Gammon Gold Announces Fourth Quarter & Year End 2007 Financial Results



    HALIFAX, March 31 /CNW/ - Gammon Gold Inc. ("Gammon Gold") (TSX:GAM and
AMEX:  GRS) announces fourth quarter and year end financial results for the
three and twelve months ended December 31, 2007.
    For the three-month period ended December 31, 2007 the Company reported
sales of $39,699,932 compared to $34,381,498 for the same period in 2006. Net
loss for the quarter was $20,728,989 or $0.19 per share compared to $3,291,590
or $0.04 per share for the same period in 2006.
    For the twelve-month period ended December 31, 2007 the Company reported
sales of $152,058,628 compared to $64,235,896 for the same period in 2006. Net
loss for the period was $101,313,968 or $0.90 per share compared to
$25,308,401 or $0.29 per share for the same period in 2006.

    
    -------------------------------------------------------------------------
                     Year ended     Year ended
                    December 31,   December 31,
                           2007           2006        Q4 2007        Q4 2006
    -------------------------------------------------------------------------
    Revenue from
     mining
     operations    $152,058,628    $64,235,896    $39,699,932    $34,381,498
    Production
     costs,
     excluding
     amortization
     and depletion $140,302,718    $37,943,583    $33,511,441    $18,129,116
    Gold ounces
     sold               121,107         67,477         28,665         33,866
    Silver ounces
     sold             5,027,983      1,888,324      1,183,729      1,138,986
    Gold equivalent
     ounces sold (2)    218,200        105,181         50,041         57,111
    Average
     realized gold
     price              $698.91        $606.99        $795.00        $608.53
    Average
     realized
     silver price        $13.42         $12.18         $14.32         $12.54
    Gold
     equivalency
     rate                    52             50             56             49
    Net loss      ($101,313,968)  ($25,308,401)  ($20,728,989)   ($3,291,590)
    Net loss per
     share, basic
     and diluted (3)     ($0.90)        ($0.29)        ($0.19)        ($0.04)
    Cash flows
     from (used in)
     operations    ($34,191,890)  ($20,026,018)    $2,704,381     $5,952,707
    Total cash
     costs (per
     gold
     equivalent
     ounce) (4)            $650           $366           $676           $323
    -------------------------------------------------------------------------
    (1) In 2005, the Company changed its year end from July 31st to
        December 31st.
    (2) Gold equivalent ounces are calculated based on actual sales.
    (3) Net loss per share on a diluted basis is the same as net loss per
        share on an undiluted basis, as all factors were anti-dilutive.
    (4) See the Non-GAAP Measures section in the attached Management
        Discussion & Analysis document.

    Cash costs per gold equivalent ounce for the fourth quarter improved by
$88 per gold equivalent ounce, or 11%, to $676 per gold equivalent ounce over
Q3 as a result of improved mine and processing productivities resulting in the
Company's fixed cost base being spread over increased production units the
effects of which were partially impacted by $86 per gold equivalent ounce of
charges taken as part of the Company's year-end accounting closing process.
Included in the final year-end consolidated total cash cost per gold
equivalent ounce result was approximately $57 per gold equivalent ounce to
revise the valuation for Ocampo's gold-in-circuit mill inventory as well as
$17 per gold equivalent ounce of pension adjustments relating to future El
Cubo employee social benefits payable under Mexican Social Security
Legislation. An additional $12 per gold equivalent ounce in non-recurring
charges was taken in Q4 to reflect payroll and severance allowances arising
from an El Cubo workforce downsizing initiative. Excluding the above
adjustments, the consolidated total cash cost per gold equivalent ounce result
in Q4 was equal to the $590 per gold equivalent ounce as reported in the
Company's monthly December Key Performance Indicator press release.
    The cash costs for the year of $650 per gold equivalent ounce were
primarily driven by operational efficiency start-up problems at Ocampo, the
effects of which were adversely impacted by the resulting net realizable value
adjustments to Ocampo's ore inventory and severance expense charges associated
with the Q4 workforce reduction at Ocampo. During the latter part of the
fourth quarter the Company began to gain traction on many of its production
and cost cutting initiatives that are expected to continue to positively
impact cash costs in future quarters.
    The impact of productivity gains achieved in the latter part of Q4 was
evident in the improvement to mine site operating and net free cash flow
achieved in the quarter. Mine site operating cash flow in Q4 improved to
($240,000) as compared to ($10.6 million) in Q3. Net free cash flow improved
to ($14.7 million) as compared to ($36.7 million) in Q3. As the Company
completes its investments in expansionary capital projects anticipated to be
in mid-2008, the Company expects to achieve positive net free cash flow
status.
    The Company has targeted opportunities where additional cost reductions
can be realized during 2008, which includes the continued focus on workforce
optimization, optimization of consumables and reagents, particularly cyanide,
as well as gaining access to 20 megawatts of grid power. All of these cost
containment initiatives will be supported by the production improvements we
anticipate achieving at both Ocampo and El Cubo through the continued
implementation of optimal mining methods.
    Rene Marion, Chief Executive Officer said: "I am encouraged by the
advancements we have made at both our Ocampo and El Cubo mine sites
particularly as demonstrated in our January and February key performance
indicator press releases. The overall implementation of enhanced mining
practices at both mines can be measured by the steady improvement in monthly
equivalent gold production which is tremendously exciting given we are in a
turnaround phase right now. In fact, we are currently exceeding internal
targets on cost reduction. At Ocampo we will continue to focus on advancing
our open pit stripping and underground development activities to re-sequence
the open-pit and underground operation for steady ore production going
forward." Mr. Marion continued, "I am particularly pleased with the
advancements made at our El Cubo mine where the progress to date has exceeded
our plans. Considering the impact of the continuing improvements in production
at both Ocampo and El Cubo, we anticipate that we will continue to report
overall improvements in the months ahead."
    Commenting on the Company's performance Scott Perry, Chief Financial
Officer said: "The Company's Ocampo turnaround strategy continues to gain
traction and combined with the operational improvements at El Cubo, the
Group's fourth quarter results were highly encouraging given the improvements
in company wide productivity as well as the resulting decreases in total cash
costs per ounce. Our turnaround strategy is well formulated and together with
the progress achieved in 2007 we are continuing to see this positive momentum
carry into 2008 where we are continuing to gain momentum with our production
profile at both Ocampo and El Cubo and we have continued to post strong cost
reductions resulting in solid cash flow performance and cash generation." My
Perry continued: "The stronger metal price environment in early 2008 has
continued to favourably impact our Company-wide business plan such that our
operating cash flow performance has proven more than sufficient to meet our
capital investment expenditures allowing us to utilize surplus cash reserves
in the month of February to make an accelerated principal pay down of
$2.1 million on our financing facility. Our financial foundation is
continually improving due to the improved operational performance momentum
which together with our undrawn debt financing facility places the Company in
good stead to fully fund the Company's recapitalization initiatives up to the
latter part of 2008 when the business anticipates maintaining steady state
positive free cash flow status."
    Mr. Marion continued, "The potential for additional gains is significant.
Equally significant in advancing operations and financial performance, I have
recently added considerable strength to senior management by appointing Scott
Perry, CFO and Russell Tremayne, COO, where collectively as a senior team we
have extensive mining experience in turnaround situations. We are very well
positioned to execute our growth strategy and we expect to continue the
positive trends seen in January and February."

    Highlights
    -------------------------------------------------------------------------
    - 2007 Results:
      - Total production of 121,387 gold ounces and 5,035,704 silver ounces
        or 218,734 gold equivalent ounces at an annual cash cost per ounce of
        $650.
      - Revenues from mining operations of $152.1 million compared to
        $64.2 million in 2006 reflecting an average annual gold selling price
        of $698.91 per ounce and silver selling price of $13.42 per ounce.
      - Net loss per share of $(0.90) compared to 2006 net loss per share of
        $(0.29).
      - Cash used in operations were $34.2 million versus $20.0 million used
        in 2006. After adjustments for changes in non-cash working capital,
        funds used in operations were $15.7 million in 2007 versus
        $4.4 million provided in 2006.
      - In late 2007 the Company's Management Team designed and implemented a
        Turn-Around Strategy that started to gain traction in early 2008.

    - New Executive Management Team:
      - Mr. Rene Marion was appointed Chief Executive Officer on
        October 25th. Mr. Marion brings over 22 years of international mining
        experience to Gammon, having most recently held the position of Chief
        Operating Officer (seconded from Barrick Gold) with Highland Gold
        Mining Ltd.
      - Subsequent to the 2007 calendar year, Mr. Scott Perry was appointed
        Chief Financial Officer on January 25th. Mr. Perry brings over
        11 years of international mining experience to Gammon having most
        recently held the position of Chief Financial Officer (seconded from
        Barrick Gold) with Highland Gold Mining Ltd.
      - Subsequent to the 2007 calendar year, Mr. Russell Tremayne was
        appointed Chief Operating Officer on January 25th. Mr. Tremayne
        brings over 35 years of international mining experience throughout
        the world to Gammon, with the majority of that time in senior
        leadership roles. Most recently, Mr. Tremayne held the position of
        Director of Operations with Highland Gold Mining Ltd.
      - Both Mr. Perry and Mr. Tremayne had previously worked with Gammon's
        Chief Executive Officer, Rene Marion at Highland Gold where
        Mr. Marion and Mr. Perry were seconded from Barrick Gold. Their
        success as a team in optimizing Highland's operations, as well as the
        recapitalization of Highland, will benefit Gammon tremendously.
        Gammon now has in place a senior management team that possesses the
        requisite mining experience needed to successfully execute the
        Company's growth strategy.

    - Post 2007 Balance Sheet Highlights:
      - The Company's Turn-Around Strategy is well underway with solid
        traction achieved on the Company's targeted cost reduction and
        productivity initiatives which is most evident in the Company's
        February Monthly Results Press Release which illustrated:
        - Increased production over January and average monthly production
          over Q4;
        - Reduced consolidated cash costs over January and ongoing
          improvement over Q4's average cash costs;
        - Increased cash flow performance over January and ongoing
          improvements in average cash flow performance over Q4; and,
        - Surplus cash generation resulting in an accelerated debt facility
          principal reduction payment of $2.1M

      - The Company strengthened its liquidity position when the Company's
        lenders, subject to the Company providing a satisfactory mine plan
        and updated reserve statements, agreed to remove all restrictions
        that limit access to the final $12.5 million portion of this facility
        such that the Company will now have access to the full $60 million
        facility.
      - In March, 2008 Gammon announced encouraging drilling results at its
        Guadalupe y Calvo exploration project located in Chihuahua State,
        Mexico which indicated strong resource growth potential from this
        exciting exploration property. Exploration diamond drilling re-
        commenced on this highly prospective project during the fourth
        quarter 2007 as part of a 15-hole (2,400 metre) exploration drilling
        program. Upon the completion of this drilling program, expected to be
        in Q2 2008, the Company will complete a scoping study in order to
        determine the next steps in this advanced exploration property.
      - The Company continues to track positively on its Q1 market
        deliverables scorecard, most notably remaining on target to produce
        in the low to mid point of the targeted range of 56,000 to
        62,000 gold equivalent ounces during Q1, at total cash costs that are
        considerably lower than the originally estimated cash costs for
        Q4 2007, namely $580 to $600 per gold equivalent ounce.
      - The Company will be providing an update on 2007 year end reserves and
        resources at the end of Q1 2008 and also expects to be releasing 2008
        production and total cash cost guidance together with a 3-year
        outlook at the end of Q1 2008.

    Audited Financial Statements for the year ended December 31, 2007 as well
as the Notes to the Financial Statements and Management Discussion and
Analysis are attached to this release and are posted on SEDAR at www.sedar.com
or on the Company's website at www.gammongold.com.

    Conference Call Details

    A webcast and conference call will be held on Monday, March 31, 2008
starting at 2:30 pm Eastern Time (3:30 pm Atlantic Time). Senior management
will be on hand to discuss the results.

    Conference Call Access:
    - Local Toronto Participants: 1-416-644-3419
    - North America Toll Free: 1-800-732-0232
    - Outside North America: 1-416-644-3419

    When the Operator answers please ask to be placed into the Gammon Gold
Fourth Quarter and Year End Results Conference Call.

    Live Webcast:

    The event will be broadcast live on the internet via webcast. To access
the webcast please follow the link provided below:
    http://w.on24.com/r.htm?e=106728&s=1&k=7BAED3BAFA9C754ACEC1D49A018F0752.

    Archive Call Access:

    If you are unable to attend the conference call, a replay will be
available until midnight, Friday April 4th by dialing the appropriate number
below:
    - Local Toronto Participants: 1-416-640-1917
                                  Passcode: 21266722#
    - North America Toll Free:    1-877-289-8525
                                  Passcode: 21266722#
    - Outside North America:      1-416-640-1917
                                  Passcode: 21266722#

    Archive Webcast:

    The webcast will be archived for 365-days by following the link provided
below: http://w.on24.com/r.htm?e=106728&s=1&k=7BAED3BAFA9C754ACEC1D49A018F0752
or via the Company's website at www.gammongold.com.

    About Gammon Gold

    Gammon Gold Inc. is a Nova Scotia based mid tier gold and silver producer
with properties in Mexico. The Company's flagship Ocampo Project in Chihuahua
State achieved commercial production in January 2007. Gammon Gold also
operates its El Cubo operation in Guanajuato State and has the promising
development Guadalupe y Calvo property in Chihuahua State. The company remains
100% unhedged.

    Cautionary Statement

    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.
    No stock exchange, securities commission or other regulatory authority has
approved or disapproved the information contained herein.
    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 Form 40-F 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 without limitation, statements regarding future cash costs
and production at El Cubo and Ocampo and the ability to continue to
successfully implement the Company's Turn-Around Strategy, statements
regarding the resource growth potential of Guadeloupe y Calvo, statements
regarding the company's ability to continue its improved cash flow
performance, the impact of any future exploration on reserve estimates;
expectations regarding the timing and extent of production at the Ocampo
project; the implications of the Mexican Single Rate Tax on future income tax
payments; estimates regarding the future costs related to exploration at
Ocampo; the nature and availability of additional funding sources; and future
plans and objectives of Gammon.  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.

    Management's Discussion & Analysis

    (formerly Gammon Lake Resources Inc.)
    Management's Discussion and Analysis
    For the year ended December 31, 2007
    -------------------------------------------------------------------------
    March 31, 2008

    This Management's Discussion and Analysis has been prepared as of March
31, 2008, and should be read in conjunction with the consolidated financial
statements of Gammon Gold Inc. ("the Company") for the year ended December 31,
2007. The Company determined that its functional and reporting currency is the
United States dollar, and as such, 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.
    The Company is a growth-oriented mid-tier gold and silver production and
exploration company listed on the Toronto Stock Exchange (TSX:GAM) and the
American Stock Exchange (AMEX:  GRS). The Company completed construction of its
Ocampo mine in Chihuahua State, Mexico, announcing commercial production in
January, 2007. In August, 2006, the Company acquired 100% of Mexgold Resources
Inc., which added the El Cubo and Las Torres active gold and silver mines in
Guanajuato State, Mexico along with the Guadalupe y Calvo advanced exploration
development property

    Highlights
    -------------------------------------------------------------------------
    - Results:
      - Total production of 121,387 gold ounces and 5,035,704 silver ounces
        or 218,734 gold equivalent ounces at an annual cash cost per ounce of
        $650.
      - Revenues from mining operations of $152.1 million compared to
        $64.2 million in 2006 reflecting an average annual gold selling price
        of $698.91 per ounce and silver selling price of $13.42 per ounce.
      - Net loss per share of $(0.90) compared to 2006 net loss per share
        of $(0.29).
      - Cash used in operations was $34.2 million compared to $20.0 million
        used in 2006. After adjustments for changes in non-cash working
        capital, funds used in operations were $15.7 million in 2007 compared
        to a $4.4 million contribution in 2006.
      - In late 2007, the Company's Management Team designed and implemented
        a Turn-Around Operational Optimization Strategy (see "Post-2007
        Balance Sheet Highlights").

    - New Executive Management Team:
      - Mr. Rene Marion was appointed Chief Executive Officer on October 25,
        2007. Mr. Marion brings over 22 years of international mining
        experience to the Company, having most recently held the position of
        Chief Operating Officer (seconded from Barrick Gold) with Highland
        Gold Mining Ltd.
      - On January 25, 2008, the Company announced the appointment of
        Mr. Scott Perry as Chief Financial Officer. Mr. Perry brings over
        11 years of international mining experience to the Company having
        most recently held the position of Chief Financial Officer (seconded
        from Barrick Gold) with Highland Gold Mining Ltd.
      - Mr. Russell Tremayne was appointed Chief Operating Officer on
        January 25, 2008. Mr. Tremayne brings over 35 years of international
        mining experience throughout the world to the Company, with the
        majority of that time in senior leadership roles. Most recently,
        Mr. Tremayne held the position of Director of Operations with
        Highland Gold Mining Ltd.

