---

Exhibit 99.3



CONSOLIDATEDFINANCIALSTATEMENTS

December 31, 2010 and 2009(in United States Dollars, unless
otherwise stated)

---

|                          | KPMG LLP  |                | 
|------------------------- | --------- | -------------- | 
|Chartered Accountants     | Telephone | (416) 777-8500
|Bay Adelaide Centre       | Fax       | (416) 777-8818
|333 Bay Street Suite 4600 | Internet  | www.kpmg.ca   
|Toronto ON M5H 2S5        |           |               
|Canada                    |           |               

INDEPENDENT AUDITORS REPORT

To the Shareholders of Gammon Gold Inc.

We have audited the accompanying consolidated financial
  statements of Gammon Gold Inc., which comprise the consolidated balance sheets
  as at December 31, 2010 and 2009, the consolidated statements of operations and
  comprehensive (loss)/income, cash flows and shareholders equity the years then
  ended, and notes, comprising a summary of significant accounting policies and
  other explanatory information.

Managements Responsibility for the Consolidated Financial
  Statements

Management is responsible for the preparation and fair
  presentation of these consolidated financial statements in accordance with
  Canadian generally accepted accounting principles, and for such internal control
  as management determines is necessary to enable the preparation of consolidated
  financial statements that are free from material misstatement, whether due to
  fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on these
  consolidated financial statements based on our audits. We conducted our audits
  in accordance with Canadian generally accepted auditing standards and the
  standards of the Public Company Accounting Oversight Board (United States).
  Those standards require that we comply with ethical requirements and plan and
  perform the audit to obtain reasonable assurance about whether the consolidated
  financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
  evidence about the amounts and disclosures in the consolidated financial
  statements. The procedures selected depend on our judgment, including the
  assessment of the risks of material misstatement of the consolidatedfinancial statements, whether due to fraud or error. In making those risk
  assessments, we consider internal control relevant to the entitys preparation
  and fair presentation of the consolidated financial statements in order to
  design audit procedures that are appropriate in the circumstances.An
  audit also includes evaluating the appropriateness of accounting policies used
  and the reasonableness of accounting estimates made by management, as well as
  evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our
  audits is sufficient and appropriate to provide a basis for our audit opinion.

KPMG LLP is a Canadian
  limited liability partnership and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International
    Cooperative(KPMG International), a Swiss
    entity.KPMG Canada provides services to KPMG LLP.

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Page 2

Opinion

In our opinion, the consolidated financial statements present
  fairly, in all material respects, the consolidated financial position of Gammon
  Gold Inc. as at December 31, 2010 and December 31, 2009, and its consolidated
  results of operations and its consolidated cash flows for the years then ended
  in accordance with Canadian generally accepted accounting principles.

Yours very truly,

/s/ KMPG LLPChartered Accountants, Licensed Public Accountants 
  Toronto,
  Canada 
  March 23, 2011

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|                                             
|---------------------------------------------
|CONSOLIDATED BALANCE SHEETS                  
|(in thousands of
      United States Dollars)

|At
      December 31                                                     |   | 2010     |   |   | 2009     |  
|------------------------------------------------------------------------ | - | -------- | - | - | -------- | -
|                                                                         |   |          |   |   |          |  
|                                                                         |   |          |   |   |          |  
|ASSETS                                                                   |   |          |   |   |          |  
|Current                                                                  |   |          |   |   |          |  
|Cash and
      cash equivalents                                          | $ | 113,142  |   | $ | 128,977  |  
|Commodity taxes
      receivable                                         |   | 14,152   |   |   | 10,598   |  
|Trade and
      other receivables                                        |   | 3,773    |   |   | 1,974    |  
|Derivative assets (Note
      20)                                        |   | 1,060    |   |   | -        |  
|Current
      portion of future income tax asset (Note 12)               |   | 2,351    |   |   | 4,210    |  
|Inventories (Note 3)                                                     |   | 75,774   |   |   | 60,485   |  
|Prepaids
      and deposits                                              |   | 2,511    |   |   | 2,680    |  
|                                                                         |   | 212,763  |   |   | 208,924  |  
|                                                                         |   |          |   |   |          |  
|Deposits on property, plant and equipment                                |   | 535      |   |   | 4,861    |  
|Long-term ore in process
      inventory (Note 3)                        |   | 13,205   |   |   | 11,197   |  
|Investments (Note 4)                                                     |   | 20,797   |   |   | -        |  
|Other long-term assets (Note
      5)                                    |   | -        |   |   | 3,847    |  
|Mining interests and property, plant and
      equipment (Notes 5 and 6) |   | 568,635  |   |   | 628,740  |  
|Intangible assets (Note 7)                                               |   | 3,453    |   |   | -        |  
|Goodwill (Note 5)                                                        |   | -        |   |   | 106,799  |  
|                                                                         |   |          |   |   |          |  
|                                                                         | $ | 819,388  |   | $ | 964,368  |  
|                                                                         |   |          |   |   |          |  
|                                                                         |   |          |   |   |          |  
|LIABILITIES                                                              |   |          |   |   |          |  
|Current                                                                  |   |          |   |   |          |  
|Payables
      and accruals                                              | $ | 38,001   |   | $ | 37,019   |  
|Current portion of
      long-term debt and capital leases (Note 8)      |   | 4,373    |   |   | 4,398    |  
|Current
      portion of other long-term obligations (Note 9)            |   | 1,956    |   |   | 763      |  
|Current portion of future
      income tax liability (Note 12)           |   | 8,934    |   |   | -        |  
|                                                                         |   | 53,264   |   |   | 42,180   |  
|                                                                         |   |          |   |   |          |  
|Long-term debt and capital
      leases (Note 8)                         |   | 27,171   |   |   | 32,431   |  
|Other long-term obligations (Note 9)                                     |   | 3,864    |   |   | 5,051    |  
|Asset retirement obligations
      (Note 10)                             |   | 5,643    |   |   | 5,958    |  
|Employee future benefits (Note 11)                                       |   | 1,983    |   |   | 1,635    |  
|Future income tax liability
      (Note 12)                              |   | 60,700   |   |   | 84,776   |  
|                                                                         |   | 152,625  |   |   | 172,031  |  
|SHAREHOLDERS EQUITY (Note
      13)                                     |   |          |   |   |          |  
|Capital stock                                                            |   | 881,973  |   |   | 866,716  |  
|Contributed surplus                                                      |   | 22,365   |   |   | 23,873   |  
|Deficit                                                                  |   | (252,173 | ) |   | (104,686 | )
|Accumulated other
      comprehensive income                             |   | 14,598   |   |   | 6,434    |  
|                                                                         |   | 666,763  |   |   | 792,337  |  
|                                                                         | $ | 819,388  |   | $ | 964,368  |  

---

Commitments and contingencies (Note 14) Subsequent events
(Note 24)

|Signed on behalf of the Board: | "Signed"                      |  | "Signed"              
|------------------------------ | ----------------------------- |  | ----------------------
|                               | *René Marion,
      Director* |  | Ronald Smith, Director

|See accompanying notes to the consolidated financial
      statements. | 1
|---------------------------------------------------------------------- | -

---

|                                                                             
|-----------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
      (LOSS) / INCOME
|(in thousands of
      United States Dollars except per share data)          

|For
      the years ended December 31                        |   | 2010        |   |   | 2009        |  
|------------------------------------------------------------ | - | ----------- | - | - | ----------- | -
|                                                             |   |             |   |   |             |  
|Revenue from mining
      operations                         | $ | 238,266     |   | $ | 206,801     |  
|                                                             |   |             |   |   |             |  
|Expenses                                                     |   |             |   |   |             |  
|Production costs,
      excluding amortization and depletion |   | 90,866      |   |   | 94,599      |  
|Mine
      standby costs (Note 15)                           |   | 9,214       |   |   | 1,905       |  
|Refining costs                                               |   | 1,873       |   |   | 2,855       |  
|General
      and administrative costs                       |   | 27,589      |   |   | 36,575      |  
|Exploration and business
      development                   |   | 1,934       |   |   | 479         |  
|Amortization, depletion and accretion                        |   | 46,527      |   |   | 42,954      |  
|                                                             |   | 178,003     |   |   | 179,367     |  
|                                                             |   |             |   |   |             |  
|Earnings before other items                                  |   | 60,263      |   |   | 27,434      |  
|                                                             |   |             |   |   |             |  
|Impairment charge (Note 5)                                   |   | (221,610    | ) |   | -           |  
|Gain on investments (Note 4)                                 |   | 1,260       |   |   | -           |  
|Loss on disposal of assets                                   |   | (2,582      | ) |   | -           |  
|Interest on long-term debt                                   |   | (3,149      | ) |   | (3,314      | )
|Foreign exchange loss                                        |   | (3,091      | ) |   | (4,896      | )
|Interest and other income                                    |   | 1,693       |   |   | 633         |  
|Other (Note 16)                                              |   | (881        | ) |   | -           |  
|                                                             |   | (228,360    | ) |   | (7,577      | )
|                                                             |   |             |   |   |             |  
|(Loss) / earnings before
      income taxes                  |   | (168,097    | ) |   | 19,857      |  
|                                                             |   |             |   |   |             |  
|Future income tax (recovery)
      / expense (Note 12)       |   | (19,094     | ) |   | 6,611       |  
|Current tax (recovery) / expense                             |   | (1,516      | ) |   | 5,041       |  
|                                                             |   | (20,610     | ) |   | 11,652      |  
|                                                             |   |             |   |   |             |  
|Net (loss) / earnings                                        | $ | (147,487    | ) | $ | 8,205       |  
|                                                             |   |             |   |   |             |  
|Other comprehensive income,
      net of tax of $1,498       |   | 8,164       |   |   | -           |  
|                                                             |   |             |   |   |             |  
|Comprehensive (loss) / income                                | $ | (139,323    | ) | $ | 8,205       |  
|                                                             |   |             |   |   |             |  
|                                                            
|                                                             |   |             |   |   |             |  
|(Loss) / earnings per share
      (Note 17)                  |   |             |   |   |             |  
|Basic                                                        | $ | (1.06       | ) | $ | 0.07        |  
|Diluted                                                      | $ | (1.06       | ) | $ | 0.06        |  
|                                                             |   |             |   |   |             |  
|                                                             |   |             |   |   |             |  
|Weighted average shares outstanding (Note 17)                |   |             |   |   |             |  
|Basic                                                        |   | 138,503,059 |   |   | 125,688,993 |  
|Diluted                                                      |   | 138,503,059 |   |   | 126,592,185 |  

