U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-KSB/A

[X]    
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2006

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

Commission File Number 0-29657

SILVER DRAGON RESOURCES INC.

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

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

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

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

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

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

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 June 27, 2007, was $59,244,769.

As of June 27, 2007, the Registrant had 64,396,488 common shares
outstanding.

Documents Incorporated by Reference: None

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

1

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EXPLANATORY NOTE

This Amendment No. l on Form 10-KSB/A is being filed as an
amendment to our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2006, as filed with the Securities and Exchange Commission May 16, 2007. For
the convenience of the reader, this Form 10-KSB/A sets forth the originally
filed Form 10-KSB in its entirety. However, the following revisions are
contained herein:
ITEM 7. FINANCIAL STATEMENTS

The Financial Statements have been restated as set forth in
Footnote 16 thereto.

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 acquisition of interest in Hubei Silver Mine Co., Ltd.;
- 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 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 has 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. 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. 3,000,000 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
  $536,030 into Sino-Top in 2006 and intend to invest approximately
  $3,000,000 into Sino-Top in 2007 towards exploration and property maintenance
  on the nine properties in the portfolio, with emphasis on bringing the Erbaohuo silver mine into production in 2007, 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. The acquisition is subject to a
  number of conditions including, but not limited to, the delivery by Hubei
  Silver of all geological and technical data related to the mine, an audit of
  Hubei Silver and an evaluation of its assets based on U.S. GAAP valuation
  methods, and the execution of a definitive agreement. In addition, we await
  the Chinese government's decision as to whether or not it will allow the
  privatization of Hubei Silver in order for a sale to be allowed. The purchase
  price, subject to confirmation of the value of Hubei Silver's assets, is
  approximately $2.4 million in cash along with shares of restricted common
  stock of Silver Dragon valued at $1.6 million on closing. Hubei Silver is a large,
  non-ferrous metal enterprise, and was the first among China's 10 largest
  independent silver mines to engage in both mining and ore dressing operations.
  Hubei Silver holds the exploration and mining rights to the Hubei Silver Mine,
  which began production in 1992. 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
  January 26, 2007 is $945,000 plus 2,560,000 restricted shares. We are
  obligated to pay a total of $200,000 to these individuals by March 8, 2008 to
  fulfill our obligations under these agreements. Cerros 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 currently have one
  consultant, a geologist, supervising the exploration program in Mexico. We pay
  him a total of approximately $12,000 per month for his services during our
  exploration program. He is responsible for retaining the drilling contractor,
  having the core samples assayed, designing and engineering the mine and
  supervising the drill program, among other things. Core drilling costs already
  completed total approximately $500,000. Analyzing the core samples cost
  approximately $125,000. Vector Engineering Company has completed a NI 43-101
  report at a cost of approximately $25,000. In addition to the foregoing, there
  are approximately 20 other employees in Mexico. In China we have one employee
  serving as administrative staff member in our Beijing representative office.
  We pay him $2,000 per month. Other than the foregoing, our
  only employee is Marc Hazout, our Chief Executive Officer, President and
  Director.In addition, we have three consultants working in our head
  office in Toronto, an office administrator and manger, an information and
  technology and investor relations manager and a Chief Accounting Officer,
  being paid collectively a total of $18,000 per month. 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. 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 the next
  3 months. We will need additional funding, either through equity or debt
  financings or partnering arrangements,  that could negatively affect us and
  our stock price. We
  will need significant additional funds to continue operations, which we may
  not be able to obtain. We estimate that we must raise approximately $12
  million over the next 12 months to fund our anticipated capital requirements and our obligations under
  the agreements for the concessions in Cerro las Minitas, Mexico, the agreement
  with Sino-Top, and the agreement with Hubei Silver. Our agreement with Jaime
  Muguiro Pena required us to make a $100,000 payment on closing, with further
  payments totaling $350,000 made during 2006, along with 450,000 restricted
  common shares. Our agreement with Ramon Tomas Davila Flores required us to
  make a payment of closing at $245,000 along with 110,000 restricted common
  shares. Our agreement with Minera Real Victoria, S.A. de C.V. required us to
  make a $100,000 payment on closing along with 2,000,000 restricted common
  shares; a further payment of $100,000 was paid on September 11, 2006, and we
  must make payments totaling $200,000 over the next 2 years. We estimate that
  we will need to raise approximately $5,300,000 to meet our obligations under
  the Cerro las Minitas agreements, as well as to continue with the exploration
  and mining of the properties throughout 2007. Our agreement with Silvia
  Villasenor Haro, the owner of Puro Corazon, required us to make payments of
  $50,000 at closing. In addition, we will require an additional $2,000,000
  should we choose to exercise the option to purchase the mining concession from
  Silvia Villasenor Haro within 3 years or $3,000,000 within 5 years. We
  currently do not have arrangements in place to raise the capital to fund these
  obligations. All payments in Mexico were and are subject to Value Added Tax (V.A.T.)
  for which we are entitled to be refunded as a non-Mexican entity. We invested approximately $536,030 into Sino-Top in 2006 and
  intend to invest approximately $3,000,000 into Sino-Top in 2007 towards
  exploration and property maintenance on the nine properties in the portfolio,
  with emphasis on bringing the Erbaohuo silver mine into production in 2007,
  and conducting advanced stage exploration on two properties (Zuanxinhu and
  Saihanaobao).We
  currently do not have arrangements in place to raise the capital to fund these
  obligations. We
  have entered into a letter of intent to acquire a 60% equity interest in Hubei
  Silver in Hubei Province, China. The agreement will require us to pay
  approximately $2,400,000 in cash and issue restricted shares of our common
  stock valued at $1,600,000 for acquiring this interest on closing. We
  currently do not have arrangements in place to raise the capital to fund these
  obligations. We
  have historically satisfied our working capital requirements through the
  private issuances of equity securities 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 $8,396,760 and $584,879
  respectively, for the fiscal years ended December 31, 2006 and 2005. We have
  accumulated losses since inception of approximately $11,519,165.  We
  anticipate that losses will continue until such time when revenue from
  operations is sufficient to offset our operating costs, if ever. If we are
  unable to increase our revenues or to increase them significantly enough to
  cover our costs, our financial condition will worsen and you could lose some
  or all of your investment. Because our management does not have technical training or experience in
  exploring for, starting and operating an exploration program, we will have to
  hire personnel to conduct these efforts. If we can not effectively supervise
  or retain such personnel, we may have to suspend or cease operations, which
  will result in the loss of your investment. Because our management is inexperienced with exploring for, starting and
  operating an exploration program, we hired new employees and contractors to
  perform surveying, exploration and excavation of mineral claims that we may
  acquire. Our management has no direct training or experience in these areas
  and as a result may not be fully aware of many of the specific requirements
  related to working within the industry. Management must rely on the personnel
  it has hired or retained to assist them in making critical engineering and
  business decisions. Consequently, our operations, earnings and ultimate
  financial success could suffer irreparable harm due to management's lack of
  experience in this industry if our management is unable to supervise and
  retain qualified personnel to carry out these tasks. As a result we may have
  to suspend or cease operations, which will result in the loss of your
  investment. Our success also depends on our ability to hire and retain skilled operating,
  marketing, technical, financial and management personnel. In the mining
  sector, competition in connection with hiring and retaining skilled,
  dependable personnel is intense. We may not offer salaries or benefits that
  are competitive with those offered by our competitors, who may have
  significantly more resources when compared to us. As such, even if we were to
  succeed in hiring skilled personnel, we may not succeed in retaining them. 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. If
  our sole officer who also serves as our sole director resigns or dies without
  having found replacements, our operations will be suspended or cease
  altogether. If that should occur, you could lose your investment. We
  have one individual who serves as our sole officer and sole director. We are
  entirely dependent upon him to conduct our operations. If he should resign or
  die, there will be no immediately available replacements. If that should occur
  our operations may be suspended or cease entirely until we find other persons,
  and our business and the results of operations would suffer. Because we have only one individual serving as our sole officer and director
  who is responsible for our managerial and organizational structure, we do not
  have effective disclosure and accounting controls to
  comply with applicable laws and regulations, which could result in fines,
  penalties and assessments against us. One individual serves as both our sole officer and director. He is responsible
  for our managerial and organizational structure, which  includes
  preparation of disclosure and accounting controls under the Sarbanes-Oxley Act
  of 2002. Our officer and director is responsible for the administration of the controls.
  Because he serves as the sole director and officer, he is incapable of creating and implementing the
  controls, which may subject us to sanctions and fines by the Securities and
  Exchange Commission, which ultimately could cause us to lose money and
  possibly to go out of business. See item 8a, Controls and Procedures elsewhere
  in this report. 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 officer and our director are located outside
  the United States of America, it may be difficult for an investor to enforce
  within the United States any judgments obtained against us, our officer or our
  director. All of our assets are located outside of the United States, the individual
  serving as both our sole officer and sole director is a national and/or
  resident of a country or countries other than the United States, and all or a
  substantial portion of such person's assets are located outside the United
  States. As a result, it may be difficult for an investor to effect service of
  process or enforce within the United States any judgments obtained against us
  or our officer and director, including judgments predicated upon the civil
  liability provisions of the securities laws of the United States or any state
  thereof. In addition, there is uncertainty as to whether the courts of Canada
  and other jurisdictions would recognize or enforce such judgments rendered by
  the courts of the United States. There is also uncertainty as to whether the
  courts of Canada or other jurisdictions would be competent to hear original
  actions brought in Canada or other jurisdictions against us or our officer and
  director predicated upon the securities laws of the United States or any state
  thereof. Our President - Chief Executive Officer controls a significant percentage of
  our common stock. As
  of June 27, 2007, Marc Hazout, our President and Chief Executive Officer,
  owned beneficially approximately 26.7% 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 sliver 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  June 27, 2007, the number of shares in the public float on the
  Over-The-Counter Bulletin Board in the U.S. is approximately 64,396,488. The
  market price for our common stock could decrease significantly and our ability
  to raise capital could be adversely affected by the availability of a large
  number of shares. The price of our common stock is volatile, which may cause investment losses
  for our shareholders. The market for our common stock is highly volatile, having ranged in the last
  twelve months from a low of $0.70 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 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. Property Location:
  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. Climate and Local Resources:
  The climate in the region is classified as plateau continent type, and
  November through April is the cold season. Annual rainfall occurs mainly in
  the month of June. Topography on the property ranges in elevation from 1,100m
  to 1,222m. Vegetation covers the shady slope of the hillsides. Farmers in the
  area plant various subsistence crops. The labor force in the area is
  plentiful. A 10kv electricity power net passes through the concession and the
  electrical power is adequate for mining purposes. Mineralization:
  The main metallic minerals include the following: pyrolusite, psilomelane,
  limonite, pyrite, galena, sphalerite, chalcopyrite, and other silver related
  minerals. Cerro las Minitas The following information is
  derived from National Instrument 43-101 Technical Report for Silver Dragon
  Resources Inc. on the Cerro Las Minitas Property, Guadalupe Victoria, Durango,
  Mexico dated January 23, 2007 prepared by Craig L. Parkinson, P.Geo, Vector
  Engineering, Inc., 143E Spring Hill Drive Grass Valley, California 95945 USA
  and Douglas R. Wood II, P. Geo., Professional Mining Consultant, 3135 Holly
  Lane, Washoe Valley, Nevada 89704. PROPERTY LOCATION AND DESCRIPTION The Cerro Las Minitas property is
  located 70 kilometers northeast of the City of Durango, capital of the state
  of Durango, and six kilometers northwest of the town of Guadalupe Victoria, in
  the municipality of Guadalupe Victoria, Durango (Figure 6.1). The claims are
  located in the Minitas Mining District in the Mining Region of Guadalupe
  Victoria. The property consists of 16 mining concessions encompassing 1,423
  hectares (Figure 6.2). 15  Figure 6.1 Cerro Las Minitas Location Map 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. Figure 6.2 Cerro Las Minitas Concession Map Agreements with property vendors
  are summarized in Table 6.1. Agreements for 15 of the 16 concessions are
  agreements to purchase. The agreement for the Puro Corazón claim is a 25-year
  Lease with Option to Purchase. Under the terms of the Purchase
  Agreement with Sr. Jaime Muguiro Peña, the Company has earned 100% interest in
  ten mining concessions (listed in Table 6.2) by payment of $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 (listed in Table 6.2) by payment of $245,000. All payments to Sr. and Sra. Flores have been made. The company currently holds
  interest in a Production Lease with Option to Purchase the Puro Corazón
  Concession from the Villaseñor Family. That Lease was previously held by
  Minera Real Victoria. Silver Dragon Mining de Mexico, S.A. de C.V. has made
  $200,000 of the $400,000 payments to Minera Real Victoria to acquire
  full ownership of the Puro Corazón Lease with Option to Purchase. Two
  additional payments of $100,000 each will be paid to Minera Real Victoria on
  the first and second anniversaries of the signing of that contract to complete
  acquisition of the Lease. The payment also includes 2 million restricted
  common shares. 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. In Mexico, the location of a
  concession is determined by the location of a single claim monument, with all
  corners being located based on surveyed distances and bearings from that
  monument. These distances and bearings must be determined and verified by a
  licensed surveyor. The monument may be placed outside of the concession
  boundaries. Although the perimeter lines may have not been partially or
  entirely surveyed, the method of locating the concession corners constitutes a
  legal survey. All of the concessions at Cerro Las Minitas have been legally
  surveyed. There were substantial changes to
  the Mexican Mining Law in 2005. Claims filed before 2006 were classified as
  either "Exploration" or "Exploitation" concessions. Exploration concessions
  were granted with a term of six years. In special cases, the term of
  exploration concessions could be extended for an additional three years. After
  expiration of the exploration designation for a concession, it was converted
  to an Exploitation concession for a term of 25 years. Another 25 year
  extension could be applied for on each concession if warranted. 16   When the Mining Law was changed in
  2005, the distinction between Exploration and Exploitation concessions was
  abandoned. Concessions are now all classified as mining concessions and each
  is given an initial term of 50 years. Exploration concessions granted prior to
  2006 still have a term of six years. Exploitation concessions granted prior to
  2006, whose terms were originally 25 years, were extended by the changes to
  have an additional 25 years added to their terms. A summary of the claim tenure
  information and projected concession maintenance costs for 2007 are located in
  Table 6.2. Title to the Cerro Las Minitas claims has been reviewed and
  verified by the management of Silver Dragon Resources, Inc.. Prior to the commencement of ground
  disturbing exploration activities such as drilling or trenching a
  "Preventative Report" (Informe Preventivo) must be prepared and submitted to
  the Mexican Government Environmental Agency (SEMARNAT). The report must detail
  the type of work to be conducted and the amount of disturbance, the location,
  vegetation encountered and proposed mitigation. One such report has been
  submitted to SEMARNAT to cover operations to date and another is in
  preparation to cover planned operations. Silver Dragon Resources, Inc and
  its subsidiary Silver Dragon Mining de Mexico, S.A. de C.V. have warranted
  that the claims: are in good standing
    have no outstanding
  work orders or legal actions pending
    are properly located
  and recorded
    are not subject to
  any litigation that the Company is aware of
    are free and clear of
  all liens and encumbrances
    have no known
  environmental liabilities that the Company is aware Title to the concessions
  constituting the Cerro Las Minitas property has been reviewed by management of
  Silver Dragon Resources, Inc. who take responsibility for its accuracy. The minimum annual work requirement
  for these mining concessions is approximately $US 19,500. According to the
  Mining Law and Ruling, there is an obligation to submit the evidence of the
  work expenditures to the authorities for properties larger than 1,000
  hectares. It is therefore recommended that the required information for the
  previous reporting year be submitted annually each May. The filing for annual
  work requirements for 2005 was made in 2006. The mineralized zones currently
  known are in the area of the Puro Corozon  Santo Nino and Mina Pina  La
  Bocona mining areas. The Puro Corozon  Santo Nino mining area is located in
  the south-central portion of the northern concessions. The Mina Pina  La
  Bocona area is located in the northeast portion of the northern concessions.
  The mineral resources discussed in this report are located in the Puro Corozon
   Santo Nino mining area. The mine workings are situated within the Puro
  Corozon  Santo Nino and Mina Pina  La Bocona mining areas. The are no tailings ponds and there
  are small waste dumps associated with the workings at the El Sol, Santo Nino,
  Puro Corozon, Mina Pina, and La Bocona mines. The significant natural feature
  is the hill called Cerro Las Minitas. Improvements consist of a network
  of graded dirt roads and various mine buildings in a poor state of repair
  located in the Puro Corozon  Santo Nino and Mina Pina  La Bocona mining
  areas. 17   ACCESSIBILITY, CLIMATE,
  PHYSIOGRAPHY, LOCAL INFRASTRUCTURE The Cerro Las Minitas property is
  located in the Minitas Mining District, approximately seven kilometers north
  of the town of Guadalupe Victoria, Durango and 70 km northeast of Ciudad
  Durango, the capital of the state of Durango. The property can be reached from