    - Post-2007 Balance Sheet Highlights:
      - The Company's Turn-Around Strategy is underway with encouraging
        results achieved on the Company's targeted cost reduction and
        productivity initiatives, as disclosed in the Company's February Key
        Performance Indicator Press Release:
        - Increased production over January and average monthly production
          over Q4;
        - Reduced consolidated cash costs over January and ongoing
          improvement over Q4's average cash costs;
        - Increased cash flow performance over January and ongoing
          improvements in average cash flow performance over Q4; and,
        - More than sufficient cash generation resulting in an accelerated
          debt facility principal reduction payment of $2.1M.
      - The Company strengthened its liquidity position when the Company's
        lenders under its $60 million revolving credit facility agreed,
        subject to the Company providing a satisfactory mine plan and updated
        reserve statements, to remove all restrictions that limit access to
        the final $12.5 million portion of this facility such that the
        Company will now have access to the full facility.
      - In March 2008 Gammon announced encouraging drilling results at its
        Guadalupe y Calvo exploration project located in Chihuahua State,
        Mexico. Exploration diamond drilling recommenced on this project
        during Q4 2007 as part of a 15-hole (2,400 metre) exploration
        drilling program. Upon the completion of this drilling program,
        expected to be in Q2 2008, the Company will complete a scoping study
        in order to determine the next steps for this property.
      - The Company remains on target to produce in the low end of the
        targeted range of 56,000 to 62,000 gold equivalent ounces during
        Q1 2008, at total cash costs that are considerably lower than the
        originally estimated cash costs for Q4 2007, namely $580 to $600 per
        gold equivalent ounce.
      - The Company will be providing an update on 2007 year end reserves and
        resources along with the 2008 production and total cash cost guidance
        together with a 3-year outlook, at the end of Q1 2008.

    Further details on the history of the Company, its mineral properties and
the risk factors associated with respect to the Company can be found under the
Company's associated documents including its Annual Information Form at
www.sedar.com or on the Company's website at www.gammongold.com.

    Growth Strategy
    -------------------------------------------------------------------------

    Gammon Gold Inc. is committed to responsibly operating and organically
growing a precious metals company while balancing the needs of all our
stakeholders.
    Gammon's growth strategy is to increase its production profile and reserve
base through:
    - Expansion opportunities at Ocampo Open Pit mine, Ocampo Underground
      mine and El Cubo Underground mine;
    - In the latter half of 2008, the Company is aggressively planning to
      expand the exploration programs at Ocampo and El Cubo; and,
    - Pending the results from the Guadalupe y Calvo exploration program
      during the first half of 2008, the Company also plans to aggressively
      advance the exploration program during the second half of 2008.
      Further, as the exploration program is only focusing on 1 kilometre of
      the 3 kilometres of identified potential, the Company believes that
      there is exploration upside yet to be delineated.

    Summarized Annual Financial Results
    -------------------------------------------------------------------------

    The following selected information has been extracted from the Company's
audited consolidated financial statements for the fiscal years in question.
    -------------------------------------------------------------------------
                                                                    5 months
                                  Year ended      Year ended           ended
                                 December 31,    December 31,    December 31,
                                        2007            2006         2005 (1)
    -------------------------------------------------------------------------
    Revenue from mining
     operations                 $152,058,628     $64,235,896            $Nil
    Production costs,
     excluding
     amortization
     and depletion              $140,302,718     $37,943,583            $Nil
    Gold ounces sold                 121,107          67,477               -
    Silver ounces sold             5,027,983       1,888,324               -
    Gold equivalent ounces
     sold (2)                        218,200         105,181               -
    Average realized gold
     price (per oz)                  $698.91         $606.99               -
    Average realized silver
     price (per oz)                   $13.42          $12.18               -
    Gold equivalency rate
     (silver oz equal to one
      gold oz)                            52              50               -
    Net loss                   ($101,313,968)   ($25,308,401)    ($9,614,241)
    Net loss per share,
     basic and diluted (3)            ($0.90)         ($0.29)         ($0.13)
    Cash flows used in
     operations                 ($34,191,890)   ($20,026,019)     $3,466,010
    Total cash costs
     (per gold equivalent
      ounce) (4)                        $650            $366            $Nil
    Total assets                $753,952,111    $716,321,415    $222,183,833
    Total long-term financial
     liabilities                  $1,333,614     $63,607,600     $39,587,505
    Cash dividends declared             $Nil            $Nil            $Nil
    -------------------------------------------------------------------------
    (1) In 2005, the Company changed its year end from July 31st to
        December 31st.
    (2) Gold equivalent ounces are calculated based on actual sales.
    (3) Net loss per share on a diluted basis is the same as net loss per
        share on an undiluted basis, as all factors were anti-dilutive.
    (4) See the Non-GAAP Measures section on page 16.

    Review of Annual Financial Results

    2007 represented the Company's first full year of commercial production at
our Ocampo operation. Together with a full twelve months of production
contributions from the El Cubo operation, which was fully consolidated
following the August 8, 2006 acquisition of Mexgold Resources Inc.
("Mexgold"), the Company reported annual production of 121,387 gold ounces and
5,035,704 silver ounces, or 218,734 gold equivalent ounces which compares to
67,477 ounces of gold and 1,888,324 silver ounces or 105,181 gold equivalent
ounces in the prior year. The Company's increased gold and silver production
profile was due to the ramped-up production profile at Ocampo, following the
establishment of commercial operations in January 2007 and the full twelve
months of production contributions from El Cubo.
    During 2007, the Company sold 121,107 gold ounces and 5,027,983 silver
ounces, or 218,200 gold equivalent ounces, at average gold and silver selling
prices of $698.91 per ounce and $13.42 per ounce respectively for total
revenues of $152.1 million. This compares to prior year sales of 67,477 gold
ounces and 1,888,324 silver ounces, or 105,181 gold equivalent ounces, at
average gold and silver selling prices of $606.99 per ounce and $12.18 per
ounce respectively for total revenues of $64.2 million. Increased revenues are
attributable to the increased gold and silver production and stronger market
prices for gold and silver, which the Company fully participated in due to
being entirely unhedged on all future production.
    Production costs, excluding amortization and depletion, for the year ended
December 31, 2007 were $140.3 million (year ended December 31, 2006 - $37.9
million). Ocampo's cumulative production costs were significantly higher than
the prior year due to the commencement of commercial operations in January
2007, resulting in close to a full twelve months of operational accounting,
whereas in the prior year a large amount of expenditures were capitalized as
pre-commissioning costs. El Cubo's cost of sales increase was especially high
due to the full inclusion of twelve months of accounting compared to 2006
where only five months of operating results were included, reflecting the
August 8, 2006 acquisition date for Mexgold. Increased production costs were
further negatively impacted by inflationary pressures at all of our
operations, attributable to increased energy, material and manpower costs,
together with operational start-up problems at the Ocampo operation resulting
in operational inefficiency cost pressures.
    The Company's consolidated total cash cost per gold equivalent ounce
increased to $650 per ounce versus $366 in the prior year, which was largely
due to higher inflationary input costs across the entire Company and the
operational efficiency start-up problems at Ocampo, the effects of which were
further impacted by net realizable value and other inventory adjustments to
Ocampo's inventory valuations as well as severance expense charges associated
with the Q4 workforce reduction at Ocampo. Included in the year-end total cash
cost per ounce result was approximately $20 per ounce of fourth quarter
charges taken as part of the Company's year-end accounting closing process
reflecting $13 per ounce of year-end inventory accounting expense to reduce
the valuation for Ocampo gold-in-circuit mill inventory, $4 per ounce of
pension adjustments required to accurately reflect future El Cubo employee
social benefits payable under Mexican Social Security Legislation and $2 per
ounce to reflect payroll and severance allowances arising from an El Cubo
workforce downsizing initiative.
    The net loss of $101.3 million was after a non-cash income tax adjustment
of $43.1 million arising from the recently enacted Mexican Single Rate Tax law
whereby certain future income tax loss carry forwards will not be utilized as
previously anticipated, and employee severance expense charges of $4.4 million
associated with reducing the Ocampo workforce by approximately 30% in the
month of September 2007 and changes to the Executive Management Team.
Excluding these items, the net loss for the year would have been $53.8 million
compared to a net loss of $25.3 million in the prior year which would have
equated to a net loss per share, basic and diluted, of $0.48 per share
compared to $0.29 per share in the prior year. The increase in this adjusted
net loss of $28.5 million over the prior year was primarily due to the
increased cash costs described above.
    After the income tax expense adjustment charge, inventory adjustments and
the severance expense, the net after-tax loss for the year was $101.3 million
compared to a net loss of $25.3 million in the prior year resulting in a net
loss per share, basic and diluted, of $0.90 per share compared to $0.29 per
share in the prior year.
    Ocampo's operational efficiency start-up issues together with increased
inflationary operating cost pressures more than offset stronger metal prices
received for gold and silver, resulting in a significantly reduced cash flow
from operations contribution of a negative $34.2 million compared to a
negative $20.0 million in the prior year. The non-existence of positive
earnings and positive cash flow together with the Company's turn-around
operational status resulted in no dividends being declared in 2007, similar to
the prior year.
    In the fourth quarter of 2007, Gammon initiated a detailed operational
asset review to address the start-up issues at Ocampo. As a result, an
operational turn-around strategy was engineered for Ocampo, based on
continuous efficiency improvement and cost reduction initiatives, to maximize
the value of this cornerstone asset going forward. A similar operational
review was also performed at El Cubo, resulting in the formulation of a
company-wide turn-around strategy. The Company's operational turn-around
strategy is in place and the targeted improvements have been flowing through
to the Company's bottom line operational results in the latter parts of the
fourth quarter and early 2008. The results to date have been disclosed through
the monthly disclosures of key performance indicators that the Company
committed to make to the market throughout the fourth quarter of 2007 and the
first quarter of 2008.
    The Company's total assets of $753.9 million increased by $37.6 million
relative to the prior year. This primarily represents capitalized development
costs, and fixed asset purchases at our Ocampo and El Cubo operations together
with capitalized exploration costs. The Company's capitalized exploration
costs largely represent expenditures at our advanced exploration project,
Guadalupe y Calvo, where a diamond drilling program is underway, and at the
completion of which the Company will complete a scoping study in order to
determine the next steps for this advanced exploration property.
    The Company continued to strengthen its liquidity position when during the
second quarter of 2007, the Company completed a public offering of 10,000,000
common shares at $17.81 (C$20.00) per common share in Canada and the United
States for gross proceeds of $178.1 million. (C$200 million). The Company used
a significant portion of the equity issue proceeds to repay its $120 million
debt facility. The remainder of the funds were employed to finance the
commissioning of operations at Ocampo and development capital funding at El
Cubo. In the fourth quarter of 2007, the Company finalized a $60 million
revolving credit facility with the Bank of Nova Scotia and Bank of Montreal to
replace the existing $20 million revolving facility.

    Quarterly Financial Review

    The following selected quarterly information has been extracted from the
Company's consolidated interim financial statements for the periods in
question.
    -------------------------------------------------------------------------
                        Q4 2007        Q3 2007        Q2 2007        Q1 2007
    -------------------------------------------------------------------------
    Revenue from
     mining
     operations     $39,699,932    $30,443,793    $38,414,989    $43,499,914
    Production
     costs          $33,511,441    $33,957,197    $35,393,662    $37,440,418
    Net loss       ($20,728,989)  ($44,835,395)  ($25,487,704)  ($10,261,880)
    Net loss per
     share, basic
     and diluted (1)     ($0.19)        ($0.38)        ($0.23)        ($0.10)
    Cash from
     (used in)
     operations      $2,704,381   ($10,571,784)  ($17,064,419)   ($9,260,068)
    Gold ounces
     sold                28,665         25,104         31,006         36,332
    Silver ounces
     sold             1,183,729      1,068,809      1,306,267      1,469,178
    Gold equivalent
     ounces sold (2)     49,969         44,863         57,063         66,305
    Average realized
     gold price
     (per oz)           $795.00        $678.97        $676.95        $655.67
    Average realized
     silver price
     (per oz)            $14.32         $12.54         $13.34         $13.40
    Gold equivalency
     rate (silver oz
     equal to one
     gold oz)                56             54             51             49
    Total cash costs,
     per gold equi-
     valent ounce (3)      $676           $764           $702           $575
    Cash dividends
     declared              $Nil           $Nil           $Nil           $Nil
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                        Q4 2006        Q3 2006        Q2 2006        Q1 2006
    -------------------------------------------------------------------------
    Revenue from
     mining
     operations     $34,381,498    $16,455,599    $11,507,809     $1,890,990
    Production
     costs          $18,129,116    $12,698,143     $3,967,984     $3,148,340
    Net loss        ($3,291,590)  ($15,115,410)   ($2,215,076)   ($4,686,325)
    Net loss per
     share, basic
     and diluted (1)     ($0.04)        ($0.16)        ($0.03)        ($0.05)
    Cash from
     (used in)
     operations      $5,952,707   ($16,323,982)   ($2,051,352)   ($7,603,392)
    Gold ounces
     sold                33,866         17,112         13,672          2,827
    Silver ounces
     sold             1,138,986        435,554        251,155         62,629
    Gold equivalent
     ounces sold (2)     57,111         25,652         18,409          4,009
    Average realized
     gold price
     (per oz)           $608.53        $604.42        $615.97        $560.68
    Average realized
     silver price
     (per oz)            $12.54         $11.88         $11.45         $10.50
    Gold equivalency
     rate (silver oz
     equal to one
     gold oz)                49             51             54             53
    Total cash costs,
     per gold equi-
     valent ounce (3)      $323           $500           $219             (4)
    Cash dividends
     declared              $Nil           $Nil           $Nil           $Nil
    -------------------------------------------------------------------------
    (1) Net loss per share on a diluted basis is the same as net loss per
        share on an undiluted basis, as all factors were anti-dilutive.
    (2) Gold equivalent ounces are calculated based on actual sales.
    (3) See the Non-GAAP Measures section on page 16.
    (4) The Company did not report cash costs per ounce in Q1 2006.

    The Company announced the commencement of open pit mining and heap leach
operations at the Ocampo location in January of 2006. In February 2006, the
first gold-silver pour from the heap leach operations was announced, and in
September 2006, the first pour from the mill facility was announced.
Commercial production at Ocampo was announced in January 2007. On August 8,
2006, the Company acquired Mexgold Resources Inc., and therefore the results
of the El Cubo mine are consolidated as of the third quarter of 2006.

    Review of Fourth Quarter Financial Results
    -------------------------------------------------------------------------

    The fourth quarter of 2007 reflected improved performance at our
cornerstone Ocampo operation attributable to improvements in mine productivity
and underground dilution levels following the re-introduction of longhole
mining, continued strengthening of key operational indicators such as daily
mill tonnage, gold and silver recovery, mining equipment availability and
stronger open pit production, all of which contributed to improved production
and cost performance. As a result and relative to the third quarter of 2007,
the Company reported improvements in production and cash costs in the fourth
quarter. This trend is expected to continue in the coming quarters as these
initiatives continue to gain traction. Improved productivity was driven by
enhanced mining methods, the deployment of mining equipment as well as overall
improved mine planning, development and improved equipment availability.
    In Q4, 2007, the Company sold 28,665 ounces of gold and 1,183,729 ounces
of silver, or 49,969 gold equivalent ounces compared to sales of 25,104 ounces
of gold, 1,068,809 ounces of silver, or 44,863 gold equivalent ounces in Q3
2007 and sales of 33,866 ounces of gold, 1,138,986 ounces of silver, or
57,111 gold equivalent ounces in the prior year corresponding period. Total
revenues of $39.7 million in Q4 2007 were $9.3 million higher than in Q3 2007,
reflecting stronger metal prices received for both gold and silver combined
with increased gold and silver sales. Increased physical metal sales are
largely due to the implementation of optimized mining methods at Ocampo which
has positively impacted productivity with the operation reporting a
significant increase in tonnes and gold/silver head grades due to lower
dilution from the underground as a result of the reintroduction of longhole
mining. Relative to the prior year corresponding period, total revenues were
$5.3 million higher due to increased metal prices received for both gold and
silver partially offset by lower equivalent gold metal production in Q4 2007
which was primarily attributable to lower head grades in Q4 2007 reflecting a
lower availability of developed high grade mining areas at the Ocampo
operation.
    Cash costs per ounce in the fourth quarter were significantly higher than
the prior year corresponding period as a result of the lower production but
improved by $88 per gold equivalent ounce, or 11%, to $676 per gold equivalent
ounce as compared to Q3 2007 as a result of improved mine and processing
productivities resulting in the Company's fixed cost base being spread over
increased production units, the effects of which were partially impacted by
$86 per ounce of charges taken as part of the Company's year-end accounting
closing process. Included in these year-end adjustments was approximately
$57 per ounce to revise the valuation for Ocampo's gold-in-circuit mill
inventory as well as $17 per ounce of pension adjustments required to
accurately reflect future El Cubo employee social benefits payable under
Mexican Social Security Legislation. An additional $12 per ounce in charges
was taken in Q4 to reflect payroll and severance allowances arising from the
2007 El Cubo workforce downsizing initiative. Excluding the above adjustments,
the consolidated total cash cost per ounce result in Q4 was equal to the $590
per ounce as reported in the Company's monthly December Key Performance
Indicator press release.
    The Company's operational turn-around strategy targets a number of
production and cost optimization initiatives which started to be realized in
the fourth quarter of 2007 and are expected to continue to flow through to the
Company's bottom line operational results early 2008. The Company believes its
reported production costs in 2007 are significantly higher than those expected
in the future as the Company's turn-around plan continues to deliver targeted
improvements and results.
    The fourth quarter net loss of $20.7 million improved significantly
compared to the third quarter net loss of $44.8 million as the third quarter
result included a non-cash income tax adjustment of $21.6 million arising from
the recently enacted Mexican Single Rate Tax law, whereby certain future
income tax loss carry forwards will not be utilized as previously anticipated.
In addition, the Company's fourth quarter net loss was favourably impacted by
the stronger revenues associated with higher metal production and stronger
metal prices received for both gold and silver and the lower cash cost per
ounce performance.
    Notwithstanding the improved net loss position, Ocampo's below design
capacity operational performance was more than offset by stronger production
and stronger metal prices, resulting in a positive cash flow from operations
of $2.7 million compared to negative operating cash flow of $10.6 million in
Q3 2007 and a positive $6.0 million in the prior year. The improvements
realised in Q4 2007 were more than offset by the underlying high cash cost
operating structure resulting in operating cash flow performance being
$3.3 million lower than the prior year corresponding period which is
reflective of Ocampo's productivity & efficiency issues that are now being
addressed in the Company's turnaround plan. The Q4 2007 cash flow from
operations result was an improvement on the third quarter result and reflects
the increased sales revenue performance and improved cost performance.
Operational cash flow performance is expected to improve significantly in 2008
as a result of the detailed operational asset review carried out in the fourth
quarter of 2007, which identified a number of continuous efficiency
improvement and cost reduction initiatives. Targeted improvements have been
flowing through to the Company's bottom line operational results in the latter
parts of the fourth quarter and early 2008 and are expected to result in
further improved operational performance results in 2008.

