Edgar Filing: Silver Dragon Resources Inc.

Silver Dragon Resources Inc.: Form 10QSB - Prepared by TNT Filings Inc.

U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

_____________________________________________

FORM 10-QSB

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2007

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number 0-29657

_________________________________________________

SILVER DRAGON RESOURCES INC.
(Exact name of small business issuer as specified in its charter)

Delaware	33-0727323
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

5160 Yonge Street, Suite 803
Toronto, Ontario M2N 6L9
(Address of Principal Executive Offices)

(416) 223-8500
(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The issuer had 64,473,033 shares of its Common Stock, $0.0001 par value, as of June 1, 2007.

Transitional Small Business Disclosure Format: Yes____ No X

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

(AN EXPLORATION STAGE COMPANY)

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2007 and 2006 (restated)

(UNAUDITED)

CONTENTS


Interim Consolidated Balance Sheet as at March 31, 2007	1
Interim Consolidated Statements of Operations and Comprehensive Loss
for the Three Month Period Ended March 31, 2007, and 2006, and
Cumulative for the Period from June 15, 1996, [Date of Inception]
Through to March 31, 2007	2-3
Interim Consolidated Statements of Cash Flows for the Three Month
Period Ended March 31, 2007, and 2006, and Cumulative for the
Period from June 15, 1996, [Date of Inception] Through to March 31,
2007	4-5
Notes to Interim Consolidated Financial Statements	6-16

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
(AN EXPLORATION STAGE COMPANY)
Interim Consolidated Balance Sheet
(Unaudited)		March 31,
		2007
ASSETS
Current Assets
	Cash and cash equivalents	$ 1,100,196
	Other receivables (note 8)	406,642
	Current portion of deferred expenses	663,053
Total Current Assets		2,169,891
Deferred Expenses		299,979
Advances to Related Parties (note 7)		50,766
Property and Equipment, net (note 4)		390,945
Mineral Rights (note 5)		6,416,897
Deferred Offering Cost		50,000

Total Assets		$9,378,478

LIABILITIES
Current Liabilities
	Accounts payable	$ 325,903
	Accrued liabilities	681,251
Total Current Liabilities		1,007,154

Total Liabilities		1,007,154

Commitments and Contingencies (note 12)

STOCKHOLDERS’ EQUITY

Capital Stock (note 6)
	Preferred stock, $0.0001 par value, 20,000,000 shares authorized None issued and outstanding	-
	Common stock, $0.0001 par value, 150,000,000 shares authorized 61,844,533 shares issued and 61,767,988 outstanding	6,184
Additional Paid-in Capital		22,382,445
Treasury Stock (note 6)		(160,745)
Stock Subscriptions		176,025
Deficit Accumulated During the Exploration Stage		(14,057,850)
Accumulated Comprehensive Loss		25,265
Stockholders’ Equity		8,371,324

Total Liabilities and Stockholders’ Equity		$ 9,378,478

-1-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
(AN EXPLORATION STAGE COMPANY)
Interim Consolidated Statement of Operations and Comprehensive Loss
For the Three Month Period Ended March 31, 2007 and 2006, and For the Period from June 15, 1996 [date of inception] Through to March 31 , 2007
(Unaudited)		For the three month period ended		For the Period June 15, 1996 (Date
		March 31, 2007	March 31, 2006	of Inception) to March 31, 2007
			(Restated note 15)

Revenues		$ -	$ -	$ 64,888

Cost of Revenues		-	-	74,482

Gross Profit		-	-	(9,594)

Operating Expenses
	General and administrative	1,941,605	3,347,817	10,511,097
	Exploration	602,031	655,662	2,828,727
	Development (non mining)	-	-	60,000
Total Operating Expenses		2,543,636	4,003,479	13,399,824

Loss From Continuing Operations		(2,543,636)	(4,003,479)	(13,409,418)

Other Income (Expenses)
	Interest expense	-	-	(36,517)
	Interest income – related parties	-	-	15,905
	Interest expense - related parties	-	-	(8,422)
	Settlement with Cyper Entertainment, Inc.	-	-	(80,000)
	Loss on disposal of asset	-	-	(15,371)
	Loss on investment	-	-	(61,240)
	Loss on sale of marketable securities (note 12)		-	(389,365)
	Other income (expense)	710	-	(23,688)
Total Other Income (Expenses)		710	-	(598,698)

Net Loss From Continuing Operations		$ (2,542,926)	$ (4,003,479)	$(14,008,116)

The accompanying notes are an integral part of these interim consolidated financial statements.

-2-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
(AN EXPLORATION STAGE COMPANY)
Interim Consolidated Statement of Operations and Comprehensive Loss
For the Three Month Period Ended March 31, 2007 and 2006, and For the Period from June 15, 1996 [date of inception] Through to March 31, 2007
(Unaudited)		For the three month period		For the Period June 15, 1996 (Date
		March 31, 2007	March 31, 2006	of Inception) to March 31, 2007
			(Restated note 15)
Net Loss From Continuing Operations (carried forward)		$ (2,542,926)	$ (4,003,479)	$ (14,008,116)
Provision For Income Taxes
	Current	-	-	-
	Future	-	-	-
Net Loss From Continuing Operations, After Tax		(2,542,926)	(4,003,479)	(14,008,116)

Minority Interest		4,241	-	253,021

Net Loss From Discontinued Operations
	Loss from discontinued operations (net of tax)	-	-	(302,755)
Net Loss From Discontinued Operations		-	-	(302,755)
Net Loss		(2,538,685)	(4,003,479)	(14,057,850)

Foreign exchange adjustment		25,265	-	25,265

Comprehensive Loss		$ (2,513,420)	$ (4,003,479)	$ (14,032,585)

Net loss per common share – basic and diluted		$ (0.04)	$ (0.10)

Net loss on continuing operations per common share – basic and diluted		$ ( 0.04)	$ (0.10)

Weighted average number of common shares outstanding during the year – basic and diluted		61,651,289	40,474,422

The accompanying notes are an integral part of these interim consolidated financial statements.

-3-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
AN EXPLORATION STAGE ENTERPRISE
Interim Consolidated Statements of Cash Flows
For the Three Month Period Ended March 31, 2007 and 2006, and
For the Period from June 15, 1996 [date of inception] to March 31, 2007
(Unaudited)
				For the period from
		For the three month period ended		June 15, 1996
		March 31	March 31	[date of inception]
		2007	2006	to March 31, 2007

Cash Flows from Operating Activities
	Net loss	$(2,538,685)	$(4,003,479)	$(14,057,850)
	Adjustments for:
	Depreciation	23,360	-	79,344
	Impairment of investment	-	-	61,240
	Write-down of assets	-	-	42,253
	Write-down of inventory	-	-	19,169
	Settlement of Cyper reverse acquisition	-	-	80,000
	Settlement of debt, net	-	3,578,750	(19,052)
	Stock issued for services	183,638	-	1,884,445
	Stock issued for management and directors fees to a related party	-	1,885,000	2,115,053
	Warrants issued for consulting fees	-	-	178,768
	Minority interest	(4,241)	-	(253,021)
	Net loss from discontinued operations	-	-	302,755
	Changes in non-cash working capital
	Other receivable	(9,498)	-	(407,821)
	Inventories	-	-	(28,510)
	Prepaid expenses	(1,710)	(1,885,000)	(77,850)
	Accounts payable	211,273	(14,093)	473,845
	Accrued liabilities	215,648	-	670,027
	Accrued officer compensation	-	15,350	709,500

Net Cash Used in Operating Activities		(1,920,215)	(453,472)	(8,227,705)

The accompanying notes are an integral part of these consolidated financial statements.

-4-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES
(AN EXPLORATION STAGE ENTERPRISE)
Interim Consolidated Statements of Cash Flows
For Three Month Period Ended March 31, 2007, and 2006, and
For the Period from June 15, 1996 [date of inception] to March 31, 2007
(Unaudited)
				For the period from
		For the three month period		June 15, 1996
		March 31	March 31	[date of inception]
		2007	2006	to March 31, 2007

Cash Flows from Investing Activities
	Investment in subsidiary	-	-	(21,221)
	Proceeds from sale of equipment	-	-	500
	Acquisition of property and equipment	(188,601)	(2,438)	(497,920)
	Investment in mineral rights	(100,000)	(731,679)	(1,554,877)

Net Cash Used in Investing Activities		(288,601)	(734,117)	(2,073,518)

Cash Flows from Financing Activities
	Payment of notes payable	-	-	3,581
	Proceeds from issuance of notes payable	-	-	(21,507)
	Advances payable related party	(28,585)	-	217,064
	Advances to related parties	(12,995)	-	(152,072)
	Cash overdraft	-	-	460
	Purchase of treasury shares	-	-	(392,830)
	Cash received on shares not issued	101,000	-	101,000
	Cumulative comprehensive income	-	-	(1,562)
	Deferred offering costs	-	-	(50,000)
	Proceeds from subscriptions receivable, net	-	-	124,748
	Share issuance costs	-	-	(35,000)
	Minority interest	-	-	253,021
	Proceeds from issuance of common stock	329,000	1,449,888	11,354,516

Net Cash Provided by Financing Activities		388,420	1,449,888	11,401,419

Change in Cash and Cash Equivalents		(1,820,396)	262,299	1,100,196
Cash and Cash Equivalents - Beginning of Period		2,920,592	303	-

Cash and Cash Equivalents - End of Period		$ 1,100,196	$ 262,602	$ 1,100,196

The accompanying notes are an integral part of these consolidated financial statements.

-5-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Nature of Business and Basis of Presentation

Silver Dragon Resources Inc. ("SDR" or the "Company") a Delaware corporation, was incorporated on May 9, 1996. The Company is headquartered in Ontario, Canada and operates primarily in the United States, Mexico and China. On June 15, 1996, SDR acquired all of the outstanding stock of California Electric Automobile Co., Inc. ("CEAC"), a California corporation incorporated on November 14, 1995.

The Company is in the exploration stage as defined in Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No.7. "Accounting and Reporting For Development Stage Enterprises." To date, the Company has generated minimal sales and has devoted its efforts primarily to developing its products, implementing its business strategy and raising working capital through equity financing or short-term borrowings.

The Company's mission is to acquire and develop a portfolio of silver properties in proven silver districts globally.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the requirements of item 310 (b) of Regulation S-B. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited interim consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented. Except for the adoption of new accounting policies as disclosed in note 3, there have been no significant changes of accounting policy since December 31, 2006. The results from operations for the period are not necessarily indicative of the results expected for the full fiscal year or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2006.

