Exhibit 99.2 Managements Discussion and AnalysisFor the year
ended December 31, 2008


This amended and restated Managements Discussion and
Analysis ("MD&A"), dated August 12, 2009, relates to the financial condition and
results of operations of Gammon Gold Inc. ("the Company") together with its
wholly owned subsidiaries, and should be read in conjunction with the Companys
amended and restated consolidated financial statements for the year ended
December 31, 2008, and notes thereto. Details of the restatement are
provided in note 2 to the December 31, 2008 restated consolidated financial
statements. The amended and restated consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles ("GAAP").
All results are presented in United States dollars, unless otherwise stated.
Statements are subject to the risks and uncertainties identified in the
Forward-Looking Statements portion of this document. The first, second, third
and fourth quarters of the Companys fiscal year are referred to as "Q1", "Q2",
"Q3" and "Q4", respectively.

|AMENDMENT AND RESTATEMENT MADE AUGUST 12, 2009
|----------------------------------------------

During the preparation of the June 30, 2009 interim financial statements, the
Company determined that certain items in the December 31, 2008 consolidated
financial statements had been incorrectly translated into the Companys
functional currency, the United States dollar. In the Companys Mexican
operations, inventory is initially recorded in Mexican pesos. When translating
these balances to the US dollar, the Company used the current exchange rate
instead of the rate in effect when the costs were incurred. The impact of this
adjustment was to change the inventory balances and production costs in each
period. For the year ended December 31, 2008, the effect of the above was to
increase inventories by $9.3 million, increase production costs by $0.6 million,
reduce amortization and depletion by $0.3 million, and increase foreign exchange
gains by $9.6 million. Net earnings increased by $9.3 million and basic and
diluted net earnings per share increased from $0.25 and $0.25 to $0.34 and $0.33
per share respectively. There was no income tax effect as a result of this
adjustment. There was no material impact of these changes on the opening deficit
or accumulated other comprehensive income or on amounts reported prior to 2008.

In addition, the Company determined that upon initial adoption of Section
3031, Inventories, on January 1, 2008, a reversal should have been
recorded for previously recognized net realizable value adjustments. Section
3031, Inventories, requires that when the net realizable value of
inventory increases, previously recorded adjustments to reduce inventory to its
net realizable value are reversed. On implementation of this section on January
1, 2008 the Company did not identify that there were previous net realizable
value adjustments that were required to be reversed. The effect of this
restatement is to increase inventories by $1.6 million at January 1, 2008, with
a $1.1 million decrease to deficit and a $0.5 million increase to future income
tax liabilities.

As a result, the Company incorrectly presented the consolidated balance sheet
as at December 31, 2008, and the consolidated statements of operations and
comprehensive income / (loss), cash flows and shareholders equity for the year
ended December 31, 2008, and is correcting such presentation in the amended and
restated consolidated financial statements. Further information on these
adjustments and a reconciliation of amounts previously reported is contained in
note 2 of the Companys amended and restated consolidated financial statements
for the year ended December 31, 2008.

For the convenience of the reader, this 2008 MD&A sets forth the amended MD&A
in its entirety. The Company has not modified or updated the disclosure
presented in this MD&A, except as required to reflect the effects of the
restatement discussed above. Accordingly, this 2008 MD&A does not reflect events
occurring after the original filing, or modify or update those disclosures
affected by subsequent events. The Company has not amended and does not intend
to amend any of its previously filed Quarterly Reports for the quarterly periods
ended March 31, 2008, June 30, 2008, September 30, 2008 and March 31, 2009.
Accordingly, this 2008 MD&A should be read in conjunction with the Companys
filings subsequent to the original filing.

The Companys Chief Executive Officer and Chief Financial Officer have
reissued the certifications required by National Instrument 52-109 and Section
302 of the Sarbanes Oxley Act.

|OVERVIEW OF THE BUSINESS
|------------------------

Gammon Gold Inc. is a publicly traded gold and silver producer
engaged in the mining, development, exploration and acquisition of resource
properties. The Company owns and operates two producing mines in Mexico, the
Ocampo mine in Chihuahua State, and the El Cubo mine in Guanajuato State, and
also owns the Guadalupe y Calvo advanced exploration property in Chihuahua
State, Mexico. The Companys common shares are listed on the Toronto Stock
Exchange (TSX: GAM) and the New York Stock Exchange (NYSE: GRS). Further details
on Gammon Gold Inc. can be found in the Companys associated documents,
including its Annual Information Form, at www.sedar.com or on the Companys website at www.gammongold.com.

In 2008, the global economy was turbulent, experiencing
all-time highs and all-time lows. Like many corporations worldwide, the Company
experienced challenges in the second half of 2008 as a result of the significant
economic downturn and financial uncertainty that followed the decrease in bank
liquidity and resulting credit crisis. With the expectation of a continuing
downturn in 2009, the Company could continue to face challenges, such as
volatility in commodity prices which directly impacts the Companys revenues and
cash flows, higher costs and reduced availability of funding, and currency
devaluations. In response to these conditions, the Company has undertaken a
number of initiatives to contain costs, and prioritize and delay capital
expenditures.

1

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS


Despite the significant economic downturn experienced in the
second half of 2008, the price of gold remained relatively strong throughout
most of the year, with an average closing price of $871 per ounce, a 25%
increase over the average closing price in 2007. In 2008, the Company sold 24%
more gold ounces and realized an average selling price of $864 per ounce, a 24%
increase over 2007s realized average selling price of $699 per ounce. Although
the price of gold declined significantly in second half of the year, in late
December it began to rebound, closing the year at $870. Subsequent to year end,
the gold price has further increased, trading well in excess of $900 per ounce,
as investors seek refuge in gold in the face of economic uncertainty.

Silver traded in the range of $8.88 to $20.92 per ounce during
2008, an almost unprecedented $12.04 per ounce annual range. The closing price
of $14.99 represented a 12% increase over the prior year. However, during the
last half of the year silver prices declined significantly and underperformed
the gold price. The price of silver has improved moderately in 2009, as
investors have also begun to seek refuge in silver in the face of economic
uncertainty.

As a result of the significant decline in the price of silver,
the gold-to-silver ratio increased from 53:1 during the first six months of the
year to 79:1 in the fourth quarter, reducing the silver contribution to the
Companys gold equivalent ounces produced by approximately 13,000 ounces.
Therefore, as a result of the volatility in the gold equivalent ratio during
2008, when making annual and quarterly comparisons, the reader should focus on
actual gold and silver production and sales.

OUTLOOK


The Company is providing the following guidance for fiscal 2009
(assuming a gold-to-silver ratio of 78:1):

-

Gold production of 185,000  205,000 ounces;

-

Silver production of 8,170,000  8,945,000 ounces;

-

Gold equivalent production of 290,000  320,000 ounces; and

-

Total cash costs per gold equivalent ounce of $410  445(1).

|(1) | The Company has included a non-GAAP performance
      measure, total cash cost per gold equivalent ounce, throughout this
      document. For further information, see the Non-GAAP Measures section on
      page 19.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In an effort to preserve working capital in the current environment of commodity price volatility, the Company has temporarily deferred work at the Guadalupe y Calvo advanced exploration development project. As part of the scoping study for this
project that was scheduled for completion in Q1 2009, the Company completed 126 holes for 38,399 metres in 2008, bringing the project total drilling to 183 holes for 52,075 metres.  Further drilling and engineering work required to complete the
scoping study has been temporarily postponed.  The Company will re-evaluate this decision once the backlog of core logging and assays is eliminated and the metallurgical column testwork has been completed in Q2 2009.

|2008 HIGHLIGHTS
|---------------

The Companys turn-around strategy implemented in December 2007 resulted in a year of unprecedented success, including:

Net earnings and net earnings per share of $40.0 million and $0.34 respectively, versus a net loss and net loss per share of $101.3 million and $0.90 respectively, in 2007, representing an improvement of 139% year over year.

Total production
of 154,428 gold ounces and 5,778,874 silver ounces, or 251,510 gold equivalent
ounces, at a cash cost per gold equivalent ounce of $528. In 2007, the Company
produced 121,387 gold ounces, 5,035,704 silver ounces, or 218,734 gold
equivalent ounces, at a cash cost per gold equivalent ounce of $670, an
improvement of 27% and 15% on gold and silver production respectively and 21% on
cash cost per gold equivalent ounce.

Revenue from mining operations increased 39.7% to $212.5 million compared to $152.1 million in 2007, reflecting increased production and an average gold selling price of $864 per ounce and silver selling price of $14.66 per ounce,
versus average selling prices of $699 and $13.42 per ounce of gold and silver respectively, in 2007.

Cash flow from operations increased by $90.1 million, or 264%, to a positive $55.9 million, compared to a negative $34.2 million in 2007.

| | 2
| | -

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS




|▬ | Net free cash flow(2)of negative $10.9 million was an improvement year over year of $92.4 million, or 89%, compared to negative net free cash flow of $103.3 million in 2007. In the first quarter of 2009, the Company has
generated positive net free cash flow and has accumulated a cash balance of $19.6 million at March 20, 2009.                                                          
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | During the second half of 2008, the Company completed Phase I of the Ocampo mill expansion (averaging 2,321 TPD during the first month of commissioning in December 2008), which increases the mill capacity to 2,400 to 2,600 tonnes per day (TPD).
Phase II construction of the mill expansion commenced in October 2008, and has expanded the mill capacity by an additional 10-15% in Q1 2009.
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | In Q3, the Company launched an 18-month, $26 to $29 million exploration program.                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | On October 14, 2008 the Company began trading on the New York Stock Exchange under the trading symbol GRS.                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | The Company ended the year with a balance outstanding on its credit facility at essentially the same level as at the end of January 2008, when the turn-around strategy started to take root and the new executive team was in place.                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | On November 28, 2008, the Companys
    credit facility was restructured and extended. The existing $60 million
    revolving credit facility was converted to a $30 million non-revolving term
    facility that will be repaid in scheduled installments over a 19 month
    period, and a $20 million revolving term credit facility that expires on
    November 27, 2009.                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | During the year, a settlement agreement was reached related to a $12.4 million claim brought against the Company by Midas Fund Inc. Midas agreed to dismiss the claim in exchange for a $200,000 cash payment by the Company. The settlement did
not constitute an admission of liability by the Company or the other defendants.                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|▬ | During the year, the $13 million claim brought against an inactive subsidiary of the Company, initiated by Mr. Rafael Villagomez, a former 50% owner of the shares of El Cubo, was dismissed by the courts of the State of Guanajuato, Mexico.                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                   



|(2) | The Company has included a non-GAAP performance measure, net free cash flow, throughout this document. For further information, see the Non-GAAP Measures section on page 19.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

GROWTH STRATEGY


Gammon Gold Inc. is committed to responsibly operating and organically growing a precious metals company while balancing the needs of its stakeholders. The Companys growth strategy is to increase its production profile organically, reduce cash
costs and increase its reserve base through a number of initiatives as follows:

|  |                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|▬ | Expansion opportunities at the Ocampo Open Pit mine, Ocampo Underground mine and El Cubo Underground mine;                                                                         
|  |                                                                                                                                                                                    
|▬ | Additional engineering studies at Ocampo indicate the potential for
  additional expansion opportunities beyond the 2009 capital expansion program;                                
|  |                                                                                                                                                                                    
|▬ | The recently expanded exploration program which was announced in Q2 is
designed to increase resources, convert resources in 2009 and increase the
Companys production profile; and
|  |                                                                                                                                                                                    
|▬ | Actively pursuing selective acquisitions in North America.                                                                                                                         

These growth initiatives are expected to be supported by the
significant improvement in the Companys cash flow performance that, together
with the Companys existing financing facility and working capital position,
should be more than sufficient to fully fund the 2009 capital expansion
programs. As previously noted, the Company has temporarily deferred work at the
Guadalupe y Calvo advanced exploration development project to maximize
company-wide cash flow generation, due to the current economic and metal price
environment.