    Results of Operations
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                           2007           2006           2007           2006
                         Ocampo         Ocampo        El Cubo        El Cubo
    -------------------------------------------------------------------------
    Revenue from
     mining
     operations    $107,833,028    $47,214,146    $44,225,600    $17,021,750
    Gold ounces
     produced            87,647         51,748         33,740         15,729
    Silver ounces
     produced         3,453,388      1,302,807      1,582,316        585,517
    Gold equivalent
     ounces
     produced (1)       154,423         77,804         64,311         27,377
    Gold ounces
     sold                87,357         51,748         33,740         15,729
    Silver ounces
     sold             3,445,667      1,302,807      1,582,316        585,517
    Gold equivalent
     ounces sold (1)    153,961         77,804         64,311         27,377
    Production
     costs         $102,657,728    $26,600,886    $37,644,990    $11,342,697
    Refining costs   $1,046,259       $342,797       $463,668       $182,807
    Net (loss) /
     earnings
     before other
     items         ($33,454,524)    $8,543,115    ($9,295,937)   ($3,630,248)
    Total cash
     costs (per
     gold
     equivalent
     ounce) (2)            $702           $346         $593             $421
    Total cash
     costs (per
     gold
     ounce) (2)            $703           $214         $511             $279
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                         2007           2006
                                                        Other          Other
    -------------------------------------------------------------------------
    Revenue from
     mining
     operations                                             -              -
    Gold ounces
     produced                                               -              -
    Silver ounces
     produced                                               -              -
    Gold equivalent
     ounces
     produced (1)                                           -              -
    Gold ounces
     sold                                                   -              -
    Silver ounces
     sold                                                   -              -
    Gold equivalent
     ounces sold (1)                                        -              -
    Production
     costs                                                  -              -
    Refining costs                                          -              -
    Net (loss) /
     earnings
     before other
     items                                       ($18,871,971)  ($26,150,386)
    Total cash
     costs (per
     gold
     equivalent
     ounce) (2)                                             -              -
    Total cash
     costs (per
     gold
     ounce) (2)                                             -              -
    -------------------------------------------------------------------------
    (1)      Gold equivalent ounces are calculated based on actual sales.
    (2)      See the Non-GAAP Measures section on page 16.


    Operational Review - Ocampo
    -------------------------------------------------------------------------

    2007 Ocampo Overview
    --------------------

    The Ocampo mine declared commercial production in early 2007 and faced
operational challenges typical to start up operations that impacted
performance particularly in the first three quarters. During the latter part
of the fourth quarter a number of production and cost initiatives were
implemented and incremental improvements in most areas of the mine were
achieved. To communicate these changes the Company began issuing monthly press
releases reporting key performance indicators as well as financial results
beginning on December 17, 2008 and subsequently on January 21, 2008, February
19, 2008 and March 11, 2008.
    The following table summarises some of the key production and cost
initiatives being managed:


    -------------------------------------------------------------------------
    Area for Improvement                           Measures Taken in Q4 2007
    -------------------------------------------------------------------------
    Equipment Availability     - Additional Mobile Equipment for Underground
     (Fixed & Mobile)            & Open Pit
                               - Improved Preventative Maintenance Practices
                                 Implemented

    Insufficient Underground   - Continued focus on increasing development
     Development               - Supplement mill feed with high grade Open
                                 Pit ore while underground development is
                                 accelerated
    Underground Mining Method  - Improved overall mining methods and process
     Selection                   implemented in late Q4
                               - Re-introduction of longhole mining in late
                                 Q4 enhanced productivity and decreased
                                 dilution
    Processing Facility        - Improved preventative maintenance practices
     Availability              - Implementation of enhanced practices
                                 & processes
    Cost Management Issues     - Implementation of cost management reporting
                                 systems and controls
                               - Enhanced mining methods to increase
                                 operational efficiencies  -
                               - Strengthening of procurement practices
                               - Optimization of workforce

    Labour Relations -         - Compensation Analysis Study initiated in Q4
     Compensation Challenges     to Address Inequities Among workforce
                               - Production Bonus Schedule developed for 2008
                                 Implementation

    Liquidity Constraints      - New $60 million revolving line of credit
                                 established in late Q3 (with restrictions)
                               - Cost Containment initiatives and improved
                                 reporting systems implemented

    -------------------------------------------------------------------------
    Area for Improvement                        Measures to be Taken in 2008
    -------------------------------------------------------------------------
    Equipment Availability     - Delivery of Additional Underground Equipment
     (Fixed & Mobile)            in March & April
                               - Training provided to Operators by equipment
                                 supplier to strengthen operation and
                                 maintenance practices
                               - Appointment of seasoned Fixed & Mobile
                                 Maintenance Managers
                               - Sufficient Spares Inventory to ensure
                                 minimal downtime

    Insufficient Underground   - New underground equipment in March & April
     Development                 to allow accelerated development
                               - Target of 50 development metres per day
                               - Ramp up of underground production by
                                 the end of 2008

    Underground Mining Method  - Continued development of longhole mining
     Selection                   stopes to maximize productivity and
                                 minimize dilution
                               - Training on longhole mining methods &
                                 utilization of proper equipment
                               - Established Quality Assurance / Quality
                                 Control team dedicated to dilution
                                 management

    Processing Facility        - Appointment of seasoned processing manager
     Availability              - 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
                               - Continued focus on optimizing workforce

    Labour Relations -         - Compensation inequities resolved
     Compensation Challenges   - Production Bonus Schedule Implemented
                               - Communications with workforce enhanced
                               - More experienced mine management team
                                 appointed
                               - Proactive labour relations program
                                 implemented
                               - Continual improvement to safety and mine
                                 services
    Liquidity Constraints      - Restrictions on line of credit removed
                               - Improved productivity in late 2007 and early
                                 2008 provided positive cash flow from
                                 operations
                               - Significantly enhanced cost controls and
                                 management reporting systems
    -------------------------------------------------------------------------

    Ocampo Underground Mine
    -----------------------

    -------------------------------------------------------------------------
                           Total    Q4 2007    Q3 2007    Q2 2007    Q1 2007
    -------------------------------------------------------------------------
    Tonnes of ore mined  412,493     81,210     79,750    154,243     97,290
    Average grade of
     gold (1)               3.48       3.09       3.21       3.61       3.91
    Average grade of
     silver (1)            193.2      171.9      163.1      209.2      218.4
    Average grade of gold
     equivalent (1)         7.22       6.20       6.24       7.73       8.36
    Metres developed      12,766      2,989      3,331      3,467      2,979
    -------------------------------------------------------------------------
    (1)  Grams per tonne.

    Productivity at the Ocampo underground mine began to decrease in mid-2007
as a result of the lack of underground development accessing stoping areas,
the shortage of underground equipment, and the move away from longhole mining.
The same factors as well as excessive dilution associated with shrinkage and
cut & fill mining methods were responsible for the decrease in grades during
2007. To improve productivity and grades, the Company undertook several
initiatives, including the re-commencement and retraining of personnel in
longhole mining in the past three months. The Company expects the changes to
impact productivity and decrease dilution. The planned accelerated development
program for 2008 is expected to allow for more flexibility in sequencing
mining areas. A new production bonus schedule for the underground was
introduced in February 2008 that has already been well received and is
anticipated to favourably improve employee productivity. High grade Ocampo
Open Pit ore will continue to be re-directed to the Ocampo Mill to take
advantage of the better economics and recoveries through the Mill Circuit, and
will thereby improve recovered metal content. The Company is providing
additional training to its operators, supported by the recent implementation
of a Quality Assurance / Quality Control program. While most of these
initiatives arrived too late to affect results for 2007, the Company has seen
improvements in grades from underground production to 6.30 grams per tonne
gold equivalent in January 2008, and 7.50 grams per tonne gold equivalent in
February 2008.
    Additionally, the Company is currently developing the Santa Eduviges
decline located under the Plaza de Gallos portion of the Ocampo Open Pit mine
that has the potential for a second underground mine and an additional source
of high grade ore feed to the mill.

    Ocampo Open Pit Mine
    --------------------

    -------------------------------------------------------------------------
                           Total    Q4 2007    Q3 2007    Q2 2007    Q1 2007
    -------------------------------------------------------------------------
    Total tonnes
     mined            24,651,769  6,682,603  6,245,055  6,189,740  5,534,371
    Tonnes of ore
     mined             4,082,339    654,605    534,064  1,222,529  1,671,141
    Waste to ore
     ratio (1)          5.04:1(1)  9.21:1(1) 10.69:1(1)  4.06:1(1)  2.31:1(1)
    Average grade of
     gold (2)               0.60       0.75       0.81       0.60       0.50
    Average grade of
     silver (2)            21.03      33.54      31.42      19.11      13.36
    Average grade of
     gold equi-
     valent (2)             1.01       0.77       0.94       1.39       1.36
    -------------------------------------------------------------------------
    (1) Marginal low grade ore inventoried in previous quarters is now
        classified as waste, causing an increase in the waste to ore ratio.
    (2) Grams per tonne.

    The high waste to ore ratio ("strip ratio") in Q3 and Q4 compared to
previous quarters was a result of accelerated stripping required to ensure
adequate access to ore throughout 2008. In December 2007 and into Q1 2008 two
open pit excavators were unavailable due to a scheduled major maintenance
program. In mid-February 2008 the first of the two excavators was
re-commissioned with an immediate impact on productivity. The second excavator
has been re-commissioned in mid-March and we expect productivity to further
increase and normal operations to resume at the Open Pit. We are still
targeting above 80,000 tonnes per day and we are confident in attaining this
target in the first half of 2008.
    The Company completed stripping activities in the Plaza de Gallos and
Refugio pits in 2007 that allowed the Company to join the two pits, leading to
more efficient mining activities. The Company is currently directing its
attention to pre-stripping activities at the Picacho and Conico pits and
expects to be extracting ore from the high grade Picacho Pit by mid-2008.

    Ocampo Mill Circuit
    -------------------

    -------------------------------------------------------------------------
                           Total    Q4 2007    Q3 2007    Q2 2007    Q1 2007
    -------------------------------------------------------------------------
    Tonnes from the
     underground         353,951     86,047    113,634     79,750     74,520
    Tonnes from the
     open pit            149,951     56,201     71,262     20,035      2,453
    Total tonnes of
     ore processed       466,127    134,032    112,262    103,169    116,664
    Average grade of
     gold processed (1)     2.93       2.57       2.73       3.09       3.45
    Average grade of
     silver
     processed (1)        163.05     137.29     144.68     182.00     193.41
    Gold equivalent
     grade processed (1)    6.06       5.04       5.41       6.66       7.40
    Gold ounces
     produced             43,591     10,301      9,687     10,299     13,304
    Silver ounces
     produced          2,153,849    475,111    461,630    547,272    669,836
    Gold ounces sold      43,391     10,935      8,763     10,411     13,282
    Silver ounces
     sold              2,150,386    504,233    425,824    549,081    671,248
    Gold equivalent
     ounces sold          84,950     20,078     16,678     21,213     26,981
    -------------------------------------------------------------------------
    (1)  Grams per tonne.

    Total tonnes processed during the fourth quarter were 134,032, for an
average of 1,457 tonnes per day which was 3% below the current name plate
capacity of 1,500 tonnes per day but was the highest level achieved in 2007.
In early 2008, Mill capacity has consistently averaged above capacity levels
and the Company anticipates expanding the capacity of the Mill to
approximately 2,600 tonnes per day in the second half of 2008 with further
studies being conducted for further expansions.
    In 2007, 33% of the mill feed was sourced from the open pit. Based on more
recent geological interpretation within the open pit, it is expected further
tonnages of high grade ore will become available to send directly to the mill
which will provide much higher levels of metallurgical recovery than that
achieved on the heap leach pad. The Santa Eduviges advanced exploration
project is anticipated to be a third source of ore to the Mill.
    Mill downtime experienced throughout 2007 was the result of mechanical
issues and lack of a reliable power source. The Company has now implemented a
preventative maintenance program. In late January 2008, the Company was
connected to an additional 5 megawatts of grid power that has reduced the
reliance on the diesel powered generators and is also expected to decrease
costs. In early 2009, we anticipate having access to 20 megawatts of grid
power that will eliminate reliance on the diesel generators and therefore
provide a far more reliable source of power and potential cost reductions of
up to $24 per ounce. Mill availability improved to 80% in February 2008 and is
expected to continue to improve throughout 2008. During February, tonnes per
day improved and the mill was operating near design capacity at 1,435 tonnes
per day. Grades improved to 7.16 grams per tonne gold equivalent from
6.34 grams per tonne in January as a result of higher grade ore from both the
underground and open pit being delivered to the mill.
    During December stockpiles of 12,500 tonnes ahead of the mill were
established to minimize the possibility of production interruption due to
possible feed variability from the underground or the open pit. The focus
going forward will remain on maintaining stockpiles ahead of both processing
facilities to ensure ongoing production during any period of downtime. As of
February 2008 10,505 tonnes grading 6.23 grams per tonne gold equivalent were
stockpiled ahead of the Mill circuit.

    Ocampo Crushing & Heap Leach Circuit
    ------------------------------------

    -------------------------------------------------------------------------
                           Total    Q4 2007    Q3 2007    Q2 2007    Q1 2007
    -------------------------------------------------------------------------
    Open pit ore
     placed on the
     heap leach pad    2,563,660    616,121    573,903    704,614    669,022
    Underground mine
     tonnes placed on
     heap leach pad       95,019      1,411      8,168     45,966     39,474
    Total tonnes of
     ore processed     2,658,679    617,532    582,071    750,580    708,496
    Average grade
     of gold
     processed (1)          0.62       0.63       0.60       0.57       0.69
    Average grade of
     silver
     processed (1)         25.52      26.50      24.42      24.45      26.82
    Gold equivalent
     grade
     processed (1)          1.57       1.43       1.51       1.28       1.24
    Gold ounces
     produced             44,056      9,252      8,233     12,673     13,898
    Silver ounces
     produced          1,299,538    270,949    276,955    378,163    373,471
    Gold ounces sold      43,966      9,712      7,817     11,906     14,531
    Silver ounces
     sold              1,295,281    285,344    266,337    353,443    390,157
    Gold equivalent
     ounces sold          69,014     14,885     12,777     18,859     22,493
    -------------------------------------------------------------------------
    (1)  Grams per tonne.

    Fourth quarter tonnes placed on the heap leach pad of 617,532 averaged
6,861 tonnes per day, an increase over Q3 levels. Ore feed to the heap leach
pad continued to improve in early 2008 and tonnes per day to the heap leach
pad increased by over 25% in both January and February over Q4 in spite of
increased tonnes being re-directed to the Mill.
    Construction on expanding the heap leach pad from 5 million to 12 million
tonnes is currently underway with completion planned before the onset of the
rainy season in late June or early July 2008. During a portion of this
construction we were unable to put approximately 120,000 tonnes of ore under
leach in January and early February 2008. However construction has since
advanced to where all areas are now currently under leach and recoveries will
begin to improve in the coming months.
    In January 2008, the Company started to haul from the old tailings that
are out of reserves, averaging 1.68 grams per tonne gold equivalent to the
heap leach pad. The Company believes that taking these high grade tails will
significantly reduce costs for the heap leach over the next few months and
expect that we will have stacking completed before the start of the wet
season.
    As at December 31, 2007, the Company had stacked 5.097 million tonnes on
the pad at a grade of 0.78 grams per tonne gold and 32.30 grams per tonne
silver or approximately 1.40 gold equivalent grams per tonne.
    As of the end of February 2008, the Company has 106,498 tonnes of low
grade ore grading 0.76 grams per tonne gold equivalent stockpiled ahead of the
heap leach that will allow uninterrupted production to continue during
unfavourable weather conditions and periods of equipment downtime.

