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| **KPMG LLP **Chartered Accountants 
Suite 1500 Purdy's Wharf Tower ITelephone (902) 492-6000
1959 Upper Water StreetTelefax (902) 429-1307
Halifax NS B3J 3N2www.kpmg.ca
Canada **AUDITORS' REPORT ON 40F – CANADIAN & US GAAP DIFFERENCES**
To the Board of Directors of Gammon Lake Resources Inc. 

On April 2, 2007, we reported on the consolidated balancesheets of Gammon Lake Resources Inc. ("the Company") as at December 31, 2006 and2005 and the consolidated statements of operations and deficit and cash flowsfor the year ended December 31, 2006 and the five month period ended December31, 2005 which are included in the annual report on Form 40-F. In connectionwith our audits of the aforementioned consolidated financial statements, we alsohave audited the related supplemental note entitled "40F – Canadian & US GAAPDifferences" included in the Form 40-F. This supplemental note is theresponsibility of the Company's management. Our responsibility is to express anopinion on this supplemental note based on our audits. 

In our opinion, such supplemental note, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

In prior periods the differences between Canadian and U.S.generally accepted accounting principles was included in the body of theCanadian financial statements. 

Our previous report dated March 15, 2006 on the Canadianfinancial statements has been withdrawn and the consolidated financialstatements have been restated as explained in the supplemental note (a) to theserestated consolidated financial statements. 

The consolidated financial statements as at July 31, 2005 andfor the year then ended have also been restated as explained in supplementalnote (a) of the restated December 31, 2005 consolidated financial statements.The original July 31, 2005 consolidated financial statements were audited byother auditors who expressed an opinion without reservation on those financialstatements in their report dated September 10, 2005. We have audited theadjustments described in supplemental note (a) that were applied to restate theJuly 31, 2005 consolidated financial statements to correct an error. In ouropinion such adjustments are appropriate and have been properly applied. We werenot engaged to audit, review, or apply any procedures to the July 31, 2005consolidated financial statements of the Company other than with respect tothe adjustments detailed in supplementalnote (a) and accordingly we do not express an opinion or any other form ofassurance on the July 31, 2005 supplemental note taken as a whole. 
/s/ KPMG LLP Chartered Accountants 

Halifax, Canada April 2, 2007 

 

**Gammon Lake Resources Inc.****40F – Canadian & US GAAP    Differences**December 31, 2006
The following represents additional information to the consolidated financialstatements of the Company that were prepared in accordance with accountingprinciples generally accepted in Canada ("Canadian GAAP"). Set out below are thematerial adjustments to net loss for the year ending December 31, 2006, fivemonths ending December 31, 2005 and year ending July 31, 2005 and toshareholders' equity at December 31, 2006, December 31, 2005 and July 31, 2005in order to conform to accounting principles generally accepted in the UnitedStates of America (U.S. GAAP). 
**Statement of loss:**
 **Year**5 months12 months
 **ended**endedended
 **December 31**December 31July 31
 **2006**20052005
  As restated (a)As restated (a)
    
    
Net loss for the year based on    Canadian GAAP**$(28,692,380)**$(11,607,510)$(19,375,595)
Exploration costs (b)**(3,308,604)**(1,286,922)(14,996,999)
Foreign exchange gain on future    income taxes liability previously expensed-745,000(1,000)
Interest expense on long term    debt adjusted to fair value (f)**(61,000)**(208,501)(526,154)
Foreign exchange gain on    adjusted long term debt (f)**51,688**(141,411)(243,463)
Future income taxes on US GAAP    differences**(493,905)**(897,712)(433,253)
Amortization and depletion**1,412,120**--
    
Net loss and comprehensive loss    for the year based on U.S. GAAP**$(31,092,081)**$(13,397,056)$(35,576,464)
    
Loss per share, basic and    diluted**$ (0.35)**$ (0.18)$ (0.54)
 

1

**Gammon Lake Resources Inc.****40F – Canadian & US GAAP    Differences**December 31, 2006    **2) Long term debt**        **December 31**December 31July 31 **2006**20052005    Canadian GAAP**$7,848,996**    $8,161,300    $8,581,300Adjustment of long    term debt to fair value (f)**(3,404,986)**    (3,713,090)    (3,713,090)Interest payable on    long term debt   adjusted to fair value    (f)**2,463,804**    2,402,804    2,194,304Foreign exchange gain    on fair value   adjusted long term debt (f)**941,182**992,870851,459    U.S. GAAP**$7,848,996**$7,843,884$7,913,973        **3) Future income    taxes**        **December 31**December 31July 31 **2006**20052005  As restated (a)As restated (a)    Canadian GAAP**$82,149,543**    $7,336,000    $8,121,000Future income tax    adjustments**(6,842,095)**    (7,336,000)    (8,233,712)Foreign exchange gain    on future income tax   liabilities previously expensed (b)**-**-745,000    U.S. GAAP**$75,307,448**$-$632,288        **4) Statements of    cash flows**       As a    result of the treatment of mining interests under item (b) above, cash    expended for exploration costs would be classified as operating rather than    investing, resulting in the following totals.     **Year**5 months12 months **ended**endedended **December 31**December    31July 31 **2006**20052005  As restated (a)As restated (a)    Cash used in operations**$(25,779,393)**$(5,280,072)$(23,972,283)    Cash used in investing**$(99,548,566)**$(65,357,364)$(59,854,118)
**Gammon Lake Resources Inc.****40F – Canadian & US GAAP    Differences**December 31, 2006**a) Canadian and U.S. generally accepted accounting principles restatement**
During 2006 the Company determined that it had incorrectly capitalizedcertain exploration costs incurred in the five month period ended December 31,2005, and the year ended July 31, 2005 in its "Differences between Canadian andU.S. generally accepted accounting principles" note. U.S. GAAP requiresexploration costs to be expensed. 

