FORM 10-KSB

(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, 2007

£  
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)

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

Yes  
Q                                     
No   £

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  
£

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
£

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

The aggregate market value of the
shares of Common Stock held by non-affiliates of the Registrant, as of March 31,
2008 was $15,155,993.

As of March 31, 2008, the Registrant
had 69,879,321 common shares outstanding.

Documents Incorporated by
Reference: None

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

1

---

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-KSB 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 90% 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 acquired
our 60% interest in Sino-Top in November, 2006, and the remaining 30% in March
2007.
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 Erbaohuo Silver
District in Northern China, as well as the properties in Cerro Las Minitas
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.
2
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.
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 $6,131,052 into Sino-Top
as of December 31, 2007 ($2,660,000 in 2007)
and intend to invest approximately $6,600,000 into Sino-Top in 2008 towards
exploration and property maintenance on the nine properties in the portfolio,
with emphasis on bringing the Erbaohuo silver mine into production in 2008, and
conducting advanced stage exploration on two properties (Zuanxinhu and
Saihanaobao).
Hubei Province Project
On August 16, 2006, we signed of a Letter of Intent with
Hubei Silver and Cistex relating to the acquisition by Silver Dragon of a 60%
equity interest in Hubei Silver, which holds the exploration and mining rights
to the Hubei Silver Mine located in Zhushan County, Shiyan City, Hubei Province,
China. Management decided to discontinue its consideration of this acquisition
due to the inability of Hubei Silver to deliver the requisite information
necessary for us to conduct our due diligence and confirm the value of Hubei
Silver.
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.
3
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 total of $100,000
to 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 16 concessions covering
1,423 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.
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.
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 sixteen (16) 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.
4
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.
5
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.
6
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.
7
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 $2,500 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 $22,000 per month.
Our Chief Financial Officer receives $6,000 per month salary.
In addition, our Operations Manager, China, receives $3,000 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. He received 1,000,000 restricted common shares as a signing
bonus and in consideration of his facilitation of the transactions with Linear
Gold Corp. Further, he is entitled to eight weeks paid holiday and fourteen (14)
personal days, sick leave, medical and group insurance, participation in our
pension or profit sharing plans, and a car allowance of up to $3,000 per month.
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.
On August 15 2007, we entered into an Employment Agreement
with Colin Sutherland for the position of Chief Financial Officer. The
Employment Agreement provides that Mr. Sutherland shall be employed by us for a
term of three years, and is entitled to a base salary of $6,000 per month. He
received 500,000 restricted common shares as a signing bonus as well as options
to acquire 500,000 common shares at a price of $0.945 per share. The Employment
Agreement contains an acknowledgment that Mr. Sutherland is also concurrently
employed as the President of Nayarit Gold Inc.
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-KSB and the other Company's
reports filed with the Securities and Exchange Commission ("SEC"), including the
Company's financial statements and related notes, in evaluating the Company's
business and prospects. The risks and uncertainties described below are not the
only ones that impact on the Company's operations and business. Additional risks
and uncertainties not presently known to the Company, or that the Company
currently considers immaterial, may also impair its business or operations. If
any of the following risks actually occur, the Company's business and financial
condition, results or prospects could be harmed.
8
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 less than one month. 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 $10 million over the next 12 months to fund our anticipated
capital requirements and our obligations in Mexico and China. We estimate that
we will need to raise approximately $2,400,000 to continue with the exploration
and mining of the properties throughout 2008. Pursuant to our agreement with
Silvia Villasenor Haro, the owner of Puro Corazon, we will require an additional
$2,000,000 should we choose to exercise the option to purchase the Puro Corazon
mining concession within 3 years or $3,000,000 within 5 years of the closing. We
currently do not have the funds in place to finance these obligations. All
payments in Mexico were and are subject to Value Added Tax (V.A.T.) for which we
are entitled to be refunded as a non-Mexican entity.
We invested approximately a total of $6,131,052 into Sino-Top as of
December 31, 2007 ($2,660,000 in 2007)
and intend to invest approximately $6,600,000 into Sino-Top in 2008 towards
exploration and property maintenance on the nine properties in the portfolio and
conducting advanced stage exploration on all nine properties. 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.
9
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 $10,498,500 and
$8,692,208 respectively, for the fiscal years ended December 31, 2007 and 2006.
We have accumulated losses since inception of approximately $22,313,113. 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.
10
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.11
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 28, 2008, Marc Hazout, our President and Chief
Executive Officer, owned beneficially approximately 24.9% 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.
12
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.
13
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 28, 2008, the number of shares in the public
float on the Over-The-Counter Bulletin Board in the U.S. is approximately
69,879,321. 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 $0.26 to a high of $2.85 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.
14
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.
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.
15
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 $6,131,052 into Sino-Top
as of December 31, 2007 (2,660,000 in 2007)
and intend to invest approximately $6,600,000 into Sino-Top in 2008 towards
exploration and property maintenance on the nine properties in the portfolio,
with emphasis on bringing the Erbaohuo silver mine into production in 2008, 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.
16
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 company currently holds interest in a 25-year Production
Lease with Option to Purchase the Puro Corazón Concession from the Villaseñor
Family. That Lease was previously held by Minera Real Victoria. Silver Dragon
Mining de Mexico, S.A. de C.V. has made $300,000 of the $400,000 payments to
Minera Real Victoria to acquire full ownership of the Puro Corazón Lease with
Option to Purchase. One additional payment of $100,000 will be paid to Minera
Real Victoria on the second anniversary of the signing of that contract to
complete acquisition of the Lease.
Until Silver Dragon Mining de Mexico, S.A. de C.V. exercises
its option to purchase the Puro Corazón concession, it is obligated to pay
monthly production or non-production royalties to the Villaseñor Family.
Currently, the Company is paying a $3,500 per month non-production royalty to
the Villaseñor Family. At such time as production commences from the Puro
Corazón concession, the Company will then pay a $1.50 per ton royalty on
production from the concession. Silver Dragon Mining de Mexico S.A. de C.V. has
the option to purchase a 100% interest in the Puro Corazón concession for
$2,000,000 if the purchase is made within the first three years of the lease
term. After the first three years of the Lease term, the Company has the option
to purchase the Puro Corazón concession for $3,000,000 within the following 2
years.
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.
17
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.
18
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
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 14th Order"). A second
Order, restraining the issuance of any shares of Silver Dragon stock pending
compliance with the Courts January 14th Order, 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 are currently involved in negotiations regarding Alpha
Capitals claim for liquidated damages set forth in the Complaint and a demand
for Alpha Capitals attorneys fees.
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, 2007, 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
      
      LowFiscal Year Ended
      December 31, 2006First Quarter
      $1.94
      
      $0.43Second Quarter
      $1.35
      
      $0.83Third Quarter
      $1.79
      
      $0.70Fourth Quarter
      $2.46
      
      $1.10Fiscal Year Ended
      December 31, 2007First Quarter
      $2.85
      
      $1.50Second Quarter
      $2.82
      
      $0.79Third Quarter
      $1.36
      
      $0.62Fourth Quarter
      $1.05
      
      $0.47


20

---

On March 28, 2008, the closing trade price of our common
stock as reported on the Bulletin Board was $0.29 per share. On that date, there
were approximately 313 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 2007,
not previously reported on the Company's 10-QSB

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 December 10, 2007, the Company closed private placements
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 warrantexercisable at any time over a period of five years from
the date of closing of the private placement.
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

---

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 2008.
Geologic mapping, trenching and drilling work is underway for
nine properties in China. Our mining and exploitation 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:
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.
  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.
  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.
  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 activities and
administration costs in Mexico over the next 12 months to be approximately
$2,400,000.
Cash Requirements.
The Companys current cash will only fund our business as
currently planned for less than one month. We will need significant additional
funds to continue operations, which we may not be able to obtain. We estimate
that we must raise approximately $10 million over the next 12 months to fund our
anticipated capital requirements in Mexico and in China, as well as the costs of
administration.
In addition, we will require an additional $2,000,000 should
we choose to exercise the option to purchase the mining concession from Silvia
Villasenor Haro within 3 years, or $3,000,000 within 5 years. We currently do
not have arrangements in place to raise the capital to fund this option.
We estimate that we will require a minimum of $6,600,000 for
exploration and development in China through the end of 2008.
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 $10 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

---

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, 2007 and
2006
Revenues and Losses
During the years ended December 31, 2007 and 2006, we did not
have any revenues.
During the years ended December 31, 2007 and 2006, we
incurred operating expenses of $10,486,817 and $8,219,127 respectively.
Increases were in all areas including:
Professional fees (legal and audit) were due to increased
disclosure requirements and filings.
The Company retained consulting services for strategic
planning in Mexico and China.
Exploration expenses in Mexico and China.
Advertising and promotion expenses as the company invested in
brand awareness of the Company name and strategy in the public marketplace.
General expenses for the Companys offices in Mexico and
China to manage the acquisitions.
During the years ended December 31, 2007 and 2006, we
incurred net other income of $Nil and $6,776, respectively, which relates to
interest income and dividends received. In addition, in 2006 we incurred losses
of $389,365 on the sale of marketable securities.
During the years ended December 31, 2007 and 2006, we
reported a net loss of $10,498,500 and $8,692,208
respectively. The reason for the increase in 2007 is due to factors discussed
above.
Liquidity and Capital Resources
As of December 31, 2007, we had $193,138 in cash, $41,217 in
restricted cash and $104,217 in other receivables (which represented VAT refunds
receivable). In addition, we had loans payable and related
party loans payable totaling $721,625, and accounts payable and accrued
liabilities totaling of $1,503,044 for a working capital deficit of ($532,624)
compared to a working capital surplus of $3,493,609 in 2006. During 2007, we
have been dependent on the issuance of common stock and loans to satisfy
expenses.
Going Concern
Our 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 financial statements, we
incurred a large net operating loss in the year ended December 31, 2007, 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 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

---

Going Concern
As of December 31, 2007, we had an accumulated deficit of
$22,313,133. 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 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, Suite 400 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

---

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, 2007 through a series of
dicussions among management. As a result of this assessment, management
concluded that, as of December 31, 2007, 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

---

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
      PositionMarc Hazout
      43
      Chief Executive Officer, President
      and DirectorColin Sutherland
      37
      Chief Financial
      Officer and DirectorManuel Chan
      52
      DirectorTerry Christopher
      42
      DirectorR.Glen MacMullin
      37
      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 clothing manufacturer and
retailer. From 1987 to 1991, Mr. Hazout established a private label apparel
manufacturing and retailing company. From 1991 to 1998, Mr. Hazout developed,
owned and operated entertainment complexes in Toronto. Mr. Hazout attended The
Canadian Securities Institute from 1998-2000 and in 1999 worked as an equity
trader for Swift Trade Securities Inc. in Toronto. 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.

