EXHIBIT 99.2

Gammon Lake Resources Inc.
Consolidated Financial Statements

July 31, 2005 and 2004

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Gammon Lake Resources Inc.
Contents

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|                                                  |     
|------------------------------------------------- | ----
|                                                  | Page
|                                                 
|Auditor's Report                                  | 1   
|                                                 
|Consolidated Statements of Operations and Deficit | 2   
|                                                 
|Consolidated Balance Sheets                       | 3   
|                                                 
|Consolidated Statement of Cash Flows              | 4   
|                                                 
|Notes to the Consolidated Financial Statements    | 5-25

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Gammon Lake Resources Inc.
Consolidated Statements of Operations and Deficit

|                    |  |     
|------------------- |  | ----
|Years Ended July 31 |  | 2005

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|                                     |  |                     
|------------------------------------ |  | --------------------
|                                     |  |                     
|Interest income                      |  | $   1,199,016       
|Management fees                      |  | 224,560             
|                                     |  |                     
|                                     |  | 1,423,576           
|                                     |  |                     
|                                     | 
|Expenses                             | 
|Capital tax                          |  | 140,000             
|Amortization                         |  | 537,540             
|General and administrative           |  | 2,593,683           
|Management fees                      |  | 278,440             
|Professional fees                    |  | 7,105,542           
|Wages and benefits                   |  | 9,651,178           
|                                     |  |                     
|                                     |  | 20,306,383          
|                                     |  |                     
|                                     | 
|Loss before other items              |  | (18,882,807         
|                                     |  |                     
|                                     | 
|Foreign exchange gain                |  | 312,172             
|Write-off of mineral property        |  | -                   
|Loss on equity investment            |  | (1,226,000          
|                                     |  |                     
|                                     |  | (913,828            
|                                     |  |                     
|                                     | 
|Net loss before income taxes         |  | $  (19,796,635      
|                                     | 
|Future income tax recovery (Note 10) |  | (421,040            
|                                     |  |                     
|                                     | 
|Net loss                             |  | $  (19,375,595      
|                                     |  |                     
|                                     | 
|Loss per share (Note 12)             |  | $              (0.29
|                                     |  |                     
|                                     | 
|                                    
|                                     | 
|Deficit, beginning of period         |  | $  (13,594,765      
|                                     | 
|Net loss                             |  | $  (19,375,595      
|                                     |  |                     
|                                     | 
|Deficit, end of period               |  | $  (32,970,360      
|                                     |  |                     
|                                     | 
|                                    

See accompanying notes
to the consolidated financial statements.

2

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Gammon Lake Resources Inc.
Consolidated Balance Sheets

| |  |            
| |  | -----------
| |  | July 312005

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|                                        |  |                
|--------------------------------------- |  | ---------------
|                                        |  |                
|Assets                                  | 
|Current                                 | 
|Cash and cash equivalents               |  | $   35,400,349 
|Receivables                             | 
|Commodity taxes                         |  | 5,332,406      
|Other                                   |  | 129,772        
|Prepaids and deposits                   |  | 947,344        
|Due from related companies              |  | 229,700        
|                                        |  |                
|                                        |  | 42,039,571     
|                                        | 
|Deposit on capital equipment (Note 3)   |  | 9,138,768      
|Long term investment (Note 4)           |  | 10,422,000     
|Capital assets (Note 5)                 |  | 32,750,554     
|Mineral properties and related deferred | 
|costs (Notes 6 and 7)                   |  | 115,997,985    
|                                        |  |                
|                                        |  | $ 210,348,878  
|                                        |  |                
|                                       
|                                        | 
|Liabilities                             | 
|Current                                 | 
|Payables and accruals                   |  | $     3,609,306
|                                        | 
|Long term debt (Note 8)                 |  | 8,581,300      
|Future employee benefits (Note 9)       |  | 213,738        
|Future income taxes (Note 10)           |  | 8,121,000      
|                                        |  |                
|                                        |  | 20,525,344     
|                                        |  |                
|                                        | 
|Shareholders' Equity                    | 
|Capital stock (Note 11)                 |  | 204,065,585    
|Contributed surplus (Note 11)           |  | 18,728,309     
|Deficit                                 |  | (32,970,360    
|                                        |  |                
|                                        |  | 189,823,534    
|                                        |  |                
|                                        | 
|                                        |  | $ 210,348,878  
|                                        |  |                
|                                       

Nature of operations and going
concern assumption (Note 1)
Commitments and contingencies (Note 7)
Subsequent events (Note 14)

On behalf of the Board

|              |          |                 |         
|------------- | -------- | --------------- | --------
|"Fred George" | Director | "Brad Langille" | Director

3

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See accompanying notes
to the consolidated financial statements.

4

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Gammon Lake Resources Inc.
Consolidated Statements of Cash Flows

|                    |  |     
|------------------- |  | ----
|Years Ended July 31 |  | 2005

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|                                         |  |               
|---------------------------------------- |  | --------------
|                                         |  |               
|Increase in cash and cash equivalents    | 
|                                         | 
|Operating                                | 
|Net loss                                 |  | $  (19,375,595
|Amortization                             |  | 537,540       
|Unrealized foreign exchange gain         |  | (876,706      
|Stock option expense                     |  | 13,974,680    
|Mineral property write-off               |  | -             
|Future income tax recovery               |  | (421,040      
|Loss on long term                        | 
|equity investment                        |  | 1,226,000     
|                                         |  |               
|                                         |  | (4,935,121    
|Change in non-cash operating             | 
|working capital (Note 17)                |  | (4,040,163    
|                                         |  |               
|                                         | 
|                                         |  | (8,975,284    
|                                         |  |               
|                                         | 
|Investing                                | 
|Acquisition of investment                |  | -             
|Acquisition of capital assets            |  | (28,825,851   
|Advances from (to) related companies     |  | 155,001       
|Increase in deposits on capital          | 
|equipment                                |  | (8,962,503    
|Expenditures on mineral                  | 
|properties and related                   | 
|deferred costs                           |  | (37,217,764   
|                                         |  |               
|                                         |  | (74,851,117   
|                                         |  |               
|                                         | 
|Financing                                | 
|Net proceeds from issuance of            | 
|capital stock                            |  | 103,931,580   
|Proceeds from exercise of options        |  | 2,274,230     
|                                         |  |               
|                                         |  | 106,205,810   
|                                         |  |               
|                                         | 
|Net increase in cash andcash equivalents |  | 22,379,409    
|                                         | 
|Cash and cash equivalents                | 
|Beginning of year                        |  | 13,020,940    
|                                         |  |               
|                                         | 
|End of year                              |  | $   35,400,349
|                                         |  |               
|                                         | 
|                                        

See accompanying notes
to the consolidated financial statements.

