---

Exhibit 99.2

MANAGEMENTS DISCUSSION AND
ANALYSIS

FOR THE YEAR ENDED DECEMBER 31, 2010

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


TABLE OF CONTENTS

|OVERVIEW OF THE BUSINESS                             | 3 
|---------------------------------------------------- | --
|                                                     |   
|2010 HIGHLIGHTS                                      | 3 
|                                                     |   
|OUTLOOK AND STRATEGY                                 | 6 
|                                                     |   
|SUMMARIZED ANNUAL FINANCIAL AND OPERATING RESULTS    | 7 
|                                                     |   
|REVIEW OF ANNUAL FINANCIAL RESULTS                   | 8 
|                                                     |   
|SUMMARY OF QUARTERLY FINANCIAL AND OPERATING RESULTS | 9 
|                                                     |   
|REVIEW OF FOURTH QUARTER FINANCIAL RESULTS           | 10
|                                                     |   
|RESULTS OF OPERATIONS                                | 11
|                                                     |   
|OPERATIONAL REVIEW  OCAMPO MINE                     | 12
|                                                     |   
|OPERATIONAL REVIEW  EL CUBO MINE                    | 21
|                                                     |   
|EXPLORATION REVIEW                                   | 22
|                                                     |   
|CONSOLIDATED EXPENSES                                | 25
|                                                     |   
|CONSOLIDATED OTHER INCOME / (EXPENSE)                | 25
|                                                     |   
|CONSOLIDATED INCOME TAX EXPENSE / (RECOVERY)         | 26
|                                                     |   
|FINANCIAL CONDITION                                  | 26
|                                                     |   
|KEY ECONOMIC TRENDS                                  | 27
|                                                     |   
|LIQUIDITY AND CAPITAL RESOURCES                      | 27
|                                                     |   
|CONTRACTUAL OBLIGATIONS                              | 29
|                                                     |   
|OUTSTANDING SHARE DATA                               | 29
|                                                     |   
|OFF-BALANCE SHEET ARRANGEMENTS                       | 29
|                                                     |   
|FINANCIAL INSTRUMENTS AND HEDGING                    | 29
|                                                     |   
|TRANSACTIONS WITH RELATED PARTIES                    | 30
|                                                     |   
|SUBSEQUENT EVENTS                                    | 31
|                                                     |   
|NON-GAAP MEASURES                                    | 31
|                                                     |   
|RISKS AND UNCERTAINTIES                              | 32
|                                                     |   
|INTERNATIONAL FINANCIAL REPORTING STANDARDS          | 36
|                                                     |   
|CRITICAL ACCOUNTING POLICIES AND ESTIMATES           | 41
|                                                     |   
|CONTROLS AND PROCEDURES                              | 43
|                                                     |   
|CAUTIONARY NOTE TO U.S. INVESTORS                    | 44
|                                                     |   
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 44

| | 2
| | -

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


This Managements Discussion and Analysis (MD&A),
dated March 23, 2011, relates to the financial condition and results of
operations of Gammon Gold Inc. (the Company) together with its wholly owned
subsidiaries, and should be read in conjunction with the Companys consolidated
financial statements for the year ended December 31, 2010, and notes thereto.
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles (GAAP). All results are
presented in United States dollars, unless otherwise stated.

The first, second, third and fourth quarters of the
Companys fiscal year are referred to as Q1, Q2, Q3 and Q4,
respectively. Except where otherwise indicated, gold equivalent ounces include
silver ounces produced and sold converted to a gold equivalent, based on the
Companys long-term gold equivalency ratio of 55:1.

Statements are subject to the risks and uncertainties
identified in the Risks and Uncertainties and Cautionary Note regarding
Forward-Looking Statements sections of this document.

OVERVIEW OF THEBUSINESS


Gammon Gold Inc. is a publicly traded gold and silver producer
engaged in the mining, development, exploration and acquisition of resource
properties in North America. The Company owns and operates two mines in Mexico,
the Ocampo mine in Chihuahua State, and the El Cubo mine in Guanajuato State,
and also owns the Guadalupe y Calvo advanced exploration property in Chihuahua
State, Mexico. The Company has also recently executed purchase-option agreements
to acquire the Mezquite Project in Zacatecas State, Mexico (460 hectares), the
Venus Project located north of the Ocampo mine in Chihuahua State, Mexico (4,575
hectares), the Los Jarros Project in Chihuahua State, Mexico (43,229 hectares),
and has executed an agreement with Aurion Resources Ltd. which provides an
option to earn up to a 70% interest in the 12,985 hectare La Bandera Project
located in Durango, Mexico. The Company has also acquired a new block of three
claims on the west side of the Ocampo Mine properties that added 2,886 hectares
to the Ocampo mineral properties  now totalling 14,641 hectares. A major new
exploration concession of 14,669 hectares, Fraile Norte was also staked in the
state of San Luis Potosi to cover potential extensions of the Santa Maria de la
Paz mining district. The Company has also made strategic investments in Golden
Queen Mining Co. Ltd. and Corex Gold Corporation.

The Companys common shares are listed on the Toronto Stock
Exchange (TSX: GAM), the New York Stock Exchange (NYSE: GRS) and the Berlin
Stock Exchange(BSX: GL7). Further details on Gammon Gold Inc. can be
found in the Companys associated documents, including its Annual Information
Form, at www.sedar.com or on the Companys
website at www.gammongold.com.

The profitability and operating cash flow performance of the
Company are affected by numerous factors, including but not limited to, the
prices of gold and silver, the amount of metal production, and the level of
operating costs, capital expenditures, and general and administrative costs. The
Company is also exposed to fluctuations in foreign currency exchange rates,
political risks, and the level of taxation imposed by local and foreign
jurisdictions. While the Company attempts to manage these risks, many of the
factors affecting these risks are beyond the Companys control. For additional
information on the factors that affect the Company, see the discussion of Risks
and Uncertainties on page 32.

The price of gold is the largest single factor impacting the
profitability and operating cash flow of the Company. The price of gold remained
strong throughout 2010, with an average London PM Fix price of $1,225 per ounce;
a 26% increase over the average price of $972 per ounce in 2009. Silver prices
also remained strong during 2010, with an average London PM Fix price of $20.19
per ounce; a 38% improvement over the average price of $14.67 per ounce in 2009.
The price of silver outperformed that of gold during 2010, causing the realized
silver-to-gold ratio to decline from 66:1 during 2009 to 61:1 in 2010. As a
result of the volatility in the gold equivalency ratio during 2009 and 2010,
when making annual and quarterly comparisons, the reader should focus on actual
gold and silver production and sales, or on the gold equivalent production or
sales calculated using the Companys long-term gold equivalency ratio of 55:1.

2010 HIGHLIGHTS


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|▬ | On February 28, 2011, the Company announced updated reserves and resources
  estimates as at December 31, 2010. Using gold and silver prices of $1,025 and
  $16.60 respectively (gold equivalency ratio of 61.75:1), the Company added 459
  thousand gold equivalent ounces to total proven and probable mineral reserves,
  representing an 18% increase before mining depletion. In addition, the Company
  added 238 thousand gold equivalent ounces (using gold and silver prices of
  $1,250 and $22.75 respectively, or a silver-to-gold equivalency ratio of 55:1)
  to measured and indicated resources, representing an increase of 47%.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| | 3
| | -

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|▬ | Despite $9.2 million of mine standby costs at El Cubo, earnings before
  other items were $60.3 million in 2010 versus earnings before other items of
  $27.4 million in 2009, representing a $32.9 million or 120% increase
  year-over-year and the best annual result in the Companys history.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | Cash flow from operations during 2010 increased by $19.4 million, or 25%,
  to $97.6 million, compared to $78.2 million in 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | On a consolidated basis, the Company produced 114,064 gold ounces and
  4,953,870 silver ounces, or 204,133 gold equivalent ounces during 2010. In
  2009, the Company produced 136,309 gold ounces, 5,165,514 silver ounces, or
  230,228 gold equivalent ounces. This reduction in ounces produced
  year-over-year was a result of the suspension of operations at the El Cubo
  mine during the second quarter of 2010, resulting in El Cubo contributing
  28,761 fewer gold equivalent ounces to consolidated production in 2010. Using
  the Companys realized gold equivalency ratios of 61:1 and 66:1, production in
  2010 and 2009 equaled 195,566 and 214,072 gold equivalent ounces respectively.                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | Annually, the Company produced 103,220 gold ounces, and 4,417,413 silver
  ounces at the Ocampo mine, at a cash cost per gold equivalent ounce of $423.
  This annual result was in line with the Companys September 16, 2010 guidance
  that included production of 100,000 to 110,000 gold ounces, and 4,400,000 to
  4,950,000 silver ounces, at a cash cost of $410 to $435 per gold equivalent
  ounce.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | On a consolidated basis, cash costs per gold equivalent ounce in 2010 were
  $459(1), compared to $430(1)per gold equivalent ounce
  in 2009, representing an increase of 7% year-over-year. This increase is
  partially due to higher cash costs at El Cubo prior to the suspension of
  operations. Using realized gold equivalency ratios, 2010 cash costs per gold
  equivalent ounce were $479(1), representing an increase of 4% over
  2009 cash costs per gold equivalent ounce of $462(1).                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | Revenue from mining operations increased 15% to $238.3 million compared to
  $206.8 million in 2009, largely as a result of an increase in realized gold
  and silver prices of 26% and 36%, partially offset by the decrease in
  production resulting from the suspension of operations at the El Cubo mine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | During 2010, the Company renegotiated its credit facility with the Bank of
  Nova Scotia and Société Générale. The revised agreement provides for a $75
  million revolving facility over a three year term, which may be increased to
  $100 million upon the completion of the acquisition of Capital Gold, subject
  to satisfactory due diligence by the lenders on Capital Gold subsequent to
  closing. The credit facility does not require principal repayments other than
  a one-time payment at maturity equal to the drawn balance at that point in
  time.                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | On June 1, 2010, the Company completed a non-brokered private placement
  with Golden Queen Mining Co. Ltd. (Golden Queen) by acquiring 5,000,000
  units of Golden Queen for an aggregate purchase price of CAD $8 million (USD
  $7.6 million). Each unit consists of one common share, one quarter of one
  share purchase warrant exercisable at CAD $1.75 and one quarter of one share
  purchase warrant exercisable at CAD $2.00 for a period of eighteen months
  following the closing date of the transaction. Golden Queen is a gold
  exploration and development company whose principal asset is the Soledad
  Mountain property located in Kern County, Southern California.                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | On July 16, 2010, the Company completed a non-brokered private placement
  with Corex Gold Corporation (Corex) by acquiring 4,706,000 units of Corex
  for an aggregate purchase price of CAD $3.2 million (USD $3.1 million). Each
  unit consists of one common share and one half of one share purchase warrant
  exercisable at CAD $0.90 for a period of twenty-four months following the
  closing date of the transaction. Corex is a gold exploration company whose
  principal asset is the Santana Gold property located in Sonora State, Mexico.                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | On December 16, 2010, the Company entered into a binding Letter of Intent
  with Aurion Resources Ltd. (Aurion) wherein both parties agreed to negotiate
  a definitive agreement that will provide the Company with an option to earn up
  to a 70% joint venture interest in the La Bandera Project located in Durango,
  Mexico. This agreement was executed in the first quarter of 2011. Under the
  terms defined in the agreement, the Company will have the option to earn its
  interest through a $250,000 private placement in Aurion and a series of
  escalating work commitments.                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | During 2010, the Company completed land acquisitions and option agreements
  totaling 65,819 hectares in Mexico, including the Mezquite project in
  Zacatecas State, the Venus and Los Jarros projects in Chihuahua State, and the
  Fraile Norte project in San Luis Potosi State.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | During 2010, the Company confirmed the addition of four independent Board
  members, including a new independent Chairman of the Board. The Companys
  Board is now comprised of nine directors, seven of which are independent. In
  addition, the Company appointed Ambassador Martha I. Lara-Alatorre as
  Government Relations Advisor to its Board of Directors to provide insight on
  geo- sociopolitical matters, and legislative trends in mining, environment and
  labour, within Mexico.                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|▬ | On October 1, 2010, the Company entered into a definitive merger agreement
  with Capital Gold Corporation (Capital Gold) pursuant to which the Company
  will acquire all of the issued and outstanding common shares of Capital Gold.
  Under the terms of the agreement, each common share of Capital Gold would be exchanged
for 0.5209 common shares of Gammon Gold and a cash payment of $0.79 per share.
On March 17, 2011, the Company amended the merger agreement with Capital Gold by
increasing the cash component of the merger consideration to be paid to Capital
Gold shareholders by $0.30 per share, to $1.09. On March 18, 2011, Capital Gold
held a shareholder meeting that was adjourned until April 1, 2011, when the
shareholder vote will occur. Capital Gold owns and operates the El Chanate gold
mine located in Sonora, Mexico as well as the Orion development project in
Nayarit, Mexico.







| | 4
| | -

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OPERATIONALHIGHLIGHTS

|▬   | On June 17, 2010, the Company announced the suspension of
      operations at the El Cubo mine as a result of continued labour
      disruptions, the termination of 397 unionized workers for participating in
      a work stoppage, and rising operating costs associated with the failure of
      the unionized workforce to achieve expected productivity levels.
      Operations at the mine were suspended throughout the remainder of 2010.                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|▬   | On February 23, 2011, the Company announced a new
      collective agreement at the El Cubo mine. The Company believes that this
      new agreement will allow for improved productivity and cost reductions.
      Operating supplies and mobile equipment began arriving during the week of
      March 14, 2011. Underground development work is expected to begin in April
      2011.                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|▬   | At Ocampo, the underground mining rate increased steadily
      throughout the year, averaging 1,537 tonnes per day (TPD), and peaked in
      the fourth quarter of 2010 with an average mining rate of 1,671 TPD. The
      Company has reported an average mining rate of 1,877 TPD in the months of
      January and February 2011.                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|▬   | During the year, the Company developed and began
      commissioning Ocampos second underground mine, Santa Eduviges, which is
      located under the current open pits and is within close proximity to the
      main crushing circuit. The Company developed a total of 2,045 metres at
      Santa Eduviges during 2010, and commissioned the mine late in the fourth
      quarter. The Company has averaged a mining rate of 140 TPD from Santa
      Eduviges during the first two months of 2011, as the mine continues to
      ramp up to the targeted level of 500 TPD.                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|▬   | The expansion and re-optimization of the heap leach pad
      through the conversion to a valley leach design has provided an additional
      10 million tonnes of stacking capacity. This initiative has successfully
      deferred the construction of the Phase III expansion for additional heap
      leach capacity from 2009 to 2012 - 2013.                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|▬   | In early 2010, the Company launched a strategy to
      increase redundant capacity at the Ocampo mill facility, such that the
      mill will be able to consistently maintain targeted production levels
      while considering periods of scheduled and unscheduled downtime. This
      project included the installation of a fourth filter press, a sixth leach
      tank and seventh thickener to the mill circuit. After the installation of
      the sixth leach tank and seventh thickener in July 2010, the Companys
      monthly average processing rate at the mill was 3,171 TPD for the last 5
      months of 2010. The fourth filter press was commissioned in January 2011.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|▬   | As of December 31, 2010, the Company had completed
      183,159 metres of exploration drilling, including 136,126 metres at
      Ocampo, 21,638 metres at El Cubo and 18,579 metres at Guadalupe y Calvo.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(1) | The Company has included a non-GAAP performance
      measure, total cash cost per gold equivalent ounce, throughout this
      document. For further information, see the Non-GAAP Measures
      section on page 31.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | 5
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OUTLOOK ANDSTRATEGY


Gammon Gold Inc. is committed to responsibly operating and
growing to become one of the most profitable North American precious metal
companies, creating value for all of its stakeholders, including shareholders,
employees, suppliers, lenders, government, and the communities in which the
Company operates. The Companys growth strategy is to increase its production
profile, reduce cash costs and increase its reserve base through a number of
initiatives as follows:

|▬ | Realizing expansion opportunities at the Ocampo Open Pit mine, Ocampo
  Underground mine and El Cubo Underground mine;                                                            
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                   
|▬ | Fully establishing Santa Eduviges as a second operating underground mine
  at Ocampo;                                                                                             
|  |                                                                                                                                                                                   
|▬ | The continuation of the Companys exploration program which is designed to
      convert resources to reserves, increase resources, and increase the
      production profile; and
|  |                                                                                                                                                                                   
|▬ | Actively pursuing selective accretive acquisitions.                                                                                                                               

These growth initiatives are expected to be supported by the
significant improvement in the Companys cash flow performance realized this
year that, together with the Companys working capital position and strong cash
balance, will be sufficient to fund the Companys anticipated working capital
requirements, the advancement of the Guadalupe y Calvo project, capital
expenditures and growth plans.

| | 6
| | -

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


SUMMARIZEDANNUALFINANCIAL ANDOPERATINGRESULTS


|(in thousands, except ounces, per share
      amounts, average realized prices and total cash costs) |  
|---------------------------------------------------------------------------------------------------- | -
|                                                                                                     |  
|                                                                                                     |  
|Gold ounces sold                                                                                     |  
|Silver ounces sold                                                                                   |  
|Gold equivalent ounces sold (realized)(1)                                                            |  
|Gold equivalency ratio (realized)(5)                                                                 |  
|Gold ounces produced                                                                                 |  
|Silver ounces produced                                                                               |  
|Gold equivalent ounces produced (realized)(1)                                                        |  
|Revenue from mining operations                                                                       | $
|Production costs, excluding amortization and depletion                                               | $
|Earnings before other items                                                                          | $
|Net (loss) / earnings                                                                                | $
|Net (loss) / earnings per share                                                                      | $
|Net (loss) / earnings per share, diluted(2)                                                          | $
|Cash flows from operations                                                                           | $
|Net free cash flow(3)                                                                                | $
|Total cash                                                                                           | $
|Total assets                                                                                         | $
|Total long-term financial liabilities                                                                | $
|Cash dividends declared                                                                              | $
|Total cash costs per gold equivalent ounce
      (realized)(3)                                       | $
|Total cash costs per gold ounce(3)                                                                   | $
|Average realized gold price per ounce                                                                | $
|Average realized silver price per ounce                                                              | $
|Gold equivalent ounces sold (55:1)(4)                                                                |  
|Gold equivalent ounces produced (55:1)(4)                                                            |  
|Total cash costs per gold equivalent ounce
      (55:1)(3)(4)                                        | $

|(1) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent based on the ratio of the actual realized
      sales prices of the commodities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Net loss per share on a diluted basis is the same as net loss per
      share on an undiluted basis in 2010 as all factors were anti-dilutive.                                      
|(3) | See the Non-GAAP Measures section on page 31.                                                                                                                                       
|(4) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent, based on the Companys long-term gold
      equivalency ratio of 55:1.         
|(5) | Silver ounce equal to one gold ounce.                                                                                                                                               

| | 7
| | -

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


REVIEW OFANNUALFINANCIALRESULTS


During 2010, the Company sold 111,775 gold ounces and 4,970,777
silver ounces, compared to sales of 133,003 gold ounces and 5,146,584 silver
ounces in 2009. Gold equivalent ounces sold were 202,152, an 11% decline over
sales of 226,577 gold equivalent ounces sold in 2009. This decline was entirely
due to the suspension of operations at the El Cubo mine in Q2 2010, as El Cubo
contributed 27,204 fewer gold equivalent ounces to consolidated ounces sold in
the year. Using the realized gold equivalency ratios of 61:1 and 66:1, gold
equivalent sales in 2010 and 2009 were 193,429 and 210,853 respectfully. Total
revenues during the year were $238.3 million, representing an increase of $31.5
million over revenues of $206.8 million in the prior year. This increase in
revenue resulted from a 26% and 36% increase in gold and silver prices
respectively, which was partially offset by the 16% lower sales of gold ounces
and 3% lower sales of silver ounces during the year.