    Ocampo Cash Costs
    -----------------

    Increased cash costs per ounce were directly attributable to lower
production rates achieved during the year. Fixed and mobile equipment issues
as well as lack of equipment negatively impacted availability and production
in all areas of the mine. However during the fourth quarter, productivity
improvements combined with the continued strengthening of key performance
indicators such as daily mill tonnage, recovery, equipment availability and
strong open pit production all contributed to the improved results. The
Company has seen an improvement in cash costs into 2008 and these initiatives
are expected to continue delivering further improvements in the coming
quarters.

    Ocampo Exploration
    ------------------

    Approximately 16% of the total 2007 production was mined out of reserves
(20% of the underground ore), which illustrates the potential to add to
reserves and perhaps increase the production profile in the future.
    The primary focus of the 2008 exploration strategy is a three stage
design:
    1. A development and drilling program at the advanced exploration Santa
       Eduviges underground target, which is located beneath the open pits
       and has the potential to become a third long term source of mill feed.
    2. A significant increase to 14,000 metres in exploration development in
       the Ocampo underground mine aimed at expanding the original 7 veins to
       the targeted 21 veins.
    3. Greenfield follow up exploration on the 10,000 hectare land position
       targeting several known anomalies including the Cerro Colorado vein
       lying parallel to and between the Ocampo vein structures and the Pinos
       Altos deposit.

    Operational Review - El Cubo
    ----------------------------

    As with Ocampo, in 2008 the Company is implementing a number of production
and cost initiatives at the El Cubo mine.

    -------------------------------------------------------------------------
    Areas for Improvement                       Measures to be Taken in 2008
    -------------------------------------------------------------------------
    High Labour Costs            - Optimization of workforce to reduce total
                                   site manning of both employees and
                                   contractors
    -------------------------------------------------------------------------
    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
                                 - All underground ore will be hauled via
                                   train at the 600 level to the Las Torres
                                   shaft and plant
    -------------------------------------------------------------------------
    Equipment Availability       - Additional Mobile Equipment for the
                                   Underground
                                 - Improved Preventative Maintenance
                                   Practices implemented
    -------------------------------------------------------------------------
    Lack of Underground          - Focus on extending existing underground
     Development                   exploration development into areas of
                                   known structures which have been neglected
                                   historically due to a lack of capital and
                                   priority
    -------------------------------------------------------------------------
    Underground Mining Method    - Improved overall mining methods
     Selection                   - Established Quality Assurance / Quality
                                   Control team dedicated to dilution
                                   management
    -------------------------------------------------------------------------

    Underground and Milling Operations
    ----------------------------------

    -------------------------------------------------------------------------
                           Total    Q4 2007    Q3 2007    Q2 2007    Q1 2007
    -------------------------------------------------------------------------
    Tonnes of ore mined
     and processed       689,753    160,278    200,530    206,166    122,779
    Average grade of
     gold processed (1)     1.77       1.74       1.54       1.61       2.44
    Average grade of
     silver (1)            83.29      88.18      69.94      73.02     115.96
    Gold equivalent
     grade
     processed (1)          3.38       3.33       2.85       3.07       4.82
    Gold ounces
     produced             33,740      8,017      8,524      9,274      7,925
    Silver ounces
     produced          1,582,316    394,738    376,648    432,271    378,659
    Gold ounces sold      33,740      8,017      8,524      9,274      7,925
    Silver ounces
     sold              1,582,316    394,738    376,648    432,271    378,659
    Gold equivalent
     ounces sold          64,308     15,112     15,409     18,135     15,652
    -------------------------------------------------------------------------
    (1) Grams per tonne

    During the latter part of 2007 the Company began to rationalize the four
existing mill facilities. Currently, two of the four mills have been put on
care & maintenance with the third mill expected to be placed on care &
maintenance in Q2 2008 after which, all ore will be routed to the 2,200 tonne
per day Las Torres mill. In early 2008, all administration functions were
consolidated at the Las Torres facility.
    In early 2008, the Company reported improved productivity and financial
results at El Cubo where monthly average production increased over 2007 with a
corresponding decrease in costs, primarily as a result of the consolidation of
the processing facilities. Further cost reductions are expected to be realized
with the closure of our third mill, the commissioning the 600 metre haulage
level and as we continue with labour rationalization initiatives in the latter
part of 2008. Currently we are already hauling at a reduced level along the
600 metre haulage level with the ramp up to full capacity expected in latter
part of 2008.

    El Cubo Exploration
    -------------------

    During 2006 and 2007, 40% of the gold and silver production was mined
outside of reserves, which illustrates the potential to add to reserves and
perhaps increase the production profile in the future.
    As with Ocampo there is exploration opportunity at El Cubo with little of
the land position being explored to date(the Company is currently only
utilizing 700 hectares of El Cubo's 8,500 hectares of total concessions).
    During 2008 we have allocated $2 million to our exploration program and
have identified drill priorities at Villalpando, La Loca / Dolores and San
Nicolas with secondary targets at San Francisco Poniente, Imaculada, Vein 178,
Soledad, Milenio, La Luz, Villalpando del Alto and Tuberos. In addition we
have significantly increased the amount of development exploration for 2008.

    Guadalupe y Calvo Exploration Project
    -------------------------------------

    During 2007 the Company initiated a 15-hole (2,400 metre) exploration
drilling program on this highly prospective project. Upon the completion of
this drilling program, expected to be in Q2 2008, the Company will complete a
scoping study in order to determine the next steps in this advanced
exploration property. The recent drilling program was designed to target the
high grade core to further test the continuity of the high grade
mineralisation along the Rosario and Nankin veins. Prior to being acquired by
Gammon, Mexgold had completed 37 holes, comprising approximately 10,000 metres
of drilling. As the structure remains open along strike and at depth, the
objective of the current exploration program is focused on expanding the
property's resources and better definition of the vein structures.
    Our drilling program in the first half of 2008 is designed to allow Gammon
to subsequently update the resource estimate, conduct metallurgical test work
and to complete a scoping study for a potential open pit and underground
operation. Pending the positive results from the drilling program, the Company
anticipates aggressively advancing the exploration program at this property
starting in the second half of 2008. Further, as our exploration program is
only focusing on 1 kilometre of the 3 kilometres of identified potential,
there remains exploration upside yet to be delineated.

    Expenses
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                                    5 months
                                  Year ended      Year ended           ended
                                 December 31,    December 31,    December 31,
                                        2007            2006            2005
    -------------------------------------------------------------------------
    General and administrative   $24,156,361     $28,247,412     $10,683,891
    Amortization and depletion   $43,392,399     $18,756,816        $180,188
    -------------------------------------------------------------------------

    General and administrative costs decreased by $4.1 million from 2006 due
to $15.8 million of stock-based compensation expense being incurred in 2006
compared to $4.0 million in 2007, offset by an increase in wages and severance
expenses of $7.4 million. The Company is managing other cost reduction initi
atives that are expected to favourably impact general and administrative
costs.
    Amortization and depletion, which relates to mining activities, increased
by $24.6 million to $43.4 million for the year, compared to $18.8 million for
the year ended December 31, 2006. The increase is primarily attributable to a
full twelve months of amortization and depletion expenses associated with
Mexgold assets (including fair value purchase price allocations) being
included in the Company's consolidated results following the full acquisition
of Mexgold in August 2006; and increased production activities and assets
being commissioned at Ocampo during 2007 resulting in higher amortization and
depletion expenses.

    Other Income / (Expense)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
                                                                    5 months
                                  Year ended      Year ended           ended
                                 December 31,    December 31,    December 31,
                                        2007            2006            2005
    -------------------------------------------------------------------------
    Interest on long-term debt   ($3,896,791)    ($5,272,904)      ($205,674)
    Foreign exchange
     (loss)/gain                 ($8,933,060)    ($1,497,350)       $569,580
    Gain/(loss) on equity
     investment                         $Nil        $503,711        $177,855
    Interest and other income       $772,218        $785,203        $170,582
    -------------------------------------------------------------------------

    Interest on long-term debt decreased by $1.4 million to $3.9 million in
2007 from $5.3 million in 2006. The Company used a significant portion of the
proceeds of the $200 million CAD equity offering to repay the $120 million US
credit facility with Scotia Capital and Société Générale in late April 2007.
At the end of the year, the Company had utilized $30.48 million of its
$60 million operating facility.
    Non-cash foreign exchange loss increased by $7.5 million from $1.5 million
to $8.9 million in 2007 as a result of the translation of the Company's
operations in Canadian dollars and Mexican pesos to US dollars. 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.
    Gains and losses on equity investments was $Nil during 2007 as the
investment in Mexgold Resources Inc. was eliminated on August 8, 2006 upon the
acquisition of all the issued and outstanding common shares, options and
warrants of Mexgold in exchange for common shares, options and warrants of the
Company. The Company earned interest on short-term investments and other
income of $0.8 million during 2007, compared to $0.8 million in 2006.

    Income taxes (recovery)
    -------------------------------------------------------------------------

    During the year ended December 31, 2007, the Company's future income tax
expense of $27.6 million was significantly higher than the $1.4 million
recovery in 2006, reflecting the significant adjustment recorded in Q3 to
reflect the impact of the recently enacted Mexican Single Rate Tax
(substantively enacted on September 28, 2007). With the implementation of this
Single Rate Tax on January 1, 2008, the Company's Mexican subsidiaries will
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 will pay 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. The Company would have recorded a recovery of
$15.5 million if this new tax had not been enacted which resulted in an
overall impact of $43.1 million to the Company.
    The Company has significant income tax loss carry-forwards primarily
relating to the accelerated deduction of mining properties costs permitted for
income tax purposes. Prior to the implementation of the single rate tax, the
full benefit of these loss carry-forwards was reflected as a future income tax
asset based on the current Mexican income tax rate of 28%. The future income
tax expense recorded in 2007 reflects the value of these loss carry-forwards
that the Company projects will not be utilized as intended in future years due
to the existence of the new single rate tax. While the 2007 net loss was
increased significantly by this future income tax adjustment, the expense is a
non-cash item and there was no impact on cash from operating activities.
    The Company has sufficient income tax loss carry-forwards in Mexico and
Canada which lower the effective current tax rate to zero except for the
imposition of the new single rate tax effective January 1, 2008. Future income
tax assets and liabilities are determined based on the difference between the
financial reporting and tax basis of assets and liabilities and on unclaimed
losses carried forward and are measured using the substantively enacted tax
rates that will be in effect when the differences are expected to reverse or
when unclaimed losses are expected to be utilized.

    Non-GAAP Measure - Total Cash Cost per Ounce Calculation
    -------------------------------------------------------------------------

    Total (consolidated) cash costs is a non-GAAP financial measure.
Management uses this measure internally to better assess performance trends
for the Company as a whole. The Company believes that, in addition to
conventional measures prepared in accordance with GAAP, certain investors use
such non-GAAP information to evaluate the Company's performance and ability to
generate cash flow. The Company believes that these measures better reflect
the Company's performance for the current period and are a better indication
of its expected performance in future periods. Total (consolidated) cash costs
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. 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 by applicable ounces sold. The following table
provides a summary of total cash costs per ounce reconciled to the financial
statements:

    -------------------------------------------------------------------------
                                                Year ended        Year ended
                                         December 31, 2007 December 31, 2006
    -------------------------------------------------------------------------
    Production cost per financial
     statements                               $140,302,718       $37,943,583
    Refining cost per financial
     statements                                 $1,509,927          $525,604
    -------------------------------------------------------------------------
    Total cash costs                          $141,812,645       $38,469,187
    Divided by gold equivalent
     ounces sold (1)                               218,200           105,243
    -------------------------------------------------------------------------
    Total cash cost per gold
     equivalent ounce                                 $650              $366
    -------------------------------------------------------------------------
    Total cash costs (per above)              $141,812,645       $38,469,187
    Less:  Silver revenue (see below)         ($67,475,532)     ($22,999,786)
    -------------------------------------------------------------------------
                                               $74,337,113       $15,469,401
    Divided by gold ounces sold                    121,107            67,477
    -------------------------------------------------------------------------
    Total cash cost per gold ounce (2)                $614              $229
    -------------------------------------------------------------------------
    Silver price                                    $13.42            $12.18
    Multiplied by silver ounces                  5,027,983         1,888,324
    -------------------------------------------------------------------------
    Silver revenue                             $67,475,532       $22,999,786
    -------------------------------------------------------------------------
    (1) Gold equivalent ounces are calculated based on actual sales.
    (2) The calculation of total cash cost per gold ounce excludes the by-
        product silver sales revenue.

    Liquidity and Capital Resources
    -------------------------------------------------------------------------

    On April 24, 2007, the Company completed a public offering of
10,000,000 common shares at $17.81 (C$20.00) per common share in Canada and
the United States for gross proceeds of $178.1 million (C$200 million). The
Company used part of the offering proceeds to repay its $120 million debt
facility. The Company believes this strengthens the balance sheet, and allows
the Company to immediately capitalize on investment and expansion
opportunities to enhance its resources and reserves.
    The balance of cash and cash equivalents as at December 31, 2007 was
$3.7 million (December 31, 2006 - $4.1 million). In the fourth quarter the
Company finalized a $60 million revolving credit facility with the Bank of
Nova Scotia and Bank of Montreal, expiring on December 31, 2008. The Company
will, subject to certain conditions, have an initial availment of $47.5
million increasing to $60 million upon the completion of an updated resources
and reserves study, life of mine plan and 2008 budget, all of which are
expected to be finalized in the first quarter of 2008. This facility replaces
the previous $20 million revolving facility.
    Details of the Company's operating, financing and investing activities and
long-term debt agreement are provided below. Other than as discussed herein,
the Company is not aware of any trends, demands, commitments, events or
uncertainties that may result in the Company's liquidity or capital resources
either materially increasing or decreasing at present or in the foreseeable
future. 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, the Company's exploration, development and construction
programs on its mineral properties and its ability to obtain equity or other
sources of financing.
    Cash used in operations increased by $14.2 million to $34.2 million from
$20.0 million in 2006 as a result of a reduction in the non-cash working
capital year over year of $5.9 million, offset by an increased cash operating
loss of $20.1 million.
    Investing activities for the year ended December 31, 2007 used cash of
$73.5 million as a result of expenditures on mining interests and property,
plant and equipment, which compared to $87.8 million in 2006 when the Ocampo
mine was still under construction. Investing activities for the year ended
December 31, 2007 include a full twelve months of investing activities at El
Cubo whereas the prior year only included investing expenditures from August
2006 following the full acquisition of Mexgold. In addition, investing
activities for the year ended December 31, 2006 are offset by cash provided by
the acquisition of Mexgold of $13.6 million. The Company has committed to
purchase $2.8 million in equipment that will be financed by either operating
cash flow and/or the Company's existing credit facility. This equipment is
expected to be delivered in the first half of 2008. In addition, the Company
has budgeted capital expenditures for 2008 of $52.5 million.
    Financing activities for the year ended December 31, 2007 contributed cash
of $107.3 million and reflects net proceeds of $170.0 million from the equity
issuance, $33.4 million in proceeds received related to the exercising of
stock options, proceeds of $37.0 million from long term debt less
$133.1 million in repayments of long term debt and capital lease obligations,
which compares to financing activities in the year ended December 31, 2006
which were also a source of cash of $106.1 million reflecting $14.1 million in
proceeds received related to the exercising of stock options, proceeds of
$94.8 million from long term debt and related party advances, less
$2.8 million in repayments of long term debt, and capital lease obligations.
As at December 31, 2007, the Company had options in-the-money that would
inject $54.7 million CAD into the Company if exercised.
    Gammon will always attempt to target the best sources of funding to
supplement operating cash flows for financing the Company's rapid development
while also optimizing the Company's capital structure through employing the
appropriate mix of capital. The operational turnaround that is underway at
Ocampo combined with the solid contributions from El Cubo is expected to
continue strengthening the Company's Balance Sheet and liquidity position. In
today's metal price environment, Gammon rates its financial foundation
strongly and anticipates that funding from existing cash reserves, operational
cash flows and in- place credit facilities will be more than sufficient to
fund the Company's anticipated working capital requirements and growth plans
in 2008.

    Contractual Obligations
    -------------------------------------------------------------------------
    A summary of the Company's contractual obligations is summarized as
follows:
    -------------------------------------------------------------------------
                                                   Less than
                                       Total        one year     1 - 3 years
    -------------------------------------------------------------------------
    Long-term debt               $30,800,988     $30,648,569        $152,419
    Interest on long-term debt    $2,156,000      $2,156,000            $Nil
    Capital leases                $3,605,265      $2,424,070      $1,181,195
    Future purchase commitments   $2,797,325      $2,797,325            $Nil
    -------------------------------------------------------------------------
    Total                        $39,359,579     $38,025,964      $1,333,615
    -------------------------------------------------------------------------

    The Company does not have any contractual obligations which extend beyond
3 years.