5

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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

Gammon Lake Resources Inc. (the
Company) is a publicly traded company, engaged in the acquisition, exploration
and development of resource properties in Canada and Mexico. The Company is continued
under Part 1A of the Companies Act (Quebec) and its common shares are listed on the
Toronto Stock Exchange (TSX:GAM) and the American Stock Exchange (AMEX:GRS).

These financial statements have been
prepared on the basis of accounting principles applicable to a going concern, which assume
that the Company will continue in operation for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of operations.

The Company may have to raise
additional funds over and above amounts raised to date to complete the acquisition,
exploration and development of its interests and, while it has been successful in doing so
in the past, there can be no assurance that it will be able to do so in the future. In
addition, the Company will require further financing to meet certain financial commitments
under its joint venture and option buy out agreements.

If the going concern assumption were
not appropriate for these financial statements, then adjustments would be necessary in the
carrying values of assets and liabilities, the reporting revenues and expenses, and the
balance sheet classifications used.

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|2. |  | Summary
of significant accounting policies
|-- |  | ------------------------------------------

Basis of presentation

The accompanying consolidated
financial statements are prepared by management in accordance with Canadian generally
accepted accounting principles and contain all adjustments necessary to present fairly
Gammon Lake Resources Inc.s financial position as at July 31, 2005 as well as its
operations and cash flows for the years ended July 31, 2005 and July 31, 2004. The
accounting principles conform in all material respects to principles generally accepted in
the United States of America except as disclosed in Note 15.

These consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Gammon
Lake Resources (NS) Incorporated, Gammon Lake de Mexico S.A. de C.V., Gammon Lake
Resources (USA) Inc. and Gammon Lake Resources (Barbados) Inc. Gammon Lake Resources (USA)
Inc. was incorporated on February 11, 2005 with a treasury issue of 100 shares for $100.

Asset retirement
obligations

Effective August 1, 2004, Gammon Lake
adopted the new Canadian Institute of Chartered Accountants (CICA) standards for Asset
Retirement Obligations (CICA 3110). This section requires the Company to fully recognize
the fair value of estimated asset retirement obligations on the balance sheet when a
reasonable estimate of fair value can be made. The Company is required to record the
estimated present value of future cash flows associated with site closure and reclamation
as a liability when the liability is incurred and increase the carrying value of the
related assets for the amount. These asset retirement costs will be amortized to expense
over the life of the related assets using the unit-of-production method. At the end of
each period, the liability is increased to reflect the passage of time and changes in the
estimated future cash flows underlying any initial fair value measurements. The Company
has not incurred any asset retirement obligations.

Use of estimates

The presentation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of assets
and liabilities and

6

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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disclosure of contingent liabilities
at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those reported.

|2. |  | Summary
of significant accounting policies (continued)
|-- |  | ------------------------------------------------------

Cash and cash equivalents

Cash and cash equivalents include
cash on hand and balances with banks, net of bank overdrafts, and highly liquid temporary
investments.

Mineral properties and related
deferred costs

Acquisitions, exploration and
development costs relating to mineral properties are deferred until the properties are
brought into production, at which time they are amortized on the unit of production method
based on estimated recoverable reserves. If it is determined that the deferred costs
related to a property are not recoverable over its productive life, those costs will be
written down to fair value as a charge to operations in the period in which the
determination is made. The amounts at which mineral properties and the related deferred
costs are recorded, do not necessarily reflect present or future values.

Long term investment

The Company accounts for its
investment in a company over which it has significant influence using the equity method of
accounting whereby the investment is initially recorded at cost and subsequently adjusted
to recognize the Companys share of earnings or losses of the investee company and
reduced by dividends received.

Capital assets and amortization

Capital assets are recorded at cost.
Amortization is calculated on the straight-line basis over the estimated useful lives of
the assets as follows:

|                       |           
|---------------------- | ----------
|                       |           
|Computer equipment     | 3-4 years 
|Exploration equipment  | 5-10 years
|Furniture and fixtures | 5-10 years
|Processing plant       | 8-9 years 
|Development equipment  | 8-9 years 
|Vehicles               | 4 years   
|Buildings              | 20 years  

Impairment of long lived assets

In August, 2004, the Company adopted
the Canadian Institute of Chartered Accountants Handbook Section 3063, Impairment of
Long-Lived Assets, which addresses the recognition, measurement and disclosure of
the impairment of long-lived assets. Section 3063 requires that an impairment loss be
recognized if the carrying amount of a long-lived asset is not recoverable. The carrying
amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of
the undiscounted cash flows expected to result from its use and eventual disposition. The
impairment loss to be recognized is measured as the amount by which the carrying amount of
the long-lived asset exceeds its fair value. The Company has determined there is an impact
on its results of operations and financial position.

Revenue recognition

7

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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Revenue is recognized when: i)
persuasive evidence of an arrangement exists; ii) the risks and rewards of ownership pass
to the purchaser including delivery of the product; iii) the selling price is fixed and
determinable, and iv) collectibility is reasonably assured.

|2. |  | Summary
of significant accounting policies (continued)
|-- |  | ------------------------------------------------------

Stock based compensation

Effective August 1, 2003, the Company
prospectively adopted the fair value method of accounting for employee stock-based
compensation. This Section establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments made in exchange for
goods and services. These recommendations require that compensation for all awards made to
employees and non-employees be measured and recorded in the financial statements at fair
value. The Companys stock option plan is described in Note 11.

Foreign currency
transactions

Foreign monetary assets and
liabilities and foreign integrated operations are denominated in foreign currencies, and
are translated at the period end exchange rate. Non-monetary assets and liabilities, as
well as revenue and expense transactions denominated in foreign currencies are translated
at the rate prevailing at the time of the transaction. Translation gains or losses are
recognized in the period in which they occur.

Income taxes

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

Loss per common share

Loss per common share is calculated
based on the weighted average number of common shares outstanding for the period. Diluted
loss per common share, when applicable, considers the potential exercise of outstanding
options and warrants using the treasury-based method.