| | 3
| | -

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS




SUMMARIZED ANNUAL FINANCIAL AND OPERATING RESULTS


|                                                                                                     |                   |                   |                   |   |           |   |   |           |  
|---------------------------------------------------------------------------------------------------- | ----------------- | ----------------- | ----------------- | - | --------- | - | - | --------- | -
|(in thousands, except ounces, per share
      amounts, average realized prices and total cash costs) |                   |                   |                   |   |           |   |  
|                                                                                                     | YEAR ENDED       
|                                                                                                     | DECEMBER 31, 2008 | DECEMBER 31, 2007 | DECEMBER 31, 2006
|                                                                                                     | (as restated)     |                   |                  
|Gold ounces sold                                                                                     |                   | 150,646           |                   |   | 121,107   |   |   | 67,477    |  
|Silver ounces sold                                                                                   |                   | 5,606,539         |                   |   | 5,027,983 |   |   | 1,888,324 |  
|Gold equivalent ounces sold(1)                                                                       |                   | 245,028           |                   |   | 218,200   |   |   | 105,181   |  
|Gold equivalency rate                                                                                |                   | 59                |                   |   | 52        |   |   | 50        |  
|Gold ounces produced                                                                                 |                   | 154,428           |                   |   | 121,387   |   |   | 67,477    |  
|Silver ounces produced                                                                               |                   | 5,778,874         |                   |   | 5,035,704 |   |   | 1,888,324 |  
|Gold equivalent ounces produced(1)                                                                   |                   | 251,510           |                   |   | 218,734   |   |   | 105,181   |  
|Revenue from mining operations                                                                       | $                 | 212,522           |                   | $ | 152,059   |   | $ | 64,236    |  
|Production costs, excluding amortization
      and depletion                                         | $                 | 127,651           |                   | $ | 144,623   |   | $ | 37,944    |  
|Net earnings / (loss)                                                                                | $                 | 39,994            |                   | $ | (101,314  | ) | $ | (25,308   | )
|Net earnings / (loss) per share                                                                      | $                 | 0.34              |                   | $ | (0.90     | ) | $ | (0.29     | )
|Net earnings / (loss) per share,
      diluted(2)                                                    | $                 | 0.33              |                   | $ | (0.90     | ) | $ | (0.29     | )
|Cash flows from / (used in)
      operations                                                         | $                 | 55,933            |                   | $ | (34,192   | ) | $ | (20,026   | )
|Net free cash flow(3)                                                                                | $                 | (10,908           | )                 | $ | (103,334  | ) | $ | (123,349  | )
|Total assets                                                                                         | $                 | 795,178           |                   | $ | 753,952   |   | $ | 716,321   |  
|Total long-term financial liabilities                                                                | $                 | 12,668            |                   | $ | 1,334     |   | $ | 63,608    |  
|Total cash costs per gold equivalent
      ounce(3)                                                  | $                 | 528               |                   | $ | 670       |   | $ | 366       |  
|Total cash costs per gold ounce(3)                                                                   | $                 | 313               |                   | $ | 649       |   | $ | 195       |  
|Average realized gold price per ounce                                                                | $                 | 863.58            |                   | $ | 698.91    |   | $ | 606.99    |  
|Average realized silver price per ounce                                                              | $                 | 14.66             |                   | $ | 13.42     |   | $ | 12.18     |  
|Cash dividends declared                                                                              | $                 | Nil               |                   | $ | Nil       |   | $ | Nil       |  



|(1) | Gold equivalent ounces include silver ounces produced
      and sold converted to a gold equivalent based on the ratio of the actual
      realized sales prices of the commodities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Net loss per share on a diluted basis is the same as
      net loss per share on an undiluted basis in 2007 and 2006, as all factors
      were anti-dilutive.                      
|(3) | See the Non-GAAP Measures section on page
      19.                                                                                                                                 

REVIEW OF ANNUAL FINANCIAL RESULTS


For Gammon Gold, 2008 was a year focused on the execution of
the Companys turn-around strategy that was launched late in the fourth quarter
of 2007. This strategy included several cost reduction and productivity
improvement initiatives aimed at increasing the production and reducing total
cash costs per gold equivalent ounce at both mine sites. In addition, the
Company continued to make strategic capital investments to expand production
capacities at the Ocampo mine.

During 2008, the Company sold 150,646 gold ounces, 5,606,539
silver ounces, or 245,028 gold equivalent ounces, representing a 12.3% increase
over sales of 218,200 gold equivalent ounces in 2007. Total revenues during the
year were $212.5 million, representing an increase of $60.4 million over
revenues of $152.1 million in the prior year. This increase in revenue resulted
from the 24% higher sales of gold ounces and 12% higher sales of silver ounces
during the year, combined with the 24% stronger gold prices realized in 2008.

Consolidated net earnings of $40.0 million in 2008 represented
a $141.3 million improvement, or 139%, over the consolidated net loss of $101.3
million in 2007. This improvement was due to the increased sales and production
of gold and silver ounces mentioned previously, reduced operating costs, and
improved realized metal prices. In addition, the Company benefited from an $27.9
million change in non-cash foreign exchange gains year-over-year resulting from
the weakening of the Mexican peso and Canadian dollar against the US dollar
during the year. 2008 earnings also improved when compared to the prior year
because 2007 included future income tax expense of $43 million related to the
Mexican Single Rate Tax which was substantively enacted on September 28, 2007.
For further details on this item, see the discussion of Income Tax Expense /
(Recovery) on page 14.

The 2008 consolidated cash cost per gold equivalent ounce
result of $528 represents a 21% improvement over the total cash costs per gold
equivalent ounce of $670 in 2007. This year-over-year improvement was achieved
through improved productivity at the Ocampo mine, cost management initiatives
implemented at both mine sites, and the favourable impact of the weakening of
the Mexican peso. Annual cash costs per gold equivalent ounce were negatively
impacted by the unfavorable increase in the gold equivalency rate in the second
half of the year. If the gold equivalency rate had remained at 2007 levels,
consolidated cash costs would have been $512 per gold equivalent ounce for 2008,
a 24% improvement over the 2007 result.

| | 4
| | -

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS


The Company reported cash flow from operations of $55.9
million, an increase of $90.1 million or 264%, over the prior year. This
significant increase in cash flow resulted from improved metal prices, increased
production and sales, and higher working capital inflows. SUMMARY OF QUARTERLY FINANCIAL AND
OPERATING RESULTS
 (in thousands, except ounces, per share amounts, average realized prices and
    total cash costs)Q4 2008
    Q3 2008
    Q2 2008
    Q1 2008
    Q4 2007
    Q3 2007
    Q2 2007
    Q1 2007(as restated)
    (as restated)
    (as restated)
    (as restated)Gold
    ounces sold
    41,004
    33,914
    44,273
    31,455
    28,665
    25,104
    31,006
    36,332Silver ounces sold
    1,534,318
    1,338,864
    1,484,763
    1,248,594
    1,183,729
    1,068,809
    1,306,267
    1,469,178Gold
    equivalent ounces sold(1)
    60,662
    56,573
    72,694
    55,099
    49,969
    44,863
    57,063
    66,305Gold
    equivalency rate(2)
    79
    59
    52
    53
    56
    54
    51
    49Gold
    ounces produced
    43,768
    34,096
    43,465
    33,099
    27,571
    26,444
    32,246
    35,126Silver ounces produced
    1,649,893
    1,372,123
    1,445,887
    1,310,971
    1,140,797
    1,115,233
    1,357,708
    1,421,966Gold
    equivalent ounces produced(1)
    64,889
    57,521
    71,154
    57,946
    48,184
    47,091
    59,312
    64,147Revenue from mining operations
    $48,262
    $48,342
    $64,550
    $51,368
    $39,700
    $30,444
    $38,415
    $43,500Production costs, excluding amortization and depletion, as previously
    reported
    $22,804
    $41,220
    $36,303
    $26,697
    $33,511
    $33,957
    $39,714
    $37,440Restated adjustments
    $1,717
    $1,220
    ($305)
    ($2,005)
    -
    -
    -
    -As restated
    $24,521
    $42,440
    $35,998
    $24,692
    $33,511
    $33,957
    $39,714
    $37,440Net
    earnings / (loss)
    $21,757
    ($6,529)
    $6,522
    $8,489
    ($20,729)
    ($44,835)
    ($25,488)
    ($10,262)Restated adjustments













    $9,798













    $3,076













    ($1,674)













    ($1,445)













    -













    -













    -













    -As restated













    $31,555













    ($3,453)













    $4,848













    $7,044













    ($20,729)













    ($44,835)













    ($25,488)













    ($10,262)Net
    earnings / (loss) per share, basic
    $0.18
    ($0.05)
    $0.06
    $0.07
    ($0.19)
    ($0.38)
    ($0.23)
    ($0.10)Restated adjustments













    $0.08













    $0.03













    ($0.02)













    ($0.01)













    -













    -













    -













    -As restated













    $0.26













    ($0.02)













    $0.04













    $0.06













    ($0.19)













    ($0.38)













    ($0.23)













    ($0.10)Net earnings / (loss) per













    share, diluted(3)













    $0.18













    ($0.05)













    $0.05













    $0.07













    ($0.19)













    ($0.38)













    ($0.23)













    ($0.10)Restated adjustments













    $0.08













    $0.03













    ($0.01)













    ($0.01)













    -













    -













    -













    -As restated













    $0.26













    ($0.02)













    $0.04













    $0.06













    ($0.19)













    ($0.38)













    ($0.23)













    ($0.10)Cash
    from / (used in) operations
    $9,965
    $7,071
    $24,342
    $14,555
    $2,704
    ($10,475)
    ($17,064)
    ($9,260)Net free cash flow(4)
    ($6,446)
    ($10,353)
    $5,297
    $1,592
    ($10,767)
    ($36,648)
    ($35,494)
    ($20,425)Total cash costs, per gold equivalent ounce(4)
    $384
    $735
    $505
    $491
    $676
    $764
    $702
    $575Restated adjustments













    $29













    $22













    ($4)













    ($36)













    -













    -













    -













    -As restated













    $413













    $757













    $501













    $455













    $676













    $764













    $702













    $575Total cash costs, per gold ounce(4)
    $192
    $655
    $245
    $158
    $589
    $832
    $743
    $656Restated adjustments













    $42













    $36













    ($7)













    ($63)













    -













    -













    -













    -As restated













    $234













    $691













    $238













    $95













    $589













    $832













    $743













    $656Average realized gold price(5)
    $796
    $855
    $897
    $928
    $795
    $679
    $677
    $656Average realized silver price(5)
    $10.05
    $14.46
    $17.08
    $17.69
    $14.32
    $12.54
    $13.34
    $13.40Cash dividends declared
    $Nil
    $Nil
    $Nil
    $Nil
    $Nil
    $Nil
    $Nil
    $Nil  (1)
    Gold equivalent ounces include silver ounces
      produced and sold converted to a gold equivalent based on the ratio of the
      actual realized sales prices of the commodities.(2)
    Silver ounce equal to one gold ounce.(3)
    Net loss per share on a diluted basis is the
      same as net loss per share on an undiluted basis in Q1 through Q4 2007 and
      Q3 2008 as all factors were anti-dilutive.(4)
    See the Non-GAAP Measures section on page
    19.(5)
    Average realized prices are on a per ounce
      basis.