Going Concern and Exploration Stage Activities

The Company's unaudited interim consolidated financial statements for the three months ended March 31, 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company has incurred a net loss of $2,538,685 for the three months ended March 31, 2007 (2006 - $4,003,479), and has accumulated losses since inception of $14,057,850. The Company's continuation as a going concern is uncertain and dependant on successfully bringing its services to market, achieving future profitable operations and obtaining additional sources of financing to sustain its operations. In the event the Company cannot obtain the necessary funds, it will be necessary to delay, curtail or cancel further acquisitions and exploration and development activities. The Company plans to pursue additional financing; however, there can be no assurance that the Company will be able to secure financing when needed or obtain such on terms satisfactory to the Company, if at all.

The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

-6-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115”(“SFAS No. 159”). SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS No. 159 is effective for the Company's fiscal year 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. The Company is currently evaluating the impact, if any, of SFAS No. 159 on the Company's consolidated financial statements.

On May 2, 2007 the FASB issued FASB Interpretation FIN No. 48-1, “Definition of Settlement in FASB Interpretation 48” (“FIN 48-1”). FIN 48-1 amends FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance in FIN 48-1 shall be applied upon the initial adoption of FIN 48. Accordingly, the Company has applied the provisions of FIN 48-1 effective January 1, 2007. The adoption of FIN 48-1 did not have a material impact on the Company’s results of operations and financial condition.

Property and Equipment, net

		Accumulated	March 31, 2007
	Cost	Depreciation	Net book value
Computer hardware	$90,488	$13,268	$77,220
Vehicles	108,441	10,541	97,900
Furniture and fixtures	162,424	9,601	152,823
Mine equipment	35,759	4,447	31,312
Buildings	31,690	-0-	31,690
	$428,802	$37,857	$390,945

-7-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Mineral Rights

	Sino-Top,	Cerro Las Minitas,	Total
	China	Mexico

Balance at December 31, 2006	$ 3,471,152	$ 2,845,745	$6,316,897
Expenditures January 1 – March 31, 2007	-	100,000	100,000
Balance at March 31, 2007	$ 3,471,152	$ 2,945,745	$6,416,897

Sino-Top

On April 14, 2005, the Company entered into a joint venture agreement with Sino Silver Corp. ("Sino Silver") whereby the Company acquired 50% of Sino Silver's interest in the net proceeds from the sale of minerals or the sale of mining rights as a result of the exploration, evaluation and development of a property located in the Erbaohuo Silver District in Northern China. In consideration for this interest, the Company paid Sino Silver $150,000 on the closing date along with 250,000 restricted common stock of the Company. Pursuant to the Agreement, an additional $200,000 was payable to Sino Silver within two years of the closing date, along with the delivery of an additional 250,000 restricted common stock of the Company. Included in these closing costs are financing fees incurred through the issuance of 500,000 restricted common stock.

On March 16, 2006, the Company entered into an Asset Purchase Agreement with Sino Silver and Sino-Top wherein Sino Silver agreed to sell its 60% interest in Sino-Top to the Company. Sino-Top holds the exploration and mining rights to nine properties in the Erbaohuo Silver District. The total purchase price was $650,000 plus 4,000,000 restricted common stock of the Company paid as follows for a total value of $3,478,000:

$150,000 was paid on the closing;

ii)

$100,000 was paid May 20, 2006;

iii)

$400,000 was paid on November 9, 2006 and;

iv)

4,000,000 restricted common stock of the Company that were held in escrow since August 2006 were released on November 9, 2006.

On March 19, 2007, the Company entered into an agreement to acquire an additional 30% ownership interest in Sino-Top, increasing its total equity position from 60% to 90%, in exchange for two million restricted shares of common stock of the Company. The transaction was subject to receipt of the consent of the Ministry of Commerce in China, which consent was obtained on May 16, 2007.

The Company has also committed to invest approximately $1,529,000 into Sino-Top towards exploration and property maintenance on the nine properties in the portfolio, with the intention of bringing the Erbahuo mine into production in 2007 and conducting advanced stage exploration on two properties (Zuanxinhu and Saihanaobao). As of March 31, 2007, the Company paid $536,030 of this amount to Sino-Top. This agreement supersedes the Venture Agreement dated April 14, 2005 between the Company and Sino Silver.

To date, all mineral property acquisition costs are capitalized and all exploration and development costs are expensed.

-8-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Mineral Rights (cont’d)

Cerro Las Minitas, Mexico

On March 1, 2006, the Company's wholly-owned subsidiary, Silver Dragon Mining De Mexico S.A. de C.V (“Silver Dragon Mexico”) entered into an agreement with Jaime Muguiro Pena wherein Mr. Pena assigned to Silver Dragon Mexico the mining and exploitation rights to 10 mining concessions, which include an operating mine, totaling approximately 1354 hectares in Guadalupe, Durango, Mexico in consideration for the payment to Mr. Pena of $450,000 and 450,000 restricted common stock issued on August 18, 2006 valued at $456,750 for a total value of $906,750. Silver Dragon Mexico also purchased certain mining equipment for the sum of $1,000 plus Value Added Tax (“V.A.T.”)

On March 2, 2006, Silver Dragon Mexico entered into an agreement with Ramon Tomas Davila Flores wherein Mr. Flores assigned to Silver Dragon Mexico the mining and exploitation rights to five mining concessions, which include an operating mine, totaling approximately 31 hectares in Guadalupe, Durango, Mexico in consideration for the payment to Mr. Flores of $245,000 plus applicable V.A.T. which was paid on closing, along with 110,000 restricted common stock of the Company valued at $71,995 for a total value of $317,064.

Silver Dragon Mexico has also entered into an Asset Purchase Agreement with Mr. Flores for the purchase of certain mining equipment for the sum of $5,000 plus V.A.T.

On March 8, 2006, Silver Dragon Mexico entered into an agreement with Minera Real Victoria, S.A. De C.V. ("Minera") wherein Minera assigned to Silver Dragon Mexico the mining and exploitation rights to a mining concession known as "Puro Corazon" which includes an operating mine, totaling approximately nine hectares, in Guadalupe, Durango, Mexico in consideration for the payment to Minera of $400,000 plus applicable V.A.T., along with 2,000,000 restricted common stock of the Company. The purchase price of $2,038,000 is payable as follows:

$100,000 was paid on the closing;

ii)

$100,000 was paid on September 11, 2006;

iii)

$100,000 was paid March 14, 2007;

iv)

$100,000 is payable twenty-four months from the closing date, and;

2,000,000 restricted common stock of the Company issued on June 12, 2006 at a value of $1,372,000.

All payments are subject to V.A.T.

On March 9, 2006, Silver Dragon Mexico entered into an agreement with Silvia Villasenor Haro, the owner of Puro Corazon, wherein, in consideration for the sum of $50,000 plus V.A.T., she has consented to the assignment of the mining and exploitation rights of Puro Corazon to Silver Dragon Mexico. In addition, she has agreed to modify the exploitation agreement of Minera which was assigned to Silver Dragon Mexico as follows:

The consideration to be paid to Ms. Haro due to the exploitation of the mining concession will be in the amount of $1.50 per ton of economic ore that is extracted from the mine, to be paid monthly, within the following 30 days as of the date in which Silver Dragon Mexico receives the corresponding invoices.

-9-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Mineral Rights (cont’d)

Regardless of the above, in the event that Silver Dragon Mexico does not initiate production over the lot regarding the Concession Title within six months of the date of execution of the Agreement, Silver Dragon Mexico must pay to Ms. Haro the monthly amount of $3,500 plus VAT. Such payment will be made for the period or periods of time during which no ore is extracted, and paid within the first eight days of the corresponding month.

In the event that Silver Dragon Mexico pays Ms. Haro the above mentioned monthly consideration, such must be discounted from any future payment made by Silver Dragon Mexico to Ms. Haro as a result of the production and extraction of ore, subject to the condition that the payments due to Ms. Haro by the production and extraction of ore are maintained at least in the minimum monthly amount of $3,500. If Silver Dragon Mexico decides not to produce or extract ore, any monthly payments that are made to Ms. Haro will remain to her benefit.

ii)

Option to Purchase. Silver Dragon Mexico has been granted the option to purchase the Concession, which can be exercised by Silver Dragon Mexico by providing written notice to Ms. Haro within a 30 day period in advance to the following events:

The Option to Purchase the Concession can be exercised by Silver Dragon Mexico within 3 years of the date of execution of the Agreement upon payment of the amount of $2,000,000 plus the applicable V.A.T.; or alternatively,

The Option to Purchase the Concession can be exercised by Silver Dragon Mexico within 5 years of the date of execution of the Agreement upon payment of $3,000,000 plus the applicable V.A.T..

Capital Stock

On March 1, 2006, the Company entered into a twenty-four month administrative services consultant contract with a close family member of the Chief Executive Officer for cash fees of $5,000 per month and 1,000,000 of restricted common shares valued at $654,500. The amount is being amortized over the service period to of which $27,271 is included in the statement of operations. Included in the current portion of the deferred expense is $327,250.

On March 1, 2006, the Company entered into a contract with an individual to provide the Company with investor relations services in The Peoples Republic of China for 1,000,000 restricted common shares valued at $654,500. The amount is being amortized over the service period of which $81,813 is included in the statement of operations. Included in the current portion of deferred expense is $327,250.

On February 5, 2007, the Company closed a private placement totaling 584,000 units at $1.00 per unit for gross proceeds of $584,000. Each unit consists of one share of the Company’s common stock and one one-half $2.00 purchase warrant and one one-half $5.00 purchase warrants. One whole warrant will entitle the holder to purchase an additional share of common stock at any time over a period of two years from the date of the closing of the private placement.

Treasury Stock

In 2006, the Company acquired, through Travellers International Inc. (“TII”), a company controlled by a director of the Company, 276,545 common shares of the Company for $392,830.

On January 23, 2007, 200,000 common shares of the Company with a value of $232,085 were returned to treasury and cancelled.