Terry Christopher, Ph.D. joined our board of directors on
November 6, 2007. Mr. Christopher is a seasoned geologist and geochemist with
diverse experience in the resource industry, including mining and oil and gas in
both the United States and Canada, and currently works as the Chief Geoscientist
for Nayarit Gold Inc.. Mr. Christopher served as the Chief Geoscientist for
Linear Gold Corp., a mineral exploration company. He was also the VP of
International Projects for a metals recovery firm and was a technical analyst
for an institutional fund manager. Mr. Christopher has a Ph.D. in Geochemistry
and a BSc. (Hons) in Geology from the Dept of Earth Sciences, Memorial
University of Newfoundland.

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.

26

---

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
On July 25, 2007, Midas Fund, Inc. ("Midas") filed a
complaint against Gammon Gold Inc. ("Gammon") in the United States District
Court for the Southern District of New York relating to shares of Gammon stock
that Midas purchased in connection with an April, 2007 offering. On October 12,
2007, Midas filed its Second Amended Complaint. The Second Amended Complaint
asserts claims based on Section 10(b) of the Securities Exchange Act of 1934,
Sections 11 and 12 of the Securities Act of 1933, unjust enrichment, common law
fraud, negligence, and the New York Deceptive Acts and Practices Statute. The
complaint alleges that Gammon made misrepresentations in connection with
production targets for its Ocampo mine. Midas is seeking damages in excess of $3
million and punitive damages in excess of $10 million.
In March, 2008 Gammon was named in a class action claim made
by a representative plaintiff in Canada. The plaintiff alleges that Gammon's
2007 prospectus contained misstatements with respect to production run rates and
the adequacy of Gammon's internal controls. The plaintiff also alleges
inappropriate option granting and is seeking an order certifying the action as a
class proceeding and CDN$80-million in damages.
Colin Sutherland, the CFO of Silver Dragon served as CFO of
Gammon from September 2004 to May 2007, Mr. Sutherland has been named as a
co-defendant in both of the foregoing legal proceedings. Mr. Sutherland has
joined in the filing of a motion to dismiss the U.S. legal proceeding.
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, 2007 and 2006 of the executive officers.

|                                                    |      |         |       |         |         |                | Nonqualified |              |          
|--------------------------------------------------- | ---- | ------- | ----- | ------- | ------- | -------------- | ------------ | ------------ | ---------
|                                                    |      |         |       |         |         | Non-Equity     | Deferred     |              |          
|Name and                                            |      |         |       | Stock   | Option  | Incentive Plan | Compensation | All Other    |          
|Principal                                           | Year | Salary  | Bonus | Awards  | Awards  | Compensation   | Earnings     | Compensation | Total    
|Position                                            |      | ($)     | ($)   | ($)     | ($)     | ($)            | ($)          | ($)          | ($)      
|                                                    |      |         |       |         |         |                |              |              |          
|Marc Hazout,                                        | 2007 | 288,000 | -     |         |         |                |              | None         | 288,000  
|Director, President and Chief
    Executive Officer | 2006 | 288,000 | -     |         |         |                |              | 1,302,780*   | 1,590,780
|                                                    |      |         |       |         |         |                |              |              |          
|                                                    |      |         |       |         |         |                |              |              |          
|Colin
    Sutherland                                | 2007 | 24,000  |       | 472,500 | 405,000 |                |              |              | 877,500  
|Director, Chief Financial Officer                   | 2006 | Nil     | -     |         |         |                |              |              | Nil      
|                                                    |      |         |       |         |         |                |              |              |          

*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

---



DIRECTOR COMPENSATION

|                      |                 |        |         |                | Change in     |               |        
|--------------------- | --------------- | ------ | ------- | -------------- | ------------- | ------------- | -------
|                      |                 |        |         |                | Pension Value |               |        
|                      |                 |        |         |                | and
    Non-  |               |        
|                      |                 |        |         | Non-Equity     | Qualified     |               |        
|                      | Fees
    Earned | Stock  | Option  | Incentive Plan | Deferred      |               |        
|                      | or
    Paid in  | Awards | Awards  | Compensation   | Compensation  | All
    Other | Total  
|Name                  | Cash            | ($)    | ($)     | ($)            | Earnings      | Compensation  | ($)    
|                      |                 |        |         |                |               |               |        
|Manuel Chan           |                 |        |         |                |               |               |        
|2007                  |                 |        | 315,000 |                |               |               | 315,000
|2006                  |                 |        |         |                |               |               | Nil    
|                      |                 |        |         |                |               |               |        
|                      |                 |        |         |                |               |               |        
|Terry Christopher     |                 |        |         |                |               |               |        
|2007                  |                 |        | 250,000 |                |               |               | 250,000
|2006                  |                 |        |         |                |               |               | Nil    
|                      |                 |        |         |                |               |               |        
|                      |                 |        |         |                |               |               |        
|R.
    Glen MacMullin |                 |        |         |                |               |               |        
|2007                  |                 |        | 176,000 |                |               |               | 176,000
|2006                  |                 |        |         |                |               |               | Nil    
|                      |                 |        |         |                |               |               |        

We do not have a Long-Term Incentive Plan.

Equity Compensation Plan Information

The Company had no equity compensation plan in 2007.

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

Compensation of Directors

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

---

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 | 17,055,206 (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             | 200,000          | 0.2%        
|                                                                |                  |             
|Glen MacMullin                                                  |                  |             
|89 Third Avenue, Ottawa, Ontario, K1S 2J7                       | 0                | 0%          
|                                                                |                  |             
|Terry Christopher                                               |                  |             
|7 Edwin Ford Ct., Bedford, Nova Scotia, B4A 4B6                 | 0                | 0%          
|                                                                |                  |             
|Officers and Directors
    as a group                           | 17,755,206       | 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 Anstalt (5)                                                                
|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 Mugurio Pena (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 Mugurio Pena (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 (6)                                                                    
|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. and Sanhe Sino-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 (management contract) (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                                                                                                            
|31.2        | Rule
    13a-14(a)/15d-14(a) Certification by the Chief Financial 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                        
|32.2        | Certification by the Chief Financial 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 $135,000
for 2006 and $95,000 for 2007.
Audit-Related Fees were $26,000 for 2006 and $83,000 for
2007.
Tax Fees were nil for 2006 and 2007
All Other Fees were nil for 2006 and 2007.

31

---

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

|                     | SILVER DRAGON
    RESOURCES INC.                      
|-------------------- | ------------------------------------------------------
|                     |                                                       
|Date: March 31, 2008 | /s/ Marc Hazout                                       
|                     | Marc Hazout, President and Chief
    Executive Officer
|                     |                                                       
|                     |                                                       
|                     | SILVER DRAGON
    RESOURCES INC.                      
|                     |                                                       
|Date: March 31, 2008 | /s/ Colin Sutherland                                  
|                     | Colin Sutherland, Chief Financial
    Officer         

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

|Date: March 31, 2008 | /s/ Marc Hazout           
|-------------------- | --------------------------
|                     | Marc Hazout, Director     
|                     |                           
|Date: March 31, 2008 | /s/ Colin Sutherland      
|                     | Colin Sutherland, Director
|                     |                           
|Date: March 31, 2008 | /s/ Manuel Chan           
|                     | Manuel Chan, Director     
|                     |                           
|Date: March 31, 2008 | /s/ Glen MacMullin        
|                     | Glen MacMullin, Director  

32

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007 and 2006

CONTENTS

|                                                                                                                                                                                                                            |      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----
|Report of Independent
    Registered Public Accounting Firm                                                                                                                                                                 | 1    
|                                                                                                                                                                                                                            |      
|Consolidated Balance Sheets
    as at December 31, 2007 and 2006                                                                                                                                                            | 2    
|                                                                                                                                                                                                                            |      
|Consolidated Statements of
    Operations and Comprehensive Loss for the Years Ended December 31, 2007 and
    2006, and Cumulative for the Period from June 15, 1996, [Date of Inception]
    Through to December 31, 2007 | 3-4  
|                                                                                                                                                                                                                            |      
|Consolidated Statements of
    Stockholders' Equity Cumulative for the Period from June 15, 1996, [Date of Inception]
    Through to December 31, 2007                                                                      | 5-7  
|                                                                                                                                                                                                                            |      
|Consolidated Statements of
    Cash Flows for the Years Ended December 31, 2007 and 2006, and Cumulative
    for the Period from June 15, 1996, [Date of Inception] Through to December
    31, 2007                        | 8-9  
|                                                                                                                                                                                                                            |      
|Notes to the Consolidated
    Financial Statements                                                                                                                                                                          | 10-33



---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Silver 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, 2007 and 2006, and the  consolidated statements of operations
and comprehensive loss, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2007, and cumulative from inception (June 15, 1996) through to December 31, 2007, 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 audit 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, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2007 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.

