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

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Deficit and accumulated other comprehensive income as at May 31, 2008 totalling $38,354,246 ($37,620,304 as at February 29, 2008)

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

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

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

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The financial information as at May 31, 2008 and for the three-month periods ended May 31, 2008 and 2007 is unaudited. However, in the opinion of management, all adjustments necessary to present fairly the results of these periods have been included.  The adjustments made were of a normal recurring nature.  Interim results may not necessarily be indicative of results anticipated for the year.

These unaudited interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles and use the same accounting policies and methods used in the preparation of Virginia Mines Inc's. (the "company") most recent annual financial statements except for the new accounting standards as described in note 2.  All disclosures required for annual financial statements have not been included in these financial statements.  These unaudited interim financial statements should therefore be read in conjunction with the company's most recent annual audited financial statements.

Accounting changes
Effective March 1, 2008, the company adopted four new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA") in relating to general standards of financial statements presentation, capital disclosures and financial instruments. 

Section 1400, General Standards of Financial Statement Presentation
The Section 1400 has been amended to include requiremements to assess and disclose an entity's ability to continue as a going concern (going concern assumption). The adoption of this Section had no impact on the financial statements of the company.

Section 1535, Capital Disclosures
This Section establishes standards for disclosing information about an entity's capital. The information will enable users of its financial statements to evaluate its objectives, policies and processes for managing capital. An entity will also disclose whether it complies with capital requirements to which it is subject and the consequences of non-compliance. The required disclosure is contained in note 3.

Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments - Presentation
Sections 3862, "Financial Instruments – Disclosures", and 3863, "Financial Instruments – Presentation", which replace Section 3861, "Financial Instruments – Disclosure and Presentation" require enhanced disclosures on financial asset and liability categories as well as a detailed analysis of the risks associated with the company's financial instruments and how the entity manages those risks. Presentation requirements remain unchanged. The required disclosure is contained in note 8.

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Impact of accounting pronouncements not yet adopted

International Financial Reporting Standards ("IFRS")
In 2007 the CICA published an update of the Accounting Standards Board's Implementation Plan for Incorporating IFRS into Canadian GAAP. The plan outlines the key decisions that the CICA will need to make as it implements the Strategic Plan to converge Canadian GAAP standards with IFRS. While IFRS uses a similar conceptual framework to that of Canadian GAAP, there are still significant accounting policy differences that will need to be resolved. The CICA has confirmed January 1, 2011 as the change over from current Canadian GAAP to IFRS for publicly accountable companies.

During the next periods, the company will develop its internal implementation plans to meet the guidelines of the future reporting requirements.

The company considers the items included in shareholders' equity as capital components.

 

The company manages its capital structure and makes adjustments to it, based on the funds available to the company, in order to support the acquisition and exploration of mineral properties. Given that the company is in the mineral exploration business, the Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the company's management to sustain future development of the business.

The properties in which the company currently has an interest are in the exploration stage. As such the company is not dependent on external financing to fund its activities, for it relies on partnerships, credit on duties refundable for loss, refundable tax credit for resources and its return on investments to support its activities.

 

There were no changes in the company's approach to capital management during the three months ended May 31, 2008.

 

The company is not subject to externally imposed capital requirements.

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As at May 31, 2008, the company held $3,800,000 principal amount of non-bank sponsored Asset-Backed Commercial Paper ("ABCP").

Since the beginning of the period, a PCAA restructuring report of J.P. Morgan dated March 14, 2008 and a restructuring Plan proposed to notes holders dated March 20, 2008 were published. The Plan was approved by notes holders on April 25, 2008 and on June 5, 2008, the Superior Court of Ontario homologated it.

 

Taking into account the information made available and the changes that occurred in the credit market conditions and the review of the assumptions, the company remeasured the fair value of its investments in ABCP.

 

The company's methodology assessment consists on use of market indexes corresponding to the length, the constitution and the notation of underlying assets.  This method includes two possible scenarios depending upon the Montreal Proposal success. We assign a 95% success probability. The average discount rate is 17.30% with an estimated average length of 8.6 years. The average coupon rate is 3.67%.

 

In determining the fair value of the Montreal Proposal ABCP, the company assumes the Montreal Proposal ABCP will be converted into term notes and in accordance with the key elements of the Master Agreement. In addition, the company assumes the restructured notes will include traditional securitized assets ($300,000 principal amount),  restructured pooled synthetic notes ($1,500,000 principal amount) will be reduced by the cost of a margin facility estimated to be 1.00% and all US sub-prime residential mortgage-backed collateralized debt obligations will be restructured as ineligible notes ($2,000,000 principal amount). The restructuring costs will be distributed among new notes and will reduce the returns. They are not enough information on the costs allocation to assign on each note.

 

As at May 31, 2008 the fair value of the company's ABCP was estimated to $1,552,000. Following this estimation the company has accounted, for the three-month period ended May 31, 2008, an unrealized gain in ABCP investments of $108,000 ($0 for the three-month period ended May 31,2007), which is presented under caption "Unrealized gains (losses) on investments held for trading".

