FORM 10-K

(Mark One)

QANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934

For the fiscal year ended December 31, 2008

£   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(Address of principal executive offices) (Zip Code)

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)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.   Yes
£  No Q

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.   Yes
£  No Q

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   Q

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

|Large
    accelerated filer  £ | Non-accelerated filer  £                        | Accelerated filer   £ | Smaller
    reporting company Q
|------------------------------ | ----------------------------------------------- | --------------------- | -------------------------------
|                               | (Do not check if
    smaller reporting company) |                       |                                

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

APPLICABLE TO CORPORATE ISSUERS:

State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date: The issuer had
85,893,488 shares of its Common Stock, $0.0001 par value, as of March 31, 2009.

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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 and
Section 21E of the Securities Exchange Act of 1934. For this purpose any
statements contained in this Form 10-K that are not statements of historical
facts 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:

- the timing and outcome of our
  feasibility study;
- the estimation of mineral resources and
  the realization of mineral resources, if any, based on mineral resource
  estimates;
- the timing of exploration, development
  and production activities and estimated future production, if any;
- estimates related to costs of
  production, capital, operating and exploration expenditures;
- requirements for additional capital and
  our ability to raise additional capital;
- governmental regulation of mining
  operations, environmental risks;
- title disputes or claims;
- the timing and outcome of referrals, if
  any, of prospective mining properties identified by Tianjin North China
  Exploration Bureau;
- the development of cooperative
  relationship with North China Geological Exploration Bureau;
- our ability to procure the required
  permits;
- our ability to attract and retain
  qualified personnel; and
- the other factors and information
  disclosed and discussed under "Risk Factors" above and elsewhere in this
  report.



PART I

ITEM 1. DESCRIPTION OF BUSINESS

Corporate History

Silver Dragon Resources, Inc. was initially incorporated in the
State of Delaware on May 9, 1996 under the name American Electric Automobile
Company Inc. On July16, 2002, we amended our Certificate of Incorporation to
change our name to American Entertainment & Animation Corporation. On
February 25, 2005, we again amended our Certificate of Incorporation to change
our name to "Silver Dragon Resources, Inc." in order to better reflect our
current business focus on global silver exploration and development. We operate
in Mexico through our wholly-owned subsidiary, Silver Dragon Mining De Mexico
S.A. de C.V.(''Silver Dragon Mexico''), a Mexico company incorporated on April
21, 2006.

We own a 40% equity interest in Sanhe Sino-Top Resources and
Technologies, Ltd. (''Sino-Top''), which was originally formed by Sino Silver
and certain other Chinese individuals as a joint venture company.

We are engaged in the acquisition, exploration and development
of silver and other mineral properties in China and Mexico. Our primary focus is
the exploration of nine properties located in the Erbaohuo Silver District in
Northern China, as well as the Cerro Las Minitas property located in Guadalupe,
Durango, Mexico. We are still in our exploration stage and have not generated
any revenues from the mining properties in China and Mexico.

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Silver Mining Business in China

Erbahuo Projects

On March 16, 2006, we entered into an agreement to acquire
certain mining and exploration rights to the Erbaohuo Silver Project by
purchasing a 60% interest in Sino-Top from Sino Silver. Sino-Top was an equity
joint venture company originally created under the Joint Venture Agreement dated
April 14, 2005 between Sino Silver and certain other parties. Pursuant to the
Asset Purchase Agreement, we acquired a 60% interest in Sino-Top and became a
party to the Joint Venture Agreement. Sino-Top holds the exploration and mining
rights to nine properties in the Erbaohuo Silver District in Northern China
("Erbaohuo Projects"). The total purchase price was $650,000 plus 4,000,000
shares of our restricted common stock, all of which had been delivered to Sino
Silver following receipt of the requisite approvals to the transfer by the local
Provincial Department of Commerce in China. In March 2007 we increased our
interest from 60% to 90% in exchange for 2 million restricted common shares of
the company. On May 9, 2007 we received approval from the Ministry of Commerce
to change the equity joint venture to a contractual joint venture. On June 10,
2008 we signed a letter of intent with our stateowned Chinese Joint venture
partner Exploration Unit of North China Nonferrous Geological Exploration
Bureau, also known as Huaguan Industrial Corp. (``HIC'') to sell 50% equity
interest in Sanhe Sino-Top Resources & Technologies Ltd. (``Sino-Top''), not
including Erbahuo, from Silver Dragon in exchange for US$4.5 million. With
respect to Erbahuo, the ninth exploration property controlled by Sino-Top, it
will be 70% owned by Silver Dragon and 30% by HIC. On November 20, 2008 Gansu
Shengda Group Ltd. (Shengda), a private Chinese conglomerate, agreed to acquire
52% of the equity interests in Sanhe Sino-Top Resources & Technologies, Ltd.
(``Sino-Top'') from Huaguan Industrial Corp. (``HIC''), Silver Dragon's
state-owned Chinese joint venture partner.

Prior to entering into the Asset Purchase Agreement described
above, on April 14, 2005 we entered into a Venture Agreement with Sino Silver to
acquire 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 the Aobaotugounao property located in the
Erbaohuo Silver District. Consideration for the interest included cash payments
of $350,000 over a two year period and the issuance of 500,000 shares of our
common stock. On closing, we paid $150,000 cash and issued 250,000 restricted
common shares. In addition, 4,500,000 restricted common shares were issued to
parties who assisted in the transaction. Three million of these shares were
subsequently returned to us and cancelled. The Venture Agreement was superseded
by the Asset Purchase Agreement described above.

We invested approximately a total of $2,618,243 into Sino-Top
as of December 31, 2008 ($6,131,052 in 2007) and intend to invest funds to
support approximately 40% of all of Sino-Top's expenses in 2008 with the focus
on further exploration and bringing the Erbaohuo silver mine into production in
2010, and conducting advanced stage exploration on two properties (Zuanxinhu and
Saihanaobao).

Strategic Cooperation Agreements

Silver Dragon and Sino-Top are party to strategic agreements
with various parties, including the North China Geological Exploration Bureau
(NCGEB).

On July 26, 2006, we signed a Strategic Cooperation Agreement
with the Tianjin North China Exploration Bureau (TNCEB) in China. The TNCEB has
access to mine assets located in various locations in China. The 5-year
Agreement provides that prospective mining properties identified by the TNCEB
will be referred exclusively to Silver Dragon first. We have 90 days to review
geological information and other information we reasonably may request. If we do
not wish to develop such properties, TNCEB may show the properties to other
prospective purchasers. In the event that Silver Dragon chooses to acquire,
develop or exploit any mining opportunities referred by the TNCEB, Silver Dragon
and TNCEB will work towards a mutually acceptable working agreement with respect
to the purchase and/or development of the mining property. The TNCEB will
provide technical, geological and other documentation as may be requested by
Silver Dragon as part of its due diligence investigation of prospective
properties. In the event that TNCEB does not wish to participate in the joint
development of the property, we are required to pay TNCEB the amount equal to 1%
of the purchase price of such property in cash or 2% of the purchase price in
non-cash consideration, including our common stock. If the seller of the
property is an affiliate of TNCEB, we have no payment obligation.

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Silver Mining Business in Mexico

Cerro las Minitas Project

On March 2, 2006, Silver Dragon Mexico acquired 16 mining
concessions from four individuals by entering into various assignment
agreements. The total consideration paid by us through March 2008 is $1,045,000
plus 2,560,000 restricted shares. We were obligated to pay a further $100,000 to
one of these individuals by March 8, 2008 to fulfill our obligations under these
agreements. This amount has not been paid as of yet, but we have been granted an
extension for the payment.

Cerro las Minitas is comprised of 15 concessions covering 1,413
Hectares. It is located 68 kilometers northeast of the City of Durango, Mexico,
and comprises the Cerro las Minitas mining district, part of the prolific silver
belt of the Sierra Madre Occidental. An initial NI 43-101 report has been
completed and concluded that the exploration done by Silver Dragon Mexico during
2006 indicates that the potential resources inferred there justify the cost of
further exploration and development a second NI 43-101 has been completed and
will be released in 2009.

Competitive Factors

The silver mining industry is fragmented, with many silver
prospectors and producers, small and large. We do not compete with anyone with
respect to our Chinese properties or on the Cerro las Minitas properties. There
is no competition for the exploration or removal of minerals from these
properties. We will either find silver on the properties or not. If we do not,
we will cease or suspend further investment.

With respect to selling silver, we compete with both existing
silver supplies and other silver producers. If the supply of silver exceeds
demand in any given period, prices will fall until supply and demand is brought
into balance. Many of these companies have substantially greater technical and
financial resources than us. Thus we may be at a disadvantage with respect to
some of our competitors.

Governmental Approvals and Regulations

Our mineral exploration programs are subject to the regulations
of various Chinese and Mexican authorities.

Regulatory Obligations in Mexico

In Mexico, our mining activities are governed by the General
Mining Law and the regulations promulgated thereunder.

We obtained initial authorizations and the relevant permits for
the exploration of Cerro Las Minitas from the Ministry of Natural Resources
(SEMARNAT). The initial authorization from SERMARNAT authorizing us to initiate
the excavation of the soil on Cerro Las Minitas was issued in 2006. The
excavation of soil must be carried out using digger machines, which are
registered and authorized by SEMARNAT. Our machines are duly registered and
authorized by SEMARNAT. The company has documented all requirements and has
submitted its Environmental Impact Assessment / Manifestacion, or Manifestacion
de Impacto Ambiental (MIA) for its Cerro las Minitas silver project in Durango,
Mexico that includes a cyanide process for the sulfide handling and Heap
Leaching process for the handling of oxides. The MIA was officially submitted on
Mar 23, 2009 to the Secretaria de Medio Ambiente y Recursos Naturales of Mexico
(SEMARNAT) for review, and is the principal document in the application process
for a mine operating permit.

After the exploration stage, mining activities in Mexico are
carried out in accordance with the permit issued by the General Direction of
Mining Ministry of Economy under the plan of operations for mining activity
submitted by an applicant. Since our current activities in Mexico are in the
exploration stage, we have not yet submitted a plan of operations. After
receiving confirmation of the existence of minerals, we are required to file an
application with the General Direction of Mining of the Ministry of Economy to
obtain concession titles for the exploitation of the minerals. As of today, we
have obtained fifteen (15) Concession Titles for the Exploitation of Minerals in
Cerro Las Minitas, which titles were granted according to the applicable
provisions of the General Mining Law. We are further required to obtain
additional permits commonly referred to as the Sole Environmental License from
SEMARNAT and the National Water Commission (NWC). After we successfully obtain
concession titles, we are required to submit annual reports in May of each year,
detailing the work performed during the designated year on the properties
specified by such concession titles.

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Once mining activities commence, we must obtain additional
permits and authorizations from the Ministry of Labor to operate special
machineries used for the exploration of the Mining Field. Such special
machineries include but are not limited to pressured containers, boilers and
other machineries designated for mining that are regulated by various National
Official Norms (NOM). We are also required to file reports on safety, hygiene
and minimum wage of our workers to the registry of the Labor Commissions as
provided under Mexican Federal Labor Law.

Regulatory Obligations in China

Exploration for and exploitation of mineral resources in China
is governed by the Mineral Resources Law of the PRC of 1986, amended effective
January 1, 1997, and the Implementation Rules for the Mineral Resources Law of
the PRC, effective March 26, 1994. In order to further implement these laws, on
February 12, 1998 the State Council issued three sets of regulations: (i)
Regulation for Registering to Explore Mineral Resources Using the Block System,
(ii) Regulation for Registering to Mine Mineral Resources, and (iii) Regulation
for Transferring Exploration and Mining Rights (together with the mineral
resources law and implementation rules being referred to herein as "Mineral
Resources Law").

Under Mineral Resources Law, the Ministry of Land and Resources
and its local authorities (the "MLR") is in charge of the supervision of mineral
resource exploration and development. The mineral resources administration
authorities of provinces, autonomous regions and municipalities, under the
jurisdiction of the State, are in charge of the supervision of mineral resource
exploration and development in their respective administration areas. The
people's governments of provinces, autonomous regions and municipalities, under
the jurisdiction of the State, are in charge of coordinating the supervision by
the mineral resources administration authorities on the same level.

The Mineral Resources Law, together with the Constitution of
the PRC, provides that mineral resources are owned by the State, and the State
Council, the highest executive organization of the State, which regulates
mineral resources on behalf of the State. The ownership rights of the State
include the rights to: (i) occupy, (ii) use, (iii) earn, and (iv) dispose of,
mineral resources, regardless of the rights of owners or users of the land under
which the mineral resources are located. Therefore, the State is free to
authorize third parties to enjoy its rights to legally occupy and use mineral
resources and may collect resource taxes and royalties pursuant to its right to
earn. In this way, the State can control and direct the development and use of
the mineral resources of the PRC.

Mineral Resources Licenses

China has adopted, under the Mineral Resources Law, a licensing
system for the exploration and exploitation of mineral resources. The MLR is
responsible for approving applications for exploration licenses and mining
licenses. The approval of the MLR is also required to transfer exploration
licenses and mining licenses.

Applicants must meet certain conditions as required by related
rules/regulations. Pursuant to the Regulations for Registering to Mine Mineral
Resources, the applicant for mining rights must present the required documents,
including a plan for development and use of the mineral resources and an
environmental impact evaluation report. The Mineral Resources Law allows
individuals to exploit sporadic resources, sand, rocks and clay for use as
construction materials and a small quantity of mineral resources for sustenance.
However, individuals are prohibited from mining mineral resources that are more
appropriately mined at a certain scale by a company, specified minerals that are
subject to protective mining by the State and certain other designated mineral
resources.

Once granted, all exploration and mining rights under the
licenses are protected by the State from encroachment or disruption under the
Mineral Resources Law. It is a criminal offence to steal, seize or damage
exploration facilities, or disrupt the working order of exploration areas.

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Exploration Rights

In order to conduct exploration, a Sino-foreign cooperative
joint venture ("CJV") must apply to the MLR for an exploration license. Owners
of exploration licenses are "licensees". The period of validity of an
exploration license can be no more than three years. An exploration license area
is described by a "basic block". An exploration license for metallic and
non-metallic minerals has a maximum of 40 basic blocks. When mineral resources
that are feasible for economic development have been discovered, a licensee may
apply for the right to develop such mineral resources. The period of validity of
the exploration license can be extended by application and each extension can be
for no more than two years. The annual use fee for an exploration license is RMB
100 per square kilometre for the first three years and increases by RMB 100 per
square kilometre for each subsequent year, subject to a maximum fee of RMB 500
per square kilometre.

During the term of the exploration license, the licensee has
the privileged priority to obtain mining rights to the mineral resources in the
exploration area, provided that the licensee meets the qualifying conditions for
mining rights owners. An exploration licensee has the rights, among others, to:
(i) explore without interference within the area under license during the
license term, (ii) construct the exploration facilities, and (iii) pass through
other exploration areas and adjacent ground to access the licensed area.

After the licensee acquires the exploration license, the
licensee is obliged to, among other things: (i) begin exploration within the
prescribed term, (ii) explore according to a prescribed exploration work scheme,
(iii) comply with State laws and regulations regarding labour safety, water and
soil conservation, land reclamation and environmental protection, (iv) make
detailed reports to local and other licensing authorities, (v) close and occlude
the wells arising from exploration work, (vi) take other measures to protect
against safety concerns after the exploration work is completed, and (vii)
complete minimum exploration expenditures as required by the Regulations for
Registering to Explore Resources Using the Block.

Mining Rights

In order to conduct mining activities, a CJV must also apply
for a mining license from the MLR. Owners of mining rights, or
"concessionaires", are granted a mining license to mine for a term of no more
than ten to thirty years, depending on the magnitude or size of the mining
project. A mining license owner may extend the term of a mining license with an
application 30 days prior to expiration of the term. The annual use fee for a
mining license is RMB 1,000 per square kilometre per year.

A mining license owner has the rights, among others, to: (i)
conduct mining activities during the term and within the mining area prescribed
by the mining license, (ii) sell mineral products (except for mineral products
that the State Council has identified for unified purchase by designated units),
(iii) construct production and living facilities within the mine area, and (iv)
use the land necessary for production and construction, in accordance with
applicable laws.

A mining license owner is required to, among other things: (i)
conduct mine construction or mining activities within a defined time period,
(ii) conduct efficient production, rational mining and comprehensive use of the
mineral resources, (iii) pay resources tax and mineral resources compensation
(royalties) pursuant to applicable laws, (iv) comply with State laws and
regulations regarding labour safety, water and soil conservation, land
reclamation and environmental protection, (v) be subject to the supervision and
management by the departments in charge of geology and mineral resources, and
(vi) complete and present mineral reserves forms and mineral resource
development and use statistics reports, in accordance with applicable law.

Transfer of Exploration and Mining Rights

A mining company may transfer its exploration or mining
licenses to others, subject to the approval of MLR.

An exploration license may only be transferred if the
transferor has: (i) held the exploration license for two years after the date
that the license was issued, or discovered minerals in the exploration block,
which are able to be explored or mined further, (ii) a valid and subsisting
exploration license, (iii) completed the stipulated minimum exploration
expenditures, (iv) paid the user fees and the price for exploration rights
pursuant to the relevant regulations, and (v) obtained the necessary approval
from the authorized department in charge of the minerals.

