Exhibit 99.3

Consolidated Financial Statements

December 31, 2008 and 2007
(in United States Dollars, unless otherwise stated)





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|                                 |                         
|-------------------------------- | ------------------------
|                                 |                         
|KPMG LLP                         |                         
|Chartered Accountants            |                         
|Suite 1500 Purdys Wharf Tower I |                         
|1959 Upper Water Street          | Telephone (902) 492-6000
|Halifax NS B3J 3N2               | Telefax (902) 429-1307  
|Canada                           | www.kpmg.ca             
|                                 |                         

AUDITORS' REPORT

To the Shareholders of Gammon Gold Inc.

We have audited the consolidated balance sheets of Gammon Gold Inc. (the
"Company") as at December 31, 2008 and 2007 and the consolidated statements of
operations and comprehensive income (loss), cash flows and shareholders equity
for each of the years in the two year period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2008 and 2007 and the results of its operations and its cash flows for each of
the years in the two period ended December 31, 2008 in accordance with Canadian
generally accepted accounting principles.

/s/ KPMG LLP

Chartered Accountants

Halifax, Canada 
March 24, 2009

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Consolidated Balance Sheets
(in thousands of
      United States Dollars)

|                                                                                                           |   |          |   |   |          |  
|---------------------------------------------------------------------------------------------------------- | - | -------- | - | - | -------- | -
|At December 31                                                                                             |   | 2008     |   |   | 2007     |  
|                                                                                                           |   |          |   |   |          |  
|                                                                                                           |   |          |   |   |          |  
|ASSETS                                                                                                     |   |          |   |   |          |  
|Current                                                                                                    |   |          |   |   |          |  
|Cash and cash equivalents                                                                                  | $ | 3,258    |   | $ | 3,709    |  
|Receivables                                                                                                |   |          |   |   |          |  
|Commodity taxes                                                                                            |   | 8,762    |   |   | 10,240   |  
|Trade / other                                                                                              |   | 4,932    |   |   | 1,740    |  
|Inventories (Note 5)                                                                                       |   | 49,318   |   |   | 51,586   |  
|Prepaids and deposits                                                                                      |   | 2,389    |   |   | 2,250    |  
|                                                                                                           |   | 68,659   |   |   | 69,525   |  
|                                                                                                           |   |          |   |   |          |  
|Deposits on property, plant and equipment                                                                  |   | 4,930    |   |   | 5,395    |  
|Other long-term assets (Note 2 (q))                                                                        |   | 4,653    |   |   | 192      |  
|Long-term ore stockpiles (Note 5)                                                                          |   | 2,119    |   |   | -        |  
|Mining interests and property, plant and equipment (Note 6)                                                |   | 597,126  |   |   | 572,041  |  
|Goodwill                                                                                                   |   | 106,799  |   |   | 106,799  |  
|                                                                                                           |   |          |   |   |          |  
|                                                                                                           | $ | 784,286  |   | $ | 753,952  |  
|                                                                                                           |   |          |   |   |          |  
|                                                                                                           |   |          |   |   |          |  
|                                                                                                           |   |          |   |   |          |  
|LIABILITIES                                                                                                |   |          |   |   |          |  
|Current                                                                                                    |   |          |   |   |          |  
|Payables and accruals                                                                                      | $ | 30,457   |   | $ | 17,279   |  
|Current portion of long-term debt and capital leases and
      other long-term obligations (Notes 7 and 8) |   | 30,861   |   |   | 33,073   |  
|                                                                                                           |   | 61,318   |   |   | 50,352   |  
|                                                                                                           |   |          |   |   |          |  
|Long-term debt and capital leases (Note 7)                                                                 |   | 7,991    |   |   | 1,334    |  
|Other long-term obligations (Note 8)                                                                       |   | 4,677    |   |   | -        |  
|Asset retirement obligations (Note 9)                                                                      |   | 3,622    |   |   | 2,991    |  
|Employee future benefits (Note 10)                                                                         |   | 1,659    |   |   | 3,746    |  
|Future income taxes (Note 11)                                                                              |   | 77,301   |   |   | 108,879  |  
|                                                                                                           |   | 156,568  |   |   | 167,302  |  
|SHAREHOLDERS EQUITY (Note 12)                                                                             |   |          |   |   |          |  
|Capital stock                                                                                              |   | 719,426  |   |   | 699,512  |  
|Contributed surplus                                                                                        |   | 33,288   |   |   | 42,373   |  
|Deficit                                                                                                    |   | (131,430 | ) |   | (161,669 | )
|Accumulated other comprehensive income                                                                     |   | 6,434    |   |   | 6,434    |  
|                                                                                                           |   | 627,718  |   |   | 586,650  |  
|                                                                                                           |   |          |   |   |          |  
|                                                                                                           | $ | 784,286  |   | $ | 753,952  |  
|                                                                                                           |   |          |   |   |          |  
|                                                                                                           |   |          |   |   |          |  

Nature of operations and going concern assumption (Note 1) 
Commitments and contingencies (Note 13) 
Subsequent events (Note 21)



|Signed on behalf of the Board: | /s/ Fred George             |                        | /a/ Andre Falzon | 
|------------------------------ | --------------------------- | ---------------------- | ---------------- | 
|                               | Fred
      George, Director | Andre Falzon, Director

See accompanying notes to the consolidated financial
statements.

1

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Consolidated Statements of Operations and Comprehensive Income
/ (Loss)
(in thousands of United States Dollars except per share
data)

|                                                              |   |             |   |   |             |  
|------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                              |   |             |   |   |             |  
|For the years
      ended December 31                         |   | 2008        |   |   | 2007        |  
|                                                              |   |             |   |   |             |  
|                                                              |   |             |   |   |             |  
|Revenue from mining operations                                | $ | 212,522     |   | $ | 152,059     |  
|                                                              |   |             |   |   |             |  
|Expenses                                                      |   |             |   |   |             |  
|Production costs, excluding
      amortization and depletion  |   | 127,024     |   |   | 144,623     |  
|Refining costs                                                |   | 1,662       |   |   | 1,510       |  
|General and administrative                                    |   | 29,945      |   |   | 24,156      |  
|Amortization and depletion                                    |   | 40,715      |   |   | 43,392      |  
|                                                              |   | 199,346     |   |   | 213,681     |  
|                                                              |   |             |   |   |             |  
|Earnings / (loss) before other items                          |   | 13,176      |   |   | (61,622     | )
|                                                              |   |             |   |   |             |  
|Interest on long-term debt                                    |   | (1,936      | ) |   | (3,897      | )
|Foreign exchange gain / (loss)                                |   | 9,337       |   |   | (8,933      | )
|Interest and other income                                     |   | 410         |   |   | 772         |  
|                                                              |   | 7,811       |   |   | (12,058     | )
|                                                              |   |             |   |   |             |  
|Earnings / (loss) before income taxes                         |   | 20,987      |   |   | (73,680     | )
|                                                              |   |             |   |   |             |  
|Future income tax (recovery) / expense (Note 11)              |   | (10,296     | ) |   | 27,634      |  
|Current tax expense                                           |   | 1,044       |   |   | -           |  
|                                                              |   | (9,252      | ) |   | 27,634      |  
|                                                              |   |             |   |   |             |  
|Net earnings /
      (loss) and comprehensive income / (loss) | $ | 30,239      |   | $ | (101,314    | )
|                                                              |   |             |   |   |             |  
|                                                              |   |             |   |   |             |  
|                                                              |   |             |   |   |             |  
|Earnings / (loss) per share (Note 14)                         |   |             |   |   |             |  
|Basic                                                         | $ | 0.25        |   | $ | (0.90       | )
|Diluted                                                       | $ | 0.25        |   | $ | (0.90       | )
|                                                              |   |             |   |   |             |  
|                                                              |   |             |   |   |             |  
|Weighted average shares outstanding (Note 14)                 |   |             |   |   |             |  
|Basic                                                         |   | 119,110,568 |   |   | 113,176,605 |  
|Diluted                                                       |   | 120,812,872 |   |   | 113,176,605 |  
|                                                              |   |             |   |   |             |  

See accompanying notes to the consolidated financial
statements.

2

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Consolidated Statements of Cash Flows(in thousands of
      United States Dollars)

|                                                                         |   |         |   |   |          |  
|------------------------------------------------------------------------ | - | ------- | - | - | -------- | -
|For the years
      ended December 31                                    |   | 2008    |   |   | 2007     |  
|                                                                         |   |         |   |   |          |  
|                                                                         |   |         |   |   |          |  
|                                                                         |   |         |   |   |          |  
|OPERATING ACTIVITIES                                                     |   |         |   |   |          |  
|Net earnings / (loss)                                                    | $ | 30,239  |   | $ | (101,314 | )
|Items not affecting cash (Note 15)                                       |   | 19,732  |   |   | 85,646   |  
|Change in non-cash operating working
      capital (Note 15)             |   | 5,962   |   |   | (18,524  | )
|                                                                         |   |         |   |   |          |  
|                                                                         |   | 55,933  |   |   | (34,192  | )
|                                                                         |   |         |   |   |          |  
|INVESTING ACTIVITIES                                                     |   |         |   |   |          |  
|Decrease / (increase) in deposits on
      property, plant and equipment |   | 465     |   |   | (4,345   | )
|Expenditures on mining interests and
      property, plant & equipment   |   | (66,841 | ) |   | (69,142  | )
|                                                                         |   | (66,376 | ) |   | (73,487  | )
|                                                                         |   |         |   |   |          |  
|FINANCING ACTIVITIES                                                     |   |         |   |   |          |  
|Repayment of capital lease obligation                                    |   | (2,551  | ) |   | (2,500   | )
|Proceeds from long-term debt                                             |   | 13,880  |   |   | 36,973   |  
|Repayment of long-term debt                                              |   | (8,109  | ) |   | (130,624 | )
|Net proceeds from issuance of capital
      stock                        |   | -       |   |   | 170,026  |  
|Proceeds from exercise of stock options                                  |   | 6,772   |   |   | 33,439   |  
|                                                                         |   | 9,992   |   |   | 107,314  |  
|                                                                         |   |         |   |   |          |  
|Net decrease in cash and cash equivalents                                |   | (451    | ) |   | (365     | )
|                                                                         |   |         |   |   |          |  
|Cash and cash equivalents, beginning of year                             |   | 3,709   |   |   | 4,074    |  
|                                                                         |   |         |   |   |          |  
|Cash and cash
      equivalents, end of year                             | $ | 3,258   |   | $ | 3,709    |  
|                                                                         |   |         |   |   |          |  
|                                                                         |   |         |   |   |          |  
|                                                                         |   |         |   |   |          |  
|Cash and cash equivalents is comprised of the following:                 |   |         |   |   |          |  
|                                                                         |   |         |   |   |          |  
|Cash                                                                     | $ | 3,258   |   | $ | 3,601    |  
|Restricted cash                                                          |   | -       |   |   | 108      |  
|                                                                         | $ | 3,258   |   | $ | 3,709    |  
|                                                                         |   |         |   |   |          |  
|                                                                         |   |         |   |   |          |  

See accompanying notes to the consolidated financial
statements.