---

|See accompanying notes to the consolidated financial
      statements. | 2
|---------------------------------------------------------------------- | -

---

|                                             
|---------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS        
|(in thousands of
      United States Dollars)

|For
      the years ended December 31                                                     |   | 2010     |   |   | 2009    |  
|----------------------------------------------------------------------------------------- | - | -------- | - | - | ------- | -
|                                                                                          |   |          |   |   |         |  
|OPERATING ACTIVITIES                                                                      |   |          |   |   |         |  
|Net
      (loss) / earnings                                                               | $ | (147,487 | ) | $ | 8,205   |  
|Payment of other
      long-term obligations                                              |   | (792     | ) |   | (727    | )
|Payment
      of employee future benefits                                                 |   | (101     | ) |   | -       |  
|Items not affecting cash
      (Note 18)                                                  |   | 261,105  |   |   | 65,666  |  
|Change in
      non-cash operating working capital (Note 18)                              |   | (15,142  | ) |   | 5,074   |  
|                                                                                          |   | 97,583   |   |   | 78,218  |  
|                                                                                          |   |          |   |   |         |  
|INVESTING ACTIVITIES                                                                      |   |          |   |   |         |  
|Increase
      in deposits on property, plant and equipment                               |   | (423     | ) |   | (601    | )
|Purchase of investments                                                                   |   | (10,775  | ) |   | -       |  
|Expenditures on mining interests, property, plant & equipment
      and intangible assets |   | (107,216 | ) |   | (76,861 | )
|                                                                                          |   | (118,414 | ) |   | (77,462 | )
|                                                                                          |   |          |   |   |         |  
|FINANCING ACTIVITIES                                                                      |   |          |   |   |         |  
|Repayment
      of capital lease obligations                                              |   | (4,351   | ) |   | (7,464  | )
|Proceeds on sale of
      property, plant and equipment                                   |   | -        |   |   | 17,201  |  
|Proceeds
      on long-term debt                                                          |   | -        |   |   | 11,500  |  
|Repayment of long-term
      debt                                                         |   | (57      | ) |   | (22,563 | )
|Financing
      fees on long-term debt                                                    |   | (1,523   | ) |   | (1,200  | )
|Net proceeds from
      issuance of common shares                                         |   | -        |   |   | 108,132 |  
|Proceeds
      from exercise of stock options                                             |   | 8,393    |   |   | 19,357  |  
|                                                                                          |   | 2,462    |   |   | 124,963 |  
|                                                                                          |   |          |   |   |         |  
|Impact of foreign exchange on cash                                                        |   | 2,534    |   |   | -       |  
|                                                                                          |   |          |   |   |         |  
|Net (decrease) / increase in cash and cash
      equivalents                              |   | (15,835  | ) |   | 125,719 |  
|                                                                                          |   |          |   |   |         |  
|Cash and cash equivalents, beginning of year                                              |   | 128,977  |   |   | 3,258   |  
|                                                                                          |   |          |   |   |         |  
|Cash and cash equivalents, end of year                                                    | $ | 113,142  |   | $ | 128,977 |  
|                                                                                          |   |          |   |   |         |  
|                                                                                         
|                                                                                          |   |          |   |   |         |  
|Cash and cash equivalents is comprised of the
      following:                            |   |          |   |   |         |  
|                                                                                          |   |          |   |   |         |  
|Cash                                                                                      | $ | 85,863   |   | $ | 93,249  |  
|Cash
      equivalents                                                                    |   | 27,279   |   |   | 35,728  |  
|                                                                                          | $ | 113,142  |   | $ | 128,977 |  

---

|See accompanying notes to the consolidated financial
      statements. | 3
|---------------------------------------------------------------------- | -

---

|                                               
|-----------------------------------------------
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|(in thousands of
      United States Dollars)  

|For the years
      ended December 31                                                                                               |   | 2010     |   |   | 2009     |  
|----------------------------------------------------------------------------------------------------------------------------------- | - | -------- | - | - | -------- | -
|                                                                                                                                    |   |          |   |   |          |  
|                                                                                                                                    |   |          |   |   |          |  
|Capital stock                                                                                                                       |   |          |   |   |          |  
|Balance, beginning of
      period                                                                                                  | $ | 866,716  |   | $ | 719,426  |  
|Shares issued through
      employee share purchase plan                                                                            |   | 540      |   |   | 92       |  
|Shares issued through
      equity offering                                                                                         |   | -        |   |   | 115,042  |  
|Share issuance costs                                                                                                                |   | -        |   |   | (6,910   | )
|For cash pursuant to
      exercise of stock options                                                                                |   | 8,393    |   |   | 19,357   |  
|Fair value of
      share-based compensation                                                                                        |   | 6,324    |   |   | 19,709   |  
|Balance, end of period                                                                                                              | $ | 881,973  |   | $ | 866,716  |  
|                                                                                                                                    |   |          |   |   |          |  
|                                                                                                                                   
|                                                                                                                                    |   |          |   |   |          |  
|Contributed surplus                                                                                                                 |   |          |   |   |          |  
|Balance, beginning of
      period                                                                                                  | $ | 23,873   |   | $ | 33,288   |  
|Fair value of
      share-based compensation                                                                                        |   | (6,324   | ) |   | (19,709  | )
|Forfeitures of stock
      options                                                                                                  |   | (253     | ) |   | (150     | )
|Share-based
      compensation                                                                                                      |   | 5,069    |   |   | 10,444   |  
|Balance, end of period                                                                                                              | $ | 22,365   |   | $ | 23,873   |  
|                                                                                                                                    |   |          |   |   |          |  
|                                                                                                                                   
|                                                                                                                                    |   |          |   |   |          |  
|Deficit                                                                                                                             |   |          |   |   |          |  
|Balance, beginning of
      period                                                                                                  | $ | (104,686 | ) | $ | (112,891 | )
|Net (loss) / earnings                                                                                                               |   | (147,487 | ) |   | 8,205    |  
|Balance, end of period                                                                                                              | $ | (252,173 | ) | $ | (104,686 | )
|                                                                                                                                    |   |          |   |   |          |  
|                                                                                                                                   
|                                                                                                                                    |   |          |   |   |          |  
|Accumulated other comprehensive income                                                                                              |   |          |   |   |          |  
|Balance, beginning of
      period                                                                                                  | $ | 6,434    |   | $ | 6,434    |  
|Unrealized gain on
      investments, net of tax of $1,340 (Note 4)                                                                 |   | 7,297    |   |   | -        |  
|Change in fair
      value of derivatives designated as
      
                cash flow
      hedges, net of tax of $217 (Note 20) |   | 1,185    |   |   | -        |  
|Reclassification of
      realized gains on cash flow hedges, net of tax of $59 (Note 20)                                           |   | (318     | ) |   | -        |  
|Balance, end of period                                                                                                              | $ | 14,598   |   | $ | 6,434    |  
|                                                                                                                                    |   |          |   |   |          |  
|                                                                                                                                   
|                                                                                                                                    |   |          |   |   |          |  
|Total shareholders equity                                                                                                          | $ | 666,763  |   | $ | 792,337  |  

---

|See accompanying notes to the consolidated financial
      statements. | 4
|---------------------------------------------------------------------- | -

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

1. Nature of operations

Gammon Gold Inc. (the Company) is a publicly traded company
engaged in the mining, development, exploration and acquisition of resource
properties. The Companys common shares are listed on the Toronto Stock Exchange
(TSX: GAM), the New York Stock Exchange (NYSE: GRS) and the Berlin Stock
Exchange (BSX: GL7).