As described in note 19 to the consolidated financial statements, the accompanying consolidated financial statements of the Company as at December 31, 2006 and for the year then ended have been restated. We therefore withdraw our previous reports dated April 24, 2007 and June 22, 2007 on those financial statements originally filed.

|Toronto, Canada | SF
    Partnership, LLP
|--------------- | -----------------------
|March 28, 2008  | CHARTERED ACCOUNTANTS  

-1-

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Consolidated Balance Sheets 
December 31, 2007 and 2006

|                                                                                                                                                                      |              | 2007         |                     | 2006      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------ | ------------------- | ----------
|                                                                                                                                                                      |              |              | (Restated, note 19)
|ASSETS                                                                                                                                                                |              |              |                     |           
|Current Assets                                                                                                                                                        |              |              |                     |           
|Cash and cash equivalents                                                                                                                                             | $            | 193,138      | $                   | 2,920,592 
|Other receivables (note 4)                                                                                                                                            |              | 104,217      |                     | 551,875   
|Current portion of deferred expenses                                                                                                                                  |              | 1,394,690    |                     | 681,354   
|Total Current Assets                                                                                                                                                  |              | 1,692,045    |                     | 4,153,821 
|                                                                                                                                                                      |              |              |                     |           
|Restricted Cash(note 5)                                                                                                                                               |              | 41,217       |                     | -         
|Deferred Expenses                                                                                                                                                     |              | 548,435      |                     | 463,606   
|Advances to Related Party(note 11)                                                                                                                                    |              | -            |                     | 37,771    
|Plant and
    Equipment, net (note 6)                                                                                                                                 |              | 813,958      |                     | 249,092   
|Mineral Rights (note 8)                                                                                                                                               |              | 9,076,897    |                     | 6,316,897 
|Deferred Offering Cost                                                                                                                                                |              | 25,219       |                     | 50,000    
|                                                                                                                                                                      |              |              |                     |           
|Total Assets                                                                                                                                                          | $            | 12,197,771   | $                   | 11,271,187
|                                                                                                                                                                      |              |              |                     |           
|LIABILITIES                                                                                                                                                           |              |              |                     |           
|Current Liabilities                                                                                                                                                   |              |              |                     |           
|Accounts payable                                                                                                                                                      | $            | 1,258,623    | $                   | 137,110   
|Accrued liabilities                                                                                                                                                   |              | 244,421      |                     | 494,517   
|Loan payable (note 9)                                                                                                                                                 |              | 250,000      |                     | -         
|Related party loans payable (note 11)                                                                                                                                 |              | 471,625      |                     | 28,585    
|Total Liabilities                                                                                                                                                     |              | 2,224,669    |                     | 660,212   
|                                                                                                                                                                      |              |              |                     |           
|Minority Interest                                                                                                                                                     |              | -            |                     | 4,241     
|Commitments and
    Contingencies (note 15)                                                                                                                           |              |              |                     |           
|                                                                                                                                                                      |              |              |                     |           
|STOCKHOLDERS' EQUITY                                                                                                                                                  |              |              |                     |           
|Capital Stock
    (note 10)                                                                                                                                           |              |              |                     |           
|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 69,545,988 shares issued and outstanding (2006 
    61,460,533 issued and 61,183,988 outstanding) |              | 6,955        |                     | 6,146     
|                                                                                                                                                                      |              |              |                     |           
|Additional Paid-in Capital(note 10)                                                                                                                                   |              | 32,183,963   |                     | 22,360,593
|Treasury Stock
    (note 10)                                                                                                                                          |              | -            |                     | (392,830) 
|Stock Subscriptions                                                                                                                                                   |              | 115,000      |                     | 449,000   
|Deficit Accumulated
    During the Exploration Stage                                                                                                                  | (22,313,113) | (11,814,613)
|Accumulated Comprehensive Loss                                                                                                                                        |              | (19,703)     |                     | (1,562)   
|Stockholders' Equity                                                                                                                                                  |              | 9,973,102    |                     | 10,606,734
|                                                                                                                                                                      |              |              |                     |           
|Total Liabilities and Stockholders'
    Equity                                                                                                                        | $            | 12,197,771   | $                   | 11,271,187

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, 2007 and 2006, and 
Cumulative for the Period from June 15, 1996 [date of inception] 
Through to December 31, 2007

|                                          |   |              |                     |             | For the period from
|----------------------------------------- | - | ------------ | ------------------- | ----------- | -------------------
|                                          |   |              |                     |             | June 15, 1996      
|                                          |   |              |                     |             | [date of inception]
|                                          |   | 2007         |                     | 2006        | to December 31,    
|                                          |   |              | (Restated, note 19) |             | 2007               
|                                          |   |              |                     |             |                    
|                                          |   |              |                     |             |                    
|Revenues                                  | $ | -            | $                   | -           | $                  
|                                          |   |              |                     |             |                    
|Cost of Revenues                          |   | -            |                     | -           |                    
|                                          |   |              |                     |             |                    
|Gross Loss                                |   | -            |                     | -           |                    
|                                          |   |              |                     |             |                    
|Operating Expenses                        |   |              |                     |             |                    
|General and administrative                |   | 7,473,836    |                     | 5,992,431   |                    
|Exploration                               |   | 3,012,981    |                     | 2,226,696   |                    
|Development (non-mining)                  |   | -            |                     | -           |                    
|Total Operating Expenses                  |   | 10,486,817   |                     | 8,219,127   |                    
|                                          |   |              |                     |             |                    
|Loss From Continuing Operations           |   | (10,486,817) |                     | (8,219,127) |                    
|                                          |   |              |                     |             |                    
|Other Income
    (Expenses)               |   |              |                     |             |                    
|Interest expense                          |   | (15,924)     |                     | (36,517)    |                    
|Interest income  related parties         |   | -            |                     | -           |                    
|Interest expense - related parties        |   | -            |                     | -           |                    
|Settlement with Cyper Entertainment, Inc. |   | -            |                     | -           |                    
|Loss on disposal of asset                 |   | -            |                     | -           |                    
|Loss on investment                        |   | -            |                     | -           |                    
|Loss on sale of marketable securities     |   | -            |                     | (389,365)   |                    
|Other income (expense)                    |   | -            |                     | 6,776       |                    
|Total Other Income (Expenses)             |   | (15,924)     |                     | (419,106)   |                    
|                                          |   |              |                     |             |                    
|Net Loss Before Income Tax                | $ | (10,502,741) | $                   | (8,638,233) | $                  

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, 2007 and 2006, and 
Cumulative for the Period from June 15, 1996 [date of inception] 
Through to December 31, 2007 (cont'd)

|                                                                             |   |              |                     |             |      | For the period from
|---------------------------------------------------------------------------- | - | ------------ | ------------------- | ----------- | ---- | -------------------
|                                                                             |   |              |                     |             |      | June 15, 1996      
|                                                                             |   |              |                     |             |      | [date of inception]
|                                                                             |   | 2007         |                     | 2006        |      | to December 31,    
|                                                                             |   |              | (Restated, note 19) |             | 2007
|                                                                             |   |              |                     |             |      | (unaudited)        
|                                                                             |   |              |                     |             |      |                    
|Net Loss Before Income
    Tax(carried forward)                              | $ | (10,502,741) | $                   | (8,638,233) | $    | (22,263,379)       
|                                                                             |   |              |                     |             |      |                    
|Provision for Income Taxes                                                   |   |              |                     |             |      |                    
|Current                                                                      |   | -            |                     | -           |      | -                  
|Deferred                                                                     |   | -            |                     | -           |      | -                  
|                                                                             |   |              |                     |             |      |                    
|Net Loss From Continuing Operations, After Tax                               |   | (10,502,741) |                     | (8,638,233) |      | (22,263,379)       
|                                                                             |   |              |                     |             |      |                    
|Minority
    Interest                                                        |   | 4,241        |                     | 248,780     |      | 253,021            
|                                                                             |   |              |                     |             |      |                    
|Loss From Discontinued
    Operations                                        |   |              |                     |             |      |                    
|Loss from discontinued operations (net of tax)                               |   | -            |                     | (302,755)   |      | (302,755)          
|                                                                             |   |              |                     |             |      |                    
|Net Loss From Discontinued Operations                                        |   | -            |                     | (302,755)   |      | (302,755)          
|                                                                             |   |              |                     |             |      |                    
|Net Loss                                                                     |   | (10,498,500) |                     | (8,692,208) |      | (22,313,113)       
|                                                                             |   |              |                     |             |      |                    
|Foreign exchange adjustment                                                  |   | (18,141)     |                     | (1,562)     |      | (19,703)           
|                                                                             |   |              |                     |             |      |                    
|Comprehensive Loss                                                           | $ | (10,516,641) | $                   | (8,693,770) | $    | (22,332,816)       
|                                                                             |   |              |                     |             |      |                    
|Net loss per common
    share  basic and diluted                            | $ | (0.16)       | $                   | (0.17)      |      |                    
|                                                                             |   |              |                     |             |      |                    
|Net loss on continuing operations per
    common share  basic and diluted   | $ | (0.16)       | $                   | (0.17)      |      |                    
|                                                                             |   |              |                     |             |      |                    
|Weighted average number
    of common shares outstanding  basic and diluted |   | 64,641,270   |                     | 49,936,892  |      |                    
|                                                                             |   |              |                     |             |      |                    

