Exhibit 99.3

Gammon Lake Resources Inc.

December 31, 2006, December 31, 2005 and July 31, 2005 
(In Canadian Dollars unless otherwise stated)







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

AUDITORS' REPORT

To the Shareholders of Gammon Lake Resources Inc.,

We have audited the consolidated balance sheets of Gammon
Lake Resources Inc. ("the Company") as at December 31, 2006 and 2005 and the
consolidated statements of operations and deficit and cash flows for the year
ended December 31, 2006 and the five month period ended December 31, 2005. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with Canadian generally
accepted auditing standards. With respect to the consolidated financial
statements for the year ended December 31, 2006, we also conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as at December 31, 2006 and 2005 and the results of its operations and its cash
flows for the year ended December 31, 2006 and the five month period ended
December 31, 2005 in accordance with Canadian generally accepted accounting
principles.

The consolidated financial statements as at July 31, 2005 and
for the year then ended were audited by other auditors, who expressed an opinion
without reservation on those statements in their report, dated September 10,
2005.

/s/ KPMG LLP 
Chartered Accountants

Halifax, Canada 
April 2, 2007

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Auditors' Report

To the Shareholders of
Gammon Lake Resources Inc.

We have audited 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. 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 audit.

We conducted our audit 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, 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.

|Halifax, Nova Scotia, Canada | /s/ 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    | 5-31

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Gammon Lake Resources Inc. 
Consolidated Balance Sheets

|                                                               | December 31 | December 31  |   | July 31     
|-------------------------------------------------------------- | ----------- | ------------ | - | ------------
|                                                               |             | 2006         |   | 2005        
|                                                               |             |              |   |             
|Assets                                                         |             |              |   |             
|Current                                                        |             |              |   |             
|Cash and cash equivalents                                      | $           | 3,427,063    | $ | 6,701,543   
|Restricted cash                                                |             | 1,320,752    |   | -           
|Receivables                                                    |             |              |   |             
|Commodity taxes                                                |             | 14,036,491   |   | 9,558,654   
|Trade / other                                                  |             | 3,506,646    |   | 2,747,728   
|Inventories:                                                   |             |              |   |             
|Supplies                                                       |             | 9,525,376    |   | 2,056,963   
|Ore stockpiles                                                 |             | 5,628,522    |   | -           
|Ore in process                                                 |             | 38,773,078   |   | -           
|Prepaids and deposits                                          |             | 903,716      |   | 289,736     
|Due from related companies                                     |             | -            |   | 626,228     
|                                                               |             | 77,121,644   |   | 21,980,852  
|                                                               |             |              |   |             
|Deposits on capital
    equipment                              |             | 1,223,154    |   | 1,762,696   
|Long term investment (Note 4)                                  |             | -            |   | 10,632,000  
|Deferred compensation                                          |             | 997,571      |   | -           
|Long term ore inventory in stockpile                           |             | 2,380,888    |   | -           
|Mining interests and capital assets (Note 5)                   |             | 628,592,613  |   | 224,579,967 
|Goodwill                                                       |             | 124,925,668  |   | -           
|                                                               |             |              |   |             
|                                                               | $           | 835,241,538  | $ | 258,955,515 
|                                                               |             |              |   |             
|Liabilities                                                    |             |              |   |             
|Current                                                        |             |              |   |             
|Payables and accruals                                          | $           | 35,950,905   | $ | 10,552,274  
|Current portion of long-term debt and capital
    leases       |             | 78,065,578   |   | 24,935,455  
|                                                               |             | 114,016,483  |   | 35,487,729  
|                                                               |             |              |   |             
|Long term debt and capital leases (Note 6)                     |             | 74,126,093   |   | 21,203,828  
|Employee future benefits (Note 8)                              |             | 3,757,638    |   | 276,126     
|Future income taxes (Note 9)                                   |             | 82,149,543   |   | 7,336,000   
|                                                               |             | 274,049,757  |   | 64,303,683  
|Shareholders' Equity                                           |             |              |   |             
|Capital stock (Note 10)                                        |             | 551,067,338  |   | 218,974,423 
|Contributed surplus (Note 10)                                  |             | 83,394,693   |   | 20,255,279  
|Deficit                                                        |             | (73,270,250) |   | (44,577,870)
|                                                               |             | 561,191,781  |   | 194,651,832 
|                                                               |             |              |   |             
|                                                               | $           | 835,241,538  | $ | 258,955,515 
|                                                               |             |              |   |             
|Nature of operations and going concern
    assumption (Note 1) |             |              |   |             
|Commitments and contingencies (Note 7)                         |             |              |   |             
|Subsequent events (Note 17)                                    |             |              |   |             
|                                                               |             |              |   |             

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

|                                    |               |              |             |               |   |             
|----------------------------------- | ------------- | ------------ | ----------- | ------------- | - | ------------
|                                    | Twelve months |              | Five months | Twelve months
|                                    |               | ended        |             | ended         |   | ended       
|                                    | December 31   | December 31  |             | July 31      
|                                    |               | 2006         |             | 2005          |   | 2005        
|                                    |               |              |             |               |   |             
|                                    |               |              |             |               |   |             
|Revenues from mining operations     | $             | 72,824,863   | $           | -             | $ | -           
|                                    |               |              |             |               |   |             
|Expenses                            |               |              |             |               |   |             
|Production costs excluding          |               |              |             |               |   |             
|amortization & depletion            | $             | 43,017,011   | $           | -             | $ | -           
|Refining costs                      |               | 595,882      |             | -             |   | -           
|General and administrative          |               | 32,024,366   |             | 12,614,847    |   | 20,131,038  
|Amortization and depletion          |               | 21,264,785   |             | 212,755       |   | 175,345     
|                                    |               |              |             |               |   |             
|                                    |               | 96,902,044   |             | 12,827,602    |   | 20,306,383  
|                                    |               |              |             |               |   |             
|Loss before other items             |               | (24,077,181) |             | (12,827,602)  |   | (20,306,383)
|                                    |               |              |             |               |   |             
|Interest on long term debt          | $             | (5,977,943)  | $           | (242,845)     | $ | -           
|Foreign exchange (loss)/gain        |               | (1,697,560)  |             | 672,524       |   | 312,172     
|Gain/(loss) on equity investment    |               | 571,062      |             | 210,000       |   | (1,226,000) 
|Interest and sundry                 |               | 890,192      |             | 201,413       |   | 1,423,576   
|                                    |               | (6,214,249)  |             | 841,092       |   | 509,748     
|                                    |               |              |             |               |   |             
|Loss before income taxes            | $             | (30,291,430) | $           | (11,986,510)  | $ | (19,796,635)
|                                    |               |              |             |               |   |             
|Future income tax recovery (Note 9) |               | (1,599,050)  |             | (379,000)     |   | (421,040)   
|                                    |               |              |             |               |   |             
|Net loss                            | $             | (28,692,380) | $           | (11,607,510)  | $ | (19,375,595)
|                                    |               |              |             |               |   |             
|Loss per share (Note 11)            | $             | (0.33)       | $           | (0.16)        | $ | (0.29)      
|                                    |               |              |             |               |   |             
|                                    |               |              |             |               |   |             
|                                    |               |              |             |               |   |             
|Deficit, beginning of period        | $             | (44,577,870) | $           | (32,970,360)  | $ | (13,594,765)
|                                    |               |              |             |               |   |             
|Net loss                            |               | (28,692,380) |             | (11,607,510)  |   | (19,375,595)
|                                    |               |              |             |               |   |             
|Deficit, end of period              | $             | (73,270,250) | $           | (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