| | 5
| | -

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS


REVIEW OF FOURTH QUARTER FINANCIAL
RESULTS
 During the fourth quarter of 2008, the Company sold 41,004 gold
ounces, 1,534,318 silver ounces, or 60,662 gold equivalent ounces, which
represents an increase of 21.4% over sales of gold equivalent ounces in the same
period of the prior year. Fourth quarter revenues increased to $48.3 million
compared to Q4 2007 revenues of $39.7 million. This $8.6 million increase in
revenue was entirely due to increased production and sales of gold and silver
ounces, as realized metal prices did not improve quarter over quarter in light
of the economic downturn that occurred in the second half of the year. Fourth
quarter revenues decreased by $0.1 million compared to Q3 2008 revenues as a
result of a decrease in metal prices, offset by increased production during the
quarter. Consolidated net earnings were $31.6 million in the fourth
quarter of 2008, representing a $52.3 million or 253% improvement over the
Companys consolidated net loss of $20.7 million in the fourth quarter of 2007,
and a $35.1 million or 1002% improvement over the consolidated net loss in Q3
2008. This increase in earnings is due to increased production and the
continuing positive effects of the Companys turn-around strategy that are being
realized in 2008. During the quarter, the Mexican peso to US dollar exchange
rate averaged 13.1, as compared to the previous nine months where it averaged
10.5. Approximately 60% of the Companys expenditures are denominated in Mexican
pesos, and therefore these Mexican denominated costs decrease significantly when
presented in US dollar terms at current exchange rates. Also contributing to the
improvement quarter over quarter is the $24.4 million reduction in tax expense
and the $17.1 million increase in foreign exchange gains in 2008 versus 2007. Total cash costs per gold equivalent ounce for the fourth
quarter decreased 39% to $413, compared to $676 per gold equivalent ounce in the
same period in 2007, and 45% compared to $757 per gold equivalent ounce in Q3
2008. The fourth quarter of 2008 represented the Companys best ever quarterly
cash cost performance since declaring commercial production at Ocampo in January
2007, despite the adverse gold-to-silver ratio of 79:1 experienced in the
quarter. This reduction in cash costs per gold equivalent ounce is as a result
of improved production at both the Ocampo and El Cubo mills, targeted production
cost reductions achieved through the Companys turnaround strategy, and the
positive effects of the devaluation of the Mexican peso. Also, in the
third quarter, the Company recorded mark-to-market valuation
adjustments for inventories of $90 per gold equivalent ounce. The mark-to-market
adjustments primarily represented non-cash valuation adjustments to previously
inventoried costs for low grade ore-in-process, when quarter-end gold and silver
prices indicated that the balance sheet carrying value was not fully
recoverable. In the fourth quarter, as a result of strengthening commodity
prices, the Company recorded a reversal of a portion of these net valuation
adjustments for inventory still on hand at year end, of $34 per gold equivalent
ounce. The Company reported cash flow from operations during the
fourth quarter of $10.0 million, an increase of $7.3 million, or 270%, over the
prior year and $2.9 million or 41% over Q3 2008. This improvement in operating
cash flow resulted from the increased metal production and sales achieved in the
fourth quarter. RESULTS OF OPERATIONS
 (in thousands, except
      ounces and total cash costs)OCAMPO
    EL CUBO
    CORPORATE2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007(as restated)
    
    
    
    
    
    (as restated)Gold ounces produced
    
    115,656
    
    
    87,647
    
    
    38,772
    
    
    33,740
    
    
    -
    
    
    -Silver ounces produced
    
    3,995,725
    
    
    3,453,389
    
    
    1,783,149
    
    
    1,582,315
    
    
    -
    
    
    -Gold equivalent ounces
      produced(1)
    
    182,399
    
    
    154,424
    
    
    69,111
    
    
    64,310
    
    
    -
    
    
    -Gold ounces sold
    
    112,682
    
    
    87,367
    
    
    37,964
    
    
    33,740
    
    
    -
    
    
    -Silver ounces sold
    
    3,867,178
    
    
    3,445,668
    
    
    1,739,361
    
    
    1,582,315
    
    
    -
    
    
    -Gold equivalent ounces
      sold(1)
    
    177,404
    
    
    153,890
    
    
    67,624
    
    
    64,310
    
    
    -
    
    
    -Revenue from mining
      operations
    $
    154,313
    
    $
    107,833
    
    $
    58,209
    
    $
    44,226
    
    
    -
    
    
    -Production costs
    $
    86,026
    
    $
    102,658
    
    $
    41,625
    
    $
    37,645
    
    
    -
    
    
    -Refining costs
    $
    1,156
    
    $
    1,046
    
    $
    506
    
    $
    464
    
    
    -
    
    
    -Net earnings / (loss) before other
      items
    $
    31,881
    
    $
    (33,454
    )
    $
    19
    
    $
    (9,296
    )
    $
    (19,016
    )
    $
    (18,872
    )Total cash costs per
      gold equivalent ounce(2)
    $
    491
    
    $
    702
    
    $
    623
    
    $
    593
    
    
    -
    
    
    -Total cash costs per
      gold ounce(2)
    $
    269
    
    $
    703
    
    $
    441
    
    $
    511
    
    
    -
    
    
    -  (1)
    Gold equivalent ounces include silver ounces produced
      and sold converted to a gold equivalent based on the ratio of the actual
      realized sales prices of the commodities.(2)
    See the Non-GAAP Measures section on page
      19.  6  2008MANAGEMENTS DISCUSSION AND ANALYSIS
 OPERATIONAL REVIEW  OCAMPO MINE


As a result of the 2008 turn-around strategy, a number of
improvement initiatives were implemented at the Companys Ocampo mine. The
following table summarizes some of the key production and cost initiatives being
managed:

|AREAS
      FOR IMPROVEMENT          | MEASURES TO BE TAKEN
      THROUGHOUT 2008 | UPDATE ON PROGRESS                                                                                                  
|------------------------------------ | ------------------------------------------ | --------------------------------------------------------------------------------------------------------------------
|Equipment Availability               | -                                          | Operator training to be
      provided by equipment supplier to strengthen operating
      and maintenance practices
|                                     |                                            |                                                                                                                     
|(Fixed & Mobile)                     |                                            | -                                                                                                                   
|                                     | -                                          | Seasoned fixed and
      mobile maintenance managers to be appointed                                                
|                                     |                                            |                                                                                                                     
|                                     | -                                          | Maintain sufficient
      spares inventory to minimize downtime                                                     
|                                     |                                            |                                                                                                                     
|Insufficient Underground Development | -                                          | New underground
      equipment by mid-2008 to allow accelerated development                                        
|                                     |                                            |                                                                                                                     
|                                     | -                                          | Achieve an annualized
      target of 50 development metres per day                                                 
|                                     |                                            | -                                                                                                                   
|                                     | -                                          | Increase underground production by
      the end of 2008                                                            
|Underground                          | -                                          | Continue development of
      longhole mining stopes to maximize productivity and
      minimize dilution           
|Mining Method                        |                                            |                                                                                                                     
|Selection                            | -                                          | Training on longhole
      mining methods and utilization of proper equipment                                       
|                                     |                                            | -                                                                                                                   
|                                     | -                                          | Establish quality
      assurance / quality control team dedicated to dilution
      management                     
|                                     |                                            | -                                                                                                                   
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|Processing Facility Availability     | -                                          | Appointment of seasoned processing
      manager                                                                    
|                                     | -                                          | Maintain proper inventory of
      spares                                                                           
|                                     | -                                          | Appointment of seasoned
      maintenance manager                                                                   
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|Cost Management Issues               | -                                          | Ongoing improvements to
      reporting systems and cost control measures                                           
|                                     |                                            |                                                                                                                     
|                                     | -                                          | Continued implementation of
      optimal mining methods                                                            
|                                     | -                                          | Optimization of consumable and
      reagents usage                                                                 
|                                     | -                                          | Continue focus on optimizing
      workforce                                                                        
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|                                     |                                            |                                                                                                                     
|Labour Relations                     | -                                          | Production bonus schedule to be
    implemented                                                                     
|
    Compensation Challenges        | -                                          | Enhance communications with workforce                                                                               
|                                     | -                                          | Proactive labour relations program
    implemented                                                                  
|                                     | -                                          | Continual improvement to safety and
    mine services                                                               
|                                     | -                                          | Appoint more experienced mine
    management team                                                                   

| | 7
| | -

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


OCAMPOUNDERGROUND
MINE

|                                    |                   |                   |                   |                  
|----------------------------------- | ----------------- | ----------------- | ----------------- | -----------------
|                                    | QUARTER ENDED     | YEAR ENDED       
|                                    | DECEMBER 31, 2008 | DECEMBER 31, 2007 | DECEMBER 31, 2008 | DECEMBER 31, 2007
|Tonnes of ore mined                 | 72,566            | 81,210            | 313,575           | 412,493          
|Tonnes of ore mined per day         | 789               | 883               | 857               | 1,130            
|Average grade of gold(1)            | 3.48              | 3.09              | 3.26              | 3.48             
|Average grade of silver(1)          | 173               | 172               | 173               | 193              
|Average grade of gold equivalent(1) | 5.68              | 6.20              | 6.23              | 7.22             
|Metres developed                    | 3,269             | 2,989             | 14,527            | 12,766           

(1)
Grams per tonne.

The Company mined 72,566 tonnes of underground ore in the fourth quarter of 2008, for a total of 313,575 tonnes annually, or 857 TPD. In the fourth quarter, underground production was negatively impacted by the development required to change to
longhole mining which caused stoping delays, and a lack of qualified personnel in key areas of the underground.

Due to the success of the open pit re-phasing, additional high grade open pit ore can be sequenced and directed to the mill facility which allows the Company to dedicate more time to training in the underground. With the appointment of expatriate
trainers, the Company will focus on providing additional training in mining methods that are not typically utilized in Mexico and supervision such that the underground workforce will embrace this more efficient and effective team approach to mining.
In addition, production engineers have been assigned to interface between operations and planning personnel, to improve the coordination of underground teams.

The Company continues to focus on the necessary underground development to have more ore tonnes available for stoping, which will provide increased flexibility in sequencing mining areas and ultimately, increased mining productivity and efficiency.
The in-process underground exploration diamond drilling program is expected to increase the Companys reserves and confidence in the mining blocks being developed. The Company continues to develop the Santa Eduviges decline, located under the
Plaza de Gallos portion of the Ocampo Open Pit mine, as lateral drilling drifts are being developed to allow delineation drilling for planning a possible second underground mine and an additional source of high grade ore feed to the mill.

| | 8
| | -

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


OCAMPO OPEN PIT MINE

|                                                    | QUARTER ENDED           | YEAR ENDED             
|--------------------------------------------------- | ----------------------- | -----------------------
|                                                    | DECEMBER 31,
      2008 | DECEMBER 31,
      2007
|Total tonnes mined                                  | 7,050,090               | 6,682,603              
|Total tonnes mined per day                          | 76,631                  | 72,637                 
|Tonnes of ore mined                                 | 987,540                 | 654,605                
|Operating Stripping ratio                           | 4.15:1                  | 9.21:1                 
|Average grade of gold(1)                            | 1.09                    | 0.75                   
|Average grade of silver(1)                          | 47                      | 34                     
|Average grade of gold equivalent(1)                 | 1.68                    | 1.35                   
|Tonnes of marginal material
    wasted in Q4        | 127,654                 | -                      
|Average grade of gold(1)                            | 0.22                    | -                      
|Average grade of silver(1)                          | 6                       | -                      
|Average grade of gold equivalent(1)                 | 0.29                    | -                      
|Total tonnes ore mined and marginal material wasted | 1,115,194               | 654,605                
|Average grade of gold(1)                            | 0.99                    | 0.75                   
|Average grade of silver(1)                          | 42                      | 34                     
|Average grade of gold equivalent(1)                 | 1.52                    | 1.35                   
|(1) Grams per tonne.                                |                         |                        

The Company mined 27,883,370 tonnes from the open pit in 2008,
a 13% improvement over the tonnes mined in 2007. The enhanced maintenance
program that occurred in the second quarter of 2008 improved equipment
availability, thereby allowing the Company to mine 987,540 tonnes of ore in Q4,
representing a 51% increase over the fourth quarter of 2007. The Company
continued to send high grade open pit ore to the mill to take advantage of the
increased throughput capacity, better economics and recoveries of the mill
circuit, thereby improving recovered metal content. During the fourth quarter,
due to volatile metal prices, the Company elected to stockpile the lower grade
open pit ore, for processing at a later date. Also during Q4, 127,654 tonnes of
0.2 to 0.5 gold equivalent grams per tonne were sent for waste due to metal
price volatility. Had management not done this, ore mined would have been
1,115,194 tonnes at 0.99 gold grams per tonne and 42 silver grams per tonne,
in-line with 2007 year end reserve grades.

The Company continued its planned pre-stripping program during
the year, with accelerated stripping activities at the Conico pit. Stripping
activities at the Picacho pit were deferred in the latter half of the second
quarter, as an independent third-party study verified that the Company could now
reduce the accelerated stripping rate and still maintain the required rates of
ore mining. The revised open pit phasing has resulted in a reduction in the
operating stripping ratio from 6.78:1 in Q1 2008 to 4.15:1 in Q4 2008, and is
expected to further decline in future quarters to be closer to the life of mine
rate within the range of 2-3:1 as per the current reserve model.