3

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Consolidated Statements of Shareholders Equity

|(in thousands of
      United States Dollars)                  |   |          |   |   |          |  
|-------------------------------------------------------------- | - | -------- | - | - | -------- | -
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|For the years
      ended December 31                          |   | 2008     |   |   | 2007     |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|Capital stock                                                  |   |          |   |   |          |  
|Balance, beginning of year                                     | $ | 699,512  |   | $ | 463,333  |  
|For cash pursuant to exercise of stock
      options           |   | 6,772    |   |   | 33,439   |  
|Fair value of share-based compensation                         |   | 13,142   |   |   | 32,714   |  
|Public offering                                                |   | -        |   |   | 178,120  |  
|Share issuance costs                                           |   | -        |   |   | (8,094   | )
|Balance, end of year                                           | $ | 719,426  |   | $ | 699,512  |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|Contributed surplus                                            |   |          |   |   |          |  
|Balance, beginning of year                                     | $ | 42,373   |   | $ | 71,747   |  
|Fair value of share-based compensation                         |   | (13,142  | ) |   | (32,714  | )
|Forfeitures of stock options                                   |   | (429     | ) |   | (1,848   | )
|Stock option expense                                           |   | 4,486    |   |   | 5,188    |  
|Balance, end of year                                           | $ | 33,288   |   | $ | 42,373   |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|Deficit                                                        |   |          |   |   |          |  
|Balance, beginning of year                                     | $ | (161,669 | ) | $ | (60,355  | )
|Net earnings / (loss)                                          |   | 30,239   |   |   | (101,314 | )
|Balance, end of year                                           |   | (131,430 | ) |   | (161,669 | )
|Accumulated other comprehensive income                         |   | 6,434    |   |   | 6,434    |  
|                                                               |   |          |   |   |          |  
|Total deficit and
      accumulated other comprehensive income | $ | (124,996 | ) | $ | (155,235 | )
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  
|Total shareholders equity                                     | $ | 627,718  |   | $ | 586,650  |  
|                                                               |   |          |   |   |          |  
|                                                               |   |          |   |   |          |  

See accompanying notes to the consolidated financial
statements.

4

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Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)

|   |                                                        
|-- | -------------------------------------------------------
|1. | Nature of operations and going
      concern assumption

Gammon Gold Inc. (the Company) is a publicly traded company
engaged in the mining, development, exploration and acquisition of resource
properties. The Companys common shares are listed on the Toronto Stock Exchange
(TSX: GAM) and the New York Stock Exchange (NYSE: GRS).

These financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which assume that the
Company will continue in operation for the foreseeable future and will be able
to realize its assets and discharge its liabilities in the normal course of
operations. The future of the Company is dependent on its ability to raise
capital, its ability to generate sufficient cash flow from the Ocampo and El
Cubo properties to make required debt repayments and fund capital expenditures,
fluctuations in foreign currency exchange rates, and the market price of gold
and silver. During the year, the Company has generated positive earnings and
cash flows from operations and renegotiated its credit facility. The Company has
forecasted continuing positive earnings and cash flows in future years, thereby
making the going concern assumption appropriate. If the going concern assumption
were not appropriate for these financial statements then adjustments would be
necessary to the carrying values of assets and liabilities, the reported
revenues and expenses, and the balance sheet classifications used.

|    |                                                 
|--- | ------------------------------------------------
|2.  | Summary of significant accounting
      policies
|    |                                                 
|(a) | Basis of presentation                           

The consolidated financial statements have been prepared by the
Company in accordance with Canadian generally accepted accounting principles,
using the following significant accounting policies. These financial statements
are prepared in United States dollars, unless otherwise indicated.

|(b) | Consolidation
|--- | -------------

These consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Gammon Lake Resources (NS)
Incorporated, Gammon Lake de Mexico S.A. de C.V., Gammon Lake Resources (USA)
Inc., Gammon Lake Holdings Inc., Mexgold Resources Inc., Compania Minera El Cubo
S.A. de C.V., and Metales Interamericanos S.A de C.V. All significant
intercompany balances and transactions have been eliminated on consolidation.

|(c) | Foreign currency
translation
|--- | ----------------------------

The functional currency of the Companys operations is the
United States dollar (US dollar). Non-US dollar balances are translated into
US dollars as follows: monetary assets and liabilities are translated to US
dollars at the period-end exchange rate; non-monetary assets and liabilities are
translated at the rate prevailing at the time of the transaction; and revenue
and expense transactions are translated using average exchange rates, except for
expenses that relate to non-monetary assets and liabilities, which are
translated at the same historical exchange rate as the related asset or
liability. Translation gains or losses are recognized in earnings in the period
in which they occur.

|(d) | Use of estimates
|--- | ----------------

The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts for assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
significant areas requiring the use of management estimates and assumptions
relate to mineral reserves that are the basis for future cash flow estimates
utilized in impairment calculations; depletion and amortization calculations;
estimates of recoverable gold and other minerals in current and long-term
stockpile and leach pad inventories; estimates of fair value for certain
reporting units and asset impairment; write-downs of inventory to net realizable
value; post-employment, post-retirement and other employee future benefits;
valuation allowances for future income tax assets; asset retirement obligations;
reserves for contingencies and litigation; and the fair value and accounting
treatment of financial instruments. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results could differ
from those estimates.

|(e) | Revenue recognition
|--- | -------------------

Revenue from the sale of gold, silver, and doré bars is
recognized when persuasive evidence of a sale arrangement exists, the risks and
rewards of ownership passes to the purchaser including delivery of the product,
the selling price is fixed or determinable, and collectibility
is reasonably assured.  Sales of the doré bars are recorded at estimated values, and are further adjusted based upon final quality assessment and quotations.

5

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Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |                          
|--- | -------------------------
|(f) | Cash and cash equivalents

The Company considers deposits in banks, certificates of deposits, and short-term investments with original maturities of three months or less from the acquisition date as cash and cash equivalents.

|(g) | Inventories
|--- | -----------

Supplies inventory

Supplies inventory consists of mining supplies and consumables used in the operation of the mines, and is valued at the lower of average cost and net realizable value.

|Current and long-term ore stockpiles inventory
|----------------------------------------------

Stockpiles represent ore that has been mined and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, the number of contained ounces (based on assay data) and the
estimated metallurgical recovery rates (based on the expected processing method). Stockpile ore tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on the current mining cost per tonne incurred up to the point of
stockpiling the ore, including applicable overhead, depletion and amortization relating to mining operations, and removed at the average cost per tonne.  Ore stockpiles inventory is measured at the lower of cost and net realizable value.

|Ore in process inventory
|------------------------

The recovery of gold and silver is achieved through a milling and heap leaching process. Costs are added to ore on leach pads and in the mill based on current mining costs, including applicable depletion and amortization relating to mining
operations. Costs are removed from ore on leach pads and in the mill as ounces are recovered, based on the average cost per ounce of gold and silver in ore in process inventory. Ore in process inventory is measured at the lower of cost and net
realizable value.

|Finished goods
|--------------

Finished goods inventory consists of gold, silver, and doré bars, and is valued at the lower of cost and net realizable value.

For all ore inventories,net realizable value is calculated as the difference between the estimated future metal revenue based on prevailing and long-term metal prices and estimated costs to complete production into a saleable form.

|(h) | Mineral interests
|--- | -----------------

The carrying value of mineral interests represents the accumulated costs to date related to the acquisition, exploration and development of the Companys producing mineral properties. Production stage mining interests are amortized over the
life of the mine using the unit-of-production method based on estimated proven and probable reserves of the mine and the portion of mineralization expected to be classified as reserves, or on a straight-line basis over the term of the lease.

The expected useful lives used in amortization and depletion calculations are determined based on the facts and circumstances associated with the mining interest. Any changes in estimates of useful lives are accounted for prospectively from the date
of the change.