Earnings before other items in 2010 were $60.3 million, a $32.9
million or 120% improvement over earnings before other items of $27.4 million in
2009. The increase in earnings before other items is primarily due to the $31.5
million increase in revenues discussed above. Also contributing to the increase
was a $9.0 million reduction in general and administration expense, which was
primarily due to $8.4 million in severance and share-based compensation costs
that occurred in 2009 upon the retirement of the Companys President and
Chairman. This was offset by a $3.6 million increase in amortization and
depletion, which was primarily due to higher production at the Ocampo
underground mine and the impact of decreased open pit reserves as at December
31, 2009, offset by a decline in amortization and depletion at El Cubo due to
the suspension of operations in the second half of 2010.

Consolidated net losses of $147.5 million in 2010 represented a
$155.7 million decline over the consolidated net earnings of $8.2 million in
2009. This decrease was due to the $193.3 million impairment charge recorded in
the second quarter of 2010 related to the El Cubo mine closure, partially offset
by the $31.5 million increase in revenue. Before impairment charges and the
related tax impact, consolidated net earnings were $45.8 million or $0.33 per
share for the year ended December 31, 2010.

Cash costs per gold equivalent ounce were $459 in 2010, versus
$430 in 2009, a 7% increase year-over-year. This increase in cash costs per gold
equivalent ounce was primarily due to the unfavourable impact of the
appreciation in the Mexican peso in 2010 as compared to 2009, rising costs at
the El Cubo mine in the first half of 2010, and open pit sequencing at Ocampo in
2010 which resulted in a decline in production. Using realized gold equivalency
ratios, total cash costs per gold equivalent ounce in 2010 increased 4% to $479,
compared to $462 per gold equivalent ounce in 2009.

The Company reported cash flow from operations of $97.6
million, an increase of $19.4 million or 25%, over cash flow from operations of
$78.2 million in the prior year. This significant increase in cash flow resulted
from improved metal prices, partially offset by negative changes in non-cash
working capital during the year specifically relating to the collection of
receivables, increases in inventory and the timing of payments on payable
balances.

| | 8
| | -

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


SUMMARY OFQUARTERLYFINANCIAL ANDOPERATINGRESULTS


|(in thousands, except ounces, per share
      amounts, average realized prices and total cash costs) |  
|---------------------------------------------------------------------------------------------------- | -
|                                                                                                     |  
|Gold ounces sold                                                                                     |  
|Silver ounces sold                                                                                   |  
|Gold equivalent ounces sold (realized)(1)                                                            |  
|Gold equivalency ratio(2)                                                                            |  
|Gold ounces produced                                                                                 |  
|Silver ounces produced                                                                               |  
|Gold equivalent ounces produced (realized)(1)                                                        |  
|Revenue from mining operations                                                                       | $
|Production costs, excluding amortization and depletion                                               | $
|Earnings / (loss) before other items                                                                 | $
|Net earnings / (loss)                                                                                | $
|Net earnings / (loss) per share, basic                                                               | $
|Net earnings / (loss) per share, diluted(3)                                                          | $
|Cash from / (used in) operations                                                                     | $
|Net free cash flow(4)                                                                                | $
|Cash dividends declared                                                                              | $
|Total cash costs, per gold equivalent ounce
      (realized)(4)                                      | $
|Total cash costs, per gold ounce(4)                                                                  | $
|Average realized gold price(5)                                                                       | $
|Average realized silver price(5)                                                                     | $
|Gold equivalent ounces sold (55:1)(6)                                                                |  
|Gold equivalent ounces produced (55:1)(6)                                                            |  
|Total cash costs per gold equivalent ounce
      (55:1)(4)(6)                                        | $

|(1) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent based on the ratio of the actual realized
      sales prices of the commodities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Silver ounce equal to one gold ounce.                                                                                                                                               
|(3) | Net loss per share on a diluted basis is the same as net loss per
      share on an undiluted basis in Q2 2009, Q3 2009 and Q2 2010 as all factors
      were anti-dilutive.        
|(4) | See the Non-GAAP Measures section on page 31.                                                                                                                                       
|(5) | Average realized prices are on a per ounce basis.                                                                                                                                   
|(6) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent based on the Companys long-term gold
      equivalency ratio of 55:1.          

| | 9
| | -

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


REVIEW OFFOURTHQUARTERFINANCIALRESULTS


During the fourth quarter of 2010, the Company sold 28,207 gold
ounces and 1,170,723 silver ounces, compared to sales of 38,249 gold ounces and
1,509,511 silver ounces in the fourth quarter of 2009. Using the Companys
long-term gold equivalency ratio of 55:1, gold equivalent ounces sold were
49,493, a 25% decline over sales of 65,694 gold equivalent ounces sold in 2009.
This decline was entirely due to the suspension of operations at the El Cubo
mine in Q2 2010, as El Cubo contributed 15,776 fewer gold equivalent ounces to
consolidated ounces sold in the quarter. Using the realized gold equivalency
ratios of 50:1 and 62:1 gold equivalent ounces sold in the fourth quarter of
2010 and 2009 were 51,439 and 62,462 respectfully. Fourth quarter revenues
increased to $71.0 million compared to Q4 2009 revenues of $68.2 million. The
$2.8 million increase in revenue was due to the 26% and 56% increase in the
realized prices of gold and silver respectively, offset by a decline in revenues
resulting from the suspension of operations at El Cubo.

Earnings before other items were $25.1 million in the fourth
quarter of 2010, representing the best quarterly result in the Companys
history. This achievement was a $3.6 million or 17% improvement over Q4 2009s
earnings before other items of $21.5 million and resulted from the improvement
in revenue mentioned previously and the reduction in total costs due to the
suspension of operations at El Cubo, partially offset by higher production costs
at Ocampo quarter-over-quarter resulting from increased tonnes mined in the open
pit. Ocampo contributed $33.6 million to earnings before other items in the
fourth quarter of 2010, the best quarterly result in the history of the mine.

Consolidated net earnings were $23.5 million in the fourth
quarter of 2010, representing a $9.8 million or 72% increase over the Companys
consolidated net earnings of $13.7 million in the fourth quarter of 2009. This
quarterly earnings result was largely due to the increase in revenue and
reduction in production costs previously discussed, offset by a $4.5 million
reduction in income tax expense quarter-over-quarter.

Consolidated cash costs per gold equivalent ounce were largely
consistent quarter-over-quarter, with the Company reporting $427 in Q4 2010
compared to $423 per ounce in Q4 2009. Consolidated cash costs improved
quarter-over-quarter due to the higher cost El Cubo operation being suspended
throughout Q4 2010; however this improvement was entirely offset by an increase
in cash costs at the Ocampo mine due to scheduled open pit sequencing, resulting
in a relatively consistent consolidated cost per ounce produced. Using realized
gold equivalency ratios for Q4 2010 and Q4 2009, total cash costs per gold
equivalent ounce for the fourth quarter decreased by 8% to $411, compared to
$445 per gold equivalent ounce in the same period in 2009.

The Company reported cash flow from operations during the
fourth quarter of $35.6 million, representing the best quarterly operating cash
flow result in the Companys history. This achievement was an increase of $4.0
million, or 13%, over the same quarter of the prior year and primarily resulted
from higher gold and silver prices when compared to the fourth quarter of 2009,
partially offset by negative changes in non-cash working capital during the year
relating to the collection of receivables and increases in inventory. The Ocampo
mine contributed $41.9 million, or $0.30 per share, to fourth quarter operating
cash flows, representing the mines best ever quarterly operating cash flow.

| | 10
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


RESULTS OFOPERATIONS


|(in thousands, except ounces and total cash
      costs)       |  
|-------------------------------------------------------------- | -
|                                                               |  
|THREE MONTHS ENDED DECEMBER 31                                 |  
|Gold ounces sold                                               |  
|Silver ounces sold                                             |  
|Gold equivalent ounces sold (realized)(1)                      |  
|Gold ounces produced                                           |  
|Silver ounces produced                                         |  
|Gold equivalent ounces produced
      (realized)(1)            |  
|Revenue from mining operations                                 | $
|Production costs                                               | $
|Refining costs                                                 | $
|Mine standby costs                                             |  
|Net earnings / (loss) before other items                       | $
|Cash flow from operations                                      | $
|Total cash costs per gold equivalent ounce
      (realized)(2) | $
|Total cash costs per gold ounce(2)                             | $
|Gold equivalent ounces sold (55:1)(3)                          |  
|Gold equivalent ounces produced (55:1)(3)                      |  
|Total cash costs per gold equivalent ounce
      (55:1)(2)(3)  | $

|(in thousands, except ounces and total cash
      costs)      |  
|------------------------------------------------------------- | -
|                                                              |  
|YEAR ENDED DECEMBER 31                                        |  
|Gold ounces sold                                              |  
|Silver ounces sold                                            |  
|Gold equivalent ounces sold (realized)(1)                     |  
|Gold ounces produced                                          |  
|Silver ounces produced                                        |  
|Gold equivalent ounces produced
      (realized)(1)           |  
|Revenue from mining operations                                | $
|Production costs                                              | $
|Refining costs                                                | $
|Mine standby costs                                            |  
|Net earnings / (loss) before other items                      | $
|Cash flow from operations                                     | $
|Total cash costs per gold equivalent
      ounce(2)           | $
|Total cash costs per gold ounce(2)                            | $
|Gold equivalent ounces sold (55:1)(3)                         |  
|Gold equivalent ounces produced (55:1)(3)                     |  
|Total cash costs per gold equivalent ounce
      (55:1)(2)(3) | $

|(1) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent based on the ratio of the actual realized
      sales prices of the commodities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | See the Non-GAAP Measures section on page 31.                                                                                                                                       
|(3) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent, based on the Companys long-term gold
      equivalency ratio of 55:1.         

| | 11
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OPERATIONALREVIEWOCAMPOMINE


The Ocampo mine, which was commissioned in January 2007, is
located in the Sierra Madre Occidental, Chihuahua State, Mexico, and is
currently one of the largest operating gold / silver mines in the state. The
mine is comprised of both open pit and underground mines, with milling and heap
leach processing facilities.

|▬ | One of the Companys key objectives at Ocampo in 2010 was to
sustain an average mining rate greater than 1,500 TPD in the Northeast
underground mine. The mining rate increased steadily throughout the year,
averaging 1,537 TPD, and peaked in the fourth quarter of 2010 with an average
mining rate of 1,671 TPD. This increase in production was largely due to the
underground reinvestment, training and reorganization program that took place in
2009. Ocampo underground operations, including Santa Eduviges, have continued to
mine at a rate above the Companys target, reporting an average of 1,877 TPD in
the months of January and February 2011.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|▬ | During 2010, there was also significant improvement in
underground development with a total of 22,382 metres developed during the year,
a 49% increase over metres developed during 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|▬ | In early 2010, the Company launched a strategy to increase
redundant capacity at the Ocampo mill facility, such that the mill will be able
to consistently maintain targeted production levels while considering periods of
scheduled and unscheduled downtime. This project included the installation of a
sixth leach tank and a seventh thickener, both of which were commissioned during
the third quarter. The project also included the installation of a fourth filter
press, a pulp density control system, and an automation system, which were all
commissioned by the end of January 2011.                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|▬ | The expansion and re-optimization of the heap leach pad through
the conversion to a valley leach design has provided an additional 10 million
tonnes of stacking capacity. This initiative has successfully deferred the
construction of the Phase III expansion for additional heap leach capacity until
2012 - 2013.                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | 12
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OCAMPOOPENPITMINE

|                                                    |  | QUARTER ENDED     |  |  | YEAR ENDED        | 
|--------------------------------------------------- |  | ----------------- |  |  | ----------------- | 
|                                                    |  | DECEMBER 31, 2010 |  |  | DECEMBER 31, 2009 | 
|Total tonnes mined                                  |  | 9,727,848         |  |  | 8,040,460         | 
|Total tonnes mined per day                          |  | 105,737           |  |  | 87,396            | 
|Tonnes of ore mined                                 |  | 975,472           |  |  | 670,211           | 
|Capitalized stripping and other tonnes              |  | 7,362,074         |  |  | 6,357,614         | 
|Operating stripping ratio                           |  | 1.42              |  |  | 1.51              | 
|Average grade of gold(1)                            |  | 0.53              |  |  | 0.96              | 
|Average grade of silver(1)                          |  | 27                |  |  | 55                | 
|Average grade of gold equivalent(1)                 |  | 1.06              |  |  | 1.85              | 
|Average grade of gold equivalent (55:1) (1)(2)      |  | 1.03              |  |  | 1.96              | 
|Tonnes of mineralized waste                         |  | -                 |  |  | 501,681           | 
|Average grade of gold(1)                            |  | -                 |  |  | 0.18              | 
|Average grade of silver(1)                          |  | -                 |  |  | 14                | 
|Average grade of gold equivalent(1)                 |  | -                 |  |  | 0.40              | 
|Average grade of gold equivalent (55:1) (1)(2)      |  | -                 |  |  | 0.43              | 
|Total tonnes ore mined and marginal material wasted |  | 975,472           |  |  | 1,171,892         | 
|Average grade of gold(1)                            |  | 0.53              |  |  | 0.63              | 
|Average grade of silver(1)                          |  | 27                |  |  | 37                | 
|Average grade of gold equivalent(1)                 |  | 1.06              |  |  | 1.23              | 
|Average grade of gold equivalent (55:1) (1)(2)      |  | 1.03              |  |  | 1.30              | 
|Tonnes stockpiled ahead of the heap leach           |  | 12,155            |  |  | 12,008            | 
|Average grade of gold(1)                            |  | 0.44              |  |  | 0.55              | 
|Average grade of silver(1)                          |  | 27                |  |  | 44                | 
|Average grade of gold equivalent(1)                 |  | 1.01              |  |  | 1.22              | 
|Average grade of gold equivalent (55:1) (1)(2)      |  | 0.93              |  |  | 1.35              | 
|Low grade tonnes stockpiled                         |  | -                 |  |  | 20,020            | 
|Average grade of gold(1)                            |  | -                 |  |  | 0.27              | 
|Average grade of silver(1)                          |  | -                 |  |  | 27                | 
|Average grade of gold equivalent(1)                 |  | -                 |  |  | 0.69              | 
|Average grade of gold equivalent (55:1) (1)(2)      |  | -                 |  |  | 0.76              | 

|(1) | Grams per tonne.                                                                                                                                                    
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average grade of gold equivalent includes silver grades converted
      to a gold equivalent, based on the Companys long-term gold equivalency
      ratio of 55:1.

The Company mined 9,727,848 tonnes from the open pit in the
fourth quarter of 2010, a 21% increase over the fourth quarter of 2009. The
Company ended 2010 with 3,386,532 tonnes, or 109,243 TPD, mined in the month of
December, representing the best monthly result in the Companys history. The
increase in tonnes mined over Q4 2009 was due to increased productivity in the
open pits, as well as more favourable weather conditions. In October 2009, a
two-day unseasonal rainfall negatively impacted open pit production for a period
of 10 days. Annually, the Company mined 36,562,497 tonnes, or 100,171 TPD,
representing a 16% increase over the 31,639,446 tonnes mined during 2009.

The Company mined 975,472 tonnes of ore from the open pit in
the fourth quarter of 2010, an increase of 305,261, or 46%, over Q4 2009. The
increase over the prior year was primarily due to the previously mentioned
increase in tonnage mined during 2010. The need to mine around historical voids
encountered in the Picacho pit during Q4 2009 also contributed to the variance.
During the fourth quarter of 2010, the Company completed the Plaza de Gallos
access road, connecting the Refugio and Picacho pits. This access road reduces
the haulage time from the Picacho pit to the crushers by 30% and will contribute
to increased ore production in 2011. During 2010 the Company mined 3,621,308
tonnes of ore, an increase of 33% over the prior year.

| | 13
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


The Company continued its stripping activities at the Picacho
open pit, mining 5,885,290 tonnes during the fourth quarter versus 3,721,227
tonnes the third quarter of 2010. To date, development stripping activities at
Picacho total approximately 23.5 million tonnes. Stripping of Phase 2 of Picacho
will end in the first quarter of 2011 while stripping of Phases 1 and 3 of
Picacho will accelerate at the same time. Stripping activities continued at the
Conico / Refugio open pit with 1,476,784 tonnes being mined compared to
1,531,010 in the previous quarter. Excluding capitalized stripping and other
capitalized activity, mining from the open pit totaled approximately 2.4 million
tonnes in Q4 2010, which is consistent with Q3 2010.

OCAMPOUNDERGROUNDMINE

|                                               |  | QUARTER ENDED     |  |  | YEAR ENDED        | 
|---------------------------------------------- |  | ----------------- |  |  | ----------------- | 
|                                               |  | DECEMBER 31, 2010 |  |  | DECEMBER 31, 2009 | 
|Tonnes of ore mined(3)                         |  | 153,727           |  |  | 102,973           | 
|Tonnes of ore mined per day                    |  | 1,671             |  |  | 1,119             | 
|Average grade of gold(1)                       |  | 2.52              |  |  | 2.44              | 
|Average grade of silver(1)                     |  | 166               |  |  | 162               | 
|Average grade of gold equivalent(1)            |  | 5.82              |  |  | 5.01              | 
|Average grade of gold equivalent (55:1) (1)(2) |  | 5.54              |  |  | 5.38              | 
|Metres developed                               |  | 7,189             |  |  | 3,668             | 

|(1) | Grams per tonne.                                                                                                                                                                 
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average grade of gold equivalent includes silver grades converted
      to a gold equivalent, based on the Companys long-term gold equivalency
      ratio of 55:1.             
|(3) | Includes 3,542 and 20,423 tonnes of low grade development material
      sent to the heap leach for processing during the three and twelve months
      ending December 31, 2010.