OCAMPO MILL CIRCUIT

|                                           | QUARTER ENDED           | YEAR ENDED             
|------------------------------------------ | ----------------------- | -----------------------
|                                           | DECEMBER 31,
      2008 | DECEMBER 31,
      2007
|Tonnes from the underground                | 78,455                  | 96,881                 
|Tonnes from the open pit                   | 116,275                 | 37,151                 
|Total tonnes of ore processed              | 194,730                 | 134,032                
|Total tonnes of ore processed per day      | 2,117                   | 1,457                  
|Average grade of gold processed(1)         | 3.44                    | 2.57                   
|Average grade of silver
      processed(1) | 154                     | 137                    
|Gold equivalent grade processed(1)         | 5.42                    | 5.04                   
|Gold ounces produced                       | 20,385                  | 10,301                 
|Silver ounces produced                     | 822,632                 | 475,111                
|Gold equivalent ounces produced            | 30,906                  | 18,906                 
|(1) Grams per tonne.                       |                         |                        

| | 9
| | -

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS


The Ocampo Mill Circuit processed 660,819 tonnes during the
year at an average rate of 1,806 TPD, which was an increase of 41% over 2007. In
addition, total tonnes processed during the fourth quarter were 194,730 at an
average of 2,117 TPD, representing the best quarter in the history of the
operation. The commissioning of the 2,400  2,600 TPD expansion in November
largely contributed to this increase, and will allow these rates of production
to further improve in 2009.

Mill availability improved during 2008, and averaged 91% for
the year as a result of the improved maintenance program and more reliable power
supply. The Company remains on schedule and on budget in having access to an
additional 20 megawatts of grid power in the first half of 2009. This 20
megawatt power supply will eliminate the Companys reliance on diesel
generators, thereby providing a far more reliable source of power at a
significantly reduced cost. To date, the Company has installed all electrical
equipment and has substantially completed the required substation, and two
transformers have been installed. In addition, cyanide destruction management
initiatives are gaining traction with a number of cost reductions anticipated to
be realized once the Phase 1 expansion achieves steady state levels.

Grades decreased to 5.72 gold equivalent grams per tonne in
2008 from 6.06 in the same period in 2007. This decline is virtually all due to
the depreciation in the silver price which caused the unfavourable gold
equivalency rate discussed previously. At the end of the year, ore stockpiles
ahead of the mill were 15,482 tonnes, minimizing the possibility of future
production interruption due to feed variability from the underground or the open
pit. The focus going forward will remain on maintaining more than sufficient
stockpiles ahead of both processing facilities to ensure ongoing production
during any period of downtime.

In October, a decision was made to install a third mill at the
Ocampo processing plant, and as a result, the Marcey mill, which was on care and
maintenance at El Cubos Chirimetera plant, was moved to Ocampo in early
October. This is the second phase of the three-phase processing plant expansion
program that was completed in Q1 2009, and will increase throughput capacity to
2,800  3,000 TPD. The detailed engineering on final processing capacity will be
completed in early 2009.

OCAMPO CRUSHING & HEAP LEACH CIRCUIT

|                                                       | QUARTER ENDED           | YEAR ENDED             
|------------------------------------------------------ | ----------------------- | -----------------------
|                                                       | DECEMBER 31,
      2008 | DECEMBER 31,
      2007
|Open pit ore placed on the heap leach
      pad        | 741,560                 | 616,121                
|Underground mine tonnes placed on heap
      leach pad | -                       | 1,411                  
|Total tonnes of ore processed                          | 741,560                 | 617,532                
|Total tonnes of ore processed per day                  | 8,060                   | 6,712                  
|Average grade of gold processed(1)                     | 0.91                    | 0.63                   
|Average grade of silver
      processed(1)             | 41                      | 27                     
|Gold equivalent grade processed(1)                     | 1.43                    | 1.43                   
|Gold ounces produced                                   | 13,492                  | 9,252                  
|Silver ounces produced                                 | 353,796                 | 270,949                
|Gold equivalent ounces produced                        | 18,016                  | 14,164                 
|(1) Grams per tonne.                                   |                         |                        

During 2008, the Company placed 3,080,771 tonnes on the heap
leach pad, which averaged 8,417 TPD and represents a 5% increase over the
name-plate capacity of 8,000 TPD. Construction of the heap leach pad expansion
was completed during the second quarter, increasing its capacity from 5 million
to 12 million tonnes. The crushing plant availability continued to improve in
the second half of the year as a result of the improved maintenance program and
more reliable power supply.

During the fourth quarter, a decision was made to defer a
$10-$12 million heap leach pad expansion from 2009 to 2010. To accomplish this,
management made the decision to stockpile low grade ores (below 0.7 gold
equivalent grams per tonne) until the latter part of 2010 and to operate at a
stacking rate of 5,000 to 7,000 tonnes per day. The result is that stacked
headgrades for gold and silver will be substantially increased over historical
levels, thereby allowing management to maintain metal production, while
conserving pad capacity.

As of the end of the year, the Company has 43,515 tonnes of
ore, grading 0.98 gold equivalent grams per tonne, stockpiled ahead of the heap
leach to minimize the impact of any open pit production issues due to
unfavourable weather conditions and periods of equipment downtime. Due to metal
price volatility, management made a decision in the third quarter to defer low
grade ore for processing at a later date. As a result, at December
31st, the Company had also stockpiled 216,192 tonnes with a grade of
0.63 grams per gold equivalent tonne.

OCAMPOCASHCOSTS

The Company saw a reduced cash cost per gold equivalent ounce
result at Ocampo in 2008, as cash costs of $491 per gold equivalent ounce were
achieved, compared to the 2007 cash cost result of $702. This favorable change
was driven by productivity improvements, such
as higher daily mill tonnage and increased equipment availability, and strong open pit production. In addition, the weakened Mexican peso in the fourth quarter resulted in lower costs when translated to US dollars.

| | 10
| | --

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS


The improved cash cost result was partially offset by the unfavorable change in the gold equivalency rate. If the gold equivalency rate had remained at 2007 levels, cash costs per gold equivalent ounce at Ocampo would have been $466 or $25
per gold equivalent ounce lower. Also, in the second and third quarters, the Company recorded mark-to-market valuation and other adjustments for inventories of $34 per gold equivalent ounce. The mark-to-market adjustments primarily represented
non-cash valuation adjustments to previously inventoried costs for low grade ore-in-process, when quarter-end gold and silver prices indicated that the balance sheet carrying value was not fully recoverable. In the fourth quarter, as a result of
strengthening commodity prices, the Company recorded a reversal of a portion of these net valuation adjustments for inventory still on hand at year end, of $12 per gold equivalent ounce.

OCAMPOEXPLORATION

In early 2008 the Company committed to a minimum $7.5 million exploration program at Ocampo during 2008  2009, to be funded from operating cash flow. The Ocampo Mining district is at a key cross-road in its history. With the open pit mines
now operating smoothly, and the underground mine under continuous improvement, the Company can now begin to expand exploration efforts beyond the known core of the district. The past years exploration efforts were designed to complete
definition drilling on the known deposits, and to complete some step-out drilling as well, but future exploration will be designed to test new target ideas beyond the known deposits. To date, less than 20% of the land position has seen any
systematic exploration. With the known resources occupying just a small part of the land position, with the known ore systems open to the NE and SE, with known ore deposits the west (Moris) and northeast (Pinos Altos) of the Companys land
position, there is ample encouragement to invest in a more thorough exploration program on the unexplored portion of the property.

During the year, the Company spent $2.9 million on Ocampo drilling. This work included the following:

-

A substantial surface drill program to better define the limits of mineralization in the Plaza de Gallos (PDG) open pits. This drilling consisted of 108 holes of reverse circulation drilling for a total of 15,516 metres, and 31 holes of
diamond drilling for a total of 5,231 metres. The total of reverse circulation
and diamond drilling in the PDG open pits in 2008 was 139 holes for a total of 20,747 metres. This work was used to refine the Companys Resource and Reserve
estimates, as well as long-range mine planning, for the PDG open pits. The Company plans a further 12,000 metres of definition drilling in the open pits in 2009.

-

In addition to the surface definition drilling on the open pits, the Company drilled 85 holes for a total of 13,574 metres in the Northeast Area using two underground diamond drills. This drilling was mostly directed to the San Fernando Vein, the
San Amado Vein, the Aventurero Vein, and the Balvanera Vein. Results from the San Fernando and San Amado Veins were positive. Strongly mineralized vein was discovered on the San Amado that is still open to the NE. The Company plans a further 10,500
metres of underground diamond drilling in the Northeast Area in 2009 to test the downward extension of known vein ore shoots to the 1,380 metres elevation.

-

Fieldwork in 2008 discovered a 450 metre outcropping NE extension of the San Amado Vein on surface that extends past any known workings or past drilling. This obvious surface target is covered to the NE by post-mineral rocks, but the termination of
veining to the NE is unknown due to this post-mineral cover. For 2009 the Company plans a step-wise program to test the San Amado NE extension first with 2,000 metre of surface drilling, and if results are positive, with a substantial drift on the
1,611 level to test the vein further at depth.

HOLE
      TARGET
      INTERVAL
      TRUE WIDTH(1)
      GOLD (G/T)
      SILVER (G/T)
      GOLD EQUIVALENT
      (G/T)(50:1)OU-426
      SAN AMADO
      5.00
      3.50
      30.57
      2,126
      73.09OU-428
      SAN AMADO
      3.65
      2.45
      82.40
      681
      96.02(1)True widths are subject to some interpretation.


Note: This exploration information has been reviewed by Qualified Person, Mr. Ramon Luna. All sample analyses were performed by Chemex Laboratories, based in Vancouver, British Columbia using standard fire assay procedures.

-

During 2008 the Company completed 27,493 metres of underground workings,of which 5,564 metres were new drifts along mineralized structures. This work will be compiled along with the 2008 underground drilling to build a new ore model and
resource  reserve model in Q3 2009.











-

Exploration at Ocampo to date has focused on the PDG and Northeast Area veins. For 2009 the Company is planning a new surface brownfields exploration program at Ocampo on the existing large land position. Much of this land position has not been
explored far beyond the presently-recognized resources in the past, and the new
program will consist of basic geology and geochemistry to define drill targets
for the following year.

| | 11
| | --

---

2008MANAGEMENTS DISCUSSION AND ANALYSIS


OPERATIONAL REVIEW  EL CUBO MINE


As with Ocampo, in 2008 the Company has implemented a number of
production and cost initiatives at the El Cubo mine as part of the Company-wide
turn-around strategy.