Mining costs associated with stripping activities in an open pit mine are capitalized if they represent a betterment to the mineral property in that access is gained to sources of reserves that will be produced in future periods that would otherwise
not have been accessible. Capitalized stripping costs are amortized over the life of the deposit benefiting from the stripping using the unit-of-production method based on estimated proven and probable reserves of the mine and the portion of
mineralization expected to be classified as reserves.

|(i) | Property, plant and equipment and amortization
|--- | ----------------------------------------------

Property, plant and equipment are recorded at cost. Amortization is calculated on the straight-line basis over the estimated useful lives of the assets, as follows:

| | Equipment under capital lease | lease term | Vehicles         | 4 years   
| | ----------------------------- | ---------- | ---------------- | ----------
| | Heavy equipment               | 5-10 years | Buildings        | 20 years  
| | Other equipment               | 8-9 years  | Office equipment | 3-10 years
| | Processing plant              | 8-9 years  |                  |           

6

---



Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)

|    |                                
|--- | -------------------------------
|(j) | Impairment of long-lived assets

The Company assesses the impairment of long-lived assets, which consist primarily of mining interests and property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
 An impairment loss will be recognized if the carrying amount of a long-lived asset is not recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to
result from its use and eventual disposition. The impairment loss to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.

Annually, or when events or circumstances indicate that the carrying amount may not be recoverable, the Company reviews the carrying value of its mining interests. The recoverability of the book value of each property is assessed for indicators of
impairment such as adverse changes to the estimated recoverable ounces of gold, estimated future commodity prices, and estimated expected future operating costs, capital expenditures and reclamation expenditures. If it is determined that the
deferred costs related to a property are not recoverable over its productive life, those costs will be written down to fair value as a charge to operations in the period in which the determination is made. The amounts at which mining interests and
the related deferred costs are recorded do not necessarily reflect present or future values.

|(k) | Goodwill and goodwill impairment
|--- | --------------------------------

Acquisitions of businesses are accounted for using the purchase method whereby assets and liabilities acquired are recorded at their fair values as of the date of acquisition and any excess of the purchase price over such fair value is recorded as
goodwill. Goodwill is identified and allocated to reporting units by preparing estimates of the fair value of each reporting unit and comparing this amount to the fair value of assets and liabilities in the reporting unit.

The Company evaluates, on an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, the Company compares the fair value
of its reporting units to their carrying amounts.  Fair value is calculated as an appropriate multiple of projected future net earnings.  If the carrying amount exceeds the fair value, the Company compares the implied fair value of the reporting
units goodwill to its carrying amount, and any excess of the carrying amount over the fair value is charged to operations. Assumptions underlying fair value estimates are subject to significant risks and uncertainties.

|(l) | Asset retirement obligations
|--- | ----------------------------

The Companys mining and exploration activities are subject to various governmental laws and regulations relating to the protection of the environment.  These environmental regulations are continually changing, and the Company intends to make
future expenditures to comply with such laws and regulations. The Company is required to record a liability and corresponding asset, for the estimated present value of future cash flows associated with site closure and reclamation when the liability
is incurred and a reasonable estimate of the fair value can be made. The present value of future cash flows is determined using the credit adjusted risk free rate. These asset retirement costs are amortized over the life of the related assets on a
straight-line basis. At the end of each period, the liability is increased to reflect the passage of time and changes in the estimated future cash flows underlying any initial fair value measurements.

|(m) | Share-based compensation
|--- | ------------------------

The Company uses the fair value method of accounting for employee share-based compensation and other share-based payments made in exchange for goods and services. Under this method, the Company recognizes a compensation expense for all awards made
to employees and non-employees, based on the fair value of the options on the date of grant, which is determined by using an option pricing model. The fair value of the options is expensed over the vesting period of the options. The Companys
stock option plan is described in Note 12.

|(n) | Income taxes
|--- | ------------

Income taxes are calculated using the asset and liability method.  Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are determined based on
the difference between the financial reporting and tax basis of assets and liabilities and on unclaimed losses carried forward. Future income tax assets and liabilities are measured using the enacted or substantively enacted tax rates that will be
in effect when the differences are expected to reverse or when unclaimed losses are expected to be utilized. A valuation allowance is recognized to the extent that the recoverability of future income tax assets is not considered to be more likely
than not.

7

---



Notes to the Consolidated Financial Statements(in thousands of United States Dollars unless otherwise
noted)


|    |                                   
|--- | ----------------------------------
|(o) | Earnings / (loss) per common share

Earnings / (loss) per common share is calculated based on the weighted average number of common shares outstanding for the period. Diluted earnings / (loss) per common share considers the potential exercise of all outstanding options using the
treasury stock method. This method assumes that proceeds received from the exercise of the in-the-money stock options and warrants are used to repurchase shares at the average market price for the year.

|(p) | Employee future benefits
|--- | ------------------------

The Company has defined benefit pension plans that provide benefits to certain of its employees. The cost of the accrued benefit liability for pension benefits earned by employees is actuarially determined using the projected benefit method prorated
on service and managements best estimate of salary escalation and retirement ages.

Actuarial gains/losses arise from changes in actuarial assumptions used to determine the accrued benefit liability. The excess of the net actuarial gain / (loss) over 10% of the greater of the accrued benefit liability and the fair value of plan
assets is amortized over the average remaining service period of active employees.

|(q) | Other long-term assets
|--- | ----------------------

Included in other long-term assets is the costs of an eight-year consultancy agreement with a third party, whereby the Company will receive assistance with strategic planning, business development, procurement and authorization of land,
employer-employee relations, community and government relations, and environmental relations. Amortization of the contract cost is calculated on a straight-line basis over the term of the agreement. See Note 8 for further details on the related
obligation. In 2007, other long-term assets related to deferred compensation arising on the Mexgold Resources Inc. acquisition in 2006.

|(r) | Financial Instruments
|--- | ---------------------

The Companys financial instruments are classified as follows:

Asset / Liability
	
	Classification
	
	MeasurementCash and cash equivalents
	Held-for-trading
	Fair valueRestricted cash
	Held-for-trading
	Fair valueReceivables
	Loans and receivables
	Amortized costPayables and accruals and other long-term obligations
	Other financial liabilities
	Amortized costLong-term debt and capital leases
	Other financial liabilities
	Amortized cost


Transaction costs other than those related to financial instruments classified as held-for-trading, which are expensed as incurred, are added to the fair value of the financial asset or financial liability on initial recognition and amortized using
the effective interest rate method.

Fair values are based on quoted market prices where available from active markets, otherwise fair values are estimated using a variety of valuation techniques and models.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless exempted from derivative treatment as a normal purchase and sale.  All changes in fair value are recorded in earnings unless cash flow
hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income.  There were no embedded derivatives for the years ended December 31, 2008 and 2007.

8

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |       
|--- | ------
|(s) | Hedges

Hedging relationships that meet documentation requirements, and can be proven to be effective both at the inception and over the term of the relationship qualify for hedge accounting. Specifically, in a cash flow hedge, the effective portion of the
change in the fair value of hedging derivatives is recorded in other comprehensive income and reclassified to earnings in the period in which the hedged item is realized. Any ineffective portion of the change in fair value of hedging derivatives is
recognized in net earnings in the reporting period. Where documentation and effectiveness requirements are not met, the derivatives are classified as held for trading and the change in fair value is recognized in earnings in the reporting period.

Fair value hedges and the related hedged items are recognized on the balance sheet at fair value with any changes in fair value recognized in net income. To the extent the fair value hedge is effective, the changes in fair value of the hedge and the
hedged item will offset each other.

The Company did not enter into any hedging relationships in the current year.

|(t) | Recent accounting pronouncements
|--- | --------------------------------

The following is an overview of recent accounting pronouncements that the Company will be required to adopt in future years:

|(i) | Section 3064, Goodwill and Intangible Assets
|--- | --------------------------------------------

In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which replaces existing Section 3062, Goodwill and Other Intangible Assets.
This new section establishes standards for the recognition of internally
developed intangible assets. The standards for the recognition and impairment
testing of goodwill are carried forward unchanged. This section is applicable to
the Company commencing January 1, 2009. The Company does not expect that this
Section will have a significant impact on the Companys financial statements.

|(ii) | EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
|---- | -------------------------------------------------------------------------------------

In January 2009, the Emerging Issues Committee of the CICA issued EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This abstract requires that credit risk be taken into account in determining the fair
value of financial instruments and financial liabilities, including derivative instruments. The Company does not expect that this abstract will have a significant impact on the Companys financial statements.

|(iii) | Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests
|----- | --------------------------------------------------------------------------------------------------------------------------------

In January 2009, the CICA issued Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling interestswhich replace Section 1581, Business Combinations and
Section 1600, Consolidated Financial Statements.  Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under International Financial Reporting
Standards (IFRS). Section 1582 is applicable for business combinations with acquisition dates on or after January 1, 2011. Early adoption of this section is permitted. Section 1601 together with Section 1602 establishes standards for the
preparation of consolidated financial statements.  Section 1601 is applicable for the Companys interim and annual consolidated financial statements for fiscal years beginning on or after January 1, 2011. Early adoption of this section is
permitted. If the Company chooses to early adopt any one of these sections, the other two sections must also be adopted at the same time.

|(iv) | International Financial Reporting Standards
|---- | -------------------------------------------

In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with
IFRS over an expected five year transitional period. In February of 2008, the AcSB announced that 2011 is the changeover date for publicly accountable enterprises to use IFRS. The date is for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010. While the Company has begun
assessing the adoption of IFRS for 2011, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.