The Company mined 153,727 tonnes, or 1,671 TPD, of underground
ore in the fourth quarter of 2010, an increase of 50,754 tonnes, or 49% over the
same period of the prior year. The significant increase over the prior year is
due to the underground reinvestment and reorganization program that took place
in 2009 that has resulted in steadily improving production since Q2 2009. In the
month of December, Ocampo achieved an average daily production rate of 1,785
TPD, the best monthly result in the Companys history. In the months of January
and February 2011, the Ocampo underground operation reported an average mining
rate of 1,877 TPD. Annually, the Company mined 561,041 tonnes in 2010, which was
a 113% increase over the tonnes mined in 2009.

Development in the underground continued to accelerate in the
fourth quarter with a total of 7,189 metres developed, an increase of 10% over
Q3 2010 development of 6,546 metres, and an increase of 52% over Q2 2010
development of 4,744 metres. This significant increase in underground
development is due to the utilization of additional personnel and equipment from
the El Cubo mine that were relocated to Ocampo in late June, and on-going
training programs.

At the end of the fourth quarter, the Company began
commissioning Ocampos second underground mine, Santa Eduviges, which is located
under the current open pits and is within close proximity of the main crushing
circuit. Production from Santa Eduviges commenced in December 2010, with the
mining rate averaging 140 TPD in the months of January and February 2011. The
mine is developing its fifth ore horizon and is within a few levels of the core
of the deposit. The mine is scheduled to ramp up production to approximately 500
TPD later in 2011. Development at Santa Eduviges totaled 774 metres during the
fourth quarter, for a total of 2,045 metres during 2010.

| | 14
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OCAMPOMILLCIRCUIT

|                                             |  | QUARTER ENDED     |  |  | YEAR ENDED        | 
|-------------------------------------------- |  | ----------------- |  |  | ----------------- | 
|                                             |  | DECEMBER 31, 2010 |  |  | DECEMBER 31, 2009 | 
|Tonnes from the underground                  |  | 153,312           |  |  | 104,291           | 
|Average grade of gold processed(1)           |  | 2.56              |  |  | 2.44              | 
|Average grade of silver processed(1)         |  | 169               |  |  | 161               | 
|Gold equivalent grade processed(1)           |  | 5.93              |  |  | 5.01              | 
|Gold equivalent grade processed (55:1)(1)(2) |  | 5.64              |  |  | 5.37              | 
|Tonnes from the open pit                     |  | 137,537           |  |  | 151,918           | 
|Average grade of gold processed(1)           |  | 1.42              |  |  | 2.07              | 
|Average grade of silver processed(1)         |  | 56                |  |  | 102               | 
|Gold equivalent grade processed(1)           |  | 2.51              |  |  | 3.73              | 
|Gold equivalent grade processed (55:1)(1)(2) |  | 2.44              |  |  | 3.92              | 
|Total tonnes of ore processed                |  | 290,849           |  |  | 256,209           | 
|Total tonnes of ore processed per day        |  | 3,161             |  |  | 2,785             | 
|Average grade of gold processed(1)           |  | 2.02              |  |  | 2.22              | 
|Average grade of silver processed(1)         |  | 116               |  |  | 127               | 
|Gold equivalent grade processed(1)           |  | 4.30              |  |  | 4.25              | 
|Gold equivalent grade processed (55:1)(1)(2) |  | 4.12              |  |  | 4.53              | 
|Gold ounces produced                         |  | 17,890            |  |  | 17,194            | 
|Silver ounces produced                       |  | 829,894           |  |  | 771,301           | 
|Gold equivalent ounces produced              |  | 34,288            |  |  | 29,635            | 
|Gold equivalent ounces produced (55:1)(3)    |  | 32,979            |  |  | 31,218            | 

|(1) | Grams per tonne.                                                                                                                                                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average grade of gold equivalent includes silver grades converted
      to a gold equivalent, based on the Companys long-term gold equivalency
      ratio of 55:1.       
|(3) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent, based on the Companys long-term gold
      equivalency ratio of 55:1.

The Ocampo mill circuit processed 290,849 tonnes, or 3,161 TPD,
during the fourth quarter as compared to 256,209 tonnes, or 2,785 TPD, in the
same quarter of 2009. This 14% improvement in the mill processing rate is
attributable to the Phase III mill expansion that was completed in the second
quarter with the commissioning of the final three cyclones. The
quarter-over-quarter improvement was also due to production losses in Q4 2009
that resulted from heavy rainfall and engineering issues associated with the
sizing of cyclones used in the Phase III mill expansion. Annually, the Ocampo
mill circuit processed 1,129,641 tonnes in 2010 at an average rate of 3,095 TPD,
which represents an increase of 17% over 2009.

Using the Companys long-term gold equivalency ratio of 55:1,
grades processed at the mill facility declined from 4.53 gold equivalent grams
per tonne in Q4 2009 to 4.12 gold equivalent grams per tonne in Q4 2010. This
decrease occurred despite a significant increase in higher grade tonnage from
the underground, due to open pit sequencing in the fourth quarter of 2010.
Realized mill grades increased to 4.30 gold equivalent grams per tonne in Q4
2010 from 4.25 in the same period in 2009.

Annually, using the Companys long-term gold equivalency ratio
of 55:1, grades processed at the mill declined from 4.64 gold equivalent grams
per tonne in 2009 to 3.76 gold equivalent grams per tonne in 2010. This decline
occurred despite a significantly higher contribution of tonnage from the
underground mine at a relatively consistent grade year-over-year, due to
scheduled open pit sequencing. Open pit grades were significantly lower during
2010, partially as a result of the historical voids encountered at Picacho in
the early stages of 2010. Grades improved throughout the year as a result of
improved short term open pit planning as well as grade control initiatives
undertaken in the third quarter.

During the fourth quarter, using the Companys long-term gold
equivalency ratio of 55:1, gold-equivalent ounces produced increased by 6% to
32,979 ounces. This increase was due to the 14% improvement in tonnes processed,
partially offset by a 9% decline in grades. Realized gold equivalent ounces
produced increased by 16% to 34,288 gold equivalent ounces.

| | 15
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OCAMPOCRUSHING&HEAPLEACHCIRCUIT

|                                                 |  | QUARTER ENDED     |  |  | YEAR ENDED        | 
|------------------------------------------------ |  | ----------------- |  |  | ----------------- | 
|                                                 |  | DECEMBER 31, 2010 |  |  | DECEMBER 31, 2009 | 
|Open pit ore tonnes placed on the heap leach pad |  | 875,373           |  |  | 897,908           | 
|Underground ore tonnes placed on heap leach pad  |  | 3,542             |  |  | 1,433             | 
|Total tonnes of ore processed                    |  | 878,915           |  |  | 899,341           | 
|Total tonnes of ore processed per day            |  | 9,553             |  |  | 9,775             | 
|Average grade of gold processed(1)               |  | 0.39              |  |  | 0.58              | 
|Average grade of silver processed(1)             |  | 23                |  |  | 33                | 
|Gold equivalent grade processed(1)               |  | 0.83              |  |  | 1.11              | 
|Gold equivalent grade processed (55:1)(1)(2)     |  | 0.81              |  |  | 1.18              | 
|Gold ounces produced                             |  | 11,494            |  |  | 10,738            | 
|Silver ounces produced                           |  | 369,935           |  |  | 297,430           | 
|Gold equivalent ounces produced                  |  | 18,742            |  |  | 15,532            | 
|Gold equivalent ounces produced (55:1)(3)        |  | 18,220            |  |  | 16,145            | 

|(1) | Grams per tonne.                                                                                                                                                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average grade of gold equivalent includes silver grades converted
      to a gold equivalent, based on the Companys long-term gold equivalency
      ratio of 55:1.       
|(3) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent, based on the Companys long-term gold
      equivalency ratio of 55:1.

During the fourth quarter of 2010, the Company placed 878,915
tonnes on the heap leach pad at an average stacking rate of 9,553 TPD,
representing a 2% decline over the stacking rate in Q4 2009. Annually, the
Company placed 3,078,283 tonnes on the heap leach pad at an average stacking
rate of 8,434 TPD, representing an increase of 36%, or 2,245 TPD, over 2009 when
stacking rates were reduced to conserve space on the leach pad. Annual
processing rates at the heap leach were negatively impacted by additional pit
wall lay back requirements in the Plaza de Gallos pit during the third quarter
of 2010, which reduced ore production from the open pit and resulted in a lower
processing rate for that period.

During the fourth quarter, the gold equivalent grades placed on
the heap leach declined from 1.18 grams per tonne in Q4 2009 to 0.81 gold
equivalent grams per tonne. Lower grades in 2010 were attributable to the
lowering of the open pit mill cut-off grade to reflect the stronger metal price
environment, the cessation of stockpiling very low grade material, which reduced
the grade of open pit ore placed on the heap leach as compared to the prior
year, and the lowering of the heap leach cut-off grade to 0.20 gold equivalent
grams per tonne. Realized grades declined from 1.11 gold equivalent grams per
tonne in 2009 to 0.83 gold equivalent grams per tonne in 2010. Annually, gold
equivalent grades placed on the heap leach declined from 1.27 gold equivalent
grams per tonne in 2009 to 0.81 gold equivalent grams per tonne in 2010 for the
same reasons as mentioned previously. Realized annual grades were 0.77 gold
equivalent grams per tonne in 2010, compared to 1.17 gold equivalent grams per
tonne in the prior year.

As of the end of the year, the Company had 12,155 tonnes of
ore, grading 0.93 gold equivalent grams per tonne, stockpiled ahead of the heap
leach compared to 32,028 tonnes of ore at 0.98 gold equivalent grams per tonne
at the end of 2009.

OCAMPOCASHCOSTS

Cash costs per gold equivalent ounce were $427 in the fourth
quarter of 2010, representing a 17% increase over cash costs of $366 per gold
equivalent ounce in the fourth quarter of 2009. Cash costs increased in 2010 due
to an unfavourable appreciation in the Mexican peso and the processing of lower
grade ore which has increased the cost per ounce produced. Using realized gold
equivalent ratios, cash costs per gold equivalent ounce were $411 in Q4 2010
compared with $384 in the fourth quarter of 2009, an increase of 7%
quarter-over-quarter. Annually, cash costs per gold equivalent ounce increased
from $389 in 2009 to $423 in 2010 for the same reasons as mentioned previously.
Using realized gold equivalency ratios, cash costs per gold equivalent ounce
were $440 in 2010, an increase of 6% over cash costs per gold equivalent ounce
of $417 in 2009.

| | 16
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


OCAMPOEXPLORATION

The Company continues to dedicate substantial resources to
exploration activities at the flagship Ocampo mine. Due to the success of the
program earlier in the year, the Company approved further exploration
expenditures of $14.2 million to conduct a further 78,700 metres of drilling and
3,290 metres of drifting in the second half of 2010. Subsequently, the Company
completed an additional 330 drill holes at Ocampo during the fourth quarter,
increasing the 2010 total to 751 drill holes and 137,392 metres. This includes
400 surface drill holes for 73,266 metres and 351 underground drill holes for
64,126 metres. The entire drill database for Ocampo, from 1997 through 2010, now
totals 2,954 drill holes for 523,889 metres.

The primary focus of the 2010 underground drilling program was
to extend known vein resources in the Northeast underground mine, both along
strike and downward below existing ore shoots, infill new vein discoveries
drilled from surface at the Northeast underground, and to delineate additional
resources in the Santa Eduviges veins directly under the operating open pits.
The Company was successful on all three fronts, with the addition of reserves in
15 of the existing 21 veins at the Northeast underground, the addition of six
new vein discoveries at the Northeast underground, and the addition of five new
veins in the Santa Eduviges complex. After accounting for 2010 depletion, and
assuming current underground mining rates, the Company has effectively added
more than three additional years of production to its underground operations at
Ocampo.

| | 17
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Some of the better intercepts from the underground drilling
conducted during the quarter include the following:

GOLD EQUIVALENTHOLE
    VEIN
    FROM
    TO
    LENGTH (M)
    GOLD (G/T)
    SILVER (G/T)
    (G/T)(55:1)OU-0881
    AVENTURERO
    228.0
    229.1
    1.1
    8.46
    293
    13.79OU-0881
    AVENTURERO
    233.0
    233.4
    0.4
    4.11
    430
    11.93OU-0885
    AVENTURERO
    169.4
    172.5
    3.1
    1.10
    153
    3.88OU-0887
    AVENTURERO
    194.7
    195.5
    0.8
    16.50
    74
    17.84OU-0887
    AVENTURERO
    236.4
    237.2
    0.8
    7.44
    58
    8.49OU-0971
    JESUS MARIA
    88.5
    92.1
    3.6
    3.91
    46
    4.75OU-1046
    JESUS MARIA
    90.0
    92.9
    2.8
    7.35
    368
    14.03OU-1046
    JESUS MARIA
    82.5
    85.5
    3.0
    3.06
    208
    6.84OU-1047
    JESUS MARIA
    81.6
    85.5
    4.0
    6.02
    113
    8.08OU-0972
    NEW VEIN
    30.6
    34.3
    3.7
    5.30
    25
    5.76OU-0972
    NEW VEIN
    26.8
    28.6
    1.9
    9.65
    10
    9.84OU-0892
    ROSARIO
    22.7
    25.2
    2.5
    2.17
    188
    5.58OU-0903
    ROSARIO
    61.0
    62.0
    1.1
    27.60
    2,358
    70.47OU-0931
    ROSARIO
    97.9
    99.0
    1.1
    4.43
    266
    9.27OU-0956
    ROSARIO
    50.5
    53.7
    3.2
    5.63
    586
    16.29OU-0957
    ROSARIO
    29.4
    30.0
    0.6
    6.64
    352
    13.04OU-0959
    ROSARIO
    13.1
    13.5
    0.4
    7.04
    373
    13.82OU-0964
    ROSARIO
    14.8
    17.0
    2.2
    1.30
    212
    5.15OU-0973
    ROSARIO
    243.0
    244.5
    1.5
    0.01
    866
    15.76OU-1027
    ROSARIO
    120.6
    123.9
    3.3
    2.05
    222
    6.08OU-0947
    SAN AMADO
    162.6
    163.1
    0.5
    16.95
    196
    20.51OU-0948
    SAN AMADO
    179.1
    181.1
    2.0
    20.77
    244
    25.20OU-1007
    SAN JOSE
    133.7
    138.2
    4.5
    5.03
    64
    6.19OU-0934
    SANTA EDUVIGES
    211.3
    214.0
    2.7
    7.00
    63
    8.15OU-0965
    SANTA EDUVIGES
    167.5
    168.0
    0.6
    22.70
    14
    22.95OU-0966
    SANTA EDUVIGES
    140.0
    140.6
    0.6
    37.10
    10
    37.28OU-0967
    SANTA EDUVIGES
    187.7
    192.2
    4.5
    8.76
    405
    16.12OU-0968
    SANTA EDUVIGES
    194.3
    195.0
    0.8
    8.30
    67
    9.52OU-1033
    SANTA EDUVIGES
    169.5
    171.7
    2.2
    4.80
    171
    7.92OU-0884
    SANTA JULIANA
    233.5
    236.8
    3.3
    10.04
    2,094
    48.11


Note: This exploration information has been reviewed and
verified by Qualified Person, Mr. Ian Hardesty, Chief Underground Geologist for
Ocampo. All sample analyses were performed by ALS-Chemex Laboratories, based in
Vancouver, British Columbia, using standard fire assay procedures with atomic
absorption finish. The Company has an established program of inserting certified
control samples and blanks in compliance with best practices, and this program
was used at Ocampo, per Company policy. Sample lengths are not necessarily true
widths. Further information regarding sample methods, analysis, quality control
and quality assurance is provided within the Companys Annual Information Form,
which is available atwww.sedar.comor on the Companys website atwww.gammongold.com.

| | 18
| | --

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Ocampo surface exploration included some in-fill drilling in
the open pits, and extensive new discovery drilling on targets outside of
present resources. Surface drilling was directed at 26 distinct targets over the
year, although 14 of these comprise over 82% of the meterage, as shown below:

|TARGET                       | HOLES | METRES | PERCENTAGE
|---------------------------- | ----- | ------ | ----------
|SANTA JULIANA                | 53    | 11,972 | 16%       
|ALTAGRACIA                   | 33    | 8,659  | 12%       
|SANTA LIBRADA                | 34    | 7,708  | 11%       
|PICACHO DEEPS / SAN RAMON    | 14    | 5,834  | 8%        
|BELEN                        | 26    | 4,925  | 7%        
|LAS MOLINAS incl. MOLINAS SW | 21    | 4,260  | 6%        
|EL RAYO                      | 12    | 2,935  | 4%        
|POLVORIN                     | 15    | 2,724  | 4%        
|STOCKWORK HILL               | 13    | 2,641  | 4%        
|BALVANERA                    | 20    | 1,893  | 3%        
|LOS MONOS                    | 12    | 1,633  | 2%        
|AVENTURERO                   | 17    | 1,234  | 2%        
|LA LEONA                     | 6     | 1,156  | 2%        
|RESURECCION                  | 9     | 1,098  | 1%        
|OTHER                        | 115   | 14,594 | 18%       

Ocampo surface exploration in the fourth quarter was focused on
in-fill and step-out drilling on two discoveries that were converted to reserves
in the third quarter, Santa Juliana and Belen, as well as follow-up drilling on
several discoveries made earlier in the year but which have not yet been
converted to reserves. Several significant new discoveries made during the
fourth quarter include:

|▬ | The Company completed another 11 drill holes at Altagracia, bringing the
  2010 total to 33 holes. All of these drill holes showed at least some
  anomalous gold, and several intercepts are above present underground cut-off
  grades.                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|▬ | The Company completed 20 short core holes in the Balvanera Vein above the
  existing northeast underground mine. The vein is mined to about the 1,720
  metre level in this area, and the surface exposures reach 1,900 metres.
  Numerous drill holes showed grades above present cut-off grades in the
  underground mine.                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|▬ | Several shallow drill intercepts on the El Rayo Vein indicate a high
  probability that this will provide ores that could be mined from present
  underground workings on the San Jose Vein.                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|▬ | New drilling on near-surface exposures of the Aventurero Vein suggest this
  could be mined from present underground exposures up to the surface. New drill
  intercepts indicate the presence of grades and widths that are presently being
  mined elsewhere in the underground mine, but also some wide zones of
  lower-grade mineralization that are suggestive of bulk-mining targets. Further
  drilling will be done in 2011 to better define this potential.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|▬ | Out of 15 holes completed on the Polvorin Target, a new discovery located
  just north of the mine office, two holes intersected high grade mineralization
  over narrow widths, including an unusually high grade intercept of 0.5 metres
  grading 48.60 gold grams per tonne, 4,020 silver grams per tonne, or 121.69
  gold-equivalent grams per tonne (55:1).                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|▬ | Drilling on and around the Resurreccion Vein has shown locally high-grade
  values both in this vein as well as in a nearby northeast striking vein.                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|▬ | Of 13 holes drilled southeast of the underground mine complex along the
  Stockwork Hill vein zone, two showed highly anomalous values, confirming that
  the structure is mineralized.                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | 19
| | --