  Ciudad Durango via Interstate Highway 40 (Toll Road) and Highway 40 (Free
  Access), the road from Francisco I. Madera to Cuencame (Figure 6.1). From
  Guadalupe Victoria, a graded dirt road leads north to the property. About half
  of the property is located north of Interstate Highway 40 (a limited access
  freeway) and an overpass over the highway affords access to the northern part
  of the property. The Cerro Las Minitas property lies
  near the western edge of the Mexican Altiplano, an extensive volcanic plateau
  characterized by narrow, NW trending fault-controlled ranges separated by wide
  flat-floored basins. In the Durango area the basins have elevations of 1900m
  to 2100m, and the higher peaks rise to 3000m. The climate is generally dry
  with sporadic, occasionally violent rainstorms in the hot summer months of
  June - September. The average precipitation in the property area is about 600
  mm mainly between May and October. The winter months are cool and dry, and
  snow is rare but nighttime temperatures below the freezing mark are common in
  December and January. Yearly average temperatures are about 25 degrees
  Celsius. Grasses, small trees and shrubs along with several varieties of cacti
  make up most of the vegetation on the steep hillsides, and larger trees are
  found near springs and streams. The broad valley south of the Cerro
  Las Minitas property is relatively densely populated and well developed. The
  town of Guadalupe Victoria is a growing farm community of about 27,000 persons
  that offers most basic services. Both the quality of infrastructure and
  population density increase towards the city of Durango, 70 km to the
  southwest. The nearby towns of Guadalupe
  Victoria and Ignacio Ramirez are serviced by the commercial electrical grid
  and a regional transmission line of the Comisión Federal de Electricidad (CFE)
  follows Interstate Highway 40. A 33,000 Kva power drop has been extended from
  the CFE line to the Mina Piña shaft and is serviceable, but in need of minor
  repair. There is no access to Interstate
  Highway 40 at Cerro Las Minitas, although the Highway bisects the property. A
  small overpass affords access between the north and southern portions of the
  property. Figure 7.1 View to the Southeast from above the Puro Corazón
  Mine at Cerro Las Minitas with the town of Ignacio Ramirez in the distance.  Potable water is readily available
  in nearby towns and water for drilling and other exploration purposes can be
  obtained from old workings on the property. Any of the materials, supplies,
  and labor required to support exploration and mining activities are available
  in Durango City and the surrounding region. Telephone service, Internet
  access, and basic necessities are available in Guadalupe Victoria. No environmental reports were
  provided for the property. Discussions with officials of SEMARNAT, the Mexican
  Environmental Agency revealed that there are no outstanding environmental
  restrictions associated with the property. Standard environmental reports (Informes)
  will be required in advance of new earth-moving activities on the property,
  but no unusual problems are foreseen regarding environmental permits for
  exploration or development. The property has ample land
  suitable for the construction of any proposed mine or mill structures and
  facilities, including tailings storage or waste disposal areas and heap leach
  pads. Surface rights are owned by the Ejidos of Guadalupe Victoria and Ignacio
  Ramirez and surface rights for all proposed exploration and mining activities
  including the installation of tailings storage or waste disposal areas, heap
  leach pads, and processing plant sites must be negotiated with the Ejidos.
  Silver Dragon Mining de Mexico, S.A. de C.V. has negotiated rights for use of
  150 hectares of the common areas of the Guadalupe Victoria Ejido that fall
  within the concession boundaries. Surface rights on deeded lands within the
  Ejidos must be negotiated with individual property owners. Silver Dragon
  Mining de Mexico, S.A. de C.V. does not currently have an agreement regarding
  surface rights within the Ignacio Ramirez Ejido, but negotiations are in
  progress and no problems are anticipated. 18   PROPERTY HISTORY There is little documentation
  regarding the history and production at Cerro Las Minitas, but local legend
  has it that Spaniards from the city of Victoria de Durango (now Durango City)
  discovered the silver mineralization at Cerro Las Minitas originally. The
  historical information presented herein has been gleaned from discussions with
  local miners and operators and the few previous evaluative reports concerning
  the property that do exist (Minas de Bacis, 1995; Enriquez, 2005; Proyectos
  Mineros y Topografia, 2001). No reliable record of historic
  production have been found, but local miners and operators report that the
  mines have been active intermittently since the early 1960's. The properties
  have passed from hand to hand with no historical documentation. However,
  concessions covering the properties have been maintained in good standing
  since the early 60's. The only two areas with significant
  exploitation in the district are the Santo Niño-Puro Corazón and La Bocona-Mina
  Piña areas, with a total estimated production by Enriquez (2005) of 1,200,000
  metric tons with an estimated average grade of 350 g/t Ag and 1.5 g/t Au, 6.3%
  Pb, 5.6% Zn and about 1.0% Cu (Enriquez, 2005). Enriquez' estimate was based
  on the earlier work of Minas Bacis and additional sampling done by Minera Real
  Victoria. Sr. Carlos Villaseñor discovered
  Ag-Pb-Zn-Cu mineralization in the Santo Niño-Puro Corazón area in 1960. He
  explored the deposits there and did minor exploitation of them until 1971,
  when he built a small mill in the Velardeña district. When the mill became
  operational, mining was stepped up and ores were shipped to the Velardeña mill
  to be processed. After attention was drawn to the area by the Villaseñor
  operations, exploration by others discovered the deposits in the La Bocona-Mina
  Piña area to the east. The majority of the mining at Cerro
  Las Minitas is reported to have been done during the period 1970  1981, but
  has continued intermittently until the present. The mines were idle from 1997
  - 2002 due to problems with mine water and the drop in metal prices.
  Intermittent, small-scale exploitation of the deposits in the Puro Corazón -
  Santo Niño area continued until 2005 and operations in the Mina Piña  La
  Bocona area continued to late 2006. It has been estimated by Enriquez (2005),
  based on the size of mine workings and limited sampling, that of the 1.2
  million metric tons have been exploited from the two areas, 0.7 million was
  produced from the Puro Corazón - Santo Niño area and 0.5 million from the Mina
  Piña  La Bocona area. The Consejo de Recursos Minerales
  (CRM) has been giving support to the miners in the area since 1977. In 1979,
  CRM completed 834.55m of diamond drilling in seven holes on the Mina Piña
  area, which belonged at that time to Mr. Santiago Valdez. Mr. Valdez exploited
  the mine until 1997, when he suspended operations due to the drop in metal
  prices. CRM discovered additional mineralization in their drilling, but no
  further exploration or development of those discoveries has been done. CRM
  delivered drill and assay data to the operators in the district without
  interpretation. Silver Dragon's exploration staff is in the process of
  compiling and analyzing that data. In 1981, CRM continued its support
  of the development of the district, completing 77m of shaft and 80m of
  crosscut to cut the upper, oxidized portion of the La Bocona deposit.
  Following that work, Sr. Jaime Muguiro deepened the Mina Piña shaft another 59
  meters to reach the 210 level. A 140-meter crosscut was driven, encountering a
  number of thin mineralized horizons and the Huisache mineralized chimney. Sr.
  Muguiro then suspended operations due to problems with water inflow. In 1995, Minas de Bacis (Minas de
  Bacis, 1995) completed a 30-day evaluation of Cerro Las Minitas which
  consisted of analysis of previous data, inspection of accessible workings and
  analysis of surficial geology. Based on that work, Minas de Bacis reported an
  inferred mineral resource of 1,296,000 metric tons grading 0.12 gr/ton gold,
  102 gr/ton silver, 2.86% lead, 10.36% zinc and 0.15% copper. The data upon
  which that estimate was based have not been found and it can only be reported
  as an historical estimate. Based on their analysis, Minas de Bacis began
  negotiations to acquire the Concessions in the district. Those negotiations
  were unsuccessful and Minas de Bacis withdrew. A summary report of Minas de
  Bacis findings has been located, but much of the data used as the basis for
  the conclusions in the report has not. The authors reviewed the 1995
  resource estimates of Minas de Bacis. Some of the actual data upon which the
  resources were calculated are not available. It is unknown what data or
  methods were used to make the resource estimates. The historical estimates of
  resources reported by Minas de Bacis (1995) are considered by the authors to
  be exploration targets. 19   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. A
  combined reverse-circulation and diamond drilling program to test continuity
  of mineralization at depth commenced in May of 2006. Eleven holes were drilled
  for 2915 meters. Nine of the eleven holes have been sampled, logged and
  assayed. Analysis of the two remaining holes will be completed when
  geotechnical personnel are available. The exploratory drill program and a
  concentrated program of geologic mapping and sampling of underground workings
  in the district is in progress, as well as the re-habilitation and de-watering
  required to support that work. The work is ongoing and expected to be
  completed in early 2007. GEOLOGICAL SETTING Regional Geology Cerro Las Minitas is located within
  the geomorphic province of the Mesa Central (Altiplano) of Mexico, northwest
  of the Sierra Madre Occidental in the State of Durango. In Durango, the Mesa
  Central is a broad plain at about 2000 meters elevation traversed by NW
  trending mountain ranges separated by broad NW-trending valleys. Within this
  province, Cerro Las Minitas lies within a belt of prolific Au, Ag, Pb, Zn and
  Cu deposits that stretches from the highly productive vein deposits of
  Fresnillo in Zacatecas to the south, to the massive manto deposits of Santa
  Eulalia in Chihuahua to the north. This belt includes the productive
  replacement deposits of San Martin, Santa Eulalia, Santa Barbara and Naica as
  well as the rich vein deposits of Fresnillo, El Bote, San Jose and various
  others. The basement rocks of Mexico are
  now known to be composed of an assemblage of tectono-stratigraphic terranes
  derived from the Paleozoic Appalachian orogen and the Mesozoic of the Atlantic
  and Gulf of Mexico combined with basement rocks of the North American
  Cordillera (Campa & Coney, 1983, 1987; Figure 9.1.1) The assemblage includes
  deformed Pre-Cambrian intrusives and sediments, deformed Lower to Middle
  Paleozoic sediments and Lower Mesozoic sediments which are all covered with a
  thick succession of Mesozoic sedimentary and volcanic strata. Those are
  covered by a thick succession of Tertiary sediments and volcanics and cut by
  numerous Tertiary intrusives. Figure 9.1.1 Tectono-stratigraphic terranes of Mexico (from
  Campa and Coney 1983, 1987) Cerro Las Minitas is located within
  the Parral tectono-stratigraphic terrane near the regional fault that marks
  the contact between the Parral terrane and the Sierra Madre Occidental terrane.
  The Parral terrane is characterized by a thick Late Mesozoic, miogeoclinal
  marine sequence deposited on a basement of Lower Mesozoic, eugeosynclinal
  sedimentary and volcanic strata. The Parral terrane is host to some of
  Mexico's larger Au, Ag, Pb, Zn and Cu replacement deposits, such as Santa
  Eulalia, Naica, Villardeña, San Martin and Santa Barbara. 20   The Cerro Las Minitas project is
  located within the broad Guadalupe Victoria Mining Region, which includes the
  districts of Avino, San Sebastian and Minitas that constitute a trend of
  deposits and workings along a 50 kilometer northwest trend. The Cerro Las
  Minitas property lies within the Minitas Mining District. The project is
  located in an area of intersection of three principal structural trends
  (Starling, 2003; Figure 9.1.2) 1.    A major N-NW fault zone
  marking the boundary between the Parral and Sierra Madre Occidental terranes. 2.    Major W-NW faults
  representing the Mojave-Sonora Megashear. 3.   Transverse faults bearing NE
  to E-NE that cross the district and are associated closely with known deposits
  and prospects. Figure 9.1.2 Regional faults and photo-lineaments in the
  Guadalupe Victoria Mining Region showing principal mines and prospects. The broad valley that contains the
  Cerro Las Minitas property trends W-NW and is covered with a thick succession
  of Tertiary continental deposits and soil. The valley is flanked on the north
  and south by Oligocene and Miocene felsic volcanic rocks and to the southwest
  by Miocene  Pliocene basalt flows. Except for the later basalt flows, the
  volcanic rocks consist principally of dacites, rhyolites and various volcanic
  breccias and ash flows with minor andesite units. Figure 9.1.3. Regional Geologic Map (from Consejo de
  Recursos Minerales, 1993) Within the valley, continental
  clastic deposits of the Upper Cretaceous Proaño Fm and marine sediments of the
  Upper Cretaceous Caracol and Indidura Formations crop out locally. The Caracol
  and Indidura Formations consist generally of calcareous siltstones and
  mudstones, with interstratified, minor siltstones, greywackes and rare
  limestone beds. The Indidura Formation lies conformably over the Upper
  Cretaceous Cuesta Del Cura Formation which has been structurally uplifted at
  Cerro Las Minitas. The uplift appears to have been caused by the injection of
  a composite intrusive which has lifted the Cuesta Del Cura to outcrop in an
  elliptical dome structure that rises about 150 meters above the surrounding
  plain. The intrusive consists of an unknown number of phases that range in
  composition from diorite to quartz-monzonite, associated with numerous dikes
  that range in composition from andesite to rhyolite. An aureole of contact metasomatic
  and replacement deposits of Au, Ag, Pb, Zn, and Cu was produced during the
  emplacement of the intrusives and is the subject of past mining activities and
  exploration currently underway at the Cerro Las Minitas Project. District Geology Portions of the geology of the
  northern portion of the Cerro Las Minitas concessions were mapped by the
  Consejo de Recursos Minerales (CRM) in 1988 and Noranda in 1999, and modified
  by Erme Enriquez in 2005 and Silver Dragon's consultants in 2006 (Figure
  9.2.1). The geological setting and stratigraphy were originally defined by the
  Consejo de Recursos Minerales (1993). Figure 9.2.1 Geologic map of the northern portion of the
  Cerro Las Minitas property, Durango, Mexico. No outcrops are known in the
  southern half of the property and the claims there cover fields under
  cultivation that are part of the Guadalupe Victoria Ejido. No geologic
  information has been collected from that area. The northern portion of the
  property is dominated by a NW-SE elongated domical uplift of Cretaceous marine
  sediments cored by an intrusive porphyry complex. Contact metasomatic (skarnoid)
  deposits of Au, Ag, Zn, Pb, Cu and W are known to occur at various locations
  in the contact zone around the central intrusive complex, as well as at the
  margins of some dikes that emanate from the main intrusive complex. More
  distal from the main intrusive contact, manto-style Ag, Pb, Zn deposits have
  been discovered replacing recrystallized carbonate strata. 21   The domical uplift of Cretaceous
  sediments is the principal topographic feature on the property and has been
  the focus of all previous exploration and production there. Past production
  has occurred principally from contact deposits in the Puro Corazón  Santo
  Niño and Mina Piña  La Bocona areas. The stratigraphic units in the region of
  Cerro Las Minitas are described below (Figure 9.2.2) Stratigraphy Stratigraphy in the Cerro Las
  Minitas property has not been defined in detail. Detailed mapping, as well as
  detailed study of drill cores available, will be necessary to define the
  stratigraphic units and their relationships there. Inspection of underground
  workings indicates that there is a strong stratigraphic control of
  mineralization on the property, especially as regards the manto-style
  mineralization. Figure 9.2.2 Stratigraphy in the region of Cerro Las Minitas
  (After Consejo de Recursos Minerales, 1993) Regional stratigraphy has been
  defined by the Consejo de Recursos Minerales and provides a starting point for
  definition of the stratigraphy in the Minitas District. Cuesta del
  Cura and Indidura Formations (Undivided) Strata of the Cuesta del Cura
  formation are the oldest rocks exposed in the district and appear to be
  equivalent to the Baluarte formation, 90km north of the project area. The
  Cuesta del Cura formation is a marine Lower Cretaceous unit and consists
  principally of grey to black (carbonaceous), fine grained, thin to medium
  bedded limestone with thin, undulatory, intercalated dark chert beds. The typical chert-bearing strata of
  the Cuesta Del Cura formation on the property grade upwards into a mixed
  carbonate-siliclastic sequence that contains inceasing amounts of thin to
  medium bedded shales and sandstones upwards. Those strata are equivalent, but
  not typical, of the lower part of the Indidura Formation in the region. The
  stratigraphic sequence on the property is too poorly defined to allow
  separation of these units and they have been mapped as Cuesta Del Cura and
  Indidura formations undivided. Where affected by contact
  metamorphism, the limestone beds are typically recrystallized and bleached and
  are the preferred hosts for both contact metasomatic and manto-style
  mineralization. Closest to the intrusive contact, the chert beds are converted
  to a quartz-scapolite-albite assemblage and limestones are typically
  marbleized. Some of the more siliceous units are hornfelsed and their
  mineralogic compositions are as yet undetermined. Higher in the section,
  limestones containing a quartz sand component have been metamorphosed to
  garnet (predominantly grossularite)  wollastonite - epidote aggregates. Some
  of the more siliceous units are hornfelsed and their mineralogic composition
  is yet to be determined. At the intrusive contact, small amounts of
  hedenbergite and diopside have been identified, but only rarely. Metamorphism
  of the calcareous sediments typically only reaches the grade properly
  described as skarnoid, which is typical of zinc skarns. Intrusive Rocks The intrusive rocks at Cerro Las
  Minitas have not been studied or mapped in detail, but it is known that the
  central intrusive complex is composed of at least two principal phases. Both
  hornblende diorite porphyry and quartz monzonite porphyry phases are seen as
  major components of the intrusive complex. Xenoliths of diorite are present in
  the quartz-monzonite intrusive. The quartz monzonite is tan to light grey in
  color, medium to coarse grained, with a porphyritic texture containing
  phenocrysts of feldspars, quartz, amphiboles, and biotite. The diorite
  porphyry is similar in gross aspect, but contains very little K-feldspar, no
  quartz and little biotite. Peripheral to the central intrusive
  complex, numerous dikes transect the folded and metamorphosed sediments of the
  Cerro Las Minitas Dome. Mapping has not been in enough detail to identify or
  define the dikes in outcrop, but many have been seen in drill core from the
  property. Dikes that have been seen vary in composition from andesite to
  rhyolite, although most are quartz monzonite porphyry and diorite porphyry. 22   Rhyolite (Upper Volcanic
  Group) Unconformably overlying the Cuesta
  del Cura and Indidura formations and intrusives of Cerro Las Minitas are an
  undetermined thickness of rhyolites of the Upper Volcanic Group of the Sierra
  Madre Occidental. The unit outcrops in the north and northwest part of the
  property and consists predominantly of porphyritic crystal-lithic-vitric
  rhyolite flows. The presence of jasperoids has been reported in the La Papa
  area, just NW of Cerro Las Minitas and have been interpreted as evidence of
  high-level hydrothermal alteration on that area. Occasionally, thin deposits of
  continental clastic sediments are seen at the base of the rhyolitic volcanics.
  Mapping has not been completed in sufficient detail to differentiate these and
  they are presently grouped with the rhyolites of the Upper Volcanic Group on
  the property. Alluvium The alluvium is composed
  principally of red soil overlying caliche deposits that conceal underlying
  rocks in the areas of lower relief on the property. The alluvium contains
  gravel to boulder sized clasts of weathered rock. In some areas the clasts
  seem to be derived from underlying rocks and in other areas they appear to be
  alluvium derived from upslope. Mapping on the property is of insufficient
  detail to distinguish those areas. Structure Detailed mapping of the Cerro Las
  Minitas property has not been done. Existing mapping was done by CRM in 1980
  and modified by Noranda geologists in 1999 and consultants to Silver Dragon
  Mining de Mexico, S.A. de C.V. in 2006. However, the current detail of mapping
  is insufficient to define structural relationships or other possible ore
  controls on the property. Detailed mapping of the Cerro Las Minitas dome will
  be necessary for effective exploration of the property. Accordingly to CRM (1993), the
