Gammon Lake Resources Inc.Consolidated Financial Statements 
Amended

December 31, 2005 and July 31, 2005







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

AUDITORS' REPORT

To the Shareholders of Gammon Lake Resources Inc.,

We have audited the consolidated balance sheet of Gammon Lake
Resources Inc. ("the Company") as at December 31, 2005 and the consolidated
statements of operations and deficit and cash flows for the five month period
ended December 31, 2005. These restated consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, these restated consolidated financial
statements present fairly, in all material respects, the financial position of
the Company as at December 31, 2005 and the results of its operations and its
cash flows for the five month period ended December 31, 2005 in accordance with
Canadian generally accepted accounting principles.

Our previous report dated March 15, 2006 has been withdrawn
and the consolidated financial statements have been restated as explained in
note 16(a) to the restated consolidated financial statements.

The consolidated financial statements as at July 31, 2005 and
for the year then ended have also been restated as explained in note 16(a) of
the restated December 31, 2005 consolidated financial statements. The original
July 31, 2005 consolidated financial statements were audited by other auditors
who expressed an opinion without reservation on those financial statements in
their report dated September 10, 2005. We have audited the adjustments described
in note 16 (a) that were applied to restate the July 31, 2005 consolidated
financial statements to correct an error. In our opinion such adjustments are
appropriate and have been properly applied. We were not engaged to audit,
review, or apply any procedures to the July 31, 2005 consolidated financial
statements of the Company other than with respect to the adjustments detailed in
note 16 (a) and accordingly we do not express an opinion or any other form of
assurance on the July 31, 2005 consolidated financial statements taken as a
whole.

/s/ KPMG LLP

Chartered Accountants Halifax, Canada

March 16, 2006 except as to note 16 (a) which is as of April 2, 2007

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Auditors' Report

To the Shareholders of Gammon Lake Resources Inc.

We have audited, before the effects of the adjustments for
the corrections of the error described in Note 16(a), the consolidated balance
sheet of Gammon Lake Resources Inc.as at
July 31, 2005 and the consolidated statements of operations and deficit and cash
flows for the year then ended (the 2005 consolidated financial statements before
the effects of the adjustments discussed in Note 16(a) are not presented
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, except for the error described in Note 16(a),
these statements present fairly, in all material respects, the financial
position of the Company as at July 31, 2005, and the results of its operations
and cash flows for the year then ended in accordance with Canadian generally
accepted accounting principles.

We were not engaged to audit, review, or apply any procedures
to the adjustments for the correction of the error described in Note 16(a) and,
accordingly, we do not express an opinion or any other form of assurance about
whether such adjustments are appropriate and have been properly applied. Those
adjustments were audited by KPMG LLP.

|                             |                      
|---------------------------- | ---------------------
|Halifax, Nova Scotia, Canada | Grant Thornton LLP   
|September 10, 2005           | Chartered Accountants



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|Gammon Lake Resources Inc.
    Contents
|---------------------------------------



|                                                      | Page
|----------------------------------------------------- | ----
|                                                      |     
|Consolidated Balance
    Sheets                       | 2   
|                                                      |     
|Consolidated
    Statements of Operations and Deficit | 3   
|                                                      |     
|Consolidated Statement
    of Cash Flows              | 4   
|                                                      |     
|Notes to the
    Consolidated Financial Statements    | 5-30







1

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|Gammon Lake Resources Inc.
    Consolidated Balance Sheets |   |                       |  |   |                 
|---------------------------------------------------------- | - | --------------------- |  | - | ----------------
|                                                           |   | December 31 
    2005 |  |   | July 31
    2005
|                                                           |   |                       |  |   |                 
|Assets                                                     |   |                       |  |   |                 
|Current                                                    |   |                       |  |   |                 
|Cash and cash equivalents                                  | $ | 6,701,543             |  | $ | 35,400,349      
|Receivables                                                |   |                       |  |   |                 
|Commodity taxes                                            |   | 9,558,654             |  |   | 5,332,406       
|Other                                                      |   | 2,747,728             |  |   | 129,772         
|Prepaids and deposits                                      |   | 289,736               |  |   | 947,344         
|Inventory                                                  |   | 2,056,963             |  |   | -               
|Due from related
    companies (Note 12)                   |   | 626,228               |  |   | 229,700         
|                                                           |   | 21,980,852            |  |   | 42,039,571      
|                                                           |   |                       |  |   |                 
|Deposits on capital
    equipment (Note 3)                 |   | 1,762,696             |  |   | 9,138,768       
|Long term investment
    (Note 4)                          |   | 10,632,000            |  |   | 10,422,000      
|Mining interests and
    capital assets (Note 5)           |   | 224,579,967           |  |   | 148,748,539     
|                                                           |   |                       |  |   |                 
|                                                           | $ | 258,955,515           |  | $ | 210,348,878     
|                                                           |   |                       |  |   |                 
|                                                           |   |                       |  |   |                 
|Liabilities                                                |   |                       |  |   |                 
|Current                                                    |   |                       |  |   |                 
|Payables and accruals                                      | $ | 10,552,274            |  | $ | 3,609,306       
|Current portion of long-term
    debt and capital leases   |   | 24,935,455            |  |   | -               
|                                                           |   | 35,487,729            |  |   | 3,609,306       
|                                                           |   |                       |  |   |                 
|Long term debt and
    capital leases (Note 6)             |   | 21,203,828            |  |   | 8,581,300       
|Employee future
    benefits (Note 8)                      |   | 276,126               |  |   | 213,738         
|Future income taxes
    (Note 9)                           |   | 7,336,000             |  |   | 8,121,000       
|                                                           |   | 64,303,683            |  |   | 20,525,344      
|                                                           |   |                       |  |   |                 
|Shareholders'
    Equity                                   |   |                       |  |   |                 
|Capital stock (Note
    10)                                |   | 213,902,423           |  |   | 204,065,585     
|Contributed surplus
    (Note 10)                          |   | 25,327,279            |  |   | 18,728,309      
|Deficit                                                    |   | (44,577,870)          |  |   | (32,970,360)    
|                                                           |   | 194,651,832           |  |   | 189,823,534     
|                                                           |   |                       |  |   |                 
|                                                           | $ | 258,955,515           |  | $ | 210,348,878     

Nature of operations and going concern assumption (Note 1) 
Commitments and contingencies (Note 7)
 Subsequent events (Note 13)

On behalf of the Board

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

See accompanying notes to the consolidated financial
statements.

2

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|Gammon Lake Resources Inc.
    Consolidated Statements of
    Operations and Deficit |   |                                      |  |   |                             
|------------------------------------------------------------------------------------ | - | ------------------------------------ |  | - | ----------------------------
|                                                                                     |   | 5 months ended
    December 31, 2005 |  |   | Year ended
    July 31, 2005
|                                                                                     |   |                                      |  |   |                             
|Expenses                                                                             |   |                                      |  |   |                             
|Capital tax                                                                          | $ | 82,860                               |  | $ | 140,000                     
|Amortization                                                                         |   | 603,245                              |  |   | 537,540                     
|General and administrative                                                           |   | 1,757,414                            |  |   | 2,593,683                   
|Management fees                                                                      |   | 171,237                              |  |   | 278,440                     
|Professional fees                                                                    |   | 6,624,734                            |  |   | 7,105,542                   
|Wages and benefits                                                                   |   | 3,830,958                            |  |   | 9,651,178                   
|                                                                                     |   | 13,070,447                           |  |   | 20,306,383                  
|                                                                                     |   |                                      |  |   |                             
|Interest income                                                                      | $ | 103,303                              |  | $ | 1,199,016                   
|Management fees                                                                      |   | 98,110                               |  |   | 224,560                     
|                                                                                     |   | 201,413                              |  |   | 1,423,576                   
|                                                                                     |   |                                      |  |   |                             
|Loss before other
    items                                                          |   | (12,869,034)                         |  |   | (18,882,807)                
|                                                                                     |   |                                      |  |   |                             
|Foreign exchange gain                                                                |   | 672,524                              |  |   | 312,172                     
|Gain/(loss) on equity
    investment                                                 |   | 210,000                              |  |   | (1,226,000)                 
|                                                                                     |   | 882,524                              |  |   | (913,828)                   
|                                                                                     |   |                                      |  |   |                             
|Net loss before income
    taxes                                                     | $ | (11,986,510)                         |  | $ | (19,796,635)                
|                                                                                     |   |                                      |  |   |                             
|Future income tax
    recovery (Note 9)                                              |   | (379,000)                            |  |   | (421,040)                   
|                                                                                     |   |                                      |  |   |                             
|Net loss                                                                             | $ | (11,607,510)                         |  | $ | (19,375,595)                
|                                                                                     |   |                                      |  |   |                             
|Loss per share (Note
    11)                                                         | $ | (0.16)                               |  | $ | (0.29)                      
|                                                                                     |   |                                      |  |   |                             
|                                                                                     |   |                                      |  |   |                             
|                                                                                     |   |                                      |  |   |                             
|Deficit, beginning of
    period                                                     | $ | (32,970,360)                         |  | $ | (13,594,765)                
|                                                                                     |   |                                      |  |   |                             
|Net loss                                                                             |   | (11,607,510)                         |  |   | (19,375,595)                
|                                                                                     |   |                                      |  |   |                             
|Deficit, end of period                                                               | $ | (44,577,870)                         |  | $ | (32,970,360)                