|AREAS FOR IMPROVEMENT                    |   | MEASURES TO BE TAKEN THROUGHOUT 2008                                                                                                                                                                                                                  |                                                                                               | UPDATE ON PROGRESS                                                                                                                                                                                                                                                                                                                            
|---------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|High Labour
    Costs                    | - | Optimization of workforce to reduce total site manning of both
      employees and contractors                                                                                                                                                        | -                                                                                             | As mills have been placed on care and maintenance and underground
      ore haulage level ramps up, the workforce (contractor and union) level has
      reduced by 29% from 1,296 in January to 920 by the end of December. No
      work stoppage occurred, however lower productivities resulted from the
      disruptive re-organization.
|                                         |   |                                                                                                                                                                                                                                                      
|                                         |   |                                                                                                                                                                                                                                                       |                                                                                              
|                                         |   |                                                                                                                                                                                                                                                       |                                                                                              
|                                         |   |                                                                                                                                                                                                                                                       | -                                                                                             | A
      further 5-10% reduction will take place through attrition in 2009.                                                                                                                                                                                                                                                                    
|Processing  Facilities                   | - | Advancing key capital projects by early 2008 to drive production
      throughput and plant availability 
    Integration of the El Cubo mine workings with the Las Torres shaft
      and mill infrastructure                                        | -                                                                                             | Majority of capital projects (including the installation of a
      gravity circuit) were completed. 
    Continued focus on determining ways to improve production
      throughput and plant availability.                                                                                                                                  
|                                         | - | -                                                                                                                                                                                                                                                    
|                                         | - | All underground ore hauled via train at the 600 level to the Las
    Torres shaft and plant                                                                                                                                                           | -                                                                                             | 60% to 80% of the underground production is now being transferred
      via the underground workings directly to the Torres shaft and mill
      infrastructure. Ramp-up to full production is anticipated by year end
      2009.                                                                                                            
|                                         |   |                                                                                                                                                                                                                                                      
|                                         |   |                                                                                                                                                                                                                                                       |                                                                                              
|Equipment
    Availability               | - | Additional
      mobile equipment for the underground                                                                                                                                                                                                 | -                                                                                             | Key new underground equipment arrived in July and early August, and
      has been fully commissioned.                                                                                                                                                                                                                                        
|                                         | - | Improved preventative maintenance practices implemented                                                                                                                                                                                               |                                                                                              
|Lack of
    Underground  Development     | - | Focus on extending existing underground exploration development
      into areas of known structures which have been neglected historically due
      to a lack of capital and priority 
    Annualized
      target of 75 development metres per day | -                                                                                             | Continued focus on underground exploration and development to build
      on the number of available longhole stopes.                                                                                                                                                                                                                         
|                                         |   |                                                                                                                                                                                                                                                      
|                                         | - | -                                                                                                                                                                                                                                                     | Averaged 64 development metres per day in Q4 2008.                                           
|Underground  Mining Method
    Selection | - | Improved
      overall mining methods                                                                                                                                                                                                                 | -                                                                                             | Continued to introduce longhole mining methods.                                                                                                                                                                                                                                                                                               
|                                         | - | Establish quality assurance / quality control team dedicated to
      dilution management                                                                                                                                                             | -                                                                                             | Longhole mining training program completed in Q2 2008.                                                                                                                                                                                                                                                                                        
|                                         |   | -                                                                                                                                                                                                                                                     | A dedicated quality assurance team is now on site that is focused
      on reducing dilution.

|EL CUBO UNDERGROUND AND MILLING OPERATIONS |                         |                         |                         |                        
|------------------------------------------ | ----------------------- | ----------------------- | ----------------------- | -----------------------
|                                           | QUARTER ENDED           | YEAR ENDED             
|                                           | DECEMBER 31,
      2008 | DECEMBER 31,
      2007 | DECEMBER 31,
      2008 | DECEMBER 31,
      2007
|Tonnes of
      ore mined                  | 158,974                 | 160,278                 | 648,373                 | 689,753                
|Tonnes of ore mined per day                | 1,728                   | 1,742                   | 1,771                   | 1,890                  
|Total tonnes of ore processed              | 160,719                 | 160,278                 | 658,105                 | 689,753                
|Total tonnes of ore processed per day      | 1,746                   | 1,742                   | 1,798                   | 1,890                  
|Average grade of gold processed(1)         | 2.11                    | 1.74                    | 1.98                    | 1.77                   
|Average grade of silver processed(1)       | 103                     | 88                      | 94                      | 83                     
|Gold equivalent grade processed(1)         | 3.41                    | 3.33                    | 3.59                    | 3.38                   
|Gold ounces produced                       | 9,891                   | 8,017                   | 38,772                  | 33,740                 
|Silver ounces produced                     | 473,466                 | 394,738                 | 1,783,148               | 1,582,316              
|Gold equivalent ounces produced            | 15,966                  | 15,112                  | 69,111                  | 64,038                 
|(1) Grams per tonne                        |                         |                         |                         |                        

The Company mined 648,373 tonnes of ore at the El Cubo mine in
2008, a 6% decrease compared to 2007. This mining performance reduction was
primarily due to the test cessation of Rezagas (old stope backfill material)
mining during the third quarter of 2008 in an effort to focus on increasing
in-situ ores mining rates, and the disruption associated with the downsizing and
restructuring of the workforce. In the fourth quarter, management recommenced
Rezagas mining, but at reduced levels due to the unfavourable gold-to-silver
ratio and depressed silver prices, and continued to focus on in-situ mining,
which is expected to result in further cost savings. Despite the reduction of
the workforce by 29% throughout the year, mining of in-situ ores improved by 55%
from January to December.

| | 12
| | --

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


During the second quarter, the Company installed a gravity circuit at the Las Torres mill which has improved the facilitys overall metallurgical recovery of higher grade ores.  With all primary processing activities now consolidated at the Las
Torres mill, management placed the grinding circuit at the Tajo mill on care and maintenance. Until the necessary permits to allow for cyanidation at Las Torres are received, the concentrate is being leached at the Tajo mill. Once permits are
obtained, the Tajo mill will be fully placed on care and maintenance, and all processing will take place at the Las Torres mill.

ELCUBOCASHCOSTS

The Company saw an increase in the cash costs per gold equivalent ounce result at El Cubo in 2008, as cash costs of $623 per gold equivalent ounce were achieved, compared to the 2007 cash cost result of $593. Cash costs per gold equivalent
ounce increased due to the workforce restructuring costs of $0.6 million or $9 per gold equivalent ounce, and the reduction in rezagas mining in the year by 49%. In addition, the unfavorable increase in the gold equivalency rate caused
higher cash costs per gold equivalent ounce. If the gold equivalency rate had remained at 2007 levels, cash costs per gold equivalent ounce at El Cubo would have been $590, in line with 2007 cash costs per gold equivalent ounce.  Offsetting this
increase in cash costs per gold equivalent ounce at El Cubo was the favorable impact of the devaluation of the Mexican peso in the fourth quarter of 2008.

The Company expects 2009 cash costs per gold equivalent ounce to further decrease due to resuming the mining of low cost rezagas material, and realizing the benefits of the reduced workforce.

ELCUBOEXPLORATION

An underground diamond drill program using Company drill equipment was initiated in June on some of the more prospective veins. Drilling expenditures in 2008 totalled $0.4 million.  A total 5,262 metres were drilled to test down dip projections
of several veins. The principal targets were:

Villalpando Vein from Levels 4 and 14 - with 2,913 metres of drilling

176 Vein and 178 Vein from Level 0 - with 1,110 metres

Villalpando del Alto and Guadalupe Veins from Level 13 - with 812 metres

Some additional ore was added to the Villalpando structure on Level 4 and 14 and indications of down-dip continuity for the 176 and 178 Veins were obtained from the drilling. This is a significant result as no veining in this part of the mine (Area
I) has as yet been explored or developed. Further exploration in 2009 will target down dip structures particularly where they occur in the favourable La Bufa rhyolite and Peregrina intrusive.

In addition, exploration drifting was completed on several veins, including La Loca  Level 12 (98 metres), La Loca  Level 6 (115 metres), and Villalpando  Level 5 (118 metres). Within Peñoles concessions the exploration
drifting occurred principally on San Alberto  Level 600 (74 metres) and Fatima  Level 600 (49 metres).

Surface diamond drilling was suspended for the year in 2008, while surface geologic mapping and sampling could be advanced. During the
year the Company decided to dedicate greater efforts to develop a property-wide renewed exploration program for the district. This work will extend into the first half of 2009 and will entail a careful compilation of the districts geology and
geochemistry, include new geologic mapping with the intent to develop a prioritized series of exploration targets for new ore systems, as well as extensions to known vein systems.

GUADALUPE YCALVOEXPLORATIONPROJECT

Exploration at the Guadalupe y Calvo Project in 2008 focused on detailed drilling, with as much a five drill rigs running at a time. During the year, the Company drilled an additional 126 diamond drill holes for a total of 38,399 metres.  Along with
previous drilling done by the Company, the total drilling in the project is now 183 diamond drill holes for a total of 52,075 metres. This years drilling was designed to fill in the previous drilling on 25 x 40 metre centres to define a
measured and indicated resource on the project. The results of this drilling are being integrated into an updated geologic and ore model for the deposit. Drilling expenditures in 2008 totalled $4.6 million.

Preliminary metallurgical tests were also performed on the mineralization discovered to date. These tests showed that six samples of vein and typical-grade wallrock stockworks averaged 84% gold and 89% silver recoveries using bottle roll cyanide
tests on -150 micron mineralization.

In addition to testing the potential open pit mineralization, the 2008 drilling tested potential underground mineralization in the Rosario Vein. Results were generally positive. This drilling extended bonanza grade mineralization to an elevation of
1,955 metre, well below the 2,200 metre elevation that was known previously. Two of the deepest intercepts were holes GC-67 with a 2.0 metre long intercept grading 9.16 gold grams per tonne and 686 silver grams per tonne at 1,955 metre elevation,
and GC-68 with a 4.0 metre long intercept grading 5.11 gold grams per tonne and 470 silver grams per tonne at 1,955 metre elevation. These are just two out of a total of sixty-four drill intercepts on the property that had grades in excess of 3.0
gold equivalent grams per tonne (using gold equivalent ratio of 80:1) over minimum drill lengths of 1.4 metres, and of fifteen drill intercepts that had grades
in excess of 10.0 gold equivalent grams per tonne (using gold equivalent ratio
of 80:1). The drilling shows that the vein mineralization is open at depth.

| | 13
| | --

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


For 2009, the Company is planning to complete the geologic and
resource model, a preliminary scoping study, as well as complete a district-wide
reconnaissance exploration program on the large land package presently around
the known deposit. This work will include an extensive geochemical  geological
program to determine if there are other worthy drill targets on the large land
package.

Note:

The scientific and technical information
related to the Guadalupe y Calvo Project is based on the technical report on
this project dated November 25, 2002 and was prepared by Qualified Person,
Clancy J. Wendt, and Mark G. Stevens, C.P.G., Pincock, Allen & Holt in
accordance with National Instrument 43-101. The full text of this report is
available under the Companys profile atwww.sedar.com.



CONSOLIDATED EXPENSES


|                           |   |                   |  |   |                   |  |   |                   | 
|-------------------------- | - | ----------------- |  | - | ----------------- |  | - | ----------------- | 
|                           |   |                   |  |   |                   |  |   |                   | 
|(in thousands)             |   |                   |  |   |                   |  |   |                   | 
|                           |   |                   |  |   | YEAR ENDED        |  |   |                   | 
|                           |   | DECEMBER 31, 2008 |  |   | DECEMBER 31, 2007 |  |   | DECEMBER 31, 2006 | 
|                           |   | (AS
    RESTATED) |  |   |                   |  |   |                   | 
|General and administrative | $ | 29,945            |  | $ | 24,156            |  | $ | 28,247            | 
|Amortization and depletion | $ | 40,380            |  | $ | 43,392            |  | $ | 18,757            | 

General and administrative costs include expenses related to
the overall management of the business which are not part of direct mine
operating costs. These costs are generally incurred at the corporate offices
located in Canada and Mexico. General and administrative costs increased by $5.8
million when compared to 2007 primarily due to higher performance-based
compensation costs, and increased professional fees and administrative costs
year-over-year. General and administrative costs include stock-based
compensation and share-based bonuses payable, both non-cash expenses that
totaled $9.7 million in 2008 (2007 - $4.0 million). During the 2008 compensation
review, it was determined that senior executive officers would not receive
increases in 2009 base salaries, in an effort to conserve funds of the Company.
In addition, the Board of Directors Compensation Committee proposed that 2008
annual incentive bonuses be awarded to executive officers in the form of
share-based compensation, plus additional tax benefits. The shares awarded are
valued at the volume weighted average trading price of the Companys shares for
the five days prior to the award, and vest over an eighteen-month period.
Subject to shareholder and stock exchange approvals, the executives will receive
the number of shares equivalent to the bonus value, using the grant date price.
In the event that approval is not obtained, the executives are entitled to
receive an amount in cash, equal to the product of the number of shares that
would have been issued and the trading price of the Companys shares on the date
paid. As at December 31, 2008, the Company has recorded $5.6 million in
compensation expense related to these share-based bonuses.

Amortization and depletion, which primarily relates to mining
activities, decreased by 7% to $40.4 million for the year, compared to $43.4
million for 2007. This change is primarily attributable to the Companys change
in the estimated useful lives of its mines, partially offset by increases in
units of production and amortization of capital additions. During the second
quarter of 2008 the Company reviewed the appropriateness of its current
estimated useful lives of the mines, which was based on proven and probable
reserves, and determined that based on the characteristics of the current
reserves and resources at Ocampo and El Cubo, the estimated useful life is more
accurately reflected by proven and probable reserves and the portion of
mineralization currently in resources that is expected to be classified as
reserves. This change in estimate was applied prospectively effective April 1,
2008 and had the impact of reducing amortization and depletion by approximately
$4.6 million.