  Minitas district, like the neighboring districts Avino, La Preciosa and San
  Sebastian, lie in a graben formed by the NW-trending Rodeo fault to the west
  and the NW-trending San Lorenzo fault to the east. Faults were formed by
  post-Laramide extensional stress that affected the western margin, and in some
  cases, the central part of Mexico. Locally, Upper Cretaceous strata of
  the Cuesta del Cura, Indidura and Caracol Formations were folded about
  northwest trending axes when they were emplaced as a regional allocthon during
  Laramide compression. Injection of the Tertiary(?) intrusive complex that
  forms the core of Cerro Las Minitas further deformed the rocks locally into an
  elliptical, NW-SE trending dome. As the invading intrusives shouldered aside
  the sediments, substantial radial and low-angle faulting as well as intense
  folding of the sediments occurred. Map data from underground workings shows
  that the faulting at Cerro Las Minitas occurred before, during and after the
  mineralizing events. Although faults of almost every orientation occur on the
  property, the dominant trends are northwest and northeast, reflecting the
  prominent regional structures. The northeast trending faults appear to be most
  closely associated with mineralization. Alteration Three distinct alteration
  assemblages have been recognized at Cerro Las Minitas. 1.    Skarnoid.
  The skarnoid alteration assemblage
  is a contact metasomatic phenomenon that is of lower metamorphic grade than is
  seen in true skarn development. At Cerro Las Minitas, high-grade skarn
  minerals are very rarely seen and then in only very small quantities. The most
  prominent assemblage seen in field and underground exposures is a conversion
  of carbonate rocks to a garnet-wollastonite-epidote assemblage, with minor
  accessory minerals. In many places it is evident that the garnetized rocks
  contained a primary quartz-sand component, but in others it appears that
  silica was introduced during metasomatism. Accompanying the garnetization of the rocks is a widespread recrystallization of carbonaceous
  carbonate rocks (marmorization), generally accompanied by moderate to intense
  bleaching. In many drill intersections, the original carbon content of the
  rocks is seen to have migrated, at least in part, into abundant stylolites.
  The intensity of garnetization and marmorization of the carbonate rocks
  decreases with distance from the contact with the central intrusive complex as
  well as away from the contacts of some larger dikes. Although the first phase
  of skarnoid mineralization was Fe-rich, the garnet exposed at Cerro Las
  Minitas is almost entirely grossularite, suggesting that the main phase of
  garnetization preceded the mineralizing events, before abundant Fe became
  available for metasomatic reactions. Mineralization within the skarnoid zone
  is predominantly replacement of calcite that survived the garnetization event
  or open space filling and calcite replacement in pipe-like breccia bodies. 23   2.    Marmorization.It is clear that much recrystallization of carbonate rocks occurred during the
  intrusion of the central intrusive complex at Cerro Las Minitas. However,
  there are numerous field exposures of recrystallized carbonate rocks at
  considerable distance from intrusive contacts and it is not clear that the
  recrystallization seen there is associated with the primary metasomatic event.
  Marmorization has therefore been recognized as a distinct form of alteration
  at Cerro Las Minitas. Two types of marmorization have been recognized. a.    Non-selective
  marmorization. This is seen as a widespread recrystallization of carbonate
  rocks which shows little or no preference for individual strata. It is a bulk
  recrystallization most closely associated with the primary metasomatic event. b.    Selective marmorization.This is a visually distinct form of marmorization that is commonly seen to
  be very bed-selective. Even though it may be confined to thin beds within
  carbonate rocks that have been only very weakly recrystallized, it is a very
  strong form of recrystallization that may produce very large grain sizes. When
  this form of marmorization is well-advanced, a central core of dark brown
  recrystallized calcite is often seen in the middle of the affected bed. This
  form of marmorization has now been recognized to be present lateral to
  Ag-Pb-Zn manto mineralization discovered on the property. The photo below
  shows an example of selective marmorization. Marmorization is an
  important exploration guide at Cerro Las Minitas as the preponderance of
  mineralization that has been seen there is a replacement of recrystallized
  carbonate rocks. 3.    Late Stage Alteration.This is a form of
  alteration that is as yet poorly defined at Cerro Las Minitas. It has been
  seen only in few drill intersections and in poor field exposures. It has been
  distinguished from other forms of alteration there because it features strong
  silicification, sericitization of feldspars and pyritization. Little study of
  late-stage alteration has been made yet, but it appears to represent a later
  stage of alteration that occurred in a very near-surface environment. It is
  currently unknown if this form of alteration is associated with mineralization
  of interest. Geologic Summary The contact metasomatic and massive
  sulfide chimney Ag, Zn, Pb, Cu deposits of Cerro Las Minitas occur in
  garnetized calcareous sediments surrounding the central intrusive complex of
  the Cerro Las Minitas dome. There has been insufficient exploration on the
  property to determine the distribution of these deposits, but two small areas
  of such deposits mined to date are estimated (Enriquez, 2005) to have produced
  about 1.2 million metric tons of Ag, Zn, Pb, Cu ores. Geologic observations
  within the Dome suggest that additional skarnoid and chimney deposits remain
  to be discovered in the skarnoid zone at Cerro Las Minitas. Ag-rich, Pb-Zn manto mineralization
  was discovered at Cerro Las Minitas by drilling in 2006. This style of
  mineralization was previously unrecognized at Cerro Las Minitas. It was found
  to lie in areas distal to the central intrusive contact with essentially no
  previous exploration. That discovery reveals a new potential at Cerro Las
  Minitas and the prospect for discovery of additional tonnages of Ag-rich,
  Pb-Zn mantos there. Exploration of the Cerro Las
  Minitas dome is in its early stages. Little exploration systematic has been
  done previously and past activities in the district have been largely
  restricted to artisanal mining of outcropping deposits. Continued exploration
  can be expected to reveal new deposits. 24   DEPOSIT TYPES Mineralization seen at Cerro Las
  Minitas to date has been classified into four types based on surface and
  underground field observations and examination of drill core. Although
  production records from the area are very fragmentary, enough sampling of
  dumps, underground exposures and drill core has been completed to estimate
  typical grades in each of the four deposit types. 1.    Skarnoid.Contact
  metasomatic Au, Ag, Zn, Pb, Cu mineralization formed at the contact of the
  sediments with the central intrusive complex or larger dikes. These deposits
  are characterized by substantial pyrite content, higher copper content, Zn >
  Pb, and sphalerite with a high Fe content. The deposits have been exploited
  principally for Ag, Zn, Pb and Cu by artisanal miners at Cerro Las Minitas,
  especially in the Santo Niño-Puro Corazón area. The deposits occur as massive
  replacements of remnant carbonate bodies and disseminated calcite present in
  the garnet-wollastonite-epidote skarnoid assemblage. The bodies mined were
  very erratic in form and distribution. Typical grades in the skarnoid
  mineralization were 80  300 g/ton Ag, 2  8% Zn, 2  4% Pb and 0.5  2% Cu.
  Characteristics of this style of mineralization suggest that it is properly
  classified as zinc skarn (Megaw, 1998) 2.    Chimney.Pipe-like
  bodies of massive to semi-massive Zn, Cu and Pb sulfides, often with high Ag
  values, that have been found in and near faults that cross-cut the skarnoid
  zone. These produced the richer ores in the Santo Niño-Puro Corazón area.
  Mineralogically, these deposits show characteristics of both the skarnoid and
  manto styles of mineralization and are believed to have been formed by
  multiple mineralizing events. The ores consisted principally of massive to
  semi-massive aggregates of pyrite, sphalerite, galena, chalcopyrite and
  bornite replacing recrystallized calcite or filling open spaces. Typical
  grades in the chimneys were 200  400g/ton Ag, 2-10% Zn, 2-6% Pb and 0.5 
  1.5% Cu. 3.    Manto.Manto-style
  Ag, Pb, Zn, (Cu) deposits as replacements of carbonate strata peripheral to or
  outside the skarnoid aureole. The deposits are typically restricted to
  selected carbonate strata ("favorable beds") that have been replaced by
  massive to semi-massive Pb and Zn sulfides with accessory pyrite, + minor
  copper sulfides. Recent de-watering and inspection of underground workings has
  shown that the La Bocona deposit is a manto deposit. Peripheral Ag-Pb-Zn
  mantos are commonly associated with zinc skarns. Typical grades in the mantos
  have yet to be determined, but recent drill intersections suggest that they
  may be in the range of 300  800 g/ton Ag, 4  12% Zn, 4  15% Pb with
  negligible Cu. 4.    Dike Margin.
  Replacement mineralization alongside dikes of various compositions outside the
  skarnoid aureole of the central intrusive complex. Massive to disseminated
  sulphides of Pb, Zn and Cu are seen replacing carbonate and carbonate bearing
  rocks, with or without associated skarnoid alteration. This type of deposit is
  only known from drilling in the district and has yet to be defined in detail.
  There is insufficient data available to project grades for the dike margin
  mineralization, but generally it appears to be similar to that of the skarnoid
  zone. Of these four deposit types, the
  skarnoid and chimney deposits have been reported to have produced the bulk of
  ore exploited in the district. Recent underground exploration has shown that
  the La Bocona deposit, which produced the bulk of the ore produced in the Mina
  Piña  La Bocona area, is a manto deposit. Exploration during 2006 revealed
  that Ag-Pb-Zn manto deposits may be a major resource in the Minitas District,
  although they were not previously recognized. The very small amount of
  exploration that has been done in the district, and the results of drilling
  done in 2006, suggest that further exploration for deposits of all four types
  is definitely warranted at Cerro Las Minitas. MINERALIZATION Data collected to date reveal that
  the mineral system at Cerro Las Minitas is properly classified as a zinc skarn
  (Meinert, 1992, 1997; Megaw, 1998; Megaw et al., 1998). In some references,
  these deposits are known as Pb-Zn skarns (Ray, 1995). Zinc skarns are well
  known and mineral deposit models are well developed for them. Recognition of
  the Cerro Las Minitas system as a zinc skarn by Silver Dragon geologists in
  2006 led to a search for evidence of distal Ag-Pb-Zn mantos there. Although
  Ag-Pb-Zn mantos had not been previously recognized in the district, several
  have now been found there using the zinc skarn model as a guide to
  exploration. The deposit model suggests that there are more to be found. 25   As predicted by the zinc skarn
  model, high-Fe skarn deposits with Zn > Pb > Cu are found in the skarnoid
  (contact) zone at Cerro Las Minitas. The model also predicts that zinc
  deposits with a decreasing skarn-mineral, Fe and Cu components should be found
  at increasing distance from the intrusive contact. These have now also been
  found and it has been further discovered that these generally have higher
  silver contents than the deposits in the contact zone. These more distal zones
  have had very little previous exploration attention. The potential to discover
  additional Ag-Pb-Zn deposits there is high. Farther out from the intrusive
  contact, the model predicts that Ag-Pb-Zn mantos should occur. Directed
  exploration has now confirmed that these deposits also occur at Cerro Las
  Minitas. The La Bocona deposit, now identified as a Ag-Pb-Zn manto by
  underground exploration and sampling, was the single largest deposit that has
  yet been mined at Cerro Las Minitas and is estimated to have produced as much
  as 400,000 metric tons of ore. Drilling west of the Puro Corazón mine in 2006
  revealed that a number of Ag-Pb-Zn mantos occur in that previously unexplored
  area. Of great interest, the newly
  discovered manto deposits appear to have the highest Ag contents, with a
  number of drill intercepts returning assays in excess of 1 kg/ton Ag. Areas
  distal to the intrusive contact, where the mantos are found to occur, have had
  no exploration previous to 2006. The fact that evidence of manto
  mineralization was cut in five of seven holes drilled west of the Puro Corazón
  mine suggests that the potential for discovery of significant tonnages of high
  Ag manto mineralization there is very high. Based on past experience in
  Mexican Ag-Pb-Zn camps, the manto deposits can be expected to be the largest
  and most continuous deposits to be discovered at Cerro Las Minitas. Among the distinctive
  characteristics of zinc skarns is their generally high Mn content (Meinert,
  1992). Samples of ore minerals from underground and from drill intercepts
  confirm that this is the case at Cerro Las Minitas. The oxidized surface
  expressions of known deposits typically feature prominent Mn staining.
  Reconnaissance exploration has revealed that areas of prominent Mn staining in
  outcrop are widespread within the Cerro Las Minitas dome. Furthermore, it has
  been observed that there are some areas of strikingly Mn-enriched soils in
  some of the covered areas peripheral to the outcropping portions of the dome. Historic operations at Cerro Las
  Minitas were hampered by water problems. The inability of artisanal miners to
  deal with water inflow problems is believed to be the reason that
  mineralization was not pursued down-dip, rather then the absence of mineable
  mineralization. Intercepts of down-dip extensions of mineralization at the
  Puro Corazón mine during 2006 lend credence to that argument. Artisanal miners in the Minitas
  district appear to have avoided exploitation of the near surface oxide ores in
  favor of the deeper sulfide ores. A number of near-surface, oxide deposits are
  now known in the district, but require drilling to define. Drilling and
  underground sampling shows that the oxidized deposits have been enriched by
  supergene processes and that Ag grades within them are considerably elevated
  above that found in proto-ores below. If metallurgical testing shows that
  metals may be extracted profitably from these deposits, they offer the
  opportunity for rapid development and exploitation as several are already
  accessed by, or are very near, existing underground access. The potential for
  discovery of additional unexploited, near-surface oxide deposits appears high. Individual Ag-Pb-Zn manto deposits
  in the one million ton range are not uncommon in other Ag-Pb-Zn replacement
  districts in the Parral terrane in north-central Mexico. In light of data
  collected from the property to date, it is not unreasonable to anticipate that
  the potential for such discoveries exists at Cerro Las Minitas as well.
  Drilling by Silver Dragon in 2006 cut a number of previously unknown manto
  deposits in the district and further exploration is planned to evaluate the
  significance of those discoveries. Discovery and exploitation of only one
  large manto deposit can significantly enhance overall project potential. EXPLORATION Little systematic exploration has
  been done in the development of the Minitas District and the principal
  activities there were artisanal mining of deposits that were discovered in
  outcrop. Additional deposits were discovered below in short exploratory drifts
  driven by the miners, but relatively little underground exploration was done.
  Some mine maps and assay results from that work have been recovered, but were
  only a fragmentary record of what was done. Silver Dragon has begun a program
  of de-watering, rehabilitation, mapping and sampling of those workings and has
  found them to be more extensive than records indicated. That work is still in
  progress. 26   In 1981, CRM continued its support
  of the development of the district, completing 77m of shaft and 80m of
  crosscut to cut the upper, oxidized portion of the La Bocona deposit.
  Following that work, Sr. Jaime Muguiro deepened the Mina Piña shaft another 59
  meters to reach the 210 level. A 140 meter crosscut was driven, encountering a
  number of thin mineralized horizons and the Huisache mineralized chimney. Sr.
  Muguiro then suspended operations due to water problems. Only fragmentary
  records of that work remain and Silver Dragon geologists are mapping and
  sampling underground workings in the Mina Piña - La Bocona area to determine
  if resources remain in the area accessed by the workings and what potential
  may exist nearby. The Huisache chimney, discovered by the work of Sr. Maguiro,
  appears to have had little development and it appears that oxide resources
  remain there. In 1995, Minas de Bacis completed a
  30-day evaluation of Cerro Las Minitas which consisted of analysis of previous
  data, inspection of accessible workings and analysis of surface geology. Based
  on that work, Minas de Bacis recognized an inferred resource of 1,296,000
  metric tons grading 0.12 gr/ton gold, 102 gr/ton silver, 2.86% lead, 10.36%
  zinc and 0.15% copper (Table 13.2). The data upon which that estimate was
  based have not been found and it can only be reported as an historical
  estimate. Based on their analysis, Minas de Bacis began negotiations to
  acquire the concessions in the district. Those negotiations were unsuccessful
  and Minas de Bacis withdrew. A summary report of Minas de Bacis findings has
  been located, but much of the data used as the basis for the conclusions in
  the report has not. From 1999 to 2000, Minerales
  Noranda, SA de CV (Noranda) optioned the properties and completed an
  exploration program including 861 soil and rock samples, an aeromagnetic
  survey covering the entire district, and seven diamond drill holes, for 3,886
  meters, within the Cerro Las Minitas Dome. Results were encouraging but not up
  to Noranda's expectations and they abandoned the property. Unfortunately, the
  original Noranda data has not been found and all that has been located is
  summary data presented in a report by Proyectos Minerales y Topografia, S.A.
  de C.V. (2001). Minera Real Victoria (MRV) acquired
  leases on concessions in the Puro Corazón - Santo Niño area in 2005 and began
  a program of exploration and development in the area. In May 2005, MRV began
  driving a 2.5m X 2.5m decline into the Puro Corazón - Santo Niño workings to
  develop resources believed to be present there. MRV drove 170 meters of
  workings to connect with level 2 of the Puro Corazon workings and to make a
  preliminary exploration of the near surface portion of the La Chiva
  mineralized zone. That work was halted in November, 2005 when MRV entered
  negotiations with Silver Dragon Resources, Inc to acquire the property. The
  sampling and resource assessment started by MRV was not completed, but some
  underground geologic maps and sample data from that work have been recovered. DRILLING The Consejo de Recursos Minerales
  (CRM) has offered some support to district miners since 1977. In 1979 and
  1980, the CRM drilled seven diamond drill holes for 834.5 meters in the Mina
  Piña - La Bocona area, which was then controlled by Sr. Santiago Valdez. Drill
  logs and assay data, as well as some geologic sketch maps, were presented to
  Sr. Valdez without interpretation. No records of interpretation or follow up
  of the intercepts of mineralization made in that drilling have been found to
  date. Silver Dragon geologists are currently compiling and analyzing that
  data. A summary of the results of the CRM
  drilling is presented in Table 13.1 and the locations of the drill holes are
  shown in Figure 13.1. The results of CRM drilling have not been verified
  because the original drilling samples are not available, and thus the samples
  cannot be retested for verification. The length of drill hole intercepts is
  reported as down-hole length only. True thicknesses of intercepts have not
  been calculated. True thicknesses of intercepts have not been calculated
  because the original drill logs are not available for analysis Figure 13.1 Location Map  CRM Drill Holes 27   From 1999 to 2000, Minerales
  Noranda, SA de CV (Noranda) optioned the properties and completed a drilling
  program consisting of seven widely-spaced diamond drill holes, for 3,886
  meters, within the Cerro Las Minitas Dome. Results were encouraging but not up
  to Noranda's expectations and they abandoned the property. Unfortunately, the
  original Noranda data has not been found and all that has been located is
  summary data presented in a report by Proyectos Minerales y Topografia, S.A.
  de C.V. (2001). Most of the core from Noranda's
  drilling has been located and a partial re-examination of that core has been
  made to confirm data used in estimating the inferred mineral resource reported
  herein. Continued re-examination of that core is ongoing, as Noranda's drill
  logs have not been recovered. A summary of the results of Noranda's drilling
  are presented in Table 13.3 and the location of Noranda's drill holes is shown
  in Figure 13.2. The results of Minerales Noranda drilling have not been
  verified because the original drilling samples are not available, and thus the