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 to December 31, 2007

|                                                |              |   |        |   |             |   | Deficit     |   |              |   |          |   |               |   |              
|----------------------------------------------- | ------------ | - | ------ | - | ----------- | - | ----------- | - | ------------ | - | -------- | - | ------------- | - | -------------
|                                                | Common Stock |   |        |   | Accumulated |   |             |   |              |   |          |   |               |   |              
|                                                | Number       |   |        |   | Additional  |   | During the  |   |              |   |          |   | Accumulated   |   | Total        
|                                                | of           |   |        |   | Paid-in     |   | Exploration |   | Stock        |   | Treasury |   | Comprehensive |   | Stockholders'
|                                                | Shares       |   | Amount |   | Capital     |   | Stage       |   | Subscription |   | Stock    |   | Loss          |   | Equity       
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Shares issued to
    founder for cash           | 333,334      | $ | 33     | $ | 967         | $ | -           | $ | -            | $ | -        | $ | -             | $ | 1,000        
|Shares issued to
    founders for services      | 55,000       |   | 6      |   | 159         |   | -           |   | -            |   | -        |   | -             |   | 165          
|Shares issued for
    investment in CECK        | 50,000       |   | 5      |   | 37,495      |   | -           |   | -            |   | -        |   | -             |   | 37,500       
|Shares issued to
    purchase subsidiary        | 350,000      |   | 35     |   | 70          |   | (1,060)     |   | -            |   | -        |   | -             |   | (955)        
|Shares issued for cash                          | 13,333       |   | 1      |   | 9,999       |   | -           |   | -            |   | -        |   | -             |   | 10,000       
|Net Loss, 1996                                  | -            |   | -      |   | -           |   | (14,198)    |   | -            |   | -        |   | -             |   | (14,198)     
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Balance, December 31, 1996
    (unaudited)      | 801,667      |   | 80     |   | 48,690      |   | (15,258)    |   | -            |   | -        |   | -             |   | 33,512       
|                                                |              |   |        |   |             |   |             |   | -            |   | -        |   |               |   |              
|Shares issued for cash                          | 37,333       |   | 4      |   | 28,896      |   | -           |   | -            |   | -        |   | -             |   | 28,900       
|Shares issued for services                      | 46,333       |   | 5      |   | 34,745      |   |             |   | -            |   | -        |   |               |   | 34,750       
|Shares issued for vehicle                       | 33,333       |   | 3      |   | 24,997      |   | -           |   | -            |   | -        |   | -             |   | 25,000       
|Net Loss, 1997                                  | -            |   | -      |   | -           |   | (142,622)   |   | -            |   | -        |   | -             |   | (142,622)    
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Balance, December 31, 1997
    (unaudited)      | 918,666      |   | 92     |   | 137,328     |   | (157,880)   |   | -            |   | -        |   | -             |   | (20,460)     
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Shares issued for cash                          | 58,667       |   | 6      |   | 49,995      |   | -           |   | -            |   | -        |   | -             |   | 50,001       
|Shares issued for vehicle                       | 10,667       |   | 1      |   | 7,999       |   | -           |   | -            |   | -        |   | -             |   | 8,000        
|Net loss, 1998                                  | -            |   | -      |   | -           |   | (54,404)    |   | -            |   | -        |   | -             |   | (54,404)     
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Balance, December 31, 1998
    (unaudited)      | 988,000      |   | 99     |   | 195,322     |   | (212,284)   |   | -            |   | -        |   | -             |   | (16,863)     
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Shares issued for cash                          | 151,918      |   | 15     |   | 56,759      |   | -           |   | (4,000)      |   | -        |   | -             |   | 52,774       
|Shares issued for
    settlement of debt        | 16,000       |   | 2      |   | 8,773       |   | -           |   | -            |   | -        |   | -             |   | 8,775        
|Shares issued for services                      | 36,000       |   | 3      |   | 126,467     |   | -           |   | -            |   | -        |   | -             |   | 126,470      
|Forgiveness of debt of
    related party        | -            |   | -      |   | 23,000      |   | -           |   | -            |   | -        |   | -             |   | 23,000       
|Net loss, 1999                                  | -            |   | -      |   | -           |   | (181,898)   |   | -            |   | -        |   | -             |   | (181,898)    
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Balance, December 31, 1999
    (unaudited)      | 1,191,918    |   | 119    |   | 410,321     |   | (394,182)   |   | (4,000)      |   | -        |   | -             |   | 12,258       
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Shares issued for cash                          | 4,296,666    |   | 430    |   | 667,070     |   | -           |   | (278,539)    |   | -        |   | -             |   | 388,961      
|Shares cancelled for
    non-payment            | (442,433)    |   | (44)   |   | (165,868)   |   | -           |   | 153,791      |   | -        |   | -             |   | (12,121)     
|Shares issued for services                      | 653,667      |   | 65     |   | 28,365      |   | -           |   | -            |   | -        |   | -             |   | 28,430       
|Shares returned for
    subscription receivable | (10,667)     |   | (1)    |   | (3,999)     |   | -           |   | 4,000        |   | -        |   | -             |   | -            
|Forgiveness of debt
    reclassification        | -            |   | -      |   | (23,000)    |   | -           |   | -            |   | -        |   | -             |   | (23,000)     
|Net loss, 2000                                  | -            |   | -      |   | -           |   | (419,296)   |   | -            |   | -        |   | -             |   | (419,296)    
|                                                |              |   |        |   |             |   |             |   |              |   |          |   |               |   |              
|Balance, December 31, 2000
    (unaudited)      | 5,689,151    |   | 569    |   | 912,889     |   | (813,478)   |   | (124,748)    |   | -        |   | -             |   | (24,768)     

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 to December 31, 2007 (cont'd)

| |              |  |        |  |             |  | Deficit     |  |              |  |          |  |               |  |              
| | ------------ |  | ------ |  | ----------- |  | ----------- |  | ------------ |  | -------- |  | ------------- |  | -------------
| | Common Stock |  |        |  | Accumulated |  |             |  |              |  |          |  |               |  |              
| | Number       |  |        |  | Additional  |  | During the  |  |              |  |          |  | Accumulated   |  | Total        
| | of           |  |        |  | Paid-in     |  | Exploration |  | Stock        |  | Treasury |  | Comprehensive |  | Stockholders'
| | Shares       |  | Amount |  | Capital     |  | Stage       |  | Subscription |  | Stock    |  | Loss          |  | Equity       
| |              |  |        |  |             |  |             |  |              |  |          |  |               |  |              

|                                                                                |              |         |           |             |           |   |   |          
|------------------------------------------------------------------------------- | ------------ | ------- | --------- | ----------- | --------- | - | - | ---------
|Balance, December 31,
    2000 (carried forward)                                | 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)
|                                                                                |              |         |           |             |           |   |   |          
|Shares issued for the
    settlement of related party advances                  | 4,861,111    | 486     | 149,514   | -           | -         | - | - | 150,000  
|Shares issued for the
    settlement of accounts payable for services performed | 66,300       | 7       | 1,319     | -           | -         | - | - | 1,326    
|Shares returned as a result
    of clerical error in a prior year               | (66,300)     | (7)     | (1,319)   | -           | -         | - | - | (1,326)  
|Net loss, 2003                                                                  | -            | -       | -         | (414,601)   | -         | - | - | (414,601)
|                                                                                |              |         |           |             |           |   |   |          
|Balance, December 31,
    2003 (unaudited)                                      | 22,866,515   | 2,287   | 1,569,588 | (2,138,498) | -         | - | - | (566,623)

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 
Cumulative for the Period from June 15, 1996 [date of inception] 
Through to December 31, 2007 (cont'd)

| |              |  |        |  |             |  | Deficit     |  |              |  |          |  |               |  |              
| | ------------ |  | ------ |  | ----------- |  | ----------- |  | ------------ |  | -------- |  | ------------- |  | -------------
| | Common Stock |  |        |  | Accumulated |  |             |  |              |  |          |  |               |  |              
| | Number       |  |        |  | Additional  |  | During the  |  |              |  |          |  | Accumulated   |  | Total        
| | of           |  |        |  | Paid-in     |  | Exploration |  | Stock        |  | Treasury |  | Comprehensive |  | Stockholders'
| | Shares       |  | Amount |  | Capital     |  | Stage       |  | Subscription |  | Stock    |  | Loss          |  | Equity       
| |              |  |        |  |             |  |             |  |              |  |          |  |               |  |              

|Balance, December 31, 2003
    (carried forward)                                                 | 22,866,515  | 2,287   | 1,569,588    | (2,138,498)    | -         | -         | -          | (566,623)   
|------------------------------------------------------------------------------------------------ | ----------- | ------- | ------------ | -------------- | --------- | --------- | ---------- | ------------
|                                                                                                 |             |         |              |                |           |           |            |             
|Shares issued for the
    settlement of related party advances                                   | 575,000     | 58      | 24,942       | -              | -         | -         | -          | 25,000      
|Short swing profits of
    shareholder                                                           | -           | -       | 50,496       | -              | -         | -         | -          | 50,496      
|Net loss, 2004                                                                                   | -           | -       | -            | (399,028)      | -         | -         | -          | (399,028)   
|                                                                                                 |             |         |              |                |           |           |            |             
|Balance, December 31, 2004                                                                       | 23,441,515  | 2,345   | 1,645,026    | (2,537,526)    | -         | -         | -          | (890,155)   
|                                                                                                 |             |         |              |                |           |           |            |             
|Shares issued for cash                                                                           | 7,175,000   | 717     | 596,783      | -              | (9,500)   | -         | -          | 588,000     
|Shares issued for services                                                                       | 3,950,000   | 395     | 814,105      | -              | -         | -         | -          | 814,500     
|Shares issued for property
    acquisition                                                       | 1,3500,000  | 135     | 388,365      | -              | -         | -         | -          | 388,500     
|Shares issued for the
    settlement of accounts payable to related party for services performed | 3,254,018   | 325     | 813,180      | -              | -         | -         | -          | 813,505     
|Cancelled stock returned to
    company                                                          | (3,500,000) | (350)   | (724,650)    | -              | -         | -         | -          | (725,000)   
|Net loss, 2005                                                                                   | -           | -       | -            | (584,879)      | -         | -         | -          | (584,879)   
|                                                                                                 |             |         |              |                |           |           |            |             
|Balance, December 31, 2005                                                                       | 35,670,533  | 3,567   | 3,532,809    | (3,122,405)    | (9,500)   | -         | -          | 404,471     
|                                                                                                 |             |         |              |                |           |           |            |             
|Shares issued for cash                                                                           | 13,050,000  | 1,305   | 5,155,164    | -              | 458,500   | -         | -          | 5,614,969   
|Shares issued for services                                                                       | 4,180,000   | 418     | 2,763,952    | -              | -         | -         | -          | 2,764,370   
|Shares issued for property
    acquisition                                                       | 6,560,000   | 656     | 4,728,089    | -              | -         | -         | -          | 4,728,745   
|Shares issued for the
    settlement of accounts payable to related party for services performed | 2,000,000   | 200     | 1,302,780    | -              | -         | -         | -          | 1,302,980   
|Warrants issued for cash                                                                         | -           | -       | 4,734,031    | -              | -         | -         | -          | 4,734,031   
|Warrants issued for
    services                                                                 | -           | -       | 207,005      | -              | -         | -         | -          | 207,005     
|Share issuance costs                                                                             | -           | -       | (63,237)     | -              | -         | -         | -          | (63,237)    
|Treasury stock                                                                                   | -           | -       |              | -              | -         | (392,830) | -          | (392,830)   
|Other comprehensive
    loss                                                                     | -           | -       | -            | -              | -         | -         | (1,562)    | (1,562)     
|Net loss, 2006                                                                                   | -           | -       | -            | (8,692,208)    | -         | -         | -          | (8,692,208) 
|                                                                                                 |             |         |              |                |           |           |            |             
|Balance, December 31, 2006
    (restated, note 19)                                               | 61,460,533  | 6,146   | 22,360,593   | (11,814,613)   | 449,000   | (392,830) | (1,562)    | 10,606,734  
|                                                                                                 |             |         |              |                |           |           |            |             
|Shares issued for cash                                                                           | 2,989,000   | 299     | 1,448,681    | -              | (499,000) | -         | -          | 949,980     
|Shares issued for related
    party debt settlement                                              | 500,000     | 50      | 424,950      | -              | -         | -         | -          | 425,000     
|Shares issued for services                                                                       | 2,868,000   | 286     | 2,741,764    | -              | -         | -         | -          | 2,742,050   
|Shares issued for property
    acquisition                                                       | 2,000,000   | 200     | 2,659,800    | -              | -         | -         | -          | 2,660,000   
|Shares issued for cash
    pursuant to exercise of share purchase warrants                       | 5,000       | 1       | 3,999        | -              | -         | -         | -          | 4,000       
|Shares issued for
    settlement of preliminary injunction (note 16)                             | -           | -       | (165,000)    | -              | 165,000   | -         | -          | -           
|Treasury stock (note 10)                                                                         | (276,545)   | (27)    | (392,803)    | -              | -         | 392,830   | -          | -           
|Warrants issued for cash                                                                         | -           | -       | 1,540,020    | -              | -         | -         | -          | 1,540,020   
|Warrants issued for related party debt settlement of preliminary injunction
    (note 16)        | -           | -       | 75,000       | -              | -         | -         | -          | 75,000      
|Warrants issued for
    services                                                                 | -           | -       | 1,102,000    | -              | -         | -         | -          | 1,102,000   
|Options issued                                                                                   | -           | -       | 459,959      | -              | -         | -         | -          | 459,959     
|Share issuance costs                                                                             | -           | -       | (75,000)     | -              | -         | -         | -          | (75,000)    
|Other comprehensive
    loss                                                                     | -           | -       | -            | -              | -         | -         | (18,141)   | (18,141)    
|Net loss, 2007                                                                                   | -           | -       | -            | (10,498,500)   | -         | -         | -          | (10,498,500)
|                                                                                                 |             |         |              |                |           |           |            |             
|Balance, December 31, 2007                                                                       | 69,545,988  | $ 6,955 | $ 32,183,963 | $ (22,313,113) | 115,000   | -         | $ (19,703) | $ 9,973,102 