8

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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|2. |  | Summary
of significant accounting policies (continued)
|-- |  | ------------------------------------------------------

Recent accounting
pronouncements

Flow-through shares

In March 2004, the CICA Emerging
Issues Committee (EIC) issued EIC Abstract 146, Flow-through
shares, identifying two issues as a result of varying practices related to the date
of recognition of the future tax liability and the recognition of previously unrecorded
future income tax assets caused by the renouncement of expenditures related to
flow-through shares. The future income tax liability must be recognized, and the
shareholders equity reduced, on the date that the Company renounces the tax credits
associated with expenditures, provided there is reasonable assurance that the expenditures
will be made. The previously unrecorded future income tax assets must be recognized as a
reduction of income tax expense included in the determination of net income or loss in the
period incurred, except when the more likely than not test cannot be
satisfied. The Company has not issued any flow-through shares.

Other changes in accounting policies

In February 2003, the CICA issued
AcG-14 Guarantors Accounting and Disclosure Requirements for Guarantees.
AcG-14 requires guarantors to disclose certain information for guarantees outstanding at
the end of the reporting period. At adoption, AcG-14 did not have any impact on the
Companys consolidated financial statements.

In January 2003, the CICA issued
AuG-15 Consolidation of Variable Interest Entities which harmonizes Canadian
GAAP with FASB Interpretation No. 46R and provides guidance for applying the principles of
Section 1590, Subsidiaries, to certain special purpose entities. This
pronouncement did not have any impact on the Companys consolidated financial
statements.

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|3. |  | Deposits
on capital equipment
|-- |  | -----------------------------

The Company has deposits on capital
equipment of $9,138,768 (2004  $176,265) relating to the Open-Pit and Underground
operations. Remaining amounts due on these contracts are included in commitments and
contingencies (Note 7).

9

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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|4. |  | Long
term investment
|-- |  | --------------------

The Companys long-term
investment, carried at equity, consists of 10,900,000 shares, representing approximately a
25% interest in the issued and outstanding common shares of Mexgold Resources Inc.
(Mexgold). Mexgold is a public junior natural resource issuer, listed on the
TSX Venture Exchange (TSXV: MGR), which holds a 100% interest in a Mexican gold and silver
mineral exploration property, known as the Guadalupe Gold-Silver Project and a
100% interest in Compania Minera Del Cubo, a gold and silver producing mine in Guanajuto
State, Mexico.

Pursuant to an agreement with
Mexgold, these shares must be held until August 20, 2009, and there will be no sale,
transfer, assignment, pledge, encumbrance, grant of a security interest in or other form
of conveyance of these shares, directly, indirectly or beneficially, prior to that time
unless Mexgold so consents in writing thereto.

|                                     |  |             
|------------------------------------ |  | ------------
|                                     |  |             
|                                     |  | July 312005 
|                                     |  |             
|                                     | 
|Investment in Mexgold Resources Inc. |  | $ 12,300,000
|Cumulative equity share of losses in | 
|Mexgold Resources Inc.               |  | (1,878,000  
|                                     |  |             
|                                     | 
|                                     |  | $ 10,422,000
|                                     |  |             

The market value of investment as at
July 31, 2005 was $29,430,000 (July 31, 2004  $27,468,000). The Company also holds
2.95 million warrants to purchase Mexgold common shares at an exercise price of $2.50
each, expiring February 26, 2006.

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|5. |  | Capital
assets
|-- |  | --------------

|                       |  |               |  |                         |  |              
|---------------------- |  | ------------- |  | ----------------------- |  | -------------
|                       |  |               |  |                         |  |              
|                       |  | July 31, 2005 |  | July 31, 2004           | 
|                       |  |               | 
|                      
|                      
|                       |  | Cost          |  | AccumulatedAmortization |  | Net BookValue
|                       |  |               |  |                         |  |              
|Computer equipment     |  | $     214,142 |  | $       52,572          |  | $     161,570
|Exploration equipment  |  | 6,235,657     |  | 537,606                 |  | 5,698,051    
|Development equipment  |  | 14,425,673    |  | -                       |  | 14,425,673   
|Processing plant       |  | 7,966,096     |  | -                       |  | 7,966,096    
|Vehicles               |  | 680,492       |  | 84,269                  |  | 596,223      
|Buildings              |  | 3,574,509     |  | 66,261                  |  | 3,508,248    
|Furniture and fixtures |  | 422,372       |  | 27,679                  |  | 394,693      
|                       |  |               |  |                         |  |              
|                       |  | $33,518,941   |  | $     768,387           |  | $32,750,554  
|                       |  |               |  |                         |  |              

Amortization of tangible capital
assets does not commence until they are available and in use.

10

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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|6. |  | Mineral
properties and related deferred costs
|-- |  | ---------------------------------------------

For the year ended July
31, 2005

|                               |              
|------------------------------ | -------------
|                               |              
|Balance, July 31, 2004         | $  80,041,737
|Expenditures during the period | 35,956,248   
|                               |              
|Balance, July 31, 2005         | $115,997,985 
|                               |              

Included in expenditures for the year
ended July 31, 2005 are future income tax adjustments of ($1,475,253) (July 31, 2004
 $1,974,832) related to the adjustment of the temporary difference between
accounting and tax values of the mineral property.

|                                                   |  |               
|-------------------------------------------------- |  | --------------
|                                                   |  |               
|Schedule of deferred mineral property expenditures |  | 2005          
|                                                   |  |               
|                                                  
|Mineral property, beginning balance                |  | $   80,041,737
|                                                   |  |               
|                                                  
|Mineral rights                                     |  | 207,097       
|Geological services and studies                    |  | 6,469,323     
|Drilling                                           |  | 4,449,719     
|Assays                                             |  | 988,219       
|Equipment and consumables                          |  | 10,383,298    
|Field Office                                       |  | 283,356       
|Camp materials and equipment                       |  | 682,231       
|Health and Safety                                  |  | 293,052       
|Vehicles                                           |  | 1,034,247     
|Consulting fees                                    |  | 800,287       
|Contract Mining fees                               |  | 5,772,270     
|Travel                                             |  | 2,375,148     
|Watering infrastructure                            |  | 669,358       
|Electrical infrastructure                          |  | 126,116       
|Heap leach                                         |  | 2,419,254     
|Roads                                              |  | 478,526       
|Future Income tax adjustment                       |  | (1,475,253    
|                                                   |  |               
|Total additions                                    |  | 35,956,248    
|                                                   |  |               
|                                                  
|Write-off of mineral property expenditures         |  | -             
|                                                   |  |               
|                                                  
|Mineral property, end of period                    |  | $ 115,997,985 
|                                                   |  |               