---

2. Summary of significant accounting policies

(a) Basis of presentation

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

(b) Consolidation

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

(c) Foreign currency translation

The functional currency of the Company and its subsidiaries is
the United States dollar (US dollar). Non-US dollar balances are translated
into US dollars as follows: monetary assets and liabilities are translated to US
dollars at the period-end exchange rate; non-monetary assets and liabilities are
translated at the rate prevailing at the time of the transaction; and revenue
and expense transactions are translated using average exchange rates.

Translation gains or losses are recognized in earnings in the
period in which they occur, other than foreign exchange gains and losses from
translating available-for-sale investments in equity securities which are
recognized in other comprehensive income as part of the total change in fair
values of the securities. Unrealized gains and losses due to movements in
exchange rates on cash and cash equivalents balances held in foreign currencies
are shown separately on the Consolidated Statements of Cash Flows.

(d) Use of estimates and measurement uncertainty

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

5

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

(e) Revenue recognition

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

(f) Cash and cash equivalents

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

(g) Inventories

Supplies inventory

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

Ore stockpiles inventory

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

Ore in process inventory

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

Finished goods inventory

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

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

(h) Mining interests and depletion

The carrying value of mining interests represents the
accumulated costs to date related to the acquisition, exploration and
development of the Companys mineral properties. Exploration expenditures
incurred prior to the date of establishing that a property has mineral resources
with the potential of being economically recoverable are expensed. Costs
incurred subsequent to this date are capitalized until such time as the projects
are brought into production or are deemed uneconomic.

Production stage mining interests are amortized over the life
of the mine using the unit-of-production method based on estimated proven and
probable reserves of the mine and the portion of mineralization expected to be
classified as reserves, or on a straight-line basis over the term of the lease.
The Company determines the portion of mineralization expected to be classified
as reserves by considering the degree of confidence in the economic extraction
of the resource, which is affected by long-term metal price assumptions, cut-off
grade assumptions, and drilling results. These assessments are made on a
mine-by-mine basis.

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

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

6

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

(i) Property, plant and equipment and amortization

Property, plant and equipment are recorded at cost.
Amortization is calculated on the straight-line basis over the estimated useful
lives of the assets, which do not exceed the related estimated life of mine, as
follows:

Equipment under capital lease
    4-6 years
    Vehicles
    4 yearsHeavy equipment
    4-9 years
    Buildings
    9 yearsOther equipment
    6-9 years
    Office equipment
    3-9 yearsProcessing plant
    6-9 years
    Leasehold improvements
    3 years


(j) Intangible assets

Amounts paid for the acquisition of identifiable intangible
assets are recorded at cost less accumulated amortization and any impairment in
value. Identifiable intangible assets with a finite useful life are amortized on
a straight-line basis over their expected useful life, unless another method
represents a more accurate allocation of the expense over its useful life. The
Company has no identifiable intangible assets for which the expected useful life
is indefinite.

(k) Impairment of long-lived assets

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

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

(l) Goodwill and goodwill impairment

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

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

During 2010, the Company recorded an impairment charge on the
El Cubo mine, resulting in a goodwill balance of $Nil (see Note 5).

(m) Asset retirement obligations

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

7

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

(n) Share-based compensation

The Company uses the fair value method of accounting for
employee share-based compensation and other share-based payments made in
exchange for goods and services. Under this method, the Company recognizes a
compensation expense for all awards made to employees, based on the fair value
of the options or units on the date of grant, which is determined by using a
valuation model. The fair value of employee options is estimated on the date of
grant using an option pricing model and is expensed over the vesting period of
the options. The fair value of options granted to non-employees is re-measured
at the earlier of each financial reporting or vesting date, and any adjustment
is charged or credited to income upon re-measurement. The fair value of the
Companys equity-based share units is determined based on the market value of
the Companys shares on the date of the grant, and is expensed over the vesting
period. Upon the exercise or settlement of stock options and units,
consideration received, together with amounts previously recorded in contributed
surplus, are recorded as an increase in share capital.

The Company also maintains an employee share purchase plan.
Under this plan, contributions by the Companys employees are matched to a
specific percentage by the Company and are recognized as an expense when the
Companys obligation to contribute arises.

(o) Income taxes

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

(p) (Loss) / earnings per common share

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

(q) Employee future benefits

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

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

8

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

(r) Financial instruments

Financial instruments are measured at fair value on initial
recognition of the instrument. Measurement in subsequent periods depends on
whether the financial instrument has been classified as held-for-trading,
available for sale, held-to-maturity, loans and receivables, or
other financial liabilities. The Companys financial instruments are
classified as follows:

Asset / Liability
    
    Classification
    
    MeasurementCash and cash equivalents
    
    Held-for-trading
    
    Fair valueReceivables
    
    Loans and receivables
    
    Amortized costCurrency forwards
    
    Held-for-trading
    
    Fair valueWarrants
    
    Held-for-trading
    
    Fair valueInvestments
    
    Available-for-sale
    
    Fair valuePayables and accruals and other long-term obligations
    
    Other financial liabilities
    
    Amortized costLong-term debt and capital leases
    
    Other financial liabilities
    
    Amortized cost


Financial assets and financial liabilities classified as
held-for-trading are measured at fair value with changes in those fair
values recognized in net earnings. Financial assets classified as available
for sale are measured at fair value, with changes in those fair values
recognized in other comprehensive income.

Warrants to purchase equity securities of other companies are
classified as held-for-trading and measured at fair value using the
Black-Scholes pricing model. Unrealized gains or losses related to changes in
fair value are reported under Gain on investments in the Consolidated
Statements of Operations.

Investments in equity securities designated as
available-for-sale are accounted for at their fair value, which is determined
based on the last quoted market price. Changes in market value as well as the
related foreign exchange and tax impact, if any, are accounted for in other
comprehensive income until the equity securities are sold or are determined to
be other than temporarily impaired. When equity securities are sold or are
determined to be other than temporarily impaired, the related accumulated change
in other comprehensive income is reversed and the actual gain or loss on
disposal, or the impairment charge, is recognized in net earnings.

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

Transaction costs other than those related to financial
instruments classified as held-for-trading, which are expensed as incurred, are
combined with the fair value of the financial asset or financial liability on
initial recognition and amortized using the effective interest rate method. If
future modifications are made to a financial asset or liability that are not
considered to be substantial, the transaction costs related to this modification
are combined with the carrying amount, and amortized over the life of the
instrument using the effective interest rate method.

All derivative instruments, including embedded derivatives, are
recorded on the balance sheet at fair value unless exempted from derivative
treatment as a normal purchase and sale. All changes in fair value are recorded
in earnings unless they are designated in a valid hedging relationship (Note
2(s)), in which case the changes in fair value are recorded in other
comprehensive income. There were no embedded derivatives for the years ended
December 31, 2010 and 2009.

(s) Hedges

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

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

9

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

(t) Other long-term assets

Included in other long-term assets were the costs of an
eight-year consultancy agreement with a third party, whereby the Company
received assistance with strategic planning, business development, procurement
and authorization of land, employer-employee relations, community and government
relations, and environmental relations. This asset was determined to be impaired
in 2010 (see Note 5). See Note 9 for further details on the related
obligation.

(u) International Financial Reporting Standards
(IFRS)

The Canadian Accounting Standards Board confirmed that January
1, 2011 is the changeover date for publicly accountable enterprises to use IFRS.
This transition date will require the restatement of amounts reported by the
Company for the year ended December 31, 2010, in order to provide comparative
information under IFRS for 2011 interim and annual reports. The Company will
prepare its first consolidated financial statements in accordance with IFRS for
the quarter ending March 31, 2011.

---

3. Inventories

|                                         |   | December 31 |   |   | December 31 |  
|---------------------------------------- | - | ----------- | - | - | ----------- | -
|                                         |   | 2010        |   |   | 2009        |  
|Supplies                                 | $ | 21,563      |   | $ | 15,847      |  
|Ore stockpiles                           |   | 499         |   |   | 627         |  
|Ore in process                           |   | 65,675      |   |   | 53,199      |  
|Finished goods                           |   | 1,242       |   |   | 2,009       |  
|                                         |   | 88,979      |   |   | 71,682      |  
|Less: Long-term ore in process inventory |   | (13,205     | ) |   | (11,197     | )
|                                         | $ | 75,774      |   | $ | 60,485      |  

During the year ended December 31, 2010, the Company recognized
$555 (December 31, 2009  $1,791) of inventory net realizable valuation
adjustments as an expense. As a result of the increase in expected future
commodity prices during the year to date, the Company recognized net overall net
realizable value adjustment reversals during the year, which had the effect of
decreasing expenses by $412 (December 31, 2009 - $428), resulting in an overall
net realizable value adjustment expense of $143 for the year ended December 31,
2010 (December 31, 2009 - $1,363).

---

4. Investments

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 $8,000
(USD $7,634). 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, each for a period of eighteen months following
the closing date of the transaction.

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 $3,200 (USD $3,037). 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.