See accompanying notes to the consolidated financial
statements.

3

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|Gammon Lake Resources Inc.
    Consolidated Statements of Cash
    Flows                          |   |                                      |  |   |                             
|------------------------------------------------------------------------------------------------- | - | ------------------------------------ |  | - | ----------------------------
|                                                                                                  |   | 5 months ended
    December 31, 2005 |  |   | Year ended
    July 31, 2005
|                                                                                                  |   |                                      |  |   |                             
|Increase in cash and
    cash equivalents                                                         |   |                                      |  |   |                             
|                                                                                                  |   |                                      |  |   |                             
|Operating                                                                                         |   |                                      |  |   |                             
|Net loss                                                                                          | $ | (11,607,510)                         |  | $ | (19,375,595)                
|Amortization                                                                                      |   | 603,245                              |  |   | 537,540                     
|Unrealized foreign exchange
    gain                                                              |   | (675,791)                            |  |   | (876,706)                   
|Stock option expense                                                                              |   | 6,598,970                            |  |   | 13,974,680                  
|Employee future benefits                                                                          |   | 62,388                               |  |   | -                           
|Future income tax recovery                                                                        |   | (379,000)                            |  |   | (421,040)                   
|Accrued interest on long term
    debt                                                            |   | 190,139                              |  |   | -                           
|(Gain)/loss on long term equity
    investment                                                    |   | (210,000)                            |  |   | 1,226,000                   
|Change in non-cash operating
    working capital (Note 16)                                        |   | 1,424,409                            |  |   | (4,040,163)                 
|                                                                                                  |   |                                      |  |   |                             
|                                                                                                  |   | (3,993,150)                          |  |   | (8,975,284)                 
|                                                                                                  |   |                                      |  |   |                             
|Investing                                                                                         |   |                                      |  |   |                             
|Advances (to) from related
    companies                                                          |   | (396,528)                            |  |   | 155,001                     
|Decrease/(Increase) in deposits
    on capital equipment                                          |   | 7,376,072                            |  |   | (8,962,503)                 
|Expenditures on mining
    interests and related deferred costs and acquisition of capital assets |   | (73,623,829)                         |  |   | (66,043,615)                
|                                                                                                  |   | (66,644,285)                         |  |   | (74,851,117)                
|                                                                                                  |   |                                      |  |   |                             
|Financing                                                                                         |   |                                      |  |   |                             
|Net proceeds from issuance of
    capital stock                                                   |   | -                                    |  |   | 103,931,580                 
|Repayment of capital lease                                                                        |   | (150,209)                            |  |   | -                           
|Increase in long-term debt                                                                        |   | 34,977,000                           |  |   | -                           
|Proceeds from exercise of
    options                                                             |   | 7,111,838                            |  |   | 2,274,230                   
|                                                                                                  |   | 41,938,629                           |  |   | 106,205,810                 
|Net
    (decrease)/increase in cash and cash equivalents                                          |   | (28,698,806)                         |  |   | 22,379,409                  
|                                                                                                  |   |                                      |  |   |                             
|Cash and cash
    equivalents                                                                     |   |                                      |  |   |                             
|Beginning of year                                                                                 |   | 35,400,349                           |  |   | 13,020,940                  
|                                                                                                  |   |                                      |  |   |                             
|End of year                                                                                       | $ | 6,701,543                            |  | $ | 35,400,349                  

See accompanying notes to the consolidated financial
statements.

4

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Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 20051.

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

The Company has changed its year-end from July 31 to December
31. The reason for the change of year-end is to make the reporting period of the
Company consistent with other emerging precious metal producing issuers.

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

The Company is in the advanced stages of construction of the
Ocampo Mine, and believes it has sufficient liquidity to finalize the
construction. The ability to generate revenues from production, additional draws
on the Scotia Capital debt facility and the proceeds from the exercise of stock
options will finance the remaining construction and operations of the Ocampo
Mine. The Company may have to raise additional funds over and above amounts
raised to date to complete the acquisition, exploration and development of its
interests and, while it has been successful in doing so in the past, there can
be no assurance that it will be able to do so in the future. However, the
Company feels confident that given the robust economics of the Ocampo Mine, the
issuance of additional equity, and or debt would be achievable in the short
term. In addition, the Company may require further financing to meet certain
financial commitments under its joint venture and option buy out agreements.

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

2.

Basis of presentation

The accompanying consolidated financial statements are
prepared by management in accordance with Canadian generally accepted accounting
principles and contain all adjustments necessary to present fairly Gammon Lake
Resources Inc.'s financial position as at December 31, 2005 as well as its
operations and cash flows for the years ended December 31, 2005 and July 31,
2005. The accounting principles conform in all material respects to principles
generally accepted in the United States of America except as disclosed in Note
17.

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

Asset retirement obligations

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

5

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



2.

Use of estimates

The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those reported.

Cash and cash equivalents

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

Long term investment

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

Mineral properties and related deferred costs

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

The recoverability of the book value of each property is
assessed annually for indicators of impairment such as adverse changes to any of
the following:

     estimated recoverable ounces of
gold 
     estimated future commodity prices 
     estimated expected future operating costs, capital
expenditures and reclamation expenditures

A write-down to fair value is recorded when the expected
future cash flow is less than the net book value of the property.

Inventory

Inventory supplies are valued at the lower of average cost or
market value.

6

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



2.     Summary of significant accounting policies (continued)
Capital assets and amortization

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

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

Impairment of long lived assets

In August, 2004, the Company adopted the Canadian Institute
of Chartered Accountants Handbook Section 3063, "Impairment of Long-Lived
Assets", which addresses the recognition, measurement and disclosure of the
impairment of long-lived assets. Section 3063 requires that an impairment loss
be recognized if the carrying amount of a long-lived asset is not recoverable.
The carrying amount of a long-lived asset is not recoverable if the carrying
amount exceeds the sum of the undiscounted cash flows expected to result from
its use and eventual disposition. The impairment loss to be recognized is
measured as the amount by which the carrying amount of the long-lived asset
exceeds its fair value. The Company has determined there is no impact on its
results of operations and financial position.

Revenue recognition

Revenue from the sale of bullion, concentrate and industrial
metals are recognized when ownership passes to the purchaser at which time the
following conditions are met: i) persuasive evidence of an arrangement exists;
ii) the risks and rewards of ownership pass to the purchaser including delivery
of the product; iii) the selling price is fixed and determinable, and iv)
collectibility is reasonably assured.

Stock based compensation

The Company uses the fair value method of accounting for
employee stock-based compensation and other stock-based payments made in
exchange for goods and services. All awards made to employees and non-employees
are measured and recorded in the financial statements at fair value. The
Company's stock option plan is described in Note 10.