11

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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|7. |  | Commitments
and contingencies
|-- |  | -----------------------------

Option and joint venture agreements

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

The Company has a joint venture
agreement with Fuerte Mayo respecting the Ocampo property under which the Company has a
60% participating interest in 17 mining claims in Mexico. Under the terms of the joint
venture, the Company is the operator and 100% of the sales from production on the property
may be applied to the cash payment due to Fuerte Mayo in the joint venture stage. Under
the terms of the agreement, a balance of US $211,526 was due to Fuerte Mayo upon the sale
of the property. During the year ended July 31, 2005, in consideration for a consulting
payment of Cdn $250,000 due for services rendered, Fuerte Mayo forgave the US $211,526 due
upon the sale of the property.

On February 21, 2003, the Company
acquired the remaining 40% of the title and interest in a group of claims located in the
municipality of Ocampo from Compania Minera Brenda S.A. de C.V. (Minera
Brenda). The Company agreed to pay 8% of net profits attributable to the development
of the mining claims and their concessions up to a maximum of US $2,000,000. An additional
US $250,000 is due if, as a result of the exploration of the claims, a minimum mining
reserve of two million ounces of equivalent gold are obtained. In the event that the
Company were to sell the property, the full US $2,000,000 becomes due and payable at that
time.

|b) |  | Minerales
de Soyopa, S.A. de C.V. (Soyopa)
|-- |  | --------------------------------------------

On November 24, 2001, the Company and
Soyopa entered into an agreement amending previous option and joint venture agreements.
Under the terms of these agreements, the Company acquired 100% of the right, title and
ownership to 17 mining claims in the Ocampo district of Mexico. Consideration for title of
the properties was US $100,000 paid on November 24, 2001, US $125,000 paid on May 23,
2002, the issuance of 5,000,000 common shares of the Company to Soyopa and US $7,000,000
in long term debt as disclosed in Note 8.

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

On July 17, 2000, the Company entered
into an agreement with Global for consulting services to assist in the negotiations of an
agreement with Soyopa to secure the right to acquire the then remaining fifty-one percent
(51%) interest in the Ocampo property.

12

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Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

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|7. |  | Commitments
and contingencies (continued)
|-- |  | -----------------------------------------

As part of the consideration for the
successful negotiation and execution of the agreement between the Company and Soyopa and
upon sale by the Company of the lands, claims and concessions described in the agreements,
the Company is required to pay Global U.S. $1,000,000.

A summary of the future commitments
based on the above noted option and joint venture agreements at July 31, 2005 are set out
in the following table:

|                                     |                |                                                                                              | 
|------------------------------------ | -------------- | -------------------------------------------------------------------------------------------- | 
|Agreement                            | Consideration  | Terms                                                                                       
|Compania Minera Global, S.A. de C.V  | US$ 1,000,000  | Upon sale of the related property                                                           
|Compania Minera, Brenda, S.A. de C.V | US$ 2,000,000  | 8% of net profits attributable to related mining claims or upon sale of the related property
|Compania Minera, Brenda, S.A. de C.V | US$    250,000 | Upon a minimum proven reserve amount                                                        

|d) |  | Capital
equipment
|-- |  | -----------------

During the year, the Company placed
deposits on several pieces of equipment for the Open-Pit and Underground operations (see
Note 3). The Companys future commitments on the equipment is $20,815,083, and is
payable upon shipment and or delivery of the items as outlined in the purchase contracts.

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|8. |  | Long
term debt
|-- |  | --------------

|                                                 |             |             |             |            | 
|------------------------------------------------ | ----------- | ----------- | ----------- | ---------- | 
|                                                 |             |             |             |            | 
|                                                 | July 312005 |             | July 312004 |           
|                                                 |             |             |            
|Soyopa loan, non-interest bearing, translated to
|Canadian dollars at the balance sheet date       |             | $ 8,581,300 |             | $9,304,400
|                                                 |             |             |            

The long term debt payable to Soyopa
is non-interest bearing with terms of repayment as follows:

|i.) |  | US
$3,500,000 on or before November 23, 2006;
|--- |  | ---------------------------------------------

|ii.) |  | US
$3,500,000 on or before November 23, 2007;
|---- |  | ---------------------------------------------

|iii.) |  | In
the event that the Company has commenced production of gold and/or silver
                    from the mining title acquired prior to November 23, 2006, the
Company is                     required to pay Soyopa US $1,000,000, annually, commencing
on the first                     anniversary of the start of production which will reduce
the remaining amount                     due;
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|iv.) |  | In
the event the Company sells or transfers title to the concessions to a third
                    party, the US $7,000,000 or the amount remaining, becomes due.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

The long term debt is secured by a
first charge over certain mineral properties.

13

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|9. |  | Future
Employee Benefits
|-- |  | ------------------------

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

A summary of the principal financial
data relative to seniority premiums and pension plans is shown below:

|                                    |  |                      | 
|----------------------------------- |  | -------------------- | 
|                                    |  | PensionBenefit Plans | 
|                                   
|Projected benefit obligation:       | 
|Balance, beginning of period        |  | $ 209,270            | 
|Service cost                        |  | 38,900               | 
|Actuarial (gain)                    |  | (5,037)              | 
|                                    |  |                      | 
|                                   
|Balance, end of year                |  | $ 243,133            | 
|                                    |  |                      | 
|                                   
|Current benefit obligation:         | 
|Service cost                        |  | $   38,900           | 
|Additional minimum liability        |  | 166,345              | 
|                                    |  |                      | 
|                                   
|Balance at end of period            |  | $ 205,245            | 
|                                    |  |                      | 
|                                   
|Employee future benefits expense:   | 
|Service cost                        |  | $   23,927           | 
|Interest cost                       |  | 9,417                | 
|Amortization of prior service costs |  | 5,556                | 
|                                    |  |                      | 
|                                   
|Net expense for the year            |  | $   38,900           | 
|                                    |  |                      | 
|                                   
|Significant assumptions used:       | 
|Discount rate                       |  | 4.50%                | 
|Rate of compensation increase       |  | 1.50%                | 