---

2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Some of the better intercepts from the surface drilling
conducted during the quarter include the following:

GOLD EQUIVALENTHOLE
    VEIN
    FROM
    TO
    LENGTH (M)
    GOLD (G/T)
    SILVER (G/T)
    (G/T)(55:1)OG-1105
    ALTAGRACIA
    71.3
    71.8
    0.5
    9.43
    75
    10.79OG-1105
    ALTAGRACIA
    75.1
    76.1
    1.1
    4.91
    610
    16.00OG-1164
    ALTAGRACIA
    107.2
    114.3
    7.1
    7.69
    119
    9.86OG-1212
    ALTAGRACIA
    61.7
    62.8
    1.2
    17.30
    355
    23.75OG-1185
    AVENTURERO
    114.7
    115.4
    0.7
    14.55
    588
    25.24OG-1185
    AVENTURERO
    122.5
    123.4
    0.8
    8.20
    136
    10.67OG-1197
    AVENTURERO
    81.7
    84.2
    2.5
    8.83
    138
    11.33OG-1259
    AVENTURERO
    56.2
    60.5
    4.3
    27.65
    416
    35.22OG-1125
    BALVANERA
    30.3
    30.8
    0.5
    14.40
    11
    14.59OG-1134
    BALVANERA
    19.3
    20.6
    1.3
    8.89
    10
    9.07OG-1143
    BALVANERA
    19.5
    20.8
    1.3
    6.05
    18
    6.37OG-1143
    BALVANERA
    24.8
    25.3
    0.6
    33.70
    332
    39.74OG-1195
    BALVANERA
    24.8
    25.3
    0.5
    18.60
    38
    19.29OG-1195
    BALVANERA
    31.2
    33.8
    2.6
    8.82
    61
    9.93OG-1197
    BALVANERA
    54.1
    55.6
    1.6
    6.32
    162
    9.26OG-1197
    BALVANERA
    57.7
    59.8
    2.1
    3.68
    138
    6.18OG-1201
    BALVANERA
    56.2
    59.2
    3.1
    3.23
    355
    9.68OG-1002
    BELEN
    99.6
    100.1
    0.5
    5.37
    252
    9.95OG-1002
    BELEN
    105.5
    106.1
    0.6
    0.07
    880
    16.07OG-1043
    BELEN
    166.3
    166.8
    0.5
    10.95
    302
    16.44OG-1128
    EL RAYO
    53.5
    55.2
    1.7
    24.95
    459
    33.29OG-1172
    EL RAYO
    21.4
    22.0
    0.6
    8.75
    48
    9.63OG-909
    EL RAYO
    51.8
    54.0
    2.2
    2.87
    179
    6.13OG-1064
    POLVORIN
    36.5
    37.1
    0.6
    6.60
    597
    17.45OG-1213
    POLVORIN
    99.9
    100.5
    0.5
    48.60
    4020
    121.69OG-1194
    REFUGIO NORTE
    11.6
    12.4
    0.8
    169.00
    204
    172.71OG-1100
    RESURRECCION
    88.7
    89.4
    0.7
    4.13
    67
    5.35OG-1127
    RESURRECCION
    20.1
    20.8
    0.8
    3.11
    123
    5.35OG-1127
    RESURRECCION
    73.2
    73.8
    0.5
    1.55
    230
    5.73OG-1155
    RESURRECCION
    18.5
    19.3
    0.8
    18.25
    458
    26.58OG-1111
    SAN JUAN
    50.1
    50.7
    0.6
    5.86
    282
    10.99OG-1007
    SANTA JULIANA
    179.1
    180.1
    1.0
    2.15
    635
    13.70OG-1032
    SANTA JULIANA
    184.6
    185.3
    0.7
    4.62
    384
    11.60OG-1078
    SANTA JULIANA
    187.7
    188.3
    0.6
    1.40
    204
    5.11OG-1085
    SANTA JULIANA
    204.0
    206.3
    2.3
    4.58
    498
    13.63OG-995
    SANTA JULIANA
    135.4
    135.9
    0.6
    0.20
    395
    7.38


Note: This exploration information has been reviewed and
verified by Qualified Person, Mr. Peter Drobeck, Senior Vice President,
Exploration and Business Development. All sample analyses were performed by
ALS-Chemex Laboratories, based in Vancouver, British Columbia, using standard
fire assay procedures with atomic absorption finish. The Company has an
established program of inserting certified control samples and blanks in
compliance with best practices, and this program was used at Ocampo, per Company
policy. Sample lengths are not necessarily true widths. Further information
regarding sample methods, analysis, quality control and quality assurance is
provided within the Companys Annual Information Form, which is available
atwww.sedar.comor on the Companys website atwww.gammongold.com.

Apart from drilling activity, the Ocampo exploration team has
dedicated substantial efforts to generating and refining new exploration targets
by detailed geologic mapping. The Company continues to use a team of geologists
working in target generation on the project, and there is

| | 20
| | --

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


a substantial inventory of exploration targets to drill test in
the future. The geology department has presently has 17 drill targets defined
and planned for drilling in 2011, as surface permits allow.

OPERATIONALREVIEWELCUBOMINE


The El Cubo mine is located in the village of El Cubo in the
state of Guanajuato, Mexico. The mine is comprised of the original El Cubo
underground mine which is owned by the Company, and the Las Torres Complex which
is leased from Industrias Peñoles, S.A.B. de C.V.

ELCUBOUNDERGROUND ANDMILLINGOPERATIONS

|                                             |  | QUARTER ENDED     |  |  | YEAR ENDED        | 
|-------------------------------------------- |  | ----------------- |  |  | ----------------- | 
|                                             |  | DECEMBER 31, 2010 |  |  | DECEMBER 31, 2009 | 
|Tonnes of ore mined                          |  | -                 |  |  | 168,358           | 
|Tonnes of ore mined per day                  |  | -                 |  |  | 1,830             | 
|Total tonnes of ore processed                |  | -                 |  |  | 165,648           | 
|Total tonnes of ore processed per day        |  | -                 |  |  | 1,801             | 
|Average grade of gold processed(1)           |  | -                 |  |  | 1.86              | 
|Average grade of silver processed(1)         |  | -                 |  |  | 84                | 
|Gold equivalent grade processed(1)           |  | -                 |  |  | 3.20              | 
|Gold equivalent grade processed (55:1)(1)(2) |  | -                 |  |  | 3.39              | 
|Gold ounces produced                         |  | -                 |  |  | 8,897             | 
|Silver ounces produced                       |  | -                 |  |  | 396,367           | 
|Gold equivalent ounces produced              |  | -                 |  |  | 15,240            | 
|Gold equivalent ounces produced (55:1)(3)    |  | -                 |  |  | 16,103            | 

|(1) | Grams per tonne                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Average grade of gold equivalent includes silver grades converted
      to a gold equivalent, based on the Companys long-term gold equivalency
      ratio of 55:1.       
|(3) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent, based on the Companys long-term gold
      equivalency ratio of 55:1.

The Company mined 240,496 tonnes of ore during 2010, a decrease
of 53% from the 506,248 tonnes mined during 2009 due to the suspension of
operations on June 17, 2010. On June 2, 2010, a work stoppage commenced whereby
unionized workers were preventing contract and other workers from entering the
mine site. The continued labour disruptions at the mine resulted in the
subsequent decision to suspend operations indefinitely. Operations at the mine
remained suspended throughout the remainder of 2010.

On February 26, 2011, the Company announced the successful
resolution of this labour disruption and work is currently underway on
development activities to allow the mine to return to full scale production in
2011.

ELCUBOCASHCOSTS

Annually, cash costs per gold equivalent ounce were $766 in
2010, an increase of 32% over cash costs per gold equivalent ounce of $582 in
2009. This increase was due to rising costs as productivity levels fell below
historical levels in the period leading up to the work stoppage on June 2, 2010,
in addition to the unfavourable strengthening in the Mexican peso during the
first half of 2010. Using realized gold equivalency ratios, cash costs per gold
equivalent ounce at El Cubo were $826 in 2010, compared to $630 in 2009.

ELCUBOEXPLORATION

There was no new exploration at the El Cubo mine in the fourth
quarter due to the suspension of operations. All data and files were moved off
site when the labour disruption began. Before the closure, the Company had
completed 91 core holes for a total of 22,336 metres in 2010. New surface
drilling was primarily directed at four target zones: Villalpando Sur (and the
nearby Cebolletas mine area), Villalpando Gap, the La Cruz vein, and on the
property leased from Peñoles, the Puertecito fault zone. Earlier in the year,
the Companys work defined a mineralized body at the intersection of the
east-northeast-striking Capulin Vein and the north-northwest-striking Dolores
Vein. A development plan was in progress when mine operations were suspended.
Drilling in the Puertecito zone intersected some potentially economic grades in
the first drill holes, but follow-up drilling indicated the mineralization is
limited to a small volume.

| | 21
| | --

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


EXPLORATIONREVIEW


GUADALUPE YCALVOEXPLORATION

Drilling at Guadalupe y Calvo during the fourth quarter was
focused on stepping out on the Northwest Rosario discovery made earlier in the
year. This exploration target consists of the northwest extension of the Rosario
Vein underneath a thick series of post-mineral tuffs, and as such, is a blind
target not exposed on surface. Drilling has shown that the vein is preserved
beneath as much as 400 metres of tuffs. Despite the depth of the target,
drilling has shown that the vein system is quite wide and well-developed, and
that locally within the vein system there are very high grades that are above
cut-off grades in similar underground mines in Mexico. Drilling completed during
the year in the northwest extension of the Rosario Vein increased the length of
discovered high grade mineralization a further 500 metres from the 2008 drilling
program. In all, the 2010 work discovered 15 new intercepts on the Rosario Vein
that are above 2.0 gold-equivalent grams per tonne (55:1), six of which were
discovered in the fourth quarter. The most notable intercept in Q4 was from hole
GC-0203, which cut a 5.0 metre length grading 8.96 gold grams per tonne, 587
silver grams per tonne, or 19.83 gold-equivalent grams per tonne (55:1). Based
on the positive results to date, the Company is considering the viability of
developing an underground ramp to set up platforms to drill from 100 to 200
metres above the vein, which might provide a pattern to calculate indicated
resources.

During the fourth quarter the Company also completed one hole
near the bottom of the volume of rock that is included in the upcoming
preliminary economic assessment resource estimate. This hole, GC-0197, cut
several parallel veins within a thick zone of veining, including one intercept
of 1.0 metre grading 25.87 gold grams per tonne, 1,815 silver grams per tonne,
or 58.87 gold-equivalent grams per tonne (55:1).

Some of the better intercepts from the drilling conducted
during 2010 include the following:

GOLD EQUIVALENTHOLE
    VEIN
    FROM
    TO
    LENGTH (M)
    GOLD (G/T)
    SILVER (G/T)
    (G/T)(55:1)GC-0183
    ROSARIO NW EXT.
    213.4
    215.4
    2.0
    6.18
    14
    6.43GC-0185
    ROSARIO NW EXT.
    386.6
    395.8
    9.2
    7.67
    28
    8.18GC-0188
    ROSARIO NW EXT.
    709.0
    717.2
    8.2
    3.97
    73
    5.77Including
    
    710.2
    711.6
    1.4
    24.04
    307
    29.63GC-0197
    CENTRAL ROSARIO
    290.0
    294.0
    4.0
    15.90
    1,225
    38.18Including
    
    292.0
    293.0
    1.0
    25.87
    1,815
    58.87GC-0197
    CENTRAL ROSARIO
    298.7
    299.7
    1.0
    3.11
    428
    10.89GC-0197
    CENTRAL ROSARIO
    305.7
    306.7
    1.0
    1.38
    174
    4.54GC-0197
    CENTRAL ROSARIO
    312.7
    313.7
    1.0
    1.00
    183
    4.33GC-0203
    ROSARIO NW EXT.
    553.0
    558.0
    5.0
    8.96
    587
    19.63GC-0203
    ROSARIO NW EXT.
    577.8
    579.4
    1.6
    1.08
    188
    4.50GC-0203
    ROSARIO NW EXT.
    585.9
    587.3
    1.4
    1.23
    105
    3.14GC-0203
    ROSARIO NW EXT.
    607.4
    608.4
    1.0
    1.84
    136
    4.31GC-0209
    ROSARIO NW EXT.
    300.6
    301.2
    0.5
    5.56
    66
    6.76GC-0207
    ROSARIO NW EXT.
    521.8
    523.8
    2.0
    2.58
    205
    6.31GC-0207
    ROSARIO NW EXT.
    527.8
    529.8
    2.0
    8.64
    656
    20.56GC-0207
    ROSARIO NW EXT.
    533.3
    536.3
    3.0
    4.06
    274
    9.04GC-0215
    ROSARIO NW EXT.
    383.6
    391.7
    8.1
    2.75
    23
    3.17Including
    ROSARIO NW EXT.
    389.6
    390.7
    1.1
    19.21
    73
    20.53


Note: This exploration information has been reviewed and
verified by Qualified Person, Mr. Peter Drobeck, Senior Vice President,
Exploration and Business Development. All sample analyses were performed by SGS
Laboratories (based in Mississauga, Ontario, using their facility in Durango,
Mexico), and at ALS-Chemex Laboratories (based in Vancouver, British Columbia,
using their facility in Hermosillo, Mexico). Gold was analyzed using standard
fire assay procedures with atomic absorption finish, and silver by multi-acid
digestion with atomic absorption finish. The Company has an established program
of inserting certified control samples and blanks in compliance with best
practices, and this program was used at Guadalupe y Calvo, per Company policy.
Sample lengths are not necessarily true widths. Further information regarding
sample methods, analysis, quality control and quality assurance is provided
within the Companys Annual Information Form, which is available atwww.sedar.comor on the Companys website atwww.gammongold.com.

| | 22
| | --

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


MEZQUITEPROJECTEXPLORATION

The Mezquite Project consists of two options to purchase
contracts on mineral rights totaling 460 hectares near the Concepcion del Oro
mining district that includes other significant discoveries such as the
Peñasquito Mine and Camino Rojo Project. During the fourth quarter, the Company
completed the planned initial drill program, totaling 9 core holes for 3,932
metres. The drilling discovered gold and zinc mineralization in two geologic
settings; in a breccia pipe on the east side of a quartz diorite intrusive, and
in pyritecarbonateiron oxide alteration in Cretaceous clastic sedimentary
rocks. In addition, significant silver, lead and zinc mineralization was
discovered within veins in the quartz diorite. Hole BMXT-007 discovered high
grade gold mineralization hosted by altered siltstones and sandstones of the
Caracal Formation, just below thin cover of colluvium. The Company is planning
to follow up this discovery with soil geochemical surveys and another drill
program in the second quarter of 2011.

Some of the better intercepts from the drilling conducted
during the quarter include the following:

HOLE
    FROM
    TO
    LENGTH (M)
    GOLD (G/T)
    SILVER (G/T)
    PB_%
    ZN_%BMXT-001
    108.8
    109.8
    1.1
    2.53
    1
    0.0
    0.1BMXT-004
    221.8
    228.8
    7.0
    0.12
    10
    0.1
    0.2BMXT-004
    305.0
    306.0
    1.0
    0.04
    43
    1.4
    1.3BMXT-004
    319.0
    323.6
    4.7
    0.04
    62
    2.3
    2.6BMXT-004
    332.2
    332.6
    0.4
    0.06
    138
    4.9
    5.2BMXT-007
    0.3
    9.2
    8.9
    4.25
    4
    0.0
    0.0Including
    4.0
    6.1
    2.1
    13.93
    5
    0.0
    0.1BMXT-007
    93.0
    94.6
    1.6
    12.67
    17
    0.1
    0.1


Note: The above exploration information has been reviewed by
Qualified Person, Mr. Peter Drobeck, Senior Vice President Exploration and
Business Development. All sample analyses were performed by ALS-Chemex, based in
Vancouver, Canada. Samples were entered and processed in ALS-Chemex Laboratories
in Hermosillo, Sonora State, Mexico, using standard fire assay procedures with
an atomic absorption finish. The Company has an established program of inserting
certified control samples and blanks in compliance with best practices, and this
program was used at Mezquite, per Company policy. Sample lengths are not
necessarily true widths. Further information regarding on sample methods,
analysis, quality control and quality assurance is provided within the Companys
Annual Information Form, which is available atwww.sedar.comor on
the Companys website atwww.gammongold.com.

VENUSPROJECTEXPLORATION

The Venus Project consists of two options to purchase contracts
on mineral rights totalling 4,575 hectares just three kilometres north of the
Ocampo Mine properties. During the fourth quarter, the Company completed
detailed geologic mapping and surface geochemical sampling, surveyed the mineral
property boundaries, negotiated and completed an agreement for access to surface
rights, permitted a drill program, and initiated core drilling. Prior to the
start of drilling on the property, the Company had collected 234 surface
samples, 101 of which contained over 0.20 grams per tonne gold equivalent. With
gold values capped at 8 grams per tonne, these 101 samples averaged 1.55 grams
per tonne gold equivalent. As of the end of the 2010, the Company had completed
three core holes for 885 metres, and had received assays for one. No positive
results were received on the one hole assayed.