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Mining rights may only be transferred if the transferor needs
to change the ownership of such mining rights because it is: (i) engaging in a
merger or split, (ii) entering into equity or cooperative joint ventures with
others, (iii) selling its enterprise assets, or (iv) engaging in a similar
transaction that will result in an alteration of the property ownership of the
enterprise.

Additionally, when state-owned assets or state funds are
involved in a transfer of exploration licenses and mining licenses, the related
state-owned assets rules and regulations apply and a proper evaluation report
must be completed and filed with the MLR.

Speculation in exploration and mining rights is prohibited. The
penalties for speculation are that the rights of the speculator may be revoked,
illegal income from speculation confiscated and a fine levied.

Environmental Laws

In the past ten years, Chinese laws and policies regarding
environmental protection have moved towards stricter compliance standards and
stronger enforcement. In accordance with the Environmental Protection Law of the
PRC adopted by the Standing Committee of the PRC National People's Congress on
26 December 1989, the General Administration of Environmental Protection Bureau
under the State Council sets national environmental protection standards. The
various local environmental protection bureaus may set stricter local standards
for environmental protection. CJVs are required to comply with the stricter of
the two standards.

The basic laws in China governing environmental protection in
the mineral industry sector of the economy are the Environmental Protection Law
and the Mineral Resources Law. Applicants for mining licenses must submit
environmental impact assessments, and those projects that fail to meet
environmental protection standards will not be granted licenses. In addition,
after the exploration, a licensee must take further actions for environmental
protection, such as performing water and soil maintenance. After the mining
licenses have expired or a licensee stops mining during the license period and
the mineral resources have not been fully developed, the licensee shall perform
other obligations such as water and soil maintenance, land recovery and
environmental protection in compliance with the original development scheme, or
must pay the costs of land recovery and environmental protection. After closing
the mine, the mining enterprise must perform water and soil maintenance, land
recovery and environmental protection in compliance with mine closure approval
reports, or must pay certain costs, which include the costs of land recovery and
environmental protection.

Land and Construction

The holder of an exploration license or mining license should
apply for land use right with MLR to conduct exploration or mining activities on
the land covered by the exploration license or mining license. The license
holder should file an application to MLR for the land use right with its
exploration license or mining license. If the application is approved by the
competent government authority, the MLR would issue an approval to the land use
right applicant. Then, the local MLR would enter into a land use right contract
with the license holder. The license holder should pay relevant price and fees
in accordance with the contract and then obtain a land use right certificate
from MLR. In practice, instead of obtaining a long-term land use right, an
exploration license holder may apply for a temporary land use right, which would
normally be valid for 2 years and may be renewed upon application.

The company should also apply for other zoning and construction
permits to conduct construction on the land. PRC laws require a company to
obtain the land zoning permit and construction zoning permit with the local
zoning authorities under the Ministry of Construction (MOCON). Then, the company
is required to enter into a construction contract with a qualified constructor
and file the construction contract to the local construction authorities under
the MOCON and obtain a construction permit. After the construction is completed,
the company should apply for the construction authorities and related
environmental and fire departments for the check and acceptance of the
construction. Upon the pass of check and acceptance, the company should apply
with local housing authorities to register the constructed buildings in its own
name and obtain a housing ownership certificate.

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Environmental Law

We are responsible for providing a safe working environment,
not disrupting archaeological sites, and conducting our activities to prevent
unnecessary damage to the area in which our mineral claim is located. At this
time, we do not believe that the cost of compliance at the federal, state and
local levels will be significant.

We intend to secure all necessary permits required for
exploration. We anticipate no discharge of water into active streams, creeks,
rivers, lakes or other bodies of water regulated by environmental law or
regulation. We also anticipate that no endangered species will be disturbed.
Restoration of the disturbed land will be completed according to law, and all
holes, pits and shafts will be sealed upon abandonment of the mineral claims. It
is difficult to estimate the cost of compliance with the environmental laws,
because the full nature and extent of our proposed activities cannot be
determined until we start our operations.

We believe we are in compliance with the environment laws, and
that we will continue to be able to comply with such laws in the future.

Employees and Employment Agreements

We have 6 full time employees and 10 total employees.

We currently have 3 employees in Mexico. We pay them a total of
approximately $12,000 per month for their services.

In China we have one employee serving as administrative staff
member in our Beijing representative office. We pay him $3,000 per month.

In our head office in Toronto we have 1 employee and 3
consultants. Our only employee is Marc Hazout, our Chief Executive Officer,
President and Director. The three consultants working in our head office in
Toronto include an office administrator and manger, an information and
technology and investor relations manager and a Controller, being paid
collectively a total of $10,000 per month.

In addition, our Operations Manager, China, receives $6,000 per
month on a consulting basis.

On November 15, 2005, we entered into an Employment Agreement
with Marc Hazout. The Employment Agreement provides that Mr. Hazout shall be
employed by us for a term of five years, and is entitled to a base salary of
$288,000 per year. In the event we terminate the Employment Agreement without
cause, he will be entitled to severance equal to 100% of his remaining base
salary under the Employment Agreement, plus an amount equal to 100% 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
us or soliciting customers or employees from us for a period of one year
following the termination of his employment.

Intellectual Property

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

Risk Factors

You should consider each of the following risk factors and any
other information set forth in this Form 10-K 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.

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Risks Relating To Our Operations

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

None of the properties in which 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, in
which 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 3 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 $1 million over the next 12 months to fund our anticipated capital
requirements and our obligations in Mexico and China.

We invested approximately a total of $2,618,243 into Sino-Top
as of December 31, 2008 ($6,131,052 in 2007) and intend to invest funds to
support approximately 40% of all of Sino-Top's expenses in 2008 with the focus
on further exploration and bringing the Erbaohuo silver mine into production in
2010, and conducting advanced stage exploration on two properties (Zuanxinhu and
Saihanaobao). We currently do not have funds in place to finance these
obligations.

We have historically satisfied our working capital requirements
through the private issuances of equity securities and from our chief executive
officer. We will continue to seek additional funds through such channels and
from collaboration and other arrangements with corporate partners. 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.

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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 limited 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 annual 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 our consolidated financial statements and
notes thereto included in this annual report.

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 $3,730,799 and
$10,498,500 respectively, for the fiscal years ended December 31, 2008 and 2007.
We have accumulated losses since inception of approximately $26,043,912. 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.

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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.

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 for the fiscal year ending December 31, 2008, 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.

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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 lose our interest
in such properties.

Because all of our assets, our officers and our directors
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
individuals serving our officers and directors are nationals 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
officers and directors, 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 officers and
directors predicated upon the securities laws of the United States or any state
thereof.

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

As of March 26, 2009, Marc Hazout, our President and Chief
Executive Officer, owned beneficially approximately 21.3% 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.

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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 laws and regulations adopted by domestic and foreign jurisdictions
where we operate. We could incur liability to governments or third parties for
any unlawful discharge of pollutants into the air, soil or water, including
responsibility for remedial costs.

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 noncompliance 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.

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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.

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 March 31, 2009 the number of shares in the public float
on the Over-The-Counter Bulletin Board in the U.S. is approximately 85,893,488.
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 $0.06 to a high of $0.41 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.

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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:

- deliver a standardized risk disclosure
  document prepared by the Securities and Exchange Commission that provides
  information about penny stocks and the nature and level of risks in the penny
  stock market;
- 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.

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

Erbaohuo

PROPERTY LOCATION AND DESCRIPTION

Erbaohuo is located at the common boundary of Keshiketeng
county and Wenniute county in Inner Mongolia, within the Maoshandong village of
Wenniute county. The property is about 13.85 km2. Access to the property is
110km via paved highway from Chifeng City to the village of Maoshandong and then
west 10 km by unsealed road to the property. The mine is an underground mine. A
10kv electricity power net passes through the concession and the electrical
power is adequate for mining purposes.

AGREEMENTS

On March 16, 2006, we entered into an agreement to acquire
certain mining and exploration rights to the Erbaohuo Silver Project by
purchasing a 60% interest in Sino-Top from Sino Silver. Sino-Top was a joint
venture company originally created under the Joint Venture Agreement dated April
14, 2005 between Sino Silver and certain other parties. Pursuant to the Asset
Purchase Agreement, we acquired a 60% interest in Sino-Top and became a party to
the Joint Venture Agreement. Sino-Top holds the exploration and mining rights to
nine properties in the Erbaohuo Silver District in Northern China ("Erbaohuo
Projects"). The total purchase price was $650,000 plus 4,000,000 shares of our
restricted common stock, all of which had been delivered to Sino Silver
following receipt of the requisite approvals to the transfer by the local
Provincial Department of Commerce in China. In March 2007 we increased our
interest from 60% to 90% in exchange for 2 million restricted common shares of
the company, valued at $2,660,000. On June 10, 2008 we signed a letter of intent
with our stateowned Chinese Joint venture partner Exploration Unit of North
China Nonferrous Geological Exploration Bureau, also known as Huaguan Industrial
Corp. (``HIC'') to sell 50% equity interest in Sanhe Sino-Top Resources &
Technologies Ltd. (``Sino-Top''), not including Erbahuo, from Silver Dragon in
exchange for US$4.5 million. With respect to Erbahuo, the ninth exploration
property controlled by Sino-Top, it will be 70% owned by Silver Dragon and 30%
by HIC. On November 20, 2008 Gansu Shengda Group Ltd. (Shengda), a private
Chinese conglomerate, agreed to acquire 52% of the equity interests in Sanhe
Sino-Top Resources & Technologies, Ltd. (``Sino-Top'') from Huaguan
Industrial Corp. (``HIC''), Silver Dragon's state-owned Chinese joint venture
partner.

Prior to entering into the Asset Purchase Agreement described
above, on April 14, 2005 we entered into a Venture Agreement with Sino Silver to
acquire 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 the Aobaotugounao property located in the
Erbaohuo Silver District. Consideration for the interest included cash payments
of $350,000 over a two year period and the issuance of 500,000 shares of our
common stock. On closing, we paid $150,000 cash and issued 250,000 restricted
common shares. In addition, 4,500,000 restricted common shares were issued to
parties who assisted in the transaction. Three million of these shares were
subsequently returned to us and cancelled. The Venture Agreement was superseded
by the Asset Purchase Agreement described above.

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HISTORY

Silver was discovered in Erbaohuo following analysis by the
Comprehensive Gross Exploration Department from 1989 to 1992, when exploration
was carried out for the purpose of finding the necessary silver reserves
projected to be required to satisfy China's growing industrial demands. A
geological survey at scales of 1:10,000 and 1:2,000 has been completed. In 1992,
the department committed the Nonferrous Metal Metallurgy Institute in Beijing to
complete the primary metallurgical trial. In 1997, the department completed
detailed geological survey work. From 1998 to 2002, exploration and development
was carried out leading to the eventual mining of approximately 30,000 tons of
ore with an average grade of 248.02 gpt silver at a cut-off grade of 200 gpt Ag.

We invested approximately a total of $2,618,243 into Sino-Top
as of December 31, 2008 (6,131,052 in 2007) and intend to invest funds to
support approximately 40% of all of Sino-Top's expenses in 2008 with the focus
on further exploration and bringing the Erbaohuo silver mine into production in
2010, and conducting advanced stage exploration on two properties (Zuanxinhu and
Saihanaobao).

MINERALIZATION

The main metallic minerals include the following: pyrolusite,
psilomelane, limonite, pyrite, galena, sphalerite, chalcopyrite, and other
silver related minerals.

Cerro las Minitas

PROPERTY LOCATION AND DESCRIPTION

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 the City of Durango,Ciudad Durango, the
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 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. 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. 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.

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. Improvements on the property
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.

AGREEMENTS

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.

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Under the terms of the Purchase Agreement with Sr. Jaime
Muguiro Peña, the Company has earned 100% interest in ten mining concessions by
payment of $450,000, plus 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 by payment of $245,000. All payments to Sr. and Sra. Flores have
been made.

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.

The minimum annual work requirement for these mining
concessions is approximately $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 2006
was made in 2007.

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.

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.

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The only two areas with significant exploitation in the
district are the Santo Niño-Puro Corazón and La Bocona-Mina Piña areas.

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.

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. 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.

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 reexamination 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.

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.

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. At that time 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. 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 mine is an underground mine. On October 28, 2008
the company acquired a mill at a price of US$245,000, including approximately
US$20,000 for delivery and assembly to commence production.

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MINERALIZATION AND ROCK FORMATION

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. 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.

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.

19

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ITEM 3. LEGAL PROCEEDINGS

On or about December 27, 2007, Alpha Capital Anstalt ("Alpha
Capital") served an Order to Show Cause and Complaint on Silver Dragon. The
Order to Show Cause sought a preliminary injunction (i) directing Silver Dragon
to deliver 333,333 shares of its common stock to Alpha Capital and (ii)
declaring that the exercise price of Silver Dragon Class A and B warrants
purchased by Alpha Capital should be reduced to $0.60 per share. The hearing on
the Order to Show Cause was scheduled for January 9, 2008 in the United States
District Court for the Southern District of New York. On or about January 14,
2008, an Order Granting Preliminary Injunction By Default was entered against
Silver Dragon (i) directing Silver Dragon to deliver 333,333 shares of its
common stock to Alpha Capital and (ii) declaring that the exercise price of
Silver Dragon Class A and B warrants purchased by Alpha Capital was thereby
reduced to $0.60 per share (the "January 14thOrder"). A second
Order, restraining the issuance of any shares of Silver Dragon stock pending
compliance with the Court's January 14thOrder, was entered on
default against Silver Dragon on or about January 25, 2008. Silver Dragon filed
a Motion to Set Aside Default Judgments and also filed an Answer to the
Complaint on February 5, 2008. Silver Dragon subsequently withdrew its Motion to
Set Aside Default Judgments and complied with the Court's January 14, 2008
Order. The parties have settled and the company is no longer involved in any
legal proceeding.

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 ended December 31, 2008, as required to be
reported upon by the Company in response to this Item 4.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS

Our common stock is quoted on the Over-the-Counter Bulletin
Board under the symbol "SDRG." The following table shows the quarterly high and
low trade prices on the Over-the-Counter Bulletin Board. The prices reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not represent actual transactions.

The first trades of our shares on the Over-The-Counter Bulletin
Board started January 1, 2001, and trading has been very limited since then;
there can be no assurance that a viable and active trading market will develop.
There can be no assurance that even if a market were developed for our shares,
there will be a sufficient market so that holders of common stock will be able
to sell their shares, or with respect to any price at which holders may be able
to sell their shares. Future trading prices of our common stock will depend on
many factors, including, among others, our operating results and the market for
similar securities.

The following sets forth information relating to the trading of
our common stock on the Over-The-Counter Bulletin Board.

|                                    |   | Sales Price on the
      Over-The-Counter Bulletin | 
|----------------------------------- | - | -------------------------------------------------- | 
|                                    |   | Board ($)                                          | 
|                                    |   | High                                               | 
|Fiscal Year Ended December 31, 2007 |   |                                                    | 
|First Quarter                       | $ | 2.85                                               | 
|Second Quarter                      | $ | 2.82                                               | 
|Third Quarter                       | $ | 1.36                                               | 
|Fourth
      Quarter                | $ | 1.05                                               | 
|                                    |   |                                                    | 
|Fiscal Year Ended December 31, 2008 |   |                                                    | 
|First Quarter                       | $ | 0.235                                              | 
|Second Quarter                      | $ | 0.135                                              | 
|Third Quarter                       | $ | 0.10                                               | 
|Fourth
      Quarter                | $ | 0.07                                               | 

20

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On March 30, 2009, the closing trade price of our common stock
as reported on the Bulletin Board was $0.08 per share. On that date, there were
approximately 381 shareholders of record of our common stock.

Information concerning the Company's equity compensation plan
is set forth in the attached audited financial statements.

We have never paid and do not intend to pay any cash dividends
on our common stock for the foreseeable future. We currently intend to retain
any future earnings for reinvestment in our business. Any future determination
to pay cash dividends will be at the discretion of our board of directors and
will be dependent upon our financial condition, results of operations, capital
requirements and other relevant factors.

Descriptions of sales of unregistered securities during
2008, not previously reported on the Company's 10-Q

On November 14, 2008 the Company issued 1,400,000 shares of the
Company's restricted common stock to a company, pursuant to an investor
relations agreement dated November 14, 2008, for fair value of $147,000.

The forgoing transactions were made in accordance with section
4(2) and/or Rule 506 of Regulation D under the 1933 Act.

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

You should read the following management's plan of operation
together with our financial statements and related notes appearing elsewhere in
this report. This management's plan of operation contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this annual report.

21

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Plan of Operation

Overview.

Our primary objective is to explore for silver minerals and, if
warranted, to develop those existing mineral properties. Our secondary objective
is to locate, evaluate, and acquire other mineral properties, and to finance our
exploration and development through equity financing, by way of joint venture or
option agreements or through a combination of both.

Plans for the Year 2009.