9

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |                               
|--- | ------------------------------
|3.  | Changes in accounting policies
|    |                               
|(i) | Section 3031, Inventories     

Effective January 1, 2008, the Company prospectively
implemented Section 3031, Inventories, which replaces Section 3030 of the same
title. This new standard provides guidance on the determination of cost and
requires inventories to be measured at the lower of cost and net realizable
value, with more specific guidance on the costs to include in the cost of
inventory. Costs such as storage costs and administrative overhead that do not
contribute to bringing inventories to their present location and condition are
specifically excluded from the cost of inventories and expensed in the period
incurred. In addition, the new Section requires that previous write-downs of
inventories be reversed when there is a subsequent increase in the net
realizable value of the inventories. The recommendations also clarified that
major spare parts are to be included in property, plant and equipment. As a
result of adopting these recommendations, the Company reclassified $2.7 million
of major spare parts from supplies inventories to property, plant, and equipment
on January 1, 2008. In addition, the Company recognized reversals of net
realizable adjustments in the amount of $2.9 million during the year. Otherwise,
this new standard did not have a significant impact on the Companys financial
results.

|(ii) | Section 3862, Financial Instruments  Disclosures and
      Section 3863, Financial Instruments 
Presentation
|---- | --------------------------------------------------------------------------------------------------------------

Effective January 1, 2008, the Company adopted Section 3862,
Financial Instruments  Disclosures, and Section 3863, Financial
Instruments  Presentation. These sections replace existing Section 3861,
Financial Instruments  Disclosure and Presentation. The presentation
standards are carried forward unchanged. The disclosure standards introduce new
disclosures to improve the information about financial instruments. This
standard requires the disclosure of qualitative and quantitative information
about the exposure to risks arising from financial instruments, including a
sensitivity analysis for market risk. The adoption of these standards did not
have any effect on the financial position or performance of the Company. See
Note 18 for further information.

|(iii) | Section 1535, Capital
Disclosures
|----- | ---------------------------------

Effective January 1, 2008, the Company adopted Section 1535,
Capital Disclosures. This section establishes standards for disclosing
information that enables users of financial statements to evaluate the entitys
objectives, policies and processes for managing capital. The adoption of this
standard did not have any effect on the financial position or performance of the
Company. See Note 19 for further information.

|   |                   
|-- | ------------------
|4. | Change in estimate

Effective April 1, 2008, the Company changed its estimate of
the useful lives of its mines to be based on proven and probable reserves of the
mine and the portion of mineralization expected to be classified as reserves.
Previously, the Company estimated the useful life based on proven and probable
reserves to be mined. Consistent with Section 1506, Accounting Changes,
the change in estimate was applied prospectively. The impact of this change on
the Companys financial results for the nine months ended December 31, 2008 was
to reduce amortization and depletion by approximately $5.1 million, and to
reduce inventories by approximately $1.3 million.

|   |                
|-- | ---------------
|5. | **Inventories**
|   |                

December 31
    
    
    December 312008
    
    
    2007Supplies
    $
    11,199
    
    $
    14,809Ore stockpiles
    
    3,319
    
    
    3,338Ore in process
    
    36,156
    
    
    31,869Finished goods
    
    763
    
    
    1,57051,437
    
    
    51,586Less: Long-term ore stockpiles
    
    (2,119
    )
    
    -$
    49,318
    
    $
    51,586


10

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


During the year, the Company recognized $5,595 of inventory net
realizable value adjustments (2007 - $32,972) as an expense. As a result of the
increase in expected future commodity prices at year end, the Company recognized
a net realizable value adjustment reversal in the fourth quarter, which had the
effect of decreasing expenses by $2,899, for an overall net realizable value
adjustment expense of $2,696 during 2008.


|   |                                                         
|-- | --------------------------------------------------------
|6. | Mining interests and property, plant and
      equipment

|                                                                                   |   |           |  |   | December 31, 2008 |  |   |          |  |   |         |  |   | December 31, 2007 | 
|---------------------------------------------------------------------------------- | - | --------- |  | - | ----------------- |  | - | -------- |  | - | ------- |  | - | ----------------- | 
|                                                                                   |   |           |  |   | Accumulated       |  |   | Net Book |  |   |         |  |   | Accumulated       | 
|                                                                                   |   | Cost      |  |   | Amortization      |  |   | Value    |  |   | Cost    |  |   | Amortization      | 
|Mining interests:                                                                  |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 
|Producing properties                                                               | $ | 334,896   |  | $ | 58,277            |  | $ | 276,619  |  | $ | 306,024 |  | $ | 35,877            | 
|Exploration properties                                                             |   | 119,400   |  |   | -                 |  |   | 119,400  |  |   | 110,555 |  |   | -                 | 
|                                                                                   |   | 454,296   |  |   | 58,277            |  |   | 396,019  |  |   | 416,579 |  |   | 35,877            | 
|Property, plant and equipment:                                                     |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 
|Processing plant                                                                   |   | 95,183    |  |   | 27,828            |  |   | 67,355   |  |   | 89,277  |  |   | 17,519            | 
|Heavy equipment                                                                    |   | 70,913    |  |   | 23,075            |  |   | 47,838   |  |   | 64,818  |  |   | 14,618            | 
|Other equipment                                                                    |   | 41,515    |  |   | 3,287             |  |   | 38,228   |  |   | 40,913  |  |   | 2,358             | 
|Buildings                                                                          |   | 22,524    |  |   | 4,015             |  |   | 18,509   |  |   | 18,519  |  |   | 3,088             | 
|Office equipment                                                                   |   | 5,621     |  |   | 2,809             |  |   | 2,812    |  |   | 5,026   |  |   | 1,882             | 
|Vehicles                                                                           |   | 3,303     |  |   | 2,059             |  |   | 1,244    |  |   | 3,238   |  |   | 1,397             | 
|Equipment under capital lease                                                      |   | 9,165     |  |   | 2,754             |  |   | 6,411    |  |   | 9,083   |  |   | 1,631             | 
|Major spare parts                                                                  |   | 6,439     |  |   | 522               |  |   | 5,917    |  |   | -       |  |   | -                 | 
|Construction in progress                                                           |   | 12,793    |  |   | -                 |  |   | 12,793   |  |   | 2,958   |  |   | -                 | 
|                                                                                   |   | 267,456   |  |   | 66,349            |  |   | 201,107  |  |   | 233,832 |  |   | 42,493            | 
|Total                                                                              | $ | 721,752 $ |  | $ | 124,626           |  | $ | 597,126  |  | $ | 650,411 |  | $ | 78,370            | 
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 
|The following table summarizes the movements in
      capitalized stripping costs: |   |           |  |   |                   |  |   |          |  |  
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   | December 31       | 
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   | 2008              | 
|Balance, beginning of year                                                         |   |           |  |   |                   |  |   |          |  |   |         |  | $ | -                 | 
|Stripping costs capitalized                                                        |   |           |  |   |                   |  |   |          |  |   |         |  |   | 7,352             | 
|Amortization                                                                       |   |           |  |   |                   |  |   |          |  |   |         |  |   | -                 | 
|Balance, end of
      year                                                         |   |           |  |   |                   |  |   |          |  |   |         |  | $ | 7,352             | 
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 
|                                                                                   |   |           |  |   |                   |  |   |          |  |   |         |  |   |                   | 

|7. | **Long-term debt and capital
      leases**
|-- | -------------------------------------------

|                                                                 |  |  |  |  |  |  |  |  |        |  |  |        |   | December 31 |  |   | December 31 | 
|---------------------------------------------------------------- |  |  |  |  |  |  |  |  | ------ |  |  | ------ | - | ----------- |  | - | ----------- | 
|                                                                 |  |  |  |  |  |  |  |  |        |  |  |        |   | 2008        |  |   | 2007        | 
|(a)   Revolving credit facility                                  |  |  |  |  |  |  |  |  |        |  |  |        | $ | 6,855       |  | $ | 30,480      | 
|(a)   Non-revolving term loan                                    |  |  |  |  |  |  |  |  |        |  |  |        |   | 29,582      |  |   | -           | 
|(b)   Capital leases for equipment                               |  |  |  |  |  |  |  |  |        |  |  |        |   | 1,910       |  |   | 3,606       | 
|(c)   Other long-term debt                                       |  |  |  |  |  |  |  |  |        |  |  |        |   | 105         |  |   | 321         | 
|                                                                 |  |  |  |  |  |  |  |  |        |  |  |        |   | 38,452      |  |   | 34,407      | 
|Less: Current portion of long-term debt and
      capital leases |  |  |  |  |  |  |  |  | 30,461 |  |  | 33,073 |  
|                                                                 |  |  |  |  |  |  |  |  |        |  |  |        | $ | 7,991       |  | $ | 1,334       | 

11

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


The estimated future minimum debt and lease payments under
      all facilities are as follows:

|
|

|2009 | $ | 30,461 | 
|---- | - | ------ | 
|2010 | $ | 7,834  | 
|2011 | $ | 157    | 

|(a) | On November 12, 2007, the Company replaced its $20,000
      revolving facility with a $60,000 revolving facility, expiring on December
      31, 2008. Interest was payable at prime rate plus 0.75% or in the case of
      US dollar advances, LIBOR + 1.75%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | On November 28, 2008, the terms of the Companys credit
      facility were revised and extended. Under the terms of the new agreement,
      the Company will have access to a $50,000 credit facility comprised of a
      $30,000 non-revolving credit facility and a $20,000 revolving credit
      facility. The non-revolving facility is repayable in varying amounts and
      matures on June 30, 2010. In addition to the required repayments, the
      Company is required, commencing June 30, 2009, to prepay outstanding
      credit in an amount equal to 75% of the excess of cash flow from
      operations over expenditures on mining interests and property, plant and
      equipment, scheduled principal repayments on long-term debt, and taxes
      paid, for the six months ended June 30, 2009 and for each subsequent
      fiscal quarter .The revolving facility matures on November 27, 2009 and
      may be renewed at the sole discretion of the lenders. Interest is payable
      at LIBOR + 3.5%. As at December 31 2008, the Company had drawn $7,130
      under the revolving facility and $30,000 under the non-revolving
      facility.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The credit facility contains various covenants that
      include a fixed charge coverage ratio of at least 1.15:1 up to March 31,
      2009 and at least 1.25:1 thereafter, a leverage ratio of no more than 3:1,
      a tangible net worth of at least $394,600 plus 50% of positive net income
      earned subsequent to September 30, 2008, and certain other operational
      covenants. The facility is secured by a first- ranking lien on all present
      and future assets, property and undertaking of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(b) | The Company is obligated under various capital leases for
      equipment, all of which expire by 2011. All capital lease agreements
      provide that the Company can purchase the leased equipment at the end of
      the lease term for a nominal amount. Interest payable on the various
      leases range from a fixed rate of 7.38% to variable rates between LIBOR +
      2.50% and LIBOR + 2.75%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(c) | The Company is obligated under certain other agreements
      maturing in 2010. These loans are non-interest bearing, with quarterly
      payments of approximately $15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|   |                            
|-- | ---------------------------
|8. | Other long-term
obligations