LOSJARROSPROJECTEXPLORATION

During the fourth quarter, the Company initiated geologic
mapping, negotiated surface access agreements, and completed a 2,000 metre
first-stage drill program on the Gaby portion of the Los Jarros properties in
Chihuahua, Mexico. This large block of concessions (43,229 hectares) surrounds
portions of the Ocampo Mine property, as well as the Concheno Mine and Pinos
Altos Mine, both northeast of Ocampo. A separate concession that is included in
the option agreement, the Gaby II concession in the southern part of the
project covers a high-sulfidation epithermal gold occurrence that was drilled in
1999 and again in 2009 by Valdez Gold. Drill hole LJ-99-04, completed by Valdez
in 1999 discovered a large breccia body with disseminated gold: 105.6 metres
grading 0.57 gold grams per tonne from a depth of 1.5 metres. The drilling
completed in the fourth quarter was successful in extending the mineralization
discovered in hole LJ-99-04 and the results were favorable enough that the
Company is planning additional metallurgical tests and geologic mapping during
the first quarter of 2011.

| | 23
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Some of the better intercepts from the drilling conducted
during the quarter include the following:

GOLD EQUIVALENTHOLE
    FROM
    TO
    LENGTH (M)
    GOLD (G/T)
    SILVER (G/T)
    (G/T)(55:1)LJ-10-01
    0.0
    78.0
    78.0
    0.48
    1
    0.50Including
    42.0
    78.0
    36.0
    0.68
    2
    0.71LJ-10-01
    94.0
    154.0
    60.0
    0.57
    4
    0.63LJ-10-01
    210.0
    254.0
    44.0
    0.34
    2
    0.37LJ-10-01
    276.0
    294.0
    18.0
    0.26
    2
    0.30LJ-10-02
    2.0
    136.7
    134.7
    0.37
    4
    0.43Including
    14.0
    40.6
    26.6
    0.69
    5
    0.78LJ-10-02
    155.0
    207.8
    52.8
    0.21
    2
    0.24LJ-10-02
    249.7
    254.6
    4.9
    0.50
    2
    0.53LJ-10-03
    7.6
    56.9
    49.3
    0.63
    1
    0.65Including
    9.2
    19.3
    10.2
    1.67
    1
    1.70Including
    19.3
    54.9
    35.6
    0.36
    1
    0.39LJ-10-03
    112.7
    193.9
    81.2
    0.28
    3
    0.34LJ-10-04
    45.2
    50.2
    5.1
    15.70
    42
    16.46


Note: The above exploration information has been reviewed by
Qualified Person, Mr. Peter Drobeck, Senior Vice President Exploration and
Business Development. All of Gammons sample analyses for the Los Jarros Project
were performed by ALS-Chemex Laboratories, based in Vancouver, Canada. Samples
were entered and processed in ALS-Chemex Laboratories in Hermosillo, Sonora
State, Mexico, using standard fire assay procedures with an atomic absorption
finish. The Company has an established program of inserting certified control
samples and blanks in compliance with best practices, and this program was used
at Los Jarros, per Company policy. Sample lengths are not necessarily true
widths. Further information regarding sample methods, analysis, quality control
and quality assurance is provided within the Companys Annual Information Form,
which is available atwww.sedar.comor on the Companys website atwww.gammongold.com.

LABANDERAEXPLORATION

During the fourth quarter, the Company negotiated and executed
a binding letter of intent with a publicly-listed company, Aurion Resources
Limited (Aurion), which gives the Company an option to earn up to a 70%
interest in a group of properties covering 12,985 hectares of mineral rights in
the state of Durango, Mexico. The subject properties cover a large system of
epithermal veining with geochemically anomalous gold that is considered
prospective for high-grade underground minable ores. The letter of intent allows
the Company to earn an initial 51% interest in the subject properties by
completing a $250,000 private placement in Aurion and by investing $5 million
within the first three years of the contract. A further 19% interest can be
achieved by the Company either completing an NI 43-101 compliant feasibility
study on the property, or investing another $7 million in the properties within
a five-year period after completing the initial 51% earn-in. A formal contract
was executed in the first quarter of 2011.

FRAILENORTEPROJECTEXPLORATION

Also during the fourth quarter, the Company applied for a new
mining concession in the state of San Luis Potosí, Mexico called El Fraile, or
the Fraile Norte Project, which covers 14,669 hectares. Most of the new
concession is covered by unconsolidated gravel, which fills a wide valley. The
Company has planned a geophysical program in 2011 to test the possibility of
economic deposits below the valley floor. The Company also negotiated and
executed a binding letter of intent with Negociación Minera Santa Maria de la
Paz y Anexos, S.A. de C.V. to allow them to earn a 50% non-operating interest in
the concession, subject to financing 50% of all costs in the project. A formal
contract will be drafted in the first half of 2011.

| | 24
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


CONSOLIDATEDEXPENSES


|(in thousands)                        |   |                   |  |   |                   |  |   |                   | 
|------------------------------------- | - | ----------------- |  | - | ----------------- |  | - | ----------------- | 
|                                      |   | YEAR ENDED        |  |   | YEAR ENDED        |  |   | YEAR ENDED        | 
|                                      |   | DECEMBER 31, 2010 |  |   | DECEMBER 31, 2009 |  |   | DECEMBER 31, 2008 | 
|General and administrative            | $ | 27,589            |  | $ | 36,575            |  | $ | 29,945            | 
|Exploration and business development  | $ | 1,934             |  | $ | 479               |  |   | -                 | 
|Amortization, depletion and accretion | $ | 46,527            |  | $ | 42,954            |  | $ | 40,380            | 

General and administrative costs include expenses related to
the overall management of the business which are not part of direct mine
operating costs. These costs are generally incurred at the corporate offices
located in Canada and Mexico, but also include share-based compensation costs
for key employees at all locations. General and administrative costs decreased
by $9.0 million when compared to 2009 primarily due to the $8.4 million in
severance and stock-based compensation costs associated with the retirement of
the President and Chairman that occurred in October 2009.

Exploration and business development fees increased over the
prior year due to $1.4 million in professional fees that were incurred as a
result of the Capital Gold transaction in 2010, in addition to an increase in
exploration expenses during 2010.

Amortization and depletion, which primarily relates to mining
activities, increased by 8% during the year to $46.5 million, as compared to
$43.0 million in 2009. Depletion expense was $5.9 million higher at Ocampo,
mostly due to increased production at the underground mine and the impact of
decreased open pit reserves as at December 31, 2009. Amortization expense at
Ocampo increased by $4.2 million due to the additional amortization recorded on
capital additions, capital upgrades to the Ocampo mill and heap leach processing
facilities, and electrical infrastructure required to connect Ocampo to the
electrical grid. These increases were offset by a decline of $7 million in
amortization and depletion at the Cubo mine, due to the suspension of operations
in June 2010.

CONSOLIDATEDOTHERINCOME/(EXPENSE)


|(in thousands)                 |   |                   |   |   |                   |   |   |                   |  
|------------------------------ | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
|                               |   | YEAR ENDED        |   |   | YEAR ENDED        |   |   | YEAR ENDED        |  
|                               |   | DECEMBER 31, 2010 |   |   | DECEMBER 31, 2009 |   |   | DECEMBER 31, 2008 |  
|Impairment charge              | $ | (221,610          | ) |   | -                 |   |   | -                 |  
|Gain on investments            | $ | 1,260             |   |   | -                 |   |   | -                 |  
|Loss on disposal of assets     | $ | (2,582            | ) |   | -                 |   |   | -                 |  
|Interest on long-term debt     | $ | (3,149            | ) | $ | (3,314            | ) | $ | (1,936            | )
|Foreign exchange (loss) / gain | $ | (3,091            | ) | $ | (4,896            | ) | $ | 17,600            |  
|Interest and other income      | $ | 1,693             |   | $ | 633               |   | $ | 410               |  
|Other expense                  | $ | (881              | ) |   | -                 |   |   | -                 |  

The Company recognized an impairment charge of $221.6 million
in the second quarter of 2010 related to the El Cubo mine. The associated income
tax impact was $28.3 million, for a net impairment charge of $193.3 million.

During 2010, the Company purchased units in both Corex Gold
Corporation and Golden Queen Mining Co. Ltd. consisting of both equity
securities and warrants. Warrants held by the Company are for long-term
investment purposes; however, due to their nature they meet the definition of a
derivative and are adjusted to fair value at each reporting date. Unrealized
gains and losses relating to the warrants are included in net earnings in the
period they occur. The Company recognized an unrealized gain of $1.3 million in
2010 related to the change in fair value of the warrants, which currently have a
fair value of $3.5 million.

During 2010, the Company recognized $2.6 million in losses on
the disposition of assets no longer in use.

Interest on long-term debt was $3.1 million in 2010 versus $3.3
million in 2009. This small decline was due to the Company carrying a lower
average drawn balance in the current year.

| | 25
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Foreign exchange losses decreased by $1.8 million, from a loss
of $4.9 million in 2009 to a loss of $3.1 million in 2010, as a result of the
translation of net monetary liabilities in the Companys Canadian and Mexican
operations to US dollars. The strengthening of these currencies results in
foreign exchange losses, primarily as a result of the Companys future income
tax liabilities which are denominated in Mexican pesos and then translated into
US dollars at each balance sheet date. Appreciation in the Mexican peso was
similar in 2010 and 2009; however, there was a significant decline in the
Companys future income tax liability in 2010 due to the Q2 impairment charge at
El Cubo, resulting in lower foreign exchange losses. The Company will continue
to experience non-cash foreign currency gains or losses; primarily as a result
of fluctuations between the US dollar and the Mexican peso.

The Company earned interest on short-term investments and other
income during the year of $1.7 million, a $1.1 million increase over interest
and other income of $0.6 million in 2009. The increase was due to higher average
balances of cash and cash equivalents in 2010.

CONSOLIDATEDINCOMETAXEXPENSE/(RECOVERY)


During the year ended December 31, 2010, the Company recognized
a current tax recovery of $1.5 million and future income tax recovery of $19.1
million, versus current tax expense of $5.0 million and a future tax expense of
$6.6 million in 2009. This year-over-year difference primarily relates to the
impairment charges recorded against the El Cubo mines long-lived assets in the
second quarter of 2010. The Company is subject to the Mexican Single Rate Tax in
its Mexican subsidiaries. Under this tax regime, the Companys Mexican
subsidiaries pay a 17.5% tax on the Companys revenues less certain deductions,
all determined on a cash basis. The Company pays the Single Rate Tax to the
extent that it exceeds its income tax otherwise determined pursuant to the
pre-existing income tax system in each taxation year. During the year ended
December 31, 2010, the Company was subject to the Single Rate Tax.

FINANCIALCONDITION


|(in thousands)              |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|--------------------------- | ----------------- | ----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            | AS AT             | AS AT             |  |                                                                                                                                                                                                                                                                                                                                                                   
|                            | DECEMBER 31, 2010 | DECEMBER 31, 2009 |  |                                                                                                                                                                                                                                                                                                                                                                   
|Current assets              | $212,763          | $208,924          |  | Current assets increased in 2010
      primarily due to higher ore in process and warehouse inventory as well as
      an increase in receivables due to the timing of receipts. These amounts
      were offset by a decline in cash on hand during 2010.                                                                                                        
|                            |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|Long-term assets            | 606,625           | 755,444           |  | Long-term assets decreased in
      2010 primarily as a result of the impairment recognized on long-term
      assets and goodwill at the El Cubo mine. This has been be partially offset
      by capital expenditures and purchases of investments during the year.                                                                                             
|                            |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|Total assets                | $819,388          | $964,368          |  |                                                                                                                                                                                                                                                                                                                                                                   
|                            |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|Total current liabilities   | $53,264           | $42,180           |  | Current liabilities increased
      during 2010 due to the reclassification of an obligation relating to the
      Companys long-term incentive plan from long-term to current, the
      reclassification of a long-term portion of income tax liability to current
      during 2010, and an increase in payables balances due to the timing of
      payments.
|                            |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|Total long-term liabilities | 99,361            | 129,851           |  | Long-term liabilities have
      decreased due to changes in the Companys future income tax liability
      related to the Q2 impairment charge and a reclassification of a portion of
      the future income tax liability to current during 2010, as well as
      payments made on capital leases during the year.                                           
|                            |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|Total liabilities           | $152,625          | $172,031          |  |                                                                                                                                                                                                                                                                                                                                                                   
|                            |                   |                   |  |                                                                                                                                                                                                                                                                                                                                                                   
|Shareholders equity        | $666,763          | $792,337          |  | Shareholders equity decreased in
      2010 as a result of losses arising on the impairment recorded in the
      second quarter, offset by exercises of stock options which increased the
      capital stock balance.                                                                                                                                          

| | 26
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


KEYECONOMICTRENDS


The Companys performance is largely dependent on the prices of
gold and silver. The prices of these commodities directly affect the Companys
profitability and cash flow. The price of gold and silver is subject to volatile
price movements during short periods of time and is affected by numerous
factors, such as the strength of the US dollar, supply and demand, interest
rates, and inflation rates, all of which are beyond the Companys control.
During 2010, the price of gold was relatively consistent, averaging $1,225 per
ounce, with daily London PM Fix prices between $1,058 and $1,421 per ounce. The
price of silver experienced greater volatility year-to-date, averaging $20.19
per ounce, with daily London fix prices between $15.14 and $30.70 per ounce. The
price of gold continued to set new record highs in the fourth quarter, and into
the first quarter of 2011. The Company generally does not hedge the price of
gold and silver, but may acquire short-term derivative instruments from time to
time to limit exposure to price fluctuations.

At the Companys mine sites, a significant portion of the
operating costs and capital expenditures are denominated in Mexican pesos.
Therefore, fluctuations in the peso versus the US dollar can significantly
impact the Companys costs. The Mexican peso strengthened in 2010, averaging
approximately 12.6 Mexican pesos to 1 US dollar for the year, versus an average
of 13.5 Mexican pesos to 1 US dollar in 2009. In the third quarter of 2010, the
Company began to manage foreign exchange exposure through the use of forward
contracts. For further information on the Companys foreign currency hedging
activities, see the discussion on Financial Instruments and Hedging on page 29.

LIQUIDITY ANDCAPITALRESOURCES


The Companys balance of cash and cash equivalents as at
December 31, 2010 was $113.1 million, a $15.9 million decline from the balance
as at the end of 2009 of $129.0 million. Factors that can impact the Companys
liquidity are monitored regularly and include the market prices of gold and
silver, production levels, operating cash costs, foreign currency fluctuations,
capital costs and exploration expenditures, purchases of investments, and
currencies.

CASHFLOW

|(in thousands)                                     |   |                   |   |   |                   |   |   |                   |  
|-------------------------------------------------- | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
|                                                   |   | YEAR ENDED        |   |   | YEAR ENDED        |   |   | YEAR ENDED        |  
|                                                   |   | DECEMBER 31, 2010 |   |   | DECEMBER 31, 2009 |   |   | DECEMBER 31, 2008 |  
|Cash flow from operating activities                | $ | 97,583            |   | $ | 78,218            |   | $ | 55,933            |  
|Cash flow used in investing activities             |   | (118,414          | ) |   | (77,462           | ) |   | (66,376           | )
|Cash flow from financing activities                |   | 2,462             |   |   | 124,963           |   |   | 9,992             |  
|Effect of foreign exchange rates on cash           |   | 2,534             |   |   | -                 |   |   | -                 |  
|(Decrease) / increase in cash and cash equivalents |   | (15,835           | ) |   | 125,719           |   |   | (451              | )
|Cash and cash equivalents, beginning of year       |   | 128,977           |   |   | 3,258             |   |   | 3,709             |  
|Cash and cash equivalents, end of year             | $ | 113,142           |   | $ | 128,977           |   | $ | 3,258             |  

Operating activities contributed $97.6 million during 2010
compared to 2009, when operating activities contributed cash flows of $78.2
million. This improvement of $19.4 million, or 25%, was primarily as a result of
improved prices for gold and silver, partially offset by negative changes in
non-cash working capital during the year specifically relating to the collection
of receivables and increases in inventory.

Investing activities for the year ended December 31, 2010 used
cash of $118.4 million as a result of expenditures on mining interests and
property, plant and equipment, which compared to $77.5 million in 2009. Current
year capital expenditures were higher than the previous year due to an increase
in capitalized stripping costs at the Ocampo open pits, increased exploration
expenditures, an increase in major repairs on the Ocampo mobile fleet, and
expenditures related to the Ocampo heap leach and mill expansions. In addition,
the Company purchased $10.8 million of investments during 2010, when no amounts
were spent on investments in the prior year. As of December 31, 2010, the
Company had committed to purchase $1.3 million in property, plant and equipment
that will be delivered in early 2011.

Financing activities for 2010 contributed cash of $2.5 million
compared to 2009, when financing activities contributed $125.0 million. The
significant cash flow from financing activities in 2009 resulted from the net
proceeds of $108.1 million received on the issuance of 12.9 million common
shares. In addition, proceeds received on the exercise of stock options declined
by $11.0 million in 2010, when compared to 2009.

| | 27
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


CREDITFACILITY

During the majority of 2010, the Company had access to a $50
million credit facility, with the exposure divided equally between the Bank of
Nova Scotia and Société Générale. This facility carried an interest rate of
LIBOR plus 3.5% and matured on November 5, 2011. On November 4, 2010, this
credit facility was expanded to a $75 million credit facility that carries and
interest rate of LIBOR plus 3.25% to 3.75%, and matures on November 4, 2013.
This facility may be increased to $100 million upon the completion of the
acquisition of Capital Gold, subject to satisfactory due diligence by the
lenders on Capital Gold subsequent to closing. No payments under the facility
are due until the maturity date, which may be extended upon mutual agreement by
all parties. At the end of 2010, the Company had drawn $26.4 million under the
revolving facility, and had issued a $1 million letter of credit against the
facility, leaving a total of $47.6 million available for future funding.

LIQUIDITYOUTLOOK

Liquidity risk is the risk that the Company will encounter
difficulties in meeting obligations associated with its financial liabilities
and other contractual obligations. The Companys strategy for managing liquidity
is based on achieving positive cash flows from operations to internally fund
operating and capital requirements. Material increases or decreases in the
Companys liquidity and capital resources will be substantially determined by
the success or failure of the Companys operations, exploration, development and
construction programs, its ability to obtain equity or other sources of
financing, and the price of gold and silver.

The Company monitors and manages liquidity risk by preparing
regular periodic cash flow forecasts, and seeking flexibility in financing
arrangements. In todays metal price environment, the Company anticipates that
funding from operating cash flows should be sufficient to fund the Companys
working capital requirements and capital expenditures at its existing mines.
This leaves the Companys current cash balance available to pursue future growth
plans. The Company had a cash balance at December 31, 2010 of $113.1 million.
The Company anticipates that a significant amount of this cash will be used upon
the acquisition of Capital Gold, which is expected to be completed in early
2011.

During 2010, the Companys capital expenditures exceeded
operating cash flows by $9.6 million. This was largely due to accelerated
capital stripping activities at the Ocampo open pits, reduced operating cash
flow from the El Cubo mine, and increased exploration expenditures. Net free
cash flow will vary depending on the prices of gold and silver, fluctuations in
the Mexican peso, total production and the extent of expenditure on mine
development and other capital projects during the year. The Company expects to
generate positive net free cash flow over the next year, to be achieved through
strong operating cash flow.

The Company has total commitments relating to future capital
expenditures of $2.9 million as at March 20, 2011.

LONG-TERMINVESTMENTS

At December 31, 2010, the Company held long-term investments
with a market value of $20.8 million. The long-term investments held by the
Company consist of both equity securities and warrants of publicly traded
companies which are held for long-term investment purposes. Unrealized gains and
losses related to available-for-sale investments are excluded from net earnings
and are included in other comprehensive income until such gains or losses are
either realized or an other-than-temporary impairment is determined to have
occurred. Warrants held by the Company are for long-term investment purposes;
however, due to their nature they meet the definition of a derivative and are
measured at fair value on a quarterly basis. Unrealized gains and losses
relating to the warrants are included in net earnings in the period they
occur.