10

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

Investments in equity securities are classified as
available-for-sale because the Company does not hold these securities for the
purpose of trading for a profit. Warrants held by the Company are for long-term
investment purposes, however, due to their nature, meet the definition of a
derivative and are classified as held-for-trading financial assets.

|                              |   |             |  |   |                  |  |   |                   |  |   | Year ended       | 
|----------------------------- | - | ----------- |  | - | ---------------- |  | - | ----------------- |  | - | ---------------- | 
|                              |   |             |  |   |                  |  |   | December 31, 2010 | 
|                              |   |             |  |   |                  |  |   | Unrealized        |  |   | Unrealized       | 
|                              |   | December 31 |  |   | December 31      |  |   | gains / (losses)  |  |   | gains / (losses) | 
|                              |   | 2010        |  |   | 2010             |  |   | included in       |  |   | included in      | 
|                              |   | Cost        |  |   | Fair
      value |  |   | OCI               |  |   | earnings         | 
|Available-for-sale securities | $ | 8,656       |  | $ | 17,293           |  | $ | 8,637             |  | $ | -                | 
|Held-for-trading warrants     |   | 2,119       |  |   | 3,504            |  |   | -                 |  |   | 1,260            | 
|                              | $ | 10,775      |  | $ | 20,797           |  | $ | 8,637             |  | $ | 1,260            | 

---

5. Impairment charge

The Company suspended operations on June 17, 2010 at the El
Cubo mine, located in Guanajuato State, Mexico, due to continued labour
disruption by the unionized workforce and rising operating costs associated with
the failure of the unionized workforce to achieve expected productivity
levels.

This was considered a triggering event for the purpose of
assessing whether the carrying value of the El Cubo mines long-lived assets and
goodwill were impaired. As a result, the Company conducted a long-lived asset
impairment test whereby the carrying value of the El Cubo reporting unit was
compared to its fair value. Net estimated cash flows from the El Cubo mine were
calculated, on an undiscounted basis, using managements best estimates of
future gold and silver production, long-term gold and silver prices of $863.00 
$1,115.00 and $14.00  $18.65 respectively, and increased cost estimates based
on revised operating levels, under the assumption of operations resuming in a
future period. The fair value was calculated by discounting the estimated future
net cash flows using a 10% interest rate, commensurate with the risk profile.
Managements estimate of future cash flows is subject to risks and
uncertainties, and therefore further impairments could occur.

Based on the results of the impairment test, the Company
recorded an impairment charge of $221,610 in 2010. This charge consisted of a
reduction of goodwill of $106,799, a reduction in other long-term assets of
$4,413, and a reduction in mining interests, property, plant and equipment of
$110,398. The related income tax impact was a future tax recovery of $28,309 and
a reduction in future income tax liabilities of $27,775.

---

11

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

6. Mining interests and property, plant and
equipment

|                                     |   |         |  |   | December 31, 2010  |  |   |          |  |   | December 31, 2009 | 
|------------------------------------ | - | ------- |  | - | ------------------ |  | - | -------- |  | - | ----------------- | 
|                                     |   |         |  |   | Accumulated        |  |   |          |  |   |                   | 
|                                     |   |         |  |   | Amortization       |  |   | Net Book |  |   |                   | 
|                                     |   | Cost    |  |   | &
      Impairment |  |   | Value    |  |   | Cost              | 
|Mining interests:                    |   |         |  |   |                    |  |   |          |  |   |                   | 
|Producing properties                 | $ | 494,410 |  | $ | 201,737            |  | $ | 292,673  |  | $ | 386,394           | 
|Exploration properties               |   | 94,606  |  |   | -                  |  |   | 94,606   |  |   | 126,517           | 
|                                     |   | 589,016 |  |   | 201,737            |  |   | 387,279  |  |   | 512,911           | 
|Property, plant and
      equipment: |   |         |  |   |                    |  |   |          |  |   |                   | 
|Processing plant                     |   | 112,632 |  |   | 49,277             |  |   | 63,355   |  |   | 101,662           | 
|Heavy equipment                      |   | 68,874  |  |   | 33,184             |  |   | 35,690   |  |   | 54,318            | 
|Other equipment                      |   | 37,710  |  |   | 8,373              |  |   | 29,337   |  |   | 50,957            | 
|Buildings                            |   | 23,092  |  |   | 8,268              |  |   | 14,824   |  |   | 22,120            | 
|Land                                 |   | 11,484  |  |   | 2,967              |  |   | 8,517    |  |   | 2,230             | 
|Office equipment                     |   | 7,626   |  |   | 5,768              |  |   | 1,858    |  |   | 6,469             | 
|Vehicles                             |   | 4,313   |  |   | 3,433              |  |   | 880      |  |   | 3,404             | 
|Equipment under capital lease        |   | 24,431  |  |   | 6,819              |  |   | 17,612   |  |   | 22,591            | 
|Major spare parts                    |   | 6,138   |  |   | 641                |  |   | 5,497    |  |   | 13,185            | 
|Construction in progress             |   | 3,786   |  |   | -                  |  |   | 3,786    |  |   | 3,176             | 
|                                     |   | 300,086 |  |   | 118,730            |  |   | 181,356  |  |   | 280,112           | 
|Total                                | $ | 889,102 |  | $ | 320,467            |  | $ | 568,635  |  | $ | 793,023           | 

Included in accumulated amortization as at December 31, 2010
are impairment charges related to the El Cubo mine closure for mining interests
and property, plant and equipment of $101,688 and $8,710 respectively.

Certain El Cubo mining interests and items of property, plant
and equipment have not been amortized subsequent to the suspension of operations
in June 2010. The net book value of mining interests and property, plant and
equipment not being amortized is $48,761 and $6,713 respectively.

The following summarizes the movements in capitalized stripping
costs, which are included in producing properties above:

|                            |   | December 31 |   |   | December 31 |  
|--------------------------- | - | ----------- | - | - | ----------- | -
|                            |   | 2010        |   |   | 2009        |  
|Balance, beginning of year  | $ | 29,309      |   | $ | 7,352       |  
|Stripping costs capitalized |   | 27,215      |   |   | 22,614      |  
|Depletion                   |   | (5,772      | ) |   | (657        | )
|Balance, end of year        | $ | 50,752      |   | $ | 29,309      |  

The Company capitalizes interest attributable to the
acquisition or construction of qualifying assets. During the year, $102 of
interest associated with capital projects was capitalized (2009 - $434).

---

7. Intangible assets

During the year, the Company recorded an intangible asset with
a cost of $4,038 relating to the right to use the capacity of the power line
connecting the Ocampo mine to the Mexican national electricity grid. This
intangible asset has a remaining life of 9 years, and will be amortized on a
straight-line basis over this period. During 2010, the Company recognized $585
in amortization expense which resulted in an ending net book value of $3,453.
Subsequent to 2010, the estimated amortization expense for this asset is $384
per year.

---

12

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

8. Long-term debt and capital leases

|                                                                 |                              |       | December 31 |  |       | December 31 | 
|---------------------------------------------------------------- | ---------------------------- | ----- | ----------- |  | ----- | ----------- | 
|                                                                 |                              |       | 2010        |  |       | 2009        | 
|(a)                                                              | Revolving credit facility    | $     | 24,356      |  | $     | 25,242      | 
|(b)                                                              | Capital leases for equipment |       | 7,188       |  |       | 11,539      | 
|(c)                                                              | Other long-term debt         |       | -           |  |       | 48          | 
|                                                                 |                              |       | 31,544      |  |       | 36,829      | 
|Less: Current portion of long-term
      debt and capital leases |                              | 4,373 |             |  | 4,398 |            
|                                                                 |                              |       |             |  |       |             | 
|                                                                 |                              | $     | 27,171      |  | $     | 32,431      | 

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

2011
    $
    4,3732012
    $
    2,8152013
    $
    26,380


|(a) | On November 4, 2010, the Companys credit facility was
      expanded to a $75,000 revolving line of credit with the Bank of Nova
      Scotia and Société Générale, with the exposure divided equally between the
      two lenders. This line of credit can be increased to $100,000 upon the
      completion of the acquisition of Capital Gold Corporation, subject to
      satisfactory due diligence by the lenders on Capital Gold. The facility
      matures on November 4, 2013 and may be extended upon mutual agreement by
      all parties. No payments under the facility are due until the maturity
      date. Interest is payable at LIBOR + 3.25% to 3.75% depending on the
      leverage ratio of the Company. At December 31, 2010, the interest rate
      payable on amounts outstanding under the credit facility was
  3.5%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The credit facility contains various covenants that
      include an interest coverage ratio of at least 3:1, a leverage ratio of no
      more than 3:1, a tangible net worth of at least $507,750 plus 50% of
      positive net income earned and 50% of equity proceeds for each quarter
      subsequent to September 30, 2010, and proven and probable reserves cannot
      be less than 2,000,000 ounces. The facility is secured by a first-ranking
      lien on all present and future assets, property and undertaking of the
      Company. The Company is in compliance with all covenants at December 31,
      2010.                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | As at December 31, 2010, the Company had drawn $26,380
      under the revolving facility and had issued a $1,000 letter of credit
      against the facility. The Company has included financing fees of $2,024
      and $1,138 in the carrying amount of the credit facility at December 31,
      2010 and 2009, respectively. These amounts are amortized into net earnings
      on a straight-line basis over the term to maturity.                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(b) | The Company is obligated under various capital leases for
      equipment, all of which expire by the end of 2012. All capital lease
      agreements provide that the Company can purchase the leased equipment at
      the end of the lease term for a nominal amount. Interest payable on the
      various leases range from a fixed rate of 7.38% to 11.05%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(c) | The Company was obligated under certain other agreements,
      which matured in 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

---

9. Other long-term obligations

Other long-term obligations includes deferred gains from
sale-leaseback transactions, obligations arising from the Companys long-term
incentive plan, and the obligation associated with an eight-year consultancy
agreement. The consultancy agreement obligation is non-interest bearing, and has
been recorded at fair value using a discount rate of 7%. As of December 31,
2010, the total balance outstanding was $4,057 (current portion - $800).