Geologic mapping, trenching and drilling work is underway for
nine properties in China. Our mining and exploration activities in Mexico are
in the exploration stage. We are in the process of exploring the concessions
through drilling, trenching and drifting. Our objective is to find new ore
bodies and expand the resource of the existing ore bodies. There are currently
four mining shafts, which were used to extract underground ore in the past. We
built a ramp directly to one of the main ore bodies. Based on our initital
findings, we have concluded that the exploration done by Silver Dragon Mexico
indicates that the potential resources inferred there justify the cost of
further exploration and development.

We intend to begin an exploration program of detailed geologic
mapping, surface geochemical sampling and ground magnetic sampling to collect
the basic geotechnical information that will be necessary to support an
effective exploration and development program at Cerro Las Minitas. The program
will include geologic mapping of the entire outcropping portion of the Cerro Las
Minitas Dome at a scale of 1:2000, with more detailed mapping in areas of
special interest, and definition of project stratigraphy in detail from
examination of exposures and drill core. Additionally, the program will include
reconnaissance geochemical soil and rock sampling and ground magnetic surveying
to cover the entire property. This first phase program will include drilling 30
diamond drill holes from surface (4500 meters) to develop oxide resources
identified on the property and an additional six diamond drill holes (1200
meters) drilled from underground in the Puro Corazón mine to further develop
discoveries of sulfide mineralization made during the 2006 drilling program. The
goals of this program are:

| | 1. | To compile a basic database of geotechnical information
      to support effective exploration at Cerro Las Minitas. All existing data
      will be incorporated into the database and recorded on maps, data sheets
      and reports on the various categories of geotechnical information. This
      geotechnical data will bear heavily on every phase of the Cerro Las
      Minitas Project and is strongly recommended.                                          
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 2. | To define, by analysis of geotechnical data collected,
      the sites on the property that offer the best potential for near-term
      discovery of near-surface oxide ore. Those discoveries are anticipated to
      extend downwards into unoxidized sulfide ores. Definition of the most
      favorable sites for further exploration expenditure will enhance the
      effectiveness of the Project and hasten its development and is strongly
      recommended.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 3. | To define and develop the inferred oxide resources that
      have been identified on the property, including drilling, trenching and
      preliminary metallurgical tests. Oxide resources already identified on the
      property offer the best potential for near-term, low- cost production from
      the project and justify this expenditure.                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 4. | To define and further develop the carbonate replacement
      Ag-Pb-Zn mineralization that was discovered west of the Puro Corazón mine
      in 2006. The exploration model suggests that carbonate replacement
      deposits at Cerro Las Minitas may offer the greatest long-term production
      potential on the property and justifies this
  investigation.                                                                                                      

We expect the cost of exploration, production activities and
administration costs in Mexico over the next 12 months to be approximately
$300,000.

Cash Requirements.

The Company's current cash will only fund our business as
currently planned for less than 3 months. We will need significant additional
funds to continue operations, which we may not be able to obtain. We estimate
that we must raise approximately $1 million over the next 12 months to fund our
anticipated capital requirements in Mexico and in China, as well as the costs of
administration.

We estimate that we will require a minimum of $2,000,000 for
exploration and development in China through the end of 2009.

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 $1 million in additional funding to continue our
operations for the next twelve months. If we fail to obtain sufficient funds, we
may need to delay, scale back or terminate some or all of our mining exploration
programs.

22

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Off Balance Sheet Arrangements

We do 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 our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that have not been disclosed in our
financial statements.

Results of Operation for the Year Ended December 31, 2008 and
2007

Revenues and Losses

During the years ended December 31, 2008 and 2007, we did not
have any revenues.

During the years ended December 31, 2008 and 2007, we incurred
operating expenses of $5,417,333 and $10,486,817 respectively. Decreases were
mainly due to:

- Lower consulting and management fees as the Company reduced the
number of consultants at head office.
- Far less shares issued for services.
- Less advertising and promotion initiatives as the Company aimed
to preserve funds.

During the years ended December 31, 2008 and 2007, we reported
a net loss of $3,730,799 and $10,498,500 respectively. The reason for the
decrease in 2008 is due to factors discussed above.

Liquidity and Capital Resources

As of December 31, 2008, we had $1,207,227 in cash and $189,883
in other receivables (which represented VAT refunds receivable). In addition, we
had accounts payable and accrued liabilities totaling of $1,289,483 for working
capital of $437,909 compared to a working capital deficit of ($532,624) in 2007.
During 2008, we have been dependent on the issuance of common stock and loans to
satisfy expenses.

Going Concern

Our consolidated financial statements have been presented on the basis that
we are 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 consolidated financial statements, we incurred
a large net operating loss in the year ended December 31, 2008, and had
significant unpaid accounts payable and accrued liabilities. These factors
create an uncertainty about our ability to continue as a going concern. Our
management has provided operating capital to us and has developed a plan to
raise additional capital. Our ability to continue as a going concern is
dependent on the success of this plan. The consolidated financial statements do not include
any adjustments that might be necessary if we were unable to continue as a going
concern.

Liquidity and Capital Resources

We will need additional capital in order to finance our
obligations to Sino-Top, and the acquired properties in Cerro Las Minitas,
Mexico, as well as to continue our attempt to acquire viable businesses and
properties and to finance the administrative costs including but not limited to
legal and accounting fees. Our management is seeking additional capital.
However, there is no assurance that this needed capital can be raised on terms
acceptable to us.

23

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Going Concern

As of December 31, 2008, we had an accumulated deficit of
$26,043,912. Our continuation as a going concern is uncertain and dependent on
successfully achieving future profitable operations and obtaining additional
sources of financing to sustain our operations. In the event we cannot obtain
the necessary funds, it will be necessary to delay, curtail or cancel the
further development of our products and services. We plan to pursue additional
financing; however there can be no assurance that we will be able to secure
financing when needed or obtain such on terms satisfactory to us, if at all.

The consolidated 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 our
possible inability to continue as a going concern.

ITEM 7. FINANCIAL STATEMENTS

The financial statements are attached hereto as Exhibit A.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

Termination of Prior Independent Accountants

By resolution adopted on January 24, 2006, our board of
directors elected to change independent accountants. The independent accounting
firm of Moore Stephens Cooper Molyneux LLP notified us on January 24, 2006 that
they were terminating their registration with the Public Company Accounting
Oversight Board and therefore, were resigning as our 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 our ability to continue as a going concern. In
connection with the audits of our consolidated financial statements for each of
the two years ended December 31, 2003 and December 31, 2004, and during any
subsequent 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.

Engagement of New Independent Accountants

On January 24, 2006, our board of directors engaged SF
Partnership LLP, 4950 Yonge Street, 4th Floor, Toronto, Ontario, M2N 6K1 as our
new independent auditors (the "new" accounting firm) to audit our financial
statements. During the two most recent fiscal years and the subsequent interim
periods prior to the engagement of the new accounting firm, we 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).

24

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ITEM 8A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, an evaluation
was carried out under the supervision of, and with the participation of, the
Company's management, including the President and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a  15(e) and Rule
15d  15(e)). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that as of the end of the period covered by
this report, the Company's disclosure controls and procedures were not effective
in ensuring that information required to be disclosed by the Company in its
reports that it files or submits to the SEC under the Exchange Act, is recorded,
processed, summarized and reported within the time period specified in
applicable rules and forms and to provide reasonable assurance that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosures. Management is taking
steps to improve our disclosure controls and procedures in order to ensure that
we are alerted to such material information in a timely fashion.

Management's Report on Internal Control over Financial
Reporting

Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rule 13a-15(f)
of the 1934 Act. Management has assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008 through a series of
dicussions among management. As a result of this assessment, management
concluded that, as of December 31, 2008, our internal control over financial
reporting was not effective in providing reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.

This annual report does not include an attestation report of
the Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.

Except as discussed above, there has been no change in the
Company's internal control over financial reporting during the Company's fourth
fiscal quarter covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 8B. OTHER INFORMATION

None.

25

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

Directors, Executive Officers and Significant Employees

The following sets forth information concerning our current
directors, executive officers and significant employees. Each director has been
elected to serve until our next annual meeting of shareholders and until his
successor has been elected and qualified. Each executive officer serves at the
discretion of our board of directors.

|Name             | Age | Position                                             
|---------------- | --- | -----------------------------------------------------
|Marc Hazout      | 44  | Chief Executive Officer,
      President and Director
|Colin Sutherland | 38  | Chief
      Financial Officer and Director           
|Manuel Chan      | 53  | Director                                             
|R.Glen MacMullin | 38  | Director                                             

Marc Hazout has been our President, Chief Executive Officer and
a director since June 1, 2002. From 1985 to 1987, Mr. Hazout was the Canadian
licensee and franchisee for a multinational 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. 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.

Colin Sutherland, C.A. has been Chief Financial officer and a
director since August 14, 2007. Mr. Sutherland has over 10 years of business of
professional experience. Mr. Sutherland was previously a Director and Chief
Financial Officer of Gammon Gold Inc. and Mexgold Resources Inc. Mr. Sutherland
has extensive experience in the financial markets, and successfully raised in
excess of US$400 million for the development and construction of the Gammon
assets. Mr. Sutherland is a Chartered Accountant and a graduate of Saint Francis
Xavier University. In addition to his work with us, Mr. Sutherland is the
President and Chief Executive Officer, and a director of Nayarit Gold Inc.

Manuel Chan joined our board of directors on August 29, 2007.
Mr. Chan is also a member of the Board of Directors of Sanhe Sino-Top Resources
& Technologies Ltd. ("Sino-Top'') of which Silver Dragon owns a 90% equity
interest. Mr. Chan possesses more than 20 years of experience in the real estate
sector and holds a Bachelor of Commerce degree in Management Information Systems
and Accounting from the University of British Columbia, Canada.

R. Glen MacMullin has been a director of the company since
December, 2007. Mr. MacMullin is currently a Vice President of Finance with
Minto Group, Inc. a fully integrated real estate development, construction and
management company with operations in Ottawa, Toronto and Florida. Prior to
joining Minto Group, Inc. in 2008, Mr. MacMullin was a Managing Director and
Chief Operating Officer with Xavier Sussex, LLC; a New York based private equity
firm he co-founded in 2004. In 2001, Mr. MacMullin was appointed Director and
Chief Operating Officer with DB Advisors, LLC; a $6 billion hedge fund group
based in New York and a wholly owned subsidiary of Deutsche Bank AG. He has also
held several senior management positions with Deutsche Bank Offshore in the
Cayman Islands from 1998 through 2001, including Head of Investment Funds. He
began his career in 1993 as a public accountant with Coopers & Lybrand in
Ottawa, Canada and KPMG in the Cayman Islands. Mr. MacMullin received a Bachelor
of Business Administration degree from Saint Francis Xavier University in 1993
and is a member of the Canadian Institute of Chartered Accountants. Mr.
MacMullin also serves on the Board of Directors of Nayarit Gold, Inc.

Guoqiang Hao has been a director of the company since June,
2008.

Mr. Hao is currently head of Exploration Unit of North China
Geological Exploration Bureau, a.k.a. Huaguan Industrial Corp.(HIC), a Chinese
state-owned entity that operates in many diversified fields such as mining,
engineering, manufacturing, chemical analysis and real estate. Mr. Hao has
served with HIC for over 30 years, first as a geologist, then as a manager, and
has witnessed its development from a geological exploration team to a
conglomerate that boasts a staff of over 700 and over 10 subsidiaries. Under the
leadership of Mr. Hao, HIC is also in the process of acquiring mining properties
in northern Africa and central Asia.

Mr. Hao is also a member of the Board of the Directors of Sanhe
Sino-Top Resources & Technologies Ltd., a joint venture between Silver
Dragon and HIC. Having a dual capacity of corporate executive and government
officer, Mr. Hao has extensive connections with China's mining and industrial
circles and the Chinese government.

26

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Donald J. Robinson, Ph.D 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.

Legal Proceedings

None

Section 16(a) Beneficial Ownership Reporting Compliance

Based upon a review of the copies of Forms 3, 4, and 5, as
applicable, and amendments thereto, provided to the Company and the written
representations of its directors, executive officers and 10% stockholders, the
Company believes that, during the fiscal year 2007, its directors, executive
officers and 10% stockholders complied with all Section 16(a) filing
requirements.

Code of Ethics and Policy Regarding Consideration of
Director Candidates Recommended by Stockholders

The Company has not adopted a Code of Ethics that applies its
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions as the Company
feels that its current corporate governance policies and procedures in place are
sufficient for this purpose.

Audit Committee

The Company does not have an audit committee.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning the
compensation for services in all capacities for the fiscal years ended December
31, 2008 and 2007 of the executive officers.

|                              |      |         |       |        |        | Non-Equity       | **Nonqualified** |                  |        
|----------------------------- | ---- | ------- | ----- | ------ | ------ | ---------------- | ---------------- | ---------------- | -------
|                              |      |         |       |        |        | Incentive        | **Deferred**     |                  |        
|Name and                      |      |         |       | Stock  | Option | Plan             | **Compensation** | All Other        |        
|Principal                     | Year | Salary  | Bonus | Awards | Awards | **Compensation** | Earnings         | **Compensation** | Total  
|Position                      |      | ($)     | ($)   | ($)    | ($)    | ($)              | ($)              | ($)              | ($)    
|                              |      |         |       |        |        |                  |                  |                  |        
|Marc Hazout,                  | 2008 | 288,000 | -     |        |        |                  |                  | None             | 288,000
|Director, President and       |      |         |       |        |        |                  |                  |                  |        
|Chief
      Executive Officer | 2007 | 288,000 | -     |        |        |                  |                  | None             | 288,000

*Travellers International Inc. (''Travellers'') received
1,000,000 restricted common shares valued at $0.6478/share, being Marc Hazout's
signing bonus with respect to his Employment Agreement. Travellers received
another 1,000,000 restricted common shares valued at $0.6551/share in
consideration for Marc Hazout successfully completed the transaction in Cerro
las Minitas, Mexico. Marc Hazout is the sole director, officer and shareholder
of Travellers.

27

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DIRECTOR COMPENSATION

|                  |             |        |         |                | Change in        |                   |        
|----------------- | ----------- | ------ | ------- | -------------- | ---------------- | ----------------- | -------
|                  |             |        |         |                | Pension          |                   |        
|                  |             |        |         |                | and Non-         |                   |        
|                  |             |        |         | Non-Equity     | Qualified        |                   |        
|                  | Fees Earned | Stock  | Option  | Incentive      | Deferred         |                   |        
|                  | or Paid in  | Awards | Awards  | **Compensati** | **Compensation** | **All
    Other** | Total  
|Name              | Cash        | ($)    | ($)     | ($)            | Earnings         | **Compensation**  | ($)    
|                  |             |        |         |                |                  |                   |        
|Manuel Chan       |             |        |         |                |                  |                   |        
|2008              |             |        |         |                |                  |                   |        
|2007              |             |        | 315,000 |                |                  |                   | 315,000
|                  |             |        |         |                |                  |                   |        
|R. Glen MacMullin |             |        |         |                |                  |                   |        
|2008              |             |        |         |                |                  |                   |        
|2007              |             |        | 176,000 |                |                  |                   | 176,000

We do not have a Long-Term Incentive Plan.

Equity Compensation Plan Information

The Company had no equity compensation plan in 2008.

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. 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

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.

28

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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth the common stock beneficially
owned by (1) our directors and named executive officers, (2) persons known by us
to beneficially own, individually, or as a group, more than 5% of our
outstanding common stock as of March 27, 2008 and (3) all of our current
directors and executive officers as a group. For the purposes of the information
provided below, beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and, for each person, includes shares
that person has the right to acquire within 60 days following April 13, 2007
subject to options, warrants, or similar instruments. Except as indicated in the
footnotes to this table, and as affected by applicable community property laws,
all persons listed have sole voting and investment power for all shares shown as
beneficially owned by them.

|Name and
      Address of Beneficial Owner              | Number of Shares | %
      Shares(1)
|------------------------------------------------------- | ---------------- | -----------------
|Marc Hazout (2)                                         |                  |                  
|Suite 803, 5160 Yonge Street, Toronto, Ontario, M2N 6L9 | 18,255,206 (2)   | 24.4%            
|Colin Sutherland                                        |                  |                  
|146 Skye Cr, Hammonds Plains, NS, B4B 1W8               | 500,000          | 0.7%             
|Manuel Chan                                             |                  |                  
|5515 Elizabeth Street, Vancouver, B.C., V5Y 3K1         | 500,000          | 0.2%             
|Glen MacMullin                                          |                  |                  
|89 Third Avenue, Ottawa, Ontario, K1S 2J7               | 0                | 0%               
|Guoqiang Hao                                            |                  |                  
|                                                        | 250,000          | 0%               
|                                                        |                  |                  
|Officers and Directors as a group                       | 18,305,206       | 25.3%            

(2) Owned by Travellers International Inc. solely
owned by Mr. Hazout. Mr. Hazout is the President and CEO of Travellers.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

On March 1, 2006 we issued Travellers 1,000,000 restricted
common shares in consideration for its assistance to the Company in the
acquisition of the mining rights in Cerro las Minitas, Mexico.

On August 17, 2007, we issued 500,000 shares of our common
stock and options to purchase 500,000 shares of our common stock to Colin
Sutherland pursuant to his appointment as our Chief Financial Officer and
Director.