CONSOLIDATED OTHER INCOME / (EXPENSE)


|                               |   |                   |   |   |                   |   |   |                   |  
|------------------------------ | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
|(in thousands)                 |   |                   |   |   |                   |   |   |                   |  
|                               |   |                   |   |   | YEAR ENDED        |   |   |                   |  
|                               |   | DECEMBER 31, 2008 |   |   | DECEMBER 31, 2007 |   |   | DECEMBER 31, 2006 |  
|                               |   | (AS RESTATED)     |   |   |                   |   |   |                   |  
|Interest on long-term debt     | $ | (1,936            | ) | $ | (3,897            | ) | $ | (5,272            | )
|Foreign exchange gain / (loss) | $ | 18,942            |   | $ | (8,933            | ) | $ | (1,497            | )
|Interest and other income      | $ | 410               |   | $ | 772               |   | $ | 785               |  

Interest on long-term debt decreased by $2.0 million to $1.9
million in 2008 from $3.9 million in 2007 as a result of the reduction in the
average balance outstanding on the Companys credit facility year-over-year. For
the first four months of 2007, the balance outstanding on the facility was $120
million. In late April 2007, the Company used a significant portion of the
proceeds from a $200 million CAD equity offering to repay the $120 million
credit facility.

| | 14
| | --

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


Foreign exchange gains increased by $27.8 million, from a loss
of $8.9 million in 2007 to a gain of $18.9 million in 2008, as a result of the
translation of net monetary liabilities in the Companys Canadian and Mexican
operations to US dollars. The weakened Mexican peso and Canadian dollar in the
second half of 2008 caused foreign exchange gains, primarily as a result of the
Companys future income tax liabilities which are denominated in these
currencies and that are translated into US dollars at each balance sheet date.
The Company will continue to experience non-cash foreign currency gains or
losses as a result of fluctuations between the US and Canadian dollars and the
Mexican peso.

The Company earned interest on short-term investments and other
income of $0.4 million during 2008, compared to $0.8 million in 2007.

CONSOLIDATED INCOME TAX EXPENSE / (RECOVERY)


During the year ended December 31, 2008, the Company incurred
current tax expense of $1.0 million and a future income tax recovery of $10.7
million, versus current tax expense of $Nil and future tax expense of $27.6
million in 2007. The future income tax recovery in the current year is primarily
a result of a continued assessment of the impact of the Mexican Single Rate Tax
on the Companys ability to utilize the future income tax assets recognized in the Mexican subsidiaries. In Q3 2007, the
Company recorded a significant future income tax adjustment resulting from the
Single Rate Tax that was substantively enacted on September 28, 2007.
Under this new tax regime, the Companys Mexican subsidiaries now pay a 17.5%
tax (with lower transitional rates for 2008 and 2009) on the Companys revenues
less certain deductions, all determined on a cash basis. The Company pays the
Single Rate Tax to the extent that it exceeds its income tax otherwise
determined pursuant to the pre-existing income tax system in each taxation year.
During the year ended December 31, 2008, the Company was subject to the Single
Rate Tax.

FINANCIAL CONDITION


|                            |                   |                        
|--------------------------- | ----------------- | -----------------------
|(in thousands)              |                   |                        
|                            |                   |                        
|                            | AS AT             | AS AT                  
|                            | DECEMBER 31, 2008 | DECEMBER 31,
      2007
|                            | (AS RESTATED)     |                        
|Current assets              | $79,469           | $69,525                
|Long-term assets            | 715,709           | 684,427                
|Total assets                | 795,178           | 753,952                
|Total current liabilities   | 61,318            | 50,352                 
|Total long-term liabilities | 95,250            | 116,950                
|Total liabilities           | 156,568           | 167,302                
|Shareholders equity        | $638,610          | $586,650               

LIQUIDITY AND CAPITAL RESOURCES


The Companys balance of cash and cash equivalents as at
December 31, 2008 was $3.3 million, consistent with the balance as at the end of
2007 of $3.7 million. Factors that can impact on the Companys liquidity are
monitored regularly and include the market prices of gold and silver, production
levels, operating cash costs, capital costs and exploration expenditures and
currencies.

| | 15
| | --

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


|                                                   |                   |                   |                   |   |         |   |   |         |  
|-------------------------------------------------- | ----------------- | ----------------- | ----------------- | - | ------- | - | - | ------- | -
|CASHFLOW                                           |                   |                   |                   |   |         |   |   |         |  
|(in thousands)                                     |                   |                   |                   |   |         |   |   |         |  
|                                                   | YEAR ENDED       
|                                                   | DECEMBER 31, 2008 | DECEMBER 31, 2007 | DECEMBER 31, 2006
|Cash flow from / (used in) operating activities    | $                 | 55,933            |                   | $ | (34,192 | ) | $ | (20,026 | )
|Cash flow used in investing activities             |                   | (66,376           | )                 |   | (73,487 | ) |   | (87,782 | )
|Cash flow
      from financing activities          |                   | 9,992             |                   |   | 107,314 |   |   | 106,132 |  
|Decrease in cash and cash equivalents              |                   | (451              | )                 |   | (365    | ) |   | (1,676  | )
|Cash and
      cash equivalents, beginning of year |                   | 3,709             |                   |   | 4,074   |   |   | 5,750   |  
|Cash and cash equivalents, end of year             | $                 | 3,258             |                   | $ | 3,709   |   | $ | 4,074   |  

Operating activities contributed $55.9 million during 2008
compared to 2007, when operating activities used cash flows of $34.2 million.
This improvement of $90.1 million, or 264%, resulted from increased cash flows
from earnings due to stronger metal prices, increased metal production, realized
cost efficiency initiatives and positive changes in non-cash working capital
balances.

Investing activities for the year ended December 31, 2008 used
cash of $66.4 million as a result of expenditures on mining interests and
property, plant and equipment, which compared to $73.5 million in 2007. Current
year expenditures were largely for the purposes of the capital expansion
program, the benefits of which will be seen in 2009. As of December 31, 2008 the
Company had committed to purchase $2.9 million in property, plant and equipment
that will be financed by operating cash flow, and will be delivered throughout
the first half of 2009.

Financing activities for 2008 contributed cash of $10.0 million
compared to 2007, when financing activities contributed $107.3 million. The
significant cash flow from financing activities in 2007 resulted from the $200
million CAD equity offering which took place in the second quarter of that year.
A large portion of the proceeds from this offering were used to pay down the
Companys $120 million credit facility. Cash flows from financing activities
have also decreased in 2008 compared to 2007 due to reduced proceeds from the
exercise of stock options.

CREDITFACILITY

During the majority of 2008, the Company had access to a $60
million revolving credit facility with a lending syndicate comprised of the Bank
of Nova Scotia and the Bank of Montreal, expiring on December 31, 2008. On
November 28, 2008, the terms of the Companys credit facility were revised and
extended. Under the terms of the revised agreement, the Company has access to a
$50 million credit facility comprised of a $30 million non-revolving term credit
facility and a $20 million revolving term credit facility. The non-revolving
facility is repayable in five installments and matures on June 28, 2010, while
the revolving facility matures on November 27, 2009 and may be renewed at the
sole discretion of the lenders. At the end of 2008, the Company had a balance of
$30 million outstanding on the non-revolving facility, and had withdrawn $7.13
million against the revolving facility, for a total of $37.13 million
outstanding. In addition, the Company has issued a $1 million letter of credit
against the revolving facility, leaving a total of $11.87 million available for
future funding.

LIQUIDITYOUTLOOK

The global credit and financial markets are currently
experiencing an unprecedented downturn that is negatively impacting nearly all
businesses, including gold and silver mining operations. Some of the key effects
that are directly impacting the Company are the higher costs and availability of
funding, currency devaluations, and volatility in global equity, commodity,
foreign exchange and precious metals markets. Material increases or decreases in
the Companys liquidity and capital resources will be substantially determined
by the success or failure of the Companys operations, exploration, development
and construction programs, its ability to obtain equity or other sources of
financing, and the price of gold and silver. The Company has reviewed its cash
generating potential, and cash utilization and working capital requirements in
light of the current economic circumstances, the results of which are discussed
below.

Improving the Companys liquidity position was a key focus in
2008 and remains a key focus going forward. Liquidity risk is the risk that the
Company will encounter difficulties in meeting obligations associated with its
financial liabilities and other contractual obligations. The Companys strategy
for managing liquidity is based on achieving positive cash flows from operations
to internally fund operating and capital requirements. Due to the current
economic environment and fluctuating commodity prices, the Company is highly
focused on preserving cash and identifying sources of cash inflows. In an effort
to preserve cash, the Company has reduced capital expenditures and operating
costs where appropriate.

The Company monitors and manages liquidity risk by preparing
regular periodic cash flow forecasts, seeking flexibility in financing
arrangements, and expects to build a cash reserve in 2009. During 2008 and
continuing into 2009, management undertook various initiatives to manage
operating and liquidity risks, taking into account the current economic
conditions, including:

| | 16
| | --

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


Implementation of cost reduction initiatives, including employee and
  contractor reductions at the El Cubo mine, renegotiation of key supplier
  contracts, and more rigorous cost management through improved approval
  processes;

Actively managing the Companys working capital by ensuring sufficient
  cash is available to support management objectives, while continuing to meet
  obligations;

Deferring a number of capital programs at the Ocampo mine to 2010, and
  deferring drilling at Guadalupe y Calvo and the El Cubo mine until the global
  economic market has stabilized; and

Renegotiating the Companys credit facility as discussed above.

Net free cash flow for 2008 was a negative $10.9 million in a
year in which the Company continued significant investment in mineral properties
and property, plant and equipment. The Company is forecasting positive net free
cash flow for 2009, to be achieved through positive operating cash flows. The
extent of cash flows generated from operations will vary depending on the prices
of gold and silver, fluctuations in the Mexican peso, and total production. In
addition to cash flows from operations, as at March 20, 2009, the Company has a
balance of $19.6 million in cash and cash equivalents and $11.87 million
available of the $20 million revolving credit facility discussed above. In
accordance with the terms of the revised credit facility agreement, the Company
is required to make $22.5 million in principal repayments on its non-revolving
facility in 2009. This facility also includes a clause whereby the Company is
required to make additional prepayments on the overall credit facility balance
equal to 75% of its excess cash flow in the six months ending June 30, 2009, and
each fiscal quarter thereafter. Excess cash flow has been defined as cash flow
from operations determined in accordance with Canadian generally accepted
accounting principles, less scheduled interest and principal payments, cash
taxes, capital and exploration expenditures, and general and administrative
expenditures. In addition, the overall credit facility is subject to certain
monthly and quarterly financial and operating covenants.

The Company has total commitments relating to future capital
expenditures of $3.8 million as at March 20, 2009.

The Company always attempts to target the best sources of
funding to supplement operating cash flows and finance the Companys
development, while optimizing the Companys capital structure through the
appropriate mix of capital. The operational turn-around that is underway at
Ocampo, combined with the solid contributions from El Cubo, are expected to
continue strengthening the Companys balance sheet and liquidity position. In
todays metal price environment, the Company anticipates that funding from
existing cash reserves, operating cash flows and the in-place credit facility
should be sufficient to fund the Companys anticipated working capital
requirements, growth plans and debt repayments in 2009.