The Company provides long-term incentive retention awards to
certain employees. Under the plan, employees can earn an increasing percentage
of their salary over a three-year period. At the end of the third year, the
employee can request that the amount earned be paid out in cash. Alternatively,
the employee may choose to remain in the plan for an additional four year period
and earn an award at the year three percentage. As of December 31, 2010, the
total balance outstanding was $1,394 (current portion - $1,156).

---

13

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

10. Asset retirement obligations

The Companys asset retirement obligations consist of
reclamation costs for the Ocampo and El Cubo mines. The present value of the
obligation is currently estimated at $5,643 (2009  $5,958), reflecting payments
that are expected to commence in 9 years. Significant reclamation activities
include land rehabilitation, demolition of buildings and mine facilities,
ongoing care and maintenance and other costs.

The undiscounted value of the reclamation costs liability is
$11,462 (2009  $11,847). The credit adjusted risk-free rate used in estimating
the obligation is 8.25% (2009  8%), and the inflation rate used is 3.5% (2009 
5.0%) . Changes to the reclamation and closure cost obligation balance during
the year were as follows:

|                                                      |   | December 31 |   |   | December 31 | 
|----------------------------------------------------- | - | ----------- | - | - | ----------- | 
|                                                      |   | 2010        |   |   | 2009        | 
|Asset retirement obligations, beginning of
      year | $ | 5,958       |   | $ | 3,622       | 
|Foreign exchange adjustment                           |   | 359         |   |   | 284         | 
|Obligations incurred                                  |   | 413         |   |   | 33          | 
|Accretion expense                                     |   | 493         |   |   | 316         | 
|Revisions in estimates                                |   | (1,580      | ) |   | 1,703       | 
|                                                      |   |             |   |   |             | 
|Asset retirement obligations, end of year             | $ | 5,643       |   | $ | 5,958       | 

---

11. Employee future benefits

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

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

As described in Note 5, the Company suspended operations at the
El Cubo mine in June of 2010. Subsequent to the suspension of operations at the
mine, certain employees were severed and will be paid statutorily mandated
severance benefits, along with any applicable seniority premium benefit,
resulting in the recognition of a settlement loss during the year. In addition,
as a consequence of their termination, these employees were no longer entitled
to certain future retirement benefits which resulted in the recognition of a
curtailment gain. The sequence in which the curtailment gain and settlement loss
were recognized did not have a material impact on the net expense for the
year.

All plans are unfunded. An actuarial valuation was performed
for all plans as at December 31, 2010.

14

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

Information about the Companys benefit plans, in aggregate, is
as follows:

|                                     |   | December 31 |   |   | December 31 |  
|------------------------------------ | - | ----------- | - | - | ----------- | -
|                                     |   | 2010        |   |   | 2009        |  
|Accrued benefit obligation:          |   |             |   |   |             |  
|Balance,
      beginning of year     | $ | 3,412       |   | $ | 2,331       |  
|Foreign exchange
      adjustment    |   | 216         |   |   | 132         |  
|Service
      cost                   |   | 462         |   |   | 328         |  
|Interest cost                        |   | 296         |   |   | 190         |  
|Benefits
      paid                  |   | (90         | ) |   | (569        | )
|Early settlements                    |   | (821        | ) |   | -           |  
|Curtailments                         |   | (1,240      | ) |   | (102        | )
|Actuarial loss                       |   | 2,018       |   |   | 1,102       |  
|Deficit                              |   | 4,253       |   |   | 3,412       |  
|Unamortized past service
      costs |   | (211        | ) |   | (430        | )
|Unamortized actuarial gain           |   | (2,059      | ) |   | (1,347      | )
|Accrued benefit liability            | $ | 1,983       |   | $ | 1,635       |  

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

|                                    |   | December 31 |   |   | December 31 |  
|----------------------------------- | - | ----------- | - | - | ----------- | -
|                                    |   | 2010        |   |   | 2009        |  
|Service
      cost                  | $ | 462         |   | $ | 328         |  
|Interest cost                       |   | 296         |   |   | 190         |  
|Actuarial
      loss                |   | 39          |   |   | 13          |  
|Curtailment gain                    |   | (854        | ) |   | (102        | )
|Settlement loss                     |   | 1,173       |   |   | -           |  
|Past service costs                  |   | 22          |   |   | 24          |  
|Net expense for the year            | $ | 1,138       |   | $ | 453         |  
|                                    |   |             |   |   |             |  
|Significant assumptions used:       |   |             |   |   |             |  
|Discount rate                       |   | 8.25%       |   |   | 9.00%       |  
|Rate of
      compensation increase |   | 5.56%       |   |   | 5.56%       |  

---

12. Income taxes

The following table reconciles the expected income tax payable
/ (recovery) at the statutory income tax rate to the amounts recognized in the
consolidated statements of operations for the years ended December 31, 2010 and
2009.

|                                                         |   | December 31 |   |   | December 31 |  
|-------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                         |   | 2010        |   |   | 2009        |  
|(Loss) / earnings before
      income taxes              | $ | (168,097    | ) | $ | 19,857      |  
|Income tax rate                                          |   | 34.00%      |   |   | 35.00%      |  
|                                                         |   |             |   |   |             |  
|Expected income tax expense based on above
      rates   |   | (57,153     | ) |   | 6,950       |  
|Effect of lower tax rates in
      foreign jurisdictions |   | 9,814       |   |   | (1,752      | )
|Effect of non-deductible goodwill impairment             |   | 30,428      |   |   | -           |  
|Non-deductible stock option
      expense                |   | 1,811       |   |   | 2,351       |  
|Permanent differences                                    |   | 2,420       |   |   | 4,550       |  
|Change in Mexican statutory
      income tax regime      |   | -           |   |   | 718         |  
|Valuation allowance                                      |   | (7,930      | ) |   | (1,165      | )
|Provision for income taxes                               | $ | (20,610     | ) | $ | 11,652      |  

15

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

The following reflects future income tax liabilities at
December 31, 2010 and 2009:

|                                                                    |   | December 31 |   |   | December 31 |  
|------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                                    |   | 2010        |   |   | 2009        |  
|Accounting value of mineral properties in
      excess of tax value | $ | 62,290      |   | $ | 85,932      |  
|Accounting value of inventories in excess of tax value              |   | 19,648      |   |   | 15,364      |  
|Deductible share issue costs                                        |   | (1,912      | ) |   | (2,865      | )
|Unrealized foreign exchange (losses) / gains                        |   | (3,206      | ) |   | (2,608      | )
|Other                                                               |   | (5,465      | ) |   | (3,254      | )
|Non-capital losses carried forward                                  |   | (42,392     | ) |   | (58,253     | )
|                                                                    |   | 28,963      |   |   | 34,316      |  
|Valuation allowance                                                 |   | 38,320      |   |   | 46,250      |  
|Future income tax liabilities recognized                            | $ | 67,283      |   | $ | 80,566      |  
|                                                                    |   |             |   |   |             |  
|Current portion of future income tax asset                          | $ | (2,351      | ) | $ | (4,210      | )
|Current portion of future income tax liability                      |   | 8,934       |   |   | -           |  
|Future income tax liability                                         |   | 60,700      |   |   | 84,776      |  
|Net future income tax liability recognized                          | $ | 67,283      |   | $ | 80,566      |  

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

|     |   | Canada |  |   | Mexico |  |   | Total   | 
|---- | - | ------ |  | - | ------ |  | - | ------- | 
|2012 |   | -      |  |   | 2,711  |  |   | 2,711   | 
|2013 |   | 5,469  |  |   | 2,011  |  |   | 7,480   | 
|2014 |   | 6,171  |  |   | 1,911  |  |   | 8,082   | 
|2015 |   | 4,111  |  |   | 507    |  |   | 4,618   | 
|2016 |   | -      |  |   | 1,283  |  |   | 1,283   | 
|2017 |   | -      |  |   | 15,473 |  |   | 15,473  | 
|2018 |   | -      |  |   | 16,684 |  |   | 16,684  | 
|2020 |   | -      |  |   | 8,058  |  |   | 8,058   | 
|2025 |   | 1,595  |  |   | -      |  |   | 1,595   | 
|2026 |   | 6,754  |  |   | -      |  |   | 6,754   | 
|2027 |   | 18,651 |  |   | -      |  |   | 18,651  | 
|2028 |   | 4,014  |  |   | -      |  |   | 4,014   | 
|2029 |   | 29,405 |  |   | -      |  |   | 29,405  | 
|2030 |   | 10,931 |  |   | -      |  |   | 10,931  | 
|     | $ | 87,101 |  | $ | 48,638 |  | $ | 135,739 | 

---

13. Shareholders equity

(a) Capital stock

Authorized:

Unlimited number of common shares.