-10-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Capital Stock (cont’d)

Warrants

As at March 31, 2007, the following warrants were outstanding:

		Number of Warrants			Value
			Issued,			Issued,
Expiry	Exercise		(Exercised),			(Exercised),
Date	Price	Opening	and (Expired)	Closing	Opening	and (Expired)	Closing
					$	$	$
09-Nov-07	1.00	1,000,000	-	1,000,000	520,762	-	520,762
30-May-08	2.00	675,000	-	675,000	347,093	-	347,093
30-May-08	5.00	675,000	-	675,000	225,881	-	225,881
12-Jun-08	2.00	600,000	-	600,000	312,109	-	312,109
12-Jun-08	5.00	600,000	-	600,000	204,971	-	204,971
13-Oct-08	2.00	1,256,500	-	1,256,500	705,289	-	705,289
13-Oct-08	5.00	1,256,500	-	1,256,500	491,398	-	491,398
29-Dec-08	2.00	1,493,500	-	1,493,500	883,348	-	883,348
29-Dec-08	5.00	1,493,500	-	1,493,500	639,793	-	639,793
05-Feb-09	2.00	-	292,000	292,000	-	174,917	174,917
05-Feb-09	5.00	-	292,000	292,000	-	127,848	127,848
11-Aug-11	0.80	200,000	-	200,000	178,768	-	178,768
09-Nov-11	2.00	250,000	-	250,000	211,200	-	211,200
09-Nov-11	5.00	250,000	-	250,000	192,187	-	192,187
09-Nov-11	2.00	17,500	-	17,500	14,784	-	14,784
09-Nov-11	5.00	17,500	-	17,500	13,453	-	13,453
		9,785,000	584,000	10,369,000	$4,941,036	$302,765	$5,243,801

A value of $302,765 has been attributed to the warrants issued during the three month period ended March 31, 2007. Warrants were valued using the Black-Scholes model, using the following weighted average key assumptions of volatility of 145%, a risk-free interest rate of 4.9%, a term equivalent to the life of the warrant, and reinvestment of all dividends in the Company of zero percent.

-11-

SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

Advances to Related Parties

Advances to TII in the amount of $37,771, a company holding approximately 25% of the issued and outstanding shares of the Company and which is controlled by an officer and stockholder of the Company are unsecured, non-interest bearing and have no fixed terms of repayment.

Advances to the officer and director of the Company in the amount of $12,995, are unsecured, non-interest bearing and have no fixed terms of repayment.

Related Party Transactions

During the three month period ended March 31, 2007, the following transactions involving related parties occurred and were measured at the exchange amount, which is the amount agreed to by the respective parties.

The Company paid $72,000 (2006 – $72,000) as payment of management and director’s fees and paid $48,000 in auto allowance that had been outstanding from December 2005 to March 31, 2007 at an amount of $3,000 per month.

In May and June 2006, the Company provided the amount of $1,000,000 in trust to TII, a company controlled by an officer and stockholder of the Company, for the purpose of buying marketable securities on the Company's behalf, see note 12. On January 24, 2007, TII delivered a stock certificate for the 200,000 shares of the Company, which TII had been holding in trust on behalf of the Company, back to the Company’s transfer agent for cancellation.

Included in other receivables are loans and advances to employees, the total outstanding balance as at March 31, 2007 was $134,561. The loans and advances bear no interest, are unsecured and are due on demand.

Income Taxes

Management determined that the deferred tax assets do not satisfy the recognition criteria of SFAS No. 109 “Accounting for Income Taxes” and, more likely than not the losses will not be utilized, accordingly, a full valuation allowance has been recorded for this amount.

The Company has accumulated approximately $14,000,000 of taxable losses, which may be used to offset future federal taxable income. The utilization of the losses expires in years 2015 to 2027.

The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change", as defined by the Internal Revenue Code. Federal and State net operating losses are subject to limitations as a result of these restrictions. Under such circumstances, the Company's ability to utilize its net operating losses against future income may be reduced.

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

10.

Statements of Cash Flows Supplemental Disclosures

For the three month period ended March 31, 2007, there were no cash payments for interest or income taxes.

11.

Litigation

The Company is not aware of any pending actions or litigation arising from current or past environmental practices that are likely to have a material adverse impact on its financial position. In the normal course of its operations, the Company has been or, from time to time, may be named in legal actions seeking monetary damages. While the outcome of these matters cannot be estimated with certainty, management does not expect that they will have a material effect on the Company's business or financial condition or results of operations.

12.

Commitments and Contingencies

On November 15, 2005, the Company entered into an employment agreement with an officer and shareholder of the Company. The term of the agreement is five years and carries an option for renewal upon mutual agreement between the officer and the Company. The agreement includes a base salary of $288,000 per year, a signing bonus of 1,000,000 shares of common stock of the company and a benefits package.

On February 17, 2006, the Company completed the sale of 1,000,000 units, at a price of $1.00 per unit, for total gross proceeds of $1,000,000. Pursuant to the Subscription Agreement, the Company agreed to file a Registration Statement on form SB-2 within 45 days of the closing in order to register shares of common stock issued in this offering and the shares of common stock issuable upon exercise of Warrants. If the Registration Statement is not filed as mentioned or declared effective within 180 days following the closing, then cash delay payments equal to 0.5% of the subscription amount per month shall apply for the first 3 months and 1% per month thereafter.

On May 30, 2006 the Company completed the sale of 1,000,000 units, at a price of $1.00 per unit, for total gross proceeds of $1,000,000. Pursuant to the Subscription Agreement for 250,000 of these shares, the Company agreed to file a Registration Statement on form SB-2 within 45 days of the closing in order to register shares of common stock issued in this offering and the shares of common stock issuable upon exercise of Warrants. If the Registration Statement is not filed as mentioned or declared effective within 180 days following the closing, then cash delay payments equal to 0.5% of the subscription amount per month shall apply for the first 3 months and 1% per month thereafter.

SB2 optional form for registration of securities to be sold to the public by small business issuers was filed on January 29, 2007 and amended on March 16, 2007.

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

12.

Commitments and Contingencies (cont’d)

On May 15, 2006, the Company entered into a trust arrangement with TII, an investment and merchant banking firm, for the deposit by the Company of $1 Million (the “Funds”) for the purpose of investing the Funds on behalf of the Company. The trust arrangement was evidenced by a Declaration of Trust dated August 16, 2006. The Company had received proceeds of an equity financing to be used towards the Company’s obligations in Mexico and China over the next several months. In the meantime, the Company decided to invest a portion of the financing proceeds for the purpose of obtaining a return on the proceeds invested.

Marc Hazout has served as Chief Executive Officer and President of the Company since June 1, 2002. Mr. Hazout has served as a director of the Company since June 1, 2002, and has served as the sole director of the Company since September 21, 2002. As of May 31, 2007, Mr. Hazout beneficially owned 26.7% of the shares of the common stock of the Company (“Company Shares”).

Mr. Hazout has served as the Chief Executive Officer, President and sole director of TII since June 25, 1998. As of December 31, 2006, Mr. Hazout beneficially owned 100% of the shares of the capital stock of TII.

For purposes of convenience, Mr. Hazout directed the investment by TII of the Funds, through TII’s brokerage account at Union Securities Ltd.

Between May 2006 and December 31, 2006, Mr. Hazout directed TII to utilize a margin of $2 million and the cash received in trust of $1 million to effect the following transactions:

Purchase 51,500 shares of Qualcomm Incorporated for an aggregate purchase price $2,262,978 and sell 51,500 shares of Qualcomm at an aggregate sale price of $1,878,504, to hold nil shares of Qualcomm as at December 31, 2006;

ii.

Purchase 2,500 iShares Silver Trust exchange-traded fund (“ETF”) shares at an aggregate purchase price of $303,635 and sell 2,500 ETF shares at an aggregate sale price of $308,379, to hold nil ETF shares as at December 31, 2006;

iii.

Purchase 276,545 of the Company’s shares at an aggregate purchase price of $392,830 with a fair market value of $580,745 as at December 31, 2006; and

iv.

Purchase 50,000 shares of First Majestic Resource Corp. at an aggregate purchase price of $160,562 and sell 50,000 shares of First Majestic Resource Corp. at an aggregate sale price of $154,525, to hold nil First Majestic Resource Corp. shares as at December 31, 2006.

Of the $1 Million which TII had been provided in trust, $187,000, was returned to the Company. Neither Mr. Hazout, nor TII received any fees or commissions as a result of TII’s trusteeship as described herein. On January 23, 2007, TII delivered a stock certificate for the 200,000 shares of the Company, which TII had been holding in trust on behalf of the Company, back to the Company’s transfer agent for cancellation.

Pursuant to the Subscription Agreement on May 30, 2006, the Company agreed to file a Registration Statement on form SB-2 within 45 days of the closing in order to register 250,000 of these shares of common stock issued in the offering and the shares of common stock issuable upon exercise of Warrants. If the Registration Statement is not filed as mentioned or declared effective within 180 days following the closing, then cash delay payments equal to 0.5% of the subscription amount per month shall apply for the first 3 months and 1% per month thereafter.

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

12.

Commitments and Contingencies (cont’d)

On August 16, 2006, the Company signed a Letter of Intent with Hubei Silver Mine Co., Ltd. ("Hubei Silver") and Cistex Global Investment Inc., ("Cistex") relating to the acquisition by Silver Dragon of a 60% equity interest in Hubei Silver which holds the exploration and mining rights to the Hubei Silver Mine located in Zhushan County, Shiyan City, Hubei Province, China. The purchase price, subject to confirmation of the value of Hubei Silver's assets, is approximately $2.4 Million in cash along with shares of restricted common stock of Silver Dragon valued at $1.6 million on closing.

On August 21, 2006, the Company entered into a two year contract with an individual for IT consulting services at $5,000 per month and 50,000 restricted common shares.

On March 1, 2007 the Company entered in a contract with two individuals to provide investor relations services. Each would receive 50,000 restricted common shares, 100,000 warrants exercisable at $2.50 and 100,000 warrants exercisable at $3.00 exercisable anytime over a period of 5 years form the time of issuance.

On March 19, 2007, the Company entered into an agreement to acquire an additional 30% ownership interest in Sino-Top, increasing its total equity position from 60% to 90%, in exchange for 2 million restricted shares of common stock of the Company. The transaction was subject to receipt of the consent of the Ministry of Commerce in China, which consent was obtained on May 16, 2007.

On April 1, 2007, the Company entered into a five lease agreement for office space with an option to renew for an additional five years, for 2,823 square feet of office. The annual payments are $50,814 for the first two years escalating to $56,460 in the final three years of the lease.

13.

Subsequent Events

During the month of April 2007, the Company issued 415,000 shares of the Company’s restricted common stock which consists of 230,000 restricted common stock were issued for cash proceeds of $1 per restricted common stock, 55,000 restricted common stock were issued to employees of the company, 50,000 restricted common stock were issued to each of two individuals for consulting services as part of a twelve month contract, 25,000 restricted common stock which were issued as part of a twelve month contract to provide the Company with investor relations services, and 5,000 restricted common stock were issued for warrants exercised.