|                                                     | Twelve months           |             | Five months  | Twelve months
|---------------------------------------------------- | ----------------------- | ----------- | ------------ | -------------
|                                                     | ended                   |             | ended        |              
|                                                     | December 31             | December 31 |              | July 31      
|                                                     | 2006                    |             | 2005         |              
|                                                     |                         |             |              |              
|                                                     |                         |             |              |              
|Cashflows from (used in) operating
    activities    |                         |             |              |              
|Net loss                                             | $     
    (28,692,380) | $           | (11,607,510) | $            
|Amortization and depletion                           | 21,264,785              |             | 603,245      |              
|Unrealized foreign exchange gain                     | (2,267,313)             |             | (675,791)    |              
|Stock option expense                                 | 17,879,591              |             | 6,598,970    |              
|Employee future benefits                             | 445,022                 |             | 62,388       |              
|Future income tax recovery                           | (1,599,050)             |             | (379,000)    |              
|Accrued interest on long term debt                   | 916,415                 |             | 190,139      |              
|(Gain)/loss on long term                             |                         |             |              |              
|equity investment                                    | (571,062)               |             | (210,000)    |              
|Change in non-cash operating                         |                         |             |              |              
|working capital (Note 14)                            | (29,846,797)            |             | 1,424,409    |              
|                                                     |                         |             |              |              
|                                                     | (22,470,789)            |             | (3,993,150)  |              
|                                                     |                         |             |              |              
|Cashflows from (used in) investing
    activities    |                         |             |              |              
|Acquisition of Investment (Note 3)                   | (7,375,000)             |             | -            |              
|Cash acquired on acquisition of Mexgold (Note
    3) | 23,761,336              |             | -            |              
|Advances (to) from related companies                 | 626,228                 |             | (396,528)    |              
|Decrease/(Increase) in deposits on capital           |                         |             |              |              
|equipment                                            | 539,542                 |             | 7,376,072    |              
|Expenditures on mining interests and related         |                         |             |              |              
|deferred costs and acquisition                       |                         |             |              |              
|of capital assets                                    | (120,409,276)           |             | (73,623,829) |              
|                                                     | (102,857,170)           |             | (66,644,285) |              
|                                                     |                         |             |              |              
|Cashflows from (used in) financing
    activities    |                         |             |              |              
|Repayment of capital lease obligation                | (2,167,709)             |             | (150,209)    |              
|Proceeds from long-term debt                         | 93,869,892              |             | 34,977,000   |              
|Repayment from related company advances              | 12,949,432              |             | -            |              
|Net proceeds from issuance of capital stock          | -                       |             | -            |              
|Proceeds from exercise of options and
    warrants   | 18,722,616              |             | 7,111,838    |              
|                                                     | 123,374,231             |             | 41,938,629   |              
|Net (decrease)/increase in cash and                  |                         |             |              |              
|cash equivalents                                     | (1,953,728)             |             | (28,698,806) |              
|                                                     |                         |             |              |              
|Cash and cash equivalents                            |                         |             |              |              
|Beginning of period                                  | 6,701,543               |             | 35,400,349   |              
|                                                     |                         |             |              |              
|End of period                                        | $        
    4,747,815 | $           | 6,701,543    | $            

See accompanying notes to the consolidated financial statements.

4

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Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements

For the year ended December 31, 2006, the five month period ended December
31, 2005 and the year ended July 31, 2005
1. Nature of operations and going concern assumption

Gammon Lake Resources Inc. (the "Company") is a publicly
traded company, engaged in the acquisition, exploration and development of
resource properties in Mexico. The Company is continued under Part 1A of the
Companies Act (Quebec) and its common shares are listed on the Toronto Stock
Exchange (TSX:GAM) and the American Stock Exchange (AMEX:GRS). These financial
statements are prepared in Canadian dollars unless otherwise stated.
In 2005, the Company changed its year-end from July 31 to
December 31. The reason for the change of yearend was 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 future of the Company is dependent on the successful operation
of the mine and mill at its Ocampo and El Cubo operations.
The Company has substantially completed construction
activities at the Ocampo Mine. The Company has been crushing ore since January
3, 2006 and produced its first dore bar on February 1, 2006. The Company has
completed all the necessary construction to run its crushing facilities, mill
and heap leach pad. The Company reached commercial production in January, 2007.
During 2006, the Company has been recognizing revenue from the sale of dore bars
and has expensed costs related to the production of gold and silver.
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 reported revenues and expenses, and the
balance sheet classifications used.
2.Summary of significant accounting policies

Basis of presentation

The accompanying consolidated financial statements are
prepared by management in accordance with Canadian generally accepted accounting
principles and contain all adjustments necessary to present fairly Gammon Lake
Resources Inc.'s financial position as at December 31, 2006 as well as its
operations and cash flows for the year ended December 31, 2006, the five month
period ended December 31, 2005 and the year ended July 31, 2005.

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. On August 8, 2006, the Company
acquired all of the issued and outstanding shares and options of Mexgold
Resources Inc. by way of a plan of arrangement under the Business Corporations
Act (Ontario). These consolidated financial statements also include the accounts
of Mexgold Resources Inc, and its subsidiaries Compania Minera El Cubo, S.A. de
C.V., and Metales Interamericanos, S.A. de C.V., and incorporates the results of
operations of these subsidiaries from August 8, 2006.

All significant inter-company balances and transactions have been eliminated
on consolidation.

5

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Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
2. Summary of significant accounting policies (continued)
Asset retirement obligations

The Company recognizes 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.
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 periods. The
significant areas requiring the use of management estimates and assumptions
relate to mineral reserves that are the basis for future cash flow estimates
utilized in impairment calculations, depletion and amortization calculations;
estimates of recoverable gold and other minerals in stockpile and leach pad
inventories; estimates of fair value for certain reporting units and asset
impairment; write-downs of inventory to net realizable value; post employment,
post retirement and other employee future benefits; valuation allowances for
future income tax assets; reserves for contingencies and litigation; and the
fair value and accounting treatment of financial instruments. The Company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Accordingly, actual results
could differ from those estimates.
Cash and cash equivalents

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

Prior to the acquisition of Mexgold Resources Inc. (Note 3),
the Company accounted for its investment 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.
6

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Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
2. Summary of significant accounting policies (continued)

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.Supplies Inventory, Ore Stockpiles and Ore in Process
Supplies InventorySupplies inventory consists of mining supplies and consumables used in the
operations of the mines and is valued at the lower of average cost or net
realizable value.

Ore Stockpiles

Stockpiles represent ore that has been mined and is available
for further processing. Stockpiles are measured by estimating the number of
tonnes added and removed from the stockpile, the number of containing ounces
(based on assay data) and the estimated metallurgical recovery rates (based on
the expected processing method). Stockpile ore tonnages are verified by periodic
surveys. Costs are allocated to stockpiles based on relative values of material
stockpiled and processed using current mining costs incurred up to the point of
stockpiling the ore, including applicable overhead, depreciation, depletion and
amortization relating to mining operations, and removed at the average cost per
recoverable unit.

Ore in Process

The recovery of gold and silver is achieved through a milling
and heap leaching process. Under the heap leaching process, ore is placed on
leach pads where it is treated with a chemical solution, which dissolves the
gold and silver contained in the ore. The resulting "pregnant" solution is
further processed in a plant where the gold and silver is recovered. Costs are
added to ore on leach pads and in the mill based on current mining costs,
including applicable depreciation, depletion and amortization relating to mining
operations. Costs are removed from ore on leach pads and in the mill as ounces
are recovered based on the average cost per estimated recoverable ounce of gold
on the leach pad and in the mill.