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

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

16

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

Issued and outstanding:

|                                                                    |  | Number of     |  |   | Ascribed | 
|------------------------------------------------------------------- |  | ------------- |  | - | -------- | 
|                                                                    |  | Common Shares |  |   | Value    | 
|Balance, December 31, 2008                                          |  | 120,040,768   |  | $ | 719,426  | 
|                                                                    |  |               |  |   |          | 
|For cash pursuant to exercise of share
      purchase options       |  | 3,785,460     |  |   | 19,357   | 
|Fair value of options exercised                                     |  | -             |  |   | 16,000   | 
|Fair value of shares issued                                         |  | 594,022       |  |   | 3,709    | 
|Shares issued through equity offering (net of issuance
      costs) |  | 12,926,000    |  |   | 108,132  | 
|Shares issued through employee share
      purchase plan            |  | 11,302        |  |   | 92       | 
|                                                                    |  |               |  |   |          | 
|Balance, December 31, 2009                                          |  | 137,357,552   |  | $ | 866,716  | 
|For cash pursuant to exercise of share
      purchase options       |  | 1,432,940     |  |   | 8,393    | 
|Fair value of options exercised                                     |  | -             |  |   | 6,324    | 
|Shares issued through employee share
      purchase plan            |  | 73,823        |  |   | 540      | 
|                                                                    |  |               |  |   |          | 
|Balance, December 31, 2010                                          |  | 138,864,315   |  | $ | 881,973  | 

(b) Stock options (in Canadian dollars)

The Company has a stock option plan under which options to
purchase common shares of the Company may be granted to directors, senior
officers, employees and service providers of the Company. The aggregate number
of common shares that may be reserved for issuance under the plan is 26,000,000.
The maximum number of common shares that may be reserved for issuance to any one
person under the plan is 5% of the shares outstanding at the time of grant (on a
non-diluted basis), less the aggregate number of shares reserved for issuance to
such person under any other option to purchase shares from treasury granted as a
compensation or incentive mechanism. Stock options are generally exercisable for
a maximum period of five to seven years from the grant date, and have vesting
periods as determined by the Companys Board of Directors.

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

|                                             |   | December 31 |  |   | December 31 | 
|-------------------------------------------- | - | ----------- |  | - | ----------- | 
|                                             |   | 2010        |  |   | 2009        | 
|Dividend yield                               |   | 0%          |  |   | 0%          | 
|Expected volatility                          |   | 63.05%      |  |   | 64.26%      | 
|Risk free interest rate                      |   | 2.97%       |  |   | 2.28%       | 
|Expected life                                |   | 7.00 years  |  |   | 6.93 years  | 
|Weighted average grant date
      fair value | $ | 5.50        |  | $ | 5.43        | 

|                                       |  | December 31, 2010 |   |   | December 31, 2009 | 
|-------------------------------------- |  | ----------------- | - | - | ----------------- | 
|                                       |  |                   |   |   | Weighted          | 
|                                       |  | Shares            |   |   | Average Price     | 
|Outstanding, beginning of
      year   |  | 5,315,300         |   | $ | 8.91              | 
|Granted                                |  | 1,513,500         |   | $ | 8.94              | 
|Expired / forfeited                    |  | (970,500          | ) | $ | 10.14             | 
|Exercised                              |  | (1,432,940        | ) | $ | 6.19              | 
|Outstanding, end of year               |  | 4,425,360         |   | $ | 9.53              | 
|Options exercisable, end of
      year |  | 2,026,610         |   | $ | 10.83             | 

17

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

During the year ended December 31, 2010, employees,
consultants, officers and directors of the Company exercised 1,432,940 (2009
3,785,460) options for total proceeds of $8,864 (2009 - $22,856). Set forth
below is a summary of the outstanding options to purchase common shares as at
December 31, 2010:

|  |               |  |             |  |   |                  |  |  | Options outstanding |  |  |             |  |   | Options exercisable | 
|- | ------------- |  | ----------- |  | - | ---------------- |  |  | ------------------- |  |  | ----------- |  | - | ------------------- | 
|  |               |  | Number      |  |   | Weighted average |  |  | Average life        |  |  | Number      |  |   | Weighted average    | 
|  | Option Price  |  | outstanding |  |   | exercise price   |  |  | remaining (yrs)     |  |  | exercisable |  |   | exercise price      | 
|$ | 6.01 - 6.50   |  | 412,500     |  | $ | 6.33             |  |  | 3.91                |  |  | 45,000      |  | $ | 6.24                | 
|$ | 6.51 - 7.00   |  | 875,000     |  | $ | 6.84             |  |  | 5.19                |  |  | 490,500     |  | $ | 6.85                | 
|$ | 7.01 - 7.50   |  | 210,000     |  | $ | 7.39             |  |  | 6.40                |  |  | -           |  | $ | -                   | 
|$ | 7.51 - 9.00   |  | 720,000     |  | $ | 8.03             |  |  | 5.48                |  |  | 100,000     |  | $ | 8.26                | 
|$ | 9.01 - 9.50   |  | 527,000     |  | $ | 9.41             |  |  | 1.82                |  |  | 394,750     |  | $ | 9.41                | 
|$ | 9.51 - 10.00  |  | 488,250     |  | $ | 9.92             |  |  | 3.85                |  |  | 274,750     |  | $ | 9.92                | 
|$ | 10.01 - 10.50 |  | 62,500      |  | $ | 10.49            |  |  | 0.41                |  |  | 62,500      |  | $ | 10.49               | 
|$ | 10.51 - 11.00 |  | 235,777     |  | $ | 10.64            |  |  | 1.02                |  |  | 218,277     |  | $ | 10.64               | 
|$ | 11.01 - 16.00 |  | 561,000     |  | $ | 11.57            |  |  | 4.91                |  |  | 107,500     |  | $ | 11.98               | 
|$ | 16.01 - 21.00 |  | 333,333     |  | $ | 20.35            |  |  | 1.25                |  |  | 333,333     |  | $ | 20.35               | 
|  | Total         |  | 4,425,360   |  | $ | 9.53             |  |  |                     |  |  | 2,026,610   |  | $ | 10.83               | 

(c) Employee share purchase plan

The Company has an Employee Share Purchase Plan which enables
employees to purchase Company shares through payroll deduction. Employees can
contribute up to 10% of their annual base salary, and the Company will match 75%
of the employees contributions. The common shares are issued based on the
volume weighted average closing price of the last five days prior to the end of
the quarter. During the year, the Company contributed $257 to this plan (2009 -
$81).

(d) Deferred share unit plan

Effective July 1, 2010, the Company established a Deferred
Share Unit (DSU) plan which provides an alternative form of compensation for
Senior Officers and members of the Companys Board of Directors. Each unit
entitles the participant to receive one common share of the Company from
treasury upon redemption. DSUs are measured on the grant date using the
Companys volume-weighted average closing share price for the five days
immediately preceding the grant date. A total of 197,864 DSUs with a grant date
fair value of $1,391 were granted and vested during the year (2009  nil), and
remained outstanding at December 31, 2010.

---

14. Commitments and contingencies

Option and joint venture agreements

(a) Compania Minera Global, S.A. de C.V. (Global)

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

18

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

(b) Compania Minera Las Torres, S.A. de C.V. (Las
Torres)

On September 7, 2004, a subsidiary of the Company entered into
a mining lease agreement with Las Torres to acquire the right to explore,
develop and mine the Las Torres Gold-Silver property located in Guanajuato
State, Mexico for a five year period. On September 4, 2009, the Company
negotiated an extension of this agreement for an additional three year period.
Under the terms of the agreement, the annual rent payments total $720 per year.
In addition, the Company is required to pay a 3.5% net smelter return on all
gold and silver sales equal to or above $350.00 per gold ounce and $5.50 per
silver ounce, with a minimum annual royalty of $240. The royalty decreases to a
3.0% net smelter return for sales of gold and silver at or below $300.00 per
gold ounce and $5.00 per silver ounce.

In addition, the Company is required to pay $20.00 per gold
equivalent ounce for each ounce processed at the Las Torres mill from existing
El Cubo claims. This payment, combined with the annual rent and minimum royalty
payment discussed above must total a minimum of $2,000 per year. In connection
with the agreement, the Company has issued a letter of credit in the amount of
$1,000 to Las Torres.