  samples cannot be retested for verification. The length of drill hole
  intercepts is reported as down-hole length only. True thicknesses of
  intercepts have not been calculated because the original drill logs are not
  available for analysis.  Silver Dragon Mining de Mexico,
  S.A. de C.V. began an exploratory drilling program at Cerro Las Minitas in May
  2006, shortly after acquiring rights to the property. Concurrently, geologists
  began compiling and analyzing existing data for the property. Examination of
  that data showed that it was inadequate to guide further exploration
  operations and a program of rehabilitation, mapping and sampling existing
  workings on the property began. That program is still in progress, but much of
  the work in the Puro Corazón - Santo Niño workings is near completion. A summary of Silver Dragon's drill
  results is presented in Table 13.4 and the location of those drill holes is
  shown in Figure 13.2. The results of selected portions of Silver Dragon's
  drilling has been verified, and is discussed in Item16 Data Verification. The
  length of drill hole intercepts is reported as down-hole length only. True
  thicknesses of intercepts have not been calculated. Nine of the eleven holes
  drilled have been logged, sampled and assayed. Analysis of the two remaining
  holes is pending availability of qualified geotechnical personnel. On the
  basis of interpretation of data in hand, the Company has planned an aggressive
  exploration and development program for 2007.  SAMPLING METHOD AND APPROACH Sampling Overview:
  All surface sampling, underground
  sampling, and drill hole sampling is presumed to have been conducted by
  previous workers in conformance with the professional standards of the mining
  industry. No data are available that describe sampling methods and approach.
  Verification sampling has been conducted by Vector for the purpose of this
  report and is described in Item 16. Vector collected 10 representative
  mineralized rock samples from various locations on the Cerro Las Minitas
  property as indicated below: Pura
  Corazon              2 samples
    Guadalupe Ramp       
  2 samples
    La Pina
  Ore                  4 samples
    Bocona                        2 samples Random hand samples were collected
  from the specific areas and placed in standard tight-woven cloth sample bags,
  sealed, and marked with an identification number. SAMPLE PREPARATION, ANALYSES AND
  SECURITY Past Sampling and Drilling Programs:
  No description is available for past sample preparation, analyses and
  security. 28   Verification Samples Lab Accreditation:
  Vector's 10 verification samples
  were delivered to ALS Chemex Laboratories in Vancouver, B.C., Canada which is
  ISO 9002 and ISO 9001:2000 certified. The coarse rejects from Chemex Vancouver
  were submitted to American Assay Laboratories in Reno, Nevada which is under
  the direction of a Certified Arizona Assayer. A set of 13 pulps from previous
  drill sample analysis was delivered to Vector and submitted to Florin
  Analytical Services in Reno, Nevada, which is a Nevada accredited laboratory. Sample Preparation:
  Initial sample preparation was
  conducted by ALS Chemex Laboratories. Chemex returned the coarse rejects to
  Vector, which were then submitted to American Assay Laboratories in Sparks,
  Nevada for verification testing. No aspect of sample preparation was conducted
  by an employee, officer, director or associate of Silver Dragon. Samples were
  logged in by the lab, assigned a bar code for tracking, dried, crushed, and
  pulverized for analysis. Samples were crushed using a jaw and/or roll crusher
  and then split with a riffle splitter to provide a homogeneous sub-sample,
  fully representative of the original field sample. The split was then
  pulverized to -200 mesh. Multi-Element Analyses:
  ALS Chemex conducted 34-element
  analysis (Lab code ME-ICP41) on the 10 Vector samples by aqua-regia acid
  digestion and ICP-AES analysis (plasma mass spectrometry). Silver, lead, and
  zinc analysis was conducted on all samples by atomic absorption using Lab code
  AA46. American Assay conducted 69-element analysis (Lab code ICP-2A) on the
  ALS Chemex coarse rejects from the 10 Vector samples by aqua-regia acid
  digestion and ICP analysis. Results for selected elements are presented in
  this report. Quality Control:
  Barren wash material is used to
  ensure that no contaminants are present between sample preparation batches.
  All batches routinely contain reference material (standards), duplicate
  samples, and blanks for analysis. Subsequent analytical data are monitored and
  audited by the laboratory for internal control and to ensure precision and
  accuracy. No independent standards or blanks were submitted by Vector. Security:
  All 10 verification samples were
  collected by Vector and assigned an individual sample number (1001 through
  1010), and the individual sample bags were tied secure. The samples were then
  transported by vehicle in Vector's presence to Guadalupe Victoria, where they
  were shipped directly to ALS Chemex in Guadalajara and then to ALS Chemex in
  Vancouver, B.C., Canada. No security seals were compromised in the presence of
  Vector. Statement of Adequacy:
  It is Vector's opinion that the
  sampling, sample preparation, analytical procedures, and security of the 10
  samples collected by Craig L. Parkinson, P.Geo are acceptable and of
  professional quality. DATA VERIFICATION Conditions & Limitations:Vector spent two days
  inspecting relevant data in the office of Silver Dragon in Guadalupe Victoria
  and conducting a site inspection of the Cerro Las Minitas property. Geologic
  maps, land maps, and sampling data were provided to Vector by Douglas R. Wood,
  P.Geo and Silver Dragon personnel. Vector spent two days inspecting and
  sampling the property, and access to all mineralized areas was by foot and
  vehicle. No underground sampling was conducted owing to safety considerations. Verification Summary: Literature review
    Inspection and
  discussion of data with Silver Dragon representatives (2 days)
    Site Visit (2 days)
    Sampling of Pura
  Corazon
    Sampling of Guadalupe
  Ramp
    Sampling of La Pina
  Ore
    Sampling of Bocona
    Discussions with
  Mexican geologists on site and in the office
    Analysis of samples
  by ALS Chemex in Vancouver, Canada
    Analysis of samples
  by American Assay in Sparks, Nevada
    Analysis of drill
  pulps by Florin Analytical Services in Reno Nevada
    Compilation of assay
  data
    Review of all data 29   Verification Sampling:
  Craig L. Parkinson, P.Geo
  personally collected all verification rock grab samples during the site visits
  on September 26 and 27, 2006. Sampling focused on mineralized exposures at
  Pura Corazon, Guadalupe Ramp, La Pina, and Bocona. Mr. Parkinson was
  accompanied by Mr. Wood, who provided geologic input on the location of
  existing anomalous mineralization. The grab samples were collected by picking
  up various-sized rock by hand and placing them in a clean new cloth sample
  bag. Sample security, analytical quality control and assurance are presented
  in Item 15. In addition to the 10 rock samples
  collected by Vector, the authors selected 13 sample pulps from previous
  drilling and sample analysis. Mineralized pulp samples were selected from
  drill hole numbers LM-01, LM-02, and LM-03, and the pulps were delivered to
  Vector and subsequently submitted for verification analysis. Verification Sample Results:Tables 16.1 and 16.2 summarize
  the sample results. All areas reported as containing significant silver, lead,
  zinc, and copper mineralization were verified by Vector. Select sample results
  are summarized below. Sample Numbers
      LocationSamples 1001 and 1002
      Pura CorazonSamples 1003 and 1004
      Guadalupe RampSamples 1005 thru 1008
      La Pina OreSamples 1009 and 1010
      Bocona ALS Chemex
      American AssaySample
      Ag
      Pb
      Zn
      Cu
      Ag
      Pb
      Zn
      CuNumber
      ppm
      %
      %
      ppm
      ppm
      ppm
      ppm
      ppm1001
      145
      4.4
      9.91
      2250
      133
      19900
      94700
      16201002
      205
      7.2
      5.85
      4910
      228
      18100
      69200
      50401003
      238
      4.1
      19.65
      6970
      248
      17100
      166000
      57601004
      139
      4.4
      9.93
      1180
      100
      20600
      82600
      7671005
      1170
      27.7
      11.75
      888
      299
      20100
      10100
      6751006
      1305
      >30.0
      1.96
      324
      271
      21100
      21500
      3241007
      956
      25.3
      17.6
      1420
      312
      17400
      170000
      11801008
      1000
      25.7
      17.4
      2620
      212
      15600
      144000
      17501009
      150
      1.97
      11.2
      6080
      186
      18300
      135000
      55701010
      57
      .76
      4.1
      1340
      34
      4440
      30400
      742Note:    10,000 ppm = 1%Table 16.1:  Summary of Vector verification results of
      rock grab sampling and analysis.  Florin Analytical
      Original AssaySample
      Ag
      Pb
      Zn
      Cu
      Ag
      Pb
      Zn
      CuNumber
      ppm
      %
      %
      %
      ppm
      %
      %
      ppm16050
      276
      12.70
      9.94
      2.16
      275
      11.2
      9.6
      2230016080
      146
      0.43
      3.42
      2.62
      142
      0.3
      3.4
      2720016081
      432
      0.88
      31.40
      6.98
      402
      0.7
      >30
      7710016082
      206
      0.42
      10.78
      2.38
      205
      0.3
      10.6
      2440016128
      Insufficient sample amount
      482
      14.7
      14.4
      149516129
      144
      3.75
      9.52
      0.02
      141
      3.7
      0.8
      16016130
      490
      16.14
      3.66
      0.04
      539
      17.1
      4.2
      52716145
      212
      10.08
      9.18
      1.01
      201
      9.3
      9.2
      1040016146
      714
      23.80
      19.52
      0.35
      804
      21.2
      19.2
      364016152
      684
      19.48
      14.94
      0.16
      751
      21.2
      16.2
      186116153
      146
      2.92
      2.82
      0.04
      134
      2.8
      3.1
      44116219
      592
      11.66
      4.36
      0.13
      683
      12.6
      4.9
      172016220
      916
      18.30
      26.60
      0.08
      977
      19.9
      28.0
      954Note:      10,000 ppm = 1%Table 16.2:  Summary of Vector verification results from
      previous drill pulps. The above results are similar to
  the assay results from previous drilling provided in Tables 13.1, 13.3, and
  13.4. The verification sampling and assay results conducted by Vector are
  indicators of significant mineralization at Cerro Las Minitas. Verification Statement:
  It is the author's opinion that the
  basic data package on the Cerro Las Minitas property is reliable and
  represents professional-level work. The presence of significant silver, lead,
  zinc, and copper mineralization of economic interest is confirmed. ADJACENT PROPERTIES There are small mines and prospects
  located in the low hills one kilometer to the northwest of Cerro Las Minitas.
  Those workings are located on concessions held by Industrias Peñoles. Brief
  field inspection by Mr. Wood revealed that the workings explore Ag-Pb-Zn-Cu
  replacement deposits associated with quartz-monzonite dikes like those seen at
  Cerro Las Minitas. No other information has been collected about those
  occurrences. 30   All mineral ground surrounding the
  Cerro Las Minitas concessions of Silver Dragon Mining de Mexico, S.A. de C.V.
  is held under concessions of Industrias Peñoles, as verified by Mr. Wood
  during a standard mining title search for the property and surrounding area.
  Mr. Parkinson and Mr. Wood have been unable to verify the information and the
  information is not necessarily indicative of the mineralization on the Cerro
  Las Minitas Property. MINERAL PROCESSING AND
  METALLURGICAL TESTING Although artisanal miners have been
  producing ore from Cerro Las Minitas since the early 1960's, no reliable
  records of either production or mineral processing data have yet been found.
  Enriquez (2005) reported that historical recoveries from sulfide ores treated
  by flotation are on the order of 85% for silver, 75% for gold, 65% for lead,
  and 75% for zinc. Enriquez did not present any supporting data for the
  recovery data. Minas de Bacis completed a 30-day
  review of data available at Cerro Las Minitas in 1995. They reported metal
  recovery data for sulfides from the La Bocona Mine, sulfides from the Puro
  Corazón Mine and oxides from the Puro Corazón Mine. It is uncertain how they
  obtained this data, but local operators say that it was obtained from the
  artisanal mills that were treating the ore in the Velardeña district. These
  data are not considered reliable and are reported as historical data (Table
  18.1).  ITEM 3.  LEGAL PROCEEDINGS As of May 14, 2007, management is
  not aware of any legal proceedings in which we are a party, as plaintiff or
  defendant, or which involve any of our properties. 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,
  2006, 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, 2005First
      Quarter........................................
      $0.38
      $0.04Second
      Quarter...................................
      $0.38
      $0.10Third
      Quarter......................................
      $0.18
      $0.085Fourth
      Quarter....................................
      $0.51
      $0.09Fiscal Year Ended December
      31, 2006First
      Quarter........................................
      $1.94
      $0.43Second
      Quarter...................................
      $1.35
      $0.83Third
      Quarter......................................
      $1.79
      $0.70Fourth
      Quarter....................................
      $2.46
      $1.10 31   On June 27, 2007, the closing
  trade price of our common stock as reported on the Bulletin Board was $0.92
  per share. On that date, there were approximately 177 shareholders of record
  of our common stock. 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 2006, not previously reported on the Company's
  10-QSB On
  October 13, 2006, we 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 our common stock
  and share purchase warrants.  One class A warrant was issued for every two
  units and will entitle the holder to purchase an additional share of our
  common stock at any time over a period of two years from the closing date at
  an exercise price of $2.00 per share.  One class B warrant was issued for
  every two units and will entitle the holder to purchase an additional share of
  our common stock at any time over a period of two years from the closing date
  at an exercise price of $5.00 per share. On November 9, 2006, we entered
  into 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 our common stock and
  share purchase warrants.  One class A warrant was issued for every two units
  and will entitle the holder to purchase an additional share of our common
  stock at any time over a period of five years from the closing date at an
  exercise price of $2.00 per share.  One class B warrant was issued for every
  two units and will entitle the holder to purchase an additional share of our
  common stock at any time over a period of five years from the closing date at
  an exercise price of $5.00.  Two class C warrants were issued for each unit
  issued on closing.  The per warrant share exercise price to acquire a share of
  our common stock is $1.00 and is exercisable until one year from the closing
  date.
  With respect to class C warrants, if certain conditions are met we may force
  the holder to exercise the warrants in full or in part at the exercise price
  of $1.00 per Share within one year of the closing date. If the holder fails to
  timely pay the exercise price, we may cancel a corresponding amount of class C
  warrants held by such holder.
  In connection
  with the private placement closed on November 9, 2006, we paid our broker,
  Dragonfly Capital Partners LLC, a cash fee in the amount of $35,000 and issued
  class A and B common stock purchase warrants.  The class A and class B common
  stock purchase warrants will each entitle the holder to purchase 17,500 common
  shares at any time for a period of five years from the date of the closing at
  an exercise price of $2.00 and $5.00 per share, respectively. On December 29, 2006, we 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 our common stock
  and share purchase warrants.  One class A warrant was issued for every two
  units and will entitle the holder to purchase an additional share of our
  common stock at any time over a period of two years from the closing date at
  an exercise price of $2.00 per share.  One class B warrant was issued for
  every two units and will entitle the holder to purchase an additional share of
  our common stock at any time over a period of two years from the closing date
  at an exercise price of $5.00 per share. 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. 32   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 2007. Our property in China has been and
  is being aggressively drilled. A test operation has commenced to provide basic
  data on design, ore dressing and business profits to be used in planning for
  future large-scale production. Geologic mapping, trenching and drilling work
  is underway for three of the properties known as Saihanaobao, Zhuanxinhu and
  Laopandao Beihou. We expect an initial NI 43-101 report on the Erbaohuo
  property to be released in the third quarter of 2007. We will also focus on the
  acquisition from Hubei Silver and Cistex 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. The acquisition
  is subject to a number of conditions including, but not limited to, the
  delivery by Hubei Silver of all geological and technical data related to the
  mine, an audit of Hubei Silver and an evaluation of its assets based on U.S.
  GAAP valuation methods and the execution of a definitive agreement. The
  purchase price, subject to confirmation of the value of Hubei Silver's assets,
  is approximately $2.4 million in cash along with shares of restricted common
  stock of Silver Dragon valued at $1.6 million on closing. 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 are planning to build a ramp directly to the
  main ore body in order to extract the ore daily and load it onto trucks for
  transport to a processing plant. 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. The cost of this report was
  approximately $25,000. The NI 43-101 report recommends a
  program of detailed geologic mapping, surface geochemical sampling and ground
  magnetic sampling to collect the basic geotechnical information that will be
  necessary to support an effective exploration and development program at Cerro
  Las Minitas. The program will include geologic mapping of the entire
  outcropping portion of the Cerro Las Minitas Dome at a scale of 1:2000, with
  more detailed mapping in areas of special interest, and definition of project
  stratigraphy in detail from examination of exposures and drill core.
  Additionally, the program will include reconnaissance geochemical soil and
  rock sampling and ground magnetic surveying to cover the entire property. This
  first phase program will include drilling 30 diamond drill holes from surface
  (4500 meters) to develop oxide resources identified on the property and an
  additional six diamond drill holes (1200 meters) drilled from underground in
  the Puro Corazón mine to further develop discoveries of sulfide mineralization
  made during the 2006 drilling program. The goals of this program are: 1.    To compile a basic database
  of geotechnical information to support effective exploration at Cerro Las Minitas. All existing data will be incorporated into the database and recorded
  on maps, data sheets and reports on the various categories of geotechnical
  information. This geotechnical data will bear heavily on every phase of the
  Cerro Las Minitas Project and is strongly recommended. 2.    To define, by analysis of
  geotechnical data collected, the sites on the property that offer the best
  potential for near-term discovery of near-surface oxide ore. Those discoveries
  are anticipated to extend downwards into unoxidized sulfide ores. Definition
  of the most favorable sites for further exploration expenditure will enhance
  the effectiveness of the Project and hasten its development and is strongly
  recommended. 33   3.    To define and develop the
  inferred oxide resources that have been identified on the property, including
  drilling, trenching and preliminary metallurgical tests. Oxide resources
  already identified on the property offer the best potential for near-term,
  low-cost production from the project and justify this expenditure. 4.    To define and further
  develop the carbonate replacement Ag-Pb-Zn mineralization that was discovered
  west of the Puro Corazón mine in 2006. The exploration model suggests that
  carbonate replacement deposits at Cerro Las Minitas may offer the greatest
  long-term production potential on the property and justifies this
  investigation. Table 22.1 presents an aggressive
  first-phase exploration and development program proposed for the Cerro Las
  Minitas property. Expense items are listed with a description where
  appropriate and a total cost. The length of this program is 10 months, from
  inception through completion of a status report. Personnel costs are based on
  employment of national geotechnical personnel. Table 22.1
  Cerro Las Minitas Project, Durango, Mexico 
  Proposed Project Budget.
  Surface Geology, Geochemisty, GeophysicsItem
      Explanation
      Cost $ USSurface Agreements
      