    Outstanding Share Data
    -------------------------------------------------------------------------
    The Company's share capital was comprised of the following as at December
31, 2007:

    -------------------------------------------------------------------------
                                                Year ended        Year ended
                                         December 31, 2007 December 31, 2006
    -------------------------------------------------------------------------
    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                               117,432,363      102,146,108
    -------------------------------------------------------------------------

    At March 31, 2008, the Company had common shares outstanding
of 118,326,068.

    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:
    -------------------------------------------------------------------------
                                                                    5 months
                                  Year ended      Year ended           ended
                                 December 31,    December 31,    December 31,
                                        2007            2006            2005
    -------------------------------------------------------------------------
    Management fees                     $Nil            $Nil        $127,664
    Mining interests
     - labour (1)                 $2,437,344      $3,717,149      $4,092,041
    Production costs
     - labour (1)                $31,147,564     $19,509,027            $Nil
    Production costs - mine
     consumables (2)              $2,032,928      $3,040,831            $Nil
    Capital assets (3)               $24,838        $916,127            $Nil
    -------------------------------------------------------------------------
    (1) The Company pays a third party company related to Mr. Fred George, a
        director of the Company, for the provision of workers in the Mexican
        operations at cost plus 13%. 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. On December 1, 2007,
        a new two year contract was signed at cost plus 10%.
    (2) The Company pays a third party company related to Mr. Canek Rangel, a
        director of the Company, for the provision of mine consumables. The
        Company believes these costs are at fair market value.
    (3) The Company pays a third party company related to Mr. Canek Rangel, a
        director of the Company, for the provision and construction of
        production and support facilities. The Company believes these costs
        are at fair market value.

    The amounts owing to related parties are recorded as a payable on the
balance sheet.
    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.
    Directors and officers of the Company are entitled to hold management
incentive stock options. The Company has a Stock Option Plan for directors,
officers, employees and consultants of the Company and its subsidiaries. The
purpose of the Stock Option 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, as well as to provide an
additional incentive for superior performance by such persons and attract and
retain valued personnel. The plan provides that eligible persons thereunder
include any director, senior officer, consultant or employee of the Company. 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.

    Risks and Uncertainties
    -------------------------------------------------------------------------

    The operations of Gammon are high-risk due to the nature of mining,
exploration, and development activities, all of which are conducted in Mexico.
The Company's foreign mining investments are subject to the risks normally
associated with the conduct of business in foreign countries, which include
but are not limited to, invalidation of governmental orders or permits,
corruption, uncertain political and economic environments, terrorist actions,
arbitrary changes in laws or policies, the opposition of mining from
environmental or other non-governmental organizations and limitations of
foreign ownership or the export of gold. These risks may limit or disrupt the
Company's projects, 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, any or all of which could have a
material and adverse effect on the Company's profitability or the viability of
its operations.
    The Company's mineral development and mining activities, and profitability
are subject to significant risks due to numerous factors outside its control
including, but not limited to, the following risks:

    Nature of Mineral Exploration and Mining
    -------------------------------------------------------------------------

    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 Corporation'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.

    Reserve Estimates
    -------------------------------------------------------------------------

    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, silver and copper 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.

    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 Corporation believes the
present attitude of the governments of Mexico and of the States of Chihuahua
and Guanajuato (where the Corporation'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.

    Environmental Laws and Regulations
    -------------------------------------------------------------------------

    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.

    Property Rights, Permits and Licensing
    -------------------------------------------------------------------------

    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
Corporation.

    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, 2007 we had $30.48 million of variable rate debt which carries an
interest rate of LIBOR plus 1.75% for US dollar advances, and prime rate plus
0.75% for Canadian dollar advances. We have not entered into any agreements to
hedge against unfavourable changes in interest rates, but may in the future
actively manage our exposure to interest rate risk.

    Foreign Currency Exchange Rate Risk
    -------------------------------------------------------------------------

    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 exposure.

    Credit Risk
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------

    The CICA issued the following sections that were adopted by the Company on
January 1, 2007: Section 3855, Financial Instruments - Recognition and
Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income; Section
3861, Financial Instruments - Disclosure and Presentation, and Section 3251,
Equity. In accordance with the transitional provisions, these standards have
been applied retrospectively without restatement of prior periods, except to
classify the currency translation adjustment as a component of accumulated
other comprehensive income.

    (i) Section 3855, Financial Instruments - Recognition and Measurement

    Section 3855 prescribes when a financial asset, financial liability or
derivative is to be recognized on the balance sheet and at what amount,
requiring fair value or cost-based measures under different circumstances.
Under Section 3855, financial instruments must be classified into one of five
categories: held-for-trading, held-to-maturity, loans and receivables,
available-for-sale, or other financial liabilities. All financial instruments,
including derivatives, are initially measured on the balance sheet at fair
value. Subsequent measurement depends on the classification as follows:
held-for-trading - measured at fair value with changes in fair value
recognized in net earnings; held-to-maturity, loans and receivables, and other
financial liabilities - recorded at amortized cost with gains and losses
recognized in net earnings in the period that the asset is derecognized or
impaired; and available-for-sale - measured at fair value with changes in fair
value recorded in other comprehensive income, until the instrument is
derecognized or impaired, when the amounts are then recorded in net earnings.
    In accordance with these new standards, the Company has classified its
financial instruments as follows:

    Asset / Liability                       Classification      Measurement
    -------------------------  ---------------------------   --------------
    Cash and cash equivalents             Held-for-trading       Fair value
    Restricted cash                       Held-for-trading       Fair value
    Receivables                      Loans and receivables   Amortized cost
    Payables and accruals      Other financial liabilities   Amortized cost
    Long-term debt             Other financial liabilities   Amortized cost

    Transaction costs other than those related to financial instruments
classified as held-for-trading, which are expensed as incurred, are added to
the fair value of the financial asset or financial liability on initial
recognition and amortized using the effective interest method.
    Fair values are based on quoted market prices where available from active
markets, otherwise fair values are estimated using a variety of valuation
techniques and models.
    All derivative instruments, including embedded derivatives, are recorded
on the balance sheet at fair value unless exempted from derivative treatment
as a normal purchase and sale. All changes in fair value are recorded in
earnings unless cash flow hedge accounting is used, in which case changes in
fair value are recorded in other comprehensive income. The Company has elected
to apply the accounting treatment for all embedded derivatives in host
contracts entered into on or after December 1, 2002. The impact of the change
in accounting policy related to financial instruments was not material.

    (ii) Section 3865, Hedges

    Section 3865, Hedges replaced Accounting Guideline 13, Hedging
Relationships. The requirements for the identification, designation,
documentation and assessment of effectiveness of hedging relationships remain
substantially unchanged from AcG-13. However, Section 3865 addresses the
accounting treatment of qualifying hedging relationships and the necessary
disclosures, and also requires all derivatives in hedging relationships to be
recorded at fair value. The adoption of this standard had no impact on the
Company, as there are no hedging relationships in place.

    (iii) Section 1530, Comprehensive Income

    Section 1530, Comprehensive Income introduces a statement of comprehensive
income, which is comprised of net earnings and other comprehensive income.
Other comprehensive income represents the change in shareholders' equity from
transactions and other events from non-owner sources, and includes unrealized
gains and losses on financial assets that are classified as available-for-sale
and changes in the fair value of the effective portion of cash flow hedging
instruments. The Company has included the cumulative changes in other
comprehensive income in accumulated other comprehensive income, which is
presented as a new category of shareholders' equity on the consolidated
balance sheet.

    (iv) Section 3861, Financial Instruments - Disclosure and Presentation

    Section 3861, Financial Instruments - Disclosure and Presentation replaces
Section 3860 of the same title, and establishes the standards for presentation
of financial instruments and non-financial derivatives, and identifies the
information that should be disclosed about them.

    (v) Section 3251, Equity

    Section 3251, Equity, replaces Section 3250, Surplus, and describes the
standards for the presentation of equity and changes in equity during the
period, with reference to the new comprehensive income standard.

    Recent Canadian Accounting Pronouncements
    -------------------------------------------------------------------------

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

    (i) Section 3031, Inventories

    In June 2007, the Canadian Institute of Chartered Accountants ("CICA")
issued new 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. This standard is effective for fiscal years beginning on or after
January 1, 2008 and will be implemented by the Company in the first quarter of
2008. The Company is currently assessing the implications of this new
standard.

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

    Effective January 1, 2008, the Company will be required to comply with
Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial
Instruments - Presentation. These sections will replace existing Section 3861,
Financial Instruments - Disclosure and Presentation. The presentation
standards are carried forward unchanged. The disclosure standards are enhanced
and expanded to complement the changes required by Section 3855, Financial
Instruments - Recognition and Measurement.

    (iii) Section 1535, Capital Disclosures

    Effective January 1, 2008, the Company will be required to comply with
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 new
requirements are related to disclosure only and will not impact the financial
results of the Company.

    (iv) 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.

    Critical Accounting Estimates
    -------------------------------------------------------------------------

    The preparation of financial statements in accordance with Canadian GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures made in the consolidated financial statements and
accompanying notes. Management continually evaluates the estimates and
assumptions it uses. Actual results could differ from these estimates.

    (i) Mineral reserves used to measure depletion and amortization

    We record amortization expense based on the estimated useful economic
lives of long-lived assets. Changes in reserve estimates are generally
calculated at the end of each year and cause amortization expense to increase
or decrease prospectively. The estimate that most significantly affects the
measurement of amortization is quantities of proven and probable reserves,
because we amortize a large portion of property, plant and equipment using the
units-of-production method. The estimation of quantities of reserves 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 estimates to substantially change from period to period. Actual
production could differ from expected based on reserves, and an adverse change
in gold prices could make a reserve 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 reserve 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 reserve estimates as material not previously
classified as a reserve becomes economic at higher gold prices.

    (ii) Goodwill and long lived assets

    Goodwill is not amortized and is assessed for impairment at the reporting
unit level. This is done, at a minimum, annually. 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, 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.
    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.

    (iii) 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.
    For fiscal 2007, the discount rate used for calculation of pension and
other benefit plan expense was 4.00% (fiscal 2006 - 4.00%), and the rate of
compensation was 1.50% (2006 - 1.50%). Changes to more than one assumption
simultaneously may amplify or reduce impact on the accrued benefit obligations
or benefit plan expenses.

    (iv) Future income taxes and valuation allowances

    We are 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 our financial statements. Changes in future
tax assets and liabilities generally have a direct impact on earnings in the
period of changes.
    Each period, we evaluate 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 we determine 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, then we record a valuation allowance against the amount
we do not expect to realize. Changes in valuation allowances are recorded as a
component of income tax expense or recovery for each period.

    (v) 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. We record the fair value of an ARO in our financial statements
when it is incurred and capitalize 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. We prepare 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, or if we are required to submit updated mine closure plans
to regulatory authorities. In the future, changes in regulations, laws or
enforcement could adversely affect our 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, our mining properties could result in us suffering 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, 2007, Gammon had not
entered into any derivative contracts for the purpose of hedging exposure to
commodity prices, interest rates and foreign exchange rates.

    Controls and Procedures
    -------------------------------------------------------------------------

    (a) Evaluation of Disclosure Controls and Procedures

    We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in its annual filings, interim filings or
other reports filed or submitted by it under provincial and territorial
securities legislation or reports that it files or submits 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 our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. As of December 31, 2007 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
Multilateral 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, 2007.

    (b) Management's Report on Internal Control Over Financial Reporting

    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 Multilateral Instrument
52-109 under the Canadian Securities Administrators Rules and Policies. The
Company's internal controls 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 (GAAP) 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, 2007, management assessed the effectiveness of the
Company's internal control over financial reporting. In making this
assessment, management used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). As of December 31, 2007,
management concluded that a previously reported material weakness no longer
exists in the design of the Company's internal control over financial
reporting in the area of accounting for non-routine and complex transactions.
The design weakness was first identified in the fourth quarter of 2006 and was
caused primarily by the lack of accounting personnel to appropriately review
the accounting for stock option expense and inventory valuation. Based on
Gammon's management assessment, management concluded that the Company's
internal control over financial reporting was effective as at December 31,
2007.
    Management's assessment of the effectiveness of the Company's internal
control over financial reporting has been audited by KPMG LLP, the Company's
independent registered public accounting firm, as stated in their report which
is included herein.

    (c) Change in Internal Control

    Management continues to monitor and improve the controls related to
non-routine and complex transactions, and implemented the following controls:
    - The Company hired two Corporate Controllers and a Mexican Finance &
      Accounting leader to provide additional review and oversight to the
      Company's routine and non-routine accounting transactions;
    - The Company has engaged third party experts to provide additional
      support in the identification and accounting for non-routine
      transactions; and
    - The Company hired additional accounting personnel with strong technical
      accounting skills to meet the growing needs of the Company's operations
      and accounting requirements, with particular emphasis on filling
      Mexican based support roles.

    Other than the remediation steps discussed above, there were no changes in
the Company's internal controls over financial reporting that occurred during
the three months ended December 31, 2007 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

    Mineral Reserves and Mineral Resources
    -------------------------------------------------------------------------

    Mineral reserves and mineral resources have been calculated as at December
31, 2007 in accordance with definitions adopted by the Canadian Institute of
Mining, Metallurgy and Petroleum and incorporated into National Instrument
43-101 (see "Definitions" below). Calculations for the Ocampo property have
been prepared by employees of Gammon Gold Inc. under the supervision of
Abdullah Arik, B.Sc., MS, Mintec, inc., and Glenn R. Clark, P. Eng. of Glenn
R. Clark & Associates Limited. Calculations for the El Cubo property have been
prepared by employees of Gammon Gold Inc. under the supervision of Jose L.
Lee, Ph.D., Director of Exploration, Gammon Gold Inc. and Glenn R. Clark, P.
Eng. of Glenn R. Clark & Associates Limited. Reserves for the Ocampo and El
Cubo properties have been calculated using an assumed gold price of US$580 per
ounce and a silver price of US$12.00 per ounce for a gold equivalent ratio of
48.33:1. Resources at the Ocampo and El Cubo properties have been calculated
assuming a gold price of US$850 per ounce and a silver price of US$15.44 and
have been summarized at a gold equivalent ratio of 48.33:1 (as per reserves).
The Guadalupe y Calvo inferred resources assumed a gold price of US$300 per
ounce and a silver price of $4.61 per ounce and have been summarized at a gold
equivalent ratio of 48.33:1 (as per reserves). The full technical report on
Guadalupe y Calvo Project dated November 25, 2002 was prepared by Clancy J.
Wendt and Mark G. Stevens, C.P.G., Pincock, Allen & Holt in accordance with NI
43-101. The information on the exploration work done on the property since the
date of the Pincock, Allen & Holt report is summarized in the material change
report filed by Mexgold on August 16, 2005. Jim McGlasson, C.P.G. and P.Geo,
is the qualified person responsible for all technical data reported in that
material change report pursuant to NI 43-101. The full text of both reports is
available at www.sedar.com. Reserve calculations incorporate current and/or
expected mine plans and cost levels at each property. Varying cut-off grades
have been used depending on the mine and type of ore. Gammon Gold's normal
data verification procedures have been employed in connection with the
calculations.

    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 Statement 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.