The "Differences between Canadian and U.S. generally accepted accountingprinciples" note has been restated to reflect the required adjustments by theCompany. Previously reported figures with restatements are summarized below: 
 **December 31** **December 31****Statement of Loss****2005**  **2005**  **Adjustments****as restated**     Deferred exploration costs prior to the    establishment of proven and probable mineral reserves (b)-$(1,286,922)$(1,286,922)Foreign exchange gain on future income taxes    liability previously expensed$(9,000)$754,000 $745,000Future income taxes-$(897,712)$(897,712)    Net loss for the year based on U.S. GAAP$(11,966,422)$(1,430,634)$(13,397,056)     Loss per share, basic and diluted$ (0.16)  $ (0.18)    Shareholders' equity based on U.S. GAAP$136,030,083$(4,110,873)$131,919,210     Mineral properties and related deferred costs, U.S. GAAP$84,997,460$(5,009,161)$79,988,299     Future income taxes, U.S. GAAP$898,288$(898,288) $ -      **July 31**  **July 31****Statement of Loss****2005**  **2005**  **Adjustments****as restated**     Deferred exploration costs prior to the    establishment of proven and probable mineral reserves (b)$(11,274,760)$(3,722,239)$(14,996,999)Future income taxes related to deferred exploration costs$(1,475,253)$1,042,000 $(433,253)     Net loss for the year based on U.S. GAAP$(32,896,225)$(2,680,239)$(35,576,464)     Loss per share, basic and diluted$ (0.50)  $ (0.54)     Shareholders' equity based on U.S. GAAP$131,560,696$(2,680,239)$128,880,457     Mineral properties and related deferred costs, U.S. GAAP$50,801,722$(3,722,239)$47,079,483     Future income taxes, U.S. GAAP$1,674,288$(1,042,000) $632,288
 

**Gammon Lake Resources Inc.****40F – Canadian & US GAAP    Differences**December 31, 2006**b) Mineral properties and related deferred costs**
In March 2002, the Emerging Issues Committee of the CICAissued EIC 126 – "Accounting by Mining Enterprises for Exploration Costs" whichaffects mining companies with respect to the deferral of exploration costs. EIC126 refers to CICA Handbook Section 3061 "Property, Plant and Equipment",paragraph .21 which states that for a mining property, the cost of the assetincludes exploration costs if the enterprise considers that such costs have thecharacteristics of property, plant and equipment. EIC 126 then states that amining enterprise that has not established mineral reserves objectively, andtherefore does not have a basis for preparing a projection of the estimated cashflow from the property is not precluded from considering the exploration coststo have the characteristics of property, plant and equipment. EIC 126 also setsforth the Committee's consensus that a mining enterprise in the explorationstage is not required to consider the conditions regarding impairment indetermining whether exploration costs may be initially capitalized. With respectto impairment of capitalized exploration costs, if an enterprise has notestablished mineral reserves objectively, and therefore does not have a basisfor preparing a projection of the estimated cash flow from the property it isnot obliged to conclude that capitalized costs have been impaired. However, suchan enterprise should consider the conditions set forth in CICA Handbook Section3061 in determining whether subsequent write-down of capitalized explorationcosts related to mining properties is required. 

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

Under United States GAAP, exploration costs incurred inlocating areas of potential mineralization are expensed as incurred. Commercialfeasibility is established in compliance with the U.S. Securities and ExchangeCommission Industry Guide 7, and consists of identifying that part of a mineraldeposit that can be economically and legally extracted or produced at the timeof the reserve determination. After an area of interest has been assessed ascommercially feasible, expenditures specific to the area of interest for furtherdevelopment are capitalized. 

 

 

 

**Gammon Lake Resources Inc.****40F – Canadian & US GAAP    Differences**December 31, 2006**c) Adjustment for exploration costs on abandoned properties**
The Company accounts for mineral properties and relateddeferred expenditures as described in item (a). During the years ended July 31,2004, 2001 and 2000, $1,063,448, $150,784 and $44,064 respectively waswritten-off as the development was not considered economically feasible andtherefore abandoned. Under U.S. GAAP these costs would have been expensed in aprior period. 
**d) Stock-based compensation**
Effective August 1, 2003, the Company accounted for its stockbased compensation under US GAAP in accordance with FAS No. 123R (fair valuemethod) for both employees and non-employees. 