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 Cash Flows 
For the Years Ended December 31, 2007 and 2006, and 
Cumulative for the Period from June 15, 1996 [date of inception] 
Through to December 31, 2007

|                                        |      |              |                     |             | For the period     
|--------------------------------------- | ---- | ------------ | ------------------- | ----------- | -------------------
|                                        |      |              |                     |             | from June 15, 1996 
|                                        |      |              |                     |             | [date of inception]
|                                        | 2007 | 2006         | to December 31,    
|                                        |      |              | (Restated, note 19) | 2007       
|                                        |      |              |                     |             |                    
|Cash Flows from Operating Activities    |      |              |                     |             |                    
|Net loss from continuing operations     | $    | (10,498,500) | $                   | (8,692,208) | $                  
|Net loss from discontinued operations   |      | -            |                     | 302,755     |                    
|Net loss                                |      | (10,498,500) |                     | (8,389,453) |                    
|Adjustments for:                        |      |              |                     |             |                    
|Depreciation                            |      | 115,918      |                     | 14,497      |                    
|Settlement of debt, net                 |      | -            |                     | -           |                    
|Shares issued for services              |      | 1,994,157    |                     | 3,003,787   |                    
|Warrants issued for services            |      | 1,561,959    |                     | 178,768     |                    
|Deferred offering costs                 |      | 50,000       |                     | -           |                    
|Minority interest                       |      | (4,241)      |                     | (248,780)   |                    
|Settlement of Cyper reverse acquisition |      | -            |                     |             |                    
|Write-down of assets                    |      | -            |                     | -           |                    
|Impairment of investment                |      | -            |                     | -           |                    
|                                        |      |              |                     |             |                    
|Changes in non-cash working capital:    |      |              |                     |             |                    
|Other receivables                       |      | 434,935      |                     | (554,541)   |                    
|Deferred expenses                       |      | (50,272)     |                     | (81,397)    |                    
|Accounts payable                        |      | 1,089,638    |                     | 38,129      |                    
|Accrued liabilities                     |      | (242,988)    |                     | 456,439     |                    
|Accrued office compensation             |      | -            |                     | -           |                    
|Inventories                             |      | -            |                     | -           |                    
|Net Cash Used in Operating Activities   |      | (5,549,394)  |                     | (5,582,551) |                    

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 Cash Flows 
For the Years Ended December 31, 2007 and 2006, and 
Cumulative for the Period from June 15, 1996 [date of inception] 
Through to December 31, 2007 (cont'd)

|                                                 |   |             |                     |             | For the period from
|------------------------------------------------ | - | ----------- | ------------------- | ----------- | -------------------
|                                                 |   |             |                     |             | June 15, 1996      
|                                                 |   |             |                     |             | [date of inception]
|                                                 |   | 2007        |                     | 2006        | to December 31,    
|                                                 |   |             | (Restated, note 19) |             | 2007               
|                                                 |   |             |                     |             |                    
|Cash Flows from Investing Activities             |   |             |                     |             |                    
|Investments in mineral rights                    |   | (100,000)   |                     | (1,290,781) |                    
|Acquisition of plant and equipment               |   | (661,435)   |                     | (264,863)   |                    
|Investment in other                              |   | -           |                     | -           |                    
|Proceeds from sale of equipment                  |   | -           |                     | -           |                    
|Net Cash Used in Investing Activities            |   | (761,435)   |                     | (1,555,644) |                    
|                                                 |   |             |                     |             |                    
|Cash Flows from Financing Activities             |   |             |                     |             |                    
|Proceeds from issuance of common stock           |   | 2,994,000   |                     | 10,349,000  |                    
|Share issuance costs                             |   | (75,000)    |                     | (35,000)    |                    
|Purchase of treasury shares                      |   | -           |                     | (392,830)   |                    
|Deferred offering costs                          |   | (25,219)    |                     | (50,000)    |                    
|Related party advances                           |   | 480,811     |                     | -           |                    
|Repayments of related party advances             |   | -           |                     | (65,707)    |                    
|Related party loans received                     |   | 250,000     |                     | -           |                    
|Restricted cash                                  |   | (41,217)    |                     | -           |                    
|Minority interest                                |   | -           |                     | 253,021     |                    
|Payment of notes payable                         |   | -           |                     | -           |                    
|Proceeds from issuance of notes
    payable      |   | -           |                     | -           |                    
|Advances payable related party                   |   | -           |                     | -           |                    
|Cash over draft                                  |   | -           |                     | -           |                    
|Proceeds from subscriptions
    receivables, net |   | -           |                     | -           |                    
|Net Cash Provided by Financing Activities        |   | 3,583,375   |                     | 10,058,484  |                    
|                                                 |   |             |                     |             |                    
|Change in Cash and Cash Equivalents              |   | (2,727,454) |                     | 2,920,289   |                    
|                                                 |   |             |                     |             |                    
|Cash and Cash Equivalents - beginning of period  |   | 2,920,592   |                     | 303         |                    
|                                                 |   |             |                     |             |                    
|                                                 |   |             |                     |             |                    
|Cash and Cash Equivalents - end of period        | $ | 193,138     | $                   | 2,920,592   | $                  
|                                                 |   |             |                     |             |                    
|Represented by:                                  |   |             |                     |             |                    
|Cash                                             | $ | 193,138     | $                   | 2,920,592   | $                  
|Cash  equivalents                                | $ | -           | $                   | -           | $                  
|                                                 | $ | 193,138     | $                   | 2,920,592   | $                  

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

- 9 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

1.

Nature of
Business and Basis of Presentation

Silver Dragon Resources Inc. ("SDR") a Delaware corporation,  incorporated on May 9, 1996.
SDR is headquartered in Ontario, Canada and operates primarily in the United
States, 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")  arein the exploration
stage as defined in Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No.7.
"Accounting and Reporting For
Development Stage Enterprises." To date, the Company has generated minimal sales
and has devoted its efforts primarily to developing its products, implementing
its business strategy and raising working capital through equity financing or
short-term borrowings.

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

2.

Going Concern
and Exploration Stage Activities

These 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 $10,498,500 (2006 -
$8,692,208) for the year and has accumulated losses since inception of
$22,313,113 (2006 - $11,814,613). 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 to
increase general working capital, finance existing obligations, and fund future
exploration programs. 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,
Silver Dragon Mining De Mexico S.A. de C.V ("Silver Dragon Mexico") and its
90% ownership in Sanhe Sino-Top Resources and Technologies, Ltd ("Sino-Top")
a limited liability company and joint venture organized under the laws of the
Peoples Republic of China.
All significant inter-company balances and transactions have been eliminated on
consolidation.



---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

3.

Summary of
Significant Accounting Policies(cont'd)

b)

Use of Estimates

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

e)

Deferred Expenses

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

f)

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.

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



---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

3.

Summary of
Significant Accounting Policies(cont'd)

g)

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.

h)

Income Taxes

The Company accounts for income taxes
pursuant to SFAS No. 109, "Accounting for Income Taxes" ("SFAS
No. 190"). 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.

i)

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


j)

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.



---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

3.

Summary of
Significant Accounting Policies(cont'd)

k)

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.

l)

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").

m)

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.



---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

3.

Summary of
Significant Accounting Policies(cont'd)

n)

Asset Retirement Obligations

For operating properties, costs
associated with environmental remediation obligations are accrued in accordance
with SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No
143"). SFAS No. 143 requires the Company to record a liability for the present
value of the estimated environmental remediation costs, and the related asset
created with it, in the period in which the liability is incurred. The liability
will be accreted and the asset will be depreciated over the life of the related
assets. Adjustments for changes resulting from the passage of time and changes
to either the timing or amount of the original present value estimate underlying
the obligation will be made.

For non-operating properties, costs
associated with environmental remediation obligations are accrued when it is
probable that such costs will be incurred and they can be reasonably estimated.
Estimates for reclamation and other closure costs are prepared in accordance
with SFAS No. 5 "Accounting for Contingencies," or Statement of Position 96-1 "Environmental Remediation Liabilities." Accruals for estimated losses from
environmental remediation obligations have historically been recognized no later
than completion of the remedial feasibility study for each facility and are
charged to provision for closed operations and environmental matters. Costs of
future expenditures for environmental remediation are not discounted to their
present value unless subject to a contractually obligated fixed payment
schedule. Such costs are based on management's current estimate of amounts to be
incurred when the remediation work is performed, within current laws and
regulations.

Future closure, reclamation and
environmental-related expenditures are difficult to estimate, in many
circumstances, due to the early stage nature of investigations, and
uncertainties associated with defining the nature and extent of environmental
contamination and the application of laws and regulations by regulatory
authorities and changes in reclamation or remediation technology. Management
periodically reviews accrued liabilities for such reclamation and remediation
costs as evidence becomes available indicating that the Company's liabilities
have potentially changed.







---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

3.

Summary of Significant Accounting Policies(cont'd)

o)

Recent
Accounting Pronouncements

In September 2006, the Financial Accounting
Standards Board ("FASB")  issued  Statement of Financial Accounting
Standards ("SFAS")  No. 157, Fair Value Measurements ("SFAS 157") ,which is
effective to fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS
157 codifies the definition of fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS 157 clarifies the principle
that fair value should be based on the assumptions market participants would use
when pricing the asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The Company is
currently assessing the potential impact that the adoption of SFAS 157 could
have on its  financial statements.