    Consolidated Balance Sheets
    -------------------------------------------------------------------------
    At December 31                                    2007              2006
                                                                     (Note 4)
    -------------------------------------------------------------------------
    ASSETS
    Current
      Cash                                  $    3,601,317  $      2,940,763
      Restricted cash                              107,427         1,133,337
      Receivables
        Commodity taxes                         10,240,326        12,044,712
        Trade / other                            1,739,195         3,009,053
      Inventories (Note 6)                      51,585,696        46,274,738
    Prepaids and deposits                        2,250,056           775,479
                                            --------------     --------------
                                                69,524,017        66,178,082
    Deposits on property, plant and
     equipment                                   5,394,975         1,049,588
    Deferred compensation                          192,611           856,016
    Long-term ore stockpiles (Note 6)                    -         2,043,040
    Mining interests and property, plant
     and equipment (Note 7)                    572,041,140       539,395,321
    Goodwill (Note 5)                          106,799,368       106,799,368
                                             -------------     --------------
                                            $  753,952,111  $    716,321,415
                                            --------------     --------------

    -------------------------------------------------------------------------
    LIABILITIES
    Current
      Payables and accruals                 $   17,279,271  $     31,799,006
      Current portion of long-term debt
       and capital leases (Note 8)              33,072,638        66,038,538
                                            --------------     --------------
                                                50,351,909        97,837,544

    Long-term debt and capital
     leases (Note 8)                             1,333,614        63,607,600
    Asset retirement obligations (Note 9)        2,990,484                 -
    Employee future benefits (Note 10)           3,746,145         3,224,429
    Future income taxes (Note 11)              108,879,303        70,492,523
                                            --------------     --------------
                                               167,301,455       235,162,096
                                            --------------     --------------

    SHAREHOLDERS' EQUITY (Note 12)
    Capital stock                              699,511,738       463,332,683
    Contributed surplus                         42,373,215        71,746,965
    Deficit                                   (161,668,695)      (60,354,727)
    Accumulated other comprehensive
     income (Note 4)                             6,434,398         6,434,398
                                            --------------     --------------
                                               586,650,656       481,159,319
                                            --------------     --------------
                                            $  753,952,111  $    716,321,415
    -------------------------------------------------------------------------
    Nature of operations and going concern
    assumption (Note 1)
    Commitments and contingencies (Note 13)
    Subsequent event (Note 19)

    Signed on behalf of the Board:     "Fred George"       "Kent Noseworthy"
                                     ------------------   ------------------
                                        Fred George,       Kent Noseworthy,
                                         Director              Director


    -------------------------------------------------------------------------
    Consolidated Statements of Operations and Comprehensive Loss
    -------------------------------------------------------------------------
    For the years ended December 31                    2007             2006
                                                                    (Note 4)
    -------------------------------------------------------------------------
    Revenue from mining operations          $  152,058,628  $     64,235,896

     Expenses
       Production costs, excluding
        amortization & depletion               140,302,718        37,943,583
       Write-down of long-term inventory         4,319,654                 -
       Refining costs                            1,509,927           525,604
       General and administrative               24,156,361        28,247,412
       Amortization and depletion               43,392,399        18,756,816
                                            --------------     --------------
                                               213,681,059        85,473,415
                                            --------------     --------------

    Loss before other items                    (61,622,431)      (21,237,519)
                                            --------------     --------------

    Interest on long-term debt                  (3,896,791)       (5,272,904)
    Foreign exchange loss                       (8,933,060)       (1,497,350)
    Gain on equity investment                            -           503,711
    Interest and other income                      772,218           785,203
                                            --------------     --------------
                                               (12,057,633)       (5,481,340)
                                            --------------     --------------

    Loss before income taxes                   (73,680,064)      (26,718,859)

    Future income tax
     expense / (recovery) (Note 11)             27,633,904        (1,410,458)
                                            --------------     --------------

    Net loss                                  (101,313,968)      (25,308,401)

    Other comprehensive income                           -        10,702,416
                                            --------------     --------------

    Comprehensive loss                     $  (101,313,968) $   ( 14,605,985)
                                            --------------     --------------

    -------------------------------------------------------------------------

    Loss per share (Note 14)
      Basic and diluted                    $         (0.90) $          (0.29)

    Weighted average shares
     outstanding (Note 14)
      Basic and diluted                        113,176,605        88,025,714
    -------------------------------------------------------------------------

    Consolidated Statements of Cash Flows
    -------------------------------------------------------------------------
    For the years ended                               2007              2006
                                                                     (Note 4)
    -------------------------------------------------------------------------

    OPERATING ACTIVITIES
      Net loss                              $ (101,313,968) $    (25,308,401)
      Amortization and depletion                43,392,399        18,756,816
      Unrealized foreign exchange
       loss / (gain)                            10,062,768        (3,236,581)
      Stock option expense, net of
       forfeitures                               4,035,401        15,770,871
      Employee future benefits                     521,716           367,952
      Future income tax
       expense / (recovery)                     27,633,904        (1,410,458)
      Gain on long-term equity investment                -          (503,711)
      Change in non-cash operating working
       capital (Note 15)                       (18,524,110)      (24,462,507)
                                            --------------     --------------
                                               (34,191,890)      (20,026,019)
                                            --------------     --------------

    INVESTING ACTIVITIES
      Acquisition of investment (Note 5)                 -        (6,544,575)
      Cash acquired on acquisition
       of Mexgold (Note 5)                               -        21,085,809
      Advances from related companies                    -           537,304
      (Increase) / decrease in deposits
       on property, plant and equipment         (4,345,387)          462,628
      Expenditures on mining interests
       and property, plant & equipment         (69,142,106)     (103,323,105)
                                            --------------     --------------
                                               (73,487,493)      (87,781,939)
                                            --------------     --------------

    FINANCING ACTIVITIES
      Repayment of capital lease
       obligation                               (2,499,458)       (1,876,794)
      (Repayment of) / proceeds
       from long-term debt                     (93,651,185)       82,660,659
      Repayment from related
       company advances                                  -        11,224,647
      Net proceeds from issuance of
       capital stock                           170,025,775                 -
    Proceeds from exercise of options
     and warrants                               33,438,895        14,123,622
                                            --------------     --------------
                                               107,314,027       106,132,134
                                            --------------     --------------

    Net decrease in cash and cash
     equivalents                                  (365,356)       (1,675,824)

    Cash and cash equivalents, beginning
     of year                                     4,074,100         5,749,924
                                            --------------     --------------

    -------------------------------------------------------------------------

    Cash and cash equivalents, end
     of year                               $     3,708,744  $      4,074,100
                                            --------------     --------------

    -------------------------------------------------------------------------
    Cash and cash equivalents is
     comprised of the following:

      Cash                                 $     3,601,317     $   2,940,763
      Restricted cash                              107,427         1,133,337
                                            --------------     --------------
                                           $     3,708,744     $   4,074,100
                                            --------------     --------------

    -------------------------------------------------------------------------

    Consolidated Statements of Shareholders' Equity

    -------------------------------------------------------------------------
    For the years ended December 31                   2007              2006
                                                                     (Note 4)
    -------------------------------------------------------------------------
    Capital stock
      Balance, beginning of year           $   463,332,683  $    168,759,035
      For cash pursuant to exercise
       of stock options                         33,438,891         9,622,947
      Fair value of options exercised           32,714,389         3,466,681
      For cash pursuant to exercise of
       warrants                                          -         4,500,675
      Fair value of warrants exercised                   -         3,157,079
      Shares issued on acquisition of
       Mexgold Resources Inc.                            -       273,826,266
      Public offering                          178,120,000                 -
      Share issuance costs                      (8,094,225)                -
                                            --------------     --------------
      Balance, end of year                 $   699,511,738  $    463,332,683
                                            --------------     --------------
    -------------------------------------------------------------------------

    Contributed surplus
      Balance, beginning of year           $    71,746,965  $     16,161,750
      Options issued on acquisition
       of Mexgold Resources Inc.                         -        50,346,340
      Fair value of options exercised          (32,714,389)       (6,623,760)
      Forfeitures                               (1,847,927)                -
      Stock option expense                       5,188,566        11,862,635
                                            --------------     --------------
      Balance, end of year                 $    42,373,215  $     71,746,965
                                            --------------     --------------
    -------------------------------------------------------------------------

    Deficit
      Balance, beginning of year          $    (60,354,727) $    (35,046,326)
      Net loss                                (101,313,968)      (25,308,401
                                            --------------     --------------
      Balance, end of year                $   (161,668,695) $    (60,354,727)
                                            --------------     --------------

    -------------------------------------------------------------------------

    Accumulated other comprehensive
     income
      Balance, beginning of year          $      6,434,398  $     17,136,814
      Unrealized foreign currency
       translation loss                                  -       (10,702,416)
                                            --------------     --------------
      Balance, end of year                $      6,434,398  $      6,434,398
                                            --------------     --------------

    -------------------------------------------------------------------------

    Total shareholders' equity            $    586,650,656 $     481,159,319
                                            --------------     --------------

    -------------------------------------------------------------------------


    Notes to the Consolidated Financial Statements
    -------------------------------------------------------------------------

    1- Nature of operations and going concern assumption

    During the year, Gammon Lake Resources Inc. formally changed its corporate
name to Gammon Gold Inc. The change in corporate name was approved by
shareholders at the Annual and Special Shareholders' Meeting on June 6, 2007.
Gammon Gold Inc. (the "Company") is a publicly traded company engaged in the
mining, development, exploration and acquisition of resource properties in
Mexico. The Company's common shares are listed on the Toronto Stock Exchange
(TSX:GAM) and the American Stock Exchange (AMEX:  GRS).
    These financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which assume that the Company will
continue in operation for the foreseeable future and will be able to realize
its assets and discharge its liabilities in the normal course of operations.
The future of the Company is dependent on the successful operation of the mine
and mill at its Ocampo and El Cubo operations. If the going concern assumption
were not appropriate for these financial statements, then adjustments would be
necessary in the carrying values of assets and liabilities, the reported
revenues and expenses, and the balance sheet classifications used.

    -------------------------------------------------------------------------

    2- Summary of significant accounting policies

      (a) Basis of presentation

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

      (b) Consolidation

    These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Gammon Lake Resources (NS)
Incorporated, Gammon Lake de Mexico S.A. de C.V., Gammon Lake Resources (USA)
Inc. and Gammon Lake Resources (Barbados) Inc. On August 8, 2006, the Company
acquired all of the issued and outstanding shares and options of Mexgold
Resources Inc. (see Note 5). As a result, these consolidated financial
statements include the accounts of Mexgold Resources Inc. and its
subsidiaries, Compania Minera El Cubo S.A. de C.V., and Metales
Interamericanos S.A. de C.V., and incorporates the results of operations of
these subsidiaries from August 8, 2006. All significant intercompany balances
and transactions have been eliminated on consolidation.

      (c) Foreign currency translation

    The functional currency of the Company's operations is the United States
dollar ("US dollar"). Non-US dollar balances are translated into US dollars as
follows: monetary assets and liabilities are translated to US dollars at the
period-end exchange rate; non-monetary assets and liabilities are translated
at the rate prevailing at the time of the transaction; and revenue and expense
transactions are translated using average exchange rates, except for expenses
that relate to non-monetary assets and liabilities, which are translated at
the same historical exchange rate as the related asset or liability.
Translation gains or losses are recognized in earnings in the period in which
they occur.

      (d) Use of estimates

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

      (e) Revenue recognition

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

      (f) Cash and cash equivalents

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

      (g) Inventories

    Supplies inventory

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

    Ore stockpiles inventory

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

    Ore in process inventory

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

    Finished goods

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

      (h) Mineral interests

    The carrying value of mineral interests represents the accumulated costs
to date related to the acquisition, exploration and development of the
Company's producing mineral properties, located in Ocampo and El Cubo, Mexico.
Production stage mining interests are amortized over the life of the mine
using the unit-of-production method based on estimated proven and probable
reserves to be mined, or on a straight-line basis over the term of the lease.
    The expected useful lives used in depreciation and depletion calculations
are determined based on the facts and circumstances associated with the mining
interest. Any changes in estimates of useful lives are accounted for
prospectively from the date of the change.

      (i) Property, plant and equipment and amortization

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

    Equipment under capital lease    lease term       Vehicles        4 years
    Exploration equipment            5-10 years      Buildings       20 years
    Development equipment            8-9 years   Other equipment   3-10 years
    Processing plant                 8-9 years


      (j) Impairment of long-lived assets

    The Company assesses the impairment of long-lived assets, which consist
primarily of mining interests and property, plant and equipment, whenever
events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss will be recognized if the
carrying amount of a long-lived asset is not recoverable. The carrying amount
of a long-lived asset is not recoverable if the carrying amount exceeds the
sum of the undiscounted cash flows expected to result from its use and
eventual disposition. The impairment loss to be recognized is measured as the
amount by which the carrying amount of the long-lived asset exceeds its fair
value.
    Annually, or when events or circumstances indicate that the carrying
amount may not be recoverable, the Company reviews the carrying value of its
mining interests. The recoverability of the book value of each property is
assessed for indicators of impairment such as adverse changes to the estimated
recoverable ounces of gold, estimated future commodity prices, and estimated
expected future operating costs, capital expenditures and reclamation
expenditures. If it is determined that the deferred costs related to a
property are not recoverable over its productive life, those costs will be
written down to fair value as a charge to operations in the period in which
the determination is made. The amounts at which mining interests and the
related deferred costs are recorded do not necessarily reflect present or
future values.

      (k) Goodwill and goodwill impairment

    Acquisitions are accounted for using the purchase method whereby assets
and liabilities acquired are recorded at their fair values as of the date of
acquisition and any excess of the purchase price over such fair value is
recorded as goodwill. Goodwill is identified and allocated to reporting units
by preparing estimates of the fair value of each reporting unit and comparing
this amount to the fair value of assets and liabilities in the reporting unit.
    The Company evaluates, on an annual basis, the carrying amount of goodwill
to determine whether current events and circumstances indicate that such
carrying amount may no longer be recoverable. To accomplish this, the Company
compares the fair value of its reporting units to their carrying amounts. If
the carrying amount exceeds the fair value, the Company compares the implied
fair value of the reporting unit's goodwill to its carrying amount, and any
excess of the carrying amount over the fair value is charged to operations.
Assumptions underlying fair value estimates are subject to significant risks
and uncertainties.

      (l) Asset retirement obligations

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

      (m) Stock based compensation

    The Company uses the fair value method of accounting for employee
  stock-based compensation and other stock-based payments made in exchange for
goods and services. Under this method, the Company recognizes a compensation
expense for all awards made to employees and non-employees, based on the fair
value of the options on the date of grant, which is determined by using an
option pricing model. The fair value of the options is expensed over the
vesting period of the options. The Company's stock option plan is described in
Note 12.

      (n) Income taxes

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

      (o) Loss per common share

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

      (q) Recent accounting pronouncements

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

        (i)   Section 3031, Inventories

    In June 2007, the Canadian Institute of Chartered Accountants ("CICA")
issued new 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. This standard is effective for fiscal years beginning on or after
January 1, 2008 and will be implemented by the Company in the first quarter of
2008. The Company is currently assessing the implications of this new
standard.

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

    Effective January 1, 2008, the Company will be required to comply with
Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial
Instruments - Presentation. These sections will replace existing Section 3861,
Financial Instruments - Disclosure and Presentation. The presentation
standards are carried forward unchanged. The disclosure standards are enhanced
and expanded to complement the changes required by Section 3855, Financial
Instruments - Recognition and Measurement.

        (iii) Section 1535, Capital Disclosures

    Effective January 1, 2008, the Company will be required to comply with
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 new
requirements are related to disclosure only and will not impact the financial
results of the Company.

        (iv)  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.


    3-  Changes in accounting policies

    The CICA issued the following sections that were adopted by the Company on
January 1, 2007: Section 3855, Financial Instruments - Recognition and
Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income;
Section 3861, Financial Instruments - Disclosure and Presentation, and Section
3251, Equity. In accordance with the transitional provisions, these standards
have been applied retrospectively without restatement of prior periods, except
to classify the currency translation adjustment as a component of accumulated
other comprehensive income.

      (i)     Section 3855, Financial Instruments - Recognition and
              Measurement

    Section 3855 prescribes when a financial asset, financial liability or
derivative is to be recognized on the balance sheet and at what amount,
requiring fair value or cost-based measures under different circumstances.
Under Section 3855, financial instruments must be classified into one of five
categories: held-for-trading, held-to-maturity, loans and receivables,
available-for-sale, or other financial liabilities. All financial instruments,
including derivatives, are initially measured on the balance sheet at fair
value. Subsequent measurement depends on the classification as follows:
held-for-trading - measured at fair value with changes in fair value
recognized in net earnings; held-to-maturity, loans and receivables, and other
financial liabilities - recorded at amortized cost with gains and losses
recognized in net earnings in the period that the asset is derecognized or
impaired; and available-for-sale - measured at fair value with changes in fair
value recorded in other comprehensive income, until the instrument is
derecognized or impaired, when the amounts are then recorded in net earnings.
    In accordance with these new standards, the Company has classified its
financial instruments as follows:


    Asset / Liability                    Classification          Measurement
    --------------------------       ---------------------       -----------
     Cash and cash equivalents            Held-for-trading        Fair value
     Restricted cash                      Held-for-trading        Fair value
     Receivables                     Loans and receivables    Amortized cost
     Payables and accruals     Other financial liabilities    Amortized cost
     Long-term debt            Other financial liabilities    Amortized cost


    Transaction costs other than those related to financial instruments
classified as held-for-trading, which are expensed as incurred, are added to
the fair value of the financial asset or financial liability on initial
recognition and amortized using the effective interest rate method.
    Fair values are based on quoted market prices where available from active
markets, otherwise fair values are estimated using a variety of valuation
techniques and models.
    All derivative instruments, including embedded derivatives, are recorded
on the balance sheet at fair value unless exempted from derivative treatment
as a normal purchase and sale. All changes in fair value are recorded in
earnings unless cash flow hedge accounting is used, in which case changes in
fair value are recorded in other comprehensive income. The Company has elected
to apply the accounting treatment for all embedded derivatives in host
contracts entered into on or after January 1, 2003. The impact of the change
in accounting policy related to financial instruments was not material.

      (ii)    Section 3865, Hedges

    Section 3865, Hedges replaced Accounting Guideline 13, Hedging
Relationships. The requirements for the identification, designation,
documentation and assessment of effectiveness of hedging relationships remain
substantially unchanged from AcG-13. However, Section 3865 addresses the
accounting treatment of qualifying hedging relationships and the necessary
disclosures, and also requires all derivatives in hedging relationships to be
recorded at fair value. The adoption of this standard had no impact on the
Company, as there are no hedging relationships in place.