(i)Golden Queen Mining Co. Ltd. (Golden
Queen)

On June 1, 2010, the Company completed a non-brokered private
placement with Golden Queen Mining Co. Ltd. (Golden Queen) by acquiring
5,000,000 units of Golden Queen for an aggregate purchase price of CAD $8
million (USD $7.6 million). Each unit consists of one common share, one quarter
of one share purchase warrant exercisable at CAD $1.75, and one quarter of one
share purchase warrant exercisable at CAD $2.00 for a period of eighteen months
following the closing date of the transaction. Golden Queen is a gold
exploration and development company whose principal asset is the Soledad
Mountain property located in Kern County, Southern California. As at December
31, 2010, the fair value of the Companys investment in Golden Queen was $17.1
million, which includes the fair value of the warrants.

(ii)Corex Gold Corporation (Corex)

On July 16, 2010, the Company completed a non-brokered private
placement with Corex Gold Corporation (Corex) by acquiring 4,706,000 units of
Corex for an aggregate purchase price of CAD $3.2 million (USD $3.0 million).
Each unit consists of one common share and one half of one share purchase
warrant exercisable at CAD $0.90 for a period of twenty-four months following
the closing date of the transaction.

| | 28
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Corex is a gold exploration Company whose principal asset is
the Santana Gold Project in Sonora State, Mexico. As at December 31, 2010, the
fair value of the Companys investment in Corex was $3.7 million, which includes
the fair value of the warrants.

CONTRACTUALOBLIGATIONS


A summary of the Companys contractual obligations at December
31, 2010 is summarized as follows:

(in thousands)TOTAL
    
    
    LESS THAN 1
      YEAR
    
    
    1  3 YEARS
    
    
    3  4 YEARS
    
    
    4  5 YEARS
    
    
    GREATER THAN 5 YEARSPayables and accruals
    $
    38,001
    
    
    38,001
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -Long-term debt
    
    26,380
    
    
    -
    
    
    26,380
    
    
    -
    
    
    -
    
    
    -Interest on long-term debt
    
    80
    
    
    80
    
    
    -
    
    
    -
    
    
    -
    
    
    -Capital leases
    
    7,765
    
    
    4,851
    
    
    2,914
    
    
    -
    
    
    -
    
    
    -Long-term obligation
    
    4,800
    
    
    800
    
    
    1,600
    
    
    800
    
    
    800
    
    
    800Future purchase commitments
    
    1,307
    
    
    1,307
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
    $
    78,333
    
    $
    45,039
    
    $
    30,894
    
    $
    800
    
    $
    800
    
    $
    800


OUTSTANDINGSHAREDATA


The Companys share capital was comprised of the following as
at December 31, 2010:

|                                                                                                                                                                                                                     | DECEMBER 31, 2010 | DECEMBER 31, 2009
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -----------------
|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
      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
      paid-in value
|Issued:                                                                                                                                                                                                              |                   |                  
|Common shares                                                                                                                                                                                                        | 138,864,315       | 137,357,552      

At March 22, 2011, the Company had common shares outstanding of
138,909,657.

OFF-BALANCESHEETARRANGEMENTS


The Company does not have any off-balance sheet arrangements.

FINANCIALINSTRUMENTS ANDHEDGING


The Company seeks to manage its exposure to fluctuations in
commodity prices, interest rates and foreign exchange rates by entering into
derivative financial instrument contracts. The Companys exposure with respect
to commodity prices, interest rates and foreign exchange is described under the
section entitled Risks and Uncertainties on page 32.

As at December 31, 2010 the Company held forward contracts to
hedge against the risk of an increase in the value of the Mexican peso versus
the United States dollar. The Company has entered into agreements to purchase
Mexican pesos amounting to $30.7 million USD at exchange rates ranging from
12.87 pesos per US dollar to 13.21 pesos per US dollar. These currency hedges
have been accounted for as cash flow hedges of specified, peso-denominated
production costs at the Ocampo mine and settle at various dates between January
1, 2011 and October 31, 2011. These contracts had a fair value of $1.1
million at December 31, 2010, of which $1 million has been recognized in other
comprehensive income, with the remainder recognized in production costs during
the year due to ineffectiveness. Upon settlement of a forward contract, the
cumulative gain or loss within accumulated other comprehensive income will be
reclassified to inventory and mineral properties to be recognized in income at
the same time as the related cost.

| | 29
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Two forward contracts settled during the year ended December
31, 2010 with a total gain of $0.4 million. The recording of this hedging gain
resulted in a $0.2 million decline in production costs and general and
administrative expenses, a $0.1 million decline in inventory, and a $0.1 million
decline in mineral properties.

The Company also holds certain financial instruments as
long-term investments and therefore is inherently exposed to various risk
factors including currency risk, credit risk, market price risk, and liquidity
risk.

TRANSACTIONS WITHRELATEDPARTIES


The Company paid or has payable the following amounts to
directors for services other than in their capacity as directors, and companies
controlled by or related to directors:

|(in thousands)                         |  |                   |  |   |                   |  |   |                   | 
|-------------------------------------- |  | ----------------- |  | - | ----------------- |  | - | ----------------- | 
|                                       |  | YEAR ENDED        |  |   | YEAR ENDED        |  |   | YEAR ENDED        | 
|                                       |  | DECEMBER 31, 2010 |  |   | DECEMBER 31, 2009 |  |   | DECEMBER 31, 2008 | 
|Production costs  labour(1)           |  | -                 |  | $ | 25,797            |  | $ | 33,762            | 
|Mining interests  labour(1)           |  | -                 |  | $ | 4,876             |  | $ | 1,167             | 
|Production costs  mine consumables(2) |  | -                 |  | $ | 11,255            |  | $ | 14,655            | 
|Capital assets(3)                      |  | -                 |  |   | -                 |  | $ | 94                | 

|(1) | The Company paid a third party company owned by the brother of Mr.
      Fred George, a former director of the Company, for the provision of
      workers in Mexico at cost plus 6-10%. The Company believes that these
      costs were at fair market value.                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The Company paid two third party companies owned by the father of Mr.
      Canek Rangel, a former director of the Company, for the provision of lime,
      lubricant and fuel. The Company is confident the cost of lubricant and
      fuel were at fair market value as the prices of these consumables are
      regulated in Mexico. The Company believes the cost of lime was also at
      fair market value.
|(3) | The Company paid Mr. Canek Rangel or a third party company owned by
      the father of Mr. Rangel, a former director of the Company, for the
      provision and construction of production and support facilities, and
      mineral properties. The Company believes these costs were at fair market
      value.                                                                                                 

In September 2009, the Company announced the retirement of Mr.
Fred George, as President and Chairman, and the resignation of Mr. Canek Rangel,
a director of the Company. As a result, effective the date of their departure
from the Company, these individuals will no longer be considered related parties
and the above transactions will not be considered related party
transactions.

No director, senior officer, principal holder of securities or
any associate or affiliate thereof of the Company has any interest, directly or
indirectly, in material transactions with the Company or any of its direct or
indirect wholly-owned subsidiaries, other than the above-noted transactions,
which were in the normal course of operations.

The Company has a Stock Option Plan for directors, officers,
employees and consultants of the Company and its subsidiaries. The purpose of
the plan is to encourage ownership of the Companys common shares by the persons
who are primarily responsible for the management and profitable growth of the
Companys business, to provide additional incentive for superior performance,
and to attract and retain valued personnel. For the purposes of the plan, a
consultant is defined as an individual that is engaged by the Company, under a
written contract, to provide services on an ongoing basis and may spend a
significant amount of time on the Companys business and affairs. The definition
of consultant also includes an individual whose services are engaged through a
corporation.

The Company has a Deferred Share Unit Plan for directors and
senior officers of the Company. The purpose of the plan is to provide Directors
and Senior Officers with the opportunity to acquire deferred share units in
order to allow them to participate in the long term success of the Company and
to promote a greater alignment of interests between the Companys directors,
senior officers, and shareholders.

| | 30
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


SUBSEQUENTEVENTS


On February 23, 2011, the Company announced the successful
resolution of the ongoing labour disruption at the El Cubo mine with the signing
of a two-year collective agreement. The terms of the revised collective
agreement reflect current legislated norms and industry best practices in
Mexico. The Company has begun developing an operations plan to recommence
production that involves retraining employees, developing sufficient mining
areas in the underground mine, and resuming exploration activities. The Company
anticipates that the mine will return to full-scale production in 2011.

On October 1, 2010, the Company entered into a definitive
merger agreement with Capital Gold Corporation (Capital Gold) pursuant to
which the Company will acquire all of the issued and outstanding common shares
of Capital Gold. Under the terms of the agreement, each common share of Capital
Gold would be exchanged for 0.5209 common shares of Gammon Gold and a cash
payment of $0.79 per share. On March 17, 2011, the Company amended the merger
agreement with Capital Gold by increasing the cash component of the merger
consideration to be paid to Capital Gold shareholders by $0.30 per share, to
$1.09. On March 18, 2011, Capital Gold held a shareholder meeting that was
adjourned until April 1, 2011, when the shareholder vote will occur.

During 2010, the Company was named as a defendant in proposed class action suits, claiming that the directors of Capital Gold breached their fiduciary duties by failing to maximize shareholder value and failing to conduct an appropriate sale process with the Company.  The plaintiffs also allege that Capital Gold and the Company aided and abetted these alleged breaches of fiduciary duties.  The plaintiffs are seeking an injunction to stop the closing of the merger, for Capital Gold to conduct an appropriate sale process, and damages from the Company in the event that the merger is completed.  Management is of the opinion that these claims are without merit, and that a strong defence exists against these claims.  No provision for loss has been reflected in the accounts of the Company.

On February 18, 2011, the Companys shareholders approved the
adoption of a shareholders rights plan. The plan is designed to ensure that the
Companys shareholders are treated fairly in the event of any unsolicited
take-over bid.

NON-GAAPMEASURES


TOTALCASHCOST PEROUNCECALCULATION

Total cash costs per ounce is a non-GAAP performance measure
that Management uses to better assess the Companys performance for the current
period and its expected performance in the future. The Company believes that, in
addition to conventional measures prepared in accordance with GAAP, certain
investors use this measure to evaluate the Companys performance and cash
generating capabilities. Total cash costs per ounce does not have any
standardized meaning prescribed by GAAP, and should not be considered in
isolation of or as a substitute for performance measures prepared in accordance
with GAAP. This measure is not necessarily indicative of operating profit or
cash flow from operations as determined under GAAP. Other companies may
calculate these measures differently. Total cash costs per ounce is calculated
by dividing all of the costs absorbed into inventory, excluding amortization and
depletion, by applicable ounces sold.

The following provides a reconciliation of total cash costs per
ounce to the financial statements:

|(in thousands, except ounces, cash costs and
      silver prices) |   |                   |   |   |                   |   |   |                   |   |  
|----------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | - | - | ----------------- | - | -
|                                                                  |   | QUARTER ENDED     |   |   | YEAR ENDED        |  
|                                                                  |   | DECEMBER 31, 2010 |   |   | DECEMBER 31, 2009 |   |   | DECEMBER 31, 2010 |   |  
|Production costs per financial statements                         | $ | 20,693            |   | $ | 27,113            |   | $ | 90,866            |   | $
|Refining costs per financial statements                           |   | 449               |   |   | 708               |   |   | 1,873             |   |  
|Total cash costs                                                  | $ | 21,142            |   | $ | 27,821            |   | $ | 92,739            |   | $
|Divided by gold equivalent ounces sold(1)                         |   | 51,439            |   |   | 62,462            |   |   | 193,429           |   |  
|Total cash cost per gold equivalent ounce                         | $ | 411               |   | $ | 445               |   | $ | 479               |   | $
|Total cash costs (per above)                                      | $ | 21,142            |   | $ | 27,821            |   | $ | 92,739            |   | $
|Less: Silver revenue (see below)                                  |   | (32,078           | ) |   | (26,477           | ) |   | (100,907          | ) |  
|                                                                  | $ | (10,936           | ) | $ | 1,344             |   | $ | (8,168            | ) | $
|Divided by gold ounces sold                                       |   | 28,207            |   |   | 38,249            |   |   | 111,775           |   |  
|Total cash cost per gold ounce(2)                                 | $ | (388              | ) | $ | 35                |   | $ | (73               | ) | $
|Average realized silver price                                     | $ | 27.40             |   | $ | 17.54             |   | $ | 20.30             |   | $
|Multiplied by silver ounces sold                                  |   | 1,170,723         |   |   | 1,509,511         |   |   | 4,970,777         |   |  
|Silver revenue                                                    | $ | 32,078            |   | $ | 26,477            |   | $ | 100,907           |   | $

|(1) | Gold equivalent ounces include silver ounces produced and sold
      converted to a gold equivalent based on the ratio of the actual realized
      sales prices of the commodities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The calculation of total cash cost per gold ounce includes the
      by-product silver sales revenue.                                                                               

| | 31
| | --

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


NETFREECASHFLOW

Net free cash flow represents an indication of the Companys
continuing capacity to generate discretionary cash flow from operations,
comprising cash flows from operating activities net of total capital
expenditures. It does not necessarily represent the cash flow in the period
available for Management to use at its discretion, which may be affected by
other sources and non-discretionary uses of cash. Net free cash flow is intended
to provide additional information, does not have any standardized meaning
prescribed by GAAP and should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with GAAP. Other companies
may calculate this measure differently. The following is a reconciliation of net
free cash flow to the financial statements:

|(in thousands)                       |   |                   |   |   |                   |   |   |                   |   |   |                   |  
|------------------------------------ | - | ----------------- | - | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
|                                     |   | QUARTER ENDED     |   |   | YEAR ENDED        |  
|                                     |   | DECEMBER 31, 2010 |   |   | DECEMBER 31, 2009 |   |   | DECEMBER 31, 2010 |   |   | DECEMBER 31, 2009 |  
|Cash flows from operating activities | $ | 35,640            |   | $ | 31,597            |   | $ | 97,583            |   | $ | 78,218            |  
|Less: Capital expenditures           |   | (28,515           | ) |   | (22,647           | ) |   | (107,216          | ) |   | (76,861           | )
|Net free cash flow                   | $ | 7,125             |   | $ | 8,950             |   | $ | (9,633            | ) | $ | 1,357             |  

RISKS ANDUNCERTAINTIES


The Companys business contains significant risk due to the
nature of mining, exploration, and development activities. Certain risk factors
listed below are related to the mining industry in general, while others are
specific to the Company. Included in the risk factors below are details on how
management seeks to mitigate these risks wherever possible. For additional
discussion of these and other risk factors, please refer to the Companys Annual
Information Form which is available on the Companys website at www.gammongold.com or on SEDAR
at www.sedar.com.

NATURE OFMINERALEXPLORATION ANDMINING

Because mines have limited lives based on proven and probable
mineral reserves, the Company will be required to continually replace and expand
its mineral reserves as its mines produce gold. The Companys ability to
maintain or increase its annual production of gold and silver in the future will
be dependent in significant part on its ability to identify and acquire
additional commercially viable mineral properties, bring new mines into
production, and to expand mineral reserves at existing mines.

Mineral resource exploration and development is a highly
speculative business, characterized by a number of significant risks including,
among other things, unprofitable efforts resulting not only from the failure to
discover mineral deposits but also from finding mineral deposits that, though
present, are insufficient in quantity and quality to return a profit from
production. There can be no assurance that the Company will successfully acquire
additional mineral rights. While the discovery of additional ore-bearing
structures may result in substantial rewards, few properties which are explored
are ultimately developed into producing mines. Major expenses may be required to
establish reserves by drilling and to construct mining and processing facilities
at a particular site. It is impossible to ensure that the current exploration
and development programs of the Company will result in profitable commercial
mining operations. The profitability of the Companys operations will be, in
part, directly related to the cost and success of its exploration and
development programs which may be affected by a number of factors.

Mining is inherently dangerous and subject to conditions or
events beyond the Companys control, which could have a material adverse effect
on the Companys business. Mining involves various types of risks and hazards,
including, but not limited to, environmental hazards; industrial accidents;
metallurgical and other processing problems; unusual or unexpected rock
formations; structural cave-ins or slides; seismic activity; flooding; fires;
periodic interruptions due to inclement or hazardous weather conditions;
variations in grade, deposit size, density and other geological problems;
mechanical equipment performance problems; unavailability of materials and
equipment; labour force disruptions; unanticipated or significant changes in the
costs of supplies; and unanticipated transportation costs. Where considered
practical to do so, the Company maintains insurance against risks in the
operation of its business in amounts which it believes to be reasonable. Such
insurance, however, contains exclusions and limitations on coverage. The Company
may suffer a material adverse effect on its business if it incurs losses related
to any significant events that are not covered by its insurance policies.

| | 32
| | --

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


RESERVEESTIMATES

Mineral resource and reserve figures are based upon estimates
made by Company personnel and independent geologists. These estimates are
imprecise and depend upon geological interpretation and statistical inferences
drawn from drilling and sampling analysis, which may prove to be unreliable.
There can be no assurance that these estimates will be accurate; that reserves,
resources or other mineralization figures will be accurate; or that this
mineralization could be mined or processed profitably. Mineralization estimates
for the Companys properties may require adjustments or downward revisions based
upon further exploration or development work or actual production experience. In
addition, the grade of ore ultimately mined, if any, may differ from that
indicated by drilling results. There can be no assurance that minerals recovered
in small scale tests will be duplicated in large scale tests under on-site
conditions or in-production scale. The reserve and resource estimates have been
determined and valued based on assumed future prices, cut-off grades and
operating costs that may prove to be inaccurate. Extended declines in market
prices for gold and silver may render portions of the Companys mineralization
uneconomic and result in reduced reported mineralization. Any material
reductions in estimates of mineralization, or of the Companys ability to
extract this mineralization, could have a material adverse effect on the
Companys results of operations or financial condition.

EFFECTIVEINTERNALCONTROL OVERFINANCIALREPORTING

The Company is required to maintain effective internal control
over financial reporting under the Sarbanes-Oxley Act of 2002 and related
regulations. Any material weakness in internal control over financial reporting
that needs to be addressed, disclosure of managements assessment of our
internal control over financial reporting, or disclosure of the public
accounting firms report on internal control over financial reporting that
reports a material weakness in internal control over financial reporting may
reduce the price of the Companys common shares. In connection with the audit of
the consolidated financial statements for the year ended December 31, 2009, the
Company and its independent registered public accounting firm identified a
deficiency in internal control over financial reporting that was a material
weakness as defined by standards established by the Public Company Accounting
Oversight Board. The deficiency resulted in the correction of future income tax
liability balances that arose on a business acquisition during the 2006 fiscal
year. The Company restated its consolidated financial statements for the years
ended December 31, 2008 and 2009 to correct the accounting treatment for this
item. Although this material weakness has been remediated in 2010, there can be
no assurance that the Company will not be subject to material weaknesses in the
future.