      $5,000Ground Magnetic Survey
      
      $40,000Geochemical samples
      2500
      $50,000Supplies
      
      $3,000Project Geologist (2)
      10 months
      $125,000Geologist (2)
      10 months
      $100,000Draftsman
      8 months
      $6,800Surveyor
      Topographic control
      $5,000Sampler (9)
      3 months
      $21,600TOTAL - Surface Geology, Geochemisty, Geophysics
      $356,400
  Oxide Resource DevelopmentPermitting
      
      2,000Drill Site Preparation (Surface)
      30 drill sites
      $25,000Surface Drilling (incl Assays)
      30 holes X 150 m @ $100/m (incl assays)
      $450,000Project Geologist
      5 months
      $32,000Geologist
      5 months
      $25,000Sampler (2)
      5 months
      $8,000Draftsman
      2 months
      $1,700Surveyor
      
      $1,000Supplies
      Bags, core boxes, saw blades, etc.
      $2,500Metallurgical Testing
      Includes mining of test samples
      $18,000TOTAL - Oxide Resource Development
      $565,200
  New Discovery DevelopmentDrill Site Preparation (Underground)
      
      
      $8,000Underground Drilling (inc Assays)
      6 holes X 200 m @ $90/m (incl assays)
      $108,000Project Geologist
      5 months
      $32,000Geologist
      5 months
      $25,000Samplers (2)
      5 months
      $8,000Draftsman
      2 months
      $1,700Surveyor
      
      $1,500Supplies
      Bags, core boxes, saw blades, etc.
      $2,500Total - New Discovery Development
      $186,700
  Project AdministrationProject Administration
      Includes Vehicles, Field Office, & Administration
      $75,000Total - Project Administration
      $75,000Total Project Budget
      $1,183,300 We will follow the exploration
  program recommended by the NI 43-101 report and revisit the program on a
  quarterly basis. Currently, surface geochemical sampling and geologic mapping
  are underway to define drill targets in the southwest of the Puro Curazon
  working and to the southeast of the La Pina-La Bocona workings. In La Chiva
  structure in the Puro Corazon workings, work is underway to define grades and
  tonnages. De-watering of the lower levels of both the Puro Corazon and La
  Bocona mines and rehabilitation of old workings are underway. We expect the cost of exploration
  activities, mine development and administration costs in Mexico over the next
  12 months to be approximately $5,300,000. Cash Requirements. We will need significant additional
  funds to continue operations, which we may not be able to obtain. We estimate
  that we must raise approximately $12 million over the next 12 months to fund our anticipated capital
  requirements and our obligations under the agreements for the concessions in
  Cerro las Minitas, Mexico, the agreement with Sino-Top, and the agreement with
  Hubei Silver, as well as the costs of exploration, mine development and
  administration. Our agreement with Jaime Muguiro
  Pena required us to make a $450,000 payment along with 450,000 common shares
  in 2006.  Our agreement with Minera Real Victoria, S.A. de C.V. required us to
  make a $100,000 payment on closing along with 2,000,000 common shares in 2006,
  a further payment of $100,000 on September 11, 2006, as well as payments
  totaling $200,000 over the next the next 2 years. We estimate that we will
  need to raise approximately $5,300,000 to meet our obligations under the Cerro
  las Minitas agreements, as well as to continue with the exploration and mining
  of the properties throughout 2007. In addition, we will require an additional
  $2,000,000 should we choose to exercise the option to purchase the mining
  concession from Silvia Villasenor Haro within 3 years, or $3,000,000 within 5
  years. We currently do not have arrangements in place to raise the capital to
  fund these obligations. Our agreement with Sino Silver and
  Sino-Top required us to make a $150,000 payment on closing, with a further
  payment of $100,000 on May 20, 2006, and a balance of $400,000, which was paid
  on November 7, 2006 when we received approval to the transaction by
  authorities in China. In addition, we have advanced an additional $536,030 to
  Sino-Top in 2006 for further exploration of the mining properties, and we
  estimate that we will require a minimum of $2,000,000 for exploration and
  mining through the end of 2007. The agreement with Hubei Silver
  will require us to pay $2,400,000 in cash and issue restricted shares of our
  common stock valued at $1,600,000 for this interest on closing. We have historically satisfied our
  working capital requirements through the private issuances of equity
  securities as well as from our chief executive officer. We will continue to
  seek additional funds through such channels and from collaborative and other
  arrangements with corporate partners. In particular, we will need $12 million
  in additional funding to continue our operations for the next twelve months.
  If we fail to obtain sufficient funds, we may need to delay, scale back or
  terminate some or all of our mining exploration programs. 34   Off Balance Sheet
  Arrangements We do not have any ofbalance
  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, 2006 and 2005 Revenues and Losses During the years ended December 31,
  2006 and 2005, we did not have any revenues. During the years ended
  December 31, 2006 and 2005, we incurred operating expenses of  $
  7,923,679  and $ 585,658 respectively.  Increases were in all
  areas including: Professional fees
  (legal and audit)  were due to
  increased disclosure requirements and filings, and negotiation and
  acquisitions of properties in Mexico and China. The Company retained
  consulting services for strategic planning 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 as the Company
  set up offices in Mexico and China to manage the acquisitions. Management fees reflecting the Chief
  Executive Officer's new
  employment contract with higher salary and performance bonus for acquiring
  the Mexican properties, in addition to a bonus for negotiating the Chinese
  property acquisition. During the years ended December 31,
  2006 and 2005, we incurred net other income of $6,776 and $779, 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 and abandoned the Linear Gold
  project in Mexico, and incurred losses of $302,755. During the years ended December 31,
  2006 and 2005, we reported a net loss of $8,396,760 and $584,879 respectively.
  The reason for the increase in 2006 is due to factors discussed above. Liquidity and Capital Resources As of December 31, 2006, we had
  $2,920,592 in cash and $398,323 in other receivables (which represented VAT
  refunds receivable and employee loans). In addition, we had $28,585 in related party advances,
  and accounts payable and accrued liabilities totaling of $660,212 for a
  working capital surplus of $3,340,057 compare to a working capital deficit of
  ($195,655) in 2005. During 2006, we have been dependent on the issuance of
  common stock 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, 2006, 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 the acquisition from Hubei Silver, 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. 35   Going Concern As of December 31, 2006, we had an
  accumulated deficit of $11,519,165. 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). ITEM 8A.  CONTROLS AND
  PROCEDURES 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. 36   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 June 27,
  2007, Mr. Hazout beneficially owned 26.7% of the shares of the common stock of
  the Company ("Company Shares"). Mr. Hazout has served as the
  Chief Executive Officer and President of TII since June 25, 1998. Mr. Hazout
  has served as sole director of TII since June 25, 1998. As of March 30, 2007,
  Mr. Hazout beneficially owned 100% of the shares of the capital stock of TII. Mr. Hazout directed the
  investment by TII of the Funds in (i) 35,000 shares of common stock of
  Qualcomm at an aggregate purchase price of $1,636,814.10 on May 26, 2006, and
  (ii) 2,500 shares of the iShares Silver Trust exchange-traded fund ("ETF") at
  an aggregate purchase price of $303,635 on June 6, 2006. For purposes of
  convenience, TII's brokerage account at Union Securities Ltd. was used. Over the course of the next few
  months, Mr. Hazout directed TII to purchase and sell shares of Qualcomm as
  detailed below. Mr. Hazout directed the purchase by TII of the following
  Qualcomm shares on the following dates: (i)
  35,000 shares on May 26, 2006 at an aggregate purchase price of $1,636,814.10;
  
  (ii) 5,000 shares on August 21 2006 at an aggregate purchase price of
  $183,084.74; 
  (iii) 3,000 shares on September 7, 2006 at an aggregate purchase price of
  $115,774.11; 
  (iv) 2,000 shares on September 11, 2006 at an aggregate purchase price of
  $77,355.00; 
  (v) 2,500 shares on October 17, 2006 at an aggregate purchase price of
  $97,480.00; 
  (vi) 2,500 shares on October 18, 2006 at an aggregate purchase price of
  $98,330.00; 
  (vii) 1,500 shares on November 11, 2006 at an aggregate purchase price of
  $54,139.95 In addition, Mr. Hazout
  directed the sale by TII of the following Qualcomm shares on the following
  dates: (i)
  8,000 shares on July 25, 2006 for aggregate proceeds of $288,596.60; 
  (ii) 2,000 shares on August 2, 2006 for aggregate proceeds of $71,149.00; 
  (iii) 2,500 shares on September 15, 2006 for aggregate proceeds of $93,730.00;
  
  (iv) 6,000 shares on September 20, 2006 for aggregate proceeds of $222,959.33;
  
  (v) 1,500 shares on September 25, 2006 for aggregate proceeds of $56,350.00;
  
  (vi) 2,500 shares on September 26, 2006 for aggregate proceeds of $97,185.00;
  
  (vii) 2,500 shares on October 4, 2006 for aggregate proceeds of $91,250.25;
  
  (viii) 5,000 shares on October 27, 2006 for aggregate proceeds of $184,060.21;
  
  (ix) 1,500 shares on November 3, 2006 for aggregate proceeds of $54,274.00;
  
  (x) 10,000 shares on November 14, 2006 for aggregate proceeds of $349,186.00;
  
  (xi) 10,000 shares on November 24, 2006 for aggregate proceeds of $369,763.59 Mr. Hazout subsequently
  directed the sale by TII of all of the ETF shares at an aggregate sale price
  of $308,378.52 on August 16, and 21, 2006. Mr. Hazout directed the
  investment by TII in a total of 50,000 shares of First Majestic Resource Corp.
  on November 15, 2006, at an aggregate purchase price of $160,562 from the
  cash proceeds of the aforementioned sales. Mr. Hazout subsequently directed
  the sale by TII of all of the First Majestic shares on November 23, 2006 at an
  aggregate sale price of $154,525. 37   Mr. Hazout directed the
  investment by TII in a total of 276,545 Company Shares using $392,830 from
  the cash proceeds from the aforementioned sales as more particularly described
  below: Mr. Hazout directed the
  purchase by TII of the following Company Shares on the following dates: (i)
  50,000 Company Shares on August 8, 2006 at an aggregate purchase price of$50,190.00; 
  (ii) 50,000 Company Shares on August 17, 2006 at an aggregate purchase price
  of $63,402.50; 
  (iii) 45,000 Company Shares on September 15, 2006 at an aggregate purchase
  price of $55,654.01; 
  (iv) 20,000 Company Shares on September 20, 2006 at an aggregate purchase
  price of $24,270.00; and 
  (v) 35,000 Company Shares on September 21, 2006 at an aggregate purchase price
  of $41,400.00. The first of the three
  foregoing purchases on Form 4s were filed for Mr. Hazout with the Securities
  and Exchange Commission ("SEC") on August 10, 2006, August 21, 2006 and
  September 19, 2006, respectively. Mr. Hazout reported the last two of the
  foregoing purchases on a Form 4 filed with the SEC on September 22, 2006. In course of working on the
  Form 10-QSB for the third quarter of the Company, SF Partnership, the
  independent auditors of the Company, notified the Company on November 8, 2006
  that above-mentioned transactions may be determined to be in violation of the
  Sarbanes-Oxley Act of 2002, namely, Section 402 of this Act. On November 20, 2006, Mr.
  Hazout directed TII to liquidate all the remaining shares of Qualcomm and
  First Majestic as detailed above, in order to return the proceeds in TII's
  account, which constituted all of the proceeds of disposition in the Company's
  account with TII less the margin amount and interest, to the Company. In
  addition, Mr. Hazout directed TII to order a stock certificate for the 200,000
  Company Shares. Mr. Hazout received the certificate for the 200,000 Company
  Shares on January 23, 2007 and immediately effectuated its transfer to the
  Company's treasury for cancellation.  Mr. Hazout reported this on a Form 4
  filed with the SEC on February 8, 2007. Of the $1 Million which TII had
  been provided in trust, approximately $187,000 has been return to the Company.
  Neither Mr. Hazout, nor TII received any fees or commissions as a result of
  TII's trusteeship as described herein. The Company is taking actions
  to prevent the recurrence of events of this nature in the future, including
  hiring an Acting Chief Accounting Officer to oversee the financial operations
  of the Company, as well as to appoint additional members to the Board of
  Directors. Under the supervision and with the participation of our management,
  including our Chief Executive Office and acting Chief Accounting Officer, we
  evaluated the effectiveness of the design and operation of our disclosure
  controls and procedures (as defined in Rule 13a-15 under the Exchange Act) as
  of December 31, 2006 (the "Evaluation Date"). Based upon that evaluation, the
  Chief Executive Officer and acting Chief Accounting Officer concluded that, as
  of the Evaluation Date, our disclosure controls and procedures were
  ineffective in timely alerting them to material information relating to us
  required to be included in our periodic SEC filings, on the basis of our delay
  in filing this annual report and for our acquisition of assets in Mexico and
  China for which we were ill equipped to deal with the disclosure required on a
  timely basis. 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. 38   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
      42
      Chief Executive Officer,
      President and Director Marc M. 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. Since 1998, Mr. Hazout has been
  President and Chief Executive Officer of Travellers International Inc., an
  investment and merchant banking firm headquartered in Toronto. Mr. Hazout has
  served as sole director of Travellers International, Inc. since June 25, 1998.
  As of May 14, 2007, Mr. Hazout beneficially owned 100% of the shares of
  the capital stock of Travellers International, Inc. 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. No director or officer has been
  involved in legal proceedings. 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 2006,
  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 Currently, we have only limited
  business operations and only one director and one officer and, therefore, we
  believe a code of ethics would have limited utility. We intend to adopt such a
  code of ethics as our business operations expand and we have more directors,
  officers and employees. Audit Committee We have only one director and
  therefore do not have an audit committee or an audit committee financial
  expert. 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, 2006 and 2005 of the person who was, at June
  27, 2007 the chief executive officer (the "named officer"). 39   SUMMARY COMPENSATION TABLE NonqualifiedNon-Equity
      DeferredName and
      
      
      
      Stock
      Option
      Incentive Plan
      Compensation
      All OtherPrincipal
      Year
      Salary
      Bonus
      Awards
      Awards
      Compensation
      Earnings
      Compensation
      TotalPosition
      
      ($)
      ($)
      ($)
      ($)
      ($)
      ($)
      ($)
      ($)Marc
      2006
      288,000
      -
      
      
      
      
      1,302,780*
      1,590,780Hazout,Director,President
      2005
      252,000
      -
      
      
      
      
      None
      252,000and ChiefExecutiveOfficer
      2004
      252,000
      -
      
      
      
      
      None
      252,000 *Travellers International Inc.
  (''Travellers'') received 1,000,000 restricted common shares valued at $0.6478/share, being Marc Hazout's signing bonus with respect to his Employment
  Agreement.  Travellers received another 1,000,000 restricted common shares
  valued at $0.6551/share in consideration for Marc Hazout successfully completed
  the transaction in Cerro las Minitas, Mexico.  Marc Hazout is the sole
  director, officer and shareholder of Travellers We awarded no stock purchase
  options, or any other rights to any of our directors or officers in fiscal
  years ended December 31, 2006 and December 31, 2005. We do not have a
  Long-Term Incentive Plan. Equity Compensation Plan
  Information The Company had no equity compensation plan in 2006. On March 31, 2005, the Company issued 3,254,018 restricted shares
  to Mr. Hazout in consideration for accrued salary and expenses owing to Mr.
  Hazout pursuant to his previous Employment Agreement which expired in July
  2005. On November 15, 2005, the Company entered into an Employment
  Agreement with Marc Hazout. The Employment Agreement provides that Mr. Hazout
  shall be employed by the Company for a term of five years, and is entitled to
  a base salary of $288,000 per year. Mr. Hazout is also entitled to a
  commission on sales generated by him consistent with the Company's commission
  policy for all sales personnel.   Further, he is entitled to 8 weeks paid
  holiday and 14 personal days, sick leave, medical and group insurance,
  participation in pension or profit sharing plans of the Company, and a car
  allowance of up to $3,000 per month. In the event of a termination of the
  Employment Agreement without cause by the Company, he will be entitled to
  severance equal to 100% of his remaining base salary under the Employment
  Agreement, plus an amount equal to 75% of the base salary plus full medical
  coverage for 12 months following the termination date. The Employment
  Agreement contains provisions prohibiting him from competing with the Company
  or soliciting customers or employees from the Company for a period of one year
  following the termination of his employment. Compensation of Directors 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 us.  We currently have one
  director who is also our president and chief executive officer. 40   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 April 13, 2007 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
      17,195,206
      26.7%Officers and Directors as a
      group
      17,195,206
      26.7%(1) Based on 64,396,488 shares issued and outstanding as of
      June 27, 2007 .(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 April 8 and November 5, 2004, we
  issued to Travellers International, Inc. ("Travellers") 375,000 shares of the
  common stock and 200,000 shares of the common stock, respectively, in
  settlement of payables of $25,000 due to Mr. Hazout. Mr. Hazout is the
  President and the Chief Executive Officer of Travellers, an investment and
  merchant banking firm headquartered in Toronto, since June 25, 1998. Mr.
  Hazout has served as sole director of Travellers since June 25, 1998. As of
  May 14, 2007, Mr. Hazout beneficially owned 100% of the shares of the
  capital stock of Travellers. Marc Hazout has served as our Chief
  Executive Officer and President of since June 1, 2002. Mr. Hazout has served
  as a director for us since June 1, 2002, and has served as our sole director
  since September 21, 2002. As of April 13, 2007, Mr. Hazout beneficially owned
  approximately 27.7% of the shares our common stock. On March 31, 2005, we issued
  Travellers 3,254,018 shares of the common stock in settlement of accrued and
  outstanding salary and expenses of $813,504.54 ($864,000 minus short swing
  profits owing to us in the sum of $50,495.46) due to Mr. Hazout pursuant to
  his Employment Agreement dated July 10, 2002. 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 May 15, 2006, we entered into a
  trust arrangement with Travellers for the deposit by us of $1,000,000 for the
  purposes of investing on behalf of us. We had received proceeds of an equity
  financing to be used towards our obligations in Mexico and China over the next
  several months. As part of the investment, Mr. Hazout directed Travellers to
  purchase a total of 276,545 shares of our common stock using $392,830 as
  described below: 41   (i)    50,000 shares of common
  stock on August 11, 2006 at an aggregate purchase price of $50,000; (ii)   50,000 shares of common
  stock on August 22, 2006 at an aggregate purchase price of $63,237; (iii)  45,000 shares of common
  stock on September 20, 2006 at an aggregate purchase price of $55,439; (iv)  20,000 shares of common stock
  on September 25, 2006 at an aggregate purchase price of $24,090; and (v)   35,000 shares of common stock
  on September 26, 2006 at an aggregate purchase price of $41,185. The first of the three foregoing
  purchases on Form 4s were filed for Mr. Hazout with the Securities and
  Exchange Commission ("SEC") on August 10, 2006, August 21, 2006 and September
  19, 2006, respectively. Mr. Hazout reported the last two of the foregoing
  purchases on a Form 4 filed with the SEC on September 22, 2006. In course of working on our Form
  10-QSB for the third quarter, SF Partnership, LLP, our independent auditors,
  notified us on November 8, 2006 that the above-mentioned transactions may be
  determined to be in violation of the Sarbanes-Oxley Act of 2002, namely,
  Section 402 of this Act. On November 20, 2006, Mr. Hazout
  directed Travellers to order a stock certificate for the 200,000 shares of our
  common stock. This stock certificate has been delivered to us and we have
  subsequently cancelled the stock certificate and returned it to treasury. Of the $1,000,000 which Travellers
  had been provided in trust, $187,000, the approximate balance in Travellers' brokerage account has been returned to us. Neither Mr. Hazout nor
  Travellers received any fees or commissions as a result of Travellers'
  trusteeship. We are taking steps to prevent
  the recurrence of events of this nature in the future, including hiring a
  Chief Accounting Officer to oversee the financial operations of the Company,
  as well as to appoint additional members to the Board of Directors. 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 Exhibit3.1
      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) 42   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)10.10
      Declaration of Trust dated
      August 16, 2006 between Silver Dragon Resources, Inc. and Travellers
      International Inc. (4)11
      Statement re: computation
      of per share earnings (9)16.1
      Letters from Moore Stephens
      Cooper Modyneux LLP on change in certifying accountants (10)21
      Subsidiaries of the Company23.1
      Consent of SF Partnership,
      LLP, Chartered Accountants23.2
      Consent of Craig L.
      Parkinson, P. Geo23.3
      Consent of Douglas R. Wood
      II, P. Geo31.1
      Rule
      13a-14(a)/15d-14(a) Certification by the Chief Executive Officer31.2
      Rule
      13a-14(a)/15d-14(a) Certification by the Acting Chief Accounting Officer32.1
      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 200232.2
      Certification by the Acting Chief Accounting 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)   Incorporated by reference to
  Form S-8 filed May 17, 2002. (9)   Included within financial
  statements attached hereto as Exhibit A. (10)   Incorporated by reference to
  Form 8-K filed January 27, 2006. 43   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 $20,000 for 2005 and $135,000
  for 2006. Audit-Related Fees were nil for
  2005 and $ 26,000 for 2006. Tax Fees were nil for 2005 and 2006 All Other Fees were nil for 2005
  and 2006.   44   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: July 9, 2007
      