CONTRACTUAL OBLIGATIONS


|                                                                                                        |   |        |  |   |                 |  |   |             |  |   |             |  |   |             |  |   |                 | 
|------------------------------------------------------------------------------------------------------- | - | ------ |  | - | --------------- |  | - | ----------- |  | - | ----------- |  | - | ----------- |  | - | --------------- | 
|A summary of the Companys
      contractual obligations at December 31, 2008 is summarized as follows: |   |        |  |   |                 |  |  
|                                                                                                        |   |        |  |   |                 |  |   |             |  |   |             |  |   |             |  |   |                 | 
|(in thousands)                                                                                          |   |        |  |   |                 |  |   |             |  |   |             |  |   |             |  |   |                 | 
|                                                                                                        |   |        |  |   |                 |  |   |             |  |   |             |  |   |             |  |   |                 | 
|                                                                                                        |   | TOTAL  |  |   | **LESS THAN 1** |  |   | 1  3 YEARS |  |   | 3  4 YEARS |  |   | 4  5 YEARS |  |   | **GREATER**     | 
|                                                                                                        |   |        |  |   | YEAR            |  |   |             |  |   |             |  |   |             |  |   | **THAN 5**YEARS | 
|Payables and accruals                                                                                   | $ | 30,457 |  | $ | 30,457          |  | $ | -           |  | $ | -           |  | $ | -           |  | $ | -               | 
|Long-term debt                                                                                          |   | 37,130 |  |   | 29,630          |  |   | 7,500       |  |   | -           |  |   | -           |  |   | -               | 
|Interest on long-term debt                                                                              |   | 631    |  |   | 631             |  |   | -           |  |   | -           |  |   | -           |  |   | -               | 
|Capital leases                                                                                          |   | 2,028  |  |   | 1,511           |  |   | 517         |  |   | -           |  |   | -           |  |   | -               | 
|Long-term obligation                                                                                    |   | 6,000  |  |   | 400             |  |   | 1,600       |  |   | 800         |  |   | 800         |  |   | 2,400           | 
|Future purchase commitments                                                                             |   | 2,859  |  |   | 2,859           |  |   | -           |  |   | -           |  |   | -           |  |   | -               | 
|Total                                                                                                   | $ | 79,105 |  | $ | 65,488          |  | $ | 9,617       |  | $ | 800         |  | $ | 800         |  | $ | 2,400           | 

| | 17
| | --

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


OUTSTANDING SHARE DATA


The Companys share capital was comprised of the following as at December 31, 2008:

|                                                                                                                                                         | DECEMBER 31, 2008 | DECEMBER 31, 2007
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -----------------
|Authorized:                                                                                                                                              |                   |                  
|Unlimited number of common shares                                                                                                                        |                   |                  
|Unlimited number of non-cumulative, dividends to be determined by the Board
    of Directors not to exceed 12%, non-participating, non-voting, Class "A"
|preferred shares, redeemable at paid-in value                                                                                                            |                   |                  
|Unlimited number of non-cumulative, dividends to be determined by the Board
    of Directors not to exceed 13%, non-participating, non-voting, Class "B"
|preferred shares, redeemable at paid-in value                                                                                                            |                   |                  
|Issued:                                                                                                                                                  |                   |                  
|Common shares                                                                                                                                            | 120,040,768       | 117,432,363      

At March 25, 2009, the Company had common shares outstanding of 122,549,168.

OFF-BALANCE SHEET ARRANGEMENTS


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

TRANSACTIONS WITH RELATED PARTIES


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

|(in thousands)                         |                   |                   |                  
|-------------------------------------- | ----------------- | ----------------- | -----------------
|                                       |                   | YEAR ENDED        |                  
|                                       | DECEMBER 31, 2008 | DECEMBER 31, 2007 | DECEMBER 31, 2006
|Production costs  labour(1)           | $33,762           | $31,147           | $19,509          
|Mining interests  labour(1)           | $1,167            | $2,437            | $3,717           
|Production costs  mine consumables(2) | $14,655           | $2,033            | $3,041           
|Capital assets(3)                      | $94               | $25               | $916             

|(1) | The Company pays a third party company owned by the brother of Mr. Fred George, a director of the Company, for the provision of workers in Mexico at cost plus 10%. Gammon is committed to a fair and transparent procurement process
for all goods and services and accordingly, in late 2007, a competitive bid process was conducted. Four organizations submitted bids after which the same related party was selected as the most competitively priced and best resourced organization to
provide the requested services.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | The Company pays two third party companies owned by the father of Mr. Canek Rangel, a director of the Company, for the provision of lubricant and fuel. The Company is confident these costs are at fair market value as the prices of
these consumables are regulated in Mexico.                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) | The Company paid Mr. Canek Rangel or a third party company owned by the father of Mr. Rangel, a director of the Company, for the provision and construction of production and support facilities, and mineral properties. The Company
believes these costs were at fair market value.                                                                                                                                                                                                                                         

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

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

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


NON-GAAP MEASURES


TOTALCASHCOST PEROUNCECALCULATION

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

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

|(in thousands,
      except ounces, cash costs and silver prices) |   |                   |   |   |                   |   |   |                   |   |  
|----------------------------------------------------------------- | - | ----------------- | - | - | ----------------- | - | - | ----------------- | - | -
|                                                                  |   | QUARTER ENDED     |   |   | YEAR ENDED        |  
|                                                                  |   | DECEMBER 31, 2008 |   |   | DECEMBER 31, 2007 |   |   | DECEMBER 31, 2008 |   |  
|                                                                  |   | (RESTATED)        |   |   |                   |   |   | (RESTATED)        |   |  
|Production costs per
      financial statements                   | $ | 24,521            |   | $ | 33,511            |   | $ | 127,651           |   | $
|Refining costs per financial statements                           |   | 508               |   |   | 326               |   |   | 1,662             |   |  
|Total cash costs                                                  | $ | 25,029            |   | $ | 33,837            |   | $ | 129,313           |   | $
|Divided by gold equivalent ounces sold(1)                         |   | 60,662            |   |   | 49,969            |   |   | 245,028           |   |  
|Total cash cost per gold equivalent ounce                         | $ | 413               |   | $ | 676               |   | $ | 528               |   | $
|Total cash costs (per above)                                      | $ | 25,029            |   | $ | 33,837            |   | $ | 129,313           |   | $
|Less: Silver revenue (see below)                                  |   | (15,420           | ) |   | (16,951           | ) |   | (82,192           | ) |  
|                                                                  | $ | 9,609             |   | $ | 16,886            |   | $ | 47,121            |   | $
|Divided by gold ounces sold                                       |   | 41,004            |   |   | 28,665            |   |   | 150,646           |   |  
|Total cash cost per gold ounce(2)                                 | $ | 234               |   | $ | 589               |   | $ | 313               |   | $
|Average realized silver price                                     | $ | 10.05             |   | $ | 14.32             |   | $ | 14.66             |   | $
|Multiplied by silver ounces sold                                  |   | 1,534,318         |   |   | 1,183,729         |   |   | 5,606,539         |   |  
|Silver revenue                                                    | $ | 15,420            |   | $ | 16,951            |   | $ | 82,192            |   | $

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

NETFREECASHFLOW

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

|(in thousands)                                   |   |                         |   |   |                         |   |   |                         |   |   |                         |  
|------------------------------------------------ | - | ----------------------- | - | - | ----------------------- | - | - | ----------------------- | - | - | ----------------------- | -
|                                                 |   | QUARTER ENDED           |   |   | YEAR ENDED              |  
|                                                 |   | DECEMBER 31,
      2008 |   |   | DECEMBER 31,
      2007 |   |   | DECEMBER 31,
      2008 |   |   | DECEMBER 31,
      2007 |  
|Cash flows from / (used in) operating activities | $ | 9,965                   |   | $ | 2,704                   |   | $ | 55,933                  |   | $ | (34,192                 | )
|Less:
      Capital expenditures                 |   | (16,411                 | ) |   | (13,471                 | ) |   | (66,841                 | ) |   | (69,142                 | )
|Net free cash flow                               | $ | (6,446                  | ) | $ | (10,767                 | ) | $ | (10,908                 | ) | $ | (103,334                | )

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


RISKS AND UNCERTAINTIES


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

NATURE OFMINERALEXPLORATION ANDMINING

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

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

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

RESERVEESTIMATES

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

EFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company is required to maintain effective internal
control over financial reporting under the Sarbanes-Oxley Act of 2002 and
related regulations. Any material weakness in internal control over financial
reporting that needs to be addressed, disclosure of managements assessment of
our internal control over financial reporting, or disclosure of the
public accounting firm's report on internal control over
financial reporting that reports a material weakness in internal control over
financial reporting may reduce the price of the Company's common shares. Inconnection with the audit of the consolidated financial statements for
the year ended December 31, 2008, the Company and its independent registered
public accounting firm identified a deficiency in internal control over
financial reporting that was a "material weakness" as defined by standards
established by the Public Company Accounting Oversight Board. The deficiency
resulted in the correction of the translation of certain foreign currency
balances into United States dollars and the reversal of previously recorded net
realizable value adjustments on inventory balances. The Company has restated its
consolidated financial statements for the year ended December 31, 2008 to
correct the accounting treatment for these items. However, there can be no
assurance that the Companys remediation of internal control over financial
reporting relating to the identified material weakness will re-establish the
effectiveness of internal control over financial reporting or that the Company
will not be subject to material weaknesses in the future.

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

The Company restated its consolidated financial statements
and other financial information for the year ended December 31, 2008 with
respect to the foreign currency translation of certain balances into United
States dollars and the reversal of previously recorded net realizable value
adjustments on inventory balances. The restatement of prior financial statements
may expose the Company to risks associated with litigation, regulatory
proceedings and government enforcement actions, including the risk that the SEC
may disagree with the manner in which the Company has accounted for and reported
the financial impact.

FOREIGN OPERATIONS

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

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

ENVIRONMENTALLAWS ANDREGULATIONS

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

PROPERTYRIGHTS,PERMITS ANDLICENSING

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

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


UNCERTAINTY OF TITLE

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

COMMODITY PRICE RISK

The profitability of the Companys gold mining operations will be significantly affected by changes in the market prices for gold and silver. Gold and silver prices fluctuate on a daily basis and are affected by numerous factors beyond the
Companys control. The supply and demand for gold and silver, the level of interest rates, the rate of inflation, investment decisions by large holders of gold and silver, including governmental reserves, and stability of exchange rates can all
cause significant fluctuations in gold and silver prices. Such external economic factors are in turn influenced by changes in international investment patterns and monetary systems, and political developments. The price of gold and silver has
fluctuated widely and future serious price declines could cause continued commercial production to be impractical. Depending on the price of gold and silver, cash flow from mining operations may not be sufficient to cover costs of production and
capital expenditures. If, as a result of a decline in gold and silver prices, revenues from metal sales were to fall below operating costs, production may be discontinued.

The Company presently does not employ any hedging instruments to manage its commodity price risk.

INTEREST RATE RISK

The Company is exposed to interest rate risk on its variable rate debt. At December 31, 2008, the Company had $37.13 million of variable rate debt which carries an interest rate of LIBOR plus 3.50% for LIBOR loans, prime rate plus 2.50% or
one-month BA Schedule I rate plus 3.5% for Prime Rate Loans, or Alternate Base Rate Canada plus 2.5% or one-month LIBOR plus 3.5% for Base Rate Canada Loans. The Company has
not entered into any agreements to hedge against unfavourable changes in interest rates, but may actively manage its exposure to interest rate risk in the future.

FOREIGNCURRENCYEXCHANGERATERISK

All metal sales revenues for the Company are denominated in US dollars. The Company is primarily exposed to currency fluctuations relative to the US dollar on expenditures that are denominated in Canadian dollars and Mexican pesos, such as payments
for labour, operating supplies and property, plant and equipment. These potential currency fluctuations could have a significant impact on production costs and thereby, the profitability of the Company. The Company is also exposed to the impact of
currency fluctuations on its monetary assets and liabilities. The Company does not actively manage this foreign currency exposure.

CREDITRISK

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

CHANGES IN ACCOUNTING POLICIES


(i)Section 3031, Inventories

Effective January 1, 2008, the Company prospectively implemented Section 3031, Inventories, which replaces Section 3030 of the same title. This new standard provides guidance on the determination of cost and requires inventories to be
measured at the lower of cost and net realizable value, with more specific guidance on the costs to include in the cost of inventory. Costs such as storage costs and administrative overhead that do not contribute to bringing inventories to their
present location and condition are specifically excluded from the cost of inventories and expensed in the period incurred. In addition, the new Section requires that previous write-downs of inventories be reversed when there is a subsequent increase
in the net realizable value of the inventories. The recommendations also clarified that major spare parts are to be included in property, plant and equipment. As a result of adopting these recommendations, the Company reclassified $2.7 million
of supplies inventories to property, plant, and equipment related to major spare parts on January 1, 2008, and recorded $4.9 in net realizable value write-down reversals
throughout the year. Otherwise, this new standard did not have a significant impact on the
Companys financial results.