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 
financial statements.

- 15 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

3.

Summary of Significant
Accounting Policies (cont'd)

In February 2007, FASB issued SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159").
SFAS 159 permits entities to choose to measure many financial instruments, and
certain other items, at fair value. SFAS No. 159 applies to reporting periods
beginning after November 15, 2007.  The Company is currently assessing the
potential impact that the adoption of SFAS 159 could have on its  financial
statements.

In April 2007, the FASB issued  a  FASB Statement Postion ("FSP")  on FASB Interpretation ("FIN") 39-1 ("FIN 39-1") which modfies FIN 39, Offsetting of Amounts relating to Certain Contracts (FIN 39).  FIN 39-1 addresses whether a reporting entity that is party to a master netting arrangement can offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FIN 39.  Upon adoption of this FASB Staff Positon (FSP), a reporting entity shall be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements.  The guidance in this FSP is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the potential impact of implementing this standard.

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 financial statements.



---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006
3.
Summary of Significant
Accounting Policies (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  financial statements.
In February 2008, FASB issued FASB Staff Position (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  financial statements.
In February 2008, FASB issued FSP SOP 07-1-1, Effective Date of AICPA Statement of Position 07-1 (SOP 07-1-1).  SOP 07-1-1 delays indefinitely the effective date of AICPA Statement of Position 07-1, Clarification of the Scope of the Audit  and  Accounting  Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies'' ("SOP No. 07-1").  SOP No. 07-1 clarifies when an entity may apply the provisions of the Guide.  Investment companies that are within the scope of the Guide report investments at fair value;  consolidation  or  use  of  the equity method for investments  is  generally  not  appropriate.  SOP No.  07-1 also addresses the retention of specialized investment company accounting by a parent company in consolidation or by an equity method investor.  The Company is currently reviewing the effect, if any; the proposed guidance will have on its financial statements.- 17 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006
3.
Summary of Significant
Accounting Policies (cont'd)

In February 2008, FASB issued 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 (FSP SFAS 157-1).  FSP SFAS 157-1 amends SFAS 157 to exclude FASB Statement No. 13, "Accounting for Leases" , and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB Statement No. 13.  However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, Business Combinations, or FASB Statement No. 141 (revised 2007), "Business Combinations", regardless of whether those assets and liabilities are related to leases.  FSP SFAS 157-1 is effective upon the initial adoption of SFAS 157.
In February 2008, FASB issued FSP SFAS No. 157-2, Effective date of FASB Statement No. 157 (FSP SFAS 157-2).  FSP SFAS 157-2 delays the effective date of SFAS No. 157, Fair Value Measurement to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.
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 financial statements.
p)
Comparative Information
Certain comparative figures have been reclassified to conform to the current year's consolidated financial statement presentation.4.

Other Receivables

Other receivables are net of
allowance for doubtful amounts of $254,436 (2006 - $ Nil). The allowance for
doubtful amounts was determined based on managements' best estimate of the collectability of the receivables.

5.

Restricted Cash

Restricted cash consists 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.



---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 20066.

Plant and Equipment, net

| |                        |   |           | Accumulated  |                | 2007               |         | 2006
| | ---------------------- | - | --------- | ------------ | -------------- | ------------------ | ------- | ----
| |                        |   | Cost      | Depreciation | Net book value | Net book
    value
| | Computer hardware      | $ | 137,847   | $            | 57,370         | $                  | 80,477  | $   
| | Computer software      |   | 45,122    |              | -              |                    | 45,122  |     
| | Vehicles               |   | 170,325   |              | 60,991         |                    | 109,334 |     
| | Office equipment       |   | 69,532    |              | 9,971          |                    | 59,561  |     
| | Mine
    equipment     |   | 349,303   |              | 43,602         |                    | 305,701 |     
| | Buildings              |   | 41,372    |              | 2,069          |                    | 39,303  |     
| | Leasehold improvements |   | 195,667   |              | 21,208         |                    | 174,459 |     
| |                        | $ | 1,009,168 | $            | 195,210        | $                  | 813,958 | $   

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

7.

Business Acquisition

On November 9, 2006 the Company
concluded its acquisition of 60% of the assets of Sino-Top for consideration of
$3,478,000. The consideration comprised of 4,000,000 restricted shares valued at
approximately $0.71 per share and cash of $650,000. The operations of Sino-Top
during the period from November 9, 2006 through to December 31, 2006 are
included in the determination of consolidated operating loss. The consideration
was allocated based on the estimated fair values on the acquisition date as
follows:

| | Consideration Given:               |            
| | ---------------------------------- | -----------
| |                                    |            
| | Cash and restricted common shares  | $ 3,478,000
| | Net Assets acquired at fair value: |            
| | Cash                               | 145,199    
| | Accounts Receivable                | 144,625    
| | Advances to Supplier               | 225,000    
| | Fixed Assets                       | 149,565    
| | Liabilities Assumed                | (31,835)   
| | Minority Interest                  | (253,106)  
| | Mineral Rights                     | 3,098,552  
| | Net assets acquired at fair value  | $ 3,478,000

8.

Mineral Rights

| |                              |   |           | Cerro Las |           | Linear |           |  
| | ---------------------------- | - | --------- | --------- | --------- | ------ | --------- | -
| |                              |   | Sino-Top  |           | Minitas   |        | Gold      |  
| |                              |   | China     |           | Mexico    |        | Mexico    |  
| |                              |   |           |           |           |        |           |  
| | Balance at January 1, 2006   | $ | 372,500   | $         | -         | $      | 227,626   | $
| | Expenditures during year     |   | 3,098,562 |           | 2,845,845 |        | 75,129    |  
| | Discontinued Operations      |   | -         |           | -         |        | (302,755) |  
| | Balance at December 31, 2006 | $ | 3,471,052 | $         | 2,845,845 | $      | -         | $
| | Expenditures during year     |   | 2,660,000 |           | 100,000   |        | -         |  
| | Balance, December 31, 2007   | $ | 6,131,052 | $         | 2,945,845 | $      | -         | $

- 19 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

8.

Mineral Rights (cont'd)

Sino-Top,
China

On April 14, 2005, the Company
entered into a joint venture agreement with Sino Silver Corp. ("Sino Silver"),
whereby the Company acquired 50% of Sino Silver's interest in the distributions
from  Sino-Top that were
attributable to the Aobaotugounao mining property located in the Erbaohuo Silver
District in Northern China. Sino Silver then owned 60% equity interest in
Sino-Top and Sino Top owned exploratory and licensing rights to certain mining
properties in The People's Republic of China, including the Aobaotugounao
property. Under the terms of the joint venture agreement, the Company paid Sino
Silver $150,000 on closing date along with 250,000 restricted common stock of
the Company valued at $67,500. The closing costs also included finder's fee
incurred through the issuance of 500,000 restricted common stock of the Company
to an individual valued at $155,000. The pending commitments of the Company to
Sino Silver under the terms of the joint venture agreement, an additional
payment of $200,000 and an additional issuance of 250,000 restricted common
stock of the Company, were cancelled following the asset purchase agreement
dated March 16, 2006.

On March 16, 2006, the Company
entered into an Asset Purchase Agreement with Sino Silver wherein Sino Silver
agreed to sell its 60% equity interest in Sino-Top to the Company. The purchase
price consisted of $650,000 in cash and 4,000,000 restricted common stock of the
Company valued at $2,828,000. The transactions were concluded on November 9,
2006.

On March 19, 2007, the Company
entered into an agreement with certain individuals to acquire an additional 30%
ownership interest in Sino-Top, increasing its total equity position from 60% to
90%, in exchange for 2,000,000 restricted common stock of the Company valued at
$2,660,000. On May 16, 2007 the Company received the certificate of approval
from the Ministry of Commerce in China to increase its ownership and released
the shares held in escrow.

To date, all mineral property and
rights acquisition costs are capitalized and all exploration and development
costs are expensed.

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
for the assignment of 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 will be due
for payment on March 8, 2008. As of March 28, 2008, the amount due for payment
remains outstanding.



---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements

December 31, 2007 and 2006
8.
Mineral Rights(cont'd)

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 as of December 31, 2007
has incurred guaranteed minimum commitments in the amount of $56,000 (for the
year ended December 31, 2007 - $42,000 and 2006 - $14,000) which are included in
exploration expenses.

ii)

Silver Dragon
Mexico has the option to purchase the Puro Corazon concession and the price
shall be $2,000,000 if exercised within 3 years, or $3,000,000 if exercised
within 5 years, from the date of execution of the agreement of consent to
assignment of rights.

Linear Gold

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

Linear Mexico, which is wholly-owned
by Linear Gold, owns an option to acquire the exploration and exploitation
rights to the property known as the Tierra Blanca Property in Durango, Mexico
(the "Mexico Property").

Under the agreement, the Company had
the option to acquire a 55% interest in the Mexico Property. Following a
detailed exploration and evaluation of the property the Company's geologists
recommended that the pursuit of the joint venture with Linear Gold be
terminated. On August 4, 2006, the Company provided notice to Linear Gold that
it would be discontinuing its exploration of the Mexico Property, thereby
terminating the Company's obligations to Linear Gold. The investment of $302,755
in the joint venture was written off as discontinued operations.

9.

Loan Payable

The loan payable in the amount of
$250,000 is from an individual unrelated to the Company. The loan payable is
unsecured, non-interest bearing and due on demand.

10.

Capital Stock

Stock Issuances

On January 10, 2006 the Company
issued 300,000 shares of the Company's restricted common stock to a company,
pursuant to a three month investor relations services contract dated January 10,
2006, for fair value of $184,190.

On January 10, 2006 the Company
issued 200,000 shares of the Company's restricted common stock to a company, in
partial fulfillment of obligations under an investor relations services contract
dated December 8, 2005, for fair value of $129,570.

On January 10, 2006 the Company issued 1,000,000 shares of the Company's restricted common stock to a company controlled by a director of the Company, pursuant to the terms of an Employment Agreement dated November 15, 2005 with that sole director as the CEO of the Company, for fair value of $647,850.

On January 11, 2006 the Company issued 100,000 shares of the Company's restricted common stock to a company, pursuant to a two month investor relations services contract dated January 10, 2006, for fair value of $64,400.

- 21 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

On January 19, 2006 the Company
issued 300,000 shares of the Company's restricted common stock to an individual,
pursuant to a 12 month investor relations services contract dated January 19,
2006, for fair value of $193,200.