On October 10, 2007, we issued
500,000 share purchase warrants to Manuel Chan pursuant to his appointment as a
Director. On November 2, 2007, we issued 500,000 share purchase warrants to
Terry Christopher pursuant to his appointment as a Director. On December 5,
2007, we issued 250,000 share purchase warrants to Glen MacMullin pursuant to
his appointment as a Director.

29

---

ITEM 13. EXHIBITS

(a) The financial statements filed as part of this report are
listed separately in the Index to Financial Statements.

|Exhibit No. | Name of Exhibit                                                                                                                                                                   
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                   
|3.1         | Articles of Incorporation (1)                                                                                                                                                     
|3.2         | Amendment to Articles of
    Incorporation (2)                                                                                                                                    
|3.3         | Bylaws (1)                                                                                                                                                                        
|4.1         | Form of Subscription Agreement
    dated March 23, 2006 between Silver Dragon Resources Inc. and Heller Capital
    Investments LLC(3)                                            
|4.2         | Form of Class A Common Stock
    Purchase Warrant issued to Heller Capital Investments LLC (4)                                                                                    
|4.3         | Form of Class B Common Stock
    Purchase Warrant issued to Heller Capital Investments LLC (4)                                                                                    
|4.4         | Subscription Agreement dated
    November 9, 2006 between Silver Dragon Resources, Inc. and Alpha Capital                                                                         
|4.5         | Form of Class A Common Stock
    Purchase Warrant issued to Alpha Capital Anstalt (5)                                                                                             
|4.6         | Form of Class B Common Stock
    Purchase Warrant issued to Alpha Capital Anstalt (5)                                                                                             
|4.7         | Form of Class C Common Stock
    Purchase Warrant issued to Alpha Capital Anstalt (5)                                                                                             
|10.1        | Assignment of Rights of Mining
    Concessions Agreement between Silver Dragon Mining De Mexico, S.A. de C.V.
    and Jamie MugurioPena (6)                                       
|10.2        | Assets Bailment Agreement dated
    March 2, 2006 by and between Silver Dragon Mining De Mexico, S.A. de C.V.
    and Jaime MugurioPena (6)                                       
|10.3        | Assets Purchase Agreement dated
    March 2, 2006 by and between Silver Dragon Mining De Mexico, S.A. de C.V.
    and Ramon Tomas Davila Flores(6)                                
|10.4        | Asset Purchase Agreement between
    Silver Dragon Mining De Mexico, S.A., de C.V. and Ramon Tomas Davila                                                                         
|10.5        | Assignment of Rights of Mining
    Concessions Agreement dated March 8, 2006 by and between Silver Dragon
    Mining De Mexico, S.A.de C.V.and Minera Real Victoria S.A.de C.V.(6)
|10.6        | Addendum to the Mining
    Exploration and Exploitation Agreement dated March 9, 2006 by and between
    Silver Dragon Mining de Mexico, S.A.de C.V.and Silvia Villasenor Haro(6) 
|10.7        | Asset Purchase Agreement dated as
    of March 16, 2006 among Silver Dragon Resources, Inc., Sino Silver Corp.
    andSanheSino-Top Resources and Technologies, Ltd.(7)           
|10.8        | Strategic Cooperation Agreement
    dated July 26, 2006, between Silver Dragon Resources, Inc. and Tianjin North
    China Exploration Bureau(4)                                  
|10.9        | Employment Agreement dated
    November 15, 2005 between Silver Dragon Resources, Inc. and Marc Hazout (managementcontract)(4)                                                    
|11          | Statement re: computation of per
    share earnings (8)                                                                                                                           
|16.1        | Letters from Moore Stephens
    Cooper Modyneux LLP on change in certifying accountants (9)                                                                                       
|21          | Subsidiaries of the Company (10)                                                                                                                                                  
|23.1        | Consent of SF Partnership, LLP,
    Chartered Accountants                                                                                                                         
|31.1        | Rule 13a-14(a)/15d-14(a)
    Certification by the Chief Executive Officer                                                                                                         
|32.1        | 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 2002                     

|     |                                                                          
|---- | -------------------------------------------------------------------------
|(1)  | Incorporated by reference to Form 10-SB filed on February
      23, 2000.
|     |                                                                          
|(2)  | Incorporated by reference to Form 10-SB/A filed on July
      17, 2003.  
|     |                                                                          
|(3)  | Incorporated by reference to Form 8-K/A filed December
      14, 2006.   
|     |                                                                          
|(4)  | Incorporated by reference to Form SB-2/A filed March 21,
      2007.     
|     |                                                                          
|(5)  | Incorporated by reference to Form 8-K filed December 5,
      2006.      
|     |                                                                          
|(6)  | Incorporated by reference to Form 8-K filed on March 20,
      2006.     
|     |                                                                          
|(7)  | Incorporated by reference to Form 8-K filed March 24,
      2006.        
|     |                                                                          
|(8)  | Included within financial statements attached hereto as
      Exhibit A. 
|     |                                                                          
|(9)  | Incorporated by reference to Form 8-K filed January 27,
      2006.      
|     |                                                                          
|(10) | Previously filed.                                                        

30

---

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees. The aggregate fees billed for professional services
rendered by SF Partnership LLP, the principal accountant, was $167,634 for 2007
and $136,950 for 2008.

Audit-Related Fees were $26,000 for 2007 and $83,000 for 2008.

Tax Fees were nil for 2007 and 2008.

All Other Fees were nil for 2006 and 2007.

31

---

SIGNATURES

In accordance with the requirements of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                         | SILVER DRAGON RESOURCES INC.            
|------------------------ | ----------------------------------------
|                         |                                         
|Date: March
    31, 2009 | /s/ Marc Hazout                         
|                         | By: Marc Hazout, Chief Executive Officer
|                         |                                         

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES(AN EXPLORATION
STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2008, and 2007 (EXPRESSED IN UNITED STATES DOLLARS)



|CONTENTS                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Report of Independent Registered Public
      Accounting Firm                                                                                                                                                                    
|Consolidated Balance Sheets as of December 31, 2008, and
      2007                                                                                                                                                              
|Consolidated Statements of Operations and
      Comprehensive Loss for the Years Ended December 31, 2008 and 2007, and
      Cumulative for the Period from June 15, 1996, [Date of Inception] Through
      to December 31, 2008
|Consolidated Statements of Stockholders' Equity, Cumulative
      for the Period from June 15, 1996, [Date of Inception] Through December
      31, 2008                                                                         
|Consolidated Statements of Cash Flows for
      the Years Ended December 31, 2008, and 2007, and Cumulative for the Period
      from June 15, 1996, [Date of Inception] Through December 31, 2008                               
|Notes to the Consolidated Financial Statements                                                                                                                                                                                   



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders' ofSilver Dragon
Resources Inc. and Subsidiaries

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, 2008 and 2007, and the consolidated
statements of operations and comprehensive loss, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 2008, and
cumulative from inception (June 15, 1996) through to December 31, 2008, 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
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 audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that 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, 2008 and 2007,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2008 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 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.

|Toronto, Canada | SF Partnership, LLP  
|--------------- | ---------------------
|March  13, 2009 | CHARTERED ACCOUNTANTS



---



|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                                       |   |             |   |   |             |  
|--------------------------------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|(AN EXPLORATION STAGE COMPANY)                                                                      |   |             |   |   |             |  
|Consolidated Balance Sheets                                                                         |   |             |   |   |             |  
|(Expressed in United States Dollars)                                                                |   |             |   |   |             |  
|                                                                                                    |   |             |   |   |             |  
|                                                                                                    |   | December 31 |   |   | December 31 |  
|                                                                                                    |   | 2008        |   |   | 2007        |  
|ASSETS                                                                                              | $ |             |   | $ |             |  
|Current
      Assets                                                                                |   |             |   |   |             |  
|Cash and cash
      equivalents                                                                     |   | 1,207,227   |   |   | 193,138     |  
|Other receivables, net (Note 6)                                                                     |   | -           |   |   | 104,217     |  
|Current portion
      of deferred expenses                                                          |   | 544,662     |   |   | 1,394,690   |  
|Total Current
      Assets                                                                          |   | 1,751,889   |   |   | 1,692,045   |  
|                                                                                                    |   |             |   |   |             |  
|Restricted Cash(Note 7)                                                                             |   | -           |   |   | 41,217      |  
|Deferred Expenses                                                                                   |   | 160,458     |   |   | 548,435     |  
|Plant and Equipment, net(Note 8)                                                                    |   | 457,455     |   |   | 813,958     |  
|Mineral Rights(Note 9)                                                                              |   | 3,045,745   |   |   | 9,076,897   |  
|Equity
      Investment(Note 10)                                                                    |   | 4,575,006   |   |   | -           |  
|Deferred Offering Cost                                                                              |   | -           |   |   | 25,219      |  
|                                                                                                    |   |             |   |   |             |  
|Total Assets                                                                                        |   | 9,990,553   |   |   | 12,197,771  |  
|                                                                                                    |   |             |   |   |             |  
|LIABILITIES                                                                                         |   |             |   |   |             |  
|Current Liabilities                                                                                 |   |             |   |   |             |  
|Accounts payable                                                                                    |   | 1,202,442   |   |   | 1,258,623   |  
|Accrued liabilities                                                                                 |   | 87,041      |   |   | 244,421     |  
|Due to related
      parties (Note 11)                                                              |   | 24,497      |   |   | 471,625     |  
|Loans payable (Note 12)                                                                             |   | -           |   |   | 250,000     |  
|Total Liabilities                                                                                   |   | 1,313,980   |   |   | 2,224,669   |  
|                                                                                                    |   |             |   |   |             |  
|                                                                                                    |   |             |   |   |             |  
|Commitments and
      Contingencies(Note 17)                                                        |   |             |   |   |             |  
|                                                                                                    |   |             |   |   |             |  
|STOCKHOLDERS'
      EQUITY                                                                          |   |             |   |   |             |  
|Capital Stock(Note 13)                                                                              |   |             |   |   |             |  
|                                                                                                    |   |             |   |   |             |  
|Preferred stock, $0.0001 par
      value, 20,000,000 shares authorized, none issued and outstanding |   | -           |   |   | -           |  
|Common stock, $0.0001 par value, 150,000,000
      shares authorized 84,753,488 shares issued and   |   |             |   |   |             |  
|outstanding (2007  69,545,988 issued and
      outstanding)                                        |   | 8,475       |   |   | 6,955       |  
|                                                                                                    |   |             |   |   |             |  
|Additional Paid-in Capital(Note 13)                                                                 |   | 34,771,264  |   |   | 32,183,963  |  
|Stock Subscriptions - 300,000
    shares receivable (2007 - 283,333 shares payable)                 |   | (117,500    | ) |   | 115,000     |  
|Deficit Accumulated During the Exploration Stage                                                    |   | (26,043,912 | ) |   | (22,313,113 | )
|Accumulated Comprehensive Income (Loss)                                                             |   | 58,246      |   |   | (19,703     | )
|Stockholders' Equity                                                                                |   | 8,676,573   |   |   | 9,973,102   |  
|                                                                                                    |   |             |   |   |             |  
|Total Liabilities and Stockholders' Equity                                                          |   | 9,990,553   |   |   | 12,197,771  |  

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

- 2 -

---





|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                          |   |             |   |   |             |   |  |                            |  |  |               |  
|---------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - |  | -------------------------- |  |  | ------------- | -
|(AN EXPLORATION STAGE COMPANY)                                         |   |             |   |   |             |   |  |                            |  |  |               |  
|Consolidated Statements of Operations and
      Comprehensive Loss     |   |             |   |   |             |   |  |                            |  |  |               |  
|For the Years Ended December 31, 2008, and
      2007, and             |   |             |   |   |             |   |  |                            |  |  |               |  
|Cumulative for the Period from June 15, 1996
      [date of inception] |   |             |   |   |             |   |  |                            |  |  |               |  
|Through December 31, 2008                                              |   |             |   |   |             |   |  |                            |  |  |               |  
|(Expressed in United States Dollars)                                   |   |             |   |   |             |   |  |                            |  |  |               |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  | Cumulative    |  
|                                                                       |   |             |   |   |             |   |  | For the period
      from  | 
|                                                                       |   |             |   |   |             |   |  |                            |  |  | June 15, 1996 |  
|                                                                       |   |             |   |   |             |   |  | [Date of
      Inception]  | 
|                                                                       |   | December 31 |   |   | December 31 |   |  | through December
      31, | 
|                                                                       |   | 2008        |   |   | 2007        |   |  |                            |  |  | 2008          |  
|                                                                       | $ |             |   | $ |             |   |  |                            |  |  | $             |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Revenues                                                               |   | -           |   |   | -           |   |  |                            |  |  | 64,888        |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Cost of Revenues                                                       |   | -           |   |   | -           |   |  |                            |  |  | 74,482        |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Gross Loss                                                             |   | -           |   |   | -           |   |  |                            |  |  | (9,594        | )
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Operating Expenses                                                     |   |             |   |   |             |   |  |                            |  |  |               |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|General and administrative                                             |   | 3,758,966   |   |   | 7,473,836   |   |  |                            |  |  | 20,097,742    |  
|Exploration                                                            |   | 1,658,367   |   |   | 3,012,981   |   |  |                            |  |  | 6,898,044     |  
|Development
      (non-mining)                                         |   | -           |   |   | -           |   |  |                            |  |  | 60,000        |  
|Total Operating Expenses                                               |   | 5,417,333   |   |   | 10,486,817  |   |  |                            |  |  | 27,055,786    |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Loss From Continuing
      Operations                                  |   | (5,417,333  | ) |   | (10,486,817 | ) |  |                            |  |  | (27,065,380   | )
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Other Income (Expenses)                                                |   |             |   |   |             |   |  |                            |  |  |               |  
|Gain on sale of controlling interest in subsidiary
      (Note 10)     |   | 1,816,733   |   |   | -           |   |  |                            |  |  | 1,816,733     |  
|Interest expense                                                       |   | -           |   |   | (15,924     | ) |  |                            |  |  | (36,517       | )
|Interest income  related parties                                      |   | -           |   |   | -           |   |  |                            |  |  | 15,905        |  
|Interest expense - related parties (Note 11)                           |   | (32,500     | ) |   | -           |   |  |                            |  |  | (56,846       | )
|Settlement with Cyper Entertainment, Inc.                              |   | -           |   |   | -           |   |  | -                          |  |  | (80,000       | )
|Loss on disposal of asset                                              |   | -           |   |   | -           |   |  | -                          |  |  | (15,371       | )
|Loss on investment                                                     |   | -           |   |   | -           |   |  | -                          |  |  | (61,240       | )
|Net loss on equity investment (Note 10)                                |   | (97,699     | ) |   | -           |   |  | -                          |  |  | (97,699       | )
|Loss on sale of marketable securities                                  |   | -           |   |   | -           |   |  |                            |  |  | (389,365      | )
|Other income (expense)                                                 |   | -           |   |   | -           |   |  |                            |  |  | (24,398       | )
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Total Other Income (Expenses)                                          |   | 1,686,534   |   |   | (15,924     | ) |  |                            |  |  | 1,071,202     |  
|                                                                       |   |             |   |   |             |   |  |                            |  |  |               |  
|Net Loss Before Income
      Tax                                       |   | (3,730,799  | ) |   | (10,502,741 | ) |  |                            |  |  | (25,994,178   | )

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

- 3 -



---





|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                |   |             |   |   |             |   |   |                      |  
|---------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | -------------------- | -
|(AN EXPLORATION STAGE COMPANY)                                               |   |             |   |   |             |   |   |                      |  
|Consolidated Statements of Operations and Comprehensive
      Loss           |   |             |   |   |             |   |   |                      |  
|For the Years Ended December 31, 2008, and 2007, and                         |   |             |   |   |             |   |   |                      |  
|Cumulative for the Period from June 15, 1996 [date of
      inception]       |   |             |   |   |             |   |   |                      |  
|Through December 31, 2008                                                    |   |             |   |   |             |   |   |                      |  
|(Expressed in United States Dollars)                                         |   |             |   |   |             |   |   |                      |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|                                                                             |   |             |   |   |             |   |   | Cumulative           |  
|                                                                             |   |             |   |   |             |   |   | For the period from  |  
|                                                                             |   |             |   |   |             |   |   | June 15, 1996        |  
|                                                                             |   |             |   |   |             |   |   | [Date of Inception]  |  
|                                                                             |   | December 31 |   |   | December 31 |   |   | through December 31, |  
|                                                                             |   | 2008        |   |   | 2007        |   |   | 2008                 |  
|                                                                             | $ |             |   | $ |             |   | $ |                      |  
|Net Loss Before Income Tax(carried
      forward)                            |   | (3,730,799  | ) |   | (10,502,741 | ) |   | (25,994,178          | )
|                                                                             |   |             |   |   |             |   |   |                      |  
|Provision for Income Taxes                                                   |   |             |   |   |             |   |   |                      |  
|Current                                                                      |   | -           |   |   | -           |   |   | -                    |  
|Deferred                                                                     |   | -           |   |   | -           |   |   | -                    |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|Net Loss From Continuing Operations,
      After Tax                         |   | (3,730,799  | ) |   | (10,502,741 | ) |   | (25,994,178          | )
|                                                                             |   |             |   |   |             |   |   |                      |  
|Minority Interest                                                            |   | -           |   |   | 4,241       |   |   | 253,021              |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|Loss From Discontinued Operations                                            |   |             |   |   |             |   |   |                      |  
|Loss from discontinued operations (net of tax)                               |   | -           |   |   | -           |   |   | (302,755             | )
|                                                                             |   |             |   |   |             |   |   |                      |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|Net Loss From Discontinued Operations                                        |   | -           |   |   | -           |   |   | (302,755             | )
|                                                                             |   |             |   |   |             |   |   |                      |  
|Net Loss                                                                     |   | (3,730,799  | ) |   | (10,498,500 | ) |   | (26,043,912          | )
|                                                                             |   |             |   |   |             |   |   |                      |  
|Foreign exchange adjustment                                                  |   | 77,949      |   |   | (18,141     | ) |   | 58,246               |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|Comprehensive Loss                                                           |   | (3,652,850  | ) |   | (10,516,641 | ) |   | (25,985,666          | )
|                                                                             |   |             |   |   |             |   |   |                      |  
|Net loss per common share  basic
      and diluted                          |   | (0.05       | ) |   | (0.16       | ) |   |                      |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|Net loss on continuing operations
      per common share  basic and diluted |   | (0.05       | ) |   | (0.16       | ) |   |                      |  
|                                                                             |   |             |   |   |             |   |   |                      |  
|Weighted average number of
    common shares outstanding - basic and diluted |   | 76,644,497  |   |   | 64,641,270  |   |   |                      |  