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  

7

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Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006

2. Summary of significant accounting policies (continued) Impairment of long
lived assets

An impairment loss will be recognized if the carrying amount
of a long-lived asset is not recoverable. The carrying amount of a long-lived
asset is not recoverable if the carrying amount exceeds the sum of the
undiscounted cash flows expected to result from its use and eventual
disposition. The impairment loss to be recognized is measured as the amount by
which the carrying amount of the long-lived asset exceeds its fair value. The
Company has determined there is no impact on its results of operations and
financial position.

Revenue recognition

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

Sale of the dore bars are recorded at the time of shipping to
the third-party refinery. Sales are recorded at estimated values by the Company,
and are further adjusted based upon final quality assessment and quotations.

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.

Income taxes

Income taxes are calculated using the asset and liability
method. Under this method, current income taxes are recognized for the estimated
income taxes payable for the current period. Future income tax assets and
liabilities are determined based on the difference between the financial
reporting and tax basis of assets and liabilities and on unclaimed losses
carried forward 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 stock method. This method assumes that
proceeds received from the exercise of the in-the-money stock options and
warrants are used to repurchase shares at the average market price for the
periods.

8

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Gammon Lake Resources Inc. 
Notes to the Consolidated Financial StatementsDecember 31, 2006

2. Summary of significant accounting policies (continued)
Goodwill

The Company allocates goodwill arising from
business combinations to reporting units acquired by preparing estimates of the
fair value of the entire reporting unit and comparing this amount to the fair
value of assets and liabilities (including intangibles) in the reporting unit.
The difference represents the amount of goodwill allocated to each reporting
unit. Based on an independent valuation, the Company calculated the amount of
goodwill arising on the Mexgold Resources acquisition, identified the reporting
units and allocated goodwill to those reporting units.

The Company will test goodwill for impairment
annually. This process will be performed in accordance with the recent
accounting pronouncement relating to "Mining Assets  Impairment and Business
Combination" (Emerging Issue Committee Abstract 152). This impairment assessment
will involve estimating the fair value of each reporting unit that includes
goodwill. The Company will compare this fair value to the total carrying amount
of each reporting unit (including goodwill). If the fair value exceeds this
carrying amount, then the Company will estimate the fair values of all
identifiable assets and liabilities in the reporting unit, and compare this net
fair value of assets less liabilities to the estimated fair value of the entire
reporting unit. The difference will represent the fair value of goodwill, and if
necessary, the Company will reduce the carrying amount of goodwill to this fair
value.

Recent accounting pronouncements

i) Financial Instruments  Recognition and Measurement,
Section 3855

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.

9

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
2. Summary of significant accounting policies (continued)
ii) Hedges, Section 3865
This standard is applicable when a company chooses to
designate a hedging relationship for accounting purposes. It builds on the
existing Accounting Guideline 13 (AcG-13) "Hedging Relationships" and Section
1650 "Foreign Currency Translation", by specifying how hedge accounting is
applied and what disclosures are necessary when it is applied.
iii) Comprehensive Income, Section 1530
This standard introduces new rules for the reporting and
display of comprehensive income. Comprehensive income represents a change in
shareholders' equity (net assets) of an enterprise during a reporting period
from transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. These items include holding
gains and losses on certain investments, gain and losses on certain derivative
investments, and foreign currency gains and losses related to self-sustaining
foreign operations. The Company does not believe that it will have any
comprehensive income when it adopts this standard commencing January 1, 2007.
3.Business combinations

Acquisition of Mexgold Resources Inc.

On August 8, 2006, the Company acquired all of the issued and
outstanding common shares and options of Mexgold Resources Inc. ("Mexgold") by
way of a plan of arrangement under the Business Corporations Act (Ontario).
Under the terms of the transaction, each Mexgold shareholder, and warrant holder
other than Gammon Lake received 0.47 of a Gammon Lake common share in exchange
for each Mexgold common share and each Mexgold warrant. Holders of Mexgold
options received Gammon Lake options to purchase a proportionate number of
Gammon Lake common shares. Gammon Lake Resources Inc. issued 21,838,033 common
shares and will issue up to an aggregate of 5,498,897 common shares to the
holders of Mexgold common share and option holders upon exercise, respectively.
Mexgold warrants will be exercisable to acquire up to an aggregate of 186,120
Gammon Lake common shares, options and warrants.

Accounting for the Mexgold Resources Acquisition

The Mexgold Resources Inc. acquisition has been accounted for
as a purchase business combination, with Gammon Lake Resources Inc. as the
accounting acquirer. Gammon Lake Resources Inc. acquired Mexgold Resources Inc.
on August 8, 2006, with the results of operations of Mexgold Resources Inc.
consolidated from August 8, 2006 onwards. The purchase cost was $387 million and
was funded through the issuance of Gammon Lake common shares and options to
acquire common shares.

The measurement price of $14.13 per common share for the
purchase consideration represents the average of the closing price 2 days before
and 2 days after of the Company's common shares at August 8, 2006. The fair
value of the stock options and warrants outstanding under the Mexgold stock
option plan has been recorded using the weighted average strike price and
expiration.

10

---





Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006

3. Business combinations (continued)

In accordance with the purchase method of accounting, the
purchase cost was allocated to the underlying assets acquired and liabilities
assumed based upon their fair values at the date of acquisition. Gammon Lake
determined the fair values based on independent appraisals, discounted cash
flows, quoted market prices, and estimates made by management. Gammon Lake
recorded the excess of purchase cost over the net identifiable tangible and
intangible assets acquired as goodwill which has been allocated to reporting
units. This process was performed in accordance with recent accounting
pronouncements relating to "Mining Assets and Business Combinations" (CICA
Emerging Issues Committee Abstract 152). The amount allocated to goodwill is not
deductible for tax purposes.

An independent valuation of the significant assets acquired was completed in
March 2007, supporting management's allocation of the purchase consideration.

The following table sets the final allocation of the purchase cost to assets
and liabilities acquired, based on fair valuations.

Purchase Price Allocation

|Cash and cash equivalents                                              | $ | 22,534,836  
|---------------------------------------------------------------------- | - | ------------
|Restricted funds                                                       |   | 1,226,500   
|Other working capital, net                                             |   | 15,594,978  
|Deferred stock based compensation                                      |   | 5,428,375   
|Capital assets                                                         |   | 22,400,000  
|Mining interests                                                       |   | 279,543,087 
|Goodwill                                                               |   | 124,925,668 
|Long term debt                                                         |   | (5,021,186) 
|Employee future benefits                                               |   | (3,041,022) 
|Future income taxes                                                    |   | (76,611,460)
|                                                                       |   |             
|Net assets acquired, at fair value                                     | $ | 386,979,776 
|                                                                       |   |             
|Consideration                                                          |   |             
|                                                                       |   |             
|Common shares representing the shares of
    Mexgold not already owned | $ | 308,571,406 
|Stock options and warrants                                             |   | 57,200,050  
|Transaction costs                                                      |   | 3,012,320   
|Investment in Mexgold previously owned                                 |   | 18,196,000  
|                                                                       |   |             
|Total consideration provided                                           | $ | 386,979,776 

11

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
4. Long term investment

In 2005, the Company held 10,900,000 shares of Mexgold
Resources Inc. In February, 2006, the Company acquired an additional 2,950,000
shares of Mexgold Resources Inc., representing in total a 23% interest in the
issued and outstanding shares of Mexgold Resources Inc. On August 8, 2006, the
Company acquired all of the remaining issued and outstanding common shares and
options of Mexgold Resources Inc. thereby acquiring 100% ownership (Note 3).