14

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|10. |  | Income
taxes
|--- |  | ------------

The following table reconciles the
expected income tax recovery (payable) at the statutory income tax rate to the amounts
recognized in the consolidated statements of operations for the years ended July 31, 2005
and 2004.

|                                              |  |               
|--------------------------------------------- |  | --------------
|                                              |  |               
|                                              |  | July 312005   
|                                              |  |               
|Net Loss                                      |  | $ 19,797,000  
|Income Tax Rate                               |  | 38%           
|                                              |  |               
|Expected income tax recovery                  |  | 7,523,000     
|Effect of statutory rate change               |  | (112,000      
|Tax effect of foreign exchange gains (losses) | 
|that are not taxable for income tax purposes  |  | (167,000      
|Tax effect of equity pick-up on investments   |  | (466,000      
|Write-off of mineral properties               |  | -             
|Non-deductible stock option expense           |  | (5,310,000    
|Valuation allowance                           |  | (1,047,000    
|                                              |  |               
|                                             
|Provision for income taxes                    |  | $      421,000
|                                              |  |               

The following reflects future income
tax liabilities at July 31, 2005 and July 31, 2004.

|                                                   |  |              
|-------------------------------------------------- |  | -------------
|                                                   |  |              
|                                                   |  | July 312005  
|                                                   |  |              
|Accounting value of mineral properties and related | 
|deferred costs in excess of tax value              |  | $ 26,508,000 
|Deductible share issue costs                       |  | (3,374,900   
|                                                   | 
|Non-capital losses carried forward                 |  | (22,558,600  
|                                                   |  |              
|                                                   |  | 574,500      
|Valuation allowance                                |  | 7,546,500    
|                                                   |  |              
|                                                   | 
|Future income tax liabilities recognized           |  | $   8,121,000
|                                                   |  |              

15

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|10. |  | Income
taxes (continued)
|--- |  | ------------------------

The Company has tax loss
carryforwards expiring in the following years:

|     |  |            |  |              
|---- |  | ---------- |  | -------------
|     |  |            |  |              
|     |  | Canada     |  | United States
|     | 
|2006 |  | 367,364    |  | -            
|2007 |  | 885,266    |  | -            
|2008 |  | 1,240,695  |  | -            
|2009 |  | 512,906    |  | -            
|2010 |  | 2,694,155  |  | -            
|2011 |  | 2,556,165  |  | -            
|2012 |  | -          |  | -            
|2013 |  | -          |  | -            
|2014 |  | -          |  | -            
|2015 |  | 2,355,660  |  | -            
|2025 |  | -          |  | 397,598      
|     | 
|     |  | 10,612,211 |  | 397,598      
|     | 

---

|11. |  | Capital
stock
|--- |  | -------------

Authorized:Unlimited number of common shares

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

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

Issued and outstanding:

|                                                        |  |                      
|------------------------------------------------------- |  | ---------------------
|                                                        |  | Number ofCommonShares
|                                                        | 
|                                                       
|Balance, July 31, 2004                                  |  | 56,676,715           
|                                                       
|Issued during the year ended July 31, 2005              | 
|For cash pursuant to private placement                  |  | 15,715,000           
|For cash pursuant to exercise of share purchase options |  | 994,800              
|Less share issue costs                                  |  | -                    
|                                                        | 
|                                                       
|Balance, July 31, 2005                                  |  | 73,386,515           
|                                                        | 

16

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|11. |  | Capital
stock (continued)
|--- |  | -------------------------

Escrow shares
As at July 31, 2005, 15,000 common
shares issued to promoters of the Company and other investors are held in escrow and will
be released subject to certain regulatory approvals.

Stock optionsThe Company has a stock option plan
under which options to purchase common shares of the Company may be granted to directors,
senior officers, employees and service providers of the Company. The aggregate number of
common shares which may be reserved for issuance under the plan shall be 17,527,000. The
maximum number of common shares which may be reserved for issuance to any one person under
the plan shall be 5% of the shares outstanding at the time of grant (on a non-diluted
basis) less the aggregate number of shares reserved for issuance to such person under any
other option to purchase shares from treasury granted as a compensation or incentive
mechanism.

During the year ended July 31, 2005,
2,512,000 options were granted to consultants, directors and employees, of which 2,016,000
options are subject to shareholder approval. During the year ended July 31, 2005, 521,000
options granted to consultants were expensed based on the fair value of the options on the
date granted. As a result, $29,600 was recorded as professional fees, and $1,478,080 as
wages and benefits with a corresponding credit to contributed surplus. The remaining
2,016,000 options will vest upon shareholder approval, at which time $3,356,200 will be
recorded as professional fees and $2,675,530 as wages and benefits with a corresponding
credit to contributed surplus. The fair value of the options granted was calculated using
the Black-Scholes option pricing model with the following assumptions:

|                                      |        |                                       |                         |        
|------------------------------------- | ------ | ------------------------------------- | ----------------------- | -------
|                                      |        |                                       |                         |        
|Options earned during the 1stquarter: |        | Options earned during the 2ndquarter:
|                                     
|Dividend yield                        | 0%     |                                       | Dividend Yield          | 0%     
|Expected volatility                   | 60.88% |                                       | Expected volatility     | 62.11% 
|Risk free interest rate               | 2.99%  |                                       | Risk free interest rate | 3.94%  
|Expected life                         | 1 year |                                       | Expected life           | 5 years

|                                      |        
|------------------------------------- | -------
|Options earned during the 3rd quarter |        
|                                     
|Dividend Yield                        | 0%     
|Expected Volatility                   | 52.34% 
|Risk Free Interest Rate               | 3.50%  
|Expected Life                         | 5 years

17

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|11. |  | Capital
stock (continued)
|--- |  | -------------------------

During the year ended July 31, 2004,
4,050,000 options that were issued to directors, employees, and consultants were approved
at the Companys annual meeting held on October 27, 2004. These options vested upon
approval, and the fair value amount of $5,294,627 was recorded as professional fees and
$7,172,373 as wages and benefits with a corresponding credit of $12,467,000 to contributed
surplus during the year ended July 31, 2005.