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

- 4 -

---



|SILVER DRAGON RESOURCES INC. AND
      SUBSIDIARIES                 
|--------------------------------------------------------------------
|(AN EXPLORATION STAGE COMPANY)                                      
|Consolidated Statements of Stockholders'
      Equity               
|Cumulative for the Period from June
    15, 1996 [Date of Inception]
|Through December 31, 2008                                           
|(Expressed in United States Dollars)                                
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Shares issued to founder
      for cash                             
|Shares issued to founders for services                              
|Shares issued for
      investment in CECK                          
|Shares issued to purchase subsidiary                                
|Shares issued for cash                                              
|Net Loss, 1996                                                      
|Balance, December 31,
      1996 (unaudited)                        
|Shares issued for cash                                              
|Shares issued for
      services                                    
|Shares issued for vehicle                                           
|Net Loss, 1997                                                      
|Balance, December 31, 1997
      (unaudited)                        
|Shares issued for cash                                              
|Shares issued for vehicle                                           
|Net loss, 1998                                                      
|Balance, December 31, 1998
      (unaudited)                        
|Shares issued for cash                                              
|Shares issued for settlement of debt                                
|Shares issued for
      services                                    
|Forgiveness of debt of related party                                
|Net loss, 1999                                                      
|Balance, December 31, 1999
      (unaudited)                        
|Shares issued for cash                                              
|Shares cancelled for non-payment                                    
|Shares issued for
      services                                    
|                                                                    
|Shares returned for
      subscription receivable                   
|Forgiveness of debt reclassification                                
|Net loss, 2000                                                      
|Balance, December 31, 2000
      (unaudited)                        

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

- 5 -



---





|SILVER DRAGON RESOURCES INC. AND
      SUBSIDIARIES                 
|--------------------------------------------------------------------
|(AN EXPLORATION STAGE COMPANY)                                      
|Consolidated Statements of
    Stockholders' Equity                 
|Cumulative for the Period from June
    15, 1996 [Date of Inception]
|Through December 31, 2008 (Cont'd)                                  
|(Expressed in United States Dollars)                                
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    

|Balance, December 31,
      2000                                                |  | 5,689,151   |   |  | 569    |   |  | 912,889   |  |  | (813,478   | ) |  | (124,748 | ) |  | - |  |  | - |  |  | (24,768  | )
|------------------------------------------------------------------------------- |  | ----------- | - |  | ------ | - |  | --------- |  |  | ---------- | - |  | -------- | - |  | - |  |  | - |  |  | -------- | -
|Shares issued for services                                                      |  | 879,415     |   |  | 88     |   |  | 59,814    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 59,902   |  
|Shares issued for consulting
      agreement                                    |  | 300,000     |   |  | 30     |   |  | 29,970    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 30,000   |  
|Cash received for subscription receivable                                       |  | -           |   |  | -      |   |  | -         |  |  | -          |   |  | 124,748  |   |  | - |  |  | - |  |  | 124,748  |  
|Other adjustment                                                                |  | -           |   |  | -      |   |  | -         |  |  | 1          |   |  | -        |   |  | - |  |  | - |  |  | 1        |  
|Net loss, 2001                                                                  |  | -           |   |  | -      |   |  | -         |  |  | (339,546   | ) |  | -        |   |  | - |  |  | - |  |  | (339,546 | )
|Balance, December 31, 2001
      (unaudited)                                    |  | 6,868,566   |   |  | 687    |   |  | 1,002,673 |  |  | (1,153,023 | ) |  | -        |   |  | - |  |  | - |  |  | (149,663 | )
|Shares issued for cash                                                          |  | 400,000     |   |  | 40     |   |  | 17,960    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 18,000   |  
|Shares issued for services -
      related party                                |  | 1,100,833   |   |  | 110    |   |  | 32,390    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 32,500   |  
|Shares issued for the settlement of related party advances                      |  | 370,000     |   |  | 37     |   |  | 66,619    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 66,656   |  
|Shares issued for the
      settlement of related party advances                |  | 116,118     |   |  | 12     |   |  | 23,212    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 23,224   |  
|Shares issued for the settlement of related party advances                      |  | 2,233,333   |   |  | 223    |   |  | 46,777    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 47,000   |  
|Shares issued for the reverse
      acquisition of Cyper                        |  | 20,000,000  |   |  | 2,000  |   |  | -         |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 2,000    |  
|Shares issued in relation to the reverse acquisition of Cyper                   |  | 4,000,000   |   |  | 400    |   |  | 119,600   |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 120,000  |  
|Shares rescinded for the
      cancellation of the reverse acquisition of Cyper |  | (20,000,000 | ) |  | (2,000 | ) |  | -         |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | (2,000   | )
|Shares issued for settlement of cancellation of Cyper reverse acquisition       |  | 250,000     |   |  | 25     |   |  | 17,475    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 17,500   |  
|Shares issued for settlement
      of advances made for the Cyper settlement    |  | 1,388,889   |   |  | 139    |   |  | 62,361    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 62,500   |  
|Shares cancelled in lieu of issuance of warrants for past services rendered     |  | (1,912,748  | ) |  | (191   | ) |  | -         |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | (191     | )
|Stock warrants issued for
      services  related party                        |  | -           |   |  | -      |   |  | 31,000    |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 31,000   |  
|Stock warrants exercised by management                                          |  | 3,255,880   |   |  | 326    |   |  | -         |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | 326      |  
|Cancellation of shares issued
      in prior years                              |  | (65,467     | ) |  | (7     | ) |  | 7         |  |  | -          |   |  | -        |   |  | - |  |  | - |  |  | -        |  
|Net
      loss, 2002                                                            |  | -           |   |  | -      |   |  | -         |  |  | (570,874   | ) |  | -        |   |  | - |  |  | - |  |  | (570,874 | )
|Balance, December 31, 2002
      (unaudited)                                    |  | 18,005,404  |   |  | 1,801  |   |  | 1,420,074 |  |  | (1,723,897 | ) |  | -        |   |  | - |  |  | - |  |  | (302,022 | )

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

- 6 -

---





|SILVER DRAGON RESOURCES INC. AND
      SUBSIDIARIES                                                       
|----------------------------------------------------------------------------------------------------------
|(AN EXPLORATION STAGE COMPANY)                                                                            
|Consolidated Statements of
    Stockholders' Equity                                                       
|And Cumulative for the Period from
      June 15, 1996 [Date of Inception]                                
|Through December 31, 2008 (Cont'd)                                                                        
|(Expressed in United States Dollars)                                                                      
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Balance, December 31,
      2002                                                                          
|Shares issued for the settlement of related party advances                                                
|Shares issued for the
      settlement of accounts payable for services performed                         
|Shares returned as a result of clerical error
      in a prior year                                       
|Net loss, 2003                                                                                            
|                                                                                                          
|Balance, December 31,
      2003 (unaudited)                                                              
|                                                                                                          
|Shares issued for the
      settlement of related party advances                                          
|Short swing profits of shareholder                                                                        
|Net loss, 2004                                                                                            
|                                                                                                          
|Balance, December 31,
      2004                                                                          
|                                                                                                          
|Shares issued for cash                                                                                    
|Shares issued for services                                                                                
|Shares issued for
      property acquisition                                                              
|Shares issued for the settlement of
      accounts   payable to related party
      for services performed
|Cancelled stock returned
      to company                                                                 
|Net loss, 2005                                                                                            
|                                                                                                          
|Balance, December 31,
      2005                                                                          

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

- 7 -

---





|SILVER DRAGON RESOURCES INC. AND
      SUBSIDIARIES                                                     
|--------------------------------------------------------------------------------------------------------
|(AN EXPLORATION STAGE COMPANY)                                                                          
|Consolidated Statements of Stockholders'
      Equity                                                   
|And Cumulative for the Period from
      June 15, 1996 [Date of Inception]                              
|Through December 31, 2008 (Cont'd)                                                                      
|(Expressed in United States Dollars)                                                                    
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Balance, December 31,
      2005                                                                        
|Shares issued for cash                                                                                  
|Shares issued for
      services                                                                        
|Shares issued for
      property acquisition                                                            
|Shares issued for the
      settlement of accounts payable to related party for
      services performed
|Warrants issued for cash                                                                                
|Warrants issued for
      services                                                                      
|Share issuance costs                                                                                    
|Treasury stock                                                                                          
|Other comprehensive loss                                                                                
|Net loss, 2006                                                                                          
|Balance, December 31,
      2006                                                                        
|Shares issued for cash                                                                                  
|Shares issued for
      related party debt                                                              
|settlement                                                                                              
|Shares issued for
      services                                                                        
|Shares issued for
      property acquisition                                                            
|Shares issued for cash
      pursuant to exercise                                                       
|of share purchase
      warrants                                                                        
|Shares issued for settlement
      of preliminary injunction (note 16)                                  
|Treasury stock (note 10)                                                                                
|Warrants issued for cash                                                                                
|Warrants issued for
      related party debt                                                            
|settlement of preliminary
      injunction (note 16)                                                    
|Warrants issued for
      services                                                                      
|Options issued                                                                                          
|Share issuance costs                                                                                    
|Other comprehensive loss                                                                                
|Net loss, 2007                                                                                          
|Balance, December 31,
      2007                                                                        

The accompanying notes are an integral part of these
consolidated financial statements. - 8 -





---





|SILVER DRAGON RESOURCES INC. AND
      SUBSIDIARIES                       
|--------------------------------------------------------------------------
|(AN EXPLORATION STAGE COMPANY)                                            
|Consolidated
    Statements of Stockholders' Equity                       
|And Cumulative for the Period from
      June 15, 1996 [Date of Inception]
|Through December 31, 2008 (Cont'd)                                        
|(Expressed in United States Dollars)                                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Balance, December 31,
      2007                                          
|Shares issued for cash                                                    
|Shares issued for
      settlement with Alpha Capital                     
|Shares issued for services                                                
|Shares issued for
      compensation                                      
|Shares issued for settlement of due to
      related  parties             
|Shares issued for cash
      pursuant to exercise of  warrants            
|Warrants issued for cash                                                  
|Warrants issued for
      settlement of due to   
      related parties   
|Warrants issued for services                                              
|Options issued for
      services                                         
|Share issuance costs                                                      
|Shares to be returned                                                     
|Other comprehensive loss                                                  
|Net loss, year ended
      December 31, 2008                              
|Balance, December 31, 2008                                                

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

- 9 -





---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES (AN
EXPLORATION STAGE COMPANY) Consolidated Statements of Cash Flows For the
Years Ended December 31, 2008 and 2007, and Cumulative for the Period from
June 15, 1996 [Date of
      Inception] through December 31, 2008 (Expressed
in United States Dollars)

|                                             |   |            |   |   |             |   |   | Cumulative           |  
|-------------------------------------------- | - | ---------- | - | - | ----------- | - | - | -------------------- | -
|                                             |   |            |   |   |             |   |   | For the Period       |  
|                                             |   |            |   |   |             |   |   | from June 15, 1996   |  
|                                             |   |            |   |   |             |   |   | [Date of Inception]  |  
|                                             |   |            |   |   |             |   |   | through December 31, |  
|                                             |   | 2008       |   |   | 2007        |   |   | 2008                 |  
|                                             |   |            |   |   |             |   |   |                      |  
|Cash Flows from Operating Activities         |   |            |   |   |             |   |   |                      |  
|Net loss from
      continuing operations    | $ | (3,730,799 | ) | $ | (10,498,500 | ) | $ | (26,043,912          | )
|Net loss from discontinued operations        |   | -          |   |   | -           |   |   | 302,755              |  
|Net loss                                     |   | (3,730,799 | ) |   | (10,498,500 | ) |   | (25,741,157          | )
|Adjustments for:                             |   |            |   |   |             |   |   |                      |  
|Depreciation                                 |   | 161,003    |   |   | 115,918     |   |   | 332,905              |  
|Gain on sale of controlling interest in      |   |            |   |   |             |   |   |                      |  
|subsidiary                                   |   | (1,816,733 | ) |   | -           |   |   | (1,816,733           | )
|Net loss from equity investment              |   | 97,699     |   |   | -           |   |   | 97,699               |  
|Shares
      issued in settlement to Alpha   |   |            |   |   |             |   |   |                      |  
|Capital                                      |   | 233,333    |   |   | -           |   |   | 214,281              |  
|Warrants
      issued in settlement to Alpha |   |            |   |   |             |   |   |                      |  
|Capital                                      |   | 64,250     |   |   | -           |   |   | 64,250               |  
|Shares
      issued for services             |   | 1,593,686  |   |   | 1,994,157   |   |   | 7,403,703            |  
|Warrants and options issued for services     |   | 126,800    |   |   | 1,561,959   |   |   | 1,867,527            |  
|Minority
      interest                      |   | -          |   |   | (4,241      | ) |   | (253,021             | )
|Settlement with Cyper Entertainment Inc.     |   | -          |   |   | -           |   |   | 80,000               |  
|Deferred
      offering costs                |   | -          |   |   | 50,000      |   |   | -                    |  
|Writeoff of deferred offering costs          |   | 25,219     |   |   | (25,219     | ) |   | -                    |  
|Write-down
      of assets                   |   | -          |   |   | -           |   |   | 42,253               |  
|Write-down of inventory                      |   | -          |   |   | -           |   |   | 19,169               |  
|Loss on
      investment                     |   | -          |   |   | -           |   |   | 61,240               |  
|                                             |   |            |   |   |             |   |   |                      |  
|Changes in
      non-cash working capital:   |   |            |   |   |             |   |   |                      |  
|Other receivables                            |   | 104,217    |   |   | 434,935     |   |   | (15,389              | )
|Deferred
      expenses                      |   | 3,381      |   |   | (50,272     | ) |   | (123,031             | )
|Accounts payable                             |   | 1,052,549  |   |   | 1,089,638   |   |   | 2,404,942            |  
|Accrued
      liabilities                    |   | (157,380   | ) |   | (242,988    | ) |   | 56,206               |  
|Accrued officer compensation                 |   | -          |   |   | -           |   |   | 709,500              |  
|Inventories                                  |   | -          |   |   | -           |   |   | (28,510              | )
|Net Cash Used in Operating
      Activities  |   | (2,242,775 | ) |   | (5,574,613  | ) |   | (14,624,166          | )