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


(ii) Section 3862, Financial Instruments  Disclosures and Section 3863, Financial Instruments  Presentation

Effective January 1, 2008, the Company adopted Section 3862, Financial Instruments  Disclosures, and Section 3863, Financial Instruments  Presentation. These sections replace existing Section 3861, Financial Instruments
 Disclosure and Presentation.  The presentation standards are carried forward unchanged. The disclosure standards introduce new disclosures to improve the information about financial instruments. This standard requires the disclosure of
qualitative and quantitative information about the exposure to risks arising from financial instruments including a sensitivity analysis to market risk. The adoption of these standards did not have any effect on the financial position or performance
of the Company.

(iii) Section 1535, Capital Disclosures

Effective January 1, 2008, the Company adopted Section 1535, Capital Disclosures. This section establishes standards for disclosing information that enables users of financial statements to evaluate the entitys objectives, policies and
processes for managing capital.  The adoption of this standard did not have any effect on the financial position or performance of the Company.

RECENT CANADIAN ACCOUNTING PRONOUNCEMENTS


The following is an overview of a recent accounting pronouncement that the Company will be required to adopt in future years:

(i) Section 3064, Goodwill and Intangible Assets

In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which replaces existing Section 3062, Goodwill and Other Intangible Assets. This new section establishes standards for the recognition of internally
developed intangible assets. The standards for the recognition and impairment testing of goodwill are carried forward unchanged. This section is applicable to the Company commencing January 1, 2009. The Company does not expect that this section will
have a significant impact on the Companys financial statements.

(ii)EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities

In January 2009, the Emerging Issues Committee of the CICA issued EIC-173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This abstract requires that credit risk be taken into account in determining the fair
value of financial instruments and financial liabilities, including derivative instruments.  The Company does not expect that this abstract will have a significant impact on the Companys financial statements.

(iii)Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests

In January 2009, the CICA issued Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements, and Section 1602,Non-controlling interestswhich replace Section 1581, Business Combinations and Section 1600, Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent
to the business combination accounting standard under International Financial Reporting Standards (IFRS). Section 1582 is applicable for business combinations with acquisition dates on or after January 1, 2011.  Early adoption of this
section is permitted.  Section 1601 together with Section 1602 establishes standards for the preparation of consolidated financial statements.  Section 1601 is applicable for the Companys interim and annual consolidated financial statements
for fiscal years beginning on or after January 1, 2011. Early adoption of this section is permitted. If the Company chooses to early adopt any one of these sections, the other two sections must also be adopted at the same time.

(iv)International Financial Reporting Standards

In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with
IFRS over an expected five year transitional period. In February of 2008, the AcSB announced that 2011 is the changeover date for publicly accountable enterprises to use IFRS. The date is for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2010.

The Company has developed a three phase changeover plan to adopt IFRS by 2011 as follows:

▬

Phase 1  Scope and Plan: This first phase involves the development of an initial project plan and structure, the identification of differences between IFRS and existing Canadian GAAP, and an assessment of their applicability and the expected
impact on the Company.

▬

Phase 2  Design and Build: The second phase includes the detailed review, documentation and selection accounting policy choices relating to each IFRS standard. This phase will also include assessing the impact of the conversion on business
activities, including the effect on information technology and data systems, income tax, internal controls over financial reporting, and disclosure controls. In this phase, accounting policies will be finalized, first-time adoption exemptions and
exceptions will be considered, and draft financial statements and note disclosures will be prepared.

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


▬

Phase 3  Implement and Review: The final phase involves the actual implementation of IFRS standards. This phase will involve the finalization of IFRS conversion impacts, approval and implementation of accounting policies, implementation and
testing of new processes, systems and controls, and the execution of detailed training where required.

As at December 31, 2008, the first phase of the Companys IFRS project was completed. An IFRS implementation team has been created, and third party advisors have been engaged to assist in this project. The Company determined that the most
significant impact of the IFRS conversion will be the implementation of International Accounting Standard 16  Property, Plant and Equipment (IAS 16). This standard requires the componentization of the Companys fixed assets where
the useful lives of components are different than the overall asset. In addition, the International Accounting Standards Board currently has an Extractive Activities project underway to develop accounting standards for extractive activities. It is
expected that a discussion paper will be released in early 2009, and that final standards will not be issued until after the Company implements IFRS in 2011.  Therefore, the Companys accounting policies specific to mining and related
activities may be impacted once final IFRS standards are released on this topic, subsequent to IFRS adoption. At this time, the impact on the Companys financial position and results of operation is not reasonably determinable or estimable for
any of the IFRS conversion impacts identified.

The Company is in the second phase of the project, and is currently evaluating the specific impacts of IFRS, and developing recommendations and accounting policies. The preliminary timeline is to complete the second phase of the project during 2009
and the third phase during the first half of 2010.

SUBSEQUENT EVENTS




(i)Proposed transaction

On March 12, 2009, the Company announced that it entered into a letter agreement (letter of intent) with Capital Gold Corporation (Capital Gold) relating to a proposed acquisition of all of the outstanding shares of Capital
Gold by the Company in exchange for the issuance of 0.1028 Gammon Gold shares for each Capital Gold common share outstanding, for a total issuance of approximately 20 million common shares. The all-share transaction is subject to satisfactory
completion of due diligence and the negotiation of definitive documentation, receipt of Capital Gold shareholder approval, regulatory approvals and the satisfaction of certain other conditions.

The letter of intent provides that the parties plan to complete their respective technical, operating and financial due diligence and negotiate the terms of a definitive agreement by March 31, 2009. Capital Gold has agreed to a non-solicitation
period expiring on March 31, 2009, subject to fiduciary outs, and both parties have agreed to the payment of a break fee to the other party in the amount of $4
million, payable only under certain circumstances.

Capital Gold is a gold production and exploration company and operates the El Chanate gold property in Sonora, Mexico.

On March 31, 2009, discussions regarding the proposed acquisition of Capital
Gold were terminated. No break fee will be exchanged.

(ii) Other

Subsequent to year-end, certain employees, consultants, officers and directors of the Company exercised 2,508,400 stock options for total proceeds of $11.5 million. As a result, capital stock increased by $22.4 million and contributed surplus decreased by $10.9 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


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

(i)Ore inventories

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

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


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

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

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

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

Effective April 1, 2008, the Company changed its estimate of the useful lives of its mines to be based on proven and probable reserves of the mine and the portion of mineralization expected to be classified as reserves. Previously, the Company
estimated the useful life based on proven and probable reserves to be mined. During the second quarter, the Company reviewed the appropriateness of its current estimate, and determined that based on the characteristics of the current reserves and
resources at Ocampo and El Cubo, the estimated useful life is more accurately reflected by proven and probable reserves and the portion of mineralization expected to be classified as reserves. Consistent with Section 1506, Accounting Changes,
the change in estimate was applied prospectively. The impact of this change on the Companys financial results for the nine months ended December 31, 2008 was to reduce amortization and depletion by approximately $4.6 million, and to reduce
inventories by approximately $0.4 million.

(iii)Goodwill and long-lived assets

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

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


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

(iv) Post-employment and post-retirement benefits

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

(v) Future income taxes and valuation allowances

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

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

(vi)Asset retirement obligations

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

The principal factors that can cause expected cash flows to change are: the construction of new processing facilities; changes in the quantities of material in reserves and a corresponding change in the life of mine plan; changing ore
characteristics that ultimately impact the environment; changes in water quality that impact the extent of water treatment required; and changes in laws and regulations governing the protection of the environment. In general, as the end of the mine
life nears, the reliability of expected cash flows increases, but earlier in the mine life, the estimation of an ARO is inherently more subjective. Significant judgments and estimates are made when estimating the fair value of AROs.  Expected cash
flows relating to AROs could occur over periods up to 20 years and the assessment of the extent of environmental remediation work is highly subjective. Considering all of these factors that go into the determination of an ARO, the fair value of AROs
can materially change over time.

FINANCIAL INSTRUMENTS


The Company can manage its exposure to fluctuations in commodity prices, interest rates and foreign exchange rates by entering into derivative financial instrument contracts. Gammons exposure with respect to commodity prices, interest rates
and foreign exchange is described under the section entitled Risks and Uncertainties.  As at December 31, 2008, Gammon had not entered into any derivative contracts for the purpose of hedging exposure to commodity prices, interest rates and foreign
exchange rates.

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


CONTROLS AND PROCEDURES


(i) Evaluation of Disclosure Controls and Procedures (as restated)

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in annual filings, interim filings or other reports filed or submitted under provincial and territorial securities legislation or
reports filed or submitted under the U.S. Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the applicable time periods, and that such information is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As of December 31, 2008 an evaluation was carried out, under the supervision of and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined in Rule 13a-15(e) under the U.S. Securities Exchange Act of 1934 and in National Instrument 52-109 under the
Canadian Securities Administrators Rules and Policies.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as at December 31, 2008.

In connection with the restatement of the December 31, 2008
financial statements, management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, has re-evaluated the effectiveness of
disclosure controls and procedures. Based on the reassessment, the Chief
Executive Officer and Chief Financial Officer have concluded that as of December
31, 2008, the Companys disclosure controls and procedures were not effective
because of the material weakness in internal controls over financial reporting
described below.

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

Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(e) under the U.S. Securities
Exchange Act of 1934 and in National Instrument 52-109 under the Canadian Securities Administrators Rules and Policies. Management is furthermore responsible for the evaluation of the effectiveness of internal control over financial reporting for
the year ended December 31, 2008. The Companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with Canadian generally accepted accounting principles and reconciled to US GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

As of December 31, 2008, management evaluated the effectiveness of the Company's internal control over financial reporting. In making this evaluation, management used the criteria set forth in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on Gammons management assessment, management concluded that the Companys design and operating effectiveness of internal control over financial reporting
was effective as at December 31, 2008.  No material weaknesses were identified by management during this evaluation.

Based upon its assessment, management concluded that, as
    of December 31, 2008, the Companys internal control over financial
    reporting was effective. However, during the preparation of the June 30,
    2009 interim financial statements the Company determined that a restatement
    of its previously issued financial statements was necessary. As a result of
    the financial statement restatement, the Company reassessed its internal
    control over financial reporting and determined that a material weakness
    existed at December 31, 2008.

A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Companys annual or
interim financial statements will not be prevented or detected on a timely
basis. The material weakness in internal control over financial reporting as of
December 31, 2008 existed as management did not maintain effective monitoring
controls and procedures over the foreign currency translation of selected
accounts or the recognition of net realizable value adjustments on inventory
balances. Specifically, management did not maintain effective monitoring
controls and procedures to provide reasonable assurance that inventory balances
were translated in accordance with GAAP, or that previously recognized net
realizable value adjustments were reversed as required upon initial adoption of
Section 3031, Inventories. This control deficiency resulted in the
restatement of the consolidated financial statements for the year ended December
31, 2008.

As a result of the aforementioned material weakness as of
December 31, 2008, management has revised its previously reported assessment of
the effectiveness of internal control over financial reporting and have
concluded that, as of December 31, 2008, the Companys internal control over
financial reporting was not effective.

KPMG LLP, an independent registered public accounting firm
has audited the effectiveness of the Companys internal control over financial
reporting as at December 31, 2008.

(iii) Remediation of Material Weakness in Internal Control over Financial
Reporting

Management has engaged in, and continues to engage in, efforts to address the
material weakness in internal control over financial reporting identified above,
by performing a thorough review of the Companys translation of foreign currency
balances in accordance with GAAP and by reviewing previously recorded net
realizable value adjustments to ensure all appropriate reversals are recorded.
Management will also amend period close procedures to include procedures to
monitor foreign currency translation and inventory net realizable value
adjustments.

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2008MANAGEMENTS DISCUSSION AND ANALYSIS


(iv) Change in Internal Control over Financial Reporting

There were no changes in the Companys internal control over financial
reporting that occurred during the three months ended December 31, 2008 that
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

CAUTIONARY NOTE TO U.S. INVESTORS


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

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


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



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