On January 19, 2006 the Company
issued 500,000 shares of the Company's restricted common stock to an individual,
pursuant to a geological services contract dated October 25, 2005, for fair
value of $322,000.

On January 25, 2006 the Company closed a private placement totaling 2,500,000 shares of the Company's restricted common stock at $0.10 per share for gross proceeds of $250,000.

On March 1, 2006 the Company issued 1,000,000 shares of the Company's restricted common stock to an individual, pursuant to a two year investor relations services contract dated March 1, 2006, for fair value of $654,500.The amount is being amortized over the service period, of which $327,251 (2006 - $245,437) is included in the statement of operations. Included in the current portion of deferred expenses is $81,812 (2006 - $327,251).

On March 1, 2006 the Company issued 110,000 shares of the Company's restricted common stock to an individual, pursuant to an exploration and mining rights acquisition contract dated March 2, 2006, for fair value of $71,995.

On March 1, 2006 the Company issued 1,000,000 shares of the Company's restricted common stock to a company controlled by a director of the Company, in consideration for its assistance to the Company with the acquisition of mining rights in Mexico, for fair value of $655,130.

On March 1, 2006 the Company issued 1,000,000 shares of the Company's restricted common stock to
a close family member of the Chief Executive Officer, pursuant to
a two year administrative services contract to commence in 2007, for fair value of $654,500. The amount is being amortized over the service period, of which $272,709 (2006 - $ Nil) is included in the statement of operations. Included in the current portion of deferred expenses is $327,251 (2006 - $272,709).

On March 3, 2006 the Company closed a private placement totaling 1,000,000 shares of the Company's restricted common stock at $0.10 per share for gross proceeds of $100,000.

On March 10, 2006 the Company issued 300,000 shares of the Company's restricted common stock to a company, in partial fulfillment of obligations under an investor relations services contract dated December 8, 2005, for fair value of $205,080.

On March 14, 2006 the Company issued 40,000 shares of the Company's restricted common stock to a company, pursuant to a three month investor relations services contract dated March 15, 2006, for fair value of $26,180.

On March 27, 2006 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 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 May 30, 2006 the Company issued 300,000 shares of the Company's restricted common stock to a company, in partial fulfillment of obligations under an investor relations services contract dated December 8, 2005, for fair value of $225,700.

- 22 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

On May 30, 2006 the Company closed a private placement totaling 1,350,000 units at $1.00 per unit for gross proceeds of $1,350,000. 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 9, 2006 the Company issued 2,000,000 shares of the Company's restricted common stock to a company, pursuant to an exploration and mining rights acquisition contract dated March 8, 2006, for fair value of $1,372,000.

On June 9, 2006 the Company issued 100,000 shares of the Company's restricted common stock to a company, pursuant to a twelve month investor relations services contract dated May 16, 2006, for fair value of $77,610.

On June 9, 2006 the Company issued 40,000 shares of the Company's restricted common stock to a company, pursuant to a twelve month investor relations services contract dated May 20, 2006, for fair value of $27,440.

On June 9, 2006 the Company closed a private placement totaling 1,200,000 units at $1.00 per unit for gross proceeds of $1,200,000. 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 August 1, 2006, the Company issued 50,000 share purchase warrants to an individual, pursuant to a twelve month investor relations services contract dated August 1, 2006, for fair value of $44,692. The warrants are exercisable at any time during a five year period from August 1, 2006 to purchase 50,000 shares at $0.80 per share.

On August 1, 2006, the Company issued 150,000 share purchase warrants to an individual, pursuant to a geological services contract dated September 13, 2006, for fair value of $134,076. The warrants are exercisable at any time during a five year period from August 1, 2006 to purchase 150,000 shares at $0.80 per share.

On August 8, 2006 the Company issued 4,000,000 shares of the Company's restricted common stock to a company, pursuant to an asset purchase agreement dated March 16, 2006, for fair value of $2,828,000.

On August 18, 2006 the Company issued 450,000 shares of the Company's restricted common stock to an individual, pursuant to an exploration and mining rights acquisition contract dated March 1, 2006, for fair value of $456,750.

On October 13, 2006 the Company closed a private placement totaling 2,513,000 units at $1.00 per unit for gross proceeds of $2,513,000. 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 November 1, 2006 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; 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 November 7, 2006; and two $1.00 per share purchase warrant exercisable at any time over period of one year from November 7, 2006.

In connection with the private placement that closed on November 1, 2006, the Company paid broker fees in the amount of $35,000 in cash and issued share purchase warrants that will entitle the holder to purchase 17,500 shares of the Company's common stock at an exercise price of $2.00 per share and an additional 17,500 shares of the Company's common stock at an exercise price of $5.00 per share at any time during a two year term commencing November 8, 2006, for a fair value of $28,237. The total compensation of $63,237 has been accounted for as share issuance cost as a reduction to additional paid in capital.

- 23 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

On December 29, 2006 the Company closed a private placement totaling 2,987,000 units at $1.00 per unit for gross proceeds of $2,987,000. 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 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.

- 24 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

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.

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.

- 25 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

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.



Treasury Stock

In 2006, the Company acquired 276,545 common shares of the Company through a corporation controlled by a
director of the Company for $392,830. The shares were returned to the treasury during the current year and cancelled.

- 26 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

Warrants

As at December 31, 2007, warrants to purchase 14,969,000 shares were outstanding, having an exercise price between $0.60 and $5.00 per share with an average remaining contractual life of 1.72 years.

| |                             |             | Weighted        
| | --------------------------- | ----------- | ----------------
| |                             | Number of   | average exercise
| |                             | warrants    | price           
| | Balance, January 1, 2006    | -           | -               
| | Issued
    during the year  | 9,785,000   | $3.19           
| | Exercised during the year   | -           | -               
| | Forfeitures during the year | -           | -               
| | Expired during the year     | -           | -               
| | Balance, December 31, 2006  | 9,785,000   | $3.19           
| |                             |             |                 
| | Issued
    during the year  | 6,189,000   | $2.32           
| | Exercised during the year   | (5,000)     | $0.80           
| | Forfeitures during the year | -           | -               
| | Expired during the year     | (1,000,000) | $1.00           
| | Balance, December 31, 2007  | 14,969,000  | $2.98           

As at December 31, 2007 the range of exercise prices of the outstanding warrants were as follows:

| |                          |           |                   | Weighted        
| | ------------------------ | --------- | ----------------- | ----------------
| |                          | Number of | Average remaining | average exercise
| | Range of exercise prices | warrants  | contractual life  | price           
| | $0.60 - $1.00            | 1,495,000 | 4.68 years        | $0.73           
| | $1.01 - $2.00            | 7,287,000 | 1.58 years        | $1.85           
| | $2.01 - $5.00            | 6,187,000 | 1.17 years        | $4.85           

Warrants were valued using the Black-Scholes model, using the weighted average key assumptions of volatility of 118% - 138%, a risk-free interest rate of 3.3% - 4.9%, a term equivalent to the life of the warrant, and reinvestment of all dividends in the Company of zero percent.

- 27 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

10.

Capital Stock(cont'd)

Options

As at December 31, 2007, options to purchase 552,000 shares were outstanding, having an exercise price
between $0.945 and $2.50 per share with an average remaining contractual life of 4.32 years.

| |                             |           | Weighted        
| | --------------------------- | --------- | ----------------
| |                             | Number of | average exercise
| |                             | options   | price           
| | Balance, January 1, 2006    | -         | -               
| | Issued during the year      | -         | -               
| | Exercised during the year   | -         | -               
| | Forfeitures during the year | -         | -               
| | Expired during the year     | -         | -               
| | Balance, December 31, 2006  | -         | -               
| |                             |           |                 
| | Issued during the year      | 552,000   | $1.10           
| | Exercised during the year   | -         | -               
| | Forfeitures during the year | -         | -               
| | Expired during the year     | -         | -               
| | Balance, December 31, 2007  | 552,000   | $1.10           

As at December 31, 2007 the range of exercise prices of the outstanding options were as follows:

| |                          |                   |                   | Weighted        
| | ------------------------ | ----------------- | ----------------- | ----------------
| |                          |                   | Average remaining | average exercise
| | Range of exercise prices | Number of options | contractual life  | price           
| | $0.60 - $1.00            | 500,000           | 4.63 years        | $0.945          
| | $1.01 - $2.00            | -                 | -                 | $ -             
| | $2.01 - $5.00            | 52,000            | 1.38 years        | $2.50           

During the period, 500,000 stock options, exercisable at a price of $0.945 with a five year period from August 16, 2007, were issued to a director and officer of the Company. These options were valued at $405,000 using the Black-Scholes model, using key assumptions of volatility of 124.79%, a risk-free interest rate of 4.26%, a term equivalent to the life of the options, and reinvestment of all dividends in the Company of zero percent.

During the period, 52,000 stock options,
exercisable at a price of $2.50 with a two year period from May 17, 2007 were
issued to employees of the Company. These options were valued at $54,959 using
the Block-Scholes model, using key assumptions of volatility of 126.08%, a
risk-free interest rate of 4.78%, a term life equivalent to the life of the
options, and reinvestment of all dividends in the Company of zero percent.

11.

Related Party Transactions and Balances

As at December 31, 2007, the related party loans payable consisted of the following:

| |                            |   | 2007    |  |   | 2006  
| | -------------------------- | - | ------- |  | - | ------
| |                            |   |         |  |   |       
| | Unpaid Remuneration        | $ | 36,000  |  | $ | -     
| |                            |   |         |  |   |       
| | Loan
    payable           |   | 435,625 |  |   | 28,585
| |                            |   |         |  |   |       
| | Balance, December 31, 2007 | $ | 471,625 |  | $ | 28,585

Loans from directors or companies controlled by directors in the amount of $435,625 are unsecured, non-interest bearing and have no fixed terms of repayment.

- 28 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

11.

Related Party Transactions and Balances(cont'd)

As at December 31, 2007 $ Nil (2006 - $37,771) has been advanced to a company controlled by a director.

During the year ended December 31, 2007, the Company incurred $288,000 (2006  $288,000) 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, 2007, the Company incurred $36,000 (2006  $Nil) in fees payable to certain directors for services rendered other than in their capacity as directors.