During the month of May 2007, the Company issued 2,213,500 shares of the Company's restricted common stock which consists of an issuance on May 18, 2007, of 2,000,000 shares of the Company's restricted common stock as part of the Sino Top agreement to increase ownership from 60% to 90% (See note 5). 175,000 restricted common stock were issued for cash proceeds of $1 per restricted common stock and 38,500 restricted common stock were issued for services.

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SILVER DRAGON RESOURCES INC. AND SUBSIDIARIES

AN EXPLORATION ENTERPRISE

Notes to the Interim Consolidated Financial Statements

March 31, 2007 and 2006

(Unaudited)

14.

Comparative Information

Certain comparative figures have been reclassified to conform with the current period’s interim consolidated financial statement presentation.

15.

Restatement of Previously Issued Consolidated Financial Statements

In 2006, the Company became aware of certain accounting irregularities affecting the previously issued interim consolidated financial statements. The Company conducted an inquiry in these accounting issues. As a result, the Company is restating previously issued interim consolidated financial statements for the three month period ended March 31, 2006 due to the accounting errors.

Exploration Expense

The Company determined that it had capitalized all costs association with the exploration and development of mineral rights, however, did not complete a feasibility study to support the establishment of proven and probable reserves, and accordingly was determined that it was inappropriate for the Company to capitalize exploration and development costs. Accordingly, net loss went from $3,347,817 to $4,003,479 and mining rights went from $1,976,466 to $1,320,804. Earnings per share went from ($0.08) to ($0.10).

Warrants

The Company determined that it had not valued warrants attached to shares issued pursuant to a private placement which occurred on February 17, 2006. Accordingly warrants went from $NIL to $55,699 and Paid in capital went from $10,362,410 to $10,306,711.

In 2007, the Company became aware of certain accounting irregularities affecting the previously issued year end consolidated financial statements. The Company conducted an inquiry in these accounting issues. As a result, the Company is restating previously issued consolidated financial statements for the year ended December 31, 2006 due to the accounting errors.

Exploration Expense

The Company determined that it had not accrued all costs association with the exploration and development of mineral rights. Accordingly, net loss went from $8,236,169 to $8,396,760 and accruals went from $226,865 to $494,517, and minority interest went from $111,302 to $4,241. Earnings per share went from ($0.16) to ($0.17).

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

CERTAIN FORWARD-LOOKING INFORMATION

Certain statements in this Quarterly Report on Form 10-QSB may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein. The words "believe", "expect", "anticipate", "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date the statement was made. The Company's financial performance and the forward-looking statements contained herein are further qualified by other risks including those set forth from time to time in the documents filed by the Company with the Securities and Exchange Commission, including the Company's most recent Form 10-KSB.

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Plan of Operation

Overview.

Our primary objective is to explore for silver minerals and, if warranted, to develop those existing mineral properties. Our secondary objective is to locate, evaluate, and acquire other mineral properties, and to finance our exploration and development through equity financing, by way of joint venture or option agreements or through a combination of both.

Plans for the Year 2007.

Our property in China has been and is being aggressively drilled. A test operation has commenced to provide basic data on design, ore dressing and business profits to be used in planning for future large-scale production. Geologic mapping, trenching and drilling work is underway for three of the properties known as Saihanaobao, Zhuanxinhu and Laopandao Beihou. We expect an initial NI 43-101 report on the Erbaohuo property to be released in the second quarter of 2007.

We will also focus on the acquisition from Hubei Silver and Cistex of a 60% equity interest in Hubei Silver which holds the exploration and mining rights to the Hubei Silver Mine located in Zhushan County, Shiyan City, Hubei Province, China. The acquisition is subject to a number of conditions including, but not limited to, the delivery by Hubei Silver of all geological and technical data related to the mine, an audit of Hubei Silver and an evaluation of its assets based on U.S. GAAP valuation methods and the execution of a definitive agreement. The purchase price, subject to confirmation of the value of Hubei Silver's assets, is approximately $2.4 million in cash along with shares of restricted common stock of Silver Dragon valued at $1.6 million on closing.

Our mining and exploitation activities in Mexico are in the exploration stage. We are in the process of exploring the concessions through drilling, trenching and drifting. Our objective is to find new ore bodies and expand the resource of the existing ore bodies. There are currently four mining shafts, which were used to extract underground ore in the past. We are planning to build a ramp directly to the main ore body in order to extract the ore daily and load it onto trucks for transport to a processing plant. An initial NI 43-101 report has been completed and concluded that the exploration done by Silver Dragon Mexico during 2006 indicates that the potential resources inferred there justify the cost of further exploration and development. The cost of this report was approximately $25,000.

The NI 43-101 report recommends a program of detailed geologic mapping, surface geochemical sampling and ground magnetic sampling to collect the basic geotechnical information that will be necessary to support an effective exploration and development program at Cerro Las Minitas. The program will include geologic mapping of the entire outcropping portion of the Cerro Las Minitas Dome at a scale of 1:2000, with more detailed mapping in areas of special interest, and definition of project stratigraphy in detail from examination of exposures and drill core. Additionally, the program will include reconnaissance geochemical soil and rock sampling and ground magnetic surveying to cover the entire property. This first phase program will include drilling 30 diamond drill holes from surface (4500 meters) to develop oxide resources identified on the property and an additional six diamond drill holes (1200 meters) drilled from underground in the Puro Corazón mine to further develop discoveries of sulfide mineralization made during the 2006 drilling program. The goals of this program are:

1. To compile a basic database of geotechnical information to support effective exploration at Cerro Las Minitas. All existing data will be incorporated into the database and recorded on maps, data sheets and reports on the various categories of geotechnical information. This geotechnical data will bear heavily on every phase of the Cerro Las Minitas Project and is strongly recommended.

2. To define, by analysis of geotechnical data collected, the sites on the property that offer the best potential for near-term discovery of near-surface oxide ore. Those discoveries are anticipated to extend downwards into unoxidized sulfide ores. Definition of the most favorable sites for further exploration expenditure will enhance the effectiveness of the Project and hasten its development and is strongly recommended.

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3. To define and develop the inferred oxide resources that have been identified on the property, including drilling, trenching and preliminary metallurgical tests. Oxide resources already identified on the property offer the best potential for near-term, low-cost production from the project and justify this expenditure.

4. To define and further develop the carbonate replacement Ag-Pb-Zn mineralization that was discovered west of the Puro Corazón mine in 2006. The exploration model suggests that carbonate replacement deposits at Cerro Las Minitas may offer the greatest long-term production potential on the property and justifies this investigation.

Table 1.1 presents an aggressive first-phase exploration and development program proposed for the Cerro Las Minitas property. Expense items are listed with a description where appropriate and a total cost. The length of this program is 10 months, from inception through completion of a status report. Personnel costs are based on employment of national geotechnical personnel.

Table 1.1

Cerro Las Minitas Project, Durango, Mexico
Proposed Project Budget.

*Surface Geology, Geochemisty, Geophysics*
Item	Explanation	Cost $ US
Surface Agreements		$5,000
Ground Magnetic Survey		$40,000
Geochemical samples	2500	$50,000
Supplies		$3,000
Project Geologist (2)	10 months	$125,000
Geologist (2)	10 months	$100,000
Draftsman	8 months	$6,800
Surveyor	Topographic control	$5,000
Sampler (9)	3 months	$21,600

TOTAL - Surface Geology, Geochemisty, Geophysics		$356,400

*Oxide Resource Development*
Permitting		2,000
Drill Site Preparation (Surface)	30 drill sites	$25,000
Surface Drilling (incl Assays)	30 holes X 150 m @ $100/m (incl assays)	$450,000
Project Geologist	5 months	$32,000
Geologist	5 months	$25,000
Sampler (2)	5 months	$8,000
Draftsman	2 months	$1,700
Surveyor		$1,000
Supplies	Bags, core boxes, saw blades, etc.	$2,500
Metallurgical Testing	Includes mining of test samples	$18,000

TOTAL - Oxide Resource Development		$565,200

*New Discovery Development*
Drill Site Preparation (Underground)		$8,000
Underground Drilling (inc Assays)	6 holes X 200 m @ $90/m (incl assays)	$108,000
Project Geologist	5 months	$32,000
Geologist	5 months	$25,000
Samplers (2)	5 months	$8,000
Draftsman	2 months	$1,700
Surveyor		$1,500
Supplies	Bags, core boxes, saw blades, etc.	$2,500

Total - New Discovery Development		$186,700

*Project Administration*
Project Administration	Includes Vehicles, Field Office, & Administration	$75,000

Total - Project Administration		$75,000

Total Project Budget		$1,183,300

We will follow the exploration program recommended by the NI 43-101 report and revisit the program on a quarterly basis. Currently, surface geochemical sampling and geologic mapping are underway to define drill targets in the southwest of the Puro Curazon working and to the southeast of the La Pina-La Bocona workings. In La Chiva structure in the Puro Corazon workings, work is underway to define grades and tonnages. De-watering of the lower levels of both the Puro Corazon and La Bocona mines and rehabilitation of old workings are underway.

We expect the cost of exploration activities, mine development and administration costs in Mexico over the next 12 months to be approximately $5,300,000.

Cash Requirements.

Our agreement with Jaime Muguiro Pena required us to make a $450,000 payment along with 450,000 common shares in 2006. Our agreement with Minera Real Victoria, S.A. de C.V. required us to make a $100,000 payment on closing along with 2,000,000 common shares in 2006, a further payment of $100,000 on September 11, 2006, as well as payments totaling $200,000 over the next the next 2 years. We estimate that we will need to raise approximately $5,300,000 to meet our obligations under the Cerro las Minitas agreements, as well as to continue with the exploration and mining of the properties throughout 2007. In addition, we will require an additional $2,000,000 should we choose to exercise the option to purchase the mining concession from Silvia Villasenor Haro within 3 years, or $3,000,000 within 5 years. We currently do not have arrangements in place to raise the capital to fund these obligations.

Our agreement with Sino Silver and Sino-Top required us to make a $150,000 payment on closing, with a further payment of $100,000 on May 20, 2006, and a balance of $400,000, which was paid, and the 2,000,000 common shares held in escrow were released, on November 7, 2006 when we received approval to the transaction by authorities in China. In addition, we have advanced an additional $536,030 to Sino-Top in 2006 for further exploration of the mining properties, and we estimate that we will require a minimum of $2,000,000 for exploration and mining through the end of 2007.