This lease agreement was suspended in accordance with the force
majeure clause that was triggered by the labour disruption and subsequent
suspension of operations at the El Cubo mine. Therefore, the Company does not
have obligations related to this contract as of December 31, 2010.

Other contingencies

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

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

Other commitments

At December 31, 2010, the Company has purchase commitments in
the amount of approximately $1.3 million (2009 - $0.9 million) related to
acquisitions of equipment.

---

15. Mine standby costs

During the last seven months of 2010, the Companys operations
at the El Cubo mine were suspended due to a labour dispute initiated by the
unionized workers employed at the mine. The Company incurred $9,214 of mine
standby costs over this period.

For seven weeks during the second quarter of 2009, the
Companys operations at the El Cubo mine were suspended due to a strike
initiated by the unionized workers employed at the mine. The Company incurred
$1,905 of mine standby costs over this period.

---

16. Other expense

During the year, the Company determined that an $881 receivable
balance was uncollectible. This receivable was originally recorded upon the
acquisition of Mexgold Resources Inc. in 2006.

---

17. (Loss) / earnings per share

Basic (loss) / earnings per share is calculated based on the
weighted average number of common shares and common share equivalents
outstanding during the year ended December 31, 2010 of 138,503,059 (December 31,
2009  125,688,993). Diluted earnings per share is based on the assumption that
options under the stock option plan that have an exercise price less than the
average market price of the Companys common shares during the period have been
exercised on the later of the beginning of the period and the date granted. As
of December 31, 2010, 4,425,360 stock options (December 31, 2009  2,652,360)
were excluded from the computation of diluted earnings per share because their
effect would have been anti-dilutive.

19

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

18. Supplemental cash flow information

|                                                   |   | December 31 |   |   | December 31 | 
|-------------------------------------------------- | - | ----------- | - | - | ----------- | 
|                                                   |   | 2010        |   |   | 2009        | 
|Items not affecting cash:                          |   |             |   |   |             | 
|Amortization, depletion
      and accretion        | $ | 46,527      |   | $ | 43,018      | 
|Unrealized foreign exchange loss                   |   | 2,177       |   |   | 5,194       | 
|Share-based
      compensation, net of forfeitures |   | 4,816       |   |   | 7,646       | 
|Future income tax (recovery) / expense             |   | (19,094     | ) |   | 6,611       | 
|Impairment charge                                  |   | 221,610     |   |   | -           | 
|Loss on disposal of assets                         |   | 2,582       |   |   | -           | 
|Other non-cash items                               |   | 2,487       |   |   | 3,197       | 
|                                                   | $ | 261,105     |   | $ | 65,666      | 

|                                                |   | December 31 |   |   | December 31 |  
|----------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                |   | 2010        |   |   | 2009        |  
|Change in non-cash operating working capital:   |   |             |   |   |             |  
|Receivables                                     | $ | (4,406      | ) | $ | 1,865       |  
|Prepaids and deposits                           |   | (529        | ) |   | (702        | )
|Inventories                                     |   | (8,817      | ) |   | (2,565      | )
|Payables and accruals                           |   | (1,390      | ) |   | 6,476       |  
|                                                | $ | (15,142     | ) | $ | 5,074       |  
|Supplemental information:                       |   |             |   |   |             |  
|Interest paid                                   | $ | 2,695       |   | $ | 2,762       |  
|Taxes paid                                      | $ | 2,022       |   | $ | 1,364       |  
|                                                |   |             |   |   |             |  
|Non-cash transactions:                          |   |             |   |   |             |  
|Acquisition of assets under capital
      lease | $ | -           |   | $ | 17,092      |  

---

19. Related party transactions

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

|    |                                      |   | December 31 |  |   | December 31 | 
|--- | ------------------------------------ | - | ----------- |  | - | ----------- | 
|    |                                      |   | 2010        |  |   | 2009        | 
|(a) | Production costs
       labour      | $ | -           |  | $ | 25,797      | 
|(a) | Mining interests  labour            |   | -           |  |   | 4,876       | 
|(b) | Production costs
       consumables |   | -           |  |   | 11,255      | 
|    |                                      | $ | -           |  | $ | 41,928      | 

|(a) | The Company paid a third party company related to a
      former director for the provision of workers in the Mexican operations at
      cost plus 6-10%.                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                             
|(b) | The Company paid two third party companies related to a
      former director for the provision of lime, lubricant and fuel. The prices
      of lubricant and fuel are regulated in Mexico.

In September 2009, the Company announced the resignations of
the two members of the Board of Directors involved in the above transactions. As
a result, effective the date of their resignations, the above are no longer
considered related party transactions.

20

---

|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

20. Financial instruments and risk management

The Companys financial instruments consist of cash and cash
equivalents, receivables, investments in equity securities, payables and
accruals, long-term debt, obligations under capital leases and assets and
liabilities arising from the use of derivative financial instruments. Unless
otherwise noted, it is managements opinion that the Company is not exposed to
significant interest or credit risks arising from these financial instruments.
Some of the Companys receivables and payables are denominated in Mexican pesos
or Canadian dollars. Balances are translated at the period end rate in
accordance with the Companys accounting policy as set out in Note 2(c) to these
annual consolidated financial statements.

Fair values of financial instruments

The Company estimates that the fair value of its cash and cash
equivalents, receivables, payables and accruals approximate the carrying value
of the assets and liabilities due to the relatively short-term nature of these
instruments. Long-term debt and lease obligations are measured at amortized cost
using the effective interest method and there were no material differences
between this amount and fair value at December 31, 2010. The Companys fair
value estimates for derivative contracts are based on observable market
information for comparable contracts. These estimates represent the amount that
the Company would have received from (or paid to) a counterparty to settle the
contract at the balance sheet date.

CICA Handbook Section 3862, Financial Instruments 
Disclosures, establishes a valuation hierarchy based on whether the inputs
to valuation techniques are observable or unobservable. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the Companys own assumptions. The two types of inputs have created the
following fair value hierarchy:

- Level 1 inputs are quoted prices (unadjusted) in active markets for
  identical assets or liabilities.
- Level 2 inputs are quoted prices in markets that are not active, quoted
  prices for similar assets or liabilities in active markets, inputs other than
  quoted prices that are observable for the asset or liability, or inputs that
  are derived principally from or corroborated by observable market data or
  other means.
- Level 3 inputs are unobservable (supported by little or no market
  activity).

The fair value hierarchy gives the highest priority to Level 1
inputs and the lowest priority to Level 3 inputs.

The following table outlines the Companys financial assets
measured at fair value within the fair value hierarchy as of December 31,
2010:

|                                                               |   | Total  |  |   | Level
      1 |  |   | Level
      2 |  |   | Level
      3 | 
|-------------------------------------------------------------- | - | ------ |  | - | ------------- |  | - | ------------- |  | - | ------------- | 
|Short-term investments                                         | $ | 27,279 |  | $ | 27,279        |  | $ | -             |  | $ | -             | 
|Held-for-trading financial assets - currency
      forwards    |   | 1,060  |  |   | -             |  |   | 1,060         |  |   | -             | 
|Held-for-trading financial
      assets - warrants             |   | 3,504  |  |   | -             |  |   | 3,504         |  |   | -             | 
|Available-for-sale financial assets - equity
      investments |   | 17,293 |  |   | 17,293        |  |   | -             |  |   | -             | 
|                                                               | $ | 49,136 |  | $ | 44,572        |  | $ | 4,564         |  | $ | -             | 

Due to their short-term maturities, the fair value of
short-term investments approximates their carrying amount.

The fair value of forward contracts is determined using forward
pricing spreads in effect at December 31, 2010. These spreads are supported by
observable market conditions and are classified within Level 2 of the fair value
hierarchy. The use of reasonably possible alternative assumptions would not
significantly affect the Companys results.

The fair value of warrants that are not traded in an active
market is determined using a Black-Scholes model based on assumptions that are
supported by observable current market conditions and as such are classified
within Level 2 of the fair value hierarchy. The fair value was calculated using
the following weighted average assumptions as of December 31, 2010:

|Expected volatility     | 74%       
|----------------------- | ----------
|Risk free interest rate | 1.67%     
|Expected life           | 1.22 years

21

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

The Companys available-for-sale investments are valued using
quoted market prices in active markets and as such are classified within Level 1
of the fair value hierarchy. The fair value of investment securities is
calculated as the quoted market price of the investment equity security
multiplied by the quantity of shares held by the Company.

Risks

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

Commodity price risk

The profitability of the Companys 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 the
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. From time to time, the Company will enter into zero cost collars
or other financial instruments to manage short term commodity price
fluctuations. At December 31, 2010, the Company did not have any
commodity-related financial instruments outstanding.

Market price risk

The Company is exposed to fluctuations in the fair value of
investments made in equity securities and warrants. A 10% reduction in the price
of the common shares of the companies held at December 31, 2010 would have
reduced other comprehensive income by $1,729 and net income by $659. A 10%
increase in the share price of each entity would have increased other
comprehensive income and net income by $1,729 and $692, respectively.