      (iii)   Section 1530, Comprehensive Income

    Section 1530, Comprehensive Income introduces a statement of comprehensive
income, which is comprised of net earnings and other comprehensive income.
Other comprehensive income represents the change in shareholders' equity from
transactions and other events from non-owner sources, and includes unrealized
gains and losses on financial assets that are classified as available-for-sale
and changes in the fair value of the effective portion of cash flow hedging
instruments. The Company has included the cumulative changes in other
comprehensive income in accumulated other comprehensive income, which is
presented as a new category of shareholders' equity on the consolidated
balance sheet.

      (iv)    Section 3861, Financial Instruments - Disclosure and
              Presentation

    Section 3861, Financial Instruments - Disclosure and Presentation replaces
Section 3860 of the same title, and establishes the standards for presentation
of financial instruments and non-financial derivatives, and identifies the
information that should be disclosed about them.

      (v)     Section 3251, Equity

    Section 3251, Equity, replaces Section 3250, Surplus, and describes the
standards for the presentation of equity and changes in equity during the
period, with reference to the new comprehensive income standard.

    ------------------------------------------------------------------------

    4-   Functional currency and reporting currency

    Effective January 1, 2007, as a result of the commencement of commercial
production at the Ocampo location, the Company determined that its functional
currency is the United States dollar. In accordance with CICA Section 1651,
Foreign Currency Translation, this change has been applied prospectively, with
no restatement of prior periods.
    In addition, at the time of commencement of commercial production, the
Company changed its reporting currency to the United States dollar from the
Canadian dollar. As a result of the change in reporting currency, the
financial information of prior periods has been translated using the current
rate method, as if the US dollar had been the reporting currency in prior
years. The resulting cumulative exchange difference of $6,434,398 has been
reported in accumulated other comprehensive income.

    -------------------------------------------------------------------------

    5-  Business combinations

    Mexgold Resources Inc.

    As of June 30, 2006, the Company held approximately a 23% interest in the
issued and outstanding common shares of Mexgold Resources Inc. ("Mexgold"). On
August 8, 2006, the Company acquired all of the remaining issued and
outstanding common shares and options of Mexgold by way of a plan of
arrangement under the Business Corporations Act (Ontario). Under the terms of
the transaction, each Mexgold shareholder and warrant holder, other than the
Company, received 0.47 of a Gammon common share or a Gammon warrant, in
exchange for each Mexgold common share and each Mexgold warrant respectively.
Holders of Mexgold options received Gammon options to purchase a proportionate
number of Gammon common shares. The Company issued 21,838,033 common shares
and became obligated to issue up to an aggregate of 5,512,997 common shares to
former Mexgold option holders upon exercise, and up to an aggregate of
186,120 Gammon common shares to former Mexgold warrant holders upon exercise.
    The Mexgold acquisition was accounted for as a purchase business
combination, with Gammon as the accounting acquirer. The purchase cost was
$343 million and was funded through the issuance of Gammon common shares and
options to acquire common shares. The measurement price of $12.54 per common
share for the purchase consideration represents the average of the Company's
common share closing price 2 days before and 2 days after May 29, 2006. The
fair value of the stock options and warrants outstanding under the Mexgold
stock option plan were calculated using the Black-Scholes option-pricing
model, using the weighted average strike price and expiration.
    In accordance with the purchase method of accounting, the purchase cost
was allocated to the underlying assets acquired and liabilities assumed based
upon their fair values at the date of acquisition. The Company determined the
fair values based on independent appraisals, discounted cash flows, quoted
market prices, and estimates made by management. The Company recorded the
excess of the purchase cost over the net identifiable tangible and intangible
assets acquired as goodwill. This process was performed in accordance with
CICA Emerging Issues Committee Abstract 152, Mining Assets and Business
Combinations. The amount allocated to goodwill is not deductible for tax
purposes.
    An independent valuation of the significant assets acquired was completed
in March 2007, supporting management's allocation of the purchase
consideration. The final allocation of the purchase cost to the assets and
liabilities acquired, based on fair valuations, was as follows:

    Net assets acquired, at fair value:
      Cash and cash equivalents                            $      19,997,413
      Restricted funds                                             1,088,396
      Other working capital, net                                  13,838,983
      Deferred stock-based compensation                            4,817,140
      Property, plant and equipment                               19,877,760
      Mining interests                                           137,521,035
      Exploration rights                                         110,545,501
      Goodwill                                                   110,446,055
      Long term debt                                              (4,455,800)
      Employee future benefits                                    (2,698,603)
      Future income taxes                                        (67,985,010)
                                                             ---------------
                                                           $     342,992,870
                                                             ---------------

    Consideration:
      Common shares, representing the shares of Mexgold
       not already owned                                   $     273,826,266
      Stock options and warrants                                  50,346,341
      Transaction costs                                            2,673,133
      Investment in Mexgold previously owned                      16,147,130
                                                             ----------------
                                                           $     342,992,870
                                                             ----------------

    -------------------------------------------------------------------------

    6- Inventories
                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    Supplies                               $    14,808,304  $      8,173,726
    Ore stockpiles                               3,337,979         6,872,874
    Ore in process                              31,869,032        32,134,262
    Finished product                             1,570,381         1,136,916
                                            --------------     --------------
                                                51,585,696        48,317,778
    Less:  Long-term ore stockpiles                      -         2,043,040
                                            --------------     --------------
                                           $    51,585,696  $     46,274,738
                                            --------------     --------------

    -------------------------------------------------------------------------

    7- Mining interests and property, plant and equipment

                                                           December 31, 2007
                                        -------------------------------------
                                                Accumulated         Net Book
                                        Cost   Amortization            Value
                               -------------  -------------- ----------------
    Mining interests:
    -----------------
    Producing properties       $ 306,023,916  $  35,876,544    $ 270,147,372
    Exploration properties       110,554,665              -      110,554,665
                               -------------  -------------- ----------------
                                 416,578,581     35,876,544      380,702,037
                               -------------  -------------- ----------------
    Property, plant and
     equipment:
    -------------------
    Processing plant              89,277,457     17,519,565       71,757,892
    Exploration equipment         54,103,648      9,878,742       44,224,906
    Development equipment         51,627,155      7,097,362       44,529,793
    Buildings                     18,519,049      3,087,691       15,431,358
    Other equipment                5,026,003      1,881,748        3,144,255
    Vehicles                       3,238,495      1,397,245        1,841,250
    Equipment under capital
     lease                         9,082,975      1,631,071        7,451,904
    Construction in progress       2,957,745              -        2,957,745
                               -------------  -------------- ----------------
                                 233,832,527     42,493,424      191,339,103
                               -------------  -------------- ----------------
    Total                      $ 650,411,108  $  78,369,968    $ 572,041,140
                               -------------  -------------- ----------------

                                                           December 31, 2006
                                        -------------------------------------
                                                 Accumulated        Net Book
                                        Cost    Amortization           Value
                               -------------  -------------- ----------------
    Mining interests:
    -----------------
    Producing properties       $ 275,896,208  $   16,416,120   $ 259,480,088
    Exploration properties       109,250,197               -     109,250,197
                               -------------  -------------- ----------------
                                 385,146,405      16,416,120     368,730,285
                               -------------  -------------- ----------------
    Property, plant and
     equipment:
    -------------------
    Processing plant              83,439,699       7,536,250      75,903,449
    Exploration equipment         48,016,568       5,046,054      42,970,514
    Development equipment         31,351,127       4,477,211      26,873,916
    Buildings                     13,471,478       2,335,617      11,135,861
    Other equipment                3,993,103       1,101,674       2,891,429
    Vehicles                       2,606,051         792,253       1,813,798
    Equipment under capital        8,408,758         563,353       7,845,405
     lease
    Construction in progress       1,230,664               -       1,230,664
                               -------------  -------------- ----------------
                                 192,517,448      21,852,412     170,665,036
                               -------------  -------------- ----------------
    Total                      $ 577,663,853  $   38,268,532   $ 539,395,321
                               -------------  -------------- ----------------

    -------------------------------------------------------------------------

    8-   Long-term debt and capital leases
                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    (a)  Revolving credit facility         $    30,480,000  $    113,793,619
    (b)  Capital leases for equipment            3,605,265         5,461,356
    (c)  Soyopa loan                                     -         6,735,223
    (c)  Mining Development Trust Loan                   -         3,499,807
    (d)  Other long-term debt                      320,987           156,133
                                            --------------     --------------
                                                34,406,252       129,646,138
    Less: Current portion of long-term
     debt and capital leases                    33,072,638        66,038,538
                                            --------------     --------------
                                           $     1,333,614  $     63,607,600
                                            --------------     --------------

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

                                                      2008  $     33,072,638
                                                      2009  $      1,234,872
                                                      2010  $         98,742

    (a) In October 2005, May 2006, and December 2006, the Company secured a
        credit facility with Bank of Nova Scotia and Société Générale. The
        facility was secured and consisted of a two-year revolving facility
        of $32,500,000, and a three-year non-revolving facility of
        $87,500,000. Interest was payable at prime rate plus 1.25% or in the
        case of US dollar advances, LIBOR + 2.25%. As at December 31, 2006,
        the Company had drawn $113,800,000 on this facility. On April 24,
        2007, the Company repaid the debt facility with proceeds from a
        public equity offering. The $32,500,000 revolving credit facility
        remained available to the Company, and was reduced to $20,000,000 at
        June 30, 2007, pursuant to its terms. In September 2007, Bank of
        Montreal replaced Société Générale in that credit facility. Bank of
        Montreal and Bank of Nova Scotia agreed to maintain the $20,000,000
        facility at September 30, 2007 when it was otherwise scheduled to
        reduce to $10,000,000.

        On November 12, 2007, the Company replaced the $20,000,000 revolving
        facility with a $60,000,000 revolving facility with the Bank of
        Nova Scotia and Bank of Montreal, expiring on December 31, 2008. The
        Company will have an initial availment of $47,500,000 increasing to
        $60,000,000 upon the completion of certain conditions. Interest is
        payable at prime rate plus 0.75% or in the case of US dollar
        advances, LIBOR + 1.75%. As at December 31, 2007, the Company had
        drawn $30,480,000 under this facility.

        The credit facility contains various covenants that include an
        interest coverage ratio of at least 3:1, a leverage ratio of no more
        than 3.5:1, a tangible net worth of at least $440,000,000 plus 50% of
        positive net income earned subsequent to June 30, 2007, and certain
        other operational covenants. The facility is secured by a first-
        ranking lien on all present and future assets, property and
        undertaking of the Company.

    (b) The Company is obligated under various capital leases for equipment,
        all of which expire by 2010. All capital lease agreements provide
        that the Company can purchase the leased equipment at the end of the
        lease term for a nominal amount. Interest payable on the various
        leases range from LIBOR + 2.50% to LIBOR + 2.75%.

    (c) The long-term debt amounts payable to Soyopa and to the Mining
        Development Trust were fully repaid during the current year.

    (d) The Company is obligated under certain other agreements maturing
        between 2008 and 2010. These loans are non-interest bearing, with
        quarterly payments of approximately $40,000.

    -------------------------------------------------------------------------

    9-  Asset retirement obligations

    The Company's asset retirement obligations consist of reclamation costs
for the Ocampo and El Cubo mines. The present value of the obligation is
currently estimated at $2,990,484 (2006 - $Nil), reflecting payments that will
commence in 10 - 20 years. Significant reclamation activities include land
rehabilitation, demolition of buildings and mine facilities, ongoing care and
maintenance and other costs.
    The undiscounted value of the reclamation costs liability is $10,624,853
(2006 - $Nil). The credit adjusted risk-free rate used in estimating the
obligation was 8%, and the inflation rate used was 3.5%. Changes to the
reclamation and closure cost obligation balance during the year were as
follows:

    Reclamation cost obligations, beginning of year        $               -
    Obligations incurred                                           2,944,135
    Accretion expense                                                 46,349
                                                           ------------------
    Reclamation cost obligations, end of year              $       2,990,484
                                                           ------------------
    -------------------------------------------------------------------------

    10- Employee future benefits

    The Company has two defined benefit plans that provide pension benefits to
certain of its employees.
    The Company accrues for employee future benefits for contract workers and
employees in Mexico paid through an employment services company. These
benefits consist of a one-time payment equivalent to 12 days wages for each
year of service (at the employee's most recent salary, but not to exceed twice
the legal minimum wage), payable to all employees with 15 or more years of
service, as well as to certain employees terminated involuntarily prior to the
vesting of their seniority premium benefit. Under Mexican Labour Law, the
Company also provides statutorily mandated severance benefits to its employees
terminated under certain circumstances. Such benefits consist of a one-time
payment of three months wages plus 20 days wages for each year of service
payable upon involuntary termination without just cause.
    Both plans are unfunded. The most recent actuarial valuation was performed
for both plans as at December 31, 2005, and the next required valuation is
December 31, 2008.

    Information about the Company's benefit plans is as follows:

                                               December 31, 2007
                               ---------------------------------------------
                                     Pension       Seniority           Total
                               benefit plans         premium        premiums
                               -------------  -------------- ----------------
    Accrued benefit
     obligation:
      Balance at beginning
       of year                 $   2,461,497  $      904,955   $   3,366,452
      Foreign exchange
       adjustment                    (26,824)         (9,863)        (36,687)
      Acquisition of Mexgold               -               -               -
      Service cost                   271,598         126,853         398,451
      Interest cost                   82,923          28,522         111,445
      Actuarial (gain) / loss        341,361          (8,966)        332,395
                               -------------  -------------- ----------------

      Deficit                      3,130,555       1,041,501       4,172,056
      Unamortized
       actuarial gain / (loss)      (321,299)       (104,612)       (425,911)
                               -------------  -------------- ----------------
      Accrued benefit
       liability               $   2,809,256  $      936,889   $   3,746,145
                               -------------  -------------- ----------------

    Employee future benefit costs recognized during the year were as follows:

    Employee future benefits expense:

      Service cost             $     271,598  $      126,853   $     398,451
      Interest cost                   82,923          28,522         111,445
      Actuarial (gain) / loss        253,302          (4,346)        248,956
                               -------------  -------------- ----------------
    Net expense for the year   $     607,823  $      151,029   $     758,852
                               -------------  -------------- ----------------
    Significant assumptions
     used:
    Discount rate                       4.00%           4.00%           4.00%
                               -------------  -------------- ----------------
    Rate of compensation
     increase                           1.50%           1.50%           1.50%
                               -------------  -------------- ----------------
                                                    December 31, 2006
                               ---------------------------------------------
                                     Pension       Seniority           Total
                               benefit plans         premium        premiums
                               -------------  -------------- ----------------
    Accrued benefit
     obligation:
      Balance at beginning
       of year                 $     271,761  $        8,818   $     280,579
      Foreign exchange
       adjustment                     (4,460)           (144)         (4,604)
      Acquisition of Mexgold       1,745,750         863,751       2,609,501
      Service cost                   176,594          91,022         267,616
      Interest cost                   65,918          27,272          93,190
      Actuarial (gain) / loss        205,934         (85,764)        120,170
                               -------------  -------------- ----------------

      Deficit                      2,461,497         904,955       3,366,452
      Unamortized
       actuarial gain / (loss)      (230,944)         88,921        (142,023)
                               -------------  -------------- ----------------
      Accrued benefit
       liability               $ 2,230,553    $ 993,876        $   3,224,429
                               -------------  -------------- ----------------

    Employee future benefit costs recognized during the year were as follows:

    Employee future benefits expense:

      Service cost             $     181,533  $       93,568   $     275,101
      Interest cost                   67,762          28,036          95,798
      Actuarial (gain) / loss         17,647           4,008          21,655
                               -------------  -------------- ----------------
    Net expense for the year   $     266,942  $      125,612   $     392,554
                               -------------  -------------- ----------------
    Significant assumptions
     used:
    Discount rate                       4.00  %         4.00%           4.00%
                               -------------  -------------- ----------------
    Rate of compensation
     increase                           1.50  %         1.50%           1.50%
                               -------------  -------------- ----------------

    -------------------------------------------------------------------------

    11- Income taxes

    The following table reconciles the expected income tax recovery (payable)
at the statutory income tax rate to the amounts recognized in the consolidated
statements of operations for the years ended December 31, 2007 and 2006.