Foreign currency transactions

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

7

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



2.     Summary of significant accounting policies (continued)
Income taxes

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

Loss per common share

Loss per common share is calculated based on the weighted
average number of common shares outstanding for the period. Diluted loss per
common share, when applicable, considers the potential exercise of outstanding
options and warrants using the treasury-based method. This method assures that
proceeds received from the exercise of the in-the-money stock options and
warrants are used to repurchase shares at the average market rates.

Recent accounting pronouncements

In 2005 the CICA issued Section 3855, Financial Instruments,
Recognition and Measurement. This section establishes for recognizing and
measuring financial assets, financial liabilities and non-financial derivatives.
The following four fundamental decisions serve as cornerstones underlying this
Section:

1)     
financial instruments and non-financial derivatives represent rights or
obligations that meet the definition of assets or liabilities and should be
reported in the financial statements;

2)     
the fair value is the most relevant measure for financial instruments and the
only relevant measure for derivative financial instruments;

3)     
only items that are assets or liabilities should be reported as such in
financial statements; and

4)     
special accounting for items designated as being part of a hedging relationship
should be provided only for qualifying items.

The mandatory effective date for the new Section is for
interim and annual financial statements relating to fiscal years beginning on or
after October 1, 2006. Management does not expect the adoption of this standard
to have a material effect on the Company's financial position and results of
operation.

During 2005, the CICA also issued Section 3861, Financial
Instruments  Disclosure and presentation. This section establishes standards
for presentation of financial instruments and non-financial derivatives, and
identifies the information that should be disclosed about them. The presentation
paragraphs deal with the classification of financial instruments, from the
perspective of the issuer, between liabilities and equity, the classification of
related interest, dividends, losses and gains, and the circumstances in which
financial assets and financial liabilities are offset. The disclosure paragraphs
deal with information about factors that affect the amount, timing and certainty
of an entity's future cash flows relating to financial instruments, the business
purposes they serve, the risks associated with them and management's policies
for controlling these risks. This Section applies to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2006. Management does not expect the adoption of this standard to have a
material effect on the Company's consolidated financial position and results of
operations.

8

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Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 20053.

The Company has deposits on capital equipment of $1,762,696
(July 31, 2005 - $9,138,768) relating to the Open-Pit and Underground
operations. Remaining amounts due on these contracts are included in commitments
and contingencies (Note 7).

4. Long
term investment

The Company's long-term investment, carried at equity,
consists of 10,900,000 shares, representing approximately a 21% interest in the
issued and outstanding common shares of Mexgold Resources Inc. ("Mexgold").
Mexgold is a public junior natural resource issuer, listed on the TSX Venture
Exchange (TSXV: MGR), which holds a 100% interest in a Mexican gold and silver
mineral exploration property, known as the "Guadalupe Gold-Silver Project" and a
100% interest in Compania Minera Del Cubo, a gold and silver producing mine in
Guanajuto State, Mexico.

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

|                                                           |   | December 31 |  |   | July 31    
|---------------------------------------------------------- | - | ----------- |  | - | -----------
|                                                           |   | 2005        |  |   | 2005       
|                                                           |   |             |  |   |            
|Investment in Mexgold Resources
    Inc.                   | $ | 12,300,000  |  | $ | 12,300,000 
|                                                           |   |             |  |   |            
|Cumulative equity share of losses inMexgold Resources Inc. |   | (1,668,000) |  |   | (1,878,000)
|                                                           |   |             |  |   |            
|                                                           | $ | 10,632,000  |  | $ | 10,422,000 

The market value of investment as at December 31, 2005 was
$53,192,000 (July 31, 2005 - $29,430,000). The Company also holds 2.95 million
warrants to purchase Mexgold common shares at an exercise price of $2.50 each,
expiring February 26, 2006. Subsequent to year end, the Company exercised the
warrants to purchase Mexgold common shares for a total commitment of $7,375,000.
The Company was successful in obtaining an additional US$7.5 million from Scotia
Capital on February 26, 2006 to finance the commitment.

5.

|                                  | December 31, 2005 |             | July 31, 2005
|--------------------------------- | ----------------- | ----------- | -------------
|                                  |                   |             |              
|                                  |                   | Accumulated |              
|                                  |                   | Cost        |              
|                                  |                   |             |              
|Mining properties 
    Ocampo    |                   | 150,193,940 |              
|Equipment under
    capital lease |                   | 4,116,614   |              
|Plant and equipment               |                   | 71,640,793  |              
|                                  |                   |             |              
|                                  | $                 | 225,951,347 |              



9

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



5.

The carrying value of mineral properties represents the
accumulated costs to date for the acquisition of and exploration and development
cost incurred by the Company on its non-producing mineral property located in
Ocampo, Mexico. Amortization of tangible capital assets does not commence until
they are available at the mine site or in use. Depletion of the mineral
properties will occur once the Company commences production, and is depleted
using the unit of production method based on estimated recoverable reserves. The
company expects amortization and depletion to commence in the first quarter of
2006. The equipment under capital lease is for O&K shovels leased through CAT
Finance.

6.

|Consolidated long-term debt and capital leases:                                                   |             |             |  |   |          
|------------------------------------------------------------------------------------------------- | ----------- | ----------- |  | - | ---------
|                                                                                                  |             | December 31 |  |   | July 31  
|                                                                                                  |             | 2005        |  |   | 2005     
|                                                                                                  |             |             |  |   |          
|a) Total
    lease payments ending December, 2008                                                 | $           | 2,693,418   |  | $ | -        
|b) Other                                                                                          |             | 117,426     |  |   | -        
|c) Soyopa
    loan                                                                                |             | 8,161,300   |  |   | 8,581,300
|d)
    Revolving credit facility                                                                  | $           | 35,167,139  |  | $ | -        
|                                                                                                  |             |             |  |   |          
|Present
    value of debt                                                                         |             | 46,139,283  |  |   | 8,581,300
|                                                                                                  |             |             |  |   |          
|Less:
    Current portion                                                                         |             | 24,935,455  |  |   | -        
|                                                                                                  |             |             |  |   |          
|                                                                                                  | $           | 21,203,828  |  | $ | 8,581,300
|                                                                                                  |             |             |  |   |          
|The
    estimated future minimum lease and debt payments under all facilities are as
    follows:
|                                                                                                  |             |             |  |   |          
|2006                                                                                              | $24,935,455 |             |  |   |          
|2007                                                                                              | $20,244,931 |             |  |   |          
|2008                                                                                              | $958,897    |             |  |   |          
|                                                                                                  |             |             |  |   |          
|                                                                                                  |             | December 31 |  |   | July 31  
|                                                                                                  |             | 2005        |  |   | 2005     
|                                                                                                  |             |             |  |   |          
|a)Total lease payments                                                                            | $           | 2,961,933   |  | $ | -        
|36 months, Libor + 2.75%, equal payments of
    principal                                         |             |             |  |   |          
|and interest of $74,780.52 per month commencing                                                   |             |             |  |   |          
|December 1, 2005                                                                                  |             |             |  |   |          
|                                                                                                  |             |             |  |   |          
|Less:
    Interest on lease                                                                       |             | 268,515     |  |   | -        
|                                                                                                  |             |             |  |   |          
|Present
    value of lease payments                                                               |             | 2,693,418   |  |   |          
|                                                                                                  |             |             |  |   |          
|Less:
    Current portion                                                                         |             | 816,793     |  |   | -        
|                                                                                                  |             |             |  |   |          
|                                                                                                  | $           | 1,876,625   |  | $ | -        



10

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



6.