The fair value of the option grant
that was approved at the annual meeting held on October 27, 2004 was calculated using the
Black-Scholes option pricing model with the following average assumptions:

|                        |        
|----------------------- | -------
|                        |        
|Dividend yield          | 0%     
|Expected volatility     | 63.00% 
|Risk free interest rate | 3.59%  
|Expected life           | 5 years

An aggregate of 19,542,300 options
have been granted pursuant to the Companys stock option plan of which 7,925,800 have
been exercised and 227,000 have expired. Set forth below is a summary of the outstanding
options to purchase common shares as at July 31, 2005.

|                |                     |                                                |                               |                   |                              
|--------------- | ------------------- | ---------------------------------------------- | ----------------------------- | ----------------- | -----------------------------
|                |                     |                                                |                               |                   |                              
|                | Options Outstanding |                                                | Options Exercisable          
|                |                    
|Option Price    | NumberOutstanding   | Weighted averageremainingcontractual life(yrs) | Weightedaverage exerciseprice | Numberexercisable | Weightedaverage exerciseprice
|               
|               
|$ 0.00 - $ 0.50 | 30,000              | 1.16                                           | $ 0.50                        | 30,000            | $ 0.50                       
|               
|$ 0.51 - $ 1.00 | 467,500             | 1.59                                           | $ 0.96                        | 467,500           | $ 0.96                       
|               
|$ 1.01 - $ 1.50 | 1,555,000           | 1.75                                           | $ 1.22                        | 1,555,000         | $ 1.22                       
|               
|$ 2.51 - $ 3.00 | 2,750,000           | 2.93                                           | $ 3.36                        | 2,750,000         | $ 3.36                       
|               
|$ 5.01 - $ 5.50 | 4,000,000           | 3.51                                           | $ 5.45                        | 4,000,000         | $ 5.45                       
|               
|$ 6.01 - $ 6.50 | 2,422,000           | 4.52                                           | $ 6.12                        | 496,000           | $ 6.12                       
|               
|$ 7.01 - $ 7.50 | 25,000              | 1.04                                           | $ 7.00                        | 25,000            | $ 7.00                       
|               
|$ 7.51 - $ 8.00 | 50,000              | 3.78                                           | $ 7.94                        | 50,000            | $ 7.94                       
|               
|$9.51 - $10.00  | 90,000              | 4.53                                           | $10.00                        | -                 | -                            

18

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|11. |  | Capital
stock (continued)
|--- |  | -------------------------

Fixed Options

|                                   |  |               |     |                               
|---------------------------------- |  | ------------- | --- | ------------------------------
|                                   |  |               |     |                               
|                                   |  | July 31, 2005 |     | July 31, 2004                 
|                                   |  |               |     |                               
|                                   |  | Shares        |     | Weighted AverageExercise Price
|                                   |  |               |     |                               
|                                  
|Outstanding, beginning of period   |  | 9,892,300     |     | $      3.44                   
|Granted                            |  | 2,512,000     | (2) | $      6.27                   
|Expired                            |  | (20,000       | )   | $     (5.45                   
|Exercised                          |  | (994,800      | )   | $     (2.29                   
|                                   |  |               |     |                               
|                                  
|Outstanding, end of period         |  | 11,389,500    |     | $      4.16                   
|                                   |  |               |     |                               
|                                  
|Options exercisable, end of period |  | 9,373,500     |     | $      3.71                   
|                                   |  |               |     |                               

| | (1) |  | Included
4,050,000 options which were approved at the annual and special
                    meeting held on October 27, 2004.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Includes
2,016,000 options subject to                     shareholder approval.
| | --- |  | -------------------------------------------------------------------------------

Compensation Warrants

During the year ended July 31, 2005,
314,300 compensation warrants were granted to agents as part of the private placement and
were expensed based on the fair value of the warrants on the date granted. As a result,
$782,607 was recorded as share issue costs with a corresponding credit to contributed
surplus. The fair value of the warrants granted was calculated using the Black-Scholes
option pricing model with the following assumptions:

|                        |        
|----------------------- | -------
|                        |        
|Dividend yield          | 0%     
|Expected volatility     | 62.00% 
|Risk free interest rate | 2.88%  
|Expected life           | 2 years

A summary of the 762,376 outstanding
compensation warrants and options to purchase common shares as at July 31, 2005 is as
follows:

|                                                        |  |                  
|------------------------------------------------------- |  | -----------------
|                                                        |  |                  
|Number ofCommon Shares UnderCompensation Warrant/option |  | Expiration Date  
|                                                       
|                                                       
|277,344                                                 |  | August 15, 2006  
|170,732                                                 |  | November 21, 2006
|314,300                                                 |  | December 16, 2006

19

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|12. |  | Loss
per share
|--- |  | --------------

Loss per share is calculated based on
the weighted average number of shares outstanding during the year ended July 31, 2005 of
66,002,431 (2004  52,298,985)

Diluted earnings (loss) per share is
based on the assumption that options under the stock options plan and warrants have been
exercised on the later of the beginning of the year and the date granted. The treasury
stock method is used to determine the dilutive effect of stock options and warrants. The
treasury stock method assumes that proceeds received from the exercise of the in-the-money
stock options and warrants are used to repurchase shares at the average market rate. The
diluted weighted average number of shares for the year ended July 31, 2005 and 2004 were
not presented, as all factors are anti-dilutive.

---

|13. |  | Related
party transactions
|--- |  | --------------------------

The Company paid the following
amounts to directors and companies controlled by or related to directors:

|                             |  |            
|---------------------------- |  | -----------
|                             |  |            
|                             |  | 2005       
|                            
|Management fees              |  | $   278,440
|Professional fees            |  | -          
|Mineral property exploration | 
|expenditures                 |  | 4,392,431  
|                             |  |            
|                            
|                             |  | $ 4,670,871
|                             |  |            

The Company received the following
amounts from related companies:

|                         |  |           
|------------------------ |  | ----------
|                         |  |           
|Professional fees        |  | $   51,600
|Travel                   |  | 118,110   
|General & Administrative |  | 54,850    
|                         |  |           
|                        
|                         |  | $  224,560
|                         |  |           

All related party transactions which
occur in the normal course of operations are recorded at the exchange amount. During the
period, Gammon charged a management fee to Mexgold Resources Inc. to recover expenditures
related to professional fees, travel, and general and administrative expenses. The amounts
due from Mexgold Resources Inc. are non-interest bearing with no fixed term of repayment.