      /s/ Marc
        HazoutMarc Hazout, President and
      Chief Executive OfficerSILVER
      DRAGON RESOURCES INC.Date:
      July 9, 2007
      
      /s/ Kirk
        BoydKirk Boyd, Chief Accounting
      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:
      July 9, 2007
      
      /s/ Marc
        HazoutMarc Hazout, Director   45


Exhibit A

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005

(Restated)

|                                                                             |      
|---------------------------------------------------------------------------- | -----
|CONTENTS                                                                    
|                                                                             |      
|Report of
    Independent Registered Public Accounting Firm                  | 1    
|                                                                             |      
|Consolidated
    Balance Sheets as at December 31, 2006 and 2005             | 2    
|                                                                             |      
|Consolidated
    Statements of Operations for the Years Ended December 31,   |      
|2006, and 2005, and
    Cumulative for the Period from June 15, 1996, [Date  |      
|of Inception]
    Through to December 31, 2006                               | 3-4  
|                                                                             |      
|Consolidated
    Statements of Stockholders' Equity for the Period from June |      
|15, 1996 [Date of
    Inception] Through to December 31, 2006                | 5-7  
|                                                                             |      
|Consolidated
    Statements of Cash Flows for the Years Ended                |      
|December 31, 2006,
    and 2005, and Cumulative for the Period from          |      
|June 15, 1996,
    [Date of Inception] Through to December 31, 2006          | 8-9  
|                                                                             |      
|Notes to
    Consolidated Financial Statements                               | 10-31



---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders' of

Silver Dragon Resources Inc. and Subsidiaries

(Formerly American Entertainment & Animation Corporation)

We have audited the accompanying consolidated balance sheets of Silver Dragon
Resources Inc., and Subsidiaries (a Delaware corporation in the exploration
stage) as of December 31, 2006 and 2005, and the consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 2006, and cumulative from inception (June 15,
1996) through to December 31, 2006, 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 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, 2006 and 2005, and the
results of their operations and its cash flows for each of the years in the
two-year period ended December 31, 2006 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 16 to the consolidated
financial statements, the accompanying consolidated financial statements of the
Company as at December 31, 2006 and 2005 and for the years then ended have been
restated. We therefore withdraw our previous reports dated March 27, 2006,
October 10, 2006 and April 24, 2007 on those financial statements originally
filed.

|Toronto, Canada | SF Partnership, LLP      
|--------------- | -------------------------
|June 22, 2007   | CHARTERED
    ACCOUNTANTS

1

---



|                                                         
|---------------------------------------------------------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES            
|(AN EXPLORATION STAGE COMPANY)                           
|(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)
|Consolidated Balance Sheets                              
|December 31, 2006 and 2005                               
|                                                         
|ASSETS                                                   
|Current Assets                                           
|                                                         
|                                                         
|                                                         
|Total Current Assets                                     
|Deferred Expenses                                        
|Advances to Related Party(note
    8)                    
|Property and Equipment, net(note 5)                      
|Mineral Rights(note 6)                                   
|Deferred Offering Cost                                   
|                                                         
|Total Assets                                             
|                                                         
|LIABILITIES                                              
|Current Liabilities                                      
|                                                         
|                                                         
|                                                         
|Total Current Liabilities                                
|                                                         
|Total Liabilities                                        
|                                                         
|Minority Interest                                        
|Commitments and Contingencies(note 13)                   
|STOCKHOLDERS' EQUITY                                     
|                                                         
|Capital Stock(note 7)                                    
|                                                         
|                                                         
|Additional Paid-in Capital                               
|Treasury Stock                                           
|Stock Subscriptions                                      
|Deficit Accumulated During the Exploration Stage         
|Accumulated Comprehensive Loss                           
|Stockholders' Equity                                     
|                                                         
|Total Liabilities and Stockholders' Equity               

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

2

---



|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                                                                                 
|----------------------------------------------------------------------------------------------------------------------------------------------
|(AN EXPLORATION STAGE COMPANY)                                                                                                                
|(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)                                                                                     
|Consolidated Statement of Operations                                                                                                          
|For the Years Ended December 31, 2006 and 2005, and
    For the Period from June 15, 1996
    [date of inception] Through to December 31, 2006
|                                                                                                                                              
|Revenues                                                                                                                                      
|                                                                                                                                              
|Cost of Revenues                                                                                                                              
|                                                                                                                                              
|Gross Profit                                                                                                                                  
|                                                                                                                                              
|Operating Expenses                                                                                                                            
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Total Operating Expenses                                                                                                                      
|                                                                                                                                              
|Loss From Continuing Operations                                                                                                               
|                                                                                                                                              
|Other Income (Expenses)                                                                                                                       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Total Other Income (Expenses)                                                                                                                 
|                                                                                                                                              
|Net Loss From Continuing Operations                                                                                                           
|                                                                                                                                              

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

3

---



|                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                                                                                 
|(AN EXPLORATION STAGE COMPANY)                                                                                                                
|(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION
    CORPORATION)                                                                               
|Consolidated Statement of Operations                                                                                                          
|For the Years Ended December 31, 2006 and 2005, and
    For the Period from June 15, 1996
    [date of inception] Through to December 31, 2006
|                                                                                                                                              
|                                                                                                                                              
|Net Loss From Continuing Operations
    (carried forward)                                                                                     
|Provision For Income Taxes                                                                                                                    
|                                                                                                                                              
|                                                                                                                                              
|Net Loss From Continuing Operations, After Tax                                                                                                
|                                                                                                                                              
|Minority Interest                                                                                                                             
|                                                                                                                                              
|Net Loss From Discontinued Operations
    (note 6)                                                                                            
|                                                                                                                                              
|Net Loss From Discontinued Operations                                                                                                         
|Net Loss                                                                                                                                      
|                                                                                                                                              
|                                                                                                                                              
|Comprehensive Loss                                                                                                                            
|                                                                                                                                              
|Net loss per common share  basic and diluted                                                                                                 
|                                                                                                                                              
|Net loss on continuing operations per common share  basic
    and diluted                                                                    
|                                                                                                                                              
|Weighted average number common
    shares outstanding during the year  basic and diluted                                                     

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

4

---



|                                                                |              |               |                     |            
|--------------------------------------------------------------- | ------------ | ------------- | ------------------- | -----------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                   |              |               |                     |            
|(AN EXPLORATION STAGE ENTERPRISE)                               |              |               |                     |            
|(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)       |              |              
|Consolidated Statements of Stockholders' Equity                 |              |               |                     |            
|For the Period from June 15, 1996 Through December 31,
    2006 |              |               |                    
|                                                                |              |               |                     |            
|                                                                | Common Stock |               | Deficit             |            
|                                                                |              |               |                     | Accumulated
|                                                                |              |               | Additional          | During the 
|                                                                | Number of    |               | Paid-in             | Exploration
|                                                                | Shares       | Amount        | Capital             | Stage      
|                                                                |              |               |                     |            
|Issuance of common stock to founders for
    services           | 55,000       | $           6 | $               159 | $
    -    
|Issuance of stock to founder for cash                           | 333,334      | 33            | 967                 | -          
|Issuance of stock for investment in CEHK                        | 50,000       | 5             | 37,495              | -          
|Issuance of stock to purchase subsidiary                        | 350,000      | 35            | 70                  | (1,060)    
|Issuance of stock for cash                                      | 13,333       | 1             | 9,999               | -          
|Net Loss, 1996                                                  | -            | -             | -                   | (14,198)   
|                                                                |              |               |                     |            
|Balance, December 31, 1996 (unaudited)                          | 801,667      | 80            | 48,690              | (15,258)   
|Issuance of stock for vehicle                                   | 33,333       | 3             | 24,997              | -          
|Issuance of stock for cash                                      | 37,333       | 4             | 28,896              |            
|Issuance of stock for services                                  | 46,333       | 5             | 34,745              | -          
|Net Loss, 1997                                                  | -            | -             | -                   | (142,622)  
|                                                                |              |               |                     |            
|Balance, December 31, 1997 (unaudited)                          | 918,666      | 92            | 137,328             | (157,880)  
|Issuance of stock for vehicle                                   | 10,667       | 1             | 7,999               | -          
|Issuance of stock for cash                                      | 58,667       | 6             | 49,995              | -          
|Net loss, 1998                                                  | -            | -             | -                   | (54,404)   
|                                                                |              |               |                     |            
|Balance, December 31, 1998 (unaudited)                          | 988,000      | 99            | 195,322             | (212,284)  
|Issuance of stock for cash                                      | 151,918      | 15            | 56,759              | -          
|Issuance of stock for debt                                      | 16,000       | 2             | 8,773               | -          
|Issuance of stock for services                                  | 36,000       | 3             | 126,467             | -          
|Forgiveness of debt of related party                            | -            | -             | 23,000              | -          
|Net loss, 1999                                                  | -            | -             | -                   | (181,898)  
|                                                                |              |               |                     |            
|Balance, December 31, 1999 (unaudited)                          | 1,191,918    | 119           | 410,321             | (394,182)  
|                                                                |              |               |                     |            

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

5

---



|                                                                |              |        |            |            
|--------------------------------------------------------------- | ------------ | ------ | ---------- | -----------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                   |              |        |            |            
|(AN EXPLORATION STAGE ENTERPRISE)                               |              |        |            |            
|(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)       |              |       
|Consolidated Statements of Stockholders' Equity                 |              |        |            |            
|For the Period from June 15, 1996 Through December 31,
    2006 |              |        |           
|                                                                |              |        |            |            
|                                                                | Common Stock |        | Deficit    |            
|                                                                |              |        |            | Accumulated
|                                                                |              |        | Additional | During the 
|                                                                | Number of    |        | Paid-in    | Exploration
|                                                                | Shares       | Amount | Capital    | Stage      
|                                                               

|                                                                                              |              |         |           |             |   |           |   |          
|--------------------------------------------------------------------------------------------- | ------------ | ------- | --------- | ----------- | - | --------- | - | ---------
|Balance, December 31, 1999 (unaudited)                                                        | 1,191,918    | 119     | 410,321   | (394,182)   | - | (4,000)   | - | 12,258   
|Cancelled stock returned to company                                                           | (10,667)     | (1)     | (3,999)   | -           | - | 4,000     | - | -        
|Issuance of stock for cash                                                                    | 4,296,666    | 430     | 667,070   | -           | - | (278,539) | - | 388,961  
|Cancelled shares for non-payment                                                              | (442,433)    | (44)    | (165,868) | -           | - | 153,791   | - | (12,121) 
|Issuance of stock for services                                                                | 653,667      | 65      | 28,365    | -           | - | -         | - | 28,430   
|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) 
|Shares issued for services                                                                    | 879,415      | 88      | 59,814    | -           | - | -         | - | 59,902   
|Cash received for subscription receivable                                                     | -            | -       | -         | -           | - | 124,748   | - | 124,748  
|Shares issued for consulting agreement                                                        | 300,000      | 30      | 29,970    | -           | - | -         | - | 30,000   
|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 private placement                                                           | 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 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 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      
|Shares issued for the settlement of related
    party advances                                | 116,118      | 12      | 23,212    | -           | - | -         | - | 23,224   
|Cancellation of shares issued in prior years                                                  | (65,467)     | (7)     | 7         | -           | - | -         | - | -        
|Shares issued for the settlement of related
    party advances                                | 370,000      | 37      | 66,619    | -           | - | -         | - | 66,656   
|Shares rescinded for the cancellation of
    related party advances                           | 2,233,333    | 223     | 46,777    | -           | - | -         | - | 47,000   
|Shares rescinded for the cancellation of the
    reverse acquisition of Cyper                 | (20,000,000) | (2,000) | -         | -           | - | -         | - | (2,000)  
|Issuance of stock for settlement of Cyper
    reverse acquisition                             | 250,000      | 25      | 17,475    | -           | - | -         | - | 17,500   
|Shares issued for the settlement of advances
    made to the company for the Cyper settlement | 1,388,889    | 139     | 62,361    | -           | - | -         | - | 62,500   
|Net loss, 2002                                                                                | -            | -       | -         | (570,874)   | - | -         | - | (570,874)
|                                                                                              |              |         |           |             |   |           |   |          
|Balance, December 31, 2002 (unaudited)                                                        | 18,005,404   | 1,801   | 1,420,074 | (1,723,897) | - | -         | - | (302,022)
|                                                                                              |              |         |           |             |   |           |   |          
|                                                                                              |              |         |           |             |   |           |   |          

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

6

---



|                                                                |              |        |            |            
|--------------------------------------------------------------- | ------------ | ------ | ---------- | -----------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                   |              |        |            |            
|(AN EXPLORATION STAGE ENTERPRISE)                               |              |        |            |            
|(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)       |              |       
|Consolidated Statements of Stockholders' Equity                 |              |        |            |            
|For the Period from June 15, 1996 Through December 31,
    2006 |              |        |           
|                                                                |              |        |            |            
|                                                                | Common Stock |        | Deficit    |            
|                                                                |              |        |            | Accumulated
|                                                                |              |        | Additional | During the 
|                                                                | Number of    |        | Paid-in    | Exploration
|                                                                | Shares       | Amount | Capital    | Stage      
|                                                               

|                                                                                                 |             |        |             |               |          |          |            |            
|------------------------------------------------------------------------------------------------ | ----------- | ------ | ----------- | ------------- | -------- | -------- | ---------- | -----------
|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)  
|                                                                                                 |             |        |             |               |          |          |            |            
|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 (restated note 16)                                                        | 7,175,000   | 717    | 596,783     | -             | -        | (9,500)  | -          | 588,000    
|Shares issued for services (restated note 16)                                                    | 3,950,000   | 395    | 814,105     | -             | -        | -        | -          | 814,500    
|Shares issued for property acquisition
    (restated note 16)                                    | 1,350,000   | 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 (restated note 16)                                                                | -           | -      | -           | (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  | 4,834,639   | -             | -        | 330,025  | -          | 5,165,969  
|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)   
|Accumulated comprehensive loss                                                                   | -           | -      | -           | -             | (1,562)  | -        | -          | (1,562)    
|Treasury stock (note 7)                                                                          | -           | -      | -           | -             | -        | -        | (392,830)  | (392,830)  
|Net loss, 2006                                                                                   | -           | -      | -           | (8,396,760)   | -        | -        | -          | (8,396,760)
|                                                                                                 |             |        |             |               |          |          |            |            
|Balance, December 31, 2006                                                                       | 61,460,533  | $6,146 | $22,040,068 | $(11,519,165) | $(1,562) | $320,525 | $(392,830) | $10,453,182

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

7

---



|                                                                                    |                                                                   |             
|----------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                       |                                                                   |             
|AN EXPLORATION STAGE ENTERPRISE                                                     |                                                                   |             
|(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)                           |                                                                  
|Consolidated Statements of Cash Flows                                               |                                                                   |             
|Years Ended December 31, 2006, and 2005, and                                        |                                                                   |             
|For the Period from June 15, 1996 [date of inception] through December
    31, 2006 |                                                                  
|                                                                                    |                                                                   |             
|                                                                                    |                                                                   |             
|                                                                                    |                                                                   |             
|                                                                                    |                                                                   |             
|                                                                                    |                                                                   | 2006        
|                                                                                    |                                                                   |             
|Cash Flows from Operating Activities                                                |                                                                   |             
|                                                                                    | Net loss                                                          | $(8,396,760)
|                                                                                    | Adjustments for:                                                  |             
|                                                                                    | Depreciation                                                      | 14,497      
|                                                                                    | Impairment of investment                                          | -           
|                                                                                    | Write-down of assets                                              | -           
|                                                                                    | Write-down of inventory                                           | -           
|                                                                                    | Settlement of Cyper reverse acquisition                           | -           
|                                                                                    | Settlement of debt, net                                           | -           
|                                                                                    | Stock issued for services                                         | 1,700,807   
|                                                                                    | Stock issued for management and directors fees to a related party | 1,302,980   
|                                                                                    | Warrants issued for consulting fees                               | 178,768     
|                                                                                    | Minority interest                                                 | (248,780)   
|                                                                                    | Net loss from discontinued operations                             | 302,755     
|                                                                                    | Changes in non-cash working capital                               |             
|                                                                                    | Other receivable                                                  | (398,323)   
|                                                                                    | Inventories                                                       | -           
|                                                                                    | Prepaid expenses                                                  | (81,397)    
|                                                                                    | Accounts payable                                                  | 37,946      
|                                                                                    | Accrued liabilities                                               | 454,244     
|                                                                                    | Accrued officer compensation                                      | -           
|                                                                                    |                                                                   |             
|Net Cash Used in Operating Activities                                               | (5,133,263)                                                       | (395,399)   

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

8

---



|                                                                                    |                                             |                   
|----------------------------------------------------------------------------------- | ------------------------------------------- | ------------------
|SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES                                       |                                             |                   
|(AN EXPLORATION STAGE ENTERPRISE)                                                   |                                             |                   
|(FORMERLY AMERICAN ENTERTAINMENT AND ANIMATION CORPORATION)                         |                                             |                   
|Consolidated Statements of Cash Flows                                               |                                             |                   
|Years Ended December 31, 2006, and 2005, and                                        |                                             |                   
|For the Period from June 15, 1996 [date of inception] through December
    31, 2006 |                                            
|                                                                                    |                                             |                   
|                                                                                    |                                             | 2006              
|                                                                                    |                                             |                   
|Cash Flows from Investing Activities                                                |                                             |                   
|                                                                                    | Investment in subsidiary                    | -                 
|                                                                                    | Proceeds from sale of equipment             | -                 
|                                                                                    | Acquisition of property and equipment       | (263,589)         
|                                                                                    | Investments in mineral rights               | (1,290,781)       
|                                                                                    |                                             |                   
|Net Cash Used in Investing Activities                                               | (1,554,370)                                 | (164,096)         
|                                                                                    |                                             |                   
|Cash Flows from Financing Activities                                                |                                             |                   
|                                                                                    | Payment of notes payable                    | -                 
|                                                                                    | Proceeds from issuance of notes payable     | -                 
|                                                                                    | Advances payable related party              | -                 
|                                                                                    | Advances to related parties                 | (65,707)          
|                                                                                    | Cash overdraft                              | -                 
|                                                                                    | Purchase of treasury shares                 | (392,830)         
|                                                                                    | Accumulated other comprehensive income      | (1,562)           
|                                                                                    | Deferred offering costs                     | (50,000)          
|                                                                                    | Proceeds from subscriptions receivable, net | -                 
|                                                                                    | Share issuance costs                        | (35,000)          
|                                                                                    | Minority interest                           | 253,021           
|                                                                                    | Proceeds from issuance of common stock      | 9,900,000         
|                                                                                    |                                             |                   
|Net Cash Provided by Financing Activities                                           | 9,607,922                                   | 559,798           
|                                                                                    |                                             |                   
|Change in Cash and Cash Equivalents                                                 | 2,920,289                                   | 303               
|Cash and Cash Equivalents - beginning of  period                                    | 303                                         | -                 
|                                                                                    |                                             |                   
|Cash and Cash Equivalents - end of period                                           | $        2,920,592                          | $              303

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



9

---





SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



1.