The Company is obligated under capital leases for mobile
equipment. All capital leases agreements provide that the Company can purchase
the leased equipment at the end of the lease term for a nominal amount. The
estimated future minimum lease payment

|2006                                | $816,793 |             |  |   |         | 
|----------------------------------- | -------- | ----------- |  | - | ------- | 
|2007                                | $949,398 |             |  |   |         | 
|2008                                | $927,227 |             |  |   |         | 
|                                    |          |             |  |   |        
|                                    |          | December 31 |  |   | July 31
|                                    |          | 2005        |  |   | 2005   
|                                    |          |             |  |   |        
|b)Total lease payments              | $        | 129,383     |  | $ | -      
|                                    |          |             |  |   |        
|Less:
    Interest on lease         |          | 11,957      |  |   | -      
|                                    |          |             |  |   |        
|Present
    value of lease payments |          | 117,426     |  |   |        
|                                    |          |             |  |   |        
|Less:
    Current portion           |          | 42,827      |  |   | -      
|                                    |          |             |  |   |        
|                                    | $        | 74,599      |  | $ | -      

The Company is obligated under capital leases for computer
hardware and software for terms ranging from two to three years. All capital
lease agreements provide that the Company can purchase the leased equipment for
a nominal amount at the end of the leased term. The estimated future minimum
lease payments under the lease are as follows:

|2006                                                                                               | $42,827 |             |  |   |           | 
|-------------------------------------------------------------------------------------------------- | ------- | ----------- |  | - | --------- | 
|2007                                                                                               | $42,929 |             |  |   |           | 
|2008                                                                                               | $31,670 |             |  |   |           | 
|                                                                                                   |         |             |  |   |          
|                                                                                                   |         | December 31 |  |   | July 31  
|                                                                                                   |         | 2005        |  |   | 2005     
|                                                                                                   |         |             |  |   |          
|c)Soyopa loan, non-interest bearing, translated to Canadian dollars at the
    balance sheet date. | $       | 8,161,300   |  | $ | 8,581,300
|                                                                                                   |         |             |  |   |          
|Less:
    Current portion                                                                          |         | 4,080,650   |  |   | -        
|                                                                                                   |         |             |  |   |          
|                                                                                                   | $       | 4,080,650   |  | $ | -        

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

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

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

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

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

11

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



6. Obligations under capital lease and long-term debt
(continued)

The long term debt is secured by a first charge over certain
mineral properties. The estimated future minimum debt payments under the
facility are as follows:

|2006                             | $4,080,650 |             |  |   |         | 
|-------------------------------- | ---------- | ----------- |  | - | ------- | 
|2007                             | $4,080,650 |             |  |   |         | 
|                                 |            |             |  |   |         | 
|                                 |            | December 31 |  |   | July 31
|                                 |            | 2005        |  |   | 2005   
|                                 |            |             |  |   |        
|d) Revolving credit
    facility | $          | 35,167,139  |  | $ | -      
|                                 |            |             |  |   |        
|Less:

    Accrued Interest      |            | 190,139     |  |   | -      
|                                 |            |             |  |   |        
|Present
    value of debt        |            | 34,977,000  |  |   |        
|                                 |            |             |  |   |        
|Less:
    Current portion        |            | 19,995,185  |  |   | -      
|                                 |            |             |  |   |        
|                                 | $          | 14,981,515  |  | $ | -      

On October 14, 2005, the Company secured a credit facility
with Scotia Capital Inc. The facility is secured and consists of a two-year
revolving facility of U.S. $40,000,000, and a three year revolving facility of
U.S. $20,000,000. Interest is payable at Prime Rate plus 1.25% or in the case of
US dollar advances, LIBOR + 2.25%. The Company has met all of the conditions
precedent under the facility, and as at December 31, 2005 had drawn U.S.
$30,000,000.

The estimated future minimum debt payments under the facility
are as follows:

|2006 | $19,995,185 |  |  |  |  | 
|---- | ----------- |  |  |  |  | 
|2007 | $14,981,815 |  |  |  |  | 

7.     Commitments and contingencies Option and joint venture
agreements

a)    
Minera Fuerte Mayo, S.A. de C.V. ("Fuerte Mayo")/Compania Minera Brenda, S.A de
C.V. ("Brenda")

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

12

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



7. Commitments and contingencies (continued)

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

b)     Minerales de Soyopa, S.A. de C.V.
("Soyopa")

On November 24, 2001, the Company and Soyopa entered into an
agreement amending previous option and joint venture agreements. Under the terms
of these agreements, the Company acquired 100% of the right, title and ownership
to 17 mining claims in the Ocampo district of Mexico. Consideration for title of
the properties was US $100,000 paid on November 24, 2001, US $125,000 paid on
May 23, 2002, the issuance of 5,000,000 common shares of the Company to Soyopa
and US $7,000,000 in long term debt as disclosed in Note 6.

c)     Compania Minera Global, S.A. de
C.V. ("Global")

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

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

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

|Agreement                             | Consideration | Terms    
|------------------------------------- | ------------- | ---------
|Compania Minera Global, S.A. de C.V.  | US$           | 1,000,000
|Compania Minera, Brenda, S.A. de C.V. | US$           | 2,000,000
|Compania Minera, Brenda, S.A. de C.V. | US$           | 250,000  

d) Capital equipment

During the year, the Company placed deposits on several
pieces of equipment for the Open-Pit and Underground operations (see Note 3).
The Company's future commitments on the equipment is $2,710,071, and is payable
upon shipment and or delivery of the items as outlined in the purchase
contracts.

13

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



8. Employee future benefits

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

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

|December 31, 2005                   | Pension       |  | Seniority |  | Total   
|----------------------------------- | ------------- |  | --------- |  | --------
|                                    | benefit plans |  | premium   |  | premiums
|                                    |               |  |           |  |         
|Projected benefit obligation:       |               |  |           |  |         
|Balance at beginning of period      | 230,724       |  | 8,823     |  | 239,547 
|Service cost                        | 60,839        |  | 3,649     |  | 64,488  
|Actuarial (gain) loss               | 25,138        |  | (2,196)   |  | 22,942  
|                                    |               |  |           |  |         
|Balance at end of period            | 316,701       |  | 10,276    |  | 326,977 
|                                    |               |  |           |  |         
|Current benefit obligation:         |               |  |           |  |         
|Service cost                        | 66,389        |  | 8,504     |  | 74,894  
|Additional minimum liability        | 200,339       |  | 894       |  | 201,232 
|                                    |               |  |           |  |         
|Balance at end of period            | 266,728       |  | 9,398     |  | 276,126 
|                                    |               |  |           |  |         
|Liability accrued:                  |               |  |           |  |         
|Total accrued liability             | 266,728       |  | 9,398     |  | 276,126 
|                                    |               |  |           |  |         
|Employee future benefits expense:   |               |  |           |  |         
|Service cost                        | 50,550        |  | 8,072     |  | 58,622  
|Interest cost                       | 10,383        |  | 397       |  | 10,780  
|Amortization of prior service costs | 5,457         |  | 35        |  | 5,492   
|                                    |               |  |           |  |         
|Net expense for the period          | 66,390        |  | 8,504     |  | 74,894  
|                                    |               |  |           |  |         
|Significant assumptions used:       |               |  |           |  |         
|Discount rate                       | 4.50%         |  | 4.50%     |  | 4.50%   
|                                    |               |  |           |  |         
|Rate of compensation increase       | 1.50%         |  | 1.50%     |  | 1.50%   