|                                                    | December 31 | December 31  |   | July 31    
|--------------------------------------------------- | ----------- | ------------ | - | -----------
|                                                    |             | 2006         |   | 2005       
|                                                    |             |              |   |            
|Investment in Mexgold Resources Inc.                | $           | 12,300,000   | $ | 12,300,000 
|Cumulative equity share of income/(losses) in       |             |              |   |            
|Mexgold Resources Inc.                              |             | (1,479,000)  |   | (1,668,000)
|Additional investment in Mexgold Resources
    Inc. |             | 7,375,000    |   | -          
|Acquisition of Mexgold Resources Inc.               |             | (18,196,000) |   | -          
|                                                    |             |              |   |            
|                                                    | $           | -            | $ | 10,632,000 

5. Mining interests & Capital assets

|                              | December 31, 2006 | December 31, 2005
|----------------------------- | ----------------- | -----------------
|                              |                   |                  
|                              |                   | Accumulated      
|                              | Cost              | Amortization     
|                              |                   |                  
|Mining properties             | 449,060,910       | 19,355,412       
|Equipment under capital lease | 11,233,450        | 656,512          
|Plant and equipment           | 213,119,708       | 24,809,531       
|                              |                   |                  
|                              | $673,414,068      | $ 44,821,455     
|                              |                   |                  
|                              |                   |                  
|                              |                   |                  
|                              |                   |                  
|                              |                   |                  
|                              |                   |                  
|Mining properties             |                   |                  
|Equipment under capital lease |                   |                  
|Plant and equipment           |                   |                  
|                              |                   |                  
|                              |                   |                  
|                              |                   |                  

The carrying value of mineral properties represents the
accumulated costs to date for the acquisition of and exploration and development
costs incurred by the Company on its producing mineral properties located in
Ocampo and El Cubo, 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 commenced when the Company began production and are depleted
using the unit of production method based on estimated proven and probable
reserves.

12

---





Gammon Lake Resources Inc. 
Notes to the Consolidated Financial StatementsDecember 31, 2006

6.Obligations under capital lease and long-term debt

Consolidated long-term debt and capital leases:

|                                                                                              |   |             | December 31 | December 31 |         | July 31   
|--------------------------------------------------------------------------------------------- | - | ----------- | ----------- | ----------- | ------- | ----------
|                                                                                              |   |             |             | 2006        |         | 2005      
|                                                                                              |   |             |             |             |         |           
|a) Total lease payments ending
    December, 2009                                             | $ | 6,289,876   | $           | 2,693,418   | $       | -         
|b) Other                                                                                      |   |             | 74,599      |             | 117,426 |           
|c) Soyopa loan                                                                                |   | 7,848,996   |             | 8,161,300   |         | 8,581,300 
|d) Revolving credit facility                                                                  |   | 133,717,694 |             | 35,167,139  |         | -         
|e) Mining Development Trust Loan                                                              |   | 4,078,554   |             | -           |         | -         
|f) Nacional Financiera SNC                                                                    |   | 40,463      |             | -           |         | -         
|g) Nacional Financiera SNC                                                                    |   | 141,489     |             | -           |         | -         
|                                                                                              |   |             |             |             |         |           
|                                                                                              |   |             |             | 152,191,671 |         | 46,139,283
|                                                                                              |   |             |             |             |         |           
|Less: Current portion                                                                         |   | 78,065,578  |             | 24,935,455  |         | -         
|                                                                                              |   |             |             |             |         |           
|                                                                                              |   |             | $           | 74,126,093  | $       | 21,203,828
|                                                                                              |   |             |             |             |         |           
|The estimated future minimum
    lease and debt payments under all facilities are as follows: |   |            
|                                                                                              |   |             |             |             |         |           
|2007                                                                                          | $ | 78,065,578  |             |             |         |           
|2008                                                                                          | $ | 50,029,639  |             |             |         |           
|2009                                                                                          | $ | 24,096,454  |             |             |         |           
|                                                                                              |   |             |             |             |         |           
|                                                                                              |   |             | December 31 | December 31 |         | July 31   
|                                                                                              |   |             |             | 2006        |         | 2005      
|                                                                                              |   |             |             |             |         |           
|a)Total lease payments                                                                        | $ | 6,883,878   | $           | 2,961,933   | $       | -         
|                                                                                              |   |             |             |             |         |           
|Less: Interest on lease                                                                       |   | 594,002     |             | 268,515     |         | -         
|                                                                                              |   |             |             |             |         |           
|Present value of lease payments                                                               |   | 6,289,876   |             | 2,693,418   |         | -         
|                                                                                              |   |             |             |             |         |           
|Less: Current portion                                                                         |   | 2,594,905   |             | 816,793     |         | -         
|                                                                                              |   |             |             |             |         |           
|                                                                                              |   |             | $           | 3,694,971   | $       | 1,876,625 
|                                                                                              |   |             |             |             |         |           

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. Interest
payable on the various leases range from LIBOR + 2.50% to LIBOR + 2.75%.
The estimated future minimum lease payments under the lease are as follows:

2007      $ 2,594,905 
2008      $ 2,580,823 
2009      $ 1,114,148

13

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
6. Obligations under capital lease and long-term debt (continued)

|                                | December 31 | December 31 |   | July 31
|------------------------------- | ----------- | ----------- | - | -------
|                                |             | 2006        |   | 2005   
|                                |             |             |   |        
|b) Total lease payments         | $           | 79,978      | $ | 129,383
|                                |             |             |   |        
|Less: Interest on lease         |             | 5,379       |   | 11,957 
|                                |             |             |   |        
|Present value of lease payments |             | 74,599      |   | 117,426
|                                |             |             |   |        
|Less: Current portion           |             | 42,929      |   | 42,827 
|                                |             |             |   |        
|                                | $           | 31,670      | $ | 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:

2007      $ 42,929 
2008      $ 31,670

|                                                        | December 31 | December 31 |   | July 31  
|------------------------------------------------------- | ----------- | ----------- | - | ---------
|                                                        |             | 2006        |   | 2005     
|c) Soyopa loan, non-interest bearing,
    translated to |             |             |   |          
|Canadian dollars at the balance sheet date.             | $           | 7,848,996   | $ | 8,161,300
|                                                        |             |             |   |          
|Less: Current portion                                   | $           | 7,848,996   | $ | 4,080,650
|                                                        |             |             |   |          
|                                                        | $           | -           | $ | 4,080,650
|                                                        |             |             |   |          

The long term debt payable to Soyopa is non-interest bearing and has been
recorded at fair value with terms of repayment as follows:

i.) US $3,500,000 on or before February 16, 2007;

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.

On February 16, 2007, the Company repaid US$3,500,000 of the Soyopa loan
included in long-term debt in accordance with the terms.

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

2007       $ 7,848,996

14

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
6. Obligations under capital lease and long-term debt (continued)

|                                                   | December 31 | December 31 |   | July 31   
|-------------------------------------------------- | ----------- | ----------- | - | ----------
|                                                   |             | 2006        |   | 2005      
|                                                   |             |             |   |           
|d) Revolving and non-revolving credit
    facility | $           | 132,611,140 | $ | 34,977,000
|                                                   |             |             |   |           
|Add: Accrued interest                              |             | 1,106,554   |   | 190,139   
|                                                   |             |             |   |           
|                                                   |             | 133,717,694 |   | 35,167,139
|                                                   |             |             |   |           
|Less: Current portion                              |             | 65,418,166  |   | 20,185,324
|                                                   |             |             |   |           
|                                                   | $           | 68,299,528  | $ | 14,981,815

On October 14, 2005 and May 19, 2006, the Company secured a
credit facility with Scotia Capital Inc and Societe Generale. The facility is
secured and consists of a two-year revolving facility of US $32,500,000, and a
three year non-revolving facility of US $87,500,000. 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, 2006 had drawn US $113,800,000.