---

|14. |  | Subsequent
events
|--- |  | -----------------

a)    
          On September 1, 2005, a Director of the Company exercised 150,000 options at
          $0.80 for total proceeds of $120,000.

b)    
          In accordance with National Instrument 51-102, the Company has determined to
          change its year end from July 31st to December 31st. The Company will report its
          interim statements for the two months ended September 30, 2005, and the five
          months ended December 31, 2005.

20

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|15. |  | Differences
between Canadian and U.S. generally accepted accounting principles
|--- |  | ------------------------------------------------------------------------------

The following represents additional
information to the consolidated financial statements of the Company that were prepared in
accordance with accounting principles generally accepted in Canada (Canadian
GAAP). Set out below are the material adjustments to net loss for the years ending
July 31, 2005 and 2004 and to shareholders equity at July 31, 2005 and 2004 in order
to conform to accounting principles generally accepted in the United States of America
(U.S. GAAP).

|                                                           |  |                     
|---------------------------------------------------------- |  | --------------------
|Statement of loss:                                         |  |                     
|                                                          
|                                                           |  | YearEndedJuly 312005
|                                                          
|Net loss for the year based on                             | 
|Canadian GAAP                                              |  | $(19,375,595        
|Deferred exploration costs prior to the                    | 
|establishment of proven and probable                       | 
|mineral reserves (a)                                       |  | (11,274,760         
|Write off of mineral properties and related deferred costs | 
|capitalized in prior periods under Canadian GAAP (b)       |  | -                   
|Future income taxes relating to deferred                   | 
|exploration costs (a)                                      |  | (1,475,253          
|Amortization of mineral rights (a)                         |  | -                   
|Future income tax relating to the                          | 
|amortization of mineral rights (a)                         |  | -                   
|Foreign exchange gain on future income                     | 
|taxes liability previously expensed                        |  | (1,000              
|Interest expense on long term debt                         | 
|adjusted to fair value (f)                                 |  | (526,154            
|Foreign exchange gain on adjusted                          | 
|long term debt (f)                                         |  | (243,463            
|                                                          
|Net loss for the year based on U.S. GAAP                   |  | $(32,896,225        
|                                                          
|Loss per share, basic and diluted                          |  | $         (0.50     
|                                                          

21

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|15. |  | Differences
between Canadian and U.S. generally accepted accounting principles (continued)
|--- |  | ------------------------------------------------------------------------------------------

|                                         |  |              
|---------------------------------------- |  | -------------
|Shareholders' equity:                    |  |              
|                                        
|                                         |  | July 312005  
|                                        
|                                        
|Shareholders' equity based on            | 
|Canadian GAAP                            |  | $ 189,823,534
|Deferred exploration costs prior to the  | 
|establishment of proven and probable     | 
|mineral reserves (a)                     |  | (49,991,581  
|Future income taxes relating to deferred | 
|exploration costs (a)                    |  | 3,932,570    
|Amortization of mineral rights (a)       |  | (12,749,889  
|Future income taxes relating to the      | 
|amortization of mineral rights (a)       |  | 3,259,142    
|Foreign exchange gain on future income   | 
|taxes liability previously expensed      | 
|with exploration costs (a)               |  | (745,000     
|Adjustment for exploration costs on      | 
|abandoned properties (b)                 |  | 1,258,296    
|Interest expense on long term debt       | 
|adjusted to fair value (f)               |  | (2,194,304   
|Foreign exchange gain on fair value      | 
|adjusted long term debt (f)              |  | (851,459     
|                                        
|Shareholders' equity based on U.S. GAAP  |  | $ 131,741,309
|                                        

Balance sheet differences:

The following material balance sheet
differences exist between Canadian and U.S. GAAP.

1)    
Mineral properties and related deferred costs

|                                              |  |               
|--------------------------------------------- |  | --------------
|                                              |  |               
|                                             
|                                              |  | July 312005   
|                                             
|Canadian GAAP                                 |  | $ 115,997,986 
|Deferred exploration costs                    | 
|prior to the establishment of proven and      | 
|probable mineral reserves (a)                 |  | (49,991,581   
|Amortization of mineral rights (a)            |  | (12,749,889   
|Adjustment for exploration costs on abandoned | 
|properties (b)                                |  | 1,258,296     
|Adjustment for mineral property purchase      | 
|at fair value (f)                             |  | (3,713,090    
|                                             
|U.S. GAAP                                     |  | $   50,801,722
|                                             

22

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|15. |  | Differences
between Canadian and U.S. generally accepted accounting principles (continued)
|--- |  | ------------------------------------------------------------------------------------------

2)     Long term
debt

|                                               |  |            
|---------------------------------------------- |  | -----------
|                                               |  |            
|                                              
|                                               |  | July 312005
|                                              
|Canadian GAAP                                  |  | $ 8,581,300
|Adjustment of long term debt to fair value (f) |  | (3,713,090 
|Interest payable on long term debt             | 
|adjusted to fair value (f)                     |  | 2,194,304  
|Foreign exchange gain on fair value            | 
|adjusted long term debt (f)                    |  | 851,459    
|                                              
|U.S. GAAP                                      |  | $ 7,913,973
|                                              

3)     Future
income taxes

|                                                 |  |            
|------------------------------------------------ |  | -----------
|                                                 |  |            
|                                                
|                                                 |  | July 312005
|                                                
|Canadian GAAP                                    |  | $ 8,121,000
|Future income taxes relating to deferred         | 
|exploration costs (a)                            |  | (3,932,570 
|Future income taxes relating to the amortization | 
|of mineral rights (a)                            |  | (3,259,142 
|Foreign exchange gain on future income tax       | 
|liabilities previously expensed (a)              |  | 745,000    
|                                                
|U.S. GAAP                                        |  | $ 1,674,288
|                                                

23

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|15. |  | Differences
between Canadian and U.S. generally accepted accounting principles (continued)
|--- |  | ------------------------------------------------------------------------------------------

a)    
Mineral properties and related deferred costs

In March 2002, the Emerging Issues
Committee of the CICA issued EIC 126  Accounting by Mining Enterprises for
Exploration Costs which affects mining companies with respect to the deferral of
exploration costs. EIC 126 refers to CICA Handbook Section 3061 Property, Plant and
Equipment, paragraph .21 which states that for a mining property, the cost of the
asset includes exploration costs if the enterprise considers that such costs have the
characteristics of property, plant and equipment. EIC 126 then states that a mining
enterprise that has not established mineral reserves objectively, and therefore does not
have a basis for preparing a projection of the estimated cash flow from the property is
not precluded from considering the exploration costs to have the characteristics of
property, plant and equipment. EIC 126 also sets forth the Committees consensus that
a mining enterprise in the exploration stage is not required to consider the conditions
regarding impairment in determining whether exploration costs may be initially
capitalized. With respect to impairment of capitalized exploration costs, if an enterprise
has not established mineral reserves objectively, and therefore does not have a basis for
preparing a projection of the estimated cash flow from the property it is not obliged to
conclude that capitalized costs have been impaired. However, such an enterprise should
consider the conditions set forth in CICA Handbook Section 3061 in determining whether
subsequent write-down of capitalized exploration costs related to mining properties is
required.