RESTATEMENT OFCONSOLIDATEDFINANCIALSTATEMENTS

In May 2010, the Company restated its consolidated financial
statements and other financial information for the years ended December 31, 2008
and 2009 with respect to future income tax liability balances that arose on a
business acquisition during the 2006 fiscal year. In August 2009, the Company
restated its consolidated financial statements and other financial information
for the year ended December 31, 2008 with respect to the foreign currency
translation of certain balances into United States dollars and the reversal of
previously recorded net realizable value adjustments on inventory balances. The
restatement of prior financial statements may expose the Company to risks
associated with litigation, regulatory proceedings and government enforcement
actions, including the risk that the SEC may disagree with the manner in which
the Company has accounted for and reported the financial impact.

FOREIGNOPERATIONS

All of the Companys property interests are located in Mexico,
and are subject to Mexican federal and state laws and regulations. As a result,
the Companys mining investments are subject to the risks normally associated
with the conduct of business in foreign countries. The Company believes the
present attitude of the governments of Mexico and of the States of Chihuahua and
Guanajuato (where the Companys projects are located) to foreign investment and
mining to be favourable; however, any variation from the current regulatory,
economic and political climate could have an adverse effect on the affairs of
the Company.

The risks of conducting business in a foreign country may
include, among others, labour disputes, invalidation of governmental orders and
permits, corruption, uncertain political and economic environments, sovereign
risk, war (including in neighbouring states), civil disturbances and terrorist
actions, arbitrary changes in laws or policies of particular countries, the
failure of foreign parties to honour contractual relations, corruption, foreign
taxation, delays in obtaining or the inability to obtain necessary governmental
permits, opposition to mining from environmental or other non-governmental
organizations, limitations on foreign ownership, limitations on the repatriation
of earnings, limitations on gold exports, instability due to economic
under-development, inadequate infrastructure and increased financing costs. In
addition, the enforcement by the Company of its legal rights to exploit its
properties may not be recognized by the government of Mexico or by its court
system. These risks may limit or disrupt the Companys operations, restrict the
movement of funds or result in the deprivation of contractual rights or the
taking of property by nationalization or expropriation without fair
compensation.

| | 33
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


ENVIRONMENTALLAWS ANDREGULATIONS

The Companys exploration and production activities in Mexico
are subject to regulation by governmental agencies under various environmental
laws. These laws address emissions into the air, discharges into water,
management of waste, management of hazardous substances, protection of natural
resources, antiquities and endangered species and reclamation of lands disturbed
by mining operations. Environmental legislation in many countries is evolving
and the trend has been towards stricter standards and enforcement, increased
fines and penalties for non-compliance, more stringent environmental assessments
of proposed projects and increasing responsibility for companies and their
officers, directors and employees. Compliance with environmental laws and
regulations may require significant capital outlays on behalf of the Company and
may cause material changes or delays in the Companys intended activities. There
can be no assurance that future changes in environmental regulations will not
adversely affect the Companys business.

PROPERTYRIGHTS,PERMITS ANDLICENSING

The Companys current and anticipated future operations,
including further exploration, development activities and expansion or
commencement of production on the Companys properties, require certain permits
and licenses from various levels of governmental authorities. The Company may
also be required to obtain certain property rights to access, or use, certain of
its properties in order to proceed to development. There can be no assurance
that all licenses, permits or property rights required for the expansion and
construction of mining facilities and the conduct of mining operations will be
obtainable on reasonable terms or in a timely manner, or at all, that such terms
may not be adversely changed, that required extension will be granted, or that
the issuance of such licenses, permits or property rights will not be challenged
by third parties. Delays in obtaining or a failure to obtain such licenses,
permits or property rights or extension thereto; challenges to the issuance of
such licenses, permits or property rights, whether successful or unsuccessful;
changes to the terms of such licenses, permits or property rights; or a failure
to comply with the terms of any such licenses, permits or property rights
obtained; could have a material adverse impact on the Company.

UNCERTAINTY OFTITLE

The Company cannot guarantee that title to its properties will
not be challenged. Title insurance is generally not available for mineral
properties and the Companys ability to ensure that it has obtained secure claim
to individual mineral properties or mining concessions may be severely
constrained. The Companys mineral properties may be subject to prior
unregistered agreements, transfers or claims, and title may be affected by,
among other things, undetected defects. A successful challenge to the precise
area and location of these claims could result in the Company being unable to
operate on its properties as permitted or being unable to enforce its rights
with respect to its properties.

COMMODITYPRICERISK

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,
the level of 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 price of gold and silver has fluctuated widely and future
serious price declines could cause continued commercial production to be
impractical. Depending on the price of gold and silver, cash flow from mining
operations may not be sufficient to cover costs of production and capital
expenditures. If, as a result of a decline in gold and silver prices, revenues
from metal sales were to fall below operating costs, production may be
discontinued.

INTERESTRATERISK

The Company is exposed to interest rate risk on its variable
rate debt. At December 31, 2010, the Company had $26.38 million of variable rate
debt which carries an interest rate of LIBOR plus 3.5% for LIBOR loans. This
margin may change depending on the Companys leverage ratio during the period,
between a range of 3.25% and 3.75% for LIBOR loans. For prime rate and base rate
Canada loans, the applicable margin ranges between 2.25% to 2.75% which also
depends on the Companys leverage ratio during the period. The Company has not
entered into any agreements to hedge against unfavourable changes in interest
rates, but may actively manage its exposure to interest rate risk in the
future.

FOREIGNCURRENCYEXCHANGERATERISK

All metal sales 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 and
Mexican pesos, such as payments for labour, operating supplies and property,
plant and equipment. 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.

| | 34
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


CREDITRISK

Credit risk relates to accounts receivable and other contracts,
and arises from the possibility that any counterparty to an instrument fails to
perform. The Company only transacts with highly-rated counterparties and a limit
on contingent exposure has been established for each counterparty based on the
counterpartys credit rating.

EQUITYPRICERISK

The Company is exposed to fluctuations in the fair value of
investments made in equity securities and warrants. Securities of mining
companies have experienced substantial volatility in the past, often based on
factors unrelated to the financial performance or prospects of the companies
involved. These factors include macroeconomic developments in North America and
globally and market perceptions of the attractiveness of particular industries.
The price of the common shares and warrants owned are also likely to be
significantly affected by short-term changes in the price of precious metals, or
in the financial condition of the entities as reflected in their quarterly
reports.

HEDGINGACTIVITIES

The Company may from time to time employ hedge (or derivative)
products in respect of commodities, interest rates and/or currencies. Hedge (or
derivative) products are generally used to manage the risks associated with,
among other things, changes in commodity prices and foreign currency exchange
rates. The Company manages its exposure to currency fluctuations in the manner
described in the Financial Instruments and Hedging section on page 29.

The use of derivative instruments involves certain inherent
risk including credit risk, market risk and liquidity risk. For derivatives,
credit risk is created when the fair value is positive. When the fair value of a
derivative is negative, no credit risk is assumed. The Company mitigates credit
risk by entering into derivatives with high quality counterparties, limiting the
amount of exposure to each counterparty, and monitoring the financial condition
of the counterparties. For hedging activities, market risk is the risk that the
fair value of a derivative might be adversely affected by a change in underlying
commodity prices or currency exchange rates, and that this in turn affects the
Companys financial condition. The Company manages market risk by establishing
and monitoring parameters that limit the types and degree of market risk that
may be undertaken. The Company generally mitigates liquidity risk by spreading
out the maturity or its derivatives over time.

| | 35
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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


INTERNATIONALFINANCIALREPORTINGSTANDARDS


In February 2008, the Canadian Accounting Standards Board
("AcSB") confirmed that January 1, 2011 is the changeover date for publicly
accountable enterprises to use International Financial Reporting Standards
(IFRS). As a result, the Company will report under IFRS for interim and annual
periods beginning on or after January 1, 2011, and will restate the comparative
information reported by the Company for 2010. The adoption of IFRS requires that
the Company make certain accounting policy choices that impact the Companys
financial position and results of operations. The Company strives to make policy
choices that are compliant with IFRS but that result in the most relevant and
reliable information for its stakeholders.

The Company has completed the first two phases of the IFRS
changeover plan, which involved the identification and analysis of differences
between IFRS and Canadian GAAP and their impact on all areas of the Companys
business. The Company is currently in the final phase of the plan, which
involves the actual implementation of IFRS standards. This phase involves the
finalization of IFRS conversion impacts, approval and implementation of
accounting policies, implementation and testing of new processes, systems and
controls, and the execution of detailed training where required.

Throughout 2009 and into 2010, the Company continued to manage
the transition to IFRS through the completion of activities and deliverables to
support key areas of impact as follows:

▬

The Company established governance practices surrounding the project,
  including the formation of a project steering committee consisting of internal
  IFRS project personnel, senior management, and external advisors.

▬

The Company has completed the detailed documentation and assessment for
  all applicable IFRS standards. All IFRS assessments by standard have been
  presented to and reviewed by the Companys project steering committee and
  audit committee.

▬

Each standard has been accompanied by a draft IFRS accounting policy. The
  Company has finalized its IFRS accounting policies and anticipates completing
  a policy and procedures manual by end of the second quarter of 2011.

▬

The Company has provided training to all personnel impacted by accounting
  changes upon transition to IFRS.

▬

For those standards where a possible accounting change has been
  identified, the Company has quantified the impact of these changes on the
  opening IFRS balance sheet and has presented these results to the Audit
  Committee of the Board of Directors.

▬

The Company is in the process of quantifying the impact of the changes on
  2010 reported results. These calculations are currently in draft form and are
  scheduled to be finalized and presented to the Audit Committee prior to the
  approval of the Q1 2011 results.

▬

The Company has drafted an IFRS-compliant financial statement format and
  annual and interim note disclosures.

▬

The Company has evaluated the potential impact of IFRS on its information
  systems, and all changes identified to date have been implemented.

▬

The IFRS project team continues to monitor new and proposed standards and
  to revisit any preliminary conclusions reached, where necessary.

At the current stage of the IFRS project, the Company has
completed a preliminary assessment of the impact that adopting IFRS will have on
its financial position at January 1, 2010. IFRS 1 requires a first-time adopter
to comply with each IFRS standard in effect at the end of its first IFRS
reporting period. Therefore, the Companys preliminary assessment of the impact
of the transition to IFRS cannot be finalized until December 31, 2011 when all
standards in effect are known. While the disclosures surrounding the transition
to IFRS within this MD&A are not final, as of March 22, 2011 the Company is
not aware of any developments that would result in a material change to the
information disclosed.

The Company has not finalized the determination of the impact
that IFRS will have on the balance sheet at December 31, 2010, or the statements
of operations for the periods ending March 31, 2010, June 30, 2010, September
30, 2010 and December 31, 2010. The Company remains on target to meet the
timelines essential to completing the changeover to IFRS.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


PRELIMINARYIFRSCONSOLIDATEDOPENINGBALANCESHEET

The Company completed a condensed preliminary IFRS consolidated
opening balance sheet during the fourth quarter that reflects the impact of the
applicable IFRS elections that are anticipated to be applied on transition to
IFRS, as well as the cumulative impact of accounting policy differences arising
from transition from Canadian GAAP to IFRS at January 1, 2010. The opening
balance sheet is preliminary and unaudited and may require other adjustments
relating to new IFRS pronouncements or other changes identified subsequent to
the date of this MD&A.

|                                        |  |               |  |   | As at January 1, 2010 |  
|--------------------------------------- |  | ------------- |  | - | --------------------- | -
|(in thousands of United States Dollars) |  | Notes         |  |   | Canadian GAAP         |  
|ASSETS                                  |  |               |  |   |                       |  
|Current assets                          |  |               |  | $ | 208,924               |  
|Non-current assets                      |  |               |  |   |                       |  
|Property, plant and equipment           |  | (a), (b), (e) |  |   | 194,231               |  
|Mining interests                        |  | (e)           |  |   | 434,509               |  
|Deferred tax asset                      |  | (g)           |  |   | -                     |  
|Goodwill                                |  |               |  |   | 106,799               |  
|Other non-current assets                |  |               |  |   | 19,905                |  
|                                        |  |               |  | $ | 964,368               |  
|                                        |  |               |  |   |                       |  
|LIABILITIES                             |  |               |  |   |                       |  
|Current liabilities                     |  |               |  | $ | 42,180                |  
|Non-current liabilities                 |  |               |  |   |                       |  
|Long-term indebtedness                  |  |               |  |   | 32,431                |  
|Other liabilities                       |  | (a)           |  |   | 5,051                 |  
|Provisions                              |  | (b)           |  |   | 5,958                 |  
|Employee future benefits                |  | (d)           |  |   | 1,635                 |  
|Deferred tax liability                  |  | (g)           |  |   | 84,776                |  
|                                        |  |               |  | $ | 172,031               |  
|SHAREHOLDERS EQUITY                    |  |               |  |   |                       |  
|Capital stock                           |  |               |  | $ | 866,716               |  
|Contributed surplus                     |  | (c)           |  |   | 23,873                |  
|Deficit                                 |  |               |  |   | (104,686              | )
|Foreign currency translation reserve    |  | (f)           |  |   | 6,434                 |  
|                                        |  |               |  | $ | 792,337               |  
|                                        |  |               |  | $ | 964,368               |  



All significant differences that resulted in an adjustment to
the Companys opening IFRS balance sheet are as follows:

(a)Amortization of property, plant and
equipment

IAS 16, Property, Plant and Equipment, requires costs
incurred for plant and equipment on initial recognition to be allocated to
significant components, capitalized and amortized separately over the estimated
useful lives of each component. Components with similar useful lives are grouped
together for purposes of amortization. Under Canadian GAAP, the Company
typically calculates amortization at the asset level. To account for this
change, an adjustment was made upon transition to IFRS to restate accumulated
amortization and amortization expense for the assets impacted.

During 2009, the Company entered into two sale-leaseback
transactions. In both cases a deferred gain on leaseback was recognized and
recorded in other liabilities, since the consideration received in the leaseback
was greater than the net book value at the time of the transaction. Due to adjusting accumulated amortization at the
date of the leaseback transaction under IFRS as described above, the deferred
gain recognized for these transactions is also impacted.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


The impact of the above two adjustments are summarized as
follows:

|                              |   | January 1 |  
|----------------------------- | - | --------- | -
|(in thousands)                |   | 2010      |  
|Property, plant and equipment | $ | (6,484    | )
|Other liabilities             |   | (4,486    | )
|Net of tax                    |   | 3,148     |  
|Increase in deficit           | $ | (7,822    | )

(b)Reclamation provision

Under IFRS, reclamation provisions are measured at the expected
value of future cash flows required to settle the obligation, discounted to
their present value using a risk-free pre-tax rate. The Companys estimates of
future cash flows reflect the risks and probabilities of alternative estimates
of cash flows required to settle the obligation at each mine. Each estimate was
discounted at the Government of Mexico risk-free pre-tax interest rate
applicable at January 1, 2010 in order to calculate the opening IFRS reclamation
provision. Under Canadian GAAP, rather than reflecting risks within the cash
flow estimate, the Company was required to use a credit-adjusted discount rate
when calculating the obligation. In addition, IFRS requires that the Company
update its estimate for reclamation liabilities at the end of each reporting
period using the discount rate applicable at each period end. Under Canadian
GAAP, the discount rate applicable at each period end was only applied to any
incremental increase in the estimated future cash flows. These two adjustments
resulted in an immaterial difference in the Companys reclamation liability.

IFRIC 1, Changes in Existing Decommissioning, Restoration
and Similar Liabilities, requires specified changes in reclamation liability
to be added or deducted from the cost of the asset to which it relates. The
adjusted depreciable amount of the asset is then depreciated prospectively over
its remaining useful life. The Company has elected to apply an IFRS 1 option
with respect to the recording of the reclamation asset on transition, which
allows the Company to restate this amount by discounting the reclamation
liability to the date that it first arose and then subsequently depreciating the
resulting asset to January 1, 2010. The alternative to this election,
retrospective application, would require the Company to reflect changes in
estimates and discount rates from inception through to January 1, 2010. The
restatement calculation resulted in a reduction in property, plant and equipment
of $1.1 million, a decrease in deferred tax of $0.3 million, and an increase in
the opening deficit of $0.8 million.

(c)Share-based compensation

The Company grants options, in certain situations, to
contractors provided by a 3rd party Company. Under Canadian GAAP,
contractors were treated as non-employees and the fair value of stock options
granted to these individuals were measured at the date on which the options were
earned. Under IFRS, contractors are considered employees and others providing
similar services which requires the Company to measure the fair value of the
options at the grant date. An adjustment has been made on transition to account
for the difference resulting from the change in measurement dates.

In addition, for all options, IFRS requires that the Company
estimate the number of awards expected to vest at the grant date, and that the
Company use this estimate when calculating grant date fair value. This estimate
is revised if subsequent information indicates that actual forfeitures are
likely to be materially different from the estimate. Under Canadian GAAP, any
option forfeitures were accounted for as they occurred. This measurement
difference has been considered in the adjustment made on transition to IFRS.

The Company elected to apply the exemption provided under IFRS
1 which limits the application of these measurement changes to all share-based
compensation granted after November 7, 2002 that had not vested by the
transition date. Further, the Company applied IFRS 2, Share-based
Payments, for all liabilities arising from share-based payment transactions
that existed at its transition date. The impact of these adjustments was a
decrease to contributed surplus of $0.3 million and an increase to deficit.

(d)Employee future benefits

Under Mexican labour law, the Company provides statutorily
mandated severance benefits to its employees terminated under certain
circumstances. These severance benefits accumulate over the employees years of
service, and under Canadian GAAP, were accounted for as defined benefit plans.
Under IFRS, these benefits are considered termination benefits and are expensed
as incurred. As a result, the Company has reduced its employee future benefits liability at
transition by the amounts related to these statutorily mandated severance
benefits.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


The Company has elected to discontinue using the corridor
approach in accounting for actuarial gains and losses, and to recognize these
amounts in other comprehensive income when they occur. The recognition of
actuarial gains and losses will result in an increase to the employee future
benefits liability on transition. However, the Company will elect the IFRS 1
exemption for employee future benefits, which allows the Company to recognize
all cumulative actuarial gains and losses in deficit at the date of transition
to IFRS and, therefore, there will be no net impact on accumulated other
comprehensive income.

In addition, the Company had unamortized past service costs
under Canadian GAAP that related to vested amounts. Under IFRS, past service
costs must be recognized in income when vested. This adjustment will increase
the Companys employee future benefits liability at transition.