14

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



8.     Employee future
benefits (continued)

|July 31, 2005                       | Pension       |  | Seniority |  | Total   
|----------------------------------- | ------------- |  | --------- |  | --------
|                                    | benefit plans |  | premium   |  | premiums
|                                    |               |  |           |  |         
|Projected benefit obligation:       |               |  |           |  |         
|Balance at beginning of period      | 209,270       |  | 4,462     |  | 213,732 
|Service cost                        | 38,900        |  | 4,933     |  | 43,833  
|Actuarial (gain) loss               | (5,037)       |  | (97)      |  | (5,134) 
|                                    |               |  |           |  |         
|Balance at end of period            | 243,133       |  | 9,298     |  | 252,431 
|                                    |               |  |           |  |         
|Current benefit obligation:         |               |  |           |  |         
|Service cost                        | 38,900        |  | 4,943     |  | 43,843  
|Additional minimum liability        | 166,345       |  | 3,550     |  | 169,895 
|                                    |               |  |           |  |         
|Balance at end of period            | 205,245       |  | 8,493     |  | 213,738 
|                                    |               |  |           |  |         
|Liability accrued:                  |               |  |           |  |         
|Total accrued liability             | 205,245       |  | 8,493     |  | 213,738 
|                                    |               |  |           |  |         
|Employee future benefits expense:   |               |  |           |  |         
|Service cost                        | 23,927        |  | 4,624     |  | 28,551  
|Interest cost                       | 9,417         |  | 201       |  | 9,618   
|Amortization of prior service costs | 5,556         |  | 118       |  | 5,674   
|                                    |               |  |           |  |         
|Net expense for the period          | 38,900        |  | 4,943     |  | 43,843  
|                                    |               |  |           |  |         
|Significant assumptions used:       |               |  |           |  |         
|Discount rate                       | 4.50%         |  | 4.50%     |  | 4.50%   
|                                    |               |  |           |  |         
|Rate of compensation increase       | 1.50%         |  | 1.50%     |  | 1.50%   



15

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



9. Income taxes

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

|                                                                                                  |   |                 |  |   |             
|------------------------------------------------------------------------------------------------- | - | --------------- |  | - | ------------
|                                                                                                  |   | December 31     |  |   | July 31     
|                                                                                                  |   | 2005            |  |   | 2005        
|Net Loss                                                                                          | $ | 11,987,000      |  | $ | 19,797,000  
|Income Tax Rate                                                                                   |   | 38%             |  |   | 38%         
|Expected income tax recovery                                                                      |   | 4,555,000       |  |   | 7,523,000   
|Effect of statutory rate change                                                                   |   | (112,000)       |  |   | (112,000)   
|Tax effect of foreign
    exchange gains (losses)that are not taxable for income tax
    purposes |   | 295,000         |  |   | (167,000)   
|Foreign exchange
    translation of opening futureIncome tax liability                            |   | (406,000)       |  |   | -           
|Tax effect of equity pick-up on
    investments                                                   |   | 39,900          |  |   | (233,000)   
|Other non-deductible expenses                                                                     |   | (42,000)        |  |   | -           
|Adjustment for unrecorded
    losses                                                              |   | 428,000         |  |   | -           
|Effect of expiry of losses                                                                        |   | (140,600)       |  |   | -           
|Non-deductible stock option
    expense                                                           |   | (2,508,000)     |  |   | (5,310,000) 
|Valuation allowance                                                                               |   | (1,730,300)     |  |   | (1,280,000) 
|                                                                                                  |   |                 |  |   |             
|Provision for income taxes                                                                        | $ | 379,000         |  | $ | 421,000     
|                                                                                                  |   |                 |  |   |             
|                                                                                                  |   |                 |  |   |             
|                                                                                                  |   |                 |  |   |             
|The following reflects future
    income tax liabilities at December 31, 2005 and July 31, 2005. 
|                                                                                                  |   |                 |  |   |             
|                                                                                                  |   | December
    31 |  |   | July 31     
|                                                                                                  |   | 2005            |  |   | 2005        
|Accounting value of
    mineral properties and relateddeferred costs in excess of tax
    value   | $ | 35,138,000      |  | $ | 26,508,000  
|Deductible share issue costs                                                                      |   | (3,099,600)     |  |   | (2,883,100) 
|Tax value of equity investment in
    excess ofaccounting value                                   |   | (316,900)       |  |   | (356,800)   
|Accounting value of foreign
    denominated debtin excess of tax value                            |   | 656,700         |  |   | 480,700     
|Non-capital losses carried
    forward                                                            |   | (35,389,900)    |  |   | (24,245,600)
|                                                                                                  |   | (3,011,700)     |  |   | (496,800)   
|Valuation allowance                                                                               |   | 10,347,700      |  |   | 8,617,800   
|                                                                                                  |   |                 |  |   |             
|Future income tax liabilities
    recognized                                                      | $ | 7,336,000       |  | $ | 8,121,000   



16

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



9.

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

|     |            | United  |             |            
|---- | ---------- | ------- | ----------- | -----------
|     | Canada     | States  | Mexico      | Total      
|     |            |         |             |            
|2006 | 885,266    | -       | -           | 885,266    
|2007 | 1,349,367  | -       | -           | 1,349,367  
|2008 | 798,102    | -       | -           | 798,102    
|2009 | 2,979,351  | -       | -           | 2,979,351  
|2010 | -          | -       | 1,512,312   | 1,512,312  
|2011 | -          | -       | -           | -          
|2012 | -          | -       | 2,281,045   | 2,281,045  
|2013 | 4,104,651  | -       | 12,795,130  | 16,899,781 
|2014 | 4,567,387  | -       | 20,666,955  | 25,234,342 
|2015 | 5,483,585  | -       | 66,051,560  | 71,535,145 
|2025 | -          | 809,519 | -           | 809,519    
|     |            |         |             |            
|     | 20,167,973 | 809,519 | 103,307,002 | 124,284,494

10.     Capital stock

a) 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.

17

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



10.     Capital stock (continued)

Issued and outstanding:

|                                                                |             | Number of  |         |            
|--------------------------------------------------------------- | ----------- | ---------- | ------- | -----------
|                                                                |             | Common     |         | Ascribed   
|                                                                |             | Shares     |         | Value      
|                                                                |             |            |         |            
|Balance, August 1, 2003                                         |             | 40,934,286 | $       | 43,939,766 
|                                                                |             |            |         |            
|For cash pursuant to exercise of share purchase
    options     |             | 1,823,700  |         | 1,609,070  
|For cash pursuant to exercise of share purchase
    warrants    |             | 2,349,700  |         | 2,980,670  
|For cash pursuant to exercise of compensation
    warrants      |             | 100,000    |         | 348,000    
|Pursuant to agreement for professional services
    and         |             |            |         |            
|exercise of share purchase options                              |             | 305,000    |         | 793,000    
|For cash pursuant to private placement                          |             | 11,163,958 |         | 48,971,876 
|                                                                |             |            |         |            
|Balance, July 31, 2004                                          |             | 56,676,724 | $       | 98,642,382 
|                                                                |             |            |         |            
|Issued during the year ended July 31, 2005                      |             |            |         |            
|For cash pursuant to private placement                          |             | 15,715,000 |         | 110,005,000
|For cash pursuant to exercise of share purchase
    options     |             | 994,800    |         | 2,274,230  
|Less share issue costs                                          |             | -          |         | (6,856,027)
|                                                                |             |            |         |            
|Balance, July 31, 2005                                          |             | 73,386,524 | $       | 204,065,585
|                                                                |             |            |         |            
|Issued during the five month period ended
    December 31, 2005 |             |            |         |            
|For cash pursuant to exercise of share purchase
    options     |             | 2,983,700  |         | 9,836,838  
|                                                                |             |            |         |            
|Balance, December 31, 2005                                      |             | 76,370,224 | $       | 213,902,423
|                                                                |             |            |         |            
|b) Contributed Surplus                                          |             |            |         |            
|                                                                | December 31 |            | July 31
|                                                                |             | 2005       |         | 2005       
|                                                                |             |            |         |            
|Contributed surplus at beginning of year                        |             | 18,728,309 |         | 3,971,222  
|                                                                |             |            |         |            
|Add: Stock option expense for the year                          |             | 6,598,970  |         | 14,757,287 
|                                                                |             |            |         |            
|Contributed surplus at end of year                              | $           | 25,327,279 | $       | 18,728,309 

18

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



10.     Capital stock (continued)

c) Stock options

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 which may be reserved for issuance under the plan shall be
19,500,000. The maximum number of common shares which may be reserved for
issuance to any one person under the plan shall be 5% of the shares outstanding
at the time of grant (on a non-diluted basis) less the aggregate number of
shares reserved for issuance to such person under any other option to purchase
shares from treasury granted as a compensation or incentive mechanism.