The agreement with Hubei Silver will require us to pay $2,400,000 in cash and issue restricted shares of our common stock valued at $1,600,000 for this interest on closing.

We have historically satisfied our working capital requirements through the private issuances of equity securities as well as from our chief executive officer. We will continue to seek additional funds through such channels and from collaborative and other arrangements with corporate partners. In particular, we will need $12 million in additional funding to continue our operations for the next twelve months. If we fail to obtain sufficient funds, we may need to delay, scale back or terminate some or all of our mining exploration programs.

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Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or contractual obligations that have had or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that have not been disclosed in our financial statements.

Competitive Factors

The silver mining industry is fragmented, with many silver prospectors and producers, small and large. We do not compete with anyone with respect to our Chinese properties or on the Cerro las Minitas properties. There is no competition for the exploration or removal of minerals from these properties. We will either find silver on the properties or not. If we do not, we will cease or suspend further investment.

With respect to selling silver, we compete with both existing silver supplies and other silver producers. If the supply of silver exceeds demand in any given period, prices will fall until supply and demand is brought into balance. Many of these companies have substantially greater technical and financial resources than us. Thus we may be at a disadvantage with respect to some of our competitors.

Governmental Approvals and Regulations

Our mineral exploration programs are subject to the regulations of various Chinese and Mexican authorities.

Regulatory Obligations in Mexico

In Mexico, our mining activities are governed by the General Mining Law and the regulations promulgated thereunder.

We obtained initial authorizations and the relevant permits for the exploration of Cerro Las Minitas from the Ministry of Natural Resources (SEMARNAT). The initial authorization from SERMARNAT authorizing us to initiate the excavation of the soil on Cerro Las Minitas was issued in 2006. The excavation of soil must be carried out using digger machines, which are registered and authorized by SEMARNAT. Our machines are duly registered and authorized by SEMARNAT.

After the exploration stage, mining activities in Mexico are carried out in accordance with the permit issued by the General Direction of Mining Ministry of Economy under the plan of operations for mining activity submitted by an applicant. Since our current activities in Mexico are in the exploration stage, we have not yet submitted a plan of operations. After receiving confirmation of the existence of minerals, we are required to file an application with the General Direction of Mining of the Ministry of Economy to obtain concession titles for the exploitation of the minerals. As of today, we have obtained sixteen (16) Concession Titles for the Exploitation of Minerals in Cerro Las Minitas, which titles were granted according to the applicable provisions of the General Mining Law. We are further required to obtain additional permits commonly referred to as the Sole Environmental License from SEMARNAT and the National Water Commission (NWC). After we successfully obtain concession titles, we are required to submit annual reports in May of each year, detailing the work performed during the designated year on the properties specified by such concession titles.

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Once mining activities commence, we must obtain additional permits and authorizations from the Ministry of Labor to operate special machineries used for the exploration of the Mining Field. Such special machineries include but are not limited to pressured containers, boilers and other machineries designated for mining that are regulated by various National Official Norms (NOM). We are also required to file reports on safety, hygiene and minimum wage of our workers to the registry of the Labor Commissions as provided under Mexican Federal Labor Law.

Regulatory Obligations in China

Exploration for and exploitation of mineral resources in China is governed by the Mineral Resources Law of the PRC of 1986, amended effective January 1, 1997, and the Implementation Rules for the Mineral Resources Law of the PRC, effective March 26, 1994. In order to further implement these laws, on February 12, 1998 the State Council issued three sets of regulations: (i) Regulation for Registering to Explore Mineral Resources Using the Block System, (ii) Regulation for Registering to Mine Mineral Resources, and (iii) Regulation for Transferring Exploration and Mining Rights (together with the mineral resources law and implementation rules being referred to herein as "Mineral Resources Law").

Under Mineral Resources Law, the Ministry of Land and Resources and its local authorities (the "MLR") is in charge of the supervision of mineral resource exploration and development. The mineral resources administration authorities of provinces, autonomous regions and municipalities, under the jurisdiction of the State, are in charge of the supervision of mineral resource exploration and development in their respective administration areas. The people's governments of provinces, autonomous regions and municipalities, under the jurisdiction of the State, are in charge of coordinating the supervision by the mineral resources administration authorities on the same level.

The Mineral Resources Law, together with the Constitution of the PRC, provides that mineral resources are owned by the State, and the State Council, the highest executive organization of the State, which regulates mineral resources on behalf of the State. The ownership rights of the State include the rights to: (i) occupy, (ii) use, (iii) earn, and (iv) dispose of, mineral resources, regardless of the rights of owners or users of the land under which the mineral resources are located. Therefore, the State is free to authorize third parties to enjoy its rights to legally occupy and use mineral resources and may collect resource taxes and royalties pursuant to its right to earn. In this way, the State can control and direct the development and use of the mineral resources of the PRC.

Mineral Resources Licenses

China has adopted, under the Mineral Resources Law, a licensing system for the exploration and exploitation of mineral resources. The MLR is responsible for approving applications for exploration licenses and mining licenses. The approval of the MLR is also required to transfer exploration licenses and mining licenses.

Applicants must meet certain conditions as required by related rules/regulations. Pursuant to the Regulations for Registering to Mine Mineral Resources, the applicant for mining rights must present the required documents, including a plan for development and use of the mineral resources and an environmental impact evaluation report. The Mineral Resources Law allows individuals to exploit sporadic resources, sand, rocks and clay for use as construction materials and a small quantity of mineral resources for sustenance. However, individuals are prohibited from mining mineral resources that are more appropriately mined at a certain scale by a company, specified minerals that are subject to protective mining by the State and certain other designated mineral resources.

Once granted, all exploration and mining rights under the licenses are protected by the State from encroachment or disruption under the Mineral Resources Law. It is a criminal offence to steal, seize or damage exploration facilities, or disrupt the working order of exploration areas.

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Exploration Rights

In order to conduct exploration, a Sino-foreign cooperative joint venture ("CJV") must apply to the MLR for an exploration license. Owners of exploration licenses are "licensees". The period of validity of an exploration license can be no more than three years. An exploration license area is described by a "basic block". An exploration license for metallic and non-metallic minerals has a maximum of 40 basic blocks. When mineral resources that are feasible for economic development have been discovered, a licensee may apply for the right to develop such mineral resources. The period of validity of the exploration license can be extended by application and each extension can be for no more than two years. The annual use fee for an exploration license is RMB 100 per square kilometre for the first three years and increases by RMB 100 per square kilometre for each subsequent year, subject to a maximum fee of RMB 500 per square kilometre.

During the term of the exploration license, the licensee has the privileged priority to obtain mining rights to the mineral resources in the exploration area, provided that the licensee meets the qualifying conditions for mining rights owners. An exploration licensee has the rights, among others, to: (i) explore without interference within the area under license during the license term, (ii) construct the exploration facilities, and (iii) pass through other exploration areas and adjacent ground to access the licensed area.

After the licensee acquires the exploration license, the licensee is obliged to, among other things: (i) begin exploration within the prescribed term, (ii) explore according to a prescribed exploration work scheme, (iii) comply with State laws and regulations regarding labour safety, water and soil conservation, land reclamation and environmental protection, (iv) make detailed reports to local and other licensing authorities, (v) close and occlude the wells arising from exploration work, (vi) take other measures to protect against safety concerns after the exploration work is completed, and (vii) complete minimum exploration expenditures as required by the Regulations for Registering to Explore Resources Using the Block.

Mining Rights

In order to conduct mining activities, a CJV must also apply for a mining license from the MLR. Owners of mining rights, or "concessionaires", are granted a mining license to mine for a term of no more than ten to thirty years, depending on the magnitude or size of the mining project. A mining license owner may extend the term of a mining license with an application 30 days prior to expiration of the term. The annual use fee for a mining license is RMB 1,000 per square kilometre per year.

A mining license owner has the rights, among others, to: (i) conduct mining activities during the term and within the mining area prescribed by the mining license, (ii) sell mineral products (except for mineral products that the State Council has identified for unified purchase by designated units), (iii) construct production and living facilities within the mine area, and (iv) use the land necessary for production and construction, in accordance with applicable laws.

A mining license owner is required to, among other things: (i) conduct mine construction or mining activities within a defined time period, (ii) conduct efficient production, rational mining and comprehensive use of the mineral resources, (iii) pay resources tax and mineral resources compensation (royalties) pursuant to applicable laws, (iv) comply with State laws and regulations regarding labour safety, water and soil conservation, land reclamation and environmental protection, (v) be subject to the supervision and management by the departments in charge of geology and mineral resources, and (vi) complete and present mineral reserves forms and mineral resource development and use statistics reports, in accordance with applicable law.

Transfer of Exploration and Mining Rights

A mining company may transfer its exploration or mining licenses to others, subject to the approval of MLR.

An exploration license may only be transferred if the transferor has: (i) held the exploration license for two years after the date that the license was issued, or discovered minerals in the exploration block, which are able to be explored or mined further, (ii) a valid and subsisting exploration license, (iii) completed the stipulated minimum exploration expenditures, (iv) paid the user fees and the price for exploration rights pursuant to the relevant regulations, and (v) obtained the necessary approval from the authorized department in charge of the minerals.

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Mining rights may only be transferred if the transferor needs to change the ownership of such mining rights because it is: (i) engaging in a merger or split, (ii) entering into equity or cooperative joint ventures with others, (iii) selling its enterprise assets, or (iv) engaging in a similar transaction that will result in an alteration of the property ownership of the enterprise.

Additionally, when state-owned assets or state funds are involved in a transfer of exploration licenses and mining licenses, the related state-owned assets rules and regulations apply and a proper evaluation report must be completed and filed with the MLR.

Speculation in exploration and mining rights is prohibited. The penalties for speculation are that the rights of the speculator may be revoked, illegal income from speculation confiscated and a fine levied.

Environmental Laws

In the past ten years, Chinese laws and policies regarding environmental protection have moved towards stricter compliance standards and stronger enforcement. In accordance with the Environmental Protection Law of the PRC adopted by the Standing Committee of the PRC National People's Congress on 26 December 1989, the General Administration of Environmental Protection Bureau under the State Council sets national environmental protection standards. The various local environmental protection bureaus may set stricter local standards for environmental protection. CJVs are required to comply with the stricter of the two standards.

