Travellers International Inc. 1,000,000 shares of common stock pursuant to the terms of the Employment Agreement dated November 15, 2005 with Marc Hazout.

On January 19, 2006 the Company entered into a contract with an individual who will provide strategic planning services in return for 300,000 restricted shares.

On January 25, 2006 the Company issued 2,500,000 restricted common shares valued at $250,000 under a private placement.

On February 17, 2006, the Company completed the sale of 1,000,000 Units, at a price of $1.00 per Unit, for total gross proceeds of $1,000,000. Each Unit consists of one share of the Companys common stock and 2 one-half of one (1/2) common stock purchase warrants ("Warrant"). The first half warrant is exercisable in whole warrants at $2.00 per common share and the second half warrant in whole warrants at $5.00 per common share.

On March 1, 2006 the Company entered into a twenty-four month contract with an individual for administrative services for fees and 1,000,000 restricted common shares.

On March 1, 2006 the Company entered into a contract with an individual for investor relations services in The Peoples Republic of China for 1,000,000 restricted common shares.

On March 1, 2006 the Company issued Travellers International Inc. 1,000,000 shares of the common stock in consideration for its assistance to the Company in the acquisition of the mining rights in Cerro Las Minitas, Mexico.

On March 2, 2006, the Companys wholly-owned subsidiary, Silver Dragon Mining De Mexico entered into an agreement for the mining and exploitation rights to 10 mining concessions, which include an operating mine, totaling approximately 1354 hectares in Guadalupe, Durango, Mexico in consideration for the payment of US$799,000.

On March 2, 2006, Silver Dragon Mexico entered into an agreement for the assignment of the mining and exploitation rights to 5 mining concessions, which include an operating mine, totaling approximately 31 hectares in Guadalupe, Durango, Mexico in consideration for the payment of US$245,000 plus applicable V.A.T. which was paid on closing, along with 110,000 restricted common shares of the Company.  Silver Dragon Mexico has also
  entered into an Asset Purchase Agreement with the same party for the purchase of certain mining equipment for the sum of US$5,000 plus V.A.T.



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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)



Notes to Consolidated Financial Statements

December 31, 2005 and 2004

11.

Subsequent Events(contd)

On March 8, 2006, Silver Dragon Mexico entered into an agreement for the assignment of the mining and exploitation rights to 1 mining concession known as Puro Corazon which includes an operating mine, totaling approximately 9 hectares, in Guadalupe, Durango, Mexico in consideration for the payment of US$400,000 and 2 Million restricted common shares of the Company.

On March 9, 2006, Silver Dragon Mexico entered into an agreement for the assignment of the mining and exploitation rights of Puro Corazon in consideration for the sum of US$50,000. In addition,   the exploitation agreement of Puro Corazon which was assigned to Silver Dragon Mexico was modified to include minimum monthly fees of $3,500 based on production and extraction.  Silver Dragon Mexico has also been granted the option to
  purchase the Concession.

On March 15, 2006 the Company entered into a four month contract with Empire Relations Group who will provide investor relations services in return for cash fees and 40,000 restricted shares.

On March 21, 2006, the Company entered into an Asset Purchase Agreement with Sino Silver  and Sanhe Sino-Top Resources and Technologies, Ltd. (Sino-Top) wherein Sino Silver agreed to sell its 60% interest in Sino-Top to the Company.  Sino-Top holds the exploration and mining rights to 9 properties in the Erbaohuo Silver District in Inner Mongolia, China.  The total purchase price is US$650,000 plus 4,000,000 restricted common shares
  of the Company.  The Company has also committed to invest approximately US$1,300,000 into Sino-Top in 2006 towards exploration and property maintenance on the nine properties in the portfolio.  This agreement supersedes the Venture Agreement dated April 24, 2005 between the Company and Sino Silver, and is subject to receipt of the requested government approvals in China.





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12.

Restatement

The previously issued financial statements have been restated as follows:

1.The report of the independent registered public accounting firm has been amended to be consistent with the first paragraph which excludes opining on the period from inception (June 15, 1996) through December 31, 2004 and excludes opining on the cumulative period from inception (June 15, 1996) through December 31, 2005.  Accordingly all cumulative columns presented in the financial statements have been labeled as unaudited.

2.The description of the Company as a Development Stage Enterprise has been restated to identify the Company as an Exploration Stage Company.

3.The disclosures surrounding managements plan on the Companys ability to continue as a going concern has been improved to accurately reflect managements plans for dealing with its adverse conditions.

4.The cash flow statement was corrected to reflect the settlement of debt in the amount of $425,030 as a reduction to investing activities instead of originally stated as in add back to net loss under operating activities.  Also, the cash flow statement subtotal within the cash flows from operating activities was removed.

5.The consolidated statement of stockholders deficit has been restated to separately disclose the shares issued for services and property acquisition.



The results of the above restatements have no effect on any per-share amounts,
  net assets or accumulated deficit as previously disclosed.



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SIGNATURES

In accordance with Section 13 of 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.

|                          | SILVER DRAGON
    RESOURCES INC.              
|------------------------- | ----------------------------------------------
|                          |                                               
|Dated: March 16,
    2007 | /s/ Marc Hazout                               
|                          | Marc Hazout,
    President and Chief Executive
|                          | Officer                                       

In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                          |                          
|------------------------- | -------------------------
|Dated: March 16,
    2007 | /s/ Marc Hazout          
|                          | Marc Hazout,
    Director



---





EXHIBIT 31

CERTIFICATION

I, Marc Hazout, certify that:

1. I have reviewed this report on Form 10-KSB/A; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrations fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and 5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting.




Date: March 16, 2007By: /s/Marc HazoutMarc HazoutChief Executive Officer




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Exhibit 32



CERTIFICATION PURSUANT TO 
  18 U.S.C. SECTION 1350, 
  AS ADOPTED PURSUANT TO 
  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the annual report of Silver Dragon Resources Inc. (the "Company") on Form 10-KSB/A for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marc Hazout, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: March 16, 2007

|By: | /s/Marc Hazout         
|--- | -----------------------
|    | Marc Hazout            
|    | Chief Executive Officer





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