The impact of these adjustments to the Companys employee
future benefits liability is as follows:

|                                                 |   | January 1 |  
|------------------------------------------------ | - | --------- | -
|(in thousands)                                   |   | 2010      |  
|Recognition of actuarial gains and losses        | $ | 1,348     |  
|De-recognition of statutory termination benefits |   | (1,946    | )
|Recognition of vested past-service costs         |   | 169       |  
|Decrease in employee future benefits obligation  | $ | (429      | )

(e)Borrowing costs

The Company has elected to apply the IFRS 1 exemption for
borrowing costs, which permits the Company to apply the requirements of IAS 23
prospectively from the transition date. As the Company has elected to apply the
IFRS 1 exemption, an adjustment was made on transition to derecognize all
borrowing costs that had been previously capitalized under Canadian GAAP. This
January 1, 2010 adjustment resulted in a decrease in property, plant and
equipment by $1.2 million, a decrease in mining interests by $0.1 million, and
an increase in the Companys opening deficit of $0.9 million, net of tax of $0.4
million.

(f)Foreign exchange

The Company has cumulative translation adjustment balances
relating to its conversion from a Canadian dollar functional currency to a US
dollar functional currency in 2007. IFRS 1 permits cumulative translation gains
and losses to be reset to zero at the transition date. The Company elected to
reset all cumulative translation gains and losses to zero at its transition
date, which resulted in a decline of $6.4 million in the foreign currency
translation reserve and a corresponding increase in the deficit at January 1,
2010.

(g)Deferred taxes

IAS 12, Income Taxes, requires that where non-monetary
assets and liabilities are measured in the Companys functional currency, but
where the Companys taxable profit or loss is determined in a different
currency, changes in the exchange rate give rise to temporary differences that
result in deferred tax assets or liabilities. Under Canadian GAAP, the
recognition of future income tax assets and future income tax liabilities due to
exchange rate differences were not accounted for. The Mexican peso has weakened
versus the US dollar since the majority of the Companys assets were acquired,
resulting in additional deferred income taxes recognized by the Company under
IFRS.

Under Canadian GAAP, deferred taxes are classified as current
or non-current on the basis of either the underlying asset or liability, or the
expected reversal of items not related to an asset or liability. Under IFRS, all
deferred tax assets and liabilities are classified as non-current. Therefore, a
reclassification adjustment of $4.2 million was made to present all deferred tax
assets and liabilities as non-current.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


Adjustments to the deferred tax liability, including the tax
effect of other IFRS transition adjustments, resulted in the following increases
or (decreases) to the liability:

|                                                |  |      |  |   | January 1 |  
|----------------------------------------------- |  | ---- |  | - | --------- | -
|(in thousands)                                  |  | Note |  |   | 2010      |  
|Foreign exchange temporary difference           |  |      |  | $ | 29,949    |  
|Amortization of property, plant and equipment   |  | (a)  |  |   | (3,148    | )
|Reclamation asset                               |  | (b)  |  |   | (306      | )
|Employee future benefits                        |  | (d)  |  |   | 120       |  
|Borrowing costs                                 |  | (e)  |  |   | (347      | )
|Other                                           |  |      |  |   | 219       |  
|Increase / (decrease) in deferred tax liability |  |      |  | $ | 26,487    |  

OTHER SIGNIFICANT ACCOUNTING POLICY
DIFFERENCES

(a)Business combinations

IFRS 1 provides the option to apply IFRS 3 Business
Combinations retrospectively or prospectively from the transition date. The
retrospective basis would require restatement of all business combinations that
occurred prior to the transition date. The Company elected not to
retrospectively apply IFRS 3 to business combinations that occurred prior to the
transition date and as a result, such business combinations have not been
restated. The election of this exemption did not preclude the Company from the
requirement to assess the assets and liabilities acquired in business
combinations and test goodwill for impairment prior to transition in determining
the opening balance sheet under IFRS.

(b)Impairment of long-lived assets

Canadian GAAP generally uses a two-step approach to impairment
testing while IFRS uses a one-step approach when testing and measuring
impairment. This increases the likelihood of impairment where carrying values of
assets were previously supported under Canadian GAAP on an undiscounted cash
flow basis, but would not be supported on a discounted cash flow basis. In
addition, IFRS requires the reversal of any previous impairment losses, other
than goodwill impairment losses, where circumstances leading to the original
impairment have changed. Canadian GAAP prohibits reversal of impairment losses.
The Company has performed a goodwill impairment test at transition and has
determined that there is no adjustment required upon transition to IFRS.

INTERNALCONTROL OVERFINANCIALREPORTING ANDDISCLOSURECONTROLS ANDPROCEDURES

As part of the assessment of each IFRS in phase two of the
Companys project, internal controls over financial reporting and disclosure
controls and procedures were considered. For example, any changes in accounting
policies could result in additional controls or procedures being required to
address the reporting of the Companys first time adoption and on-going
reporting requirements.

As a result of the adoption of IAS 16, Property, Plant and
Equipment, certain controls and procedures were designed and put in place to
ensure the accurate componentization and amortization of the Companys property,
plant and equipment. However, the Company does not consider these changes to be
significant. The Company does not anticipate any significant changes in internal
control that will be required as a result of the implementation of IFRS. The
certifying officers have completed the design, and are in the process of
evaluating the effectiveness of key controls implemented as a result of IFRS, to
prepare for certification under IFRS in 2011.

The Company has, and will continue to ensure that key
stakeholders are informed about the anticipated effects of the IFRS
transition.

FINANCIALREPORTINGEXPERTISE

The Company has identified an IFRS Project Team, comprised of
senior finance staff and senior management. The majority of these individuals
have attended external IFRS training specific to the mining industry. The
Company has provided training to all personnel impacted by accounting changes
upon transition to IFRS.

The Company has held an IFRS information session with the
Companys Audit Committee of the Board of Directors. During this session,
management and external advisors provided the members with the Companys project
plan, and presented the expected areas of significance. The Audit Committee has
also reviewed and approved the Companys analysis of each relevant IFRS
standard, and the Companys opening balance sheet.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


CRITICALACCOUNTINGPOLICIES ANDESTIMATES


The preparation of the Companys consolidated financial
statements in accordance with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The following is a list of the accounting
policies that the Company believes are critical, due to the degree of
uncertainty regarding the estimates or assumptions involved and the magnitude of
the asset, liability, revenue or expense being reported:

(i)Ore inventories

Finished goods, work-in-process, heap leach ore and stockpile
ore are valued at the lower of the average cost or net realizable value (NRV).
NRV is the difference between the estimated future realizable gold price based
on prevailing and long-term prices, less estimated costs to complete production
into a saleable form. The assumptions used in the valuation of work-in-process
inventories include estimates of gold contained in the ore stacked on leach
pads, assumptions of the amount of gold stacked that is expected to be recovered
from the leach pads, the amount of gold in mill circuits and in stockpiles, and
an assumption of the gold price expected to be realized when the gold is
recovered. Write-downs of ore in stockpiles, ore on leach pads, in-process and
finished metal inventories resulting from NRV impairments are reported as a
component of current period costs. The primary factors that influence the need
to record write-downs include prevailing and long-term gold prices and
prevailing costs for production inputs such as labour, fuel and energy,
materials and supplies, as well as realized ore grades and actual production
levels. When the circumstances that previously caused inventories to be written
down below cost no longer exist or when there is clear evidence of an increase
in net realizable value because of changed economic circumstances, the amount of
the write-down or a portion thereof is reversed so that the new carrying amount
is the lower of the cost and the revised net realizable value. The reversal is
limited to the amount of the original write-down for inventory still on hand.

Ore on leach pads is ore that is placed on pads where it is
saturated with a chemical solution that dissolves the gold contained in the ore.
Costs are attributed to the leach pads based on current mining costs, including
applicable depletion and amortization relating to mining operations, incurred up
to the point of placing the ore on the pad. Costs are removed from the leach pad
based on the average cost per recoverable ounce of gold on the leach pad as the
gold is recovered. Estimates of recoverable gold on the leach pads are
calculated from the quantities of ore placed on the pads, the grade of ore
placed on the leach pads and an estimated percentage of recovery. Timing and
ultimate recovery of gold contained on leach pads can vary significantly from
the estimates. The quantities of recoverable gold placed on the leach pads are
reconciled to the quantities of gold actually recovered (metallurgical
balancing), by comparing the grades of ore placed on the leach pads to actual
ounces recovered. The nature of the leaching process inherently limits the
ability to precisely monitor inventory levels. As a result, the metallurgical
balancing process is constantly monitored and the engineering estimates are
refined based on actual results over time. The ultimate recovery of gold from a
pad will not be known until the leaching process is completed.

The allocation of costs to ore in stockpiles, ore on leach pads
and in-process inventories and the determination of NRV involve the use of
estimates. There is a high degree of judgment in estimating future costs, future
production levels, proven and probable mineral reserve estimates, gold and
silver prices, and the ultimate estimated recovery for ore on leach pads. There
can be no assurance that actual results will not differ significantly from
estimates used in the determination of the carrying value of inventories.

(ii)Mineral reserves and resources used to
measure depletion and amortization

The Company records depletion and amortization expense based on
the estimated useful economic lives of long-lived assets. Property, plant and
equipment are amortized on a straight-line basis over their estimated useful
lives. Mining interests are amortized using the units of production method over
proven and probable reserves of the mine and the portion of mineralization
expected to be classified as reserves. Changes in reserve and resources
estimates are generally calculated at the end of each year and cause
amortization expense to increase or decrease prospectively. The estimation of
quantities of reserves and resources is complex, requiring significant
subjective assumptions that arise from the evaluation of geological,
geophysical, engineering and economic data for a given ore body. This data could
change over time as a result of numerous factors, including new information
gained from development activities, evolving production history and a
reassessment of the viability of production under different economic conditions.
Changes in data and/or assumptions could cause reserve and resources estimates
to substantially change from period to period. Actual production could differ
from expected based on reserves and resources, and an adverse change in gold
prices could make a reserve or resource uneconomic to mine. Variations could
also occur in actual ore grades and gold and silver recovery rates from
estimates. A key trend that could reasonably impact reserves and resources
estimates is rising market mineral prices, because the mineral price assumption
is closely related to the trailing three-year average market price. As this
assumption rises, this could result in an upward revision to reserves and
resources estimates as material not previously classified as a reserve or
resource becomes economic at higher gold prices.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


(iii)Goodwill and long-lived assets

Goodwill is not amortized and is assessed for impairment at the
reporting unit level on at least an annual basis. Any potential goodwill
impairment is identified by comparing the fair value of a reporting unit to its
carrying value. If the fair value of the reporting unit exceeds its carrying
value, goodwill is considered not to be impaired. If the carrying value of the
reporting unit exceeds its fair value, a potential goodwill impairment has been
identified and must be quantified by comparing the estimated fair value of the
reporting units goodwill to its carrying value. Any goodwill impairment will
result in a reduction in the carrying value of goodwill on the consolidated
balance sheet and in the recognition of a non-cash impairment charge in
operating income.

The Company periodically assesses the recoverability of
long-lived assets when there are indications of potential impairment. In
performing these analyses, the Company considers such factors as current
results, trends and future prospects, current market value and other economic
factors. A substantial change in estimated undiscounted future cash flows for
these assets could materially change their estimated fair values, possibly
resulting in additional impairment.

(iv)Post-employment and post-retirement
benefits

Certain estimates and assumptions are used in actuarially
determining the Companys defined pension and employee future benefit
obligations. Significant assumptions used to calculate the pension and employee
future benefit obligations are the discount rate and long-term compensation
rate. These assumptions depend on various underlying factors such as economic
conditions, investment performance, employee demographics and mortality rates.
These assumptions may change in the future and may result in material changes in
the pension and employee benefit plans expense.

(v)Future income taxes and valuation
allowances

The Company is periodically required to estimate the tax basis
of assets and liabilities. Where applicable tax laws and regulations are either
unclear or subject to varying interpretations, it is possible that changes in
these estimates could occur that materially affect the amounts of future income
tax assets and liabilities recorded in the financial statements. Changes in
future tax assets and liabilities generally have a direct impact on earnings in
the period of changes.

Each period, the Company evaluates the likelihood of whether
some portion or all of each future tax asset will not be realized. This
evaluation is based on historic and future expected levels of taxable income,
the pattern and timing of reversals of taxable temporary timing differences that
give rise to future tax liabilities, and tax planning initiatives. Levels of
future taxable income are affected by, among other things, market gold prices,
production costs, quantities of proven and probable gold reserves, interest
rates and foreign currency exchange rates. If it is determined that it is more
likely than not (a likelihood of more than 50%) that all or some portion of a
future tax asset will not be realized, a valuation allowance is recorded.
Changes in valuation allowances are recorded as a component of income tax
expense or recovery for each period.

(vi)Asset retirement obligations

Asset retirement obligations (AROs) arise from the
acquisition, development, construction and normal operation of mining property,
plant and equipment, due to government controls and regulations that protect the
environment and public safety on the closure and reclamation of mining
properties. The Company records the fair value of an ARO in the financial
statements when it is incurred, and capitalizes this amount as an increase in
the carrying amount of the related asset. The fair values of AROs are measured
by discounting the expected cash flows using a discount factor that reflects the
credit-adjusted risk-free rate of interest. The Company prepares estimates of
the timing and amounts of expected cash flows when an ARO is incurred, which are
updated to reflect changes in facts and circumstances. In the future, changes in
regulations, laws or enforcement could adversely affect operations; and any
instances of non-compliance with laws or regulations that result in fines or
injunctions or delays in projects, or any unforeseen environmental contamination
at, or related to, the mining properties could result in significant costs.

The principal factors that can cause expected cash flows to
change are: the construction of new processing facilities; changes in the
quantities of material in reserves and a corresponding change in the life of
mine plan; changing ore characteristics that ultimately impact the environment;
changes in water quality that impact the extent of water treatment required; and
changes in laws and regulations governing the protection of the environment. In
general, as the end of the mine life nears, the reliability of expected cash
flows increases, but earlier in the mine life, the estimation of an ARO is
inherently more subjective. Significant judgments and estimates are made when
estimating the fair value of AROs. Expected cash flows relating to AROs could
occur over periods up to 9 years and the assessment of the extent of
environmental remediation work is highly subjective. Considering all of these
factors that go into the determination of an ARO, the fair value of AROs can
materially change over time.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


CONTROLS ANDPROCEDURES


(i)Evaluation of Disclosure Controls and
Procedures

The Company maintains disclosure controls and procedures
designed to ensure that information required to be disclosed in annual filings,
interim filings or other reports filed or submitted under provincial and
territorial securities legislation or reports filed or submitted under the U.S.
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the applicable time periods, and that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. As of December 31, 2010 an evaluation was carried out, under the
supervision of and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of
disclosure controls and procedures as defined in Rule 13a-15(e) under the U.S.
Securities Exchange Act of 1934 and in National Instrument 52-109 under the
Canadian Securities Administrators Rules and Policies. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as at December 31,
2010.

(ii)Managements Report on Internal Control
Over Financial Reporting

Management, including the Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(e) under the U.S. Securities Exchange Act of 1934 and in National
Instrument 52-109 under the Canadian Securities Administrators Rules and
Policies. Management is furthermore responsible for the evaluation of the
effectiveness of internal control over financial reporting for the year ended
December 31, 2010. The Companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian generally accepted accounting principles
and reconciled to US GAAP. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements.

As of December 31, 2010, management evaluated the effectiveness
of the Company's internal control over financial reporting. In making this
evaluation, management used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Companys
design and operating effectiveness of internal control over financial reporting
was effective as at December 31, 2010. No material weaknesses were identified by
management during this evaluation.

(iii) Change in Internal Control over Financial
Reporting

There have been no significant changes in internal controls
over financial reporting during the three months ended December 31, 2010 that
could have materially affected or are reasonably likely to materially affect the
Company's internal controls over financial reporting.

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2010ANNUAL
MANAGEMENT'S DISCUSSION AND ANALYSIS


CAUTIONARYNOTE TOU.S.INVESTORS


Cautionary Note to U.S. Investors concerning estimates of
Measured and Indicated Resources:We advise U.S. investors that while such
terms are recognized and permitted under Canadian regulations, the U.S.
Securities and Exchange Commission does not recognize them. The term resources
does not equate to the term reserves, and U.S. investors are cautioned not to
assume that any part or all of the mineral deposits in these categories will
ever be converted into reserves.

Cautionary Note to U.S. Investors concerning estimates of
Inferred Resources: We advise U.S. investors that while such term is
recognized and permitted under Canadian regulations, the U.S. Securities and
Exchange Commission does not recognize it. "Inferred resources" have a great
amount of uncertainty as to their existence, and great uncertainty as to their
economic and legal feasibility. It cannot be assumed that all or any part of an
inferred mineral resource will ever be upgraded to a higher category. Under
Canadian rules estimates of inferred mineral resources may not form the basis of
feasibility or other economic studies. U.S. investors are cautioned not to
assume that any part or all of an inferred resource exists, or is economically
or legally mineable.

The consolidated financial statements of the Company have been
prepared by management in accordance with Canadian generally accepted accounting
principles (GAAP) (see Note 2: Summary of Significant Accounting
Policies to the financial statements), which differ in certain material
respects from accounting principles generally accepted in the United States of
America (U.S. GAAP). Differences between GAAP and U.S. GAAP that are
applicable to the Company are described in the Companys 40-F form filed with
the U.S. Securities and Exchange Commission, which is available at www.edgar.com. The
Companys reporting currency is in United States dollars unless otherwise noted.

CAUTIONARYNOTEREGARDINGFORWARD-LOOKINGSTATEMENTS


Certain information regarding the Company contained herein may
constitute forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements are subject to a variety of risks
and uncertainties which could cause actual events or results to differ from
those reflected in the forward-looking statements. Should one or more of these
risks and uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in forward
looking statements. Specific reference is made to "Risk Factors" in the
Company's Annual Information Form and 40-F Report. Forward-looking statements
may include estimates, plans, expectations, opinions, forecasts, projections,
guidance or other statements that are not statements of fact including, without
limitation, statements regarding future gold and silver production and cash
costs per ounce; potential mineralization and reserves, including the impact of
any future exploration on reserve estimates; expectations regarding the timing
and extent of production at the Companys projects; future cash flows; estimates
regarding the future costs related to exploration at the Companys projects; the
nature and availability of additional funding sources; and future plans and
objectives of the Company. In some cases, you can identify forward-looking
statements by the use of words such as may, will, should, could, expect, plan,
intend, anticipate, believe, estimate, predict, potential or continue or the
negative or other variations of these words, or other comparable words or
phrases. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Companys expectations include,
among others, risks related to international operations, including political
turmoil and limited local infrastructure to support large scale mining
operations; the actual results of current exploration activities; conclusions of
economic evaluations and changes in project parameters as plans continue to be
refined; and fluctuations in future prices of gold and silver. These factors are
set out in more detail in the Companys Annual Information Form. The Companys
forward-looking statements are expressly qualified in their entirety by this
cautionary statement.

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