The basic laws in China governing environmental protection in the mineral industry sector of the economy are the Environmental Protection Law and the Mineral Resources Law. Applicants for mining licenses must submit environmental impact assessments, and those projects that fail to meet environmental protection standards will not be granted licenses. In addition, after the exploration, a licensee must take further actions for environmental protection, such as performing water and soil maintenance. After the mining licenses have expired or a licensee stops mining during the license period and the mineral resources have not been fully developed, the licensee shall perform other obligations such as water and soil maintenance, land recovery and environmental protection in compliance with the original development scheme, or must pay the costs of land recovery and environmental protection. After closing the mine, the mining enterprise must perform water and soil maintenance, land recovery and environmental protection in compliance with mine closure approval reports, or must pay certain costs, which include the costs of land recovery and environmental protection.

Land and Construction

The holder of an exploration license or mining license should apply for land use right with MLR to conduct exploration or mining activities on the land covered by the exploration license or mining license. The license holder should file an application to MLR for the land use right with its exploration license or mining license. If the application is approved by the competent government authority, the MLR would issue an approval to the land use right applicant. Then, the local MLR would enter into a land use right contract with the license holder. The license holder should pay relevant price and fees in accordance with the contract and then obtain a land use right certificate from MLR. In practice, instead of obtaining a long-term land use right, an exploration license holder may apply for a temporary land use right, which would normally be valid for 2 years and may be renewed upon application.

The company should also apply for other zoning and construction permits to conduct construction on the land. PRC laws require a company to obtain the land zoning permit and construction zoning permit with the local zoning authorities under the Ministry of Construction (MOCON). Then, the company is required to enter into a construction contract with a qualified constructor and file the construction contract to the local construction authorities under the MOCON and obtain a construction permit. After the construction is completed, the company should apply for the construction authorities and related environmental and fire departments for the check and acceptance of the construction. Upon the pass of check and acceptance, the company should apply with local housing authorities to register the constructed buildings in its own name and obtain a housing ownership certificate.

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Environmental Law

We are responsible for providing a safe working environment, not disrupting archaeological sites, and conducting our activities to prevent unnecessary damage to the area in which our mineral claim is located. At this time, we do not believe that the cost of compliance at the federal, state and local levels will be significant.

We intend to secure all necessary permits required for exploration. We anticipate no discharge of water into active streams, creeks, rivers, lakes or other bodies of water regulated by environmental law or regulation. We also anticipate that no endangered species will be disturbed. Restoration of the disturbed land will be completed according to law, and all holes, pits and shafts will be sealed upon abandonment of the mineral claims. It is difficult to estimate the cost of compliance with the environmental laws, because the full nature and extent of our proposed activities cannot be determined until we start our operations.

We believe we are in compliance with the environment laws, and that we will continue to be able to comply with such laws in the future.

Employees and Employment Agreements

We currently have one consultant, a geologist, supervising the exploration program in Mexico. We pay him a total of approximately $12,000 per month for his services during our exploration program. He is responsible for retaining the drilling contractor, having the core samples assayed, designing and engineering the mine and supervising the drill program, among other things. Core drilling costs already completed total approximately $500,000. Analyzing the core samples cost approximately $125,000. In addition to the foregoing, there are approximately 20 other employees in Mexico.

In China we have one employee serving as administrative staff member in our Beijing representative office. We pay him $2,000 per month.

Other than the foregoing, our only employee is Marc Hazout, our Chief Executive Officer, President and Director. In addition, we have three consultants working in our head office in Toronto, an office administrator and manger, an information and technology and investor relations manager and a Chief Accounting Officer, being paid collectively a total of $18,000 per month.

On November 15, 2005, we entered into an Employment Agreement with Marc Hazout. The Employment Agreement provides that Mr. Hazout shall be employed by us for a term of five years, and is entitled to a base salary of $288,000 per year. He received 1,000,000 restricted common shares as a signing bonus and in consideration of his facilitation of the transactions with Linear Gold Corp. Further, he is entitled to eight weeks paid holiday and fourteen (14) personal days, sick leave, medical and group insurance, participation in our pension or profit sharing plans, and a car allowance of up to $3,000 per month. In the event we terminate the Employment Agreement without cause, he will be entitled to severance equal to 100% of his remaining base salary under the Employment Agreement, plus an amount equal to 100% of the base salary plus full medical coverage for 12 months following the termination date. The Employment Agreement contains provisions prohibiting him from competing with us or soliciting customers or employees from us for a period of one year following the termination of his employment.

Intellectual Property

We have no patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts that management believes have any value.

Risk Factors

You should consider each of the following risk factors and any other information set forth in this Form 10-QSB and the other Company's reports filed with the Securities and Exchange Commission ("SEC"), including the Company's financial statements and related notes, in evaluating the Company's business and prospects. The risks and uncertainties described below are not the only ones that impact on the Company's operations and business. Additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business or operations. If any of the following risks actually occur, the Company's business and financial condition, results or prospects could be harmed.

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Risks Relating To Our Operations

None of the properties in which we have an interest or the right to earn an interest has any known reserves.

None of the properties in which we have an interest or the right to earn an interest has any reserves. To date, we have engaged in only limited preliminary exploration activities on the properties. Accordingly, in which we do not have sufficient information upon which to assess the ultimate success of our exploration efforts. If we do not establish reserves, we may be required to curtail or suspend our operations, in which case the market value of our common stock may decline, and you may lose all or a portion of your investment.

Our current cash will only fund our business as currently planned for the next 3 months. We will need additional funding, either through equity or debt financings or partnering arrangements, that could negatively affect us and our stock price.

We will need significant additional funds to continue operations, which we may not be able to obtain. We estimate that we must raise approximately $12 million over the next 12 months to fund our anticipated capital requirements and our obligations under the agreements for the concessions in Cerro las Minitas, Mexico, the agreement with Sino-Top, and the agreement with Hubei Silver. Our agreement with Jaime Muguiro Pena required us to make a $100,000 payment on closing, with further payments totaling $350,000 made during 2006, along with 450,000 restricted common shares. Our agreement with Ramon Tomas Davila Flores required us to make a payment of closing at $245,000 along with 110,000 restricted common shares. Our agreement with Minera Real Victoria, S.A. de C.V. required us to make a $100,000 payment on closing along with 2,000,000 restricted common shares; a further payment of $100,000 was paid on September 11, 2006, and we must make payments totaling $200,000 over the next 2 years. We estimate that we will need to raise approximately $5,300,000 to meet our obligations under the Cerro las Minitas agreements, as well as to continue with the exploration and mining of the properties throughout 2007. Our agreement with Silvia Villasenor Haro, the owner of Puro Corazon, required us to make payments of $50,000 at closing. In addition, we will require an additional $2,000,000 should we choose to exercise the option to purchase the mining concession from Silvia Villasenor Haro within 3 years or $3,000,000 within 5 years. We currently do not have arrangements in place to raise the capital to fund these obligations. All payments in Mexico were and are subject to Value Added Tax (V.A.T.) for which we are entitled to be refunded as a non-Mexican entity.

We invested approximately $536,030 into Sino-Top in 2006 and intend to invest approximately $3,000,000 into Sino-Top in 2007 towards exploration and property maintenance on the nine properties in the portfolio, with emphasis on bringing the Erbaohuo silver mine into production in 2007, and conducting advanced stage exploration on two properties (Zuanxinhu and Saihanaobao).We currently do not have arrangements in place to raise the capital to fund these obligations.

We have entered into a letter of intent to acquire a 60% equity interest in Hubei Silver in Hubei Province, China. The agreement will require us to pay approximately $2,400,000 in cash and issue restricted shares of our common stock valued at $1,600,000 for acquiring this interest on closing. We currently do not have arrangements in place to raise the capital to fund these obligations.

We have historically satisfied our working capital requirements through the private issuances of equity securities and from our chief executive officer. We will continue to seek additional funds through such channels and from collaboration and other arrangements with corporate partners. However, we may not be able to obtain adequate funds when needed or funding that is on terms acceptable to us. If we fail to obtain sufficient funds, we may need to delay, scale back or terminate some or all of our mining exploration programs.

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We are an exploration stage company, and based on our negative cash flows from operating activities there is uncertainty as to our ability to continue as a going concern.

From inception, we have generated limited revenues and have experienced negative cash flows from operating losses. We anticipate continuing to incur such operating losses and negative cash flows for the foreseeable future, and to accumulate increasing deficits as we increase our expenditures for exploration and mining of minerals, infrastructure, research and development and general corporate purposes. Any increases in our operating expenses will require us to achieve significant revenue before we can attain profitability. Our history of operating losses and negative cash flows from operating activities will result in our continued dependence on external financing arrangements. In the event that we are unable to achieve or sustain profitability or are otherwise unable to secure additional external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our security holders losing their entire investment. There is no guaranty that we will generate revenues or secure additional external financing. Our financial statements, which have been prepared in accordance with the United States GAAP, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, lower than anticipated revenues, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern. See "Management's Plan of Operations".

The reports of independent auditors of our consolidated financial statements included in the previously filed 10-KSB annual report contain explanatory paragraphs which note our recurring operating losses since inception, our lack of capital and lack of long term contracts related to our business plans, and that these conditions give rise to substantial doubt about our ability to continue as a going concern. In the event that we are unable to successfully achieve future profitable operations and obtain additional sources of financing to sustain our operations, we may be unable to continue as a going concern. See "Management's Plan of Operation" and our consolidated financial statements and notes thereto included in this annual report.

We have a history of operating losses and we anticipate future losses.

Since we changed our business focus to silver exploration, we have generated no revenues. We incurred losses of approximately $8,236,169 and $2,538,685 respectively, for the fiscal year ended December 31, 2006 and the three month period ending March 31, 2007. We have accumulated losses since inception of approximately $14,057,850. We anticipate that losses will continue until such time when revenue from operations is sufficient to offset our operating costs, if ever. If we are unable to increase our revenues or to increase them significantly enough to cover our costs, our financial condition will worsen and you could lose some or all of your investment.

Because our management does not have technical training or experience in exploring for, starting and operating an exploration program, we will have to hire personnel to conduct these efforts. If we can not effectively supervise or retain such personnel, we may have to suspend or cease operations, which will result in the loss of your investment.

Because our management is inexperienced with exploring for, starting and operating an exploration program, we hired new employees and contractors to perform surveying, exploration and excavation of mineral claims that we may acquire. Our management has no direct training or experience in these areas and as a result may not be fully aware of many of the specific requirements related to working within the industry. Management must rely on the personnel it has hired or retained to assist them in making critical engineering and business decisions. Consequently, our operations, earnings and ultimate financial success could suffer irreparable harm due to management's lack of experience in this industry if our management is unable to supervise and retain qualified personnel to carry out these tasks. As a result we may have to suspend or cease operations, which will result in the loss of your investment.