During the current fiscal year, the Company entered into an
eight-year consultancy agreement with a third party, whereby the Company will
receive assistance with strategic planning, business development, procurement
and authorization of land, employer-employee relations, community and government
relations, and environmental regulations. The obligation is non-interest
bearing, and has been recorded at fair value using a discount rate of 7%, with
payment terms as follows: an initial payment of $1,000 was made in the second
quarter, and an additional payment of $400 was made in the third quarter. An
additional payment of $400 will be made in January 2009, and seven annual
payments of $800 will be made in January of each subsequent year. As of December
31, 2008, the total balance outstanding is $4,676 (current portion  $400).

|   |                             
|-- | ----------------------------
|9. | Asset retirement
obligations

The Companys asset retirement obligations consist of
reclamation costs for the Ocampo and El Cubo mines. The present value of the
obligation is currently estimated at $3,622 (2007 - $2,991), reflecting payments
that will commence in 10  20 years. Significant reclamation activities include
land rehabilitation, demolition of buildings and mine facilities, ongoing care
and maintenance and other costs.

12

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


The undiscounted value of the reclamation costs liability is
$13,298 (2007 - $10,625). The credit adjusted risk-free rate used in estimating
the obligation was 8%, and the inflation rate used was 5.4% (2007  3.5%) .
Changes to the reclamation and closure cost obligation balance during the year were as follows:

|                                                |   | December 31 |   |   | December 31 | 
|----------------------------------------------- | - | ----------- | - | - | ----------- | 
|                                                |   | 2008        |   |   | 2007        | 
|Asset retirement obligations, beginning of year | $ | 2,991       |   | $ | -           | 
|Foreign exchange adjustment                     |   | (620        | ) |   | -           | 
|Obligations incurred                            |   | 803         |   |   | 2,945       | 
|Accretion expense                               |   | 190         |   |   | 46          | 
|Revisions in estimates                          |   | 258         |   |   | -           | 
|Asset retirement obligations, end of year       | $ | 3,622       |   | $ | 2,991       | 
|                                                |   |             |   |   |             | 

|    |                         
|--- | ------------------------
|10. | Employee future benefits

The Company has three defined benefit plans that provide
employee future benefits, other than pensions, to certain of its employees.

The Company accrues for employee future benefits for contract
workers and employees in Mexico paid through an employment services company or
by its subsidiaries. These benefits consist of a one-time payment equivalent to
12 days wages for each year of service (at the employees most recent salary,
but not to exceed twice the legal minimum wage), payable to all employees with
15 or more years of service, as well as to certain employees terminated
involuntarily prior to the vesting of their seniority premium benefit. Under
Mexican Labour Law, the Company also provides statutorily mandated severance
benefits to its employees terminated under certain circumstances. Such benefits
consist of a one-time payment of three months wages plus 20 days wages for each
year of service payable upon involuntary termination without just cause.

On September 12, 2008, the Company established a
post-retirement benefit plan for a member of senior management. The plan
provides for a lump sum retirement payment at age 65, determined as a multiple
of the members aggregate salary in 2006 and 2007.

All plans are unfunded. An actuarial valuation was performed
for all plans as at December 31, 2008.

|Information about the Companys benefit plans, in
      aggregate, is as follows: |   |             |   |   |             |  
|--------------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                                                  |   | December 31 |   |   | December 31 |  
|                                                                                  |   | 2008        |   |   | 2007        |  
|Accrued benefit obligation:                                                       |   |             |   |   |             |  
|Balance, beginning of year                                                        | $ | 3,746       |   | $ | 3,366       |  
|Foreign exchange adjustment                                                       |   | (453        | ) |   | (37         | )
|Service cost                                                                      |   | 462         |   |   | 399         |  
|Interest cost                                                                     |   | 227         |   |   | 112         |  
|Benefits paid                                                                     |   | (213        | ) |   | -           |  
|Early settlements                                                                 |   | (1,527      | ) |   | -           |  
|Actuarial loss                                                                    |   | 22          |   |   | 332         |  
|Deficit                                                                           |   | 2,264       |   |   | 4,172       |  
|Unamortized actuarial loss                                                        |   | (605        | ) |   | (426        | )
|Accrued benefit liability                                                         | $ | 1,659       |   | $ | 3,746       |  

13

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


Employee future benefit expense recognized during the year was
as follows:

|                                                                                                       |   | December 31 |   |   | December 31 | 
|------------------------------------------------------------------------------------------------------ | - | ----------- | - | - | ----------- | 
|                                                                                                       |   | 2008        |   |   | 2007        | 
|Employee future benefits expense:                                                                      |   |             |   |   |             | 
|Service cost                                                                                           | $ | 462         |   | $ | 398         | 
|Interest cost                                                                                          |   | 227         |   |   | 112         | 
|Actuarial loss                                                                                         |   | 38          |   |   | 249         | 
|Past service costs                                                                                     |   | (260        | ) |   | -           | 
|                                                                                                       |   | 467         |   |   | 759         | 
|Difference between costs arising in the period and costs
      recognized in the period in respect of: |   |             |   |   |             | 
|Actuarial gains                                                                                        |   | 72          |   |   | -           | 
|Net expense for the year                                                                               | $ | 539         |   | $ | 759         | 
|                                                                                                       |   |             |   |   |             | 
|Significant assumptions used:                                                                          |   |             |   |   |             | 
|Discount rate                                                                                          |   | 8.04%       |   |   | 4.00%       | 
|Rate of compensation increase                                                                          |   | 5.22%       |   |   | 1.50%       | 

|    |             
|--- | ------------
|11. | Income taxes

The following table reconciles the expected income tax
(recovery) / payable at the statutory income tax rate to the amounts recognized
in the consolidated statements of operations for the years ended December 31,
2008 and 2007.

|                                                                    |   | December 31 |   |   | December 31 |  
|------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                                    |   | 2008        |   |   | 2007        |  
|Net earnings / (loss) before income taxes                           | $ | 20,987      |   | $ | (73,680     | )
|Income tax rate                                                     |   | 35.50%      |   |   | 38.12%      |  
|                                                                    |   |             |   |   |             |  
|Expected income tax expense / (recovery) based on above
      rates |   | 7,450       |   |   | (28,086     | )
|Effect of lower tax rates in foreign jurisdictions                  |   | (4,120      | ) |   | 7,458       |  
|Non-deductible stock option expense                                 |   | 1,441       |   |   | 1,538       |  
|Other                                                               |   | 2,307       |   |   | (6,727      | )
|Change in Mexican statutory income tax regime                       |   | -           |   |   | 43,081      |  
|Valuation allowance                                                 |   | (17,374     | ) |   | 10,370      |  
|Provision for income taxes                                          | $ | (10,296     | ) | $ | 27,634      |  

14

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


The following reflects future income tax liabilities at
December 31, 2008 and 2007:

|                                                                              |   |        |  |   | December 31 |   |   | December 31 |  
|----------------------------------------------------------------------------- | - | ------ |  | - | ----------- | - | - | ----------- | -
|                                                                              |   |        |  |   | 2008        |   |   | 2007        |  
|                                                                              |   |        |  |   |             |   |   |             |  
|Accounting value of mineral properties in excess of tax
      value           |   |        |  | $ | 85,340      |   | $ | 108,666     |  
|Accounting value of inventories in excess of tax value                        |   |        |  |   | 11,311      |   |   | 10,297      |  
|Deductible share issue costs                                                  |   |        |  |   | (1,871      | ) |   | (3,638      | )
|Future employee benefits                                                      |   |        |  |   | (436        | ) |   | (769        | )
|Unrealized foreign exchange gains / (losses)                                  |   |        |  |   | 1,938       |   |   | (4,201      | )
|Other                                                                         |   |        |  |   | (2,146      | ) |   | -           |  
|Non-capital losses carried forward                                            |   |        |  |   | (64,251     | ) |   | (66,266     | )
|                                                                              |   |        |  |   | 29,885      |   |   | 44,089      |  
|                                                                              |   |        |  |   |             |   |   |             |  
|Valuation allowance                                                           |   |        |  |   | 47,416      |   |   | 64,790      |  
|                                                                              |   |        |  |   |             |   |   |             |  
|Future income tax liabilities recognized                                      |   |        |  | $ | 77,301      |   | $ | 108,879     |  
|                                                                              |   |        |  |   |             |   |   |             |  
|The Company has tax loss carryforwards expiring in the
      following years: |   |        |  |   |             |   |   |             |  
|                                                                              |   |        |  |   |             |   |   |             |  
|                                                                              |   | Canada |  |   | Mexico      |   |   | Total       |  
|2009                                                                          |   | 2,433  |  |   | -           |   |   | 2,433       |  
|2010                                                                          |   | -      |  |   | 1,146       |   |   | 1,146       |  
|2011                                                                          |   | -      |  |   | 36          |   |   | 36          |  
|2012                                                                          |   | -      |  |   | 4,089       |   |   | 4,089       |  
|2013                                                                          |   | 2,755  |  |   | 11,316      |   |   | 14,071      |  
|2014                                                                          |   | 5,416  |  |   | 17,201      |   |   | 22,617      |  
|2015                                                                          |   | 4,622  |  |   | 42,723      |   |   | 47,345      |  
|2016                                                                          |   | -      |  |   | 41,493      |   |   | 41,493      |  
|2017                                                                          |   | -      |  |   | 46,114      |   |   | 46,114      |  
|2018                                                                          |   | -      |  |   | 12,884      |   |   | 12,884      |  
|2026                                                                          |   | 6,781  |  |   | -           |   |   | 6,781       |  
|2027                                                                          |   | 14,434 |  |   | -           |   |   | 14,434      |  
|2028                                                                          |   | 10,297 |  |   | -           |   |   | 10,297      |  
|                                                                              | $ | 46,738 |  | $ | 177,002     |   | $ | 223,740     |  

|    |                     
|--- | --------------------
|12. | Shareholders equity
|    |                     
|(a) | Capital stock       

Authorized:

Unlimited number of common shares.