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

- 10 -



---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES (AN
EXPLORATION STAGE COMPANY) Consolidated Statements of Cash Flows For the
Years Ended December 31, 2008 and 2007, and Cumulative for the Period from
June 15, 1996 [Date of
      Inception] through December 31, 2008 (Expressed
in United States Dollars)

|                                                         |   |            |   |   |            |   |   | Cumulative           |  
|-------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | -------------------- | -
|                                                         |   |            |   |   |            |   |   | For the Period       |  
|                                                         |   |            |   |   |            |   |   | from June 15, 1996   |  
|                                                         |   |            |   |   |            |   |   | [Date of Inception]  |  
|                                                         |   |            |   |   |            |   |   | through December 31, |  
|                                                         |   | 2008       |   |   | 2007       |   |   | 2008                 |  
|                                                         |   |            |   |   |            |   |   |                      |  
|Cash Flows from Investing Activities                     |   |            |   |   |            |   |   |                      |  
|Investments in
      mineral rights                      |   | -          |   |   | (100,000   | ) |   | (1,554,877           | )
|Proceeds from sale of controlling interest in subsidiary |   | 4,384,811  |   |   | -          |   |   | 4,384,811            |  
|Additional
      contribution to Sino-Top                |   | (2,618,242 | ) |   | -          |   |   | (2,618,242           | )
|Acquisition of plant and equipment                       |   | (9,458     | ) |   | (661,435   | ) |   | (981,486             | )
|Investment in
      other                                |   | -          |   |   | -          |   |   | (21,221              | )
|Proceeds from sale of equipment                          |   | -          |   |   | -          |   |   | 500                  |  
|Net Cash Provided by (Used in) Investing Activities      |   | 1,757,111  |   |   | (761,435   | ) |   | (790,515             | )
|                                                         |   |            |   |   |            |   |   |                      |  
|Cash Flows from Financing Activities                     |   |            |   |   |            |   |   |                      |  
|Proceeds from issuance of common stock and warrants      |   | 1,477,500  |   |   | 2,994,000  |   |   | 15,946,016           |  
|Share issuance
      costs                               |   | (6,562     | ) |   | (75,000    | ) |   | (116,562             | )
|Purchase of treasury shares                              |   | -          |   |   | -          |   |   | (392,830             | )
|Related party
      advances                             |   | 441,855    |   |   | 480,811    |   |   | 922,666              |  
|Repayments of related party advances                     |   | (288,983   | ) |   | -          |   |   | (428,060             | )
|Loans received                                           |   | 10,000     |   |   | 250,000    |   |   | 260,000              |  
|Repayments of loans payable                              |   | (260,000   | ) |   | -          |   |   | (260,000             | )
|Restricted cash                                          |   | -          |   |   | (41,217    | ) |   | (41,217              | )
|Minority interest                                        |   | -          |   |   | -          |   |   | 253,021              |  
|Payment of notes
      payable                           |   | -          |   |   | -          |   |   | 3,581                |  
|Proceeds from issuance of notes payable                  |   | -          |   |   | -          |   |   | (21,507              | )
|Advances payable
      related party                     |   | -          |   |   | -          |   |   | 245,649              |  
|Bank indebtedness                                        |   | -          |   |   | -          |   |   | 460                  |  
|Proceeds from
      stock subscriptions                  |   | -          |   |   | -          |   |   | 124,748              |  
|Net Cash Provided by Financing Activities                |   | 1,373,810  |   |   | 3,608,594  |   |   | 16,495,965           |  
|Effect of Change in Foreign Exchange                     |   | 125,943    |   |   | -          |   |   | 125,943              |  
|Change in Cash and Cash Equivalents                      |   | 1,014,089  |   |   | (2,727,454 | ) |   | 1,207,227            |  
|                                                         |   |            |   |   |            |   |   |                      |  
|Cash and Cash Equivalents - beginning of period          |   | 193,138    |   |   | 2,920,592  |   |   | -                    |  
|                                                         |   |            |   |   |            |   |   |                      |  
|Cash and Cash Equivalents - end of period                | $ | 1,207,227  |   | $ | 193,138    |   | $ | 1,207,227            |  
|                                                         |   |            |   |   |            |   |   |                      |  
|Represented by:                                          |   |            |   |   |            |   |   |                      |  
|Cash                                                     | $ | 1,207,227  |   | $ | 193,138    |   | $ | 1,207,227            |  
|Cash equivalents                                         |   | -          |   |   | -          |   |   | -                    |  
|                                                         | $ | 1,207,227  |   | $ | 193,138    |   | $ | 1,207,227            |  

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

- 11 -



---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES(AN
EXPLORATION STAGE COMPANY) Notes to the Consolidated Financial Statements
December 31, 2008 and 2007 (Expressed in United States Dollars)
1.Nature of Business and Basis of Presentation

Silver Dragon Resources Inc. ("SDR"), a Delaware corporation,
was incorporated on May 9, 1996. SDR is headquartered in Ontario, Canada and
operates primarily in Mexico and China. 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.

SDR and its subsidiaries (the "Company") are in the exploration
stage as defined by Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") No.7. "Accounting and Reporting For
Development Stage Enterprises." As of December 31, 2008, 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 consolidated 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 $3,730,799 for the year ended December 31, 2008 (2007 
$10,498,500) and has accumulated losses since inception of $26,043,912. The
Company's continuation as a going concern is uncertain and dependant on
successfully bringing its product 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. The Company is currently in discussions with several parties in an
attempt to raise debt and/or equity and is considering monetizing certain assets
to increase general working capital, finance existing obligations, and fund
future exploration programs. Although the Company intends to phase its Mexican
operations into some light production by the end of 2009, there is no assurance
that it will be able to develop a sufficient customer base to maintain
profitable operations. The Company was able to raise approximately $4.4 Million
through the sale of its controlling interest in its former Chinese subsidiary,
Sanhe Sino-Top Resources and Technologies, Ltd ("Sino-Top"). The Company intends
to raise additional funds through private equity financing, which will help fund
the required capital outlays related to bringing the Mexican property into
production. It will also fund the monthly expenditures at Silver Dragon head
office until late 2009, at which time it will have to seek further financing.
There can be no assurance the Company can successfully raise monies, and these
matters raise some doubt about the Company's ability to continue as a going
concern.

The consolidated 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, CEAC, and Silver Dragon Mining De
Mexico S.A. de C.V ( "Silver Dragon Mexico"). During the year the Company sold
its controlling interest in Sino-Top but maintained a shareholding that gave the
Company significant influence over Sino-Top. It was therefore deconsolidated
from the date of sale in accordance with the Financial Accounting Standards
Board (FASB) statement FASB 141, Business Combinations, and accounted
for using the equity method of accounting, in accordance with the Accounting
Principles Board Opinion (APB) 18, The Equity Method of Accounting for
Investments in Common Stock. All significant inter-company balances and
transactions have been eliminated on consolidation.

b)

Use of Estimates

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 periods. 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

The Company considers cash deposits held in financial
institutions and all highly liquid investments with original maturities of three
months or less at the time of purchase to be cash and cash equivalents.

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 value.

All capitalized costs of mineral properties subject to
amortization and the estimated future costs to develop proven 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 reserves. Where estimates of future net cash flows are not
available and where other conditions suggest impairment, management assesses if
the 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.

- 12 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES(AN
EXPLORATION STAGE COMPANY) Notes to the Consolidated Financial Statements
December 31, 2008 and 2007 (Expressed in United States Dollars)

|3. Summary of Significant Accounting
      Policies(cont'd)
|-----------------------------------------------------------
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           

Deferred expenses consists of those expenses which will derive
benefit for the Company in the future and are deferred until such time as the
benefit is realized.

g)

Revenue
Recognition

The Company has not earned revenues from its planned principal
operations. Revenues incidental to the planned principal operations have been
recognized as follows: Revenues from the provision of mine exploration services
are recognized when the services are performed and collection is reasonably
assured.

Revenues from the sale of silver are recognized when the
product is shipped.

h)

Deferred Offering
Costs

The Company defers as other assets the direct incremental costs
of raising capital until such time as the offering is completed. At the time of
the completion of the offering, the costs are charged against the capital
raised. Should the offering be terminated, deferred offering costs are charged
to operations during the period in which the offering is terminated.

i)

Income Taxes

The Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Deferred tax assets and
liabilities are recorded for differences between the consolidated financial
statements 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.

j)

Plant and
Equipment

Plant and equipment are stated at cost. Depreciation is based
on the estimated useful life of the asset and depreciated annually as
follows:

Category
    Rate
    MethodComputer hardware
    30%
    declining balanceComputer software
    30%
    declining balanceVehicles
    20%
    declining balanceOffice equipment
    20%
    declining balanceMine equipment
    20%
    declining balanceBuildings
    20
      years
    straight lineLeasehold improvements
    5 years
    straight line


Equipment awaiting installation on site is not depreciated
until it is commissioned.

k)

Earnings (Loss)
per Share

The Company accounts for earnings (loss) per share pursuant to
SFAS No. 128, "Earnings per Share", which requires disclosure on the
consolidated financial statements of "basic" and "diluted" earnings (loss) per
share. Basic earnings (loss) per share are 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. The computation of diluted
earnings (loss) per share has not been presented as its effect would be
anti-dilutive.

l)

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 carrying amounts 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.

- 13 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
 (AN EXPLORATION STAGE COMPANY) 
 Notes to the Consolidated Financial Statements 
 December 31, 2008 and 2007 
(Expressed in United States Dollars)

|3. Summary of Significant Accounting Policies(cont'd)
|-----------------------------------------------------

m)

Stock-based Compensation

In accordance with SFAS No. 123(R) (Revised 2004), "Share-Based Payment": ("SFAS No. 123R"), the Company measures and recognizes compensation expense for all stock-based awards made to employees and directors based on the estimated grant date
fair value of those awards. SFAS No. 123R also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The fair value of stock options is
calculated using the Black-Scholes option-pricing model.

Prior to January 1, 2006, the Company used 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" ( " APB
No.25"), and, as permitted by SFAS No. 123,  "Accounting for Stock-Based Compensation" ( " SFAS No. 123"), provided 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 was 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.

For non-employee stock-based compensation, the Company uses the fair value method in accordance with SFAS No. 123R and Emerging Issues Task Force ( " EITF " ) 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services" ("EITF 96-18").

n)

Foreign Currency Translation

The Company accounts for foreign currency translation pursuant to SFAS No. 52, "Foreign Currency Translation". The Company's functional currency is United States dollars ("USD"). In foreign operations, the local currency is the functional
currency, in China it's the Yuan ("RMB") and in Mexico it's the Nuevo Peso ("MXN"). 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.

4. Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value and
expands the related disclosure requirements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. SFAS 157 indicates, among other things, that a
fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
SFAS 157 defines fair value based upon an exit price model. In February 2008, the FASB issued FASB Staff Positions (FSP) SFAS No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, and FSP SFAS No. 157-2, Effective Date of FASB Statement No. 157. FSP SFAS 157-1 removes leasing transactions from
the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to the fiscal year beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a nonrecurring basis. It does not defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least
annually. Effective January 1, 2008, the Company adopted SFAS 157, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 did not impact the Company's
financial position or results of operations.

In September 2006, FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R) ("SFAS 158") . The Company has adopted SFAS 158
except for the requirement to measure plan assets and benefit obligations as of the date of the Company's fiscal year-end statement of financial position which is effective to fiscal years beginning after December 15, 2008. The Company is currently
assessing the potential impact that the adoption of SFAS 158 could have on its consolidated financial statements.

In December 2007, FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"). This statement replaces SFAS No. 141, "Business Combinations" and requires an acquirer to recognize the assets acquired, the
liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair
value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize
changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the
circumstances. It also amends SFAS 142, "Goodwill and Other Intangible Assets", to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not
to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the
potential impact that the adoption of SFAS 141(R) could have on its consolidated financial statements.

- 14 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
 (AN EXPLORATION STAGE COMPANY) 
 Notes to the Consolidated Financial Statements 
 December 31, 2008 and 2007 
(Expressed in United States Dollars) 4. Recent Accounting Pronouncements (cont'd)

In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsamendment of Accounting Research Bulletin No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests
of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption
of SFAS 160 could have on its consolidated financial statements.

In February 2008, FASB issued FSP on SFAS No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP SFAS 140-3). The objective of this FSP is to provide guidance on accounting
for a transfer of a financial asset and a repurchase financing. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked
transaction and shall be evaluated separately under SFAS No. 140. FSP SFAS 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within these fiscal years. Earlier application is
not permitted. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

In March 2008, FASB issued SFAS 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.
The Company is currently assessing the potential impact that the adoption of SFAS 161 could have on its consolidated financial statements.

In April 2008, FASB issued FSP SFAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles
(GAAP). FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. Early adoption is prohibited. The
Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

In May, 2008, FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants." Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. The Company is
currently reviewing the effect, if any; the proposed guidance will have on its consolidated financial statements.

In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation
of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The Company is currently reviewing the effect, if any; the
proposed guidance will have on its consolidated financial statements.

- 15 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
 (AN EXPLORATION STAGE COMPANY) 
 Notes to the Consolidated Financial Statements 
 December 31, 2008 and 2007 
(Expressed in United States Dollars)

4. Recent Accounting Pronouncements (cont'd)

In September 2008, FASB issued FSP SFAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB
Statement No. 161" (FSP SFAS 133-1 and FIN 45-4). FSP SFAS 133-1 and FIN 45-4 amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,to require disclosures by sellers of
credit derivatives, including credit derivatives embedded in a hybrid instrument. FSP SFAS 133-1 and FIN 45-4 also amends FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, FSP SFAS 133-1 and FIN 45-4 clarifies the Board's intent about the
effective date of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. FSP SFAS 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The
adoption of FSP SFAS 133-1 and FIN 45-4 will have no impact on the Company's consolidated financial statements.

In December 2008, FASB issued FSP SFAS 140-4 and FIN 46 (R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (FSP SFAS 140-4 and FIN 46
(R)). FSP SFAS 140-4 and FIN 46 (R) amends FASB SFAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public entities to provide additional disclosures about
transfers of financial assets. It also amends FASB SFAS 46 (revised December 2003), Consolidation of Variable Interest Entities, to require public enterprises, including sponsors that have a variable interest in a variable
interest entity, to provide additional disclosures about their involvement with variable interest entities. Additionally, this FSP requires certain disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying special
purpose entity (SPE) that holds a variable interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable
interest in the qualifying SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE. The disclosures required by FSP SFAS 140-4 and FIN 46 (R) are intended to provide greater transparency to financial statement
users about a transferor's continuing involvement with transferred financial assets and an enterprise's involvement with variable interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46 (R) is effective for reporting periods
(annual or interim) ending after December 15, 2008. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.

In December 2008, FASB issued FSP SFAS 132 (R)-1, Employers' Disclosures about Postretirement Benefit Plan Assets, (FSP SFAS 132 (R)-1). FSP SFAS 132 (R)-1 provides guidance on an employer's disclosures about
plan assets of a defined benefit pension or other postretirement plan. It also includes a technical amendment that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented.
FSP SFAS 132 (R)-1is effective for fiscal years ending after December 15, 2009. The adoption of FSP SFAS 132 (R)-1 will have no impact on the Company's consolidated financial statements.

5.  Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS 157, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP SFAS 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use
in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Cash and cash equivalents, restricted cash (level 1), other receivables, accounts payable, accrued liabilities, loans payable, and due to related parties (level 2) are reflected in the consolidated balance sheets at carrying value, which
approximates fair value due to the short-term nature of these instruments.

6.  Other Receivables

Other receivables are $189,883 (2007 - $358,653) gross and are net of an allowance for doubtful accounts of $189,883 (2007 - $254,436). The allowance for doubtful accounts was determined based on management's best estimate of
the collectability of the receivables.

7.  Restricted Cash

Restricted cash consisted of a mandatory deposit held as security under workers' safety provisions of the People's Republic of China. The Company can withdraw the interest; however the principal will remain on deposit for the duration of the life of
the mining property. The balance as at December 31, 2008 was $nil as the Company was no longer required to consolidate the assets and liabilities of Sanhe Sino-Top Resources & Technologies Ltd., subsequent to the equity sale further detailed
in Note 10.

- 16 -

---



|SILVER DRAGON RESOURCES INC. AND
      SUBSIDIARIES  |   |         |  |   |              |  |   |                   |  |  
|---------------------------------------------------- | - | ------- |  | - | ------------ |  | - | ----------------- |  | -
|(AN EXPLORATION STAGE COMPANY)                       |   |         |  |   |              |  |   |                   |  |  
|Notes to the Consolidated Financial
      Statements |   |         |  |   |              |  |   |                   |  |  
|December 31, 2008 and 2007                           |   |         |  |   |              |  |   |                   |  |  
|(Expressed in United States Dollars)                 |   |         |  |   |              |  |   |                   |  |  
|                                                     |   |         |  |   |              |  |   |                   |  |  
|8. Plant and Equipment, net                          |   |         |  |   |              |  |   |                   |  |  
|                                                     |   |         |  |   | Accumulated  |  |   | December 31, 2008 |  |  
|                                                     |   | Cost    |  |   | Depreciation |  |   | Net book value    |  |  
|Computer hardware                                    | $ | 53,738  |  | $ | 23,658       |  | $ | 30,080            |  | $
|Computer software                                    |   | 45,122  |  |   | -            |  |   | 45,122            |  |  
|Vehicles                                             |   | 19,210  |  |   | 7,284        |  |   | 11,926            |  |  
|Office equipment                                     |   | 60,909  |  |   | 19,078       |  |   | 41,831            |  |  
|Mine equipment                                       |   | 263,698 |  |   | 74,769       |  |   | 188,929           |  |  
|Buildings                                            |   | -       |  |   | -            |  |   | -                 |  |  
|Leasehold improvements                               |   | 195,667 |  |   | 56,100       |  |   | 139,567           |  |  
|                                                     | $ | 638,344 |  | $ | 180,889      |  | $ | 457,455           |  | $

The Company did not claim any depreciation on the computer software as it has
not been placed in service.

**9.  Mineral Rights**



Cerro LasSino-Top
    
    
    MinitasChina
    
    
    Mexico
    
    
    TotalBalance,
      December 31, 2007
    $
    6,131,052
    
    $
    2,945,845
    
    $
    9,076,897Expenditures during the
      period
    
    -
    
    
    99,900
    
    
    99,900Divestitures during the
      period
    
    (6,131,052
    )
    
    -
    
    
    (6,131,052
    )Balance, December 31,
      2008
    $
    -
    
    $
    3,045,745
    
    $
    3,045,745




Sanhe Sino-Top Resources & Technologies Ltd.,
China

On December 12, 2008 the Company sold its controlling interest
in Sino-Top and therefore deconsolidated the mining rights related to
Sino-Top.