Our success also depends on our ability to hire and retain skilled operating, marketing, technical, financial and management personnel. In the mining sector, competition in connection with hiring and retaining skilled, dependable personnel is intense. We may not offer salaries or benefits that are competitive with those offered by our competitors, who may have significantly more resources when compared to us. As such, even if we were to succeed in hiring skilled personnel, we may not succeed in retaining them.

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Because we do not have much capital, we may have to limit our exploration activity, which may result in a loss of your investment.

Because we are small and do not have much capital, we must limit our exploration activity. As such, we may not be able to complete an exploration program that is as thorough as the one that we currently anticipate on conducting. In that event, an existing ore body may go undiscovered. Without an ore body, we cannot generate revenues, in which case, you will lose your investment.

If our sole officer who also serves as our sole director resigns or dies without having found replacements, our operations will be suspended or cease altogether. If that should occur, you could lose your investment.

We have one individual who serves as our sole officer and sole director. We are entirely dependent upon him to conduct our operations. If he should resign or die, there will be no immediately available replacements. If that should occur our operations may be suspended or cease entirely until we find other persons, and our business and the results of operations would suffer.

Because we have only one individual serving as our sole officer and director who is responsible for our managerial and organizational structure, we do not have effective disclosure and accounting controls to comply with applicable laws and regulations, which could result in fines, penalties and assessments against us.

One individual serves as both our sole officer and director. He is responsible for our managerial and organizational structure, which includes preparation of disclosure and accounting controls under the Sarbanes-Oxley Act of 2002. Our officer and director is responsible for the administration of the controls. Because he serves as the sole director and officer, he is incapable of creating and implementing the controls, which may subject us to sanctions and fines by the Securities and Exchange Commission, which ultimately could cause us to lose money and possibly to go out of business.

Pursuant to Section 404 Of The Sarbanes-Oxley Act Of 2002 ("Section 404"), we will be required, beginning with our annual report on Form 10-KSB for the fiscal year ending December 31, 2007, to include in our annual reports on Form 10-KSB, our management's report on internal control over financial reporting and for the fiscal year ending December 31, 2008, the registered public accounting firm's attestation report on our management's assessment of our internal control over financial reporting.

We have not prepared an internal plan of action for compliance with the requirements of Section 404. As a result, we cannot guarantee that we will not have any "significant deficiencies" or "material weaknesses" reported by our independent registered public accounting firm. Compliance with the requirements of Section 404 is expected to be expensive and time-consuming. If we fail to complete this evaluation in a timely manner, or if our independent registered public accounting firm cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to establish an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Securities and Exchange Act of 1934, which could adversely affect our business.

Because our interests are in Mexico and China, our business is subject to additional risks associated with doing business outside the United States.

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We expect that a portion of our revenues, if any, may be derived from sales of our products in foreign markets. Accordingly, we will be subject to all risks associated with foreign trade. These risks include:

· shipping delays,

· increased credit risks,

· trade restrictions,

· export duties and tariffs,

· fluctuations in foreign currency, and

· uncertainties in international, political, regulatory and economic developments.

In addition, we anticipate that our foreign operations will require us to devote significant resources to system installation, training and service, areas in which we have limited experience.

It is possible that third parties will challenge our title for the properties in which we have an interest.

We have not obtained title insurance for our properties. It is possible that the title to the properties in which we have our interest will be challenged or impugned. If such claims are successful, we may lose our interest in such properties.

Because all of our assets, our officer and our director are located outside the United States of America, it may be difficult for an investor to enforce within the United States any judgments obtained against us, our officer or our director.

All of our assets are located outside of the United States, the individual serving as both our sole officer and sole director is a national and/or resident of a country or countries other than the United States, and all or a substantial portion of such person's assets are located outside the United States. As a result, it may be difficult for an investor to effect service of process or enforce within the United States any judgments obtained against us or our officer and director, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. In addition, there is uncertainty as to whether the courts of Canada and other jurisdictions would recognize or enforce such judgments rendered by the courts of the United States. There is also uncertainty as to whether the courts of Canada or other jurisdictions would be competent to hear original actions brought in Canada or other jurisdictions against us or our officer and director predicated upon the securities laws of the United States or any state thereof.

Our President - Chief Executive Officer controls a significant percentage of our common stock.

As of May 14, 2007, Marc Hazout, our President and Chief Executive Officer, owned beneficially approximately 28% of our outstanding common stock. Mr. Hazout is able to influence all matters requiring stockholder approval, including election of directors and approval of significant corporate transactions. This concentration of ownership, which is not subject to any voting restrictions, could limit the price that investors might be willing to pay for our common stock. In addition, Mr. Hazout is in a position to impede transactions that may be desirable for other shareholders. He could, for example, make it more difficult for anyone to take control of us.

Risks Relating To The Industry In General

Planned exploration, and if warranted, development and mining activities involve a high degree of risk.

We cannot assure you of the success of our planned operations. Exploration costs are not fixed, and resources cannot be reliably identified until substantial development has taken place, which entails high exploration and development costs. The costs of mining, processing, development and exploitation activities are subject to numerous variables which could result in substantial cost overruns. Mining for silver and other base or precious metals may involve unprofitable efforts, not only from dry properties, but from properties that are productive but do not produce sufficient net revenues to return a profit after accounting for mining, operating and other costs.

Our mining operations may be curtailed, delayed or cancelled as a result of numerous factors, many of which are beyond our control, including economic conditions, mechanical problems, title problems, weather conditions, compliance with governmental requirements and shortages or delays of equipment and services. If our drilling activities are not successful, we will experience a material adverse effect on our future results of operations and financial condition.

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In addition to the substantial risk that the mines that we drill will not be productive or may decline in productivity after commencement of production, there are hazards inherent in geothermal exploration and production. Such hazards include unusual or unexpected geologic formations, pressures, downhole fires, mechanical failures, blowouts, cratering, explosions, uncontrollable flows of well fluids, pollution and other physical and environmental risks. These hazards could result in substantial losses to us due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. As protection against operating hazards, we maintain insurance coverage against some, but not all, of the potential losses. We do not fully insure against all risks associated with our business because insurance is either unavailable or its cost of coverage is prohibitive. The occurrence of an event that is not fully covered or covered at all by insurance could have a material adverse effect on our financial condition and results of operations.

The impact of governmental regulation could adversely affect our business.

Our business is subject to applicable domestic and foreign laws and regulations, including laws and regulations on taxation, the exploration for and development, production and distribution of electricity, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of mines, rates of production, prevention of waste and other matters. These laws and regulations may increase the costs and timing of planning, designing, drilling, installing, operating and abandoning our silver mines and other facilities. In addition, our operations are subject to complex environmental laws and regulations adopted by domestic and foreign jurisdictions where we operate. We could incur liability to governments or third parties for any unlawful discharge of pollutants into the air, soil or water, including responsibility for remedial costs.

In addition, the submission and approval of environmental impact assessments may be required. Environmental legislation is evolving in a manner which means stricter standards; enforcement, fines and penalties for noncompliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations has a potential to reduce the profitability of operations.

Because the requirements imposed by these laws and regulations frequently change, we cannot assure you that laws and regulations enacted in the future, including changes to existing laws and regulations, will not adversely affect our business. In addition, because we acquire interests in properties that have been operated in the past by others, we may be liable for environmental damage caused by former operators. In Mexico, changes in government leadership and/or the unionization of workers could adversely affect our operations. In China, political instability and unexpected state intervention could adversely affect our assets.

Decline in sliver prices may make it commercially infeasible for us to develop our property and may cause our stock price to decline.

The value and price of our common shares and warrants, our financial results, and our exploration, development and mining activities may be significantly adversely affected by declines in the price of silver and other precious metals. Silver prices fluctuate widely and are affected by numerous factors beyond our control such as interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of silver-producing countries throughout the world. The price of silver fluctuates in response to many factors, which are beyond anyone's prediction abilities. The prices used in making the estimates in our plans differ from daily prices quoted in the news media. The percentage change in the price of a metal cannot be directly related to the estimated mineralized material quantities, which are affected by a number of additional factors. Because mining occurs over a number of years, it may be prudent to continue mining for some periods during which cash flows are temporarily negative for a variety of reasons. Such reasons include a belief that the low price is temporary, and/or the expense incurred is greater when permanently closing a mine.

Declines in the price of silver may cause our stock price to decline, which could cause you to lose money while making it difficult for us to raise capital on terms acceptable to us.

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Weather interruptions in China may affect and delay our proposed exploration operations.

Our proposed exploration work in China can only be performed approximately six to seven months out of the year. The cold, rain and snow make the roads leading to our claims impassible every year during certain times from November to March. When the roads are impassible, we are unable to conduct exploration operations on the mineral claim.

We may not have access to all of the supplies and materials we need to begin exploration, which could cause us to delay or suspend operations.

Competition and unforeseen limited sources of supplies in the industry could result in occasional spot shortages of supplies such as dynamite as well as certain equipment like bulldozers and excavators that we might need to conduct exploration. If we cannot obtain the necessary supplies, we will have to suspend our exploration plans until we do obtain such supplies.

Risks Relating To The Market For Our Securities

Because the public market for shares of our common stock is limited, investors may be unable to resell their shares of common stock.

Currently there is only a limited public market for our common stock on the Over-The-Counter Bulletin Board in the United States. Thus investors may be unable to resell their shares of our common stock. The development of an active public trading market depends upon the existence of willing buyers and sellers who are able to sell their shares as well as market makers willing to create a market in such shares. Under these circumstances, the market bid and ask prices for the shares may be significantly influenced by the decisions of the market makers to buy or sell the shares for their own account. Such decisions of the market makers may be critical for the establishment and maintenance of a liquid public market in our common stock. Market makers are not required to maintain a continuous two-sided market and are free to withdraw firm quotations at any time. We cannot give you any assurance that an active public trading market for the shares will develop or be sustained.

A significant number of shares of our common stock are eligible for sale in the United States, which could have an adverse effect on the market price for our common stock and could adversely affect our ability to raise needed capital.

As of June 1^st, 2007, the number of shares in the public float on the Over-The-Counter Bulletin Board in the U.S. is approximately 64,473,033. The market price for our common stock could decrease significantly and our ability to raise capital could be adversely affected by the availability of a large number of shares.

The price of our common stock is volatile, which may cause investment losses for our shareholders.

The market for our common stock is highly volatile, having ranged in the last twelve months from a low of $0.70 to a high of $2.85 on the Over-The-Counter Bulletin Board. The trading price of our common stock on the Over-The-Counter Bulletin Board is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs while diverting management's attention and resources.