Unlimited number of non-cumulative, dividends to be determined
by the Board of Directors not to exceed 12%, non-participating, non-voting,
Class A preferred shares, redeemable at their paid-in value.

Unlimited number of non-cumulative, dividends to be determined
by the Board of Directors not to exceed 13%, non-participating, non-voting,
Class B preferred shares, redeemable at their paid-in value.

15

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|                                                        |  |               |  |   |          |  
|------------------------------------------------------- |  | ------------- |  | - | -------- | -
|Issued and outstanding:                                 |  |               |  |   |          |  
|                                                        |  | Number of     |  |   | Ascribed |  
|                                                        |  | Common Shares |  |   | Value    |  
|Balance, December 31, 2006                              |  | 102,146,108   |  | $ | 463,333  |  
|                                                        |  |               |  |   |          |  
|For cash pursuant to exercise of share purchase options |  | 5,286,255     |  |   | 33,439   |  
|Fair value of options exercised                         |  | -             |  |   | 32,714   |  
|Public offering                                         |  | 10,000,000    |  |   | 178,120  |  
|Share issuance costs                                    |  | -             |  |   | (8,094   | )
|Balance, December 31, 2007                              |  | 117,432,363   |  | $ | 699,512  |  
|                                                        |  |               |  |   |          |  
|For cash pursuant to exercise of share purchase options |  | 2,558,405     |  |   | 6,772    |  
|Fair value of options exercised                         |  | -             |  |   | 12,694   |  
|Fair value of shares issued                             |  | 50,000        |  |   | 448      |  
|                                                        |  |               |  |   |          |  
|Balance, December 31, 2008                              |  | 120,040,768   |  | $ | 719,426  |  

|(b) | Stock options (in Canadian
  dollars)
|--- | -------------------------------------

The Company has a stock option plan under which options to
purchase common shares of the Company may be granted to directors, senior
officers, employees and service providers of the Company. The aggregate number
of common shares that may be reserved for issuance under the plan is 23,600,000.
The maximum number of common shares that may be reserved for issuance to any one
person under the plan is 5% of the shares outstanding at the time of grant (on a
non-diluted basis), less the aggregate number of shares reserved for issuance to
such person under any other option to purchase shares from treasury granted as a
compensation or incentive mechanism. Stock options are generally exercisable for
a maximum period of five to seven years from the grant date, and have vesting
periods as determined by the Companys Board of Directors.

The fair value of the options granted was calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

|                                       |  |                   |   |   |                   |   |   | December 31 |   |   | December 31   |  
|-------------------------------------- |  | ----------------- | - | - | ----------------- | - | - | ----------- | - | - | ------------- | -
|                                       |  |                   |   |   |                   |   |   | 2008        |   |   | 2007          |  
|Dividend yield                         |  |                   |   |   |                   |   |   | 0%          |   |   | 0%            |  
|Expected volatility                    |  |                   |   |   |                   |   |   | 53.35%      |   |   | 55.32%        |  
|Risk free interest rate                |  |                   |   |   |                   |   |   | 3.45%       |   |   | 4.21%         |  
|Expected life                          |  |                   |   |   |                   |   |   | 6.13 years  |   |   | 5 years       |  
|Weighted average grant date fair value |  |                   |   |   |                   |   | $ | 5.23        |   | $ | 8.56          |  
|                                       |  |                   |   |   |                   |   |   |             |   |   |               |  
|                                       |  |                   |   |   |                   |   |   |             |   |   |               |  
|                                       |  | December 31, 2008 |   |   | December 31, 2007 |  
|                                       |  |                   |   |   | Weighted          |   |   |             |   |   | Weighted      |  
|                                       |  | Shares            |   |   | Average Price     |   |   | Shares      |   |   | Average Price |  
|Outstanding, beginning of year         |  | 9,544,920         |   | $ | 6.35              |   |   | 14,040,342  |   | $ | 4.75          |  
|Granted                                |  | 1,885,000         |   | $ | 8.73              |   |   | 1,800,000   |   | $ | 16.41         |  
|Expired / forfeited                    |  | (321,422          | ) | $ | (9.45             | ) |   | (1,009,167  | ) | $ | (18.31        | )
|Exercised                              |  | (2,558,405        | ) | $ | (2.69             | ) |   | (5,286,255  | ) | $ | (7.00         | )
|Outstanding, end of year               |  | 8,550,093         |   | $ | 7.85              |   |   | 9,544,920   |   | $ | 6.35          |  
|Options exercisable, end of year       |  | 6,514,593         |   | $ | 7.56              |   |   | 8,926,656   |   | $ | 6.13          |  

16

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


During the year ended December 31, 2008, employees,
consultants, officers and directors of the Company exercised 2,558,405 (2007
5,286,255) options for total proceeds of $6,893 (2007 - $38,815). Set forth
below is a summary of the outstanding options to purchase common shares as at
December 31, 2008:

|  |               |  | Options outstanding |  |   | Options exercisable | 
|- | ------------- |  | ------------------- |  | - | ------------------- | 
|  |               |  | Number              |  |   | Weighted average    | 
|  | Option Price  |  | outstanding         |  |   | exercise price      | 
|$ | 5.01 - 5.50   |  | 2,013,700           |  | $ | 5.45                | 
|$ | 5.51 - 6.00   |  | 573,400             |  | $ | 5.68                | 
|$ | 6.01 - 6.50   |  | 1,894,500           |  | $ | 6.18                | 
|$ | 6.51 - 7.00   |  | 558,050             |  | $ | 6.58                | 
|$ | 7.01 - 7.50   |  | 235,000             |  | $ | 7.45                | 
|$ | 7.51 - 8.00   |  | 195,000             |  | $ | 8.09                | 
|$ | 9.01 - 9.50   |  | 891,500             |  | $ | 9.26                | 
|$ | 9.51 - 10.00  |  | 917,000             |  | $ | 9.92                | 
|$ | 10.01 - 10.50 |  | 89,333              |  | $ | 10.49               | 
|$ | 10.51 - 11.00 |  | 799,277             |  | $ | 10.64               | 
|$ | 11.01 - 18.00 |  | 50,000              |  | $ | 13.00               | 
|$ | 18.01 - 21.00 |  | 333,333             |  | $ | 20.35               | 
|  | Total         |  | 8,550,093           |  |   |                     | 

|(c) | Share-based compensation
|--- | ------------------------

In 2008, the Company awarded share-based compensation to
certain employees in lieu of a cash bonus. The shares awarded are valued at the
volume weighted average trading price of the Companys shares for the five days
prior to the award, and vest over an eighteen-month period. Subject to
shareholder and stock exchange approvals, the employees will receive the number
of shares equivalent to the bonus value, using the grant date price. In the
event that approval is not obtained, the employees are entitled to receive an
amount in cash, equal to the product of the number of shares that would have
been issued and the trading price of the Companys shares on the date paid.
Until the necessary approvals are obtained, this liability is remeasured at each
reporting period of the Company and the change is recognized in general and
administrative expenses. The amount of compensation expense recorded in 2008
with respect to share-based compensation was $5,587.


|    |                              
|--- | -----------------------------
|13. | Commitments and
contingencies

|(a) | Minera Fuerte Mayo, S.A. de C.V. (Fuerte Mayo) /
      Compania Minera Brenda, S.A. de C.V.
(Brenda)
|--- | --------------------------------------------------------------------------------------------------------

Option and joint venture agreements

As a result of an agreement dated February 21, 2003 in which
the Company acquired the remaining 40% of the title and interest in a group of
claims located in the municipality of Ocampo from Brenda, the Company agreed to
pay 8% of net profits attributable to the development of the mining claims and
their concessions up to a maximum of $2,000. As at December 31, 2007, the
Company had paid Brenda $455.

During the year ended December 31, 2008, a contract addendum
was signed which eliminated the clause containing the percentage of profits
payable up to a maximum of $2,000, and instead the Company agreed to pay Brenda
a total of $2,000 for the group of claims. The Company had previously paid $455
and during the current year, the Company paid a further $750, resulting in a
balance payable at December 31, 2008 of $795.