During the year ended July 31, 2005, 2,512,000 options were
granted to consultants, directors and employees, of which 2,016,000 options were
subject to shareholder approval. The 2,016,000 options were approved at the
Annual and Special Meeting of Shareholders held on November 16, 2005, and vested
upon shareholder approval. As a result, $3,356,200 was recorded as professional
fees and $2,675,530 as wages and benefits with a corresponding credit to
contributed surplus. The company also granted an additional 175,000 options to
employees, consultants and directors. As a result, $487,785 was recorded as
professional fees, and $94,893 as wages and benefits with a corresponding credit
to contributed surplus. A further 445,000 options were granted to consultants,
directors and employees which are subject to shareholder approval. Upon
shareholder approval, $151,828 will be recorded as professional fees, and
$1,537,259 as wages and benefits with a corresponding credit to contributed
surplus. The fair value of the options granted was calculated using the Black-Scholes
option pricing model with the following assumptions:

Options earned during 5 months ended December 31, 2005:Dividend yield
      0%Expected volatility
      41.89%Risk free interest rate
      3.90%Expected life
      5 yearsOptions earned during the year ended, July 31, 2005:Dividend yield
      0%Expected volatility
      53%Risk free interest rate
      3.47%Expected life
      5 years


19

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------

10. Capital stock (continued)

Fixed Options

|                                       | December 31, 2005 |   | July 31, 2005   
|-------------------------------------- | ----------------- | - | ----------------
|                                       | Weighted Average  |   | Weighted Average
|                                       | Shares            |   | Exercise Price  
|                                       |                   |   |                 
|Outstanding, beginning of
    period   | 11,389,500        | $ | 4.16            
|Granted                                | 620,000 (2)       | $ | 9.05            
|Expired                                | -                 | $ | -               
|Exercised                              | (2,977,500)       | $ | (3.28)          
|                                       |                   |   |                 
|Outstanding, end of period             | 9,032,000         | $ | 4.75            
|                                       |                   |   |                 
|Options exercisable, end of
    period | 8,587,000         | $ | 4.56            

(1)     Included 2,016,000 options which were
approved at the annual and special meeting held on November 16, 2005. 
(2)     Includes 445,000 options subject to shareholder approval.

In January, 2006, Directors of the Company exercised 375,000
options for total proceeds of $1,779,000.

An aggregate of 19,717,300 options have been granted pursuant
to the Company's stock option plan of which 10,903,300 have been exercised and
227,000 have expired. Set forth below is a summary of the outstanding options to
purchase common shares as at December 31, 2005.

|             | Options Outstanding | Options Exercisable
|------------ | ------------------- | -------------------
|             |                     |                    
|             |                     | Weighted           
|             |                     | average            
|             | Number              | exercise           
|Option Price | outstanding         | price              



|$ 0.00 - $ 0.50 | 30,000    | $ 0.50 | 0.74 | 30,000    | $ 0.50
|--------------- | --------- | ------ | ---- | --------- | ------
|                |           |        |      |           |       
|$ 0.51 - $ 1.00 | 90,000    | $ 0.75 | 1.10 | 467,500   | $ 0.75
|                |           |        |      |           |       
|$ 1.01 - $ 1.50 | 755,000   | $ 1.32 | 0.86 | 755,000   | $ 1.32
|                |           |        |      |           |       
|$ 2.51 - $ 3.00 | 2,350,000 | $ 2.60 | 2.51 | 2,350,000 | $ 2.60
|                |           |        |      |           |       
|$ 5.01 - $ 5.50 | 2,600,000 | $ 5.45 | 3.09 | 2,600,000 | $ 5.45
|                |           |        |      |           |       
|$ 6.01 - $ 6.50 | 2,522,000 | $ 6.12 | 4.11 | 2,522,000 | $ 6.12
|                |           |        |      |           |       
|$ 7.01 - $ 7.50 | 25,000    | $ 7.00 | 0.62 | 25,000    | $ 7.00
|                |           |        |      |           |       
|$ 7.51 - $ 8.00 | 50,000    | $ 7.94 | 3.36 | 50,000    | $ 7.94
|                |           |        |      |           |       
|$9.00  $9.05   | 75,000    | $9.05  | 4.84 | 125,000   | $9.05 
|                |           |        |      |           |       
|$9.51 - $10.00  | 90,000    | $10.00 | 4.11 | 90,000    | $10.00



















20

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



10.     Capital stock (continued)

d) Compensation Warrants

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

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

A total of 6,200 broker warrants were exercised during the
year for total proceeds of $43,400. As a result, $15,438 representing the fair
value of the broker warrants was recorded as capital stock with a corresponding
credit to share issue costs. A summary of the 756,176 outstanding compensation
warrants and options to purchase common shares as at December 31, 2005 is as
follows:

|Number of                   |                       |   |               
|--------------------------- | --------------------- | - | --------------
|Common Shares
    Under     |                       |   |               
|Compensation Warrant/option | Expiration Date       |   | Exercise Price
|                            |                       |   |               
|277,344                     | August 15, 2006       | $ | 3.48          
|170,732                     | November 21,
    2006 | $ | 6.15          
|308,100                     | December 16,
    2006 | $ | 7.00          











21

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



11.     Loss per share

Loss per share is calculated based on the weighted average number of shares
outstanding during the year ended December 31, 2005 of 73,831,114 (July 31, 2005
 66,002,431)

Diluted earnings (loss) per share is based on the assumption
that options under the stock options plan and warrants have been exercised on
the later of the beginning of the year and the date granted. The diluted
weighted average number of shares for the year ended December 31, 2005 and July
31, 2005 were not presented, as all factors are anti-dilutive.

12.     Related party transactions

The Company has the following amounts owing from related
companies for general overheads paid for by Gammon Lake Resources Inc. Gammon
Lake Resources Inc. and Mexgold Resources Inc. share the same office premises in
Canada and Mexico, and Gammon Lake Resources Inc. pays for the common costs and
invoices Mexgold Resources Inc. on a quarterly basis:

|                           | December 31 |         | July 31
|-------------------------- | ----------- | ------- | -------
|                           |             | 2005    |        
|                           |             |         |        
|Due from related companies | $           | 626,228 | $      

The Company paid the following amounts to directors for
services other than their capacity as directors, and companies controlled by or
related to directors. The Company also pays a third party company related to a
director for the provision of workers in our Mexican operations, and pays a
markup of cost plus 10%. The fees listed in Mineral property exploration
expenditures below is the gross cost of all the workers fees plus the indicated
markup:

|                             | December 31 |           | July 31
|---------------------------- | ----------- | --------- | -------
|                             |             | 2005      |        
|                             |             |           |        
|Management fees              | $           | 150,737   | $      
|Professional fees            |             | -         |        
|Mineral property exploration |             |           |        
|expenditures                 |             | 4,831,617 |        
|                             |             |           |        
|                             | $           | 4,982,354 | $      
|                             |             |           |        

|The Company received the following amounts
    from related companies: |   |        |   |        
|---------------------------------------------------------------------- | - | ------ | - | -------
|                                                                       |   |        |   |        
|Professional fees                                                      | $ | 17,390 | $ | 51,600 
|Travel                                                                 |   | 45,522 |   | 118,110
|General & Administrative                                               |   | 35,198 |   | 54,850 
|                                                                       |   |        |   |        
|                                                                       | $ | 98,110 | $ | 224,560

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

22

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



13.     Financial instruments

The Company's financial instruments consisted of cash and
cash equivalents, receivables, payables and long term debt. Unless otherwise
noted, it is management's opinion that the Company is not exposed to significant
interest or credit risks arising from these financial instruments. Some of the
Company's receivables and payables are denominated in Mexican Pesos and the
Company's long term debt is denominated in United States dollars. Balances are
translated at the period end based on the Company's accounting policy as set out
in Note 2 to the consolidated financial statements. The long term debt creates a
risk to the Company's earnings that arises from fluctuations in foreign exchange
rates and the degree of volatility of these rates. The company does not enter
into derivative financial instruments to mitigate the foreign exchange risks
related to the foregoing items.