 

An increase in the estimate discount rates of 1% would reduce the estimated fair value of the company’s investment in ABCP by approximately $86,000.

 

Since the fair value of the ABCP is determined using a probability-weighted approach and the foregoing assumptions and is based on the company’s assessment of market conditions as at May 31, 2008, the reported fair value may change materially in subsequent periods. In addition, the fair value estimate is dependent upon the likelihood, nature and timing of future restructuring under the terms of the Montreal Proposal. The company believes the outcome of the proposed restructuring will not have a material impact to the company’s financial condition.

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All mining properties are located in the province of Quebec.

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For the three period ended May 31, 2007, there was no difference between the basic and diluted loss per share since the dilutive effect of stock options was not included in the calculation; otherwise, the effect would have been anti-dilutive.  However, the net loss diluted per share for this period was calculated according to the basic weighted average number of shares outstanding (26,425,698 in 2007).

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Amounts receivable from partners and others and accounts payable and accrued liabilities are financial instruments whose carrying value approximates their fair value due to their short-term maturity. Cash and cash equivalents are valued at fair value.

 

The fair value of available-for-sale short-term investments is established using the bid price on the most beneficial active market for this instrument that is readily available to the company. When a bid price is not available, the company uses the closing price of the most recent transaction on such instrument.

 

The fair value of convertible debentures is established in a manner similar to available-for-sale short-term investments. Since there is no active market for the warrants, the company determined their fair value using an option pricing model (Black & Scholes model).

 

The fair value of long-term investments was determined using the method as described in note 4.

 

As at May 31, 2008, gross unrealized losses on available-for-sale securities totalled $976,076. Of this amount, $22,355 related to bonds and preferred shares and result from wider credit spreads due to recent disruptions on capital markets as well as increases in market interest rates and not from deterioration in the creditworthiness of issuers and the balance of $953,721 on common shares and trust units related to the timing of market prices, foreign exchange movements and early years in business cycle of the investees for certain investments. The company has the ability and intent to hold these securities for a period of time sufficient to allow for recovery in fair value. It determined that the gross unrealized losses are temporary in nature.

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Financial risks
The company has exposure to credit risk, liquidity risk and market risk from its use of financial instruments (including interest risk and foreign exchange risk).

Credit risk
Credit risk associated with short-term investments arises mainly from the possibility that the issuer of securities may be unable to fulfill payment obligations. The company minimizes its exposure to issuer risk by investing only in products having a high quality investment-grade rating. It also ensures to achieve a good diversification of its banking investments. In addition, the company attempts to minimize its risks by entering into agreements only with Canadian institutions and their subsidiaries. Exposure to these risks is closely monitored and maintained within the limits stated in the investment policy of the company, which is revised regularly.

Credit risk associated with receivables from partners arises from the possibility that the partners may not be able to repay their debts. These receivables result from exploration work carried out on projects in partnership with other mining companies.  The company considers that the credit risk related to amounts receivable from such partnership is minimal, because the company signed agreements with major mining companies.

Liquidity risk

Liquidity risk is the risk that the company may be enable to fulfill its financial obligations related to financial liabilities. The company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at May 31, 2008 the company had a cash balance of $8,719,289 ($8,665,254 as at February 29, 2008) to settle current liabilities of $3,685,722 ($3,895,275 as at February 29, 2008).  All of the company's financial liabilities have contractual maturities of less than 30 days and are subject to normal trade terms.

Market risk
Market risk is the risk of loss that may arise from changes in market factors such as variation in fair value of financial instruments, interest rate risk and foreign exchange risk.

Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument fluctuate due to changes to market interest rates. Company's current policy is to invest excess cash principally in bonds and convertible debentures refundable before maturity and/or in interest bearing accounts of Canadian banks and their subsidiaries.

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Foreign exchange risk

The company's functional currency is the Canadian dollar and major purchases are transacted in Canadian dollars. The company holds foreign currency in a Canadian bank account as at May 31, 2008, but the risk is minimized because the balance of the bank account is not significant for the company. As a result, the company's exposure to foreign exchange risk is minimal.

On June 5, 2008, the company completed a private placement consisting of 500,000 common shares at the price of $9.00 for a total financing of $4,500,000. Proceeds from the offering will be used mainly to fund exploration on the Coulon JV project on which Virginia and Breakwater Resources Ltd. announced a significant base-metal discovery. Part of the proceeds will also be used to fund exploration on other projects.

On July 3, 2008, the company signed a letter agreement with its financial institution concerning a credit agreement that will be effective following the application of the Crawford Committee's proposal on ABCP. This agreement applies on restructured notes to be received in exchange of ABCP supported by ineligible assets with a carrying value of $2,000,000 that the company holds. The company will be eligible to credit facilities up to $1,500,000. The initial maturity will be 2 years from the signing of the agreement, which term can be deferred at the financial institution's discretion for additional periods of one year respectively, for a maximum of 5 renewals. Under the credit agreement, the company will have the option, from the contractual maturity date of the credit facility, to dispose of the restructuring notes in favour of the financial institution in payment of the facility principal.

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