Cerros Las Minitas, Mexico

On March 1, 2006, the Company's wholly-owned subsidiary, Silver
Dragon Mexico entered into an agreement with Jaime Muguiro Pena wherein Mr. Pena
assigned to Silver Dragon Mexico the mining and exploration rights to ten mining
concessions in Guadalupe, Durango, Mexico in consideration for the payment to
Mr. Pena of $450,000 and issuance of 450,000 restricted common stock of the
Company valued at $456,750.

On March 2, 2006, Silver Dragon Mexico entered into an
agreement with Ramon Tomas Davila Flores wherein Mr. Flores assigned to Silver
Dragon Mexico the mining and exploration rights to five mining concessions in
Guadalupe, Durango, Mexico in consideration for the payment to Mr. Flores of
$245,000 and issuance of 110,000 restricted common stock of the Company valued
at $71,995.

On March 8, 2006, Silver Dragon Mexico entered into an
agreement with Minera Real Victoria, S.A. De C.V. ("Minera") for the assignment
to Silver Dragon Mexico the mining and exploration rights to a mining concession
known as "Puro Corazon" in Guadalupe, Durango, Mexico. On March 9, 2006, Silver
Dragon Mexico obtained the consent of the owner of the concession, Silvia
Villasenor Haro, for the assumption of mining and exploration rights from
Minera.

The consideration payable to Minera Real Victoria, S.A. De C.V.
("Minera") for the assignment of mining and exploration rights consisted of
$400,000 and the issuance of 2,000,000 restricted common stock of the Company
valued at $1,372,000. In accordance with the terms of the agreement with Minera
$200,000 was paid in 2006; $100,000 was due and paid in March 2007; and the
final installment of $100,000 was due for payment on March 8, 2008. As of
December 31, 2008, the amount due for payment remained outstanding.

The consideration paid by Silver Dragon Mexico to Silvia
Villasenor Haro, for consenting to the assignment of rights from Minera, was
$50,000. In addition, the exploration rights agreement was amended as follows:

i)The consideration to be paid to the owner for granting the
exploration rights shall be $1.50 per ton of economic ore that is extracted from
the mine, due and payable monthly, effective six months from the date of
execution of the agreement, at a guaranteed minimum of $3,500 per month
regardless of ore extraction.

The Company is currently in negotiations with Silvia Villasenor
Haro to purchase the Puro Corazon concession and is no longer committed to pay
any guaranteed payments since the last payment made to the above.

ii)Silver Dragon Mexico has the option to purchase the Puro
Corazon concession and the price shall be $2,000,000 if exercised within three
years, or $3,000,000 if exercised within five years, from March 2, 2006, the
date of execution of the agreement of consent to assignment of rights.

- 17 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES(AN
EXPLORATION STAGE COMPANY) Notes to the Consolidated Financial Statements
December 31, 2008 and 2007 (Expressed in United States Dollars)

10.  Equity Investment

Sanhe Sino-Top Resources & Technologies Ltd.,
China

On December 12, 2008, the Exploration Unit of North China
Nonferrous Geological Exploration Bureau, also known as Huaguan Industrial Corp.
(HIC), acquired 50%, in addition to its previous 10%, of the Company's equity
interest in Sino-Top, not including the Erbahuo property, from the Company in
exchange for Chinese Yuan (RMB) 30 million (approximately USD$4.4 million).
HIC and the Company hold equity interest of 60% and 40%, respectively, in
Sino-Top, whose assets now mainly consist of eight exploration properties. With
respect to Erbahuo, the ninth exploration property controlled by Sino-Top, it
will be 70% owned by the Company and 30% by HIC, subject to regulatory approval.
The proceeds will be used to further develop the Company's properties in China
and Mexico. All proceeds and expenses from the new venture will be shared
between HIC and the Company proportionate to their respective equity interests.

|Carrying value of total investment in
      Sino-Top previously held (90%) as at December 12, 2008                   |  |  |  | $ | 4,622,541         |  
|-------------------------------------------------------------------------------------------------------------------- |  |  |  | - | ----------------- | -
|Carrying value as at December 12, 2008 of 50% holding
      sold                                                     |  |  |  |   | 2,568,078         |  
|Proceeds received on disposition of
      50% holding                                                                |  |  |  |   | 4,384,811         |  
|Gain on disposal of 50% holding                                                                                      |  |  |  | $ | 1,816,733         |  
|                                                                                                                     |  |  |  |   |                   |  
|                                                                                                                     |  |  |  |   |                   |  
|                                                                                                                     |  |  |  |   | December 31, 2008 |  
|Carrying value of investment
    at December 12,
      2008 (40% holding)                                            |  |  |  | $ | 2,054,463         |  
|Additional investment                                                                                                |  |  |  |   | 2,618,242         |  
|40% share of net loss for the period December
      13  December 31, 2008                                           |  |  |  |   | (97,699           | )
|Carrying value of investment
      at December 31, 2008                                                              |  |  |  | $ | 4,575,006         |  
|                                                                                                                     |  |  |  |   |                   |  
|Total assets and
      liabilities associated with the Company's equity investment in Sino-Top
      are as follows: |  |  |  |  
|                                                                                                                     |  |  |  |   |                   |  
|                                                                                                                     |  |  |  |   | December 31, 2008 |  
|Total
      Assets                                                                                                   |  |  |  | $ | 3,383,446         |  
|Total Liabilities                                                                                                    |  |  |  | $ | 5,702,358         |  

11.  Related Party Transactions and Balances

Due to related parties consists of the following:

|                    |   | December 31, 2008 |  |   | December 31, 2007 | 
|------------------- | - | ----------------- |  | - | ----------------- | 
|Unpaid Remuneration | $ | 24,497            |  | $ | 36,000            | 
|Loans
      payable |   | -                 |  |   | 435,625           | 
|Payable Due         | $ | 24,497            |  | $ | 471,625           | 

Loans from directors or companies controlled by directors in
the amount of $ Nil (2007 - $435,625) were unsecured, non-interest bearing and
had no fixed terms of repayment and have been repaid.

During the year ended December 31, 2008, the Company paid
$32,500 (2007 - $ Nil) in interest to a company controlled by a director of the
Company, in relation to a loan that was secured by the aforementioned party on
behalf of the Company.

During the year ended December 31, 2008, the Company incurred
$279,000 (2007 - $162,000) in management fees payable to a company controlled by
a director for services rendered other than in his capacity as director.

During the year ended December 31, 2008, the Company incurred
$50,000 (2007  $ Nil) in fees payable to a director for services rendered other
than in their capacity as director. There remains a total of $24,497 in fees
payable to the director.

During the year ended December 31, 2008, the Company issued
200,000 restricted shares of the Company's stock to a director of the Company
for services performed as director. The director also received 500,000 options
to purchase shares of the Company's stock at a per share purchase price of
$0.23, exercisable for a period of two years from June 18, 2008.

- 18 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
 (AN EXPLORATION STAGE COMPANY) 
 Notes to the Consolidated Financial Statements 
 December 31, 2008 and 2007 
(Expressed in United States Dollars)

12.  Loans Payable

The loans payable in the amount of $Nil (2007 - $250,000) were unsecured, non-interest bearing and due on demand.

13.  Capital Stock

On February 5, 2007 the Company closed a private placement totaling 584,000 units at $1.00 per unit for gross proceeds of $584,000. Each unit consists of one share of the Company's common stock and one one-half $2.00 per share purchase
warrant and one one-half $5.00 per share purchase warrant exercisable at any time over a period of two years from the date of the closing of the private placement.

On April 2, 2007 the Company closed a private placement totaling 230,000 units at $1.00 per unit for gross proceeds of $230,000. Each unit consists of one share of the Company's common stock and one one-half $2.00 per share purchase
warrant and one one-half $5.00 per share purchase warrant exercisable at any time over a period of two years from the date of the closing of the private placement. As
at December 31, 2007, 50,000 of the units remained unsubscribed.

On April 2, 2007 the Company issued 5,000 of the Company's restricted common stock to an individual, pursuant to an administrative services contract dated May 16, 2006, for fair value of $9,100.

On April 2, 2007 the Company issued 50,000 shares of the Company's restricted common stock to an individual, pursuant to an administrative services contract dated August 29, 2006, for fair value of $91,000. The amount is being amortized over the
service period, of which $60,667 is included in the statement of operations. Included in the current portion of deferred expenses is $30,333.

On April 2, 2007 the Company issued 100,000 shares of the Company's restricted common stock to certain individuals, pursuant to investor relations services contracts dated March 1, 2007, for fair value of $165,900. The amount is being amortized
over the service period, of which $138,250 is included in the statement of operations. Included in the current portion of deferred expenses is $27,650. In accordance with the service contracts, the individuals received 400,000 share purchase
warrants, for fair value of $323,000. The warrants are exercisable at any time during a five year period from March 1, 2007 to purchase 200,000 shares at $2.50 per share and 200,000 shares at $3.00 per share.

On April 9, 2007 the Company issued 25,000 shares of the Company's restricted common stock to a company, pursuant to a twelve month investor relations services contract dated April 6, 2007, for fair value of $53,750. The amount is being
amortized over the service period, of which $40,313 is included in the statement of operations. Included in the current portion of deferred expenses is $13,437.

On April 30, 2007 the Company issued 5,000 shares of the Company's unrestricted common stock at $0.80 per share upon the exercise of warrants.

On May 2, 2007 the Company issued 38,500 shares of the Company's restricted common stock to a company for services rendered in connection with a private placement, for fair value of $38,500.

On May 22, 2007 the Company closed a private placement totaling 175,000 units at $1.00 per unit for gross proceeds of $175,000. Each unit consists of one share of the Company's common stock and one one-half $2.00 per share purchase
warrant and one one-half $5.00 per share purchase warrant exercisable at any time over a period of two years from the date of the closing of the private placement.

On June 12, 2007 the Company issued 75,000 shares of the Company's restricted common stock to a company, pursuant to an investor relations services contract dated May 29, 2007, for fair value of $69,000. The amount is being amortized over the
service period, of which $40,250 is included in the statement of operations. Included in the current portion of deferred expenses is $28,750.

On June 27, 2007 the Company issued 50,000 shares of the Company's restricted common stock to a company, pursuant to a consulting services contract dated June 15, 2007, for fair value of $34,000.

On July 27, 2007 the Company closed a private placement totaling 500,000 units at $1.00 per unit for gross proceeds of $500,000. Each unit consists of one share of the Company's common stock and one one-half $2.00 per share purchase
warrant and one one-half $5.00 per share purchase warrant exercisable at any time over a period of two years from the date of the closing of the private placement.

On July 27, 2007 the Company issued 550,000 shares of the Company's restricted common stock to a company, in fulfillment of obligations under an investor relations services contract dated December 8, 2005, for fair value of $638,000.

On August 17, 2007 the Company issued 250,000 of the Company's restricted common stock to an individual, pursuant to an accounting services contract effective July 2, 2007, for fair value of $232,500. The amount is being amortized over the
service period, of which $38,750 is included in the statement of operations. Included in the current portion of deferred expenses is $77,500.

On August 17, 2007 the Company issued 500,000 of the Company's restricted common stock to a director, as compensation for his appointment as an officer of the Company, for fair value of $472,500. The amount is being amortized over the service
period, of which $59,063 is included in the statement of operations. Included in the current portion of deferred expenses is $157,500.

On October 1, 2007 the Company issued 360,000 of the Company's restricted common stock to a company pursuant an agreement to extend an existing investor relations services contract for an additional year, for fair value of $252,000. This amount
will be amortized over the extended service period to commence on May 29, 2008.

On October 10, 2007 the Company issued 500,000 share purchase warrants to a director following an executive appointment, exercisable at $0.75 per share and expiring October 10, 2012, for fair value of $287,000.

- 19 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
 (AN EXPLORATION STAGE COMPANY) 
 Notes to the Consolidated Financial Statements 
 December 31, 2008 and 2007 
(Expressed in United States Dollars)

13.  Capital Stock (cont'd)

On October 19, 2007 the Company issued 500,000 units in the capital of the Company to certain directors or companies controlled by the directors as consideration for the conversion of loans payable in the amount of $500,000. Each unit consists
of one common share and one one-half $2.00 per share purchase warrant and one one-half $5.00 per share purchase warrant exercisable within a two year period from October 19, 2007.

On October 19, 2007 the Company issued 180,000 of the Company's restricted common stock as compensation under the terms of an investor relations services contract dated October 10, 2007, for fair value of $122,400. The amount is being amortized
over the service period, of which $30,600 is included in the statement of operations. Included in the current portion of deferred expenses is $91,800.

On November 2, 2007 the Company issued 500,000 share purchase warrants as compensation to a new member of the Board of Directors, exercisable at $0.60 per share and expiring November 2, 2012, for fair value of $250,000. The warrants are
exercisable at any time during a five year period from November 2, 2007 to purchase 500,000 shares at $0.60 per share.

On November 14, 2007 the Company issued 50,000 share purchase warrants to an individual, pursuant a one-year extension of an investor relations services contract dated August 1, 2006, for fair value of $42,000. The warrants are exercisable at
any time during a five year period from November 14, 2007 to purchase 50,000 shares at $0.94 per share.

On November 16, 2007 the Company closed a private placement totaling 500,000 units at $1.00 per unit for gross proceeds of $500,000. Each unit consists of one share of the Company's common stock and one $1.25 per share purchase warrant
exercisable at any time over a period of two years from the date of the closing of the private placement.

On November 16, 2007 the Company issued 180,000 shares of the Company's restricted common stock to a company, pursuant to an investor relations services contract dated November 14, 2007, for fair value of $154,800.

On December 5, 2007 the Company issued 250,000 share purchase warrants as compensation to a new member of the Board of Directors, exercisable at $0.84 per share and expiring December 5, 2012, for fair value of $176,000.

On December 10, 2007 the Company issued 500,000 shares of the Company's restricted common stock to an individual, pursuant to an investor relations services contract for a one year term, for fair value of $405,000. The amount is being amortized
over the service period, of which $33,750 is included in the statement of operations. Included in the current portion of deferred expenses is $371,250.

On December 10, 2007 the Company closed a private placement totaling 1,000,000 units at $1.00 per unit for gross proceeds of $1,000,000. Each unit consists of one share of the Company's common stock and one $1.25 per share purchase
warrant exercisable at any time over a period of five years from the date of the closing of the private placement.

On December 14, 2007 the Company issued 4,500 shares of the Company's restricted common stock to an individual for services rendered in connection with a private placement, for fair value of $3,600.

On January 18, 2008 the Company engaged the services of a consultant for a term of twelve months and issued 100,000 options, for a fair value of $43,000, to purchase one common share per option of the Company at an exercise price of $0.62 at
any time within three years from the date of the agreement.

On February 26, 2008 the Company issued 30,000 share purchase warrants to an individual for services rendered in connection with a private placement, for a fair value of $9,000. The warrants are exercisable at any time during a two year period
from February 26, 2008 to purchase 30,000 shares at $0.60 per share.

On February 27, 2008 the Company closed a private placement totaling 120,000 units at $0.50 per unit for gross proceeds of $60,000. Each unit consists of one common share and one one-half $0.60 per share purchase warrant exercisable
within a two year period from the date of the closing of the private placement.

On February 28, 2008 the Company issued 333,333 shares of the Company's restricted common stock to a company in settlement of a Preliminary Injunction. As part of the settlement, the per share purchase price of each of the 250,000 Class A and
250,000 Class B warrants held by the company were reduced to $0.15, on July 10, 2008, from $2.00 and $5.00, respectively.

In April 2008 the Company closed private placements totaling 900,000 units at $0.25 per unit for gross proceeds of $225,000. Each unit consists of one common share and one $0.50 per share purchase warrant exercisable within a two year
period from the date of the closing of the private placement.

On April 1, 2008 the Company requested that 250,000 restricted shares of the Company's stock, that were initially issued on August 17, 2007, be returned and cancelled due to non-performance of contract terms.

On April 18, 2008, the Company issued 1,200,000 units of the capital of the Company to a company controlled by a director as consideration for the conversion of loans payable in the amount of $300,000. Each $0.25 unit consists of one common
share and one $0.50 per share purchase warrant exercisable within a two year period from April 18, 2008.

On April 29, 2008 the Company closed a private placement totaling 166,667 units at $0.15 per unit for gross proceeds of $25,000. Each unit consists of one common share and one $0.40 per share purchase warrant and one $0.50 per share
purchase warrant exercisable within a one and two year period, respectively, from the date of the closing of the private placement.

On May 1, 2008 the Company issued 25,000 of the Company's restricted common stock to an individual, pursuant to a one-year accounting services contract for fair value of $5,000.

- 20 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES(AN
EXPLORATION STAGE COMPANY) Notes to the Consolidated Financial Statements
December 31, 2008 and 2007 (Expressed in United States Dollars)

13.  Capital Stock (cont'd)

On May 6, 2008 the Company closed a private placement totaling
250,000 units at $0.20 per unit for gross proceeds of $50,000. Each unit
consists of one common share and one $0.50 per share purchase warrant
exercisable within a two year period from the date of the closing of the private
placement.