The Company estimates that the fair value of its cash and
cash equivalents, receivables, and payables approximate the carrying value of
the assets and liabilities. The Company has calculated the fair value of its
long term debt as disclosed in Note 16.

14.     Supplemental cash flow information

|                                                              |   | December 31   |             | July 31     
|------------------------------------------------------------- | - | ------------- | ----------- | ------------
|                                                              |   | 2005          |             | 2005        
|                                                              |   |               |             |             
|Change in non-cash working capital:                           |   |               |             |             
|Receivables                                                   | $ | (4,119,204)   | $           | (2,779,637) 
|Prepaids                                                      |   | 657,608       |             | (831,027)   
|Inventory                                                     |   | (2,056,963)   |             |             
|Payables and accruals                                         |   | 6,942,968     |             | (429,499)   
|                                                              |   |               |             |             
|                                                              |   | $ (1,424,409) |             | $(4,040,163)
|Supplemental information                                      |   |               |             |             
|Interest paid                                                 | $ | 242,845       | $           | Nil         
|Income taxes paid                                             |   |               | $           | Nil         
|                                                              |   |               |             |             
|Non-cash transactions                                         |   |               |             |             
|Acquisition of assets under capital lease                     | $ | 2,810,844     | $           | Nil         
|                                                              |   |               |             |             
|Loan to shareholder pursuant to exercise
    of share options | $ | 2,725,000     | $           | Nil         
|                                                              |   |               |             |             
|Cash and equivalents                                          |   |               |             |             
|Cash                                                          | $ | 6,701,543     | $13,752,796
|Temporary money market instruments                            |   | -             |             | 21,647,553  
|                                                              |   |               |             |             
|                                                              | $ | 6,701,543     | $           | 35,400,349  

Temporary money market instruments consisted of commercial
paper with terms of less than 30 days, having rates between 2.46%-2.48%. The
loan to shareholder pursuant to the exercise of share options is unsecured,
non-interest bearing with no set terms of repayment. The loan was subsequently
received in February, 2006.

15.

Certain of the comparative figures for July 31, 2005 have
been reclassified to conform with the financial statement presentation adopted
for December 31, 2005.

23

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16.     Differences between Canadian and U.S. generally accepted
accounting principles

The following represents additional information to the
consolidated financial statements of the Company that were prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"). Set out below are the material adjustments to net loss and loss per
share, basic and diluted for the five months ended December 31, 2005 and the
year ended July 31, 2005 and to shareholders' equity, mineral properties and
related deferred costs and future income taxes at December 31, 2005 and July 31,
2005 in order to conform to accounting principles generally accepted in the
United States of America (U.S. GAAP).

|Statement
    of loss:                                         |   |                 |   |                
|-------------------------------------------------------------- | - | --------------- | - | ---------------
|                                                               |   | 5 months        |   | Year           
|                                                               |   | ended           |   | ended          
|                                                               |   | December 31     |   | July 31        
|                                                               |   | 2005            |   | 2005           
|                                                               |   | As restated (a) |   | As restated (a)
|Net loss for the year based on                                 |   |                 |   |                
|Canadian GAAP                                                  | $ | (11,607,510)    | $ | (19,375,595)   
|Deferred exploration costs prior to the                        |   |                 |   |                
|establishment of proven and probable                           |   |                 |   |                
|mineral reserves (b)                                           |   | (1,286,922)     |   | (14,996,999)   
|Write off of mineral properties and related
    deferred costs |   |                 |   |                
|capitalized in prior periods under Canadian
    GAAP (c)       |   | -               |   | -              
|Future income taxes relating to deferred                       |   |                 |   |                
|exploration costs (b)                                          |   | (897,712)       |   | (433,253)      
|Amortization of mineral rights (b)                             |   | -               |   | -              
|Future income tax relating to the                              |   |                 |   |                
|amortization of mineral rights (b)                             |   | -               |   | -              
|Foreign exchange gain on future income                         |   |                 |   |                
|taxes liability previously expensed                            |   | 745,000         |   | (1,000)        
|Interest expense on long term debt                             |   |                 |   |                
|adjusted to fair value (f)                                     |   | (208,501)       |   | (526,154)      
|Foreign exchange gain on adjusted                              |   |                 |   |                
|long term debt (f)                                             |   | (141,411)       |   | (243,463)      
|                                                               |   |                 |   |                
|Net loss for
    the year based on U.S. GAAP                   | $ | (13,397,056)    | $ | (35,576,464)   
|                                                               |   |                 |   |                
|Loss per share, basic and diluted                              | $ | (0.18)          | $ | (0.54)         

24

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16.     Differences between Canadian and U.S. generally accepted accounting
principles (continued)

|Shareholders' equity:                       |   |                 |   |                
|------------------------------------------- | - | --------------- | - | ---------------
|                                            |   |                 |   |                
|                                            |   | December 31     |   | July 31        
|                                            |   | 2005            |   | 2005           
|                                            |   | As restated (a) |   | As restated (a)
|                                            |   |                 |   |                
|Shareholders' equity based on               |   |                 |   |                
|Canadian GAAP                               | $ | 194,651,832     | $ | 189,823,534    
|Deferred exploration costs prior to the     |   |                 |   |                
|establishment of proven and probable        |   |                 |   |                
|mineral reserves (b)                        |   | (55,000,742)    |   | (53,713,820)   
|Future income taxes relating to deferred    |   |                 |   |                
|exploration costs (b)                       |   | 4,076,858       |   | 4,974,570      
|Amortization of mineral rights (b)          |   | (12,749,889)    |   | (12,749,889)   
|Future income taxes relating to the         |   |                 |   |                
|amortization of mineral rights (b)          |   | 3,259,142       |   | 3,259,142      
|Foreign exchange gain on future income      |   |                 |   |                
|taxes liability previously expensed         |   |                 |   |                
|with exploration costs (b)                  |   | -               |   | (745,000)      
|Adjustment for exploration costs on         |   |                 |   |                
|abandoned properties (c)                    |   | 1,258,296       |   | 1,258,296      
|Fair value of stock options issued prior to |   |                 |   |                
|August 1, 1999 (d)                          |   | (180,613)       |   | (180,613)      
|Interest expense on long term debt          |   |                 |   |                
|adjusted to fair value (f)                  |   | (2,402,804)     |   | (2,194,304)    
|Foreign exchange gain on fair value         |   |                 |   |                
|adjusted long term debt (f)                 |   | (992,870)       |   | (851,459)      
|                                            |   |                 |   |                
|Shareholders' equity based on U.S. GAAP     | $ | 131,919,210     | $ | 128,880,457    

Balance sheet differences:

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

1) Mineral properties and related deferred costs

|                                                  |   | December 31     |   | July 31        
|------------------------------------------------- | - | --------------- | - | ---------------
|                                                  |   | 2005            |   | 2005           
|                                                  |   | As restated (a) |   | As restated (a)
|                                                  |   |                 |   |                
|Canadian GAAP                                     | $ | 150,193,724     | $ | 115,997,986    
|Deferred exploration costs                        |   |                 |   |                
|prior to the establishment of proven and          |   |                 |   |                
|probable mineral reserves (b)                     |   | (55,000,742)    |   | (53,713,820)   
|Amortization of mineral
    rights (b)            |   | (12,749,889)    |   | (12,749,889)   
|Adjustment for exploration
    costs on abandoned |   |                 |   |                
|properties (c)                                    |   | 1,258,296       |   | 1,258,296      
|Adjustment for mineral
    property purchase      |   |                 |   |                
|at fair value (f)                                 |   | (3,713,090)     |   | (3,713,090)    
|                                                  |   |                 |   |                
|U.S. GAAP                                         | $ | 79,988,299      | $ | 47,079,483     

25

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16.     Differences between Canadian and U.S. generally accepted accounting
principles (continued)