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Our common stock is considered to be a "penny stock," which may make it more difficult for investors to sell their shares.

Our common stock is considered to be a "penny stock." The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in these securities is provided by the exchange or system). Prior to a transaction in a penny stock, a broker-dealer is required to:

· deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission that provides information about penny stocks and the nature and level of risks in the penny stock market;

· provide the customer with current bid and offer quotations for the penny stock;

· explain the compensation of the broker-dealer and its salesperson in the transaction;

· provide monthly account statements showing the market value of each penny stock held in the customer's account; and

· make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction.

These requirements may have the effect of reducing the level of trading activity in the secondary market for our stock, and investors may find it more difficult to sell their shares.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2007 and March 31, 2006

Net sales were $NIL for both the quarters ended March 31, 2007 and March 31, 2006 as there was no production at any of the mining properties.

Total operating expenses for the Company were $2,543,636 (March 2006: $4,003,479) Expenses decreased in management fees, as in 2006 bonuses of 2,000,000 restricted common shares valued at $1,302,980 were provided to the Company's management.

Net operating loss for the quarter ended March 31, 2007 was $2,538,685, compared to a net loss of $4,003,479 for the similar period in 2006. This includes an offset of $4,241 representing the minority interest in Sanhe Sino-Top Resources and Technologies, Ltd. The principal reason for this is the impact of the factors discussed above.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our possible inability to continue as a going concern.

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LIQUIDITY AND CAPITAL RESOURCES

The Company will need additional capital in order to finance its obligations to Sanhe Sino-Top Resources and Technologies Ltd., and the acquired properties in Cerro Las Minitas, Mexico, as well as to continue its attempt to acquire viable businesses and properties and to finance the administrative costs including but not limited to legal and accounting fees. The Company's management is seeking additional capital however, there is no assurance that this needed capital can be raised, or raised on terms acceptable to the Company.

GOING CONCERN

As of March 31, 2007 the Company had an accumulated deficit of $14,057,850. The financial statements therefore have been prepared on a going concern basis as explained in Note 2 to the Financial Statements.

ITEM 3. CONTROLS AND PROCEDURES

On May 15, 2006, the Company entered into a trust arrangement with Travellers International Inc. ("TII"), an investment and merchant banking firm, for the deposit by the Company of $1 Million (the "Funds") for the purpose of investing the Funds on behalf of the Company. The trust arrangement was evidenced by a Declaration of Trust dated August 16, 2006. The Company had received proceeds of an equity financing to be used towards the Company's obligations in Mexico and China over the next several months. In the meantime, the Company decided to invest a portion of the financing proceeds for the purpose of obtaining a return on the proceeds invested.

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Mr. Hazout has served as the Chief Executive Officer and President of TII since June 25, 1998. Mr. Hazout has served as sole director of TII since June 25, 1998. As of March 30, 2007, Mr. Hazout beneficially owned 100% of the shares of the capital stock of TII.

Mr. Hazout directed the investment by TII of the Funds in (i) 35,000 shares of common stock of Qualcomm at an aggregate purchase price of $1,636,814.10 on May 26, 2006, and (ii) 2,500 shares of the iShares Silver Trust exchange-traded fund ("ETF") at an aggregate purchase price of $303,635 on June 6, 2006. For purposes of convenience, TII's brokerage account at Union Securities Ltd. was used.

Over the course of the next few months, Mr. Hazout directed TII to purchase and sell shares of Qualcomm as detailed below. Mr. Hazout directed the purchase by TII of the following Qualcomm shares on the following dates:

(i) 35,000 shares on May 26, 2006 at an aggregate purchase price of $1,636,814.10;
(ii) 5,000 shares on August 21 2006 at an aggregate purchase price of $183,084.74;
(iii) 3,000 shares on September 7, 2006 at an aggregate purchase price of $115,774.11;
(iv) 2,000 shares on September 11, 2006 at an aggregate purchase price of $77,355.00;
(v) 2,500 shares on October 17, 2006 at an aggregate purchase price of $97,480.00;
(vi) 2,500 shares on October 18, 2006 at an aggregate purchase price of $98,330.00;
(vii) 1,500 shares on November 11, 2006 at an aggregate purchase price of $54,139.95

In addition, Mr. Hazout directed the sale by TII of the following Qualcomm shares on the following dates:

(i) 8,000 shares on July 25, 2006 for aggregate proceeds of $288,596.60;
(ii) 2,000 shares on August 2, 2006 for aggregate proceeds of $71,149.00;
(iii) 2,500 shares on September 15, 2006 for aggregate proceeds of $93,730.00;
(iv) 6,000 shares on September 20, 2006 for aggregate proceeds of $222,959.33;
(v) 1,500 shares on September 25, 2006 for aggregate proceeds of $56,350.00;
(vi) 2,500 shares on September 26, 2006 for aggregate proceeds of $97,185.00;
(vii) 2,500 shares on October 4, 2006 for aggregate proceeds of $91,250.25;
(viii) 5,000 shares on October 27, 2006 for aggregate proceeds of $184,060.21;
(ix) 1,500 shares on November 3, 2006 for aggregate proceeds of $54,274.00;
(x) 10,000 shares on November 14, 2006 for aggregate proceeds of $349,186.00;
(xi) 10,000 shares on November 24, 2006 for aggregate proceeds of $369,763.59

Mr. Hazout subsequently directed the sale by TII of all of the ETF shares at an aggregate sale price of $308,378.52 on August 16, and 21, 2006.

Mr. Hazout directed the investment by TII in a total of 50,000 shares of First Majestic Resource Corp. on November 15, 2006, at an aggregate purchase price of $160,562 from the cash proceeds of the aforementioned sales. Mr. Hazout subsequently directed the sale by TII of all of the First Majestic shares on November 23, 2006 at an aggregate sale price of $154,525.

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Mr. Hazout directed the investment by TII in a total of 276,545 Company Shares using $392,830 from the cash proceeds from the aforementioned sales as more particularly described below:

Mr. Hazout directed the purchase by TII of the following Company Shares on the following dates:

(i) 50,000 Company Shares on August 8, 2006 at an aggregate purchase price of $50,190.00;
(ii) 50,000 Company Shares on August 17, 2006 at an aggregate purchase price of $63,402.50;
(iii) 45,000 Company Shares on September 15, 2006 at an aggregate purchase price of $55,654.01;
(iv) 20,000 Company Shares on September 20, 2006 at an aggregate purchase price of $24,270.00; and
(v) 35,000 Company Shares on September 21, 2006 at an aggregate purchase price of $41,400.00.

The first of the three foregoing purchases on Form 4s were filed for Mr. Hazout with the Securities and Exchange Commission ("SEC") on August 10, 2006, August 21, 2006 and September 19, 2006, respectively. Mr. Hazout reported the last two of the foregoing purchases on a Form 4 filed with the SEC on September 22, 2006.

In course of working on the Form 10-QSB for the third quarter of the Company, SF Partnership, the independent auditors of the Company, notified the Company on November 8, 2006 that above-mentioned transactions may be determined to be in violation of the Sarbanes-Oxley Act of 2002, namely, Section 402 of this Act.

On November 20, 2006, Mr. Hazout directed TII to liquidate all the remaining shares of Qualcomm and First Majestic as detailed above, in order to return the proceeds in TII's account, which constituted all of the proceeds of disposition in the Company's account with TII less the margin amount and interest, to the Company. In addition, Mr. Hazout directed TII to order a stock certificate for the 200,000 Company Shares. Mr. Hazout received the certificate for the 200,000 Company Shares on January 23, 2007 and immediately effectuated its transfer to the Company's treasury for cancellation. Mr. Hazout reported this on a Form 4 filed with the SEC on February 8, 2007.

Of the $1 Million which TII had been provided in trust, approximately $187,000 has been return to the Company. Neither Mr. Hazout, nor TII received any fees or commissions as a result of TII's trusteeship as described herein.

The Company is taking actions to prevent the recurrence of events of this nature in the future, including hiring an Acting Chief Accounting Officer to oversee the financial operations of the Company, as well as to appoint additional members to the Board of Directors. Under the supervision and with the participation of our management, including our Chief Executive Office and acting Chief Accounting Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Exchange Act) as of March 31. 2007 (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and acting Chief Accounting Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were ineffective in timely alerting them to material information relating to us required to be included in our periodic SEC filings, on the basis of our delay in filing this quarterly report and for our acquisition of assets in Mexico and China for which we were ill equipped to deal with the disclosure required on a timely basis.

Except as discussed above, there has been no change in the Company's internal control over financial reporting during the Company's first fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On February 7, 2007 the Company issued 584,000 shares of the Company's restricted common stock.

On April 3, 2007 the Company issued 230,000 shares of the Company's restricted common stock.

On May 22, 2007 the Company issued 175,000 shares of the Company's restricted common stock.

All of the above private placements totaled 989,000 units and Class A and B Warrants. Each Unit was priced at $1.00 and consists of one common share of the Company and share purchase warrants. One Class A Warrant was issued for each two shares and will entitle the holder to purchase an additional common share of the Company at any time over a period of two years from the date of closing of the private placement at an exercise price of $2.00. One Class B Warrant was issued for each two shares and will entitle the holder to purchase an additional common share of the Company at any time over a period of two years from the date of closing at an exercise price of $5.00.

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No underwriting discounts or commissions were paid in connection with the sale. The sale of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder, and/or Regulation S promulgated thereunder. All of the purchasers of the shares were sophisticated and/or accredited investors, and were provided with information comparable to what would be required in a registration statement. The shares were issued with a restrictive legend.

The funds received from the above-mentioned private placements were used to meet the financial requirements to finance exploration operations in China and at Cerro Las Minitas, Mexico, and to pay legal, accounting and administrative expenses.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

On May 16, 2007, the Ministry of Commerce in China approved the acquisition by the Company of an additional 30% interest in Sanhe Sino-Top Resources and Technologies, Ltd. ("Sino-Top"), thereby increasing the Company's equity interest in Sino-Top to 90%. In consideration for the acquisition on May 22, 2007, the Company issued 2,000,000 restricted common shares to the shareholders of Sino-Top who sold their interests to the Company.

Item 6. Exhibits.

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2	Certification of Chief Accounting Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2	Certification of Chief Accounting Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SILVER DRAGON RESOURCES INC.

Date: June 4^th 2007	/s/ Marc Hazout
	By: Marc Hazout, President and Chief Executive Officer

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