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

2007     $ 65,418,166 
2008     $ 45,317,222 
2009     $ 22,982,306

e) Mining Development Trust Loan

|                              | December 31 | December 31 |   | July 31
|----------------------------- | ----------- | ----------- | - | -------
|                              |             | 2006        |   | 2005   
|                              |             |             |   |        
|Mining Development Trust Loan | $           | 4,078,554   | $ | -      
|                              |             |             |   |        
|Less: Current portion         |             | 2,039,268   |   | -      
|                              |             |             |   |        
|                              | $           | 2,039,286   | $ | -      

On December 21, 1999, El Cubo entered into a credit agreement
with the Mining Development Trust for an amount of US $7,000,000. On December
21, 2003, the loan was restructured to reflect an amended interest rate of LIBOR
plus 650 basis points with monthly principal payments of US $145,833 to commence
January, 2005. This loan is secured by a first priority mortgage over the rights
deriving from El Cubo's mining concession rights, certain machinery and
equipment of El Cubo and an industrial mortgage on buildings, machinery and
equipment of El Cubo.

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

2007     $ 2,039,268 
2008     $ 2,039,286

15

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
6. Obligations under capital lease and long-term debt (continued)
f) Nacional Financiera SNC

|                      | December 31 | December 31 |   | July 31
|--------------------- | ----------- | ----------- | - | -------
|                      |             | 2006        |   | 2005   
|                      |             |             |   |        
|Other debt            | $           | 40,463      | $ | -      
|                      |             |             |   |        
|Less: Current portion |             | 40,463      |   | -      
|                      |             |             |   |        
|                      | $           | -           | $ | -      

On September 8, 2005, El Cubo received a loan from Nacional
Financiera, S.N.C. of $107,100 (Ps 1,000,000), which was used to finance an
energy-saving project. This loan is a non-interest bearing loan, with quarterly
payments of Ps125,000 beginning on December 31, 2005, and as of December 31,
2006, the aggregate balance of the loan amounted to $40,463 (Ps 375,000).

The estimated future minimum debt payment under the facility is as follows:

2007    $ 40,463

g) Nacional Financiera SNC

|                      | December 31 | December 31 |   | July 31
|--------------------- | ----------- | ----------- | - | -------
|                      |             | 2006        |   | 2005   
|                      |             |             |   |        
|Other debt            | $           | 141,489     | $ | -      
|                      |             |             |   |        
|Less: Current portion |             | 80,851      |   | -      
|                      |             |             |   |        
|                      | $           | 60,638      | $ | -      

On September 8, 2005, El Cubo received a loan from Nacional
Financiera, S.N.C. of $152,261 (Ps 1,498,628), which was used to finance an
energy-saving project. This loan is a non-interest bearing loan, with quarterly
payments of Ps 187,329 beginning on November 18, 2006.

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

2007     $ 80,851 
2008     $ 60,638

16

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
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 $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.
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 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. During the year ended
December 31, 2006, the Company paid Brenda US $40,000 (December 31, 2005  $Nil
and July 31, 2005 $Nil)
b) Compania Minera Global, S.A. de C.V. ("Global")

On July 17, 2000, the Company entered into an agreement with
Global for consulting services to assist in the negotiations of an agreement
with 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 US $1,000,000.
A summary of the future commitments based on the above noted option and joint
venture agreements at December 31, 2006 are set out in the following table:

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

17

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
7. Commitments and contingencies (continued)
c) Compania Minera Las Torres S.A. de C.V. ("Las Torres")

In September, 2004, the Company entered into a mining lease
agreement with Las Torres. Pursuant to the agreement, the Company acquired the
right to explore, develop and mine the Las Torres Gold-Silver property located
in Guanajuato State, Mexico, for a five-year period, subject to renewal for a
further five-year period. The annual lease payments total US $480,000 for the
first year and US $720,000 for each year thereafter. The Company has provided a
letter of credit in the amount of US $1 million in favour of the fulfilment of
the terms and conditions as set forth in this mining lease agreement.
In addition, the Company is required to pay a 3.5% net
smelter return on all gold and silver sales equal to or above US $350 per gold
ounce and US $5.50 per silver ounce, with a minimum monthly royalty of US
$20,000. The royalty will gradually decrease to a 3.0% net smelter return for
sales of gold and silver at or below US $300 per gold ounce and US $5 per silver
ounce.
Pursuant to the mining lease agreement with Las Torres, minimum annual lease
and royalty payment commitments for successive years approximate:

|     |   |   | Lease     |   | Royalty 
|---- | - | - | --------- | - | --------
|     |   |   | Payments  |   | Payments
|     |   |   | (US $)    |   | (US $)  
|     |   |   |           |   |         
|2007 | . | $ | 720,000   | $ | 240,000 
|2008 |   |   | 720,000   |   | 240,000 
|2009 |   |   | 720,000   |   | 180,000 
|     |   |   |           |   |         
|     |   | $ | 2,160,000 | $ | 660,000 

18

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
8. Employee future benefits

The Company accrues for employee future benefits for contract
workers and employees 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.
The reconciliation of the funded status of the defined benefit plans to the
amounts recorded in the financial statements is as follows:

|December 31, 2006                           |               | Pension   |         | Seniority |          | Total    
|------------------------------------------- | ------------- | --------- | ------- | --------- | -------- | ---------
|                                            | benefit plans |           | premium |           | premiums
|                                            |               |           |         |           |          |          
|Projected benefit obligation:               |               |           |         |           |          |          
|Balance at beginning of period              | $             | 316,701   | $       | 10,276    | $        | 326,977  
|Foreign exchange adjustment                 |               | (5,198)   |         | (168)     |          | (5,366)  
|Acquisition of Mexgold                      |               | 2,034,436 |         | 1,006,586 |          | 3,041,022
|Service cost                                |               | 205,796   |         | 106,074   |          | 311,870  
|Interest cost                               |               | 76,819    |         | 31,782    |          | 108,601  
|Actuarial (gain) loss                       |               | 239,988   |         | (99,946)  |          | 140,042  
|                                            |               |           |         |           |          |          
|Balance at end of period                    | $             | 2,868,542 | $       | 1,054,604 | $        | 3,923,146
|                                            |               |           |         |           |          |          
|Current benefit obligation:                 |               |           |         |           |          |          
|Projected benefit obligation, end of period | $             | 2,868,542 | $       | 1,054,604 | $        | 3,923,146
|Actuarial gain (loss)                       |               | (269,134) |         | 103,626   |          | (165,508)
|                                            |               |           |         |           |          |          
|Total accrued liability                     | $             | 2,599,408 | $       | 1,158,230 | $        | 3,757,638

|                                                                             |   |         |   |        
|---------------------------------------------------------------------------- | - | ------- | - | -------
|Employee future benefit costs
    recognized during the year are as follows: |   |         |   |        
|                                                                             |   |         |   |        
|Employee future benefits expense:                                            |   |         |   |        
|Service cost                                                                 | $ | 205,796 | $ | 106,074
|Interest cost                                                                |   | 76,819  |   | 31,783 
|Actuarial (gain) loss                                                        |   | 20,006  |   | 4,544  
|                                                                             |   |         |   |        
|Net expense for the period                                                   | $ | 302,621 | $ | 142,401
|                                                                             |   |         |   |        
|Significant assumptions used:                                                |   |         |   |        
|Discount rate                                                                |   | 4.00%   |   | 4.00%  
|                                                                             |   |         |   |        
|Rate of compensation increase                                                |   | 1.50%   |   | 1.50%  
|                                                                             |   |         |   |        