17

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |                                                      
|--- | -----------------------------------------------------
|(b) | Compania Minera Global, S.A. de C.V.
      (Global)

On July 17, 2000, the Company entered into an agreement with
Global for consulting services to assist in the negotiations of an agreement
with Minerales de Soyopa, S.A. de C.V. (Soyopa) to secure the right to acquire
the then remaining fifty-one percent (51%) interest in the Ocampo property. As
part of the consideration for the successful negotiation and execution of the
agreement between the Company and Soyopa, the Company agreed that if it should
subsequently sell the lands, claims and concessions described in the agreements,
the Company shall be required to pay Global $1,000. The lands, claims and
concessions have not been sold.

|(c) | Compania Minera Las Torres, S.A. de C.V. (Las
      Torres)
|--- | -------------------------------------------------------------

On September 7, 2004, a subsidiary of the Company entered into
a mining lease agreement with Las Torres. Pursuant to the agreement, the Company
acquired the right to explore, develop and mine the Las Torres Gold-Silver
property located in Guanajuato State, Mexico, for a five-year period, subject to
renewal for a further five-year period. The annual lease payments total $480 for
the first year and $720 for each year thereafter. In addition, the Company is
required to pay a 3.5% net smelter return on all gold and silver sales equal to
or above $350.00 per gold ounce and $5.50 per silver ounce, with a minimum
monthly royalty of $20. The royalty will gradually decrease to a 3.0% net
smelter return for sales of gold and silver at or below $300.00 per gold ounce
and $5.00 per silver ounce.

On November 28, 2008, the Company entered into an agreement
with Las Torres such that the Company will pay $10.00 per ounce for each ounce
of ore processed at the Las Torres mill from existing El Cubo claims. In
addition, as a result of this amendment the Company issued a letter of credit in
the amount of $1,000 to Las Torres.

Pursuant to the original mining lease agreement with Las
Torres, minimum annual lease and royalty payment commitments for successive years approximate:

|     |   | Lease    |  |   | Royalty  | 
|---- | - | -------- |  | - | -------- | 
|     |   | Payments |  |   | Payments | 
|2009 | $ | 720      |  | $ | 180      | 

|Other contingencies
|-------------------

In March 2008, the Company was named as a defendant in a claim
filed by Ed J. McKenna. The plaintiff was seeking, among other things, an order
certifying the action as a class proceeding and $75 million in special and
general damages and $5 million in punitive damages on behalf of the class. In
July 2008, the claim was amended to, among other things, assert new claims and
increase the damages sought from $80 million to $160 million. Management is of
the opinion that the claim is without merit, and that a strong defence exists
against the claim. Therefore, no provision for loss has been reflected in the
accounts of the Company.

The Company is involved in legal proceedings arising in the
ordinary course of its business. In the opinion of management, the ultimate
liability with respect to these actions will not materially affect the Companys
financial position, results of operations or cash flows.

|Other commitments
|-----------------

At December 31, 2008, the Company has purchase commitments in
the amount of approximately $2.9 million (2007 - $2.8 million) related to
acquisitions of equipment. The equipment is expected to be delivered during the
first half of 2009.


|    |                            
|--- | ---------------------------
|14. | Earnings / (loss) per
share

Basic earnings / (loss) per share is calculated based on the
weighted average number of shares outstanding during the year ended December 31,
2008 of 119,110,568 (December 31, 2007  113,176,605). Diluted earnings / (loss)
per share is based on the assumption that options under the stock option plan
have been exercised on the later of the beginning of the year and the date
granted. As of December 31, 2008, 3,275,433 stock options (December 31, 2007 
9,544,920) were excluded from the computation of diluted earnings per share
because their effect would have been anti-dilutive.


18

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |                                     
|--- | ------------------------------------
|15. | Supplemental cash flow
  information

|                                                |   | December 31 |   |   | December 31 |  
|----------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                |   | 2008        |   |   | 2007        |  
|Items not affecting cash:                       |   |             |   |   |             |  
|Amortization, depletion and accretion           | $ | 40,704      |   | $ | 43,392      |  
|Amortization of transaction costs               |   | 55          |   |   | -           |  
|Unrealized foreign exchange (gain) /
      loss |   | (13,582     | ) |   | 10,063      |  
|Stock option expense, net of
      forfeitures  |   | 4,250       |   |   | 4,035       |  
|Employee future benefits                        |   | (1,019      | ) |   | 522         |  
|Future income tax (recovery) / expense          |   | (10,296     | ) |   | 27,634      |  
|Other long-term obligations                     |   | (606        | ) |   | -           |  
|Other long-term assets                          |   | 226         |   |   | -           |  
|                                                | $ | 19,732      |   | $ | 85,646      |  
|Change in non-cash working capital:             |   |             |   |   |             |  
|Receivables                                     | $ | (6,155      | ) | $ | 3,074       |  
|Prepaids and deposits                           |   | (582        | ) |   | (1,474      | )
|Inventories                                     |   | (9,416      | ) |   | (5,604      | )
|Payables and accruals                           |   | 22,115      |   |   | (14,520     | )
|                                                | $ | 5,962       |   | $ | (18,524     | )
|Supplemental information:                       |   |             |   |   |             |  
|Interest paid                                   | $ | 2,527       |   | $ | 4,567       |  
|Taxes paid                                      | $ | 2,882       |   | $ | -           |  
|Non-cash transactions:                          |   |             |   |   |             |  
|Acquisition of assets under capital
      lease | $ | 860         |   | $ | 635         |  
|                                                |   |             |   |   |             |  

|16. | Related party transactions
|--- | --------------------------

The Company had the following related party transactions, which
were in the normal course of operations and measured at fair value:

|    |                                |   | December 31 |  |   | December 31 | 
|--- | ------------------------------ | - | ----------- |  | - | ----------- | 
|    |                                |   | 2008        |  |   | 2007        | 
|(a) | Production costs  labour      | $ | 33,762      |  | $ | 31,148      | 
|(a) | Mining interests  labour      |   | 1,167       |  |   | 2,437       | 
|(b) | Production costs  consumables |   | 14,655      |  |   | 2,033       | 
|(c) | Capital assets                 |   | 94          |  |   | 25          | 
|    |                                | $ | 49,678      |  | $ | 35,643      | 

|(a) | The Company pays a third party company related to a
      director for the provision of workers in the Mexican operations at cost
      plus 10%.                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                         
|(b) | The Company pays two third party companies related to a
      director for the provision of lubricant and fuel, the prices of which are
      regulated in Mexico.                      
|    |                                                                                                                                                                                         
|(c) | The Company paid a director, or a third party company
      related to a director, for the provision and construction of production
      and support facilities and mineral properties.

As at December 31, 2008, the Company had included $1,922 (2007
- $1,775) in payables and accruals and $1,022 (2007 - $Nil) included in prepaids
and deposits, representing amounts owing or paid to these related parties.


19

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |                      
|--- | ---------------------
|17. | Financial instruments

The Companys financial instruments consisted of cash and cash
equivalents, restricted cash, receivables, payables and accruals, long-term debt
and capital leases. Unless otherwise noted, it is managements opinion that the
Company is not exposed to significant interest or credit risks arising from
these financial instruments. Some of the Companys receivables and payables are
denominated in Mexican Pesos or Canadian dollars. Balances are translated at the
period end based on the Companys accounting policy as set out in Note 2(c) to
the consolidated financial statements.

The Company estimates that the fair value of its cash and cash
equivalents, restricted cash, receivables, payables and accruals, and long-term
debt approximate the carrying value of the assets and liabilities due to the
relatively short terms to maturity or due to the borrowing terms being
comparable to current market terms for similar liabilities.


|    |                          
|--- | -------------------------
|18. | Financial risk management

In the normal course of operations, the Company is exposed to
commodity price, interest rate, foreign currency exchange, credit and liquidity
risks. The Company has recently developed a risk management process to identify,
analyze, and assess these risks, and has formed a Risk Committee to monitor
these risks. The Board of Directors has overall responsibility for the oversight
of the Companys risk management framework, and receives reports from the Risk
Committee.

|Commodity price risk
|--------------------

The profitability of the Companys gold mining operations will
be significantly affected by changes in the market prices for gold and silver.
Gold and silver prices fluctuate on a daily basis and are affected by numerous
factors beyond the Companys control. The supply and demand for gold and silver,
interest rates, the rate of inflation, investment decisions by large holders of
gold and silver, including governmental reserves, and stability of exchange
rates can all cause significant fluctuations in gold and silver prices. Such
external economic factors are in turn influenced by changes in international
investment patterns and monetary systems, and political developments. The
Company does not actively hedge this exposure.

|Interest rate risk
|------------------

The Company is exposed to interest rate risk on its variable
rate debt. The Company has not entered into any agreements to hedge against
unfavourable changes in interest rates. If interest rates had been 50 basis
points higher during the year, equity and net earnings would have decreased by
$161, arising mainly as a result of higher interest rates on variable
borrowings. This analysis assumes that other variables remain constant (a 50
basis point decrease in interest rates would have had the equal but opposite
effect).

|Foreign currency exchange rate risk
|-----------------------------------

All metal revenues for the Company are denominated in US
dollars. The Company is primarily exposed to currency fluctuations relative to
the US dollar on expenditures that are denominated in Canadian dollars (CAD) and
Mexican Pesos (MXN). These potential currency fluctuations could have a
significant impact on production costs and thereby, the profitability of the
Company. The Company is also exposed to the impact of currency fluctuations on
its monetary assets and liabilities. The Company does not actively manage this
exposure.