In May 2008 the Company closed further private placements
totaling 112,500 units at $0.20 per unit for gross proceeds of $22,500. Each
unit consists of one common share and one $0.40 per share purchase warrant and
one $0.50 per share purchase warrant exercisable within a one and two year
period, respectively, from the date of the closing of the private placement.

On June 2, 2008 the Company closed a private placement totaling
133,333 units at $0.15 per unit for gross proceeds of $20,000. Each unit
consists of one common share and one $0.50 per share purchase warrant
exercisable within a two year period from the date of the closing of the private
placement.

On June 2, 2008 the Company issued 150,000 shares of the
Company's restricted common stock to a company, pursuant to a consulting
services contract dated June 2, 2008, for fair value of $30,000. The shares were
subsequently cancelled on July 16, 2008 due to non-performance of contract
terms.

On June 19, 2008 the Company issued 50,000 shares of the
Company's restricted common stock to an individual, pursuant to an
administrative services contract dated June 1, 2008, for fair value of $10,000.

On July 10, 2008, Alpha Capital Anstalt (Alpha) and the
Company entered into a Settlement Agreement and Release (the "Settlement
Agreement") whereby all claims and disputes between the parties relating to the
pending litigation were resolved and all agreements between the parties are to
terminate - in accordance with the terms of the Settlement Agreement.
Additionally, in accordance with the terms of the Settlement Agreement, the
Company issued 2,946,734 free trading (shares which include the exercise of the
250,000 Class A and 250,000 Class B warrants at $0.15 per warrant) and 53,266
restricted shares of the Company's stock and paid $100,000 of Alpha's legal
fees.

On July 23, 2008 the Company issued 200,000 restricted shares
of the Company's stock to a director of the Company for services performed as
director. The director also received 500,000 options to purchase shares of the
Company's stock at a per share purchase price of $0.23, exercisable for a period
of two years from June 18, 2008.

On July 23, 2008 the Company issued share purchase warrants to
an employee of a subsidiary of the Company to purchase 20,000 shares of the
Company's restricted stock at a per share purchase price of $0.25, exercisable
for a period of two years.

On July 29, 2008 the Company closed a private placement
totaling 6,666,667 shares of the Company's restricted common stock at $0.15 per
share for gross proceeds of $1,000,000.

On September 1, 2008 the Company issued 150,000 shares of the
Company's restricted common stock to an individual, pursuant to a consulting
agreement dated September 1, 2008 to provide investor relations and information
technology services, for fair value of $23,250.

On September 1, 2008 the Company issued 500,000 shares of the
Company's restricted common stock to an individual, pursuant to a consulting
agreement dated September 1, 2008, for fair value of $77,500.

On November 14, 2008 the Company issued 1,400,000 shares of the
Company's restricted common stock to a company, pursuant to an investor
relations agreement dated November 14, 2008, for fair value of $147,000.

Warrants

As at December 31, 2008, 8,570,667 warrants were outstanding,
having an exercise price of between $0.25 and $5.00 per share with an average
remaining contractual life of 1.48 years.

|                            |  |            |   |   | Weighted         | 
|--------------------------- |  | ---------- | - | - | ---------------- | 
|                            |  | Number of  |   |   | average exercise | 
|                            |  | warrants   |   |   | price            | 
|Balance, December 31, 2007  |  | 14,969,000 |   | $ | 2.87             | 
|Issued during the year      |  | 3,151,667  |   |   | 0.49             | 
|Exercised during the year   |  | (500,000   | ) |   | 0.15             | 
|Forfeitures during the year |  | -          |   |   | -                | 
|Expired during the year     |  | (9,050,000 | ) |   | 3.50             | 
|Balance, December 31, 2008  |  | 8,570,667  |   | $ | 1.48             | 



|As at December 31, 2008 the range of exercise
      prices of the outstanding warrants were as follows: |  |           |  | 
|------------------------------------------------------------------------------------------------------- |  | --------- |  | 
|                                                                                                        |  |           |  | 
|                                                                                                        |  |           |  | 
|                                                                                                        |  | Number of |  | 
|Range of exercise prices                                                                                |  | warrants  |  | 
|$0.25 - $1.00                                                                                           |  | 4,646,667 |  | 
|$1.01 - $2.00                                                                                           |  | 2,512,000 |  | 
|$2.01 - $5.00                                                                                           |  | 1,412,000 |  | 
|                                                                                                        |  | 8,570,667 |  | 

- 21 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES(AN
EXPLORATION STAGE COMPANY) Notes to the Consolidated Financial Statements
December 31, 2008 and 2007 (Expressed in United States Dollars)

13.  Capital Stock (cont'd)

During the year ended December 31, 2008, 50,000 share purchase
warrants, exercisable at prices between $0.25 and $0.60 expiring two years from
their respective date of issuance were issued to a consultant and an employee of
a subsidiary of the Company. These warrants were valued using the Black-Scholes
model, using key assumptions of volatility between 115.65% and 124.82%,
risk-free interest rates between 2.04% and 2.81%, a term life equivalent to the
life of the warrants, and reinvestment of all dividends in the Company of zero
percent.

Warrants were valued using the Black-Scholes model, using the
weighted average key assumptions of volatility of 115.65% - 125.96%, a risk-free
interest rate of 1.84% - 2.81%, a term equivalent to the life of the warrant,
and reinvestment of all dividends in the Company of zero percent.

Options

As of December 31, 2008, 1,152,000 options were outstanding,
having an exercise price between $0.23 and $2.50 per share with an average
remaining contractual life of 2.40 years.

|                            |  |           |  |   | Weighted         | 
|--------------------------- |  | --------- |  | - | ---------------- | 
|                            |  | Number of |  |   | average exercise | 
|                            |  | options   |  |   | price            | 
|Balance, December 31, 2007  |  | 552,000   |  | $ | 1.10             | 
|Issued during the year      |  | 600,000   |  |   | 0.30             | 
|Exercised during the year   |  | -         |  |   | -                | 
|Forfeitures during the year |  | -         |  |   | -                | 
|Expired during the year     |  | -         |  |   | -                | 
|Balance, December 31, 2008  |  | 1,152,000 |  | $ | 0.68             | 



|As of December 31, 2008 the range of exercise
      prices of the outstanding options were as follows: |  |                   |  | 
|------------------------------------------------------------------------------------------------------ |  | ----------------- |  | 
|                                                                                                       |  |                   |  | 
|                                                                                                       |  |                   |  | 
|Range of
      exercise prices                                                                         |  | Number of options |  | 
|$0.20 - $1.00                                                                                          |  | 1,100,000         |  | 
|$1.01 - $2.00                                                                                          |  | -                 |  | 
|$2.01 - $5.00                                                                                          |  | 52,000            |  | 
|                                                                                                       |  | 1,152,000         |  | 

During the year ended December 31, 2008, 600,000 stock options,
exercisable at prices between $0.23 and $0.62 with two and three year periods
from their respective grant dates were issued to a consultant and a director of
the Company. These options were valued at $116,200 using the Black-Scholes
model, using key assumptions of volatility of between 117.23% and 125.79%,
risk-free interest rates of between 2.39% and 2.89%, a term life equivalent to
the life of the options, and reinvestment of all dividends in the Company of
zero percent.

14.  Consolidated Statements of Cash Flows Supplemental
Disclosures

For the year ended December 31, 2008, stock-based compensation
and the current portion of deferred expenses amounted to $2,138,348 (2007 -
$472,048). These amounts are included in the consolidated financial statements
as follows:

|                                                                     |   | December 31, 2008 |  |   | December 31, 2007 | 
|-------------------------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|Statement of operations (current portion of
      deferred expenses) | $ | 544,662           |  | $ | 1,008,246         | 
|Statement of operations (stock-based compensation expensed)          |   | 1,593,686         |  |   | 1,970,064         | 
|                                                                     | $ | 2,138,328         |  | $ | 2,978,310         | 

For the year ended December 31, 2008 there were no cash
payments for income taxes (2007 - $ Nil). Cash payments for interest expense
amounted to $32,500 (2007 - $15,924).

15.  Litigation

The Company is not aware of any pending actions or litigation
arising from current or past environmental practices that are likely to have a
material adverse impact on its financial position. 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 that they will have a
material effect on the Company's business or financial condition or results of
operations.

- 22 -

---



|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                                     |   |            |   |   |             |  
|------------------------------------------------------------------------------------------------- | - | ---------- | - | - | ----------- | -
|(AN EXPLORATION STAGE COMPANY)                                                                    |   |            |   |   |             |  
|Notes to the Consolidated Financial Statements                                                    |   |            |   |   |             |  
|December 31, 2008 and 2007                                                                        |   |            |   |   |             |  
|(Expressed in United States Dollars)                                                              |   |            |   |   |             |  
|16. Income Taxes                                                                                  |   |            |   |   |             |  
|The Company's income tax provision (recovery) has been
      calculated as follows:               |   |            |   |   |             |  
|                                                                                                  |   | 2008       |   |   | 2007        |  
|                                                                                                  |   |            |   |   |             |  
|Loss before income taxes                                                                          | $ | (3,730,799 | ) | $ | (10,502,741 | )
|Deferred: Expected income tax recovery at the
      combined average statutory rates of 27.98%    |   |            |   |   |             |  
|(2007  31.18%)                                                                                   |   | (1,043,871 | ) |   | (3,274,618  | )
|Losses not available to carryforward                                                              |   | 475,945    |   |   | -           |  
|Change in valuation allowance                                                                     |   | 567,926    |   |   | 3,274,618   |  
|                                                                                                  |   |            |   |   |             |  
|Provision for income taxes                                                                        | $ | -          |   | $ | -           |  
|                                                                                                  |   |            |   |   |             |  
|The following summarizes the
      principal temporary differences and related future tax effect: |   |            |   |   |             |  
|                                                                                                  |   | 2008       |   |   | 2007        |  
|                                                                                                  |   |            |   |   |             |  
|Losses carried forward                                                                            | $ | 6,435,648  |   | $ | 6,808,516   |  
|Valuation allowance                                                                               |   | (6,435,648 | ) |   | (6,808,516  | )
|                                                                                                  |   |            |   |   |             |  
|Deferred income tax asset                                                                         | $ | -          |   | $ | -           |  

Potential benefits of income tax losses are not recognized in
the accounts until realization is more likely than not. The Company has adopted
SFAS No. 109 as of its inception. Pursuant to SFAS No. 109 the Company is
required to compute tax asset benefits for net operating losses carried forward.

Potential benefits of net operating losses have not been
recognized in these consolidated financial statements because the Company cannot
be assured it is more likely than not it will utilize the net operating losses
carried forward in future years.

The Company has accumulated approximately $18,900,000 of
taxable losses, which may be used to offset future federal taxable income. The
utilization of the losses expires in years 2016 to 2028.

The Company's tax returns have not yet been filed and are
subject to audit and potential reassessment by taxation authorities. The outcome
of audits cannot be reasonably determined and the potential impact on the
financial statements is not determinable.

The Tax Reform Act of 1986 (Internal Revenue Code)
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.

|17.  Commitments and Contingencies
|----------------------------------

a) On
      April 1, 2007, the Company entered into a five year lease agreement for
      office space with an option to renew for an additional five years. The
      future minimum commitment under the lease obligations for office premises are
as follows:

2009
    
    44,9512010
    
    46,1052011
    
    46,1052012
    
    11,526$ 148,687


In addition, the Company is required to pay its proportionate
share of realty taxes and certain other occupancy costs under the terms of the
lease.

b) Under the terms of the agreement with Jaime Muguiro Pena,
the Company purchased 100% interest in 10 mining concessions in consideration
for $450,000 and the issuance of 450,000 restricted common stock of the Company.
The agreement also stipulates that the 450,000 common shares issued under the
purchase agreement have a minimum value of $450,000 ($1.00 per share issued),
which therefore obligates the Company to compensate for any shortfall in the
share price on disposition.

c) Under the terms of the Equity Transfer Agreement with HIC,
the Company had committed to provide capital contributions to cover all expenses
proportionate to its equity interest in Sino-Top.

- 23 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
 (AN EXPLORATION STAGE COMPANY) 
 Notes to the Consolidated Financial Statements 
 December 31, 2008 and 2007 
(Expressed in United States Dollars)

18.  Subsequent Events

On January 20, 2009 the Company issued 600,000 shares of the Company's restricted common stock to a company, pursuant to an investor relations agreement dated January 20, 2009, for fair value of $57,000.

On January 21, 2009 the Company issued 650,000 shares of the Company's restricted common stock to a company, pursuant to an investor relations agreement dated January 15, 2009, for fair value of $61,750.

On January 23, 2009 the Company cancelled 250,000 restricted shares of the Company's stock, which were initially issued on August 17, 2007 and requested to be returned and cancelled due to non-performance of contract terms.

On February 4, 2009 the Company issued 100,000 shares of the Company's restricted common stock to an employee of a subsidiary of the Company, in relation to the facilitation of the mill purchase, for fair value of $10,000.

On February 6, 2009 the Company issued 300,000 options, to an individual, to purchase shares of the Company's stock at a per share purchase price of $0.10, exercisable for a period of three years from contract date. The options were issued
pursuant to a management consulting agreement dated February 6, 2009.

On February 12, 2009 the Company issued 40,000 shares of the Company's restricted common stock to an employee of a subsidiary of the Company, in relation to investor relations services provided, for fair value of $3,608.

19.  Financial Instruments

Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments. The fair value of the financial instruments approximates their carrying
values, unless otherwise noted.

The carrying amount of cash and cash equivalents, restricted cash, other receivables, accounts payable, accrued liabilities, loans payable, and due to related parties, as applicable, approximates fair value due to the short term nature of these
items and/or the current interest rates payable in relation to current market conditions.

Financial risk is the risk that the Company's earnings are subject to fluctuations in interest risk or currency risk and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure
to financial risk, if any.

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.

Currency Risk

While the reporting currency is the US Dollar (USD), 42% and 13% of consolidated costs and expenses for the year ended December 31, 2008 are denominated in the RMB and Mexican Peso (MXN), respectively. As
at December 31,
2008, 4% of the assets and 42% of the liabilities are denominated in MXN. The Company is exposed to foreign exchange risk as the results of operations may be affected by fluctuations in the exchange rates between the USD and the MXN.

The Company has not entered into any hedging transactions in an effort to reduce the exposure to currency risk.

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|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES  |   |            |   |   |            |   |   |            |   |   |             |  
|---------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ----------- | -
|(AN EXPLORATION STAGE COMPANY)                 |   |            |   |   |            |   |   |            |   |   |             |  
|Notes to the Consolidated Financial Statements |   |            |   |   |            |   |   |            |   |   |             |  
|December 31, 2008 and 2007                     |   |            |   |   |            |   |   |            |   |   |             |  
|(Expressed in United States Dollars)           |   |            |   |   |            |   |   |            |   |   |             |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|20. Segmented Information                      |   |            |   |   |            |   |   |            |   |   |             |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|As at December 31, 2008                        |   | Corporate  |   |   | China      |   |   | Mexico     |   |   | Total       |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|Mineral Rights                                 | $ | -          |   | $ | -          |   | $ | 3,045,745  |   | $ | 3,045,745   |  
|Equity Investment                              | $ | 4,575,006  |   | $ | --         |   | $ | -          |   | $ | 4,575,006   |  
|Total Assets                                   | $ | 6,701,705  |   | $ | --         |   | $ | 3,288,848  |   | $ | 9,990,553   |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|Year Ended December 31, 2008                   |   | Corporate  |   |   | China      |   |   | Mexico     |   |   | Total       |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|Revenues                                       | $ | -          |   | $ | -          |   | $ | -          |   | $ | -           |  
|Depreciation                                   | $ | 52,402     |   | $ | 54,154     |   | $ | 54,447     |   | $ | 161,003     |  
|Net Loss Before Income Tax                     | $ | (1,670,370 | ) | $ | (1,570,899 | ) | $ | (489,530   | ) | $ | (3,730,799  | )
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|As at December 31, 2007                        |   | Corporate  |   |   | China      |   |   | Mexico     |   |   | Total       |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|Mineral Rights                                 | $ | -          |   | $ | 6,131,052  |   | $ | 2,945,845  |   | $ | 9,076,897   |  
|Total Assets                                   | $ | 2,299,386  |   | $ | 6,511,700  |   | $ | 3,386,685  |   | $ | 12,197,771  |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|Year Ended December 31, 2007                   |   | Corporate  |   |   | China      |   |   | Mexico     |   |   | Total       |  
|                                               |   |            |   |   |            |   |   |            |   |   |             |  
|Revenues                                       | $ | -          |   | $ | -          |   | $ | -          |   | $ | -           |  
|Depreciation                                   | $ | 30,937     |   | $ | 40,433     |   | $ | 44,548     |   | $ | 115,918     |  
|Net Loss Before Income Tax                     | $ | (6,612,600 | ) | $ | (1,964,603 | ) | $ | (1,925,538 | ) | $ | (10,502,741 | )

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