19

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
8. Employee future benefits (continued)

The reconciliation of the funded status of the defined benefit plans to the
amounts recorded in the financial statements is as follows:

|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                                                                 |               | 19,787   |         | 3,536     |          | 23,323  
|Interest cost                                                                |               | 4,232    |         | 161       |          | 4,393   
|Actuarial (gain) loss                                                        |               | 61,958   |         | (2,244)   |          | 59,714  
|                                                                             |               |          |         |           |          |         
|Balance at end of period                                                     | $             | 316,701  | $       | 10,276    | $        | 326,977 
|                                                                             |               |          |         |           |          |         
|Current benefit obligation:                                                  |               |          |         |           |          |         
|Projected benefit obligation, end of period                                  | $             | 316,701  | $       | 10,276    | $        | 326,977 
|Actuarial gain (loss)                                                        |               | (49,972) |         | (879)     |          | (50,851)
|                                                                             |               |          |         |           |          |         
|Total accrued liability                                                      | $             | 266,729  | $       | 9,397     | $        | 276,126 
|                                                                             |               |          |         |           |          |         
|                                                                             |               |          |         |           |          |         
|                                                                             |               |          |         |           |          |         
|Employee future benefit costs
    recognized during the year are as follows: |               |          |         |          
|                                                                             |               |          |         |           |          |         
|Employee future benefits expense:                                            |               |          |         |           |          |         
|Service cost                                                                 | $             | 19,787   | $       | 3,536     | $        | 23,323  
|Interest cost                                                                |               | 4,232    |         | 161       |          | 4,393   
|Actuarial (gain) loss                                                        |               | 42,371   |         | 4,807     |          | 47,178  
|                                                                             |               |          |         |           |          |         
|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%   
|                                                                             |               |          |         |           |          |         

20

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
8. Employee future benefits (continued)

The reconciliation of the funded status of the defined benefit plans to the
amounts recorded in the financial statements is as follows:

|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                                                                 |               | 23,927   |         | 4,624     |          | 28,551  
|Interest cost                                                                |               | 9,417    |         | 201       |          | 9,618   
|Actuarial (gain) loss                                                        |               | 519      |         | 11        |          | 530     
|                                                                             |               |          |         |           |          |         
|Balance at end of period                                                     | $             | 243,133  | $       | 9,298     | $        | 252,431 
|                                                                             |               |          |         |           |          |         
|Current benefit obligation:                                                  |               |          |         |           |          |         
|Projected benefit obligation, end of period                                  | $             | 243,133  | $       | 9,298     | $        | 252,431 
|Actuarial gain (loss)                                                        |               | (37,888) |         | (805)     |          | (38,693)
|                                                                             |               |          |         |           |          |         
|Total accrued liability                                                      | $             | 205,245  | $       | 8,493     | $        | 213,738 
|                                                                             |               |          |         |           |          |         
|                                                                             |               |          |         |           |          |         
|                                                                             |               |          |         |           |          |         
|Employee future benefit costs
    recognized during the year are as follows: |               |          |         |          
|                                                                             |               |          |         |           |          |         
|Employee future benefits expense:                                            |               |          |         |           |          |         
|Service cost                                                                 | $             | 23,927   | $       | 4,624     | $        | 28,551  
|Interest cost                                                                |               | 9,417    |         | 201       |          | 9,618   
|Actuarial (gain) loss                                                        |               | 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%   
|                                                                             |               |          |         |           |          |         

21

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
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, 2006,
December 31, 2005 and July 31, 2005.

|                                                                                                                       | December 31 | December 31  |   | July 31     
|---------------------------------------------------------------------------------------------------------------------- | ----------- | ------------ | - | ------------
|                                                                                                                       |             | 2006         |   | 2005        
|                                                                                                                       |             |              |   |             
|Net Loss                                                                                                               | $           | 30,291,430   | $ | 11,987,000  
|Income Tax Rate                                                                                                        |             | 38%          |   | 38%         
|                                                                                                                       |             |              |   |             
|Expected income tax recovery based on above
    rates                                                                  |             | 11,547,093   |   | 4,555,000   
|Effect of lower tax rates in foreign
    jurisdictions                                                                 |             | (1,579,633)  |   | -           
|Other non-deductible expenses                                                                                          |             | 1,126,237    |   | (113,100)   
|Adjustment for unrecorded losses                                                                                       |             | -            |   | 428,000     
|Effect of expiry of losses                                                                                             |             | -            |   | (140,600)   
|Non-deductible stock option expense                                                                                    |             | (6,815,700)  |   | (2,508,000) 
|Valuation allowance                                                                                                    |             | (2,678,947)  |   | (1,842,300) 
|                                                                                                                       |             |              |   |             
|Provision for income taxes                                                                                             | $           | 1,599,050    | $ | 379,000     
|                                                                                                                       |             |              |   |             
|                                                                                                                       |             |              |   |             
|The following reflects future
    income tax liabilities at December 31, 2006, December 31, 2005 and July 31,
    2005
|                                                                                                                       |             |              |   |             
|                                                                                                                       | December 31 | December 31  |   | July 31     
|                                                                                                                       |             | 2006         |   | 2005        
|                                                                                                                       |             |              |   |             
|Accounting value of mineral properties and
    related                                                                 |             |              |   |             
|deferred costs in excess of tax value                                                                                  | $           | 114,607,688  | $ | 35,138,000  
|Deductible share issue costs                                                                                           |             | (2,475,800)  |   | (3,099,600) 
|Future employee benefits                                                                                               |             | (460,979)    |   |             
|Tax value of equity investment in excess of                                                                            |             |              |   |             
|accounting value                                                                                                       |             | -            |   | (316,900)   
|Accounting value of foreign denominated debt                                                                           |             |              |   |             
|in excess of tax value                                                                                                 |             | 384,700      |   | 656,700     
|Non-capital losses carried forward                                                                                     |             | (43,119,752) |   | (35,389,900)
|                                                                                                                       |             | 68,935,857   |   | (3,011,700) 
|                                                                                                                       |             |              |   |             
|Valuation allowance                                                                                                    |             | 13,213,686   |   | 10,347,700  
|                                                                                                                       |             |              |   |             
|Future income tax liabilities recognized                                                                               | $           | 82,149,543   | $ | 7,336,000   
|                                                                                                                       |             |              |   |             

22

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
9. Income taxes (continued)

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

|     |   |            |               |   |        |             |       |            
|---- | - | ---------- | ------------- | - | ------ | ----------- | ----- | -----------
|     |   | Canada     | United States |   | Mexico |             | Total
|     |   |            |               |   |        |             |       |            
|2006 | $ | -          | $             | - | $      | -           | $     | -          
|2007 |   | 249,930    |               | - |        | -           |       | 249,930    
|2008 |   | 861,250    |               | - |        | -           |       | 861,250    
|2009 |   | 2,979,351  |               | - |        | -           |       | 2,979,351  
|2010 |   | -          |               | - |        | 1,547,790   |       | 1,547,790  
|2011 |   | -          |               | - |        | 49,181      |       | 49,181     
|2012 |   | 1,461,209  |               | - |        | 5,601,632   |       | 7,062,841  
|2013 |   | 5,523,818  |               | - |        | 15,711,660  |       | 21,235,478 
|2014 |   | 6,137,892  |               | - |        | 24,660,167  |       | 30,798,059 
|2015 |   | 4,089,216  |               | - |        | 60,682,147  |       | 64,771,363 
|2016 |   | -          |               | - |        | 19,037,348  |       | 19,037,348 
|2026 |   | 6,283,192  |               | - |        | -           |       | 6,283,192  
|     |   |            |               |   |        |             |       |            
|     | $ | 27,585,858 | $             | - | $      | 127,289,925 | $     | 154,875,783

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.