At December 31, 2008, the Companys exposure to foreign
currency exchange risk was as follows:

|                                  |   | CAD     |   |  | MXN      |  
|--------------------------------- | - | ------- | - |  | -------- | -
|Cash and cash equivalents         | $ | 44      |   |  | 19,037   |  
|Receivables                       |   | 190     |   |  | 148,160  |  
|Payables and accruals             |   | (8,485  | ) |  | (114,517 | )
|Long-term debt and capital leases |   | (112    | ) |  | (5,718   | )
|Future income tax liabilities     |   | (67,328 | ) |  | (308,720 | )
|Net balance sheet exposure        | $ | (75,691 | ) |  | (261,758 | )

20

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


A 10% weakening of these currencies against the US dollar at
December 31stwould have increased / (decreased) equity and net
earnings by the amounts shown below. This analysis assumes that other variables,
in particular interest rates, remain constant (a 10% strengthening would have
had the equal but opposite effect).

|                                |   | Equity / earnings | 
|------------------------------- | - | ----------------- | 
|Translation of net CAD exposure | $ | 5,631             | 
|Translation of net MXN exposure |   | 1,744             | 

|Credit risk
|-----------

Credit risk relates to receivables and other contracts, and
arises from the possibility that any counterparty to an instrument fails to
perform. For cash and cash equivalents and receivables, the Companys credit
risk is limited to the carrying amount on the balance sheet. The Company manages
credit risk by transacting with highly-rated counterparties and establishing a
limit on contingent exposure for each counterparty based on the counterpartys
credit rating. Exposure on receivables is limited as the Company sells its
products to a small number of organizations, on which the historical level of
defaults is minimal.

|Liquidity risk
|--------------

Liquidity risk is the risk that the Company will be unable to
meet its financial obligations as they become due. The Company manages this risk
through regular monitoring of its cash flow requirements to support ongoing
operations and expansionary plans. The Company ensures that there are sufficient
committed loan facilities to meet its business requirements, taking into account
its anticipated cash flows from operations and its holdings of cash and cash
equivalents.

Effective November 28, 2008, the Companys credit facility was
restructured and extended. The existing $60 million revolving credit facility
was converted to $30 million non-revolving credit facility, of which $30 million
was outstanding on December 31, 2008, that will be repaid in scheduled
instalments over a 19 month period and a $20 million revolving facility that
expires on November 27, 2009 of which $7.13 million was drawn at December 31,
2008.

The following are the contractual maturities of financial
liabilities, including interest payments:

|                                      |   | Carrying |  |   | Contractual      |   |   | Less than      |   |   | 6 - 12  |   |   | 1 - 2  |   |   | 2  5  |   |   | More than     |  
|------------------------------------- | - | -------- |  | - | ---------------- | - | - | -------------- | - | - | ------- | - | - | ------ | - | - | ------ | - | - | ------------- | -
|                                      |   | amount   |  |   | cash
      flows |   |   | 6
      months |   |   | months  |   |   | years  |   |   | years  |   |   | 5
      years |  
|Payables and accruals                 | $ | 30,457   |  | $ | (30,457          | ) | $ | (30,457        | ) | $ | -       |   | $ | -      |   | $ | -      |   | $ | -             |  
|Long-term debt
    and capital leases |   | 38,452   |  |   | (39,893          | ) |   | (9,121         | ) |   | (22,710 | ) |   | (7,901 | ) |   | (161   | ) |   | -             |  
|Other long-term liabilities           |   | 4,677    |  |   | (6,000           | ) |   | (400           | ) |   | -       |   |   | (800   | ) |   | (2,400 | ) |   | (2,400        | )
|                                      |   |          |  |   |                  |   |   |                |   |   |         |   |   |        |   |   |        |   |   |               |  
|                                      | $ | 73,586   |  | $ | (76,350          | ) | $ | (39,978        | ) | $ | (22,710 | ) | $ | (8,701 | ) | $ | (2,561 | ) | $ | (2,400        | )
|                                      |   |          |  |   |                  |   |   |                |   |   |         |   |   |        |   |   |        |   |   |               |  
|                                      |   |          |  |   |                  |   |   |                |   |   |         |   |   |        |   |   |        |   |   |               |  

|19. | Capital management
|--- | ------------------

The primary objective of managing the Companys capital is to
ensure that there is sufficient available capital to support the funding
requirements of the Company, including capital expenditures, in a way that
optimizes the cost of capital and shareholder returns, and ensures that the
Company remains in a sound financial position. There were no changes to the
Companys overall capital management approach during the current year.

The capital of the Company consists of items included in
Shareholders equity and debt obligations. The Company manages and makes
adjustments to the capital structure as opportunities arise in the market place,
as and when borrowings mature, or when funding is required. This may take the
form of raising equity or debt.

21

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


The Company monitors capital through the gross debt to total
equity ratio, and targets a ratio of less than 25%. As at December 31, 2008, the
ratio of gross debt to total equity was 6.13% (December 31, 2007  5.86%),
calculated as follows:

|                                  |   | December 31, 2008 |  |   | December 31, 2007 | 
|--------------------------------- | - | ----------------- |  | - | ----------------- | 
|Current portion of long-term debt | $ | 30,461            |  | $ | 33,073            | 
|Long-term debt                    |   | 7,991             |  |   | 1,334             | 
|Gross debt                        |   | 38,452            |  |   | 34,407            | 
|Shareholders equity              | $ | 627,718           |  | $ | 586,650           | 
|Gross debt / Shareholders equity |   | 6.13%             |  |   | 5.86%             | 

|    |                      
|--- | ---------------------
|20. | Segmented information

Information is reported on a mine by mine basis, and therefore
the Companys operating segments are represented by the individual mines and the
corporate operations. Revenue in both mining segments is derived from the sale
of gold and silver.

The following are the operating results by segment:

|                                                                                 |   |         |   |   |               |   |   |           | December 31, 2008 |  
|-------------------------------------------------------------------------------- | - | ------- | - | - | ------------- | - | - | --------- | ----------------- | -
|                                                                                 |   | Ocampo  |   |   | El
      Cubo |   |   | Corporate |                   |  
|Revenue from mining operations                                                   | $ | 154,313 |   | $ | 58,209        |   | $ | -         |                   | $
|                                                                                 |   |         |   |   |               |   |   |           |                   |  
|Production costs                                                                 |   | 85,399  |   |   | 41,625        |   |   | -         |                   |  
|Refining costs                                                                   |   | 1,156   |   |   | 506           |   |   | -         |                   |  
|General and administrative                                                       |   | 8,983   |   |   | 2,092         |   |   | 18,870    |                   |  
|Amortization and depletion                                                       |   | 26,602  |   |   | 13,967        |   |   | 146       |                   |  
|                                                                                 |   | 122,140 |   |   | 58,190        |   |   | 19,016    |                   |  
|Earnings / (loss) before other items                                             | $ | 32,173  |   | $ | 19            |   | $ | (19,016   | )                 | $
|Expenditures related to mining interests and property,
      plant and equipment | $ | 50,419  |   | $ | 16,237        |   | $ | 185       |                   | $
|Total assets                                                                     | $ | 401,067 |   | $ | 382,095       |   | $ | 1,124     |                   | $
|                                                                                 |   |         |   |   |               |   |   |           |                   |  
|                                                                                 |   |         |   |   |               |   |   |           |                   |  
|                                                                                 |   |         |   |   |               |   |   |           | December 31, 2007 |  
|                                                                                 |   | Ocampo  |   |   | El
      Cubo |   |   | Corporate |                   |  
|Revenue from mining operations                                                   | $ | 107,833 |   | $ | 44,226        |   | $ | -         |                   | $
|                                                                                 |   |         |   |   |               |   |   |           |                   |  
|Production costs                                                                 |   | 106,977 |   |   | 37,645        |   |   | -         |                   |  
|Refining costs                                                                   |   | 1,046   |   |   | 464           |   |   | -         |                   |  
|General and administrative                                                       |   | 4,682   |   |   | 682           |   |   | 18,792    |                   |  
|Amortization and depletion                                                       |   | 28,582  |   |   | 14,731        |   |   | 80        |                   |  
|                                                                                 |   | 141,287 |   |   | 53,522        |   |   | 18,872    |                   |  
|Loss before other items                                                          | $ | (33,454 | ) | $ | (9,296        | ) | $ | (18,872   | )                 | $
|Expenditures related to mining interests and property,
      plant and equipment | $ | 53,806  |   | $ | 15,255        |   | $ | 81        |                   | $
|Total assets                                                                     | $ | 379,285 |   | $ | 373,044       |   | $ | 1,623     |                   | $
|                                                                                 |   |         |   |   |               |   |   |           |                   |  
|                                                                                 |   |         |   |   |               |   |   |           |                   |  




22

---



Notes to the Consolidated Financial Statements
(in thousands of United States Dollars unless otherwise
noted)


|    |                     
|--- | --------------------
|21. | Subsequent events   
|    |                     
|(i) | Proposed transaction

On March 12, 2009, the Company announced that it entered into a
letter agreement (letter of intent) with Capital Gold Corporation (Capital
Gold) relating to a proposed acquisition of Capital Gold by the Company. The
all-share transaction is subject to satisfactory completion of due diligence and
the negotiation of definitive documentation, receipt of Capital Gold shareholder
approval, regulatory approvals and the satisfaction of certain other conditions.
The letter of intent contemplates, among other things, the issuance of 0.1028
Gammon Gold shares for each Capital Gold common share outstanding, for a total
issuance of 20,389,591 common shares.

The letter of intent provides that the parties plan to complete
their respective technical, operating and financial due diligence and negotiate
the terms of a definitive agreement by March 31, 2009. Capital Gold has agreed
to a non-solicitation period expiring on March 31, 2009, subject to fiduciary
outs, and both parties have agreed to the payment of a break fee to the other
party in the amount of $4,000, payable only under certain circumstances.

Capital Gold is a gold production and exploration company and
operates the El Chanate gold property in Sonora, Mexico.

|(ii) | Other
|---- | -----

Subsequent to year-end, certain employees, consultants,
officers and directors of the Company exercised 2,508,400 stock options for
total proceeds of $11,508. As a result, capital stock increased by $22,383 and
contributed surplus decreased by $10,875.

| | 
| | 

|22. | Comparative figures
|--- | -------------------

Certain of the comparative figures for December 31, 2007 have
been reclassified to conform with the financial statement presentation adopted
for December 31, 2008.




23

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