During the year ended December 31, 2006, an amount of $1,000,000 was advanced in trust to a company controlled by a director of the Company, for the purpose of trading in marketable securities on the Company's behalf.  As at December 31, 2006, the Company realized losses of $389,365 on the sale of these marketable securities, incurred interest expenses in the amount of $37,311, realized investment income in the amount of $6,766 and the remaining funds were returned to the Company in cash (note 15) and 276,545 of Company's common shares returned to the Treasury for cancellation (note 10).

12.

Income Taxes

The Company's income tax provision (recovery) has been calculated as follows:

| |                                                                                                     |   | 2007         |  |   | 2006       
| | --------------------------------------------------------------------------------------------------- | - | ------------ |  | - | -----------
| |                                                                                                     |   |              |  |   |            
| | Loss before income taxes                                                                            | $ | (10,502,741) |  | $ | (8,638,233)
| | Deferred: Expected income tax recovery at the combined average statutory rates of 31.18%            |   |              |  |   |            
| | (2006
    - 32.79%)                                                                                 |   | (3,274,618)  |  |   | (2,832,385)
| | Other                                                                                               |   | -            |  |   | (54,752)   
| | Change in valuation allowance                                                                       |   | 3,274,618    |  |   | 2,887,137  
| |                                                                                                     |   |              |  |   |            
| | Provision for income taxes                                                                          | $ | -            |  | $ | -          
| |                                                                                                     |   |              |  |   |            
| | The
    following summarizes the principal temporary differences and related future
    tax effect: |   |              |  |   |            
| |                                                                                                     |   | 2007         |  |   | 2006       
| |                                                                                                     |   |              |  |   |            
| | Losses carried forward                                                                              | $ | 6,808,516    |  | $ | 3,810,828  
| | Valuation allowance                                                                                 |   | (6,808,516)  |  |   | (3,810,828)
| |                                                                                                     |   |              |  |   |            
| | 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 $21,700,000 of taxable losses, which may be used to offset future federal taxable income. The utilization of the losses expires in years 2015 to
2027.

The Company's tax returns are subject to
audit and potential reassessment by taxation authorities. Although the Company
believes that it has adequately provided for current and future income taxes
based on the information available, 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.

- 29 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

13.

Statements of Cash Flows Supplemental
Disclosures

For the year ended December 31, 2007, stock based compensations amounted to $7,638,524 (2006 - $9,003,100). These amounts are included in the
consolidated financial statements as follows:

| |                                                                 |   | 2007      |  |   | 2006     
| | --------------------------------------------------------------- | - | --------- |  | - | ---------
| |                                                                 |   |           |  |   |          
| | Mineral rights (note 8)                                         | $ | 2,660,000 |  | $ | 4,728,745
| |                                                                 |   |           |  |   |          
| | Paid-in capital  share issuance costs                          | $ | -         |  | $ | 28,237   
| |                                                                 |   |           |  |   |          
| | Current portion of deferred expenses                            | $ | 945,221   |  | $ | 599,957  
| |                                                                 |   |           |  |   |          
| | Deferred expenses                                               | $ | 477,187   |  | $ | 463,606  
| |                                                                 |   |           |  |   |          
| | Statement of operations (stock-based
    compensation expensed) | $ | 3,556,116 |  | $ | 3,182,555

For the year ended December 31, 2007, there were no cash payments for income taxes.  Cash payments for interest expense amounted to $15,924 (2006 - $36,517).

14.

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.

15.

Commitments and Contingencies

a) On May 15, 2006, the Company entered into a trust arrangement with
Travellers International Inc., an investment and merchant banking firm ("TII"), for the deposit by the Company of $1 Million (the "Funds") for the purpose of investing the Funds on behalf of the Company.  The trust arrangement was evidenced by a Declaration of Trust dated August 16, 2006. The Company had received proceeds of an equity financing to be used towards the Company's obligations in Mexico and China over the next several months.  In the meantime, the Company decided to invest a portion of the financing proceeds for the purpose of obtaining a return on the proceeds invested.

Marc Hazout has served as Chief Executive Officer and President of the Company since June 1, 2002.

Mr. Hazout has served as a director of the Company since June 1, 2002, and has served as the sole director of the Company since September 21, 2002. As of March 30, 2007, Mr. Hazout beneficially owned 28% of the shares of the common stock of the Company ("Company Shares").

Mr. Hazout has served as the Chief Executive Officer, President and sole director of TII since June 25, 1998. As of December 31, 2006, Mr. Hazout beneficially owned 100% of the shares of the capital stock of TII.

For purposes of convenience, Mr. Hazout directed the investment by TII of the Funds, through
TII's brokerage account at Union Securities Ltd.

- 30 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

15.

Commitments and Contingencies(cont'd)

Between May 2006 and December 31, 2006, Mr. Hazout directed TII to utilize a margin of $2 million and the cash received in trust of $1 million to effect the following transactions:

i.

Purchase 51,500 shares of Qualcomm Incorporated for an aggregate purchase price $2,262,978 and sell 51,500 shares of Qualcomm at an aggregate sale price of $1,878,504, to hold nil shares of Qualcomm as at December 31, 2006;

ii.

Purchase 2,500 iShares Silver Trust
exchange-traded fund ("ETF") shares at an aggregate purchase price of $303,635 and sell 2,500 ETF shares at an aggregate sale price of $308,379, to hold nil ETF shares as at December 31, 2006;

iii.

Purchase 276,545 of the Company's shares at an aggregate purchase price of $392,830 with a fair market value of $580,745 as at December 31, 2006; and

iv.

Purchase 50,000 shares of First Majestic Resource Corp. at an aggregate purchase price of $160,562 and sell 50,000 shares of First Majestic Resource Corp. at an aggregate sale price of $154,525, to hold nil First Majestic Resource Corp. shares as at December 31, 2006.

Of the $1 Million which TII had been provided in trust, $187,000 was returned to the Company
and 276,545 Common Shares of the Company valued at $392,830 were returned to the
Compnay for cancellation as per Note 10.  Neither Mr. Hazout, nor TII received any fees or commissions as a result of
TII's trusteeship as described herein.

b) 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:

2008
      $ 47,2722009
      51,2122010
      52,5252011
      52,5252012
      13,131


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.

c)  On December 28, 2007, a subsidiary of the Company entered into an agreement to fund a scientific research project in China for approximately $400,000 payable over a three year period commencing January 1, 2008.

16.

Subsequent Events

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 $43,460, 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 $8,900. 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 $0.60 from $2.00 and $5.00, respectively.
$165,000 was accrued to subscriptions payable at December 31, 2007 and was
treated as a capital transaction with a redemption to additional paid-in
capital.

- 31 -

---

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

17.

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
equivilents, other receivables, accounts payables, and accrued liabilities, 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
USD, approximately 35% of consolidated costs and expenses for the year ended
December 31, 2007 (2006  18%) are denominated in RMB and MXN. As at December
31, 2007, 15% (2006  15%) of the assets and 35% (2006  61%) of the liabilities
are denominated in RMB and 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, RMB and the MXN.

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

18.

Segmented Information

| | As
    of 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
| |                                |            |            |            |            
| |                                |            |            |            |            
| | As
    of December 31, 2006    |            |            |            |            
| |                                |            |            |            |            
| | Mineral Rights                 | -          | $3,471,052 | $2,845,845 | $6,316,897 
| |                                |            |            |            |            
| | Total
    Assets               | $4,154,864 | $3,842,867 | $3,273,456 | $11,271,187
| |                                |            |            |            |            
| |                                |            |            |            |            
| | 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
| |                                |            |            |            |            
| |                                |            |            |            |            
| | Year Ended December 31, 2006   |            |            |            |            
| |                                |            |            |            |            
| | Revenues                       | -          | -          | -          | -          
| |                                |            |            |            |            
| | Depreciation                   | $366       | $5,080     | $9,051     | $14,497    
| |                                |            |            |            |            
| | Net
    Loss Before Income Tax | $6,165,133 | $1,352,538 | $1,120,562 | $8,638,233 

- 32 -

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES 
(AN EXPLORATION STAGE COMPANY) 
Notes to the Consolidated Financial Statements 
December 31, 2007 and 2006

19.

Restatement of Previously Issued
Consolidated Financial Statements

In 2007, the Company became aware of accounting errors affecting the previously issued year end consolidated financial statements.  The Company determined that it had expensed in error, a deposit towards improvements to the leased premises that it currently occupies, in the amount of $153,552 during the year ended December 31, 2006. The Company also determined that it had misallocated prepaid share subscriptions in the amount of $449,000 to General and Administrative expenses due to incorrect cut-off procedures.

As a result, the Company is retroactively restating the previously issued consolidated financial statements for the year ended December 31, 2006.

The effect on the consolidated statement of operations and the consolidated balance sheet for the year ended December 31, 2006 is as follows:

| |                                                                       |   | As           |  |   |           |  |   |             
| | --------------------------------------------------------------------- | - | ------------ |  | - | --------- |  | - | ------------
| |                                                                       |   | Previously   |  |   |           |  |   |             
| |                                                                       |   | Reported     |  |   | Change    |  |   | Restated    
| | Consolidated Statement of Operations                                  |   |              |  |   |           |  |   |             
| |                                                                       |   |              |  |   |           |  |   |             
| | Net

    loss for the year ended December 31, 2006                    | $ | (8,396,760)  |  | $ | (295,448) |  | $ | (8,692,208) 
| |                                                                       |   |              |  |   |           |  |   |             
| | Net

    loss per common share - basic and diluted for the year ended | $ | (0.17)       |  | $ | (0.00)    |  | $ | (0.17)      
| |                                                                       |   |              |  |   |           |  |   |             
| | Net

    loss for the cumulative period ended December 31, 2006       | $ | (11,519,165) |  | $ | (295,448) |  | $ | (11,814,613)
| |                                                                       |   |              |  |   |           |  |   |             
| | Consolidated Balance Sheet                                            |   |              |  |   |           |  |   |             
| |                                                                       |   |              |  |   |           |  |   |             
| | Other
    receivables                                                 | $ | 398,323      |  | $ | 153,552   |  | $ | 551,875     
| |                                                                       |   |              |  |   |           |  |   |             
| | Deficit accumulated during the exploration stage                      | $ | (11,519,165) |  | $ | (295,448) |  | $ | (11,814,613)
| |                                                                       |   |              |  |   |           |  |   |             
| | Additional paid-in capital                                            | $ | 22,040,068   |  | $ | 320,525   |  | $ | 22,360,593  
| |                                                                       |   |              |  |   |           |  |   |             
| | Stock
    subscriptions                                               | $ | 320,525      |  | $ | 128,475   |  | $ | 449,000     

- 33 -

---