23

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
10. Capital stock (continued)
Issued and outstanding:

|                                                                    |             |             |           | Number of   |           |            
|------------------------------------------------------------------- | ----------- | ----------- | --------- | ----------- | --------- | -----------
|                                                                    |             |             |           | Common      |           | Ascribed   
|                                                                    |             |             |           | Shares      |           | Value      
|                                                                    |             |             |           |             |           |            
|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
|Fair value of options exercised                                     |             |             |           | -           |           | 5,072,000  
|                                                                    |             |             |           |             |           |            
|Balance, December 31, 2005                                          |             |             |           | 76,370,224  | $         | 218,974,423
|                                                                    |             |             |           |             |           |            
|Issued in connection with
    acquisition of Mexgold Resources Inc. |             | 21,838,033  |           | 308,571,406
|For cash pursuant to exercise of share
    purchase options         |             |             |           | 2,995,555   |           | 10,909,629 
|For cash pursuant to exercise of warrants                           |             |             |           | 942,296     |           | 5,102,459  
|Fair value of warrants exercised                                    |             |             |           | -           |           | 3,579,211  
|Fair value of options exercised                                     |             |             |           | -           |           | 3,930,210  
|                                                                    |             |             |           |             |           |            
|Balance, December 31, 2006                                          |             |             |           | 102,146,108 | $         | 551,067,338
|                                                                    |             |             |           |             |           |            
|                                                                    |             |             |           |             |           |            
|b) Contributed Surplus                                              |             |             |           |             |           |            
|                                                                    | December 31 | December 31 |           | July 31    
|                                                                    |             | 2006        |           | 2005        |           | 2005       
|                                                                    |             |             |           |             |           |            
|Contributed surplus at beginning of year                            | $           | 20,255,279  | $         | 18,728,309  | $         | 3,971,222  
|                                                                    |             |             |           |             |           |            
|Options issued in connection with Acquisition                       |             |             |           |             |           |            
|of Mexgold Resources Inc.                                           |             | 57,200,050  |           | -           |           | -          
|Add: Stock option expense for the year                              |             | 13,448,785  |           | 6,598,970   |           | 14,757,087 
|Deduct: Fair value of options exercised                             |             | (7,509,421) |           | (5,072,000) |           | -          
|                                                                    |             |             |           |             |           |            
|Contributed surplus at end of year                                  | $           | 83,394,693  | $         | 20,255,279  | $         | 18,728,309 
|                                                                    |             |             |           |             |           |            

24

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
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
22,500,000. 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.
The increase of the Corporation's Stock Option Plan for
directors, officers, employees and consultants by 3,000,000 common shares was
approved at the Annual and Special Meeting of the Shareholders held on May 10,
2006. During 2005, the Company had granted 2,555,000 options to directors,
officers, employees and consultants, and upon approval at the Annual and Special
Meeting of the Shareholders held on May 10, 2006, the options vested. As a
result $13,448,785 (December 31, 2006 - $6,614,408 and July 31, 2005 -
$13,974,680) was included in general and administrative costs in 2006.
On August 8, 2006, the Company acquired all of the issued and
outstanding common shares and options of Mexgold Resources Inc. by way of a plan
of arrangement under the Business Corporations Act (Ontario). Under the terms of
the transaction, each Mexgold shareholder, option and warrant holder other than
Gammon Lake received 0.47 of a Gammon Lake common share in exchange for each
Mexgold common share. Gammon Lake Resources Inc. issued 21,838,033 common shares
and up to an aggregate of 5,512,997 common shares to the holders of Mexgold
common share and option holders upon exercise, respectively. Mexgold warrants
will be exercisable to acquire up to an aggregate of 186,120 Gammon Lake common
shares.
The fair value of the options granted was calculated using the Black-Scholes
option pricing model with the following weighted average assumptions:

|                            | December
    31 | December 31 | July 31
|--------------------------- | --------------- | ----------- | -------
|                            | 2006            | 2005        | 2005   
|                            |                 |             |        
|Dividend yield              | 0%              | 0%          | 0%     
|Expected volatility         | 43.82%          | 41.89%      | 53.00% 
|Risk free interest rate     | 3.93%           | 3.90%       | 3.47%  
|Expected life               | 5 years         | 5 years     | 5 years
|Weighted average fair value | $ 4.48          | $ 2.98      | $ 3.09 

25

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
10. Capital stock (continued)
Options

|                                      | December 31, 2006 | December 31, 2005
|------------------------------------- | ----------------- | -----------------
|                                      | Weighted Average  | Weighted Average 
|                                      | Shares            | Exercise Price   
|                                      |                   |                  
|Outstanding, beginning of period      | 9,032,000         | $                
|Granted                               | 2,555,000         | $                
|Issued in connection with acquisition |                   |                  
|of Mexgold Resources Inc.             | 5,512,997         | $                
|Expired                               | (64,100)          | $                
|Exercised                             | (2,995,555)       | $                
|                                      |                   |                  
|Outstanding, end of period            | 14,040,342        | $                
|                                      |                   |                  
|Options exercisable, end of period    | 12,756,677        | $                
|                                      |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|                                      |                   |                  
|Outstanding, beginning of period      |                   |                  
|Granted                               |                   |                  
|Issued in connection with acquisition |                   |                  
|of Mexgold Resources Inc.             |                   |                  
|Expired                               |                   |                  
|Exercised                             |                   |                  
|                                      |                   |                  
|Outstanding, end of period            |                   |                  
|                                      |                   |                  
|Options exercisable, end of period    |                   |                  

26

---





Gammon Lake Resources Inc. 
Notes to the Consolidated Financial StatementsDecember 31, 2006

10. Capital stock (continued)

During the year ended December 31, 2006,
Employees, Consultants, Officers and Directors of the Company exercised
2,995,555 options for total proceeds of $10,909,629. Set forth below is a
summary of the outstanding options to purchase common shares as at December 31,
2006.

|                    | Options Outstanding | Options Exercisable
|------------------- | ------------------- | -------------------
|                    |                     |                    
|                    |                     | Weighted           
|                    |                     | average            
|                    | Number              | exercise           
|Option Price        | outstanding         | price              
|                    |                     |                    
|$ 1.01 - $ 1.50     | 1,633,250           | $ 1.06             
|                    |                     |                    
|$
    2.51 - $ 3.00 | 1,524,000           | $ 2.60             
|                    |                     |                    
|$
    4.51 - $ 5.00 | 4,700               | $ 4.89             
|                    |                     |                    
|$
    5.01 - $ 5.50 | 2,829,615           | $ 5.44             
|                    |                     |                    
|$
    5.51 - $ 6.00 | 1,612,100           | $ 5.68             
|                    |                     |                    
|$
    6.01 - $ 6.50 | 1,615,000           | $ 6.12             
|                    |                     |                    
|$
    6.51 - $ 7.00 | 321,100             | $ 6.59             
|                    |                     |                    
|$
    7.01 - $ 7.50 | 235,000             | $ 7.45             
|                    |                     |                    
|$
    7.51 - $ 8.00 | 50,000              | $ 7.94             
|                    |                     |                    
|$
    9.00 - $ 9.50 | 470,000             | $ 9.05             
|                    |                     |                    
|$
    9.51 - $10.00 | 90,000              | $10.00             
|                    |                     |                    
|$10.01 - $10.50     | 555,000             | $10.49             
|                    |                     |                    
|$10.51 - $11.00     | 3,100,577           | $10.64             
|                    |                     |                    
|                    |                     |                    
|Totals              | 14,040,342          |                    

27

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
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 942,296 broker warrants were exercised during the
year for total proceeds of $5,102,459. As a result, $3,579,211 representing the
fair value of the broker warrants was recorded as capital stock with a
corresponding credit to share issue costs. As at December 31, 2006, there are no
remaining broker warrants outstanding.