2) Long term debt

|                                                   | December 31     |           | July 31        
|-------------------------------------------------- | --------------- | --------- | ---------------
|                                                   |                 | 2005      |                
|                                                   |                 |           |                
|Canadian GAAP                                      | $               | 8,161,300 |                
|Adjustment of long term debt to fair value
    (f) | (3,713,090)     |           | (3,713,090)    
|Interest payable on long term debt                 |                 |           |                
|adjusted to fair value (f)                         | 2,402,804       |           | 2,194,304      
|Foreign exchange gain on fair value                |                 |           |                
|adjusted long term debt (f)                        | 992,870         |           | 851,459        
|                                                   |                 |           |                
|U.S. GAAP                                          | $               | 7,843,884 | $              
|                                                   |                 |           |                
|3) Future income taxes                             |                 |           |                
|                                                   |                 |           |                
|                                                   | December 31     |           | July 31        
|                                                   |                 | 2005      |                
|                                                   | As restated (a) |           | As restated (a)
|                                                   |                 |           |                
|Canadian GAAP                                      | $               | 7,336,000 | $              
|Future income tax adjustments                      | (7,336,000)     |           | (8,233,712)    
|Foreign exchange gain on future income tax         |                 |           |                
|liabilities previously expensed (b)                |                 | -         |                
|                                                   |                 |           |                
|U.S. GAAP                                          | $               | -         | $              

26

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16.     Differences between Canadian and U.S. generally accepted
accounting principles (continued)

a) Canadian and U.S. generally accepted accounting principles
restatement

During 2006 the Company determined that it had incorrectly
capitalized certain exploration costs incurred in the five month period ended
December 31, 2005, and the year ended July 31, 2005 in its "Differences between
Canadian and U.S. generally accepted accounting principles" note. U.S. GAAP
requires exploration costs to be expensed.

The "Differences between Canadian and U.S. generally accepted
accounting principles" note has been restated to reflect the required
adjustments by the Company. Previously reported figures with restatements are
summarized below:

|                                                              |   | December 31  |   |             | December 31  
|------------------------------------------------------------- | - | ------------ | - | ----------- | -------------
|Statement of Loss                                             |   | 2005         |   |             |              
|                                                              |   |              |   | Adjustments | as restated  
|Deferred
    exploration costs prior to the                   |   |              |   |             |              
|establishment of proven and probable                          |   |              |   |             |              
|mineral reserves (b)                                          |   | -            | $ | (1,286,922) | $            
|Foreign exchange gain on future income taxes
    liability    |   |              |   |             |              
|previously expensed                                           | $ | (9,000)      | $ | 754,000     | $            
|Future
    income taxes                                       |   | -            | $ | (897,712)   | $            
|                                                              |   |              |   |             |              
|Net loss
    for the year based on U.S. GAAP                  | $ | (11,966,422) | $ | (1,430,634) | $(13,397,056)
|                                                              |   |              |   |             |              
|Loss per
    share, basic and diluted                         | $ | (0.16)       |   |             | $            
|                                                              |   |              |   |             |              
|                                                              |   |              |   |             |              
|Shareholders' equity based on U.S. GAAP                       | $ | 136,030,083  | $ | (4,110,873) | $            
|                                                              |   |              |   |             |              
|                                                              |   |              |   |             |              
|Mineral
    properties and related deferred costs, U.S. GAAP  | $ | 84,997,460   | $ | (5,009,161) | 79,988,299   
|                                                              |   |              |   |             |              
|                                                              |   |              |   |             |              
|Future income taxes, U.S. GAAP                                | $ | 898,288      | $ | (898,288)   | $            
|                                                              |   |              |   |             |              
|                                                              |   | July 31      |   |             |              
|Statement of Loss                                             |   | 2005         |   |             |              
|                                                              |   |              |   | Adjustments | as restated  
|Deferred
    exploration costs prior to the                   |   |              |   |             |              
|establishment of proven and probable                          |   |              |   |             |              
|mineral reserves (b)                                          | $ | (11,274,760) | $ | (3,722,239) | $            
|Future
    income taxes related to deferred exploration costs | $ | (1,475,253)  | $ | 1,042,000   | $            
|                                                              |   |              |   |             |              
|Net loss for
    the year based on U.S. GAAP                  | $ | (32,896,225) | $ | (2,680,239) | $(35,576,464)
|                                                              |   |              |   |             |              
|Loss per
    share, basic and diluted                         | $ | (0.50)       |   |             | $            
|                                                              |   |              |   |             |              
|                                                              |   |              |   |             |              
|Shareholders' equity based on U.S. GAAP                       | $ | 131,560,696  | $ | (2,680,239) | $128,880,457 
|                                                              |   |              |   |             |              
|                                                              |   |              |   |             |              
|Mineral
    properties and related deferred costs, U.S. GAAP  | $ | 50,801,722   | $ | (3,722,239) | $            
|                                                              |   |              |   |             |              
|Future income taxes, U.S. GAAP                                | $ | 1,674,288    | $ | (1,042,000) | $            

27

---



|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16.     Differences between Canadian and U.S. generally accepted accounting
principles (continued)

Statements of cash flows

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

|                        | Year          | Year         
|----------------------- | ------------- | -------------
|                        | Ended         | Ended        
|                        | December 31   | July 31      
|                        | 2005          | 2005         
|                        | As restated   | As restated  
|                        |               |              
|Cash used in operations | $ (5,280,172) | $(23,972,283)
|                        |               |              
|Cash used in investing  | $(65,357,364) | $(59,854,118)











b) Mineral properties and related deferred costs

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

Under Canadian GAAP, the Company considers that exploration
costs have the characteristics of property, plant and equipment and,
accordingly, defers such costs. Furthermore, pursuant to EIC 126, deferred
exploration costs would not automatically be subject to regular assessment of
recoverability, unless certain conditions exist. Under United States GAAP
exploration costs are not considered to have the characteristics of property,
plant and equipment and accordingly are expensed before a commercially mineable
deposit has been established, which requires the preparation of a bankable
feasibility study.

c) Adjustment for exploration costs on abandoned properties

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

28

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16. Differences between Canadian and U.S. generally accepted
accounting principles (continued)

d) Stock-based compensation

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

Under Canadian GAAP, stock options granted to employees and
non-employees prior to August 1, 2002 were accounted for as capital transactions
when the options were exercised. For the year ended July 31, 2003, under
Canadian GAAP, stock options granted to employees and directors continued to be
accounted for as capital transactions and stock options granted to non-employees
were accounted for using the fair value method. Subsequent to August 1, 2003,
under Canadian GAAP, stock options granted to employees and non-employees were
accounted for using the fair value method. Accordingly, from August 1, 2003
there was no U.S.-Canadian GAAP difference.

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

e) Comprehensive income

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

f) Fair value of long term debt

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

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

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|Gammon Lake Resources Inc.
    Notes to the Consolidated Financial StatementsDecember 31, 2005
|----------------------------------------------------------------------------------------------



16.     Differences between Canadian and U.S. generally accepted
accounting principles (continued)

g) Recently issued accounting standards

In May 2005 the ("FASB") issued statement of Financial
Accounting Standards No. 154, "Accounting Changes and Error Corrections-a
replacement of APB Opinion No. 20 and FASB Statement No. 3" ("FAS 154"). FAS 154
replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements", and changes the
requirements for the accounting for and reporting of a change in accounting
principle. FAS 154 applies to all voluntary changes in accounting principle and
is effective immediately. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. Management does not
believe the adoption of FAS 154 will have a material effect on its financial
position or results of operations.

During 2004, a committee of the Emerging Issues Task Force ("EITF")
began discussing the accounting treatment for stripping costs incurred during
the production phase of a mine, EITF 04-06, "Accounting for stripping costs
incurred during production in the mining industry". During March 2005, the EITF
reached a consensus that stripping costs incurred during the production phase of
a mine are variable production costs that should be included in the costs of
inventory produced during the period that the stripping costs are incurred. The
Financial Accounting Standards Board ratified the EITF consensus. The EITF
consensus is effective for the first reporting period in fiscal years beginning
after December 15, 2005, with early adoption permitted. The Company is currently
in the development phase and is currently evaluating the impact, if any, on the
Company's financial position and results from operations once production
commences.

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