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

Prior to August 1, 1999, the Company had issued stock optionsto non-employees with a total fair value of $180,613 which was expensed for U.S.GAAP purposes. 
**e) Comprehensive income**
Effective for fiscal years beginning after December 15, 1997,Statement of Financial Accounting Standards No. 130 "Reporting ComprehensiveIncome" ("FAS 130"), is applicable for US GAAP purposes. Comprehensive income isnet income, plus certain other items that are recorded directly to shraeholders'equity such as foreign currency translation adjustments and unrealized gains(losses) on marketable securities. 
**f) Fair value of long term debt**
In consideration for the Soyopa claims acquired in November,2001 (Note 7(c)), the Company entered into a non-interest bearing loan agreementas disclosed in Note 7. Commencing in 2006, under Canadian GAAP, the loan hasbeen presented at its fair value. Under US GAAP, interest must be imputed onthis loan in accordance with APB 21. The reduction in the principal amount ofthe loan as a result of imputing a market rate of interest also reduces thecarrying values of the company's mineral properties accordingly. 

During the periods subsequent to November, 2001, For US GAAPthe interest imputed on the loan is recorded as a period expense. For CanadianGAAP the imputed interest is added to the cost of the mineral properties. 
**g) Employee future benefits**
In September 2006, the FASB issued FAS 158 "Employer'sAccounting for Defined Benefit Pension and Other Postretirement Plans" whichrequires the recognition in the Company's financial statements the fundingstatus of a benefit plan and that the plan assets and benefit obligations bemeasured as of the date of the employer's fiscal year-end statement of financialposition. Under FAS 158 the Company is required to recognize unamortizedactuarial gains and losses, prior service cost and remaining transitionalamounts not recognized under Canadian GAAP, with the offset to accumulatedcomprehensive income. 

 

**Gammon Lake Resources Inc.****40F – Canadian & US GAAP    Differences**December 31, 2006**h) Recent U.S. accounting pronouncements**
In May 2005 the ("FASB") issued statement of FinancialAccounting Standards No. 154, "Accounting Changes and Error Corrections-areplacement of APB Opinion No. 20 and FASB Statement No. 3" ("FAS 154"). FAS 154replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3,"Reporting Accounting Changes in Interim Financial Statements", and changes therequirements for the accounting for and reporting of a change in accountingprinciple. FAS 154 applies to all voluntary changes in accounting principle andis effective immediately. It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. The adoption of FAS154 did not have a material effect on its financial position or results ofoperations. 

During 2004, a committee of the Emerging Issues Task Force ("EITF")began discussing the accounting treatment for stripping costs incurred duringthe production phase of a mine, EITF 04-06, "Accounting for stripping costsincurred during production in the mining industry". During March 2005, the EITFreached a consensus that stripping costs incurred during the production phase ofa mine are variable production costs that should be included in the costs ofinventory produced during the period that the stripping costs are incurred. TheFinancial Accounting Standards Board ratified the EITF consensus. The EITFconsensus is effective for the first reporting period in fiscal years beginningafter December 15, 2005, with early adoption permitted. The Company has includedstripping costs during the production phase of the mine as part of theproduction costs. 

In December 2004, FASB issued Statement of FinancialAccounting Standard No. 123-R "Share Based Payment (revised)" ("SFAS No.123-R"). SFAS No. 123-R amends Statement of Financial Accounting Standard No.123"Accounting for Stock Based Compensation" ("SFAS No. 123") eliminating theintrinsic value for accounting of equity based transactions primarily withemployee based services. SFAS No. 123-R will have no material impact on thefinancial results of the Company as the Company has not used the intrinsic valuemethod for its equity investments. 

In 2004, the FASB issued Statement of Financial AccountingStandard No. 151 "Inventory Costs, and Amendment of ARB No. 43, Chapter 4" ("SFASNo. 151"). SFAS No. 151 established standards for how an issuer measures fixedproduction costs and certain non-direct inventory costs when determininginventory costs. SFAS No. 151 is effective for financial periods beginning afterNovember 1, 2004. Adoption of this standard has no material impact on thefinancial statements of the Company. 

In June 2006 the FASB issued FIN 48 "Accounting forUncertainty in Income Taxes – an Interpretation of FASB Statement No. 109" whichclarifies the accounting for uncertainty in income taxes recognized in anenterprise's financial statements in accordance with FASB Statement No. 109,"Accounting for Income Taxes". This interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return andprovides guidance on accounting and disclosure based on whether it is morelikely than not that an uncertain tax position will be sustained on review bytaxation authorities. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. The Company is evaluating the implications of the adoption ofFIN 48. 

In September 2006, the FASB issued FAS Statement No. 157,"Fair Value Measurements" (FAS 157). FAS 157 provides guidance on how to usefair values to measure assets and liabilities and applies whenever otherstandards require or permit assets or liabilities to be measured at fair value.Expanded disclosures about the use of fair value to measure assets andliabilities are also required. FAS 157 is effective for the Company on January1, 2008 and is applied on a prospective basis. The Company is evaluating theimpact of FAS 157 on its consolidated financial statements.**** |
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