                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    Net loss                               $    73,680,064  $     26,718,859
    Income tax rate                                  38.12%            38.12%
                                            --------------     --------------
    Expected income tax recovery based
     on above rates                             28,086,840        10,185,229
    Effect of lower tax rates in foreign
     jurisdictions                              (7,457,905)       (1,393,332)
    Non-deductible stock option expense         (1,538,295)       (6,011,856)
    Other                                        6,726,844           993,409
    Change in Mexican statutory income
     tax regime                                (43,081,397)                -
    Valuation allowance                        (10,369,991)       (2,362,992)
                                            --------------     --------------
    Provision for income taxes            $    (27,633,904) $      1,410,458


    The following reflects future income tax liabilities at December 31, 2007
    and 2006:

                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    Accounting value of mineral properties
     in excess of tax value                $   108,666,062 $      98,344,857
    Accounting value of inventories
     in excess of tax value                     10,297,670                 -
    Deductible share issue costs                (3,637,857)       (2,124,484)
    Future employee benefits                      (769,197)         (395,566)
    Unrealized foreign exchange
     gains (losses)                             (4,200,597)          330,111
    Non-capital losses carried forward         (66,266,830)      (37,001,059)
                                            --------------     --------------
                                                44,089,251        59,153,859
    Valuation allowance                         64,790,052        11,338,664
                                            --------------     --------------
    Future income tax liabilities
     recognized                           $    108,879,303 $      70,492,523
                                            --------------     --------------
    The Company has tax loss
     carry-forwards expiring in the
     following years:


                                     Canada           Mexico           Total
                               ---------------------------------------------
    2008                       $    807,679  $             -   $     807,679
    2009                          3,015,103                -       3,015,103
    2010                                  -        1,363,067       1,363,067
    2011                                  -           43,315          43,315
    2012                                  -        4,933,518       4,933,518
    2013                          3,414,516       13,506,112      16,920,628
    2014                          6,712,317       20,502,426      27,214,743
    2015                          5,727,638       50,818,387      56,546,025
    2016                                  -       49,375,219      49,375,219
    2017                                  -       47,838,575      47,838,575
    2026                          8,403,422                -       8,403,422
    2027                         16,139,920                -      16,139,920
                               ------------      -----------     -----------
                              $  44,220,595  $   188,380,619  $  232,601,214
                               ------------      -----------     -----------

    -------------------------------------------------------------------------

    12-  Shareholders' equity

    (a) Capital stock

    Authorized:

    Unlimited number of common shares.

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

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

    Issued and outstanding:
    -----------------------

                                                 Number of          Ascribed
                                             Common Shares             Value
                                            --------------     --------------
    Balance, December 31, 2005                  76,370,224 $     168,759,035
                                            --------------     --------------
    Issued in connection with acquisition
     of Mexgold                                 21,838,033       273,826,266
    For cash pursuant to exercise of share
     purchase options                            2,995,555         9,622,947
    Fair value of options exercised                      -         3,466,681
    For cash pursuant to exercise
     of warrants                                   942,296         4,500,675
    Fair value of warrants exercised                     -         3,157,079
                                            --------------     --------------
    Balance, December 31, 2006                 102,146,108 $     463,332,683
                                            --------------     --------------
    For cash pursuant to exercise of
     share purchase options                      5,286,255        33,438,891
    Fair value of options exercised                      -        32,714,389
    Public offering                             10,000,000       178,120,000
    Share issuance costs                                 -        (8,094,225)
                                            --------------     --------------
    Balance, December 31, 2007                 117,432,363 $     699,511,738
                                            --------------     --------------

    (b)  Stock options (in Canadian dollars)

    The Company has a stock option plan under which options to purchase common
shares of the Company may be granted to directors, senior officers, employees
and service providers of the Company. The aggregate number of common shares
that may be reserved for issuance under the plan is 22,500,000. The maximum
number of common shares that may be reserved for issuance to any one person
under the plan is 5% of the shares outstanding at the time of grant (on a
non-diluted basis), less the aggregate number of shares reserved for issuance
to such person under any other option to purchase shares from treasury granted
as a compensation or incentive mechanism. Stock options are generally
exercisable for a maximum period of five years from the grant date, and have
vesting periods as determined by the Company's Board of Directors.
    Under the terms of the Mexgold acquisition described in Note 5, the
Company became obligated to issue up to an aggregate of 5,512,997 common
shares upon exercise to Mexgold option holders.
    The fair value of the options granted was calculated using the
     Black-Scholes option-pricing model with the following weighted average
assumptions:


                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    Dividend yield                                       0%                0%
    Expected volatility                              55.32%            43.82%
    Risk free interest rate                           4.21%             3.93%
    Expected life                                  5 years           5 years
    Weighted average fair value                     $ 8.56            $ 4.48


                              December 31                   December 31
                                 2007                           2006
                            --------------                --------------
                                       Average                       Average
                         Shares          Price         Shares          Price
                  -------------     ----------      ----------      --------
    Outstanding,
     beginning
     of year         14,040,342    $      4.75      9,032,000     $     4.75
    Granted           1,800,000    $     16.41      2,555,000     $     9.05
    Issued in
     connection
     with acq-
     uisition
     of Mexgold               -    $         -       5,512,997    $     5.40
    Expired /
     forfeited       (1,009,167)   $    (18.31)        (64,100)   $    (7.90)
    Exercised        (5,286,255)   $     (7.00)     (2,995,555)   $    (3.28)
                  -------------                     ----------      --------
    Outstanding,
     end of year      9,544,920    $      6.35      14,040,342    $     4.75
                  -------------                     ----------
    Options
     exercisable,
     end of year      8,926,656    $      6.13      12,756,677    $     4.56
                  -------------                     ----------

    During the year ended December 31, 2007, employees, consultants, officers
and directors of the Company exercised 5,286,255 (2006 - 2,995,555) options
for total proceeds of $38,815,129 (2006 - $10,909,629). Set forth below is a
summary of the outstanding options to purchase common shares as at December
31, 2007:
                          Options outstanding            Options exercisable
          -----------------------------------------   ----------------------
                                     Weighted  Ave-                 Weighted
                                      average  rage                  average
                           Number    exercise  life        Number   exercise
          Option Price outstanding      price  (yrs)  exercisable      price
          ------------------------------------------  -----------------------
    $      1.01 - 1.50     893,000   $   1.06  0.04       893,000   $   1.06
    $      2.51 - 3.00   1,100,000   $   2.60  0.51     1,100,000   $   2.60
    $      5.01 - 5.50   2,577,160   $   5.45  1.30     2,576,063   $   5.45
    $      5.51 - 6.00     573,400   $   5.68  1.10       573,400   $   5.68
    $      6.01 - 6.50   1,579,500   $   6.12  2.09     1,579,500   $   6.12
    $      6.51 - 7.00     293,750   $   6.55  2.65       293,750   $   6.55
    $      7.01 - 7.50     235,000   $   7.45  1.19       235,000   $   7.45
    $      7.51 - 8.00      50,000   $   7.94  1.36        50,000   $   7.94
    $      9.01 - 9.50     903,500   $   9.25  3.04       386,833   $   9.05
    $     9.51 - 10.00      70,000   $  10.00  2.11        70,000   $  10.00
    $    10.01 - 10.50     135,000   $  10.49  3.45        45,000   $  10.49
    $    10.51 - 11.00     801,277   $  10.64  3.06       790,777   $  10.64
    $    18.01 - 21.00     333,333   $  20.35  4.26       333,333   $  20.35
         -------------   --------------------------   ----------------------
                 Total   9,544,920                      8,926,656
         -------------   --------------------------   ----------------------

    (c)  Compensation warrants (in Canadian dollars)

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

    -------------------------------------------------------------------------

    13- Commitments and contingencies

    Option and joint venture agreements

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

    The Company has a joint venture agreement with Fuerte Mayo in respect of
the Ocampo property under which the Company has a 60% participating interest
in 17 mining claims in Mexico. Under the terms of the joint venture, the
Company is the operator and 100% of the sales from production on the property
may be applied to the cash payment due to Fuerte Mayo in the joint venture
stage. Under the terms of the agreement, a balance of $211,526 was due to
Fuerte Mayo upon the sale of the property to a third party. During the year
ended July 31, 2005, in consideration for a consulting payment of $250,000 due
for services rendered by Fuerte Mayo to the Company, Fuerte Mayo forgave the
$211,526 due upon the sale of the property to a third party.
    On February 21, 2003, the Company acquired the remaining 40% of the title
and interest in a group of claims located in the municipality of Ocampo from
Brenda. The Company agreed to pay 8% of net profits attributable to the
development of the mining claims and their concessions up to a maximum of
$2,000,000. An additional $250,000 is due if, as a result of the exploration
of the claims, a minimum mining reserve of two million ounces of equivalent
gold are obtained. In the event that the Company were to sell the property,
the full $2,000,000 becomes due and payable at that time. During the year
ended December 31, 2007, the Company paid Brenda $415,000 (December 31, 2006 -
$40,000).

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

    On July 17, 2000, the Company entered into an agreement with Global for
consulting services to assist in the negotiations of an agreement with
Minerales de Soyopa, S.A. de C.V. ("Soyopa") to secure the right to acquire
the then remaining fifty-one percent (51%) interest in the Ocampo property. As
part of the consideration for the successful negotiation and execution of the
agreement between the Company and Soyopa, the Company agreed that if it should
subsequently sell the lands, claims and concessions described in the
agreements, the Company shall be required to pay Global $1,000,000.

    A summary of the future commitments based on the above noted option and
joint venture agreements at December 31, 2007 are set out in the following
table:


    Agreement                       Consideration                       Terms
    ------------------------------- -------------   -------------------------
    Compania Minera Global, S.A.                     Upon sale
     de C.V.                        $   1,000,000    of the related property
    Compania Minera, Brenda, S.A.
     de C.V.                        $   1,545,000    8% of net profits
                                                     attributable to related
                                                     mining claims or upon
                                                     sale of the related
                                                     property, up to a
                                                     maximum of $2,000,000
    Compania Minera, Brenda, S.A.
     de C.V.                        $     250,000    Upon a minimum proven
                                                     reserve amount


    (c) Compania Minera Las Torres S.A. de C.V. ("Las Torres")

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

                                                     Lease           Royalty
                                                  Payments          Payments
                                           ---------------   ----------------
    2008                                   $       720,000  $        240,000
    2009                                           720,000           180,000
                                           ---------------   ----------------
                                           $     1,440,000  $        420,000
                                           ---------------   ----------------

    Other contingencies

    The Company has been named as a defendant in a claim filed by Midas Fund,
Inc. seeking actual damages of $2.4 million and punitive and other damages of
$10 million. The complaint arose over Midas's participation in the Company's
April 2007 common share issuance.
    In addition, an inactive subsidiary of the Company has been named as a
defendant in a $13 million claim filed by Rafael Villagomez, former owner of
50% of the shares of El Cubo, which were acquired by the Company in 2004.
    Management is of the opinion that both claims are without merit, and that
a strong defence exists against each claim. Therefore, no provision for loss
has been reflected in the accounts of the Company.
    The Company is involved in legal proceedings from time to time, arising in
the ordinary course of its business. In the opinion of management, the
ultimate liability with respect to these actions will not materially affect
the Company's financial position, results of operations or cash flows.

    Other commitments

    At December 31, 2007, the Company has purchase commitments in the amount
of approximately $2.8 million (2006 - $Nil) related to acquisitions of
equipment. The equipment is expected to be delivered during the first half of
2008.

    -------------------------------------------------------------------------

    14- Loss per share

    Basic loss per share is calculated based on the weighted average number of
shares outstanding during the year ended December 31, 2007 of 113,176,605
(December 31, 2006 - 88,025,714). Diluted loss per share is based on the
assumption that options under the stock option plan have been exercised on the
later of the beginning of the year and the date granted. As of December 31,
2007, 9,544,920 stock options (December 31, 2006 - 14,040,342) were excluded
from the computation of diluted earnings per share because their effect would
have been anti-dilutive.

    -------------------------------------------------------------------------

    15- Supplemental cash flow information

                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    Change in non-cash working capital:
      Receivables                          $     3,074,244  $       (298,924)
      Prepaids                                  (1,474,577)         (433,197)
      Inventory                                 (5,604,041)      (35,843,586)
      Payables and accruals                    (14,519,736)       12,113,200
                                            --------------     --------------
                                           $   (18,524,110) $    (24,462,507)
                                            --------------     --------------

    Supplemental information
      Interest paid                        $     4,567,318  $      4,464,571


    Non-cash transactions
      Acquisition of assets under
       capital lease                       $      635,200   $      4,910,680

    Loan to shareholder pursuant
     to exercise of share options          $            -   $         12,415

    -------------------------------------------------------------------------

    16- Related party transactions

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

                                               December 31       December 31
                                                      2007              2006
                                            --------------     --------------
    (a) Production costs - labour          $     31,147,564  $     19,509,027
    (a) Mining interests - labour                2,437,344         3,717,149
    (b) Production costs - consumables           2,032,928         3,040,831
    (c) Capital assets                              24,838           916,127
                                            --------------     --------------
                                           $    35,642,674   $    27,183,134


    (a) The Company pays a third party company related to a director for the
        provision of workers in the Mexican operations at cost plus 13%.  On
        December 1, 2007, a new two year contract was signed at cost plus
        10%.

    (b) The Company pays a third party company related to a director for the
        provision of mine consumables.

    (c) The Company pays a third party company related to a director for the
        provision and construction of production and support facilities.

    As at December 31, 2007, the Company had included $1,775,351         (2006
- $1,730,561) in payables and accruals, representing amounts owing to these
related parties.


    17- Financial instruments

    The Company's financial instruments consisted of cash and cash
equivalents, restricted cash, receivables, payables and accruals, long-term
debt and capital leases. Unless otherwise noted, it is management's opinion
that the Company is not exposed to significant interest or credit risks
arising from these financial instruments. Some of the Company's receivables
and payables are denominated in Mexican Pesos or Canadian dollars. Balances
are translated at the period end based on the Company's accounting policy as
set out in Note 2(c) to the consolidated financial statements.
    The Company estimates that the fair value of its cash and cash
equivalents, restricted cash, receivables, payables and accruals, and
long-term debt approximate the carrying value of the assets and liabilities.

    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 Company does not actively hedge this
exposure.

    Interest rate risk

    The Company is exposed to interest rate risk on its variable rate debt.
The Company has not entered into any agreements to hedge against unfavourable
changes in interest rates.

    Foreign currency exchange rate risk

    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. 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 exposure.

    Credit risk

    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.

    -------------------------------------------------------------------------

    18. Segmented information

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

    The following are the operating results by segment:
                                                           December 31, 2007
                  -----------------------------------------------------------
                         Ocampo        El Cubo          Other          Total
                  -------------    -----------      ---------   -------------
    Revenue from
     mining
     operations   $ 107,833,028   $ 44,225,600   $          -  $ 152,058,628
                  -------------    -----------      ---------   -------------
    Production
     costs          102,657,728     37,644,990   $          -    140,302,718
    Write-down
     of long-term
     inventory        4,319,654              -              -      4,319,654
    Refining costs    1,046,259        463,668              -      1,509,927
    General and
     administrative   4,681,913        682,167     18,792,281     24,156,361
    Amortization
     and depletion   28,581,998     14,730,712         79,689     43,392,399
                  -------------    -----------      ---------   -------------
                    141,287,552     53,521,537     18,871,970    213,681,059
                  -------------    -----------      ---------   -------------
    Total         $ (33,454,524) $  (9,295,937) $ (18,871,970) $ (61,622,431)
                  -------------    -----------      ---------   -------------
    Expenditures
     related to
     mining
     interests
     and property,
     plant and
     equipment   $  53,805,959  $   15,254,724  $      81,423  $  69,142,106
                  -------------    -----------      ---------   -------------
    Total assets $ 379,284,869  $  373,044,164  $   1,623,078  $ 753,952,111
                  -------------    -----------      ---------   -------------


                                                           December 31, 2006
                  -----------------------------------------------------------
                         Ocampo        El Cubo          Other          Total
                  -------------    -----------      ---------   -------------
    Revenue from
     mining
     operations  $   47,214,146  $  17,021,750     $        -  $  64,235,896
                  -------------    -----------      ---------   -------------
    Production
     costs           26,600,886     11,342,697     $        -     37,943,583
    Refining
     costs              342,797        182,807              -        525,604
    General
     and
     administrative   1,970,035        407,685     25,869,692     28,247,412
    Amortization
     and depletion    9,757,313      8,718,809        280,694     18,756,816
                  -------------    -----------      ---------   -------------
                     38,671,031     20,651,998     26,150,386     85,473,415
                  -------------    -----------      ---------   -------------
    Total        $    8,543,115 $   (3,630,248) $ (26,150,386) $ (21,237,519)
                  -------------    -----------      ---------   -------------
    Expenditures
     related to
     mining
     interests
     and pro-
     perty,
     plant and
     equipment   $   95,681,070 $    7,469,306  $     172,729  $  103,323,105
                  -------------    -----------      ---------   -------------
    Total assets $  341,251,075 $  370,965,750  $   4,104,590  $  716,321,415
                  -------------    -----------      ---------   -------------

    All goodwill included on the balance sheet relates to the El Cubo
operating segment.

    -------------------------------------------------------------------------

    19- Subsequent event

    Subsequent to year-end, the Company has been named as a defendant in a
claim filed by Ed J. McKenna. The plaintiff is seeking, among other things, an
order certifying the action as a class proceeding and $75 million in special
and general damages and $5 million in punitive damages on behalf of the class.
Management considers the allegations in the statement of claim to be without
merit and therefore no amount has been accrued in the accounts of the Company.

    20. Comparative figures

    Certain of the comparative figures for December 31, 2006 have been
reclassified to conform with the financial statement presentation adopted for
December 31, 2007.

    




For further information:

For further information: Scott Perry, Chief Financial Officer, Gammon
Gold Inc., (902) 468-0614; Anne Day, Director of Investor Relations, Gammon
Gold Inc., (902) 468-0614

Organization Profile

GAMMON GOLD INC.

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