Interest rate risk

The Company is exposed to interest rate risk on its variable
rate debt. The Company has not entered into any agreements to hedge against
unfavourable changes in interest rates. If interest rates had been 50 basis
points higher during the year ended December 31, 2010, equity and net earnings
would have decreased by $132, mainly as a result of higher interest rates on
variable borrowings. This analysis assumes that other variables remain constant
(a 50 basis points decrease in interest rates would have had the equal but
opposite effect).

Foreign currency exchange rate risk

All metal sales revenues for the Company are denominated in US
dollars (USD). The Company is primarily exposed to currency fluctuations
relative to the US dollar on expenditures that are denominated in Canadian
dollars (CAD) and Mexican pesos (MXN). These potential currency fluctuations
could have a significant impact on 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.

At December 31, 2010, the Companys balance sheet exposure to
foreign currency exchange rate risk in Canadian dollars and Mexican pesos was as
follows:

|                              |   | CAD    |   |   | MXN      |  
|----------------------------- | - | ------ | - | - | -------- | -
|Cash and cash equivalents     | $ | 2,059  |   | $ | 335,652  |  
|Receivables                   |   | 331    |   |   | 192,615  |  
|Investments                   |   | 20,685 |   |   | -        |  
|Payables and accruals         |   | (4,402 | ) |   | (200,860 | )
|Other long-term obligations   |   | (360   | ) |   | (13,435  | )
|Future income tax liabilities |   | -      |   |   | (831,487 | )
|Net balance sheet exposure    | $ | 18,313 |   | $ | (517,515 | )

22

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

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

|                                |   | Equity / earnings |  
|------------------------------- | - | ----------------- | -
|Translation of net CAD exposure | $ | (1,674            | )
|Translation of net MXN exposure |   | 3,812             |  

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 $30,699 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 $1,060 at December 31,
2010, of which $1,025 has been recognized in other comprehensive income and $35
has been recognized in production costs. Upon settlement of a forward contract,
the cumulative gain or loss within accumulated other comprehensive income is
reclassified to inventory and mineral properties to be recognized in income at
the same time as the related cost.

Two forward contracts settled during the year ended December
31, 2010 with a total gain of $377. The recognition of this hedging gain has
resulted in a $175 decline in production costs, a $60 decline in inventory, a
$17 decline in general and administrative expense and a $125 decline in mineral
properties.

Credit risk

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

Liquidity risk

Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial liabilities that are
settled by delivering cash or another financial asset. The Company manages this
risk through regular monitoring of its cash flow requirements to support ongoing
operations and expansionary plans. The Company ensures that there are sufficient
committed loan facilities to meet its business requirements, taking into account
anticipated cash flows from operations and holdings of cash and cash
equivalents.

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

|                                  |   | Carrying |  |   | Contractual      |  |   | Less than      |  |   | 6 - 12 |  |   | 1 - 2 |  |   | 2  5  |  |   | More than     | 
|--------------------------------- | - | -------- |  | - | ---------------- |  | - | -------------- |  | - | ------ |  | - | ----- |  | - | ------ |  | - | ------------- | 
|                                  |   | amount   |  |   | cash
      flows |  |   | 6
      months |  |   | months |  |   | years |  |   | years  |  |   | 5
      years | 
|Payables and accruals             | $ | 38,001   |  | $ | 38,001           |  | $ | 38,001         |  | $ | -      |  | $ | -     |  | $ | -      |  | $ | -             | 
|Long-term debt and capital leases |   | 31,544   |  |   | 34,225           |  |   | 2,610          |  |   | 2,321  |  |   | 2,914 |  |   | 26,380 |  |   | -             | 
|Other long-term obligations       |   | 4,057    |  |   | 4,800            |  |   | 800            |  |   | -      |  |   | 800   |  |   | 2,400  |  |   | 800           | 
|                                  |   |          |  |   |                  |  |   |                |  |   |        |  |   |       |  |   |        |  |   |               | 
|                                  | $ | 73,602   |  | $ | 77,026           |  | $ | 41,411         |  | $ | 2,321  |  | $ | 3,714 |  | $ | 28,780 |  | $ | 800           | 

---

23

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

21. Capital management

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

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

The Company monitors capital through the gross debt to total
equity ratio, and targets a ratio of less than 25%. As at December 31, 2010, the
ratio of gross debt to total equity was 4.73% (December 31, 2009  4.65%),
calculated as follows:

|                                                           |   | December 31 |  |   | December 31 | 
|---------------------------------------------------------- | - | ----------- |  | - | ----------- | 
|                                                           |   | 2010        |  |   | 2009        | 
|Current portion of long-term debt and
      capital leases | $ | 4,373       |  | $ | 4,398       | 
|Long-term debt and capital leases                          |   | 27,171      |  |   | 32,431      | 
|Gross debt                                                 |   | 31,544      |  |   | 36,829      | 
|                                                           |   |             |  |   |             | 
|Shareholders equity                                       | $ | 666,763     |  | $ | 792,337     | 
|                                                           |   |             |  |   |             | 
|Gross debt / Shareholders equity                          |   | 4.73%       |  |   | 4.65%       | 

22. Segmented information

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

The following are the operating results by segment:

|                                                                                              |   |         |  |   |               |   |   | December 31, 2010 |  
|--------------------------------------------------------------------------------------------- | - | ------- |  | - | ------------- | - | - | ----------------- | -
|                                                                                              |   | Ocampo  |  |   | El
      Cubo |   |   | Corporate         |  
|Revenue from mining
      operations                                                          | $ | 215,717 |  | $ | 22,549        |   | $ | -                 |  
|Production costs                                                                              |   | 74,819  |  |   | 16,047        |   |   | -                 |  
|Mine standby costs                                                                            |   | -       |  |   | 9,214         |   |   | -                 |  
|Refining costs                                                                                |   | 1,631   |  |   | 242           |   |   | -                 |  
|General and administrative
      costs                                                        |   | 7,866   |  |   | 2,117         |   |   | 17,606            |  
|Exploration and business development                                                          |   | 529     |  |   | -             |   |   | 1,405             |  
|Amortization, depletion and
      accretion                                                   |   | 41,256  |  |   | 4,947         |   |   | 324               |  
|                                                                                              |   | 126,101 |  |   | 32,567        |   |   | 19,335            |  
|Earnings / (loss) before
      other items                                                    | $ | 89,616  |  | $ | (10,018       | ) | $ | (19,335           | )
|                                                                                              |   |         |  |   |               |   |   |                   |  
|Expenditures on mining interests, property,
      plant     & equipment and intangible assets | $ | 97,879  |  | $ | 9,074         |   | $ | 263               |  
|                                                                                              |   |         |  |   |               |   |   |                   |  
|Total assets as at December
      31, 2010                                                    | $ | 550,620 |  | $ | 159,479       |   | $ | 109,289           |  

24

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|                                                                     
|---------------------------------------------------------------------
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                       
|(in thousands of
      United States dollars unless otherwise stated)

|                                                                                                  |   |         |  |   |               |   |   | December 31, 2009 |  
|------------------------------------------------------------------------------------------------- | - | ------- |  | - | ------------- | - | - | ----------------- | -
|                                                                                                  |   | Ocampo  |  |   | El
      Cubo |   |   | Corporate         |  
|Revenue from mining operations                                                                    | $ | 162,579 |  | $ | 44,222        |   | $ | -                 |  
|Production costs                                                                                  |   | 66,988  |  |   | 27,611        |   |   | -                 |  
|Mine standby costs                                                                                |   | -       |  |   | 1,905         |   |   | -                 |  
|Refining costs                                                                                    |   | 2,232   |  |   | 623           |   |   | -                 |  
|General and administrative                                                                        |   | 8,100   |  |   | 2,447         |   |   | 26,028            |  
|Exploration and business development                                                              |   | 158     |  |   | -             |   |   | 321               |  
|Amortization and depletion                                                                        |   | 30,861  |  |   | 11,963        |   |   | 130               |  
|                                                                                                  |   | 108,339 |  |   | 44,549        |   |   | 26,479            |  
|Earnings / (loss) before other items                                                              | $ | 54,240  |  | $ | (327          | ) | $ | (26,479           | )
|                                                                                                  |   |         |  |   |               |   |   |                   |  
|Expenditures on mining interests, property, plant
      
       & equipment and intangible assets | $ | 68,048  |  | $ | 8,407         |   | $ | 406               |  
|                                                                                                  |   |         |  |   |               |   |   |                   |  
|Total assets as at December 31, 2009                                                              | $ | 474,748 |  | $ | 386,719       |   | $ | 102,901           |  

Included in the total assets of the El Cubo operating segment
is $93,554 related to the Guadalupe y Calvo exploration property. All goodwill
included on the balance sheet as at December 31, 2009 relates to the El Cubo
operating segment.

The Company sells all gold and silver produced to one customer.
The Company is not economically dependent on this customer for the sale of its
product because gold and silver can be sold through numerous commodity market
traders worldwide.

---

23. Comparative figures

Certain of the comparative figures for the prior period have
been reclassified to conform with the financial statement presentation adopted
for December 31, 2010.

---

24. Subsequent events

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.

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.

---

25

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