Under Canadian GAAP, the Company
considers that exploration costs have the characteristics of property, plant and equipment
and, accordingly, defers such costs. Furthermore, pursuant to EIC 126, deferred
exploration costs would not automatically be subject to regular assessment of
recoverability, unless certain conditions exist.

Under United States GAAP, exploration
costs are not considered to have the characteristics of property, plant and equipment and
accordingly are expensed prior to the Company determining that proven or provable mineral
reserves exist, after which time all such costs are capitalized. Proven and probable
mineral reserves were determined on January 31, 2005. Exploration costs subsequent to this
date have been capitalized. This is consistent with their treatment under Canadian GAAP.

Prior to May 1, 2004, the Company
considered mineral rights to be intangible assets with finite lives pursuant to FAS 142
and amortized over the estimated useful lives of 6 years. EITF-04-2 concluded that mineral
rights are tangible property and the aggregate carrying amount of the mineral rights
should be reported as a separate component of property, plant and equipment.

b)    
Adjustment for exploration costs on abandoned properties

The Company accounts for mineral
properties and related deferred expenditures as described in item (a). During the years
ended July 31, 2004, 2001 and 2000, $1,063,448, $150,784 and $44,064 respectively was
written-off as the development was not considered economically feasible and therefore
abandoned. Under U.S. GAAP these costs would have been expensed in a prior period. The
write-off of the mineral rights under U.S. GAAP would be included in expenses and the
sub-total loss before write-off would not be permitted.

c)    
Stock-based compensation

Effective August 1, 2003, the Company
accounted for its stock based compensation under US GAAP in accordance with FAS No. 123
(fair value method) for both employees and non-employees.

Under Canadian GAAP, stock options
granted to employees and non-employees prior to August 1, 2002 were accounted for as
capital transactions when the options were exercised. For the year ended July 31,

24

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|15. |  | Differences
between Canadian and U.S. generally accepted accounting principles (continued)
|--- |  | ------------------------------------------------------------------------------------------

2003, under Canadian GAAP, stock
options granted to employees and directors continued to be accounted for as capital
transactions and stock options granted to non-employees were accounted for using the fair
value method. Subsequent to August 1, 2003, under Canadian GAAP, stock options granted to
employees and non-employees were accounted for using the fair value method.

Prior to August 1, 1999, the Company
had issued stock options to non-employees with a total fair value of $180,613 which was
expensed for U.S. GAAP purposes.

d)    
Statements of cash flows

As a result of the treatment of
mining interests under item (a) above, cash expended for exploration costs would be
classified as operating rather than investing, resulting in the following totals.

|                        |  |                     
|----------------------- |  | --------------------
|                        |  |                     
|                       
|                        |  | YearEndedJuly 312005
|                       
|                       
|Cash used in operations |  | $(20,250,044        
|                       
|                       
|                       
|Cash used in investing  |  | $(63,576,357        
|                       

e)     Comprehensive
income

Effective for fiscal years beginning
after December 15, 1997, Statement of Financial Accounting Standards No. 130
Reporting Comprehensive Income (FAS 130), is applicable for US
GAAP purposes. FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose financial
statements. FAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a financial
statement.

f)    
Fair value of long term debt

In consideration for the Soyopa
claims acquired in November, 2001 (Note 6(b)), the Company entered into a non-interest
bearing loan agreement as disclosed in Note 7. Under Canadian GAAP, this loan has been
presented at its face value of US $7,000,000. Under US GAAP, interest must be imputed on
this loan in accordance with APB 21. The reduction in the principal amount of the loan as
a result of imputing a market rate of interest also reduces the carrying values of the
companys mineral properties accordingly.

During the periods subsequent to
November, 2001, the interest imputed on the loan is recorded as a period expense.

---

|16. |  | Financial
instruments
|--- |  | ---------------------

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

25

---

---

Gammon Lake Resources Inc.
Notes to the Consolidated Financial Statements
(Audited)
July 31, 2005

---

|16. |  | Financial
instruments (continued)
|--- |  | ---------------------------------

that arises from fluctuations in
foreign exchange rates and the degree of volatility of these rates. The company does not
enter into derivative financial instruments to mitigate the foreign exchange risks related
to the foregoing items.

The Company estimates that the fair
value of its cash and cash equivalents, receivables, and payables approximate the carrying
value of the assets and liabilities. The Company has calculated the fair value of its long
term debt as disclosed in Note 15.

---

|17. |  | Supplemental
cash flow information
|--- |  | ----------------------------------

|                                    |  |             
|----------------------------------- |  | ------------
|                                    |  |             
|                                    |  | 2005        
|Change in non-cash working capital: | 
|Receivables                         |  | $(2,779,637 
|Prepaids                            |  | (831,027    
|Payables and accruals               |  | (429,499    
|                                    |  |             
|                                   
|                                    |  | $(4,040,163 
|                                    |  |             
|                                   
|Supplemental information            | 
|Interest paid                       |  | $   Nil     
|Income taxes paid                   |  | $   Nil     
|                                   
|Cash and equivalents                | 
|Cash                                |  | $ 13,752,796
|Temporary money market instruments  |  | 21,647,553  
|                                    |  |             
|                                   
|                                    |  | $35,400,349 
|                                    |  |             

Temporary money market instruments
consist of commercial paper with terms of less than 30 days, having rates between
2.46%-2.48%.

---

|18. |  | Comparative
figures
|--- |  | -------------------

Certain of the comparative figures
for 2004 have been reclassified to conform with the financial statement presentation
adopted for 2005.

26