Nature of Business

Silver Dragon Resources Inc. ("SDR" or the "Company") a Delaware corporation,
was incorporated on May 9, 1996. The Company is headquartered in Ontario, Canada
and operates primarily in the United States, 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.



The Company is in 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 $8,396,760 (2005 - $584,879) for the year and has accumulated losses
since inception of $11,519,165 (2005 - $3,122,405).  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. Though
the business plan indicates revenues from the operating mines it has acquired in
the coming year, these revenues, if any, may not be sufficient to cover
operating capital.  The Company plans to pursue additional financing, however,
there can be no assurance that the Company will be able to secure financing when
needed or obtain financing on terms satisfactory to the Company, if at all.



The 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 60% ownership in Sanhe Sino-Top Resources and
Technologies, Ltd (''Sino-Top'').  All significant inter-company balances and
transactions have been eliminated on consolidation.

10

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



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
market value.



All capitalized costs of mineral properties subject to amortization and the
estimated future costs to develop proved reserves, are amortized using the
unit-oproduction 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



Consists 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.

11

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



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".  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)        Property and Equipment



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

Category
      Rate
      MethodComputer hardware
      30%
      declining balanceVehicles
      20%
      declining balanceFurniture & equipment
      20%
      declining balanceMine equipment
      20%
      declining balanceBuildings
      20 years
      straight line


Equipment 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.

12

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



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 assets are recoverable.  In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value.  Long lived assets to be disposed of are reported at
the lower of the carrying amount or the fair value of the asset less cost to
sell.

l)

Stock-based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123(R) (Revised 2004),
''Share-Based Payment'' (''SFAS No. 123R''), which requires the measurement and
recognition of 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.



13

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



3.

Summary of Significant Accounting Policies (cont'd)

n)

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 receivable and payables, 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
OfBalance Sheet Risk and Financial Instruments with Concentration of Credit
Risk", requires disclosure of any significant ofbalance sheet risk and credit
risk concentration. The Company does not have significant ofbalance 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 47% of consolidated costs
and expenses are denominated in RMB and MXN. Substantially all of our assets 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 rate
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.



o)       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.

14

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

3.

Summary of Significant Accounting Policies (cont'd)

o)       Asset Retirement Obligations (cont'd)

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 review accrued liabilities for such reclamation and
remediation costs as evidence becomes available indicating that the Company's
liabilities have potentially changed.

p)       Recent Accounting Pronouncements



In February 2006, the FASB issued ''SFAS'' No. 155, "Accounting for Certain Hybrid
Financial Instrumentsan amendment of FASB Statements No. 133 and 140'' (''SFAS
No. 155''). This statement permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation; clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"; establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation; clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and amended SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for all financial
instruments acquired, issued, or subject to a remeasurement (new basis) event
occurring after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company is currently reviewing the effect, if any, SFAS
No. 155 will have on its financial position.



In March 2006, FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets", an amendment of FASB Statement No. 140'' (''SFAS No. 156''). In a
significant change to current guidance, SFAS No. 156 permits an entity to choose
either of the following subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities: (1)
amortization method or (2) fair value measurement method. SFAS No. 156 is
effective as of the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company is currently reviewing the effect, if any, SFAS
No. 156 will have on its financial position.



15

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

3.

Summary of Significant Accounting Policies (cont'd)

p)       Recent Accounting Pronouncements (cont'd)

In July 2006 FASB issued FASB No. 48, ''Accounting for Uncertainty in
Income Taxes'' FASB interpretation No. (''FIN'') 48. FIN No. 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises' financial
statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition
threshold and measurement attributable for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and transitions. FIN No.
48 is effective for fiscal years beginning after December 15, 2006. The Company
is currently reviewing the effect, if any, FIN No. 48 will have on its financial
position.

In September 2006, the FASB issued SFAS No. 157, ''Fair Value Measurements'',
which is effective for calendar year companies on January 1, 2008. The statement
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The statement 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. The standard 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 impacts of implementing this standard.

In February 2007, the FASB issued SFAS No. 159, ''The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115 ''SFAS No. 159'' permits an entity to elect fair value as the
initial and subsequent measurement attribute for many financial assets and
liabilities. Entities electing the fair value option would be required to
recognize changes in fair value in earnings. Entities electing the fair value
option are required to distinguish, on the face of the statement of financial
position, the fair value of assets and liabilities for which the fair value
option has been elected and similar assets and liabilities measured using
another measurement attribute. SFAS No. 159 is effective for the Company's
fiscal year 2008. The adjustment to reflect the difference between the fair
value and the carrying amount would be accounted for as a cumulative-effect
adjustment to retained earnings as of the date of initial adoption. The Company
is currently evaluating the impact, if any, of SFAS No. 159 on the Company's
consolidated financial statements.

On May 2, 2007 the FASB issued FASB
Interpretation FIN No. 48-1,''Definition
of Settlement in FASB Interpretation 48''(''FIN 48-1'').
FIN 48-1 amends FIN 48,''Accounting
for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109'',
to provide guidance on how an enterprise should determine whether a tax position
is effectively settled for the purpose of recognizing previously unrecognized
tax benefits. The guidance in FIN 48-1 shall be applied upon the initial
adoption of FIN 48. Accordingly, the Company has applied the provisions of FIN
48-1 effective January 1, 2007. The adoption of FIN 48-1 did not have a material
impact on the Company's results of operations and financial condition.

In May 2007, the FASB issued a FASB Staff Position
on FIN 46(R)-7, "Application of FASB Interpretation No. 46(R) to Investment
Companies" ("FSP FIN 46 (R)-7"). FSP FIN 46(R)-7 addresses the application of
FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities", by an entity that accounts for its investments in accordance
with the specialized accounting guidance in the AICPA Audit and Accounting
Guide, "Investment Companies". The adoption of FSP FIN 46(R)-7 did not have a
material impact on the Company's results of operations and financial condition.

In June 2007, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No.
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 clarifies when an entity may apply the provisions of the Audit and
Accounting Guide from Investment Companies (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. SOP No. 07-1 is effective for fiscal years beginning on or after
December 15, 2007 with early adoption encouraged.

4.      Business Acquisitions

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 (see note 6).

16

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

4.

Business Acquisitions (cont'd)

The consideration was allocated based on the estimated fair values on the
acquisition date as follows:

|                                                           | 2006        
|---------------------------------------------------------- | ------------
|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



5.

Property and Equipment, net

|                        |          | Accumulated  | December 31, 2006 | December 31, 2005
|----------------------- | -------- | ------------ | ----------------- | -----------------
|                        | Cost     | Depreciation | Net book value    | Net book value   
|Computer hardware       | $67,223  | $4,319       | $62,904           | $      -         
|Vehicles                | 108,441  | 5,119        | 103,322           | -                
|Furniture and Equipment | 26,618   | 2,400        | 24,218            | -                
|Mine equipment          | 31,902   | 2,659        | 29,243            | -                
|Buildings               | 29,405   | -            | 29,405            | -                
|                        | $263,589 | $14,497      | $249,092          | $      -         

17

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



6.

Mineral Rights

|                             |              |                        |              |           
|---------------------------- | ------------ | ---------------------- | ------------ | ----------
|                             | Sino-Top,    | Cerro Las
    Minitas, | Linear Gold, | Total     
|                             | China        | Mexico                 | Mexico       |           
|                             |              |                        |              |           
|Balance at January 1, 2005   | $      -     | $      -               | $      -     | $      -  
|Expenditures                 | 372,500      | -                      | 227,626      | 600,126   
|Balance at December 31, 2005 | 372,500      | -                      | 227,626      | 600,126   
|Expenditures                 | 3,098,652    | 2,845,745              | 75,129       | 6,019,526 
|Write-off of                 |              |                        |              |           
|Discontinued Operations      | -            | -                      | (302,755)    | (302,755) 
|Balance at December 31, 2006 | $  3,471,152 | $        2,845,745     | $      -     | $6,316,897

Sino-Top

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 net proceeds from the sale of minerals or the sale of mining
rights as a result of the exploration, evaluation and development of a property
located in the Erbaohuo Silver District in Northern China. In consideration for
this interest, the Company paid Sino Silver $150,000 on the closing date along
with 250,000 restricted common stock of the Company. Pursuant to the Agreement,
an additional $200,000 was payable to Sino Silver within 2 years of the closing
date, along with the delivery of an additional 250,000 restricted common stock
of the Company. Included in these closing costs are financing fees incurred
through the issuance of 500,000 restricted common stock.

On March 16, 2006, the Company entered into an Asset Purchase Agreement with
Sino Silver and Sino-Top wherein Sino Silver agreed to sell its 60% interest in
Sino-Top to the Company. Sino-Top holds the exploration and mining rights to
nine properties in the Erbaohuo Silver District. The total purchase price was
$650,000 plus 4,000,000 restricted common stock of the Company paid as follows
for a total value of $3,478,000:

i)        $150,000 was paid on the closing;

ii)       $100,000 was paid May 20, 2006;

iii)      $400,000 was paid on November 9, 2006 and;

iv)      4,000,000 restricted common stock of the Company that were held in
escrow since August 2006 were released on November 9, 2006.

The Company has also committed to invest approximately $1,529,000 into Sino-Top
towards exploration and property maintenance on the nine properties in the
portfolio, with the intention of bringing the Erbahuo mine into production in
2007 and conducting advanced stage exploration on two properties (Zuanxinhu and
Saihanaobao). As of December 31, 2006, the Company paid $536,030 of this amount
to Sino-Top. This agreement supersedes the Venture Agreement dated April 14,
2005 between the Company and Sino Silver.

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

18

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

6.

Mineral Rights (cont'd)

Cerro 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 exploitation rights to 10 mining
concessions, which include an operating mine, totaling approximately 1354
hectares in Guadalupe, Durango, Mexico in consideration for the payment to Mr.
Pena of $450,000 and 450,000 restricted common stock issued on August 18, 2006
valued at $456,750 for a total value of $906,750.  Silver Dragon Mexico also
purchased certain mining equipment for the sum of $1,000 plus Value Added Tax (''V.A.T.'')

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 exploitation rights to five mining concessions, which include an
operating mine, totaling approximately 31 hectares in Guadalupe, Durango, Mexico
in consideration for the payment to Mr. Flores of $245,000 plus applicable V.A.T.
which was paid on closing, along with 110,000 restricted common stock of the
Company valued at $71,995 for a total value of $317,064.

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

On March 8, 2006, Silver Dragon Mexico entered into an agreement with Minera
Real Victoria, S.A. De C.V. ("Minera") wherein Minera assigned to Silver Dragon
Mexico the mining and exploitation rights to a mining concession known as "Puro
Corazon" which includes an operating mine, totaling approximately nine hectares,
in Guadalupe, Durango, Mexico in consideration for the payment to Minera of
$400,000 plus applicable V.A.T., along with 2,000,000 restricted common stock of
the Company. The purchase price of $2,038,000 is payable as follows:

i)        $100,000 was paid on the closing;

ii)       $100,000 was paid on September 11, 2006;

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

iv)      $100,000 is payable twenty-four months from the closing date, and;

v)       2,000,000 restricted common stock of the Company issued on June 12,
2006 at a value of $1,372,000.

All payments are subject to V.A.T.

19

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



6.

Mineral Rights (cont'd)

On March 9, 2006, Silver Dragon Mexico entered into an agreement with Silvia
Villasenor Haro, the owner of Puro Corazon, wherein, in consideration for the
sum of $50,000 plus V.A.T., she has consented to the assignment of the mining
and exploitation rights of Puro Corazon to Silver Dragon Mexico. In addition,
she has agreed to modify the exploitation agreement of Minera which was assigned
to Silver Dragon Mexico as follows:



i)     The consideration to be paid to Ms. Haro due to the exploitation of the
mining concession will be in the amount of $1.50 per ton of economic ore that is
extracted from the mine, to be paid monthly, within the following 30 days as of
the date in which Silver Dragon Mexico receives the corresponding invoices.



Regardless of the above, in the event that Silver Dragon Mexico does not
initiate production over the lot regarding the Concession Title within six
months of the date of execution of the Agreement, Silver Dragon Mexico must pay
to Ms. Haro the monthly amount of $3,500 plus VAT. Such payment will be made for
the period or periods of time during which no ore is extracted, and paid within
the first eight days of the corresponding month.



In the event that Silver Dragon Mexico pays Ms. Haro the above mentioned monthly
consideration, such must be discounted from any future payment made by Silver
Dragon Mexico to Ms. Haro as a result of the production and extraction of ore,
subject to the condition that the payments due to Ms. Haro by the production and
extraction of ore are maintained at least in the minimum monthly amount of
$3,500. If Silver Dragon Mexico decides not to produce nor extract ore, any
monthly payments that are made to Ms. Haro will remain to her benefit.



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



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



b)    The Option to Purchase the Concession can be exercised by Silver Dragon
Mexico within 5 years of the execution of this Agreement upon payment of
$3,000,000 plus the applicable V.A.T..



20

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)
6.       Mineral Rights (cont'd)

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.

7.       Capital Stock

On January 31 2005 the Company issued 1,500,000 restricted common shares at a
price of $0.02 per share for total gross proceeds of $30,000 cash.

On March 31, 2005, the Company issued 3,254,018 restricted common shares, valued
at $813,505 in settlement of all amounts owing to the officer of the Company in
accordance with the terms of the employment agreement.

In April 2005, the Company issued 3,025,000 restricted common shares at a price
of $0.10 per share for total gross proceeds of $302,500 cash.

On April 14, 2005, the Company issued 250,000 restricted common shares at a
value of $67,500 as part of a venture agreement with Sino Silver to acquire a
50% interest in Sino Silver's property located in the Erbaohuo Silver District
in Northern China. In addition, the Company issued 500,000 restricted common
shares at a value of $155,000 to an individual as a transaction fee in relation
to the joint venture.

On April 18, 2005 the Company issued 250,000 restricted common shares in
exchange for investor relations services valued at $47,500.

On May 2, 2005 the Company issued 50,000 restricted common shares at a price of
$0.10 per share for total gross proceeds of $5,000 cash.

On September 8, 2005, the Company issued of 2,600,000 restricted common shares
at a price $0.10 per share, for total gross proceeds of $260,000 cash.

On September 27, 2005, the Company issued 100,000 restricted common shares at a
value of $11,000 as part of a venture agreement with Linear Gold to acquire a
55% interest in the Mexico property.  In addition the company issued 500,000
restricted common shares at a value of $155,000 to an individual as a
transaction fee in relation to the joint venture.

21

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



7.

Capital Stock (cont'd)

On November 30, 2005 the Company entered into an Investment Agreement with
Dutchess Private Equities Fund, L.P. in which, the Company has the right to sell
Dutchess up to $10,000,000 of its shares of common stock during a three year
period under certain conditions.  The conditions were not met and the agreement
lapsed.

On December 8, 2005 the Company entered into an agreement with Uptick Capital
Ltd. for financing and strategic advice for cash fees and up to 1,500,000
restricted common shares of which 800,000 restricted common shares were issued
in 2006 (2005  150,000).  Total value for services provided as of December 31,
2006 is $567,786 (2005 - $31,500) of which $7,436 represents cash (2005 - $nil).

On December 12, 2005, the Company issued 50,000 restricted common shares to
Newport Capital Consultants in exchange for consulting services valued at
$10,500.

On January 10, 2006, the Company entered into a two-month contract with Small
Cap Voice.Com, Inc., to provide the Company with investor relations services in
return for cash fees of $25,152 and 100,000 of restricted shares valued at
$64,400 for a total value of $89,552.

On January 10, 2006, the Company entered into a three-month consulting contract
with San Diego Torrey Hills Capital to provide the Company with strategic
planning services in return for cash fees and 300,000 shares of restricted
common stock.  As of December 31, 2006 the company paid $32,613 in cash and
issued 400,000 having a value of $261,800 and a total value of $294,413.

On January 10, 2006, the Company issued Travellers International Inc. (''TII''), a
company controlled by a director of the Company, 1,000,000 shares of common
stock, at a value of $647,850, pursuant to the terms of the Employment Agreement
dated November 15, 2005 with the Company's sole director and CEO.

On January 12, 2006, an individual received 500,000 restricted common shares for
a value of $322,000 as part of compensation for geological services rendered
from an agreement dated October 25, 2005.