11. Loss per share

Loss per share is calculated based on the weighted average number of shares
outstanding during the year ended December 31, 2006 of 88,025,714 (December 31,
2005  73,831,114 and July 31, 2005  66,002,431)

Diluted earnings (loss) per share is based on the assumption
that options under the stock option 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, 2006, December 31, 2005
and July 31, 2005 were not presented, as all factors are anti-dilutive.

12. Related party transactions

The Company paid or has payable the following amounts to
directors for services other than in their capacity as directors, and companies
controlled by or related to directors. The Company also pays a third party
company related to a director for the provision of workers in our Mexican
operations, and pays a mark-up of cost plus 12.5%. The total costs paid to the
company for the provision of workers plus the mark-up of cost was:

|                                    | Twelve months |             | Five months | Twelve months
|----------------------------------- | ------------- | ----------- | ----------- | -------------
|                                    |               | ended       |             | ended        
|                                    | December 31   | December 31 |             | July 31      
|                                    |               | 2006        |             | 2005         
|                                    |               |             |             |              
|Management fees                     | $             | -           | $           | 150,737      
|Mining interests & production costs |               | 26,429,650  |             | 4,831,617    
|                                    |               |             |             |              
|                                    | $             | 26,429,650  | $           | 4,982,354    
|                                    |               |             |             |              

28

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
12. Related party transactions (continued)

The Company paid or has payable the following amounts to
directors for services other than in their capacity as directors, and companies
controlled by or related to directors. The Company also pays a third party
company related to a director for the provision of mine consumables. The Company
believes these costs are at fair market value. The total costs paid to the
company for the provision of mine consumables was:

|                 | Twelve months |             | Five months | Twelve months
|---------------- | ------------- | ----------- | ----------- | -------------
|                 |               | ended       |             | ended        
|                 | December 31   | December 31 | July 31    
|                 |               | 2006        |             | 2005         
|                 |               |             |             |              
|Production costs | $             | 3,450,322   | $           | -            

The Company paid or has payable the following amounts to
directors for services other than in their capacity as directors, and companies
controlled by or related to directors. The Company also pays a third party
company related to a director for the provision and construction of production
and support facilities. The Company believes these costs are at fair market
value. The total costs paid to the company for the provision and construction of
production and support facilities was:

|               |               |             |             |                   |   |      
|-------------- | ------------- | ----------- | ----------- | ----------------- | - | -----
|               | Twelve months |             | Five months | Twelve
    months
|               |               | ended       |             | ended             |   | ended
|               | December 31   | December 31 |             | July 31          
|               |               | 2006        |             | 2005              |   | 2005 
|               |               |             |             |                   |   |      
|Capital Assets | $             | 1,027,977   | $           | -                 | $ | -    

13. Financial instruments

The Company's financial instruments consisted of cash and
cash equivalents, restricted cash, receivables, payables and accruals, long term
debt and capital leases. Unless otherwise noted, it is management's opinion that
the Company is not exposed to significant interest or credit risks arising from
these financial instruments. Some of the Company's receivables and payables are
denominated in Mexican Pesos 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, restricted cash, receivables, and payables and accruals
approximate the carrying value of the assets and liabilities. The Company has
calculated the fair value of its long term debt and such fair value approximates
the carrying value of the debt as disclosed in Note 6.

29

---



Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006

|                                          |             |              |   |             |   |            
|----------------------------------------- | ----------- | ------------ | - | ----------- | - | -----------
|14. Supplemental cash flow information    |             |              |   |             |   |            
|                                          | December 31 | December 31  |   | July 31    
|                                          |             | 2006         |   | 2005        |   | 2005       
|Change in non-cash working capital:       |             |              |   |             |   |            
|Receivables                               | $           | (500,309)    | $ | (4,119,204) | $ | (2,779,637)
|Prepaids                                  |             | (504,766)    |   | 657,608     |   | (831,027)  
|Inventory - Supplies                      |             | (5,295,954)  |   | (2,056,963) |   | -          
|Inventory - Ore                           |             | (37,034,315) |   | -           |   | -          
|Payables and accruals                     |             | 13,488,547   |   | 6,942,968   |   | (429,499)  
|                                          |             |              |   |             |   |            
|                                          | $           | (29,846,797) | $ | 1,424,409   | $ | (4,040,163)
|                                          |             |              |   |             |   |            
|Supplemental information                  |             |              |   |             |   |            
|Interest paid                             | $           | 5,061,528    | $ | 242,845     | $ | -          
|Income taxes paid                         |             | -            |   | -           |   | -          
|                                          |             |              |   |             |   |            
|Non-cash transactions                     |             |              |   |             |   |            
|Acquisition of assets under capital lease | $           | 5,722,736    | $ | 2,810,844   | $ | -          
|                                          |             |              |   |             |   |            
|Loan to shareholder pursuant to exercise  |             |              |   |             |   |            
|of share options                          | $           | 14,468       | $ | 2,725,000   | $ | -          
|                                          |             |              |   |             |   |            
|Cash and equivalents                      |             |              |   |             |   |            
|Cash                                      | $           | 4,747,815    | $ | 6,701,543   | $ | 13,752,796 
|Temporary money market instruments        |             | -            |   | -           |   | 21,647,553 
|                                          |             |              |   |             |   |            
|                                          | $           | 4,747,815    | $ | 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. Comparative figures

Certain of the comparative figures for December 31, 2005 have been
reclassified to conform with the financial statement presentation adopted for
December 31, 2006.

30

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Gammon Lake Resources Inc. 
Notes to the Consolidated Financial Statements December 31, 2006
16. Segmented information

On August 8, 2006, the Company acquired all the issued and
outstanding common shares and options of Mexgold Resources Inc. (Note 3). With
the acquisition of Mexgold Resouces, the Company acquired the El Cubo mine
resulting in a separate reportable segment from Ocampo and Other operations.
Operating results by segment:

|                         | December 31, 2006
|------------------------ | -----------------
|                         | Revenue          
|                         | From             
|                         | Production       
|Operating Segments       |                  
|Ocampo                   | $ 53,527,140     
|El Cubo                  | 19,297,723       
|Corporate and other      | -                
|                         |                  
|Total                    | $ 72,824,863     
|                         |                  
|                         |                  
|Total assets by segment: |                  
|                         |                  
|                         |                  
|Operating Segments       |                  
|Ocampo                   |                  
|El Cubo                  |                  
|Corporate and other      |                  
|                         |                  
|Total                    |                  
|                         |                  

17. Subsequent events

Subsequent to year end, 2,948,355 options were exercised by employees,
consultants and directors for total proceeds of $26,436,444.

31

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