On January 19, 2006, the Company entered into a contract with an individual to
provide strategic planning services in return for 300,000 restricted common
shares for a value of $193,200.

On January 25, 2006, the Company issued 2,500,000 restricted common shares at a
price $0.10 per share, for total gross proceeds of $250,000 cash.

On February 17, 2006, the Company issued 1,000,000 restricted common shares at a
price $0.10 per share, for total gross proceeds of $100,000 cash.

On March 1, 2006, the Company entered into a twenty-four month administrative
services consultant contract with a close family member of the Chief Executive
Officer for cash fees of $5,000 per month and 1,000,000 of restricted common
shares valued at $654,500.  The amount is being amortized over the service
period to commence in 2007.  Included in the current portion of the deferred
expense is $272,708.

On March 1, 2006, the Company entered into a contract with an individual to
provide the Company with investor relations services in The Peoples Republic of
China for 1,000,000 restricted common shares valued at $654,500.  The amount is
being amortized over the service period of which $245,437 is included in the
statement of operations.  Included in the current portion of deferred expense is
$327,250.

22

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



7.

Capital Stock (cont'd)

On March 2, 2006, Silver Dragon Mexico entered into an agreement for the
assignment of the mining and exploitation rights to five mining concessions in
consideration for cash fees of $450,000 along with 450,000 restricted common
shares valued at $456,750 and for a total value of $906,750.

On March 7, 2006, the Company completed the sale of 1,000,000 units, at a price
of $1.00 per unit, for total gross proceeds of $1,000,000. Each unit consists of
one share of the Company's common stock and one one-half $2.00 purchase warrant
and one one-half $5.00 purchase warrant. One whole warrant will entitle the
holder to purchase an additional share of common stock at any time over a period
of two years from the date of the closing of the private placement.

On March 8, 2006, Silver Dragon Mexico entered into agreements with Ramon Tomas
Davila Flores and Minera Real Victoria S.A. de C.V. for the assignment of the
mining and exploitation rights to a mining concession known as "Puro Corazon" in
consideration for cash fees of $495,000 and 2,110,000 of restricted common
shares for a total value of $1,938,995.

On March 14, 2006, the Company issued to TII, a company controlled by a director
of the Company, 1,000,000 restricted common shares valued at $655,130 in
consideration for its assistance to the Company in the acquisition of the mining
rights in Cerro las Minitas, Mexico.

On March 15, 2006, the Company entered into a three month contract with Empire
Relations Group for investor relations services for 80,000 restricted common
shares for a value of $53,620.

On May 30, 2006 the Company completed the sale of 1,350,000 units, at a price of
$1.00 per unit, for total gross proceeds of $1,350,000.  Each unit consists of
one share of the Company's common stock and one one-half $2.00 purchase warrant
and one one-half $5.00 purchase warrants. One whole warrant will entitle the
holder to purchase an additional share of common stock at any time over a period
of two years from the date of the closing of the private placement valued at
$1.6 million on closing.

On June 12, 2006, the Company completed 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 purchase warrant
and one one-half $5.00 purchase warrants. One whole warrant will entitle the
holder to purchase an additional share of common stock at any time over a period
of two years from the date of the closing of the private placement valued at
$1.6 million on closing.

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 purchase warrant
and one one-half $5.00 purchase warrants. One whole warrant will entitle the
holder to purchase an additional share of common stock at any time over a period
of two years from the date of the closing of the private placement.

On November 9, 2006 the Company concluded its acquisition of 60% interest in
Sino-Top. The total purchase price was $650,000 plus 4,000,000 restricted common
stock valued at $2,828,000 of the Company for a total consideration of
$3,478,000.

23

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

7.

Capital Stock (cont'd)

On November 9, 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 and one one-half class A $2.00 purchase
warrant and one one-half class B $5.00 purchase warrants.  One whole warrant
will entitle the holder to purchase an additional share of common stock at any
time over a period of five years from the date of the closing of the private
placement.  Two class C warrants were issued for each share issued on closing.
The per warrant share exercise price to acquire a share of common stock shall be
$1.00 and shall be exercisable until one year from November 9, 2006.

In connection with the private placement closed on November 9, 2006, the Company
paid broker fees to, Dragonfly Capital Partners LLC, a cash fee in the amount of
$35,000 and issued class A and B common stock purchase warrants. The class A and
class B common stock purchase warrants will each entitle the holder to purchase
17,500 common shares at any time for a period of five years from the date of the
closing at an exercise price of $2.00 and $5.00 per share, respectively.  The
broker fees have been accounted for as share issuance costs as a reduction to
additional paid-in capital.

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 purchase warrant
and one one-half $5.00 purchase warrants. One whole warrant will entitle the
holder to purchase an additional share of common stock at any time over a period
of two years from the date of the closing of the private placement.

Treasury Stock

The Company acquired, through Travellers, a company controlled by a director of
the Company, 276,545 common shares of the Company during the year for $392,830.

24

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

7.

Capital Stock (cont'd)

Warrants

As at December 31, 2006, the following warrants were outstanding:

|          |          | Number of Warrants | Value        
|--------- | -------- | ------------------ | -------------
|          |          |                    | Issued,      
|Expiry    | Exercise |                    | (Exercised), 
|Date      | Price    | Opening            | and (Expired)
|          |          |                    |              
|09-Nov-07 | 1.00     | -                  | 1,000,000    
|30-May-08 | 2.00     | -                  | 675,000      
|30-May-08 | 5.00     | -                  | 675,000      
|12-Jun-08 | 2.00     | -                  | 600,000      
|12-Jun-08 | 5.00     | -                  | 600,000      
|13-Oct-08 | 2.00     | -                  | 1,256,500    
|13-Oct-08 | 5.00     | -                  | 1,256,500    
|29-Dec-08 | 2.00     | -                  | 1,493,500    
|29-Dec-08 | 5.00     | -                  | 1,493,500    
|11-Aug-11 | 0.80     | -                  | 200,000      
|09-Nov-11 | 2.00     | -                  | 250,000      
|09-Nov-11 | 5.00     | -                  | 250,000      
|09-Nov-11 | 2.00     | -                  | 17,500       
|09-Nov-11 | 5.00     | -                  | 17,500       
|          |          | -                  | 9,785,000    



25

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

7.       Capital Stock (cont'd)

A value of $4,941,036 has been attributed to the warrants issued during the
year. Warrants were valued using the Black-Scholes model, using the following
weighted average key assumptions of volatility of 126%  144%, a risk-free
interest rate of 4  5%, a term equivalent to the life of the warrant, and
reinvestment of all dividends in the Company of zero percent.

On August 11, 2006 the Company entered into a one year contract with an
individual for management consulting services for 50,000 restricted warrants.
Each warrant will entitle the holder to purchase a common share of the Company,
after a two year hold period, at any time thereafter, over a period of five
years from the date of issuance at an exercise price of $0.80.  $44,700 is
included in operating expenses.

On August 11, 2006 the Company awarded an individual under contract for
geological consulting services 150,000 restricted warrants.  Each warrant will
entitle the holder to purchase a common share of the Company, after a two year
hold period, at any time thereafter, over a period of five years from the date
of issuance at an exercise price of $0.80.  $ 134,068 is included in operating
expenses.

8.        Advances to/from Related Parties

Advances to TII, a company holding approximately 25% of the issued and
outstanding shares of the Company and which is controlled by an officer and
stockholder of the Company, are unsecured, non-interest bearing and have no
fixed terms of repayment.

Advances from the Chief Executive Officer and President of the Company are
unsecured, non-interest bearing and have no fixed terms of repayment.

9.      Related Party Transactions

During the year, the following transactions involving related parties occurred
and were measured at exchange amount, which is the amount agreed to by the
respective parties.

The Company paid $288,000 (2005  $288,000) and issued 2,000,000 restricted
common shares valued at $1,302,780 as payment of management and director's fees.

The Company provided the amount of $1,000,000 in trust to TII, a company
controlled by an officer and stockholder of the Company, for the purpose of
buying marketable securities on the Company's behalf, see note 13.  As at
December 31, 2006 the Company realized losses of $389,365 on the sale of these
marketable securities.

Included in other receivables are loans to employees. As at December 31, 2006,
$99,819 (2005 - $nil) remain outstanding. The loans bear no interest, are
unsecured and are due on demand.

10.    Income Taxes

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

|                                                                                      |   | 2006        |   | 2005     
|------------------------------------------------------------------------------------- | - | ----------- | - | ---------
|Loss before income taxes                                                              | $ | (8,342,785) | $ | (584,879)
|Deferred: Expected income tax recovery at
    the statutory rates of 34% (2005 - 34%) |   | (2,836,547) |   | (198,859)
|Other                                                                                 |   | (54,752)    |   | -        
|Change in valuation allowance                                                         |   | 2,891,299   |   | 198,859  
|                                                                                      |   |             |   |          
|Provision for income taxes                                                            | $ | -           | $ | -        

26

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



10.

Income Taxes (cont'd)

The following summarizes the principal temporary differences and related future
tax effect:

|                          |   | 2006        |   | 2005       
|------------------------- | - | ----------- | - | -----------
|Losses carried forward    | $ | 3,916,516   | $ | 1,061,618  
|Valuation allowance       |   | (3,916,516) |   | (1,061,618)
|                          |   |             |   |            
|Deferred income tax asset | $ | -           | $ | -          

Management determined that the deferred tax assets do not satisfy the
recognition criteria of SFAS No. 109 and, more likely than not the losses will
not be utilized, accordingly, a full valuation allowance has been recorded for
this amount.

The Company has accumulated approximately $11,519,000 of taxable losses, which
may be used to offset future federal taxable income. The utilization of the
losses expires in years 2015 to 2026.

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

11.    Statements of Cash Flows Supplemental Disclosures

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

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

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

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

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

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

27

---



SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

11.

Statements of Cash Flows Supplemental Disclosures (cont'd)

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

During the year ended December 31, 2006, the Company issued 4,180,000 restricted
common stock for services valued at $2,764,370 of which $1,700,807 is included
in operating expenses.

During the year ended December 31, 2006, the Company issued 6,560,000 restricted
common stock valued at $4,728,089 for the acquisition of mineral rights.

During the year ended December 31, 2006, the Company issued 2,000,000 restricted
common stock valued at $1,302,980 in settlement of accounts payable to related
party for services performed.

During the year ended December 31, 2006, the Company issued warrants for
services amounted to $207,005 of which $178,768 is included in operating
expenses and the remainder with the difference included with share issuance
costs.

For the year ended December 31, 2006, there were no cash payments for income
taxes.  Cash payments for interest expense amounted to $36,302.

12.

Litigation

The Company is not aware of any pending actions, 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, based upon consultation with legal
counsel, that they will have a material effect on the Company's business or
financial condition or results of operations.

13.

Commitments and Contingencies

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

On May 15, 2006, the Company entered into a trust arrangement with TII, an
investment and merchant banking firm, 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.

28

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)

13.

Commitments and Contingencies (cont'd)

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.

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.  Neither Mr. Hazout, nor TII received any fees or commissions as
a result of TII's trusteeship as described herein.

Pursuant to the Subscription Agreement on May 30, 2006, the Company agreed to
file a Registration Statement on form SB-2 within 45 days of the closing in
order to register 250,000 of these shares of common stock issued in the offering
and the shares of common stock issuable upon exercise of Warrants. If the
Registration Statement is not filed as mentioned or declared effective within
180 days following the closing, then cash delay payments equal to 0.5% of the
subscription amount per month shall apply for the first 3 months and 1% per
month thereafter.

On August 16, 2006 the Company signed a Letter of Intent with Hubei Silver Mine
Co., Ltd. ("Hubei Silver") and Cistex Global Investment Inc., ("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. The purchase
price, subject to confirmation of the value of Hubei Silver's assets, is
approximately $2.4 Million in cash along with shares of restricted common stock
of Silver Dragon valued at $1.6 million on closing.

On August 21, 2006 the Company entered into a two year contract with an
individual for IT consulting services at $5,000 per month and 50,000 restricted
common shares.

29

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



14.

Subsequent Events

On January 23, 2007 TII delivered a stock certificate for the 200,000 shares of
the Company, which TII had been holding in trust on behalf of the Company, back
to the Company's transfer agent for cancellation.

On February 7, 2007 the Company issued 584,000 shares of the Company's
restricted common stock.

On March 1, 2007 the Company entered in a
contract with two individuals to provide investor relations services.  Each
would receive 50,000 restricted common shares, 100,000 warrants exercisable at
$2.50 and 100,000 warrants exercisable at $3.00 exercisable anytime over a
period of 5 years form the time of issuance.

On March 19, 2007, the Company entered
into an agreement to acquire an additional 30% ownership interest in Sino-Top,
increasing its total equity position from 60% to 90%, in exchange for 2 million
restricted shares of common stock of the Company. The transaction was subject to
receipt of the consent of the Ministry of Commerce in China, which consent was
obtained on May 16, 2007.

On April 1, 2007, the Company entered into
a five lease agreement for office space with an option to renew for an
additional five years, for 2,823 square feet of office.  The annual payments are
$50,814 for the first two years escalating to $56,460 in the final three years
of the lease.

On April 3, 2007, the Company issued 230,000 shares
of the Company's restricted common stock for cash.

On April 3, 2007, the Company issued 50,000 shares
of the Company's restricted common stock to two individuals for consulting
services as part of a twelve month contract.

During April 3, 2007 the Company issued 55,000 shares of
the Company's restricted common stock to employees of the Company.

On April 6, 2007 the Company entered into a twelve month contract with Small Cap
Voice.Com, Inc. to provide the Company with investor relations services in
return for 25,000 restricted common shares.

On May 1, 2007 the Company issued 5,000 shares of the Company's unrestricted
stock upon the exercise of warrants.

On May 3, 2007, the Company issued 38,500 shares of
the Company's restricted common stock to a Company for investor relations
services performed.

On May 18, 2007, the Company issued 2,000,000
shares of the Company's restricted common stock as part of the Sino Top
agreement to increase ownership from 60% to 90%. The shares will be released
upon obtaining the appropriate approvals for the increase in ownership from the
Chinese government.

On May 22, 2007, the Company issued 175,000 shares
of thee Company's restricted common stock for cash.

On June 13, 2007, the Company issued 75,000 shares
of the Company's restricted common stock as part of an agreement for investor
relation services.

On June 15, 2007, the Company entered into a
service contract with WJG Enterprises for consulting services in exchange for
50,000 restricted common shares to be delivered at the time of the agreement and
an additional 50,000 restricted common shares 6 months from the time of the
agreement.

On June 28, 2007 TII delivered a stock certificate for the 76,545 shares of the
Company, which TII had been holding in trust on behalf of the Company, back to
the Company's Transfer Agent for cancellation.

15.    Comparative Information

Certain comparative figures have been reclassified to conform with the current
year's financial statement presentation.

16.    Restatement of Previously Issued Consolidated Financial Statements

i) 
In 2006, the Company became aware of certain accounting irregularities affecting
the previously issued consolidated financial statements.  The Company conducted
an inquiry into these accounting issues.  As a result, the Company is restating
previously issued consolidated financial statements for the year ended December
31, 2006 due to the accounting errors.

The Company determined that it had not accounted for shares issued for mining
rights and services and had not properly presented the allocation of share
issuances in the consolidated statement of stockholders' equity.  Accordingly,
net loss went from $542,909 to $584,879 and mining rights went from $589,126 to
$600,126.  There was no change in earnings per share.

30

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

(FORMERLY AMERICAN ENTERTAINMENT & ANIMATION CORPORATION)

Notes to the Consolidated Financial Statements

December 31, 2006 and 2005 (Restated note 16)



16.    Restatement of Previously Issued Consolidated Financial Statements
 (cont'd)

ii)  In 2007, the Company became aware of
certain accounting irregularities affecting the previously issued year end
consolidated financial statements. The Company conducted an inquiry into these
accounting issues. As a result, the Company is restating previously issued
consolidated financial statements for the year ended December 31, 2006 due to
the accounting errors.

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

| |                                                                                                                                                                |   | As           |   | Change    |   | Restated    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | --------- | - | ------------
| |                                                                                                                                                                |   | Previously   |   |           |   |             
| |                                                                                                                                                                |   | Reported     |   |           |   |             
| | Consolidated
    Statement of Operations                                                                                                                       |   |              |   |           |   |             
| |                                                                                                                                                                |   |              |   |           |   |             
| | Exploration (a)                                                                                                                                                | $ | 1,959,044    | $ | 267,652   | $ | 2,226,696   
| |                                                                                                                                                                |   |              |   |           |   |             
| | Minority interest
    (a)                                                                                                                                      | $ | 141,719      | $ | 107,061   | $ | 248,780     
| |                                                                                                                                                                |   |              |   |           |   |             
| | Net Loss for the
    year ended December 31, 2006                                                                                                              | $ | (8,236,169)  | $ | (160,591) | $ | (8,396,760) 
| |                                                                                                                                                                |   |              |   |           |   |             
| | Net Loss per
    common share - basic and diluted for the year
    ended December 31, 2006                                                                     | $ | $(0.16)      | $ | $(0.01)   | $ | $(0.17)     
| |                                                                                                                                                                |   |              |   |           |   |             
| | Exploration
    expense for the cumulative period ended December 31, 2006 (a)                                                                                  | $ | 1,959,044    | $ | 267,652   | $ | 2,226,696   
| |                                                                                                                                                                |   |              |   |           |   |             
| | Minority interestfor the
    cumulative period ended December 31, 2006 (a)                                                                                     | $ | 141,719      | $ | 107,061   | $ | 248,780     
| |                                                                                                                                                                |   |              |   |           |   |             
| | Net Loss for the
    cumulative period ended December 31, 2006                                                                                                 | $ | (11,358,574) | $ | (160,591) | $ | (11,519,165)
| |                                                                                                                                                                |   |              |   |           |   |             
| | Consolidated
    Balance Sheet                                                                                                                                 |   |              |   |           |   |             
| |                                                                                                                                                                |   |              |   |           |   |             
| | Accrued
    liabilities (a)                                                                                                                                    | $ | 226,865      | $ | 267,652   | $ | 494,517     
| |                                                                                                                                                                |   |              |   |           |   |             
| | Minority interest
    (a)                                                                                                                                      | $ | 111,302      | $ | (107,061) | $ | 4,241       
| |                                                                                                                                                                |   |              |   |           |   |             
| | Deficit
    accumulated during the exploration stage                                                                                                           | $ | (11,358,574) | $ | (160,591) | $ | (11,519,165)
| |                                                                                                                                                                |   |              |   |           |   |             
| |                                                                                                                                                                |   |              |   |           |   |             
| | (a) Exploration expense                                                                                                                                        |   |              |   |           |   |             
| | The Company determined that it
    had not accrued all costs association with the exploration and development
    of mineral rights in its